Movie Review: Too Big to Fail

Main Characters

1. US treasury Secretary - Henry Paulson
2. CEO Lehman Brothers - Dick Fuld
3. President federal reserve bank of New York - Timothy Geithner
4. Chairman of federal reserve system - Ben Bernanke

Law:

1. Emergency economic stabilization Act of 2008
2. Troubled Assets Relief Program (TRIP)

Lehman Brothers was in deep trouble on account of excessive exposure to toxic housing assets. Its CEO Dick Fuld tried to contain the problem by bringing in external investment but he got no success.

Henry Paulson, in order to mitigate the financial crisis, which already started with the Bankruptcy of Bear Stearns, tried to arrange investors for Lehman Brothers. He convinced BOA and Barclays to buy Lehman's good assets but, eventually BOA purchased Merrill Lynch. Barclays expressed interest but British Banking Regulators pulled it back by refusing to give a go to the deal.

It was quickly understood that Lehman Brothers problem was not individual. It got spread to entire financial market, which lead to free fall in Dow Jones. Another crisis started with AIG about to default on their loans. AIG was the largest insurer for Mortgage based securities of that time. If it was allowed to collapse, all the companies which have MBO's secured by AIG would collapse. In short, whole financial market would collapse.

Treasury had no option but to take control over AIG. Ben Bernanke forced congress to pass the legislation to authorize any continued intervention by Fed or Treasury. Timothy Geithner planned to end the crisis by planning mergers between Investment bank and Consumer bank, but he failed to do so. Paulson received call from Jeffrey Immelt of GE, who tells Paulson that he is not getting credit for financing day to day business operation. If company like GE is not getting credit, what would be the credit condition for a normal business?

Paulson realised that the crisis has spread to the main street. Ben and Paulson made clear to congress that lack of credit resulted in great depression of 1929. And if congress doesn't act now, it will lead to a situation which is even worse than the great depression. Congress passed the Legislation although in its second attempt.

Now that Ben and Paulson had the cash to make injections in the system, they pressurized the group of banks for mandatory capital injections and use this money to get the credit moving. Banks were running in highly protective format, and were wary of giving loans, but to bring the system to normal state, credit has to start revolving.

Although markets did stabilize and banks repaid their Troubled Assets Relief Programs Funds, credit standards continued to tighten resulting in wide spread closure of businesses which in turn resulted in very high unemployment level in Country.

Finally, to define the crisis in three keywords:

1. Lack of Prudence  - Which resulted in Excessive Leverage

2. Lack of Simplicity - Complex financial products

3. Lack of Humility   - Bankers believing they are the master of Universe 

- By Uday Kotak, Executive Vice Chairman and Managing Director, Kotak Mahindra Group