Judith Miller: HBO's full-page ad in Monday's Wall Street Journal for its new film on the 2008 financial crisis, Too Big to Fail, billed the made-for-TV docudrama as "the true story behind" America's (and the world's) economic near-meltdown. Brilliantly acted, well directed, and based on a book by Andrew Ross Sorkin, the movie has gotten much-deserved praise and even some wildly enthusiastic reviews from movie critics. Too Big to Fail is Hollywood's second effort within a year to explain the enormously complex crisis to the American public. The first was Inside Job, which appeared last summer. It did surprisingly well, given its complex plot and lack of interviews with most of the disaster's perpetrators. Its director, Charles Ferguson, won an Oscar for Best Documentary.
But I couldn't help but wonder, Nicole: How accurate are these movies? How ideological are they? Do they assign blame appropriately? Do they agree on who the "villains" were? Are there any heroes—other than the directors, of course? Finally, how well are the roots of the financial crisis explained to Americans, many of whom will learn about how close our nation came to economic Armageddon primarily from these films?
My own take, which may tell you more about my own economic policy biases than about the movies, is that both films did remarkably well in explaining one of the more complicated crises in our recent history. Both films blame the nation's politicians, Republicans and Democrats alike, and our financial regulators for failing to do their jobs. Both the documentary and the docudrama assail the regulators for letting financial mechanisms and institutions spin out of control, thus endangering the housing and financial markets upon which the nation's and the world's economies depend. What do you think?
Nicole Gelinas: I agree that both movies were well done—riveting, really. They're accurate as far as they go, though one should not watch one without the other. I don't find them ideological. Neither overtly assigns more blame to "the free market" than to the government—or vice versa. Nor do the movies blame one political party over another. They feature leaders of both parties, from Ronald Reagan to Bill Clinton, extolling financial-industry deregulation. The manner in which America deregulated its financial industry from the 1980s through the 2000s—allowing financial firms to take so much risk with other people's money that they could effectively hold the economy hostage, thus assuring their eventual government rescue—was disastrous. Both movies get that point across.
All but a few minutes of Too Big to Fail chronicle the late summer and early fall of 2008, when Treasury secretary Hank Paulson (played by William Hurt), New York Federal Reserve president Timothy Geithner (Billy Crudup), and Federal Reserve chief Ben Bernanke (Paul Giamatti) struggled to keep the world's financial system from vanishing and wiping out tens of millions of jobs. The movie performs a public service in dramatizing the abstract topic of "too big to fail." After Paulson and his team find that they can't convince another bank to buy Lehman Brothers, they allow the investment bank to go bankrupt. Chaos ensues. Paulson hadn't considered that under Britain's bankruptcy system, administrators would freeze the money and securities that London clients, including global hedge funds, had parked at Lehman. Once clients realize that Lehman's bankruptcy has cut off access to their own money, they pull their funds from other investment banks with London offices, just to be safe. As Goldman Sachs CEO Lloyd Blankfein (Evan Handler) paces his trading floor hours after Lehman's collapse, he warns Paulson via cell phone: "If customers think their money wasn't safe at Lehman, they're not gonna trust us either."
Paulson understands too late that the loss of trust will be contagious. Lehman's failure has triggered an old-fashioned run on the bank, only this time it's a run on the global financial system. Companies won't be able to borrow money for a few days against future sales, as is their normal practice, to make payroll for their workers. The nation will have "lines outside the bank" and "smashed ATMs" in a couple of weeks, the Treasury secretary morosely tells his wife, unless Congress does something, and fast.
As AIG teeters on the brink of bankruptcy a day after Lehman's failure, Treasury staffers hesitate about rescuing the insurer. "You want too big to fail, here it is," Paulson says. He notes further that AIG stands behind everything from global air travel to construction projects to elderly folks' life insurance policies to "billions of dollars in teachers' pensions. It's everywhere."
You ask how well the two films explain the causes of the crisis. I wish that Too Big to Fail had spent more time showing viewers how the financial system got that way in the first place. Inside Job does this better, though not enough (more on that tomorrow). Ferguson's documentary does a terrific job of explaining derivatives and how they contributed to the meltdown—in particular, how AIG was able to use credit-default derivatives to "insure" hundreds of billions of dollars' worth of mortgage securities and other assets that underpinned the global financial system without having cash to back up that "insurance." AIG couldn't fail, in the eyes of Paulson and Bernanke, because it had falsely insured the rest of the financial industry against failure.
In discussing derivatives, Ferguson's film also makes an important point: the disaster was preventable. He interviews Michael Greenberger, a former top financial regulator, who explains that during the Clinton years, his boss at the Commodity Futures Trading Commission, Brooksley Born, moved to regulate new types of derivatives, including the swaps that AIG would use. Larry Summers, then the Treasury secretary, gathered 13 bankers into his office, telephoned Born, and told her to back off. When she wouldn't, Congress, with the support of Summers and Fed chief Alan Greenspan, passed a law halting Born's efforts to govern new financial instruments with old-fashioned rules.
I think there are some problems with Ferguson's account, including confusion of cause and effect. But I'll get to that tomorrow, too, along with the "heroes and villains." Paulson and Bernanke are heroes in Too Big to Fail, I think, but they're villains in Inside Job. What do you think is the truth?
Let me ask you a few more questions. You said that the films explained the crisis "remarkably well." Did the films change your mind about anything? You say that you're convinced that leading up to the crisis, politicians and regulators let "financial mechanisms and institutions spin out of control." After watching the movies, what do you think was the single biggest mistake that politicians and regulators made? How much blame do you assign to the banks versus the politicians and the regulators?
Finally: in Too Big to Fail, French finance minister Christine Lagarde (Laila Robins) castigates Paulson for letting Lehman to go under. "What on earth were you thinking?" she says crisply over a transatlantic telephone line the morning after. "You allowed it to fail, Hank. It was a horrifying mistake." Do you agree with that judgment?
Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute, is a Chartered Financial Analyst and the author of After the Fall: Saving Capitalism from Wall Street—and Washington. Judith Miller is a contributing editor of City Journal, an adjunct fellow at the Manhattan Institute, and a FOX News contributor.