Too Big To Save?

Industry luminary Robert Pozen offers his insights on the future of U.S. finance

Too Big To Save? How to Fix The U.S. Financial SystemThe recent credit crisis and the resulting bailout program are unprecedented events in the financial industry. While it’s important to understand what got us here, it’s even more important to consider how we should get out. While there is little question that immediate action was required to stabilize the situation, it is now time to look for a long-term plan to reform the United States financial industry.

That is where Bob Pozen comes in. Perhaps more than anyone in the industry, Pozen commands the respect and attention of the public and private sector. In this timely guide, he outlines his vision for the new financial future and provides actionable advice along the way.

To Pozen, there are four high-priority problems that must be addressed, and this book puts them in perspective

  1. Analyzes alternative models for government stakes in banks
  2. Recommends a new board structure for large financial institutions
  3. Examines the importance of broader Fed jurisdiction over systemic risks
  4. Proposes a way to revive the securitization of loans

With Too Big to Save, you’ll learn the likely future of the finance industry and understand why changes have to be made.


What People Are Saying

David Gergen, Professor, Harvard Kennedy School; Senior Political Analyst, CNN
“In an era of specialized books about the financial crisis, Bob Pozen’s is a sparkling exception. In plain English, he explains to the intelligent reader how we got into this financial mess, assesses steps taken by government, and prescribes practical ways to prevent a future crisis. Bob Pozen is one of the nation’s most thoughtful and responsible financial leaders. If you are looking for one book to sort out the financial crisis, start here!”

Alan S. Blinder, Former Vice Chairman, Federal Reserve Board, Gordon S. Rentschler
Memorial Professor of Economics and Public Affairs, Princeton University
“When Bob Pozen talks, people listen—with good reason. This book is full of wisdom about the flaws in our financial system that let the crisis develop and, more important, detailed prescriptions for fixing it. Read it. Then keep it on your desk as a reference.”

Richard A. Posner, U.S. Circuit Judge and author of A Failure of Capitalism: The Crisis of ‘08 and the Descent into Depression
“This book is not only a detailed yet thoroughly lucid and accessible study of the financial crisis; it is also, and more important, the best critique I have seen of the government’s responses to the crisis and its recent blueprint for financial regulatory reform.”

Tom Ashbrook, Host of NPR’s “On Point”:
“Americans need to understand the financial crisis shaking this country. Bob Pozen offers a great guide to inner workings gone wrong and a clear agenda for getting the system right again.  Read this book and understand.”

Benjamin M. Friedman, William Joseph Maier Professor of Political Economy, Harvard University; Author, The Moral Consequences of Economic Growth:
“America’s financial system is sorely in need of fundamental reform, and the aftermath of the recent crisis represents a historic opportunity to do something about it. Too Big To Save? is full of the kind of knowledge-based common sense that only someone with Bob Pozen’s rich background of experience in the securities industry is likely to bring to today’s debate about what to do and who should do it.  The country will stand a better chance of getting these reforms right if everyone pays attention to his thinking.”

Jeffrey E. Garten, Juan Trippe Professor of International Finance and Trade, Yale School of Management; Former Under Secretary of Commerce, Clinton Administration:
“Bob Pozen is among the most knowledgeable and thoughtful commentators on America’s financial system today. Based on decades of practical experience and years of penetrating analysis, his book Too Big to Save? presents new ideas that should be essential reading for laymen and experts alike, especially our top policy makers.”

Robert E. Litan, Vice President for Research and Policy, The Kauffman Foundation; Senior Fellow, The Brookings Institution:
“There will be many books written about the financial crisis of 2007-09. But if you want to read just one, read this book. Bob Pozen’s account of what went wrong and how to prevent future crises is a tour de force, clearly written for the non-expert and powerfully argued.”

Richard A. Posner, U.S. Circuit Judge and author of A Failure of Capitalism: The Crisis of ‘08 and the Descent into Depression:
“This book is not only a detailed yet thoroughly lucid and accessible study of the financial crisis; it is also, and more important, the best critique I have seen of the government’s responses to the crisis and its recent blueprint for financial regulatory reform.”

Kevin Hall, McClatchy Newspapers
“Should be required reading on Capitol Hill.”

Alisa Greenstein, The Hedge Fund Law Report
“Pozen’s book offers significantly more than a factual recitation of events leading up to and during the credit crisis. Beyond that, it offers a comprehensive framework for analysis and concrete proposals for appropriate regulatory responses. Broadly, Pozen’s aim is not – or not only – to tell the story of the crisis, but rather to analyze how the crisis can illuminate and inform the appropriate relationship between government and financial markets. Pozen describes specific regulatory innovations intended to keep pace with the speed and complexity of financial innovation. He offers, that is, the analysis sorely lacking in more journalistic accounts of the crisis. In that regard, his book is one of the few in the growing literature arising out of the crisis that should inform any serious discussion of new financial regulation.”

Tyler Cowen, marginalrevolution.com
“For the last two years I’ve been receiving requests — email and otherwise — for a readable, educating book on the financial crisis. And while various books on the crisis have had their merits, no one of them has fit that bill. Until now. Robert Pozen’s Too Big to Save? How to Fix the U.S. Financial System is the single best source for figuring out what happened. It is the go-to book if you are a non-specialist and want to understand: how credit default swaps work, the significance of Basel II, mark-to-market, how the various Fed bailouts operated, the meaning of the toxic asset plans, and many other matters.”


Table of Contents

    Foreword.
    Acknowledgments.
    The Financial Crisis: A Parable.

    Part I: The United States Housing Slump and the Global Financial Crisis.

    • Chapter 1: The Rise and Fall of United States Housing Prices.
    • Chapter 2: Fannie and Freddie.
    • Chapter 3: Mortgage Securitization in the Private Sector.
    • Chapter 4: Credit Default Swaps and Mathematical Models.

    Part II: Impact on Stock and Bond Markets.

    • Chapter 5: Short Selling, Hedge Funds and Leverage.
    • Chapter 6: Leverage At Brokers and Banks.
    • Chapter 7: Impact on Short-Term Lending.
    • Chapter 8: Insuring Deposits and Money Market Funds.

    Part III: Evaluating the Bailout Act of 2008.

    • Chapter 9: Why and How Treasury Recapitalized So Many Banks.
    • Chapter 10: Increasing Lending Volumes and Removing Toxic Assets.
    • Chapter 11: Limiting Executive Compensation and Improving Boards of Directors.
    • Chapter 12: Were Accounting Rules an Important Factor Contributing to the Financial Crisis?

    Part IV: The Future of the American Financial System.

    • Chapter 13: The International Implications of the Financial Crisis for the US.
    • Chapter 14: The New Structure of US Financial Regulation.

    Notes.

    Glossary.
    About the Author.
    Index.


Foreword by Robert J. Shiller, Yale University

Every time there is a major financial crisis, and there have been quite a number of them in history, we find that there are many who are ready to dwell on blaming people and institutions and only very few who offer really serious and constructive new proposals for improvements in our financial system that can repair the damage and reduce the impact of future crises. It is much harder to do the latter, as it requires coming to an understanding of the real origins of the crisis. The causes of the crisis are typically multiple, and understanding them requires extensive knowledge, of the real nature of  financial arrangements as they appear at this point in history, of the laws and conventions that regulate them, and the kinds of human failures that underlie their misapplication. Constructive solutions require also an analytical framework that allows us to use basic economic theory to evaluate government responses.

Too Big to Save? provides us with just such an understanding and analytical framework. The policy proposals offered here should be taken seriously.

The analysis of the crisis that is provided here is a pleasure to read. It brings together a strong list of relevant facts in connection with an illuminating interpretation.   For example, Bob documents how very low interest rates created a demand for mortgage-backed securities with high yields — which could be met due to the weak regulation of mortgage lendings and the eagerness of the credit rating agencies to hand out AAA ratings.  He provides a wealth of information that can enable the reader to assess his argument.

Second, Bob develops several principles for evaluating the government’s bailout efforts. He criticizes the Treasury’s peculiar reliance on preferred stock as an instance of one-way capitalism — where taxpayers bear almost all the downside losses of bank failures with little upside if a troubled bank is rehabilitated. Ironically, they appear to have chosen the preferred stock rather than common stock in part because they wanted to keep the appearance of capitalism (not “nationalizing” the banks) more than its substance. This is a book about the real substance of our capitalist economy.

He also articulates specific tests for justifying bailouts and then shows why many recent bailouts do not meet these tests. We need to view bailouts in terms of our economic theory as well as we can, for only then can we have any semblance of an economic justification for these last minutemeasures, rule-changes in the midst of the game.

Third, Bob presents an integrated view of how US financial regulation should be structured in the future.  He puts meat on the bone of systemic risks — with the Fed as the monitor of such risks and the functional regulators implementing remedial measures.  Since government guarantees have become so broad, he argues for a different type of board of directors to help regulators monitor the financial condition of megabanks.

Of course, not everyone agree with all his proposals since the book includes so many.  This is not a book with a lengthy discussion of the past plus a few future-looking proposals outlined in the last few pages.  It is a thoughtful account on nearly every page. It keeps its momentum going, bringing us to a position where we can really evaluate how we ought to proceed from here and how our financial economy should evolve over the coming years.