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Too Big to Save? How to Fix the U.S. Financial System

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Bob Pozen's book, "Too Big to Save: How to Fix the US Financial System" is the most important books on financial reform written to date. The book not only provides an overview of how the US economy entered into a deep recession, but also a comprehensive plan for reform and a return to growth. Filled with original insight, the book clearly explains the failure of our modern capitalist society that has morphed into one-way capitalism that penalizes taxpayers who do not participate in upside gains but are exposed to losses from bailed out financial institutions. The book offers pragmatic advice for policymakers and important guidelines for all readers to understand the nature, causes, and appropriate reforms associated with the current US financial crisis. There has not been a more timely and important book written this decade.

Furthermore, Bob Pozen approaches each potential idea of reform with a well-reasoned perspective on the legal, economic, political, ethical and cultural implications of such reform. Pozen has a unique ability to describe complex phenomona such as the housing boom and bust and explosive growth in the use and complexity of financial derivatives with ease. His grasp of the complex issues is second to none, and his ability to convey these complex ideas in easily understandable, succinct prose is remarkable. Pozen's suggestions for reform - including reducing moral hazard problems, strengthening boards, and improving the regulatory system - present feasible, necessary steps that policymakers must head to improve financial markets and the real economy.

"Too Big to Save" is comprehensive, rigorous, and not only descriptive but also prescriptive. The US economy is too important a global player to be ignored, and Pozen's analysis in "Too Big Too Save" is too important to not be read. This book is truly a gem and a strongly recommended read.

Robert Pozen's "Too Big to Save?" has already received a number of enthusiastic notices on Amazon's pages by readers who know a lot more about economics than I do. And due disclosure mandates that I state that I am related to the author--but both of these disclaimers are in fact recommendations. Like most members of the general public I depend on newspapers for knowledge about topics I don't read in any depth about--I am a novelist and a professor of English, writing at times about architecture, literature, or Biblical scholarship. I have a bank account, some stocks, a few bonds, and in the present recession realized that I could neither trust the media or conventional wisdom to guide my own finances, let alone the choices being made by elected and appointed government officials. In the quickly moving present crisis, every book on the past is almost immediately outdated, but what struck me in the past weeks reading "Too Big to Save?" is how current it is about what is playing out in the headlines right now, and perhaps a few steps ahead. Just how the crisis at AIG came about, how many mistakes were made in its resolution, why Ben Bernanke's present disclaimers ring hollow, and the complications of Executive Pay issues, are not adequately put into context in a narrow column of the New York Times, and certainly not on Web news sites. Robert Pozen's analysis of the crisis however, gives one a shrewd seat at the table of the insiders and makes one boil at the sheer arrogance and bone-headedness of the club that helped cause this crisis. A dozen friends have hammered at me that the dollar is on the way out and that the Euro and the Yen, and China, are the future, but the last chapter of "Too Big to Save?" calls that into question, based on hard statistics. I know Robert Pozen's reputation as a quiet and skilled negotiator whose experience as an Associate General Counsel at The S.E.C, a former president of Fidelity Investments, and his present position as Chairman of MFS Investments, gives him a perspective on the broader outlines of American financial regulation. What brought me up short in "Too Big to Save?" was the depth of anger implicit in its pages, an anger that many of us feel, shocked and outraged by the cavalier attitude of economists who were the beneficiaries of media platitudes and politicians of both parties who simply caved in to Wall Street wishes. Take the following biting quote on the credit default swaps that brought on the collapse:

"The value of such multilayer products depended on the actual payment record of the mortgage pools underlying the tranches of mortgage backed securities, because that record measured the default risk that was being insured against by the CDs. However, debt securities based on CDS were several steps removed from the actual mortgages. When these mortgages were subprime loans of dubious quality, the layering helped to obscure the weak foundation of these products. Steve Eisman, a professional investor, characterized the trances of such multilayer products as 'the equivalent of three levels of dog [feces] lower than the original bonds.'"

Such language speaks to the outrage, let alone the mea culpa, we should be hearing from Republicans and Democrats. Politicians on both sides of the divide share the responsibility for what happened. "Too Big to Save?" speaks the kind of straight talk that instantly evokes confidence, a confidence sadly lacking in politics today. One reader on Amazon called the book a college course, and perhaps it is, a rigorous one for the neophyte in American economics. It was not a field of study I was attracted to as an undergraduate, and the irony seems to be that any number of professors of economics forgot what Robert Pozen presents as its basics, but sometimes it's necessary for many of us to go back to school
"Too Big to Save?" is not interested in simply apportioning blame. The power of the book is not only its analysis of just what went wrong, the drama of hubris with which the author indicts the last and present generation of experts with sharp and pithy quotes that enliven the narrative, but in proposing solutions. I don't agree with every last one of the latter, but I can't see considering any others without first correcting what Robert Pozen has identified as obviously and dangerously wrong.
To address specifics though--I'll quote a passages which speak volumes in a chapter about derivatives. "Too Big to Save?" is tracing the attempts of the chair of the Commodities Futures Trading Commission to rein in speculation:

"Brooksly Born, the CFTC chair in 1998, became concerned about this regulatory void in light of the huge growth in swaps contracts and other types of privately negotiated derivatives. But her views were curtly dismissed by then Federal Reserve Chair as well as then SEC Chair Arthur Levitt and then Treasury Secretary Robert Rubin. As Michael Greenburger a senior CFTC offical at the time, explained, 'Greenspan told Brooksly that she essentially did not know what she was doing and she'd cause a financial crisis. Brooksly was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.'
"On May 7, 1998 the CFTC issued a concept release raising questions about whether certain types of OTC derivatives should be regulated. Although the release did not actually propose any rules, it was met on the same day with a highly unusual joint statement by Greenspan, Levitt, and Rubin expressing 'grave concerns' about the release and its possible consequences. On June 5, 1998 the trio publicly called on Congress to to prevent the CFTC from acting in this area until other senior regulators developed their own recommendations. On July 30, 1998 the Senate Agriculture Committee held a hearing to extract a promise from Born to cease her efforts to regulate OTC derivatives. If not the Committee threatened to impose a moratorium on further CFTC actions. When Born defended the need for CFTC regulation, Greenspan responded with ideological fervor. 'Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary... Regulation that serves no useful purpose hinders the efficiency of markets to enlarge standards of living...' Though unheeded at the time, Born's foresight was recognized a decade later; in 2009 she received the John F. Kennedy Profiles in Courage Award."

I've told my children and my friends--you have to read this book. I've sent out snippets of paragraphs to them--on hedge funds, derivatives, credit swaps, the instruments that I never busied myself to understand, foolishly thinking that the banks and their whiz kids did. Those who closely follow financial markets may know much of what the book details but "Too Big to Save?" is required homework for the rest of us who vote, invest, own a house, or want to pick a way through the rhetoric to understand who is responsible and what can be done to safeguard our finances.

Too Big to Save is a clear and straightforward account of the financial crisis in 2008 and 2009. As Pozen states, the book is aimed at intelligent readers, who are not financial experts. The book sets out to answer three key questions: How exactly did a steep drop in U.S. housing prices result in a severe financial crisis throughout the world? What did the U.S. government do right and what did it do wrong in responding to the financial crisis? What actions should be taken in the future to resolve this financial crisis and prevent others from happening?

Pozen accomplishes these goals. The book is easy to read and not only synthesizes the background and history of elements of the financial system (for example, of Fannie Mae and Freddie Mac, of credit default swaps, and of the 2008 Bailout Act), but goes much further. It includes detailed analysis and critique, and concrete policy proposals. Pozen explains complex concepts in a clear and understandable manner. The book is insightful and accomplished. The book also contains a helpful glossary.

There's a tendency in history to ascribe to telesis, which means certain things happen due to innate, inexorable facts. This dates back to the time of Aristotle. Pozen's book is like this: Pozen can explain everything that happened based on a handful of rules: the Fed expanded too quickly, lack of regulation, agency problems (managers getting rich short term at long term shareholder expense), rating agency abuses. But for the violation of these rules we would not have a crisis. Pozen's prescription is better regulation. Perhaps this is all true, but it's a bit too pat. Question: given that crisis are endemic to capitalism, sometimes is it possible that despite the best safeguards, bubbles with form? Not according to Pozen, but a number of reputable economists think so.

Nevertheless, this is a good book because it's well written and easy to read, has original and interesting charts and graphics, is not too long and is thought provoking.

Four stars. If you need however a compendium of viewpoints, some for or against regulation, buy this book (or journal): Critical Review: Volume 21, No. 2-3, 2009, ISSN 0891-3811, "Causes of the Crisis", which has a Who's Who of economists with divergent viewpoints. Very interesting, but it's more technical and harder to follow that this book, but worth it.

Bob Pozen explains, play by play, what happened during the crisis, why it happened, and then specifies corrections to reduce the risk of future financial crises.

If you want to fully understand the mortgage securitization process, credit default swaps, bank leverage, recapitalization and the effects these have on the economy, this book is for you. With graphs and diagrams, Pozen breaks down the material for the reader - not for dummies, but for the seriously interested. His bold printed suggestion for policy along with chapter appendices and summaries really drive home Mr. Pozen's points and clarify his suggested reforms. This book truly is a blue print for reforms to reduce the frequency and severity of financial crises. Hopefully, enough powerful people will read this book and follow Mr. Pozen's reforms before it is too late. This book gains more cultural relevance each day. Even if you just bought the book to read the chapter on executive compensation, in order to have an educated opinion on President Obama's bank tax, it would be worth every penny.

I had the pleasure of interviewing Robert Pozen on my Radio Show as well as reading his new book.
This is the book we have all been waiting for on the financial and economic policies that put not only the U.S. but the world financial system at risk of collapse. Robert Pozen takes the reader through the explanation of how a number of the usual suspects are to blame. He guides the reader through an analysis of the government's response and more importantly, makes concrete and specific suggestions for reforms that encompass almost every aspect of financial reform.
The book contains common sense analysis that demonstrate the way Wall Street and Main Street work and how it should look in the future. There are excellent charts and graphs illustrating the issues in a clear and understandable manner. Charts on the mortgage securitization process, investment bank leverage growth, foreign holdings of treasuries, and more will make this book a great reference source for educators of finance.
As our legislators and elected representatives try to put the pieces back together again, they should read Robert's excellent commentary.
He approaches moral hazard in an honest, straight forward manner. "In supporting financial institutions, the federal government should avoid whenever possible the creation of moral hazard, an economic term for the situation created by broad loss guarantees that remove all incentive for private investors to perform due diligence on their investments."
There is a chapter discussing these issues as it pertains to Short Sell, Hedge Funds, and Leverage. Among Mr. Pozen's recommendations that I whole heartily agree with is "Congress should require all large hedge funds to submit regular confidential reports..." If we are going to monitor systemic risk, we need to do it for all large systemically important institutions be they a bank or other entity.
Our leaders from the Federal Reserve to the SEC must see that their policies if not changed will only have limited value in protecting us from another similar situation. Mr. Pozen also talks about the need for international cooperation.
I highly recommend that you read Too Big To Save? How to fix the U.S. Financial System by Robert Pozen
Reviewed by Mark Seleznov [...]

Is anyone else having as much trouble as I am, trying to make sense of the current financial debacle? Feeling overwhelmed yet under-informed? Finally, here comes Bob Pozen to the rescue.

This is a book for everyday people. Clear, concise, and chock-full of handy tools to understand the wealth of information, Too Big to Save? is a keeper.

Here are some ways that Pozen puts a light at the end of the tunnel.

The book easier read than one might expect. Pozen's prose is straightforward and down to earth. Its audience seems to be everyday people, as well as educators and other professionals who need to understand, analyze, and explain the world financial crisis.

I'm a fan of indexes, and this book has an excellent one. Beyond the index, many other features of the book make it easy to find and understand complex information.

For instance, each of the four major sections of the book begins with a few pages of summary, and each chapter in the section ends with a chapter summary. Reading these combined summaries alone can bring everything into focus.

The visuals are especially strong and numerous. There are about 70 different charts, graphs, tables, and diagrams throughout the book. These include some of the most informative (and original) financial diagrams I've seen in a long time. The most elegant, in my opinion, are "Simple Diagram of the U.S. Financial System," "Mortgage Securitization Process," "Mortgage Securitization Process in the Private Sector," and "Collateralized Debt Obligation."

The table of contents is clear, and the 10-page glossary is a godsend. Footnotes at the end of the book are handy and good reading in themselves. The overall layout and design of the book, using serif, is easy on the eyes and mind. Pozen's use of boldface type for his recommendations is an especially good idea, and it further illustrates his dynamic view of our situation.

There's a forensic, almost cinematic quality to the way Bob Pozen unfolds the facts of our current economic drama and sets them (and us) on the world stage. Most importantly, he provides vision. We are all the protagonists in this drama, and there is a way out.

As a student of law and finance, I've kept a close eye on the economic happenings all through the crisis. Not until I read this book did all the media accounts, op-eds, and book narratives mesh into a comprehensive and interrelated whole. Simply a fantastic account. Brisk yet nuanced. Easy to read. Free from overeditorializing and demagoguery. I highly recommend it.

This book is a fascinating read, and it seems informed by the author's wealth of experience in financial markets. The non-partisan, clear cut compromises the book develops for fixing the financial system cut through the red tape to give all readers, from policy-makers to the average voter, a clear way out of our present financial crisis. For example, the book provides an excellent play by play of the Treasury Department's bank bailout in the form of a useful running critique of the Bush administration's decisions. Yet it also runs counter to many of the reform initiatives in the current financial regulation reform bill from Democratic Senator Chris Dodd. It is a breath of fresh air to read a financial regulation reform proposal that isn't motivated by partisanship or regulatory turf wars. Another appealing feature of the book is its accessibility. The novice will find in it a concise summary of the events leading up to the financial crisis of 2008-2009 and a clear explanation of some very complicated financial products. If you want to be able to intelligently describe the causes of, and solutions to, the financial crisis at cocktail parties you should pick up a copy of this book.

Reading "Too Big to Save" is like having a personal tutorial by a masterful teacher who has taken a highly complex problem and broken it down--with graphs, anecdotes and simple, precise language--so that even non-financial types can understand. Bob Pozen has not only provided a tool for understanding, but he has offered detailed and insightful suggestions for going forward. Anyone who is interested in learning how we got into the financial mess, appreciating the difficulty in getting out, and preventing such problems in the future should read this book.