On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.
Article Type:
Book review
Books (Book reviews)
Tan, Cliff
Pub Date:
Name: Business Economics Publisher: The National Association for Business Economists Audience: Academic; Trade Format: Magazine/Journal Subject: Business; Economics Copyright: COPYRIGHT 2010 The National Association for Business Economists ISSN: 0007-666X
Date: Oct, 2010 Source Volume: 45 Source Issue: 4
NamedWork: On the Brink: Inside the Race to Stop the Collapse of the Global Financial System (Nonfiction work)
Reviewee: Paulson, Henry M., Jr.

Accession Number:
Full Text:
By Henry M. Paulson, Jr., 2010. New York, NY: Business Plus, Hachette Book Group. Pp. 496, $39.95 hardcover

Business Economies (2010) 45, 299-300. doi:10.1057/be.2010.33

It's impossible to read former U.S. Treasury Secretary Hank Paulson's tale of the global credit crisis without thinking of Robert Rubin's In an Uncertain World, an earlier memoir by another ex-Goldman Sachs CEO who became Treasury Secretary, Rubin's 2003 book reaped the wind in financial crises and Paulson the whirlwind. But unlike Rubin--who tends to hover at 40,000 feet and stay there--with Paulson you're at 500 feel, close enough to see ground features and hear human voices. And sometimes Paulson will fly you close enough to strafe the trees.

Combat analogies seem altogether appropriate because the meat of the book is a blow-by-blow account of how Paulson and his Treasury team, along with their U.S. Federal Reserve counterparts, contended with 10 major financial failures or near-failures in 2008: Bear Stearns, Fannie Mae, Freddie Mac, Washington Mutual, Lehman Brothers, AIG, Merrill Lynch, Morgan Stanley, Wachovia, and Citigroup. Any one of these in normal times might qualify as highlight of the year; in 2008 they mostly occurred in rapid succession between August and October.

First up was Bear Stearns, sold over a March weekend to JP Morgan before the former could fail. Most noteworthy was the U.S. Federal Reserve's decision to make nonrecourse loans to securities dealers for the first time since the 1930s. Earlier histories recorded Bernanke's predecessor, Alan Greenspan, at a similar stage fresh into the Chairman's role, making precisely the opposite decision to not lend on Black Monday 1987. Paulson, however, says Bear was in an even weaker financial position than famous burnouts like Drexel Burnham Lambert of that earlier era, and he repeatedly highlights the importance of government guarantees for stopping financial panics cold.

Central to the book--figuratively and quite literally in terms of pagination--was the Lehman bankruptcy. The decision to allow Lehman to fail is now widely attacked by even other central bankers, among the politest of all bureaucrats, as a gross error. Paulson wants you to know that he worked hard for months to avert a Lehman bankruptcy; but in the end, the government under the law had no authority to inject capital into Lehman and a U.S. Federal Reserve loan to Lehman would have thrown good money after bad. Paulson offers a good explanation for why circumstances behind Bear's rescue were fundamentally different than those of the Lehman case. There is also a tongue-in-cheek passage in which Paulson recounts how Dick Fuld, Lehman's former head, had urgently asked for permission to fly over Russian airspace during the crisis, just in case Air Force One didn't need it. Paulson deadpanned he didn't have the authority to make that decision.

Despite Paulson's efforts to present himself as an honest broker engaged in straightforward reporting, the book still contains huge gaps in its narrative. None is more noticeable than the complete story of AIG's rescue, which you won't find here. There are precisely zero words in an almost 500-page book about the decision to make whole AIG's derivatives counterparties, which of course included Paulson's old firm Goldman. That Goldman benefited from government largess has contributed to a deeply cynical worldwide attitude about such rescues.

For economists, the key issue will be Paulson's decision to divert Troubled Asset Relief Program--widely sold as a vehicle to buy bad assets off bank books--into a vehicle to inject capital into systemically important institutions and automakers to boot, something Paulson had been unable to do in the Lehman case. In the hundreds of bank failures economists have studied, the need to remove bad assets has been highlighted time and again. But Paulson says he concluded that buying such assets would take too long and that the impact would have been too small before the Bush team left office to have made much of a difference. He says he grudgingly adopted the capital injection strategy because it would have a much larger leveraged effect and points to the aftermath of the Citi rescue as validation. Much room remains for debate.

Throughout the book, Paulson is unswervingly loyal to former President George W. Bush. This is no Don Regan revenge vehicle. He says that President Bush played it straight, always for the good of the country, even when politics would dictate otherwise. At one stage. Bush kindly remarked it was better that the crisis occurred near the end of his administration, when processes and people were already seasoned, than at the beginning of the next administration. But, since Truman, we also know where the buck has to stop. The key plea of Paulson's book is that urgency justified everything, but did it? Could it be that Paulson's team and the U.S. Federal Reserve team and the White House, pulling consistent all-nighters for weeks and months, always made the best decisions? To affirm stretches credulity. At one stage, during sleep-deprived days, Paulson records himself at the center of his office managing multiple crises as staff flew around him and uses it as an example of his strengths as a crisis manager. But future generations will need to ask if Treasury Secretaries should primarily prevent fires or fight fires.

Paulson the Republican more than hints that he often found Congressional Democrats more constructive partners than House or even Senate Republicans, a stance for which he will probably receive no future Tea Party invites. But, overall, the deeply divided partisanship of Congress comes through clearly and paints a foreboding picture for future cooperation in the financial legislation that lies ahead.

By writing simply, with charm and with considerable, albeit not complete, detail, Paulson's book breaks the mold of near-hagiography staked out by earlier policy memoirs in the "How I Saved the Earth" vein. History may be kinder to him as a result.

Cliff Tan

Stanford Center for International Development, Stanford University, Stanford, CA, USA
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