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