Books@DailyFinance: Henry Paulson's Meltdown Memoir
The Perils of Paulson, Fall 2008
Henry Paulson's memoir of his term at the Treasury, On the Brink (BusinessPlus, $28.99), is much like the man himself: Hefty, a little bit dull in spots, but thorough. It's far from a gossipy tell-all. Even Paulson's dissing of Sarah Palin is understated: "Right away she started calling me Hank. Now, everyone calls me Hank....It's what I like. But for some reason, the way she said it over the phone like that, even though we'd never met, rubbed me the wrong way."
On the Brink begins with a crisis: the September 2008 federal takeover of housing finance giants Fannie Mae and Freddie Mac. After a brief flashback that lets the author reprise his student days, marriage, early career, and first experiences as Treasury Secretary, it's on to further recapitulation of the financial meltdown.
More than 300 of the book's 478 pages are devoted to a fast-paced account of the cardiac-inducing events of that fall. The moment one calamity was momentarily put to rest, another catastrophe would appear. Imminent collapse of the world financial system seemed like a real possibility.
Many of these events are already lore in the financial community, exhaustively detailed in such accounts as Andrew Ross Sorkin's bestselling Too Big to Fail. But Paulson gives us an insider's look and explains what he and other primary actors, including Fed Chairman Ben Bernanke and then–New York Fed Chief Timothy Geithner, were doing and thinking.
'The British Screwed Us'
Paulson documents how, after weeks of dealing with failing institutions, from Bear Stearns to Lehman Brothers to AIG, he and the other key actors decided to approach Congress for a huge appropriation of funds to buy troubled assets. Although he initially had the figure of $500 billion in mind, one of Paulson's assistants, Kevin Fromer, suggested they go for more. "The public and Congress will hate $500 billion," said Fromer. "But I'm not sure they will hate $700 billion any more. If you get any higher, closer to a trillion, we will have a problem." That back-of-the-envelope figure was what they asked for, and what Congress agreed to two weeks later.
Some have faulted the U.S. for letting Lehman fail, arguing that it had catastrophic results. But Paulson details how he spent days angling to get first Bank of America (BAC), then the British bank Barclays (BCS), to buy Lehman. "The government had no authority to put in capital," he writes, although he recently told CNBC that such assertions were only a ploy to find a buyer.
The Fed loan that later saved insurance giant AIG was different, he argues: "We were dealing with a liquidity, not a capital, problem." Paulson shows BofA flirting with the idea of a Lehman purchase for days before backing away. Barclays was very close to making the purchase, but the deal was nixed by British regulators. Once it was clear that there was no way to save Lehman, Paulson lost his temper before a gathering of Wall Street CEOs: "The British screwed us," he said.
Paulson writes that, as Citigroup teetered on the brink, Federal Deposit Insurance Corp. chair Sheila Bair asserted that the U.S. should take no special measures to save it. Even though the institution had $3 trillion in assets, Bair told Paulson that "she wasn't sure that Citi's failure would constitute a systemic risk." And he's self-critical. Two years before the financial crisis became an emergency, at a gathering of the White House economic team in August 2006, Paulson says he suggested that the capital markets were due for another "disruption." "Notably absent from my presentation was any mention of problems in housing or mortgages," he admits. "I misread the cause, and the scale, of the coming disaster."
Still, Paulson repeatedly compliments his former boss, George Bush, as "admirably stalwart," courageous, and supportive. But even more surprising are his flattering portrayals of Democratic leaders. Barack Obama, who repeatedly telephoned the Treasury Secretary during the crisis, was "always well informed, well briefed, and self-confident." House Financial Services committee chairman Barney Frank was "a pragmatic, disciplined, completely honorable politician."
Frank also provides most of the book's funny moments. In March 2008, Paulson was attending a meeting of Latin American finance ministers in Cancun. Frank buzzed Paulson's cell phone and caught him in the lavatory. "Barney," I said, "you're getting me in a men's room in Mexico." Frank quickly responded: "Don't drink the water."
In his afterword, Paulson anticipates the battle that's just beginning to unfold. "Our regulatory system remains a hopelessly outmoded patchwork quilt built for another day and age," he writes. Some would say that it's not so much antiquated as just plain lax -- but that's a battle others will have to fight out. Paulson must be thanking his lucky stars that he can simply sit back and watch.