Henry Paulson’s insider account of the financial crisis “On the Brink” is a fascinating story. Paulson, of course, presided over the demise of Lehman Brothers and Wachovia and others as Treasury Secy. This book is supposed to be a day-to-day account of the crisis unfolded and how Paulson and others (Ben Bernanke, Tim Geithner) handled them.
It is an easy read; you don’t need to know about credit-default swaps or collateralized mortgage obligations to understand this book (although geeks who dabble in CDSs and CMOs will find it interesting too).
First of all, there is Paulson, who would be a clear winner in the contest for Most-Likely-to-be-voted-Dr. Jekyll and Mr.Hyde. There is Paulson the bird watching environmentalist, the Illinois farm boy who grew up milking cows and baling hay, there is the Christian Scientist who doesn’t take any medicines and believes in prayer for curing everything. Then there is the multi-millionaire/ billionaire former CEO of Goldman Sachs.
There is also the ardent believer of work-life balance who believes in sleeping every night at 9:30 pm and talks about how, even in his early days at Goldman, always left work at 4:30 pm to spend time with his family. If you wonder how he feels about making Goldman employees working all those really long hours (think 100 hour weeks, working Saturdays and Sundays), he has this to say: “It’s not your boss’s job to figure out your life.” [1.]
Given this kind of double talk, you shouldn’t be surprised, perhaps, that he treated arch rival Lehman Brothers differently from Bear Stearns. When Bear Stearns was failing, he was desperate to save the company for fear of the impact on the economy. When J.P. Morgan initially walked away from the deal, he asked JPM CEO Jamie Dimon “Is there something we can work out where the Fed helps you get this deal done?” [2.]
And even though the Treasury had no powers (without a congressional allocation, which they didn’t have) to assist JPM or Bear, Paulson finagles a $30 billion non-recourse loan from the Fed.
Cut to when Lehman was collapsing. Paulson suddenly finds his hands tied. The framework that he created for Bear? Mysteriously impossible now. When Bank of America walks away from Lehman and its CEO Ken Lewis tries to bargain for some kind of government money, Paulson tells him it won’t happen. [3.] There would be no government money for Lehman.
Interestingly, Lehman was the only big Wall Street firm which was allowed to go bankrupt in the crisis. All others either got bailed out (AIG, Bear Stearns) or bought (Wachovia, Merrill Lynch).
Paulson never comes up with a convincing explanation for why he let Lehman fail. But he blames Lehman’s CEO Dick Fuld plenty: “His ego was entwined with the firm’s” , “How far he was willing to go to protect his firm was another question”, [4.] “Does he know how serious the problem is?” [5.] So there we have it, Paulson thinks Dick Fuld is arrogant, out of touch and doesn’t even care about the same firm that he soent 14 years rebuilding (as Paulson himself admits). Paulson, on the other hand, claims to care deeply : “But AIG was not my foremost concern that night as I lay sleepless, wondering how Lehman would manage to pull through the weekend. Three days was a long time.” [6.]
It’s not that Lehman’s demise was too swift or unexpected. Paulson talks about how his team (led by Neel Kashkari) always anticipated that Lehman would be next after Bear and spent 3 months planning how to ring-fence Lehman’s assets and insulate the economy from a possible Lehman collapse. But it’s strange how somehow all their planning seems to involve what to do after Lehman collapses, not what to do to save it from a possible collapse.
So perhaps we shouldn’t be surprised that Paulson finds $85 billion in a bridge loan for AIG even as Lehman was filing for bankruptcy. Sure, it was necessary to save AIG and Bear, but why did he think the economy would be unharmed if Lehman failed?
Oh, and Paulson never explains how he thought he could get $700 billion in bailout money from Congress with a mere three page proposal. He doesn’t mention the three-pageness of it, and seems to wonder why it created such a fuss. Clearly, owning up to his own mistakes is not part of this book.
He doesn’t explain why Treasury and the Fed kept changing the rules and treating each institution differently, why there was a complete seat-of-the -pants approach to each new crisis (what happened to the plan Kashkari had?). This lack of consistency and unpredictability about how the Fed/Treasury would react was a big factor in spooking the markets. I remember writing about the Lehman collapse and the bailout bill back in September 2008.
To my mind, the biggest mistake Paulson made was in thinking that Lehman’s collapse could be contained; that they could wind down Lehman without too much damage. I think he panicked when AIG was in trouble because he thought it would create far too big of a ripple effect, but that sense of panic or urgency was always missing when he talks about Lehman. He did not anticipate the kind of effect it had on the markets’ confidence, and on Main Street. I suppose it did not help that there was a personality clash with Dick Fuld. Not surprising in itself, considering what arch-rivals Lehman and Goldman were, but you would think personalities would be irrelevant at such a time.
Paulson was right in thinking Wall Street would recover – it has; but Main Street hasn’t. All those people who had their lifetime retirement savings (401-ks) wiped out in the market crash aren’t going to get them back anytime soon. I only wish Paulson could bring himself to see his part in all this. The book doesn’t set any records straight; it only reinforces what we have suspected for a long time.
[1.] On Page 31, [2.] Page 110, [3.] Page 184, [4.] Page 123-124, [5.] Page 173, [6.] Page 179