What I Learned From Hank Paulson's Book

What I Learned From Hank Paulson's Book

By David Wessel, WSJ | 10 February 2010

David Wessel, The Wall Street Journal's economics editor and author of "In Fed We Trust: Ben Bernanke's War on the Great Panic," recently finished "On the Brink," the new book by former Treasury Secretary Henry Paulson, which covers much of the same time period from a different vantage point. Wessel says he'll leave the 'book reviewing' to other, more neutral, observers, but offered this list of nuggets he gleaned from Paulson's account.

1. Paulson says that ever since high school he has had occasional bouts of "dry heaves" at moments of exhaustion, of which there were several during his tenure as Treasury secretary. During contentious September 2008 negotiations on Capitol Hill over the Troubled Asset Relief Program's restrictions on executive compensation, he recalls:

"Exhausted, I went back to the small office I was using and had a bout of the dry heaves in front of Judd Gregg [a Republican senator from New Hampshire.] I wasn't that sick, but I made a lot of noise, which seemed to galvanize Rahm Emanuel. 'We need to get everyone back together again and get this thing done,' he said. Harry Reid [the Senator majority leader] came in and asked if I needed a doctor. I said no, I was just tired."

2. When Bank of America bought Countrywide Financial, the subprime mortgage lender, for $4.1 billion, it expected to get some relief from regulatory capital requirements from the Federal Reserve for saving Countrywide. But in September 2008, the Federal Reserve Bank of Richmond instead was putting pressure on Bank of America to redo its capital plan and cut its dividend. When Paulson encouraged Bank of America CEO Ken Lewis to buy Lehman Brothers, Lewis asked for help in getting the Fed off his back.

Paulson agreed to talk to Fed Chairman Ben Bernanke and New York Federal Reserve Bank President Tim Geithner, though the issue became moot when BoA decided against buying Lehman. Bank of America went on to buy Merrill Lynch. In October 2008, after the government had pumped money into BofA, Merrill and other big banks, Lewis confided to Paulson that he was worried Merrill CEO John Thain would try to wiggle out of the deal; he wanted Paulson to insist that Thain go through with it. Paulson says he never mentioned the call to Thain. Less than three months later, of course, Lewis would talk about backing out of the deal, completing the purchase under pressure from Paulson and Bernanke.

3. The day after Lehman went into bankruptcy, Paulson told the press: "I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers". But with the benefit of hindsight, he says, he realizes "I ought to be have been more careful with my words," he writes.

"Some interpreted them to mean that we were drawing a strict line in the sand… and that we didn't care about a Lehman collapse or its consequences. Nothing could have been further from the truth. I had worked hard for months to ward off the nightmare we foresaw with Lehman. But few understood what we did— that the government had no authority to put in capital, and a Fed loan by itself wouldn't have prevented a bankruptcy."

4. Paulson is full of praise for most government officials with whom he worked— with a couple of exceptions, among them Chris Dodd, the Connecticut Democrat who chairs the Senate Banking Committee. About Dodd and his House counterpart, Barney Frank, Paulson writes,

"Barney was scary-smart, ready with a quip, and usually a pleasure to work with…. Dodd was more of a challenge. We'd worked together on Fannie and Freddie reform, but he had been distracted by his unsuccessful campaign for the Democratic presidential nomination and seemed exhausted afterwards. Though personable and knowledgeable, he was not as consistent or predictable as Barney."

5. Another exception is Sheila Bair:

"I respected Sheila… (B)ut sometimes she said things that made my jaw drop. That morning she had said she wasn't sure that Citi's failure would constitute a systemic risk," the threshold for extraordinary federal action. "She spoke as if Citi were just another failing bank and not a world leader— with $3 trillion in assets, both on and off its balance sheet— imploding in the midst of the worst economic conditions since the Great Depression… Although I believed she was simply posturing, I replied, 'If Citi isn't systemic, I don't know what is.'"

6. Toward the end of the Bush presidency, Paulson heard more than once from Bob Rubin, the former Clinton Treasury secretary and former colleague of Paulson's at Goldman Sachs who was then among those at the top of Citigroup.

"Bob Rubin… called to tell me that short sellers were attacking the bank… Always calm and measured, Bob put the public interest ahead of everything else. He rarely called me, and the urgency in his voice that afternoon left me without doubt that Citi was in grave danger."

7. The federal rescue of Citi led directly to the rescue of General Motors and Chrysler.

"Nancy Pelosi [the speaker of the House]… told me point-blank that it was politically impossible to rescue Citi and not help the automakers. She had until recently opposed bailouts for the car companies, which she considered poorly managed."

8. Jeff Immelt, CEO of General Electric, frightened Paulson in early September by calling to say GE, which Paulson describes as "an American business icon," was having trouble borrowing money by selling IOUs known as commercial paper, and visited Paulson several days later in person. In mid-October, Paulson called Immelt to discuss imminent plans for a Federal Deposit Insurance Corp. guarantee of all new bank debt, but not GE's. Immelt told him not to worry, GE would manage and would benefit indirectly by a more stable banking system.

The next day, Immelt called back and said the bank guarantees were hurting GE's finance unit because banks could borrow with U.S. government guarantees and GE couldn't. And on Oct. 16, 2008, Immelt came in person to press the matter with Paulson. Over the following weeks, Paulson and Treasury official David Nason "worked hard to get Sheila [Bair] comfortable" with extending the guarantee to GE. In November, she did. GE's finance unit, along with Citi, became one of the biggest users of the program.

.

The Financial Crisis From Henry Paulson's View.
Book Review Of "On The Brink"

By Jacob Wolinsky | 10 February 2010

This is my 11th book review on books related to the current financial crisis. To see my previous book reviews check my previous articles. My most recent book is On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry Paulson. Henry Paulson was former CEO of Goldman Sachs and Treasury Secretary from 2006-2009. The book was released on Feb 1, 2010 and as of this writing is the fourth best selling book on Amazon.com.

I will be honest that I was most excited for this book. I can not think of anyone who was more on the front lines throughout the crisis than Henry Paulson. The only person who can even come close to Hank Paulson is Ben Bernanke. However, from all accounts I have read so far, Henry Paulson was, for better or worse, the leader throughout the crisis.

I was also excited for this book because I wanted to hear Paulson account for his reasons for letting Lehman Brothers fail, and for changing TARP from buying toxic assets to capital injections into banks. To be frank, I was very skeptical of the book and Paulson's attempt to defend his actions towards Lehman Brothers. I was pleasantly surprised by the book, and came out with a much more favorable opinion of Hank Paulson.

Throughout the book Paulson truly shines. The first part of the book talks briefly about Henry Paulson's early life. I thought Paulson did a good job describing enough about him for a reader to get a feel for him, without boring the reader with too many personal details. I gained a deeper insight to the man who many in the media portrayed as a Goldman Sachs 'covert' agent. Paulson gets personal and talks about his vacations with his wife and family.

Henry Paulson is not a partisan Republican as many assume. His wife was a big supporter of Hillary Clinton and his mother hated President George Bush and voted for Barrack Obama. Only Paulson's daughter wanted him to take the job as Treasury Secretary. He jokes that he was considered "a closet Democrat" by many [[Republican: normxxx]] friends.

Henry Paulson had much praise in the book for Democrat Barney Frank while criticizing the House Republicans on various issues. Paulson also speaks positively about Barrack Obama, Chris Dodd, Harry Reid and John Kerry. Paulson is sharply critical of John McCain and the actions he took during the crisis. Although he does not mention it, I would not be surprised from his description of McCain if Paulson voted for Barrack Obama. He also has plenty of criticism for the Democrats, of course, but he is fairly critical of politicians on both sides of the aisle.

Henry Paulson discusses a lot about how Ben Bernanke, Tim Geithner and he worked as a team for months to save the financial system. He has tremendous respect for both men and was happy they would continue their role in Government after he was gone. Paulson criticizes Sheila Bair several times, but overall paints her in a positive light for her work at FDIC.

Henry Paulson discusses throughout the book his Christian Scientist faith and his love of nature. He really reveals himself to the reader: talking about a sleepless night during the height of the financial crisis when he was given sleeping pills. He talks about holding the pills in his hand, and then deciding to flush them down the toilet.

He decided not to take the pills and instead decided to pray to God for guidance. Although he does not mention the name of the drug, I assume he is referring to a controlled substance like Ambien. Not many public officials would admit in a bestselling book that they nearly committed a federal crime.

The second part of the book deals with the beginning of Paulson's career at treasury. He discusses at length his attempts to restructure Fannie Mae and Freddie Mac (the GSEs). He also discusses the political maneuvering that he took to get the Federal Housing Finance Agency (the agency that oversaw the GSEs) and other branches of Government to agree to put the GSEs into conservatorship. No other book on the crisis goes into as much detail as Henry Paulson's book does about the months of brainstorming and political maneuvering regarding the GSEs.

Henry Paulson discusses relatively little about the failure to save Lehman. Andrew Ross Sorkin devoted several hundred pages to the topic in his book Too Big to Fail which I previously reviewed. However, Henry Paulson devotes no more than a few pages to the Lehman Brothers affair.

Paulson offers two reasons for not saving Lehman Brothers:
1. He [did not have the requisite] authority; and 2. It would have set a 'moral hazard'. [[How more so than the actual saving of the several other behemoth banks, and AIG and the GSEs!?!: normxxx]] This strikes me as strange since the two reasons contradict themselves. Furthermore how did he have the authority to save AIG but not Lehman Brothers? Couldn't the Fed have been more accommodative to Lehman at the time? [[Obviously, the Lehman people were not "members of the Club"; nor were GS (and possibly Paulson's $700 million retirement package) threatened, as with an AIG failure).: normxxx]]

I remember hearing the news that Sunday night in September 2008 that the Government was going to let Lehman fail and I could not believe it. (I am not playing Monday morning quarterback, I thought it was an awful decision at the time.) I was disappointed in Paulson's inability to explain himself. I suspect the reason he did not discuss the topic in depth is because he knows in hindsight it was a bad decision. [[Wholly reminiscent of letting the Jewish owned New York Bank of the United States fail in 1930, which started the U.S. banks toppling like dominoes ("In that month alone, over 300 banks around the country failed".), and even contributed to the events leading to the collapse of the Credit Anstalt bank in Austria and the entire German Banking system, in 1931.: normxxx]]

The book does not end with Lehman's failure. Henry Paulson discusses in detail his efforts to save Morgan Stanley and Goldman Sachs. Paulson talks about the political negotiations he had to conduct with both the Democrats and Republicans to get TARP passed. Henry Paulson shows himself to be a shrewd politician capable of getting very unpopular legislation passed by an unpopular administration.

Paulson explains in the book why he changed TARP's original plan of buying toxic assets to capital injections. The purchase of toxic assets would take too long and there were many other obstacles in the way of the plan. I am satisfied by his answer for the drastic change in plan.

The book ends of with further actions Henry Paulson took to extend a 'life' loan to the automakers. Again, Paulson used some political maneuvering to make the plan salable to both Democrats and Republicans. Paulson also discusses the race to save Citigroup and Bank of America. He discusses pressuring Ken Lewis to complete the acquisition of Merrill Lynch but discusses little more of this sensitive topic.

I have heard many Henry Paulson's critics are boycotting this book because "they do not want to give money to a crook". Obviously this tactic is not working because the book is a best seller. Nevertheless, I think this is a wrong view to take. Regardless, of whether you are a fan or critic of the former Treasury, you owe him the opportunity to explain himself.

Despite his numerous media appearances throughout the financial crisis, On the Brink is Paulson's best defense of his actions to date. I am not telling critics of Paulson they have to buy the book. But people should consider hearing the events from Paulson's point of view (not only because it is fascinating, but) because it is only fair to hear the events from Paulson himself.

My next book reviews will be The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson and Distress Investing: Principles and Technique by Martin Whitman.

Disclosure: New FTC guidelines require me to disclose I have a material connection because I received a free copy of the book to review.