Paulson's Memoir Out

Henry Paulson's "On The Brink" might make for fascinating reading. Even now, people don't realize that the world financial system was within a few hours of complete destruction in September, 2008. Complete Destruction, as in in Total Destruction. Secretary of the Treasury Paulson was in that unfortunate position of being Indiana Jones in the Temple of Doom, evading snakes and rolling blocks of stone, but without enough movie-making technology to help him completely save the day:

Paulson reveals that he's prone to dry heaves when he's under pressure. And be forewarned: Reliving the epic, wholesale failure of the financial system and the nauseating bailouts can trigger a gag reflex. Paulson was in an unenviable position. The Bush administration was on its last legs, the economy was in recession, and the global financial system melted down smack in the middle of a torrid campaign season. Working with Federal Reserve Chairman Ben Bernanke— "an incredible stand up guy" —and the cool, calm and collected president of the New York Federal Reserve Bank, Tim Geithner, Paulson stitched together the guarantees, bailouts and backstops that helped cushion the fall.

...As a condition of accepting the job, Paulson demanded to be President George W. Bush's chief economic spokesman. But Paulson, a halting public speaker, wasn't particularly good at constructing narratives about what was happening in the economy—leaving the public and his boss continually shocked at the succession of failures. In late April 2007, he said subprime mortgage problems were "largely contained." In March 2008, as Bear Stearns was about to implode, Bush asked: "We're not going to do a bailout, are we?" The response: "I told him I wasn't predicting one and it was the last thing in the world I wanted."

When the bailouts began, Paulson took charge, acting as investment banker in chief. He personally replaced the management of Fannie Mae and Freddie Mac and put the government's credit behind the faltering mortgage agencies. "We had, I thought, just saved the country—and the world from financial catastrophe," he writes.

But just as one crazy caper ended, a new one was about to begin. The reason: The Wall Street banks were royal screw-ups. Without passing judgment on them—these were members of his former fraternity—Paulson treats us to a parade of big shots asking the government to save their banks from their own incompetence. Here's Chuck Prince, Citigroup's hapless chief executive, at a dinner in June 2007: "Isn't there something you can do to order us not to take all of these risks?" Lehman Brothers chief executive Richard Fuld calls from India to ask if Paulson can get him flyover rights from Russia to get home more quickly. Then on the day before Lehman Brothers went bankrupt, Fuld pleads: "Hank, you have to figure something out." John Mack of Morgan Stanley begs: "Hank, the SEC needs to act before the short sellers destroy Morgan Stanley." "On the Brink" will do little to dispel the notion, which Paulson acknowledges, that some Republicans believe him to be a closet Democrat. His wife, Wendy, held a fundraiser for her fellow Wellesley classmate, Hillary Rodham Clinton, in 2000, and the Paulsons are big-time tree huggers. His mother, a once-staunch Republican, had so soured on Bush that she urged her son not to take a job in his administration. Paulson love-bombs Barney Frank as "scary-smart, ready with a quip, and usually a pleasure to work with," praises Senate Majority Leader Harry Reid and notes that then-Sen. Barack Obama was "always well informed, well briefed, and self-confident."

But while Bush ("admirably stalwart") comes in for similar praise, Paulson has little positive to say about other Republicans. Sarah Palin annoyed him from the get-go. When he spoke to House Republicans about efforts to help Fannie and Freddie, he was chagrined that many responded with speeches about ACORN, the low-income housing activist group. House Minority Leader John Boehner was ineffectual. John McCain comes off worst of all: impulsive, ill-informed and counterproductive. "This was crazy," Paulson writes of McCain's decision to suspend his campaign in late September 2008 and demand a White House meeting on the bailout. At the climactic meeting in the Cabinet room, Obama spoke for the Democrats, delivering a "thoughtful, well-prepared presentation." But McCain? "When it came right down to it, he had little to say in the forum he himself had called."

...As the narrative lurches from crisis to crisis—TARP, AIG, GM—the reader, and Bush, are continually presented with bailout moves as unavoidable faits accomplit. Bush was "visibly shocked" when Paulson told him in November 2008 that Citigroup was in big trouble. "I thought the programs we put in place had stabilized the banks," the president said.

The main problem with this fast-paced book was the main problem with Paulson's tenure—a surprising inability to see the big picture. And as tough as he is on congressional Republicans, Paulson lets some people off much too easy. If many smart, highly regarded people had simply carried out their responsibilities with a bit more diligence—Bernanke, Securities and Exchange Commission Chairman Christopher Cox, Wall Street bankers—much of the catastrophe could have been avoided. "As first responders to an unprecedented crisis that threatened the destruction of the modern financial system, we had little choice," Paulson writes. But the first responders assembled the bonfire and helped light it. Paulson was among the Wall Street chief executives who, in 2004, lobbied the SEC to allow them to use much larger amounts of debt—a move that set the stage for the debacles of Bear Stearns and Lehman.

Finally, given that Paulson knew this culture from the inside, it's disappointing that he doesn't reflect more on Wall Street's pathological need for compensation, on its pathetic leadership and corporate governance. But this is to be expected. Investment bankers look forward, not backward. So, largely, does this engaging, well-written narrative. It is what it is.