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Paulson's 'On the Brink'

by Robert Teitelman | Published August 6, 2010 at 4:41 PM

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
by Henry Paulson Jr.

Like Andrew Ross Sorkin in "Too Big to Fail" or David Wessel in "In Fed We Trust," Henry Paulson Jr. force-marches us through one crisis after another in the recently published "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System." He is brisk; he is indomitable; he is more than a little exhausting.

With the exception of one flashback, Paulson plows ahead. It often feels as if he is lecturing us in that raspy voice of his. Indeed, it's not always pleasant to be in his skin, particularly when, under stress, he suffers the dry heaves. But that is the real point of "On the Brink." Paulson wants us to see what he confronted, a seemingly endless series of financial woes. He wants us to feel how lost regulators, policymakers and politicians were, to realize how hard they worked, how bone-tired they became, how they triumphed -- well, survived -- through persistence, hard work and grace under pressure. Paulson is no whiner (most of the time), but he's seeking a pass here. We made decisions, he argues, some were right and a few were wrong, but consider the context. Don't forget what it was like. Cut us a break.

He has a point, though politically it's one that's easily discarded by the venal and the demagogic, meaning most of Congress and the punditocracy. And the reality of this book does align with the sense Paulson himself communicated throughout the crisis: that here was this grindingly rational man, this superstar financial executive, who would outwork everyone else and was forced by circumstances to make snap decisions from his gut. Here was a man who often didn't know what to do and who was driven to pray with his wife. If you weren't frightened in the fall of 2008, you will be after reading "On the Brink."

The big question here, which Paulson, like other members of the you-were-there club, minimizes in his eagerness to provide action and drama, is how we got to the point where experienced leaders like Paulson, Tim Geithner and Ben Bernanke were at such a loss. Paulson rarely discusses this question. He admits that he missed the buildup of subprime mortgages. That's excusable; he wasn't alone, he wasn't a mortgage expert, and Goldman wasn't a huge player in his era.

It's less excusable that as the longtime CEO of Goldman, Sachs & Co., he missed the regulatory arbitrage going on, the increasingly shaky leveraged financial structures of Wall Street (he participated in the 2004 lobbying of the Securities and Exchange Commission to boost leverage), the accumulation of stresses and strains. Although he shakes his head at excessive compensation, he made a nice living himself. On the regulatory front, he argues that he offered proposals before the crisis to "modernize" the capital markets. But while he recognized that the New Deal regime was crumbling and he eventually proposed tougher regulatory structures, his initial plan aimed at reducing regulatory interference, arguing that London was getting all the IPOs. This was regulatory arbitrage in action.

As the crisis began to mount, Paulson says he recognized quickly how dangerous it was -- his greatest triumph may have been his decisive move to nationalize Freddie Mac and Fannie Mae -- particularly after the run on Bear Stearns Cos. But short of harassing Lehman Brothers' Dick Fuld to find a buyer, there's only sketchy evidence in this book, and very little in the rest, about steps taken by regulators to understand what they were facing in the failure of an interconnected investment bank between Bear in March and Lehman in September. "Too Big to Fail" notes that Paulson and Bernanke did order an assessment of areas of risk in the event of a collapse, like the repo book or securities portfolio. Paulson says that the group "hammered out some protocols" before adding that a study suggested Treasury had few options. But what does that mean? Had anyone bothered to go beyond protocols and actually find out what toxic creatures were lurking at the bottom of Lehman's basket? What were the systemic consequences? You would think someone would attempt to grasp the vulnerabilities -- to make some calculus of the systemic risk.

As the crisis neared, Sorkin reports, Bernanke and Paulson released a statement saying they were confident that Lehman counterparties had time to protect themselves. This turned out to be overly sanguine, to say the least. But in "On the Brink," Paulson, like Job, to whom he later jokingly compares himself, never stops worrying. He knows it'll be bad. Really bad. But he doesn't know how bad. He knows he can't go to Congress to seek greater authority until it's really bad. All he can think to do is to get a recalcitrant Fuld to sell Lehman. But Fuld is hopeless, which Paulson doesn't see until it's too late.

Throughout the you-were-there books, the principals are constantly racked by uncertainty, but they are so busy worrying that they often fail to act pre-emptively. Paulson says he and Geithner worried early on about credit default swaps, but little was accomplished, and no one seemed to know enough about them -- certainly not their scale -- to anticipate their cataclysmic propensities. The same applies to more traditional vehicles like repos, commercial paper, auction-rate securities and money markets. The implosion of money market funds after Lehman comes as a shock, despite the fact that it's one of the largest short-term markets in the world.

Could they have known more? Yes and no. By the time the crisis deepened in September, there was little time to investigate these linkages and interconnections. But all these principals had been in charge for at least several years; they were all proficient in the ways of modern finance. Longer term, regulators had allowed a system to grow that was too complex, too opaque, too global. True, the efficient-market hypothesis gave them a good reason to believe it didn't matter. But practitioners like Paulson certainly knew the flaws as well as the benefits. And there were those six crucial months between Bear and Lehman. Paulson is mostly silent on these topics. He knew a crisis was coming, but it still caught him by surprise.

Paulson has written a canny book about these matters. It's a narrative that moves so briskly that it sweeps past knotty issues, questions, difficulties; much-debated incidents, from the AIG bailout to the Bank of America wrangle over the Merrill Lynch & Co. deal to the fateful decision to let Lehman go (or, for that matter, to save Bear), hardly register before the reader is bundled off to the next disaster. The surface Paulson constructs appears straightforward: He's a hardworking straight shooter trying to do the best he can for family, firm, country and world. He's no theoretician, ideologue or politician.

Much of this may be true, but that very listing of priorities raises questions that he barrels past in his call to action. Beneath the surface Paulson is a driven, complicated and occasionally tortured soul caught up in radically complex situations. He is no innocent, on his own testimony. In the late '90s, he becomes co-CEO of Goldman with Jon Corzine -- a collegial tradition since the days of John Weinberg and John Whitehead. The public offering is looming; the firm is split politically, and the partnership, past and present, is ripping itself apart. That's what we know. All that Paulson blandly gives us is that "tension was growing between Jon Corzine and me. ... [F]rankly the pairing was never right." Co-CEOs could never work in a public company, he decides, and he persuades the management committee to dump Corzine. He even turns this episode into a grudging compliment, recalling how Corzine admitted to underestimating his toughness. That's the lesson he leaves readers: not the complexities of Goldman politics, but that he's a tough guy who does the right thing. And he won, too.

And yet Paulson is also not your stereotypical investment-banker-turned-mandarin. As he himself says, he dresses poorly, he travels to a second home in Barrington, Ill., on weekends, he's happily married (while admitting how hard he has been to live with), and his passion, besides sports, is something he shares with his wife: birding. He's a Republican, sort of (his mother bursts into tears when he tells her he is going to work for George W. Bush, and his wife is a committed environmentalist). He's a believer in free markets even after orchestrating massive government interventions. He is incredibly hardworking and demanding of others, yet he lavishes praise on Bernanke, Geithner and the rest of his band of brothers. He is, for all his candor and toughness, sensitive, even thin-skinned: He bristles when Sarah Palin calls him Hank. Generally, he disdains retail politicians, despite having triumphed at politicking in the wholesale shark tank. Most surprising, he takes comfort in a Christian Science that has been in his family for generations and that he shares with his wife Wendy, who despite her only intermittent appearances, may be the book's most remarkable character.

Paulson's few moments of introspection soften, though they don't banish, a comment Robert Steel, an old Goldman colleague, Treasury aide and then Wachovia CEO, made to Sorkin in "Too Big to Fail": Paulson would work harder than any man on earth, but there was an emotional quotient missing. (Another comment, from NYU professor and former Goldmanite Roy Smith in his "Paper Fortunes," also appears valid: Paulson, he says, was "pathologically competitive.") The flashes, occasionally awkward, of personal details suggest a roiling inner world beneath the bluff exterior. Early in the book, Paulson is being wooed to take the Treasury job by the Bush White House. He has turned it down once, but he's flattered and intrigued when asked again. His thoughts reflect elements of his personality that resembles a kind of Victorian stoicism. Thinking about why he turned down the job, he realizes he is gripped by fear -- "fear of failure: fear of the unknown. ...

"Once I understood this, I pushed back hard against the fear. I wasn't going to give in to that. I prayed for the humility to do something not out of a sense of ego, but out of the fundamental understanding that one's job in life is to express the good that comes from God. I always believed you should run toward problems and challenges; it was what I told the kids in camp when I was a counselor, and now I told myself again. Fear of failure is ultimately selfish; it reflects a preoccupation with self and overlooks the fact that one's strength and abilities come from the divine Mind."

It's no wonder that Paulson continually praises George W. Bush; they both sense divine direction. There is a strange I-have-no-ego quality here that is, paradoxically, egotistical. He is decisively indecisive, which sometimes drives the markets to distraction. He knows he's the right man for the job, and throughout the long crisis, as he struggles to make decisions of enormous import, his confidence that he is the right man never really wanes. Even should he fail -- and he often senses failure -- no one else could have done better.

He, Hank Paulson, was America's last great hope, and that was a crushing responsibility he would bear with grace. It's no surprise that so many of his dealings with politicians -- with the exception of Barack Obama, who only miffs Paulson when he stops calling after his election -- were fraught with tensions (he is devastating on John McCain, particularly on his famous intervention in the TARP talks when he had little to add). He does not like to be contradicted. He is not comfortable with grandstanding and emotion. Some of his respect for Bush seems to stem from his willingness to let Paulson do what he thinks best. But Bush hardly ever offers him much in the way of political advice or air cover, which he clearly needed; Bush is genially disengaged, if interested.

Still, Paulson's memoir effectively nails its major point: the shock and unprecedented quality of the evolving crisis and, yes, the fortitude and heroism of its major players, including Paulson. Despite the fact that Treasury was lousy with former Goldmanites, there's little to suggest he conspired to, say, kill Lehman to save Goldman. He had no plan, except to get through a weekend without a complete collapse. He was no master of public communication. But the reality of that collapse, its extent, depth and consequences, can be denied only by lunatics. He is persuasive that he did the best he could. Was that perfect? No, but he held things together, as he often says, with "duct tape and bailing wire" until the storm passed. He's no Lincoln, he's no genius of human insight, and he's more ambitious and conflicted than he will admit. But we could have done far worse. And he deserves more credit than he's getting.

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