Buy the Book
Goldman Paulson Sachs
Henry Paulson’s apologia is a sorry effort that will only reinforce the loathing he inspires.
On the Brink: Inside the Race to Prevent the Collapse
of the Global Financial
System
By Henry M.
Paulson
(Business Plus, 496 pages, $28.99)
The only new piece of information in Henry Paulson’s new book is that when Warren Buffett woke Paulson up with a phone call on October 11, 2008, in his initial grogginess Paulson thought that it was Warren Hansen, his mother’s handyman.
The rest of On the Brink contains not a single new story from the financial crisis, and what a shame that is, considering that Paulson was more involved in those events than anyone. Instead, the book is Paulson’s contribution to a growing collection of post-Bush administration memoirs written solely to vindicate the author. Although Bush left office the most unpopular president since Truman, he remains convinced that history will rehabilitate his image and is hard at work writing an autobiography that he hopes will help shape the eventual pro-Bush narrative. Dick Cheney has been holed up in a McLean attic since Obama’s inauguration working on his own confessions. Meanwhile, Bush and Cheney are being beaten to the bookstands by John Yoo, Marc Thiessen, and, not least of all, Karl Rove. And those are just the most recent books, not counting any from Bush’s first term or the separate cottage industry of tell-all books.
At least all the above add something to the debates by addressing critics or revealing new details. Paulson’s book does not. Instead, it simply rehashes the basic historical outline of the crash, while whitewashing all the main characters so that they are perfectly PC and user-friendly — politicians, bankers, and especially Paulson and his two innocent and gentle buddies, Ben and Tim. Even the momentous conversations Paulson had over the course of the crisis have been sterilized of all historical noteworthiness and now read like Dick and Jane dialogues, with no big words or complex sentences but lots of first names. Let me pick a back-and-forth at random:
I called Aramark CEO Joe Neubauer, who was on Wachovia’s board. I’d worked with Joe and knew him to be financially sophisticated and a straight shooter [it’s worth reiterating that Paulson says only good things about everyone he mentions. Toward the end of the book his resentment of McCain simmers to the top a little, but that’s all].
“Joe [say this for Hank: apparently the one thing he never lost during the crisis was his ability to use his interlocutors’ first names at least once per three sentences], I just want to make sure you have the right sense of urgency,” I said. “The Goldman Sachs people are waiting in their offices, and no one has showed up.”
“Why does this have to be done so quickly?” he asked.
“Wachovia is likely to fail soon,” I said. “The market is very nervous about your mortgage portfolio. It’s much better to get ahead of this.”
Every exchange in the book is recounted exactly this way: huge decisions determining the fates of endlessly complex institutions are gamed out in the crudest of terms by two pals in conversations depicted with a level of detail, dramatic tension, and moral awareness that would be better suited for a Sesame Street segment about cooperation.
It is maddening to think that Paulson decided that history books would be better off with a number of these heavily edited conversations than with insights into some of the most consequential and still unexplained events of the fall of 2008. Here are two such instances, picked randomly out of dozens of possible examples:
1. Why did Treasury and the Fed allow Lehman Bros. to collapse after they’d bailed out Fannie and Freddie and facilitated the sale of Bear Stearns?
Paulson does not say. The line at the time was that Treasury had no legal authority to intervene, but that was the extent of the information officials gave out. Paulson tells a long story (which has its own problems) about his efforts to coax different banks into buying Lehman, and then concludes with this: “Some in the group asked if we should revisit the idea of putting public money into Lehman, but Tim said there was no authority to do that.”
Again, note the reduction of an impossibly complicated issue — whether regulators had the legal authority to bail out Lehman — into a impromptu conversation with a first-name-basis friend. Does Paulson expect the reader to believe that the Treasury establishes its policy options by making a phone call to the head of the New York Fed? That “on the brink” of economic collapse he couldn’t be bothered to ask one of the thousands of Treasury employees to dust off the ol’ regulations booklet?
2. What did the government do to get the CEOs of the nine largest banks to agree to the initial sale of preferred stocks and warrants to the Treasury? Only two weeks after Congress passed TARP, Treasury announced its intention to use TARP funds to purchase bank shares and warrants instead of toxic assets — a huge shift in strategy that Paulson admits he planned even before Congress signed onto the original TARP. The point of the new plan was to inject equity into banks, whether they needed it or not, in order to reassure other financial institutions. Of course, the CEO of a bank with a healthy balance sheet wouldn’t want to sell the Treasury equity for no reason, and it didn’t take long for rumors to arise that Paulson & Co. had engaged in shenanigans to persuade the sound banks to participate. In On the Brink, Paulson recounts inviting the banks’ CEOs to D.C. without disclosing the purpose of the meeting, and then scripting the meeting with other regulators beforehand. He writes that he led off with a hard sell: “And I pointed out that we wanted them to contact their boards and confirm their participation by that evening.”
This doesn’t sound too far from “and I threatened them.” If Paulson wanted to avoid that interpretation, he should have added some mitigating details.
It is striking how bipartisan anti-bailout sentiment has become. If Paulson wants to rehabilitate his image for the history books, he has to win over both the left and right wings. Conservatives resent him because, as far as they can see, he was a closet Democrat from the beginning and only confirmed those suspicions by helping Bush abandon free market principles in the hour of greatest need. Liberals hate him because they believe he always acted in the interests of his Wall Street fat cat friends from his Goldman Sachs days. And both fault him for an arrogance and elitism that only the truly rich and powerful think they can get away with. Unfortunately, Paulson’s book will only reinforce all these beliefs.
About the Author
Joseph Lawler, former managing editor of The American Spectator, is editor of Real Clear Policy. Follow him on twitter: @josephlawler.
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Howard| 3.9.10 @ 7:39AM
I've read excerpts of the book. Good points. I think one area that perhaps accounts for some of the shoddy work done by Paulson is with a change of administration coming soon, there were more short term fixes thrown together, than a more comprehensive program. Also, it was a very panicked time, so some slack should be given. That being said, I still consider Paulson a horses ass.
Pingback| 3.9.10 @ 8:20AM
The American Spectator : Goldman Paulson Sachs capital university links to this page. Here’s an excerpt:
Eric Cartman| 3.9.10 @ 9:09AM
Sounds like the end result of the Smartest People In the Room Syndrome (TSPITRS - T - Sptitters) The same guys who gave us Black-Scholes , CAPM, Aaa tranches created from HUD homes in Detroit needed a bailout because their riskless portfolios blew up and killed the credit market.
Until we decide that shuffling paper and hording information is not the same as an actual industrial base, then we can expect more of the same. Capital growth is essential to economic growth, but capital growth based on property evaluations performed by Mr. Magoo Appraisals and Myopia Clinic are probably not the way to run your nation.
Oh, I know: The rating agencies, the SEC, Fanny, Freddie, Dodd, Barney & Co., bubbles, Schiller Indexes, blah blah blah. But it really boils down to the T-Spiters. The guys who first gave us LTCM as a prelude to this folly.
R Martin| 3.9.10 @ 9:23AM
It has been 1 1/2 years since world financial markets were rocked by a crisis of confidence. Governments responded to that crisis as governments always do and, not surprisingly, critics have come forward after the fact to find fault with those actions. Some criticism is, perhaps, justified, but the facts remain--a catastrophe was averted, confidence was restored and markets are again working normally. I would cut Paulson a little slack. And, anyway, a reader of such a "tell all" book knows the author is not going to betray his own self interest.
Norman Park| 3.9.10 @ 11:33AM
Well said. A good deal of slack should be given to Paulson, et. al., as they did indeed steer us thru the crisis quite well.
My question is this. What exactly did those critics on the left and right suggest we do? Nothing? I have a pretty good hunch how that would work out. It's quite a good laugh to see so many economic illiterates weigh in on matters they clearly know so little about. Conspiracies re. big banks and Goldman Sachs make for a grand time in cyberspace, but none of these critics have spent anytime in the arena.
Eric Cartman| 3.9.10 @ 11:42AM
That's right, Norman. No one here has spent time in "the arena". No one here could possibly see that investing in worthless paper put together by people like G/S and rated by compromised agencies as Aaa investments and sold around the world is a bad idea. We're not smart enough to see the value in it, I guess. Putz.
Norman Park| 3.9.10 @ 2:51PM
I'm talking about the response to the crisis Cartman, not what caused it. That's another matter altogether. Suffice to say, on that score, Wall Street bears a great deal of responsibility ...
Eric Cartman| 3.9.10 @ 3:05PM
I'm well aware of what you are referring. The crisis was allowed to get to a point where there was little if any recourse to Paulson's action. But I bet he had Brooksley Born's number in his Rolodex. As did Summers and Giethner. After all, theses were the people who squashed her like a bug after the LTCM fiasco. Allowing the practices that would eventually cause the mess was the original sin. Writing a book about cleaning up the train wreck afterwords is the second sin. Being from the arena, I'm sure you understand what I am talking about.
Eric Cartman| 3.9.10 @ 3:27PM
PS: Has anyone gone to jail for these practices? I haven't heard of any. When that starts to happen, I may have some trust in the Street again. Until then, it's a rat's nest with immoral rats running it.
John Markham| 3.9.10 @ 6:14PM
Are you talking about idiots like Phil Gramm, Mr. Cartman? If so, I heartily agree. The derugulatory zeal of idiots like Gramm should be your concern. Guys on the Street will always do what guys on the Street do. That is to say they will try to make money. Somebody needs to regulate the markets, and I suspect a lot of your anti-government friends cheered the brave new world Mr. Gramm was championing ...
Dai Alanye | 3.9.10 @ 10:10PM
The real estate crisis wasn't caused by lack of regulation, old chap, but by government actions that encouraged and assisted foolish lending. In effect, regulations were largely the cause of the mortgage crash.
Norman Park| 3.9.10 @ 6:16PM
Who do you suggest we put in jail? And, exactly what law were they breaking? I guess you could just tax the hell out of them, if you like.
Eric Cartman| 3.9.10 @ 7:17PM
Are you telling me that no one did anything wrong? I guess it just happened. Tranches made up of distressed properties, sub-prime mortgages, second mortgages and given Triple A ratings from Moody's and other agencies are just normal, everyday, sober business. Nothing to see here - move along. No fraud. Nothing to see!
And as for Sen. Gramm, did he write laws saying fraud is swell? The new way to do business? I believe the SEC still exists. The Gramm-Leach-Bliley Act didn't allow wholesale fraud, did it? To say the act repealed Glass–Steagall is wrong. It allowed holding companies to own Commercial, Investment banks and insurance companies. The banks still must keep their business activities separate. There are people in both Government and Wall Street that need to be jailed and no one has even asked polite questions.
Norman Park| 3.9.10 @ 10:25PM
Clearly people did things that were wrong, but I don't think there was criminality at the heart of the crisis (Madoff, etc. are separate issues). I assume when you refer to "fraud" you're referring to credit default swaps. There's no question that nobody knew what the hell was going on with these things, but I don't think it was criminal. Leverage and risk are very dangerous, and people clearly performed poorly. I'm sympathetic to your defense of Phil Gramm, but it's important to remember that he was instrumental in the effort to keep CDSs and the like in the murky, unregulated world in which they reside. Very hard to then deem this activity "criminal".
JoshInHB| 3.9.10 @ 11:24PM
I assume when you refer to "fraud" you're referring to credit default swaps.
The entire mortgage lending system circa 2003-2006 was built on fraud. Underwriting standards were entirely abandonded.
If you proposed to a banker in 1965 that they underwrite a mortgage with no income verification of the borrower, for 100% of the estimated (not appraised) value of a property that had appreciated 200% in the last 3 years, with no money down by the borrower; the banker would have known that this was a scam, possibly some organized crime scheme, certainly have declined the loan and probably have called the police.
But all the "free" marketeers created an environment where this kind of loan was not only not unusual, but could be considered conservative.
Either these people are criminals or they are the sorriest bunch of incompetent posuers that have ever infiltrated any business.
Either way their just deserts are personal bankruptcy not billion dollar bonuses.
L Blanchard| 3.10.10 @ 12:27AM
Free Marketers did not create that environment. Congress did. Congress ordered them to create those instruments. Perhaps not in specific detail, but via congressional fiat. They initially refused, for the very reasons you note. But congress legislated stiff penalties. And when congress then swung open the door on the secondary market by ordering fannie and freddie to purchase those instruments, wall street obliged. After all, they wouldn't be holding the bag. But if America were a household, who are the parents? Who sets rules and defines law? That's where the blame lies.
Eric Cartman| 3.10.10 @ 1:16AM
There is no doubt that Congress and the WH had a big hand in creating this mess. The ACORN/Loud Mouth Jesse Jackson mouthpieces race-bated the spineless into thinking Mortgages for Morons was a great idea. No one is forgetting them. Dodd, Barney and others belong up against the wall, also. I waiting for one person to stand up and tell the race hustlers to shut-the-f&%k-up. I'm not holding my breath, though.
Eric Cartman| 3.10.10 @ 12:33AM
Josh said it pretty well. Clearly some people simply made mistakes or bought into the "new math". But some purposefully loaded the burrito full of bad-faith loans, had enough leverage to get some absurd rating (Aaa, AAA, Aa1, etc), sliced them up and offer the debt as a great investment.
There is nothing inherently wrong with swaps, CDOS or other derivatives. Industry needs future markets to minimize loss and facilitate planning. Leverage and risk are inescapable. Its when firms hide or falsify the risk, that is the problem. The derivative market practices should have been reigned in back in 1999 after LTCM and oversight - e.g. the clearinghouse model, regulation reflecting the risk, etc. - but politics prevailed. But there was fraud in the game as well. My point is that no one seems to be looking for it.
Norman Park| 3.10.10 @ 9:50AM
I really don't disagree with much of anything that you're arguing Cartman, but I don't think this was largely a problem of firms falsifying the risk. Ignoring the risk and not understanding the risk yes, but not falsifying the risk. Everything from the ill-advised subprime mortgage to the mortgage backed securities were built on the notion that housing prices would go up forever. This was an incredibly wrong, and dangerous notion, but I don't think this is criminal. That's my only point. Plenty of blame to go around, but it certainly seems that the bubble mentality will be with us for awhile.
Norman Park| 3.10.10 @ 9:52AM
And, Cartman, you're also clearly right that there was fraud in this whole mess. I just don't think that fraud was the real issue here.
Eric Cartman| 3.10.10 @ 11:29AM
I agree that he underlying mistake was that people thought they knew how to handle these complex vehicles when they clearly didn't - that was my initial point about T-SPITERS. Lets say 90% of this was due to hubris. But what lit the fuse were the loans that shouldn't have been made and were. When these people started defaulting, it became impossible to try to value the investments and it sped up the defaults and raised the fear level - trust was gone and risk exploded. The 5 - 10% of the fraudulent loans carried nuch more weight than they should if there were guardrails on these transactions after the LTCM mess. The worthless junk could have been steered into some mechanism to better protect the system. We would still have taken a hit, but in my opinion, not the one we have. The effect of the fraud had more weight than it should have. At the least, the fraud needs to be prosecuted and the people responsible go to jail. Some modicum of trust needs to be restored.
L Blanchard| 3.10.10 @ 12:18AM
Good point. In most instances, I agree with the position of allowing failure....allowing bad management to destroy itself. But when Lehman fell, all Lehman's obligations - held by other institutions as performing assets- became worthless, starting a potential domino effect. If the volume of assets at risk was Trillions of dollars (and I suspect it was), then allowing the whole house of cards to fall in spectacular fashion may have put the entire economy into meltdown. For all the complaining that toxic assets will now fester and hamper recovery, I think I will take that over cataclysmic implosion of the entire economy. Recapitalizing these firms in my mind was VASTLY superior vs the idea of saddling taxpayers with all the toxic assets. Hold rates low, and let these firms earn their way out of that negative in a controlled manner. Some of the original Tarp (given to banks) could conceivably be returned to the treasury. The ROI on the toxic assets would likely have been much worse.
Eric Cartman| 3.9.10 @ 9:35AM
And who exactly brought on this "crisis of confidence"? This isn't like discovering dandruff on your Tux just before your big date and calling for the Head and Shoulders at the last minute. And I still haven't seen anyone go be brought up on charges for this. Has anybody? Just wondering.
Eric Cartman| 3.9.10 @ 9:57AM
Oh, this isn't to say that the oil price spike didn't play a part. Speculators treating oil as safe harbor for excess cash and diving the price up past $5.00 a gallon didn't help, either. That's when people stopped paying their mortgages and Black-Scholes was proven to be just another partial differential equation useful for heat and fluid dynamics.
JoshInHB| 3.9.10 @ 10:31AM
At least all the above add something to the debates by addressing critics or revealing new details. Paulson's book does not. Instead, it simply rehashes the basic historical outline of the crash, while whitewashing all the main characters so that they are perfectly PC and user-friendly -- politicians, bankers, and especially Paulson and his two innocent and gentle buddies, Ben and Tim. Even the momentous conversations Paulson had over the course of the crisis have been sterilized of all historical noteworthiness and now read like Dick and Jane dialogues, with no big words or complex sentences but lots of first names.
You didn't think he'd tell the truth did you?
I'd be satisfying if he admit that he pulled the biggest scam in the history of the world to enrich himself and his buddies, but criminals rarely confess.
PCC| 3.9.10 @ 11:07AM
Well, no matter how you slice and dice it, this book review is funny and insightful.
As Mr. Paulson would say, "Thanks, Joe."
Yosemeti Sam| 3.9.10 @ 11:26AM
" Goldman Paulson Sachs ...."
What's in his wallet?
Eric Cartman| 3.9.10 @ 11:29AM
Your money!
DatsunMark| 3.9.10 @ 11:29AM
Shame on George Bush for hiring this egotistical arrogant pompass ass democrat who bailed out his friends with my grandchildren's future earnings. We placed our posterity's future into zombie banks buying up worthless bad assets which we'll see the effects for years to come. Paulson then gets to be selective on who gets bailed out and who does not . Some of you think this was a good decision and confidence has been restored...we're not out of this yet and now with the Fed inflating money supply to buy our worthless bonds we're on the road to serfdom.
Ken (Old Texican)| 3.9.10 @ 11:47AM
I mentioned yesterday, my cousin/friend -nationally famous macro-economist said words to the effect, "no-one knows.....no one."
His best suggestion is to let the gazillions of personal decisions in a free economy set the trend. "Build our stuff, manufacture our stuff, heal our sick, extract our God given resources, use our minds as our most powerful resource, grow our food, and get government under control, because it can only complicate stuff."
PCC| 3.9.10 @ 12:47PM
To have achieved the level of success in business and appointed public service that Mr. Paulson has must mean that he is, amongst other things, a highly capable and intelligent person.
Or does it?
bob s| 3.9.10 @ 1:00PM
Would he, by any chance, be related to Pat Paulson?
Petronius| 3.9.10 @ 3:46PM
The late Pat Paulson is undeserving of such a cut. After leaving comedy/politics; (the two being interchangeable), he actually produced something.
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aware| 3.9.10 @ 1:40PM
The biggest disaster of all in the minds of rat bastards like Paulson is the exposure of the rotten banking system for the criminal farce it is.
As usual, their "fix" only magnifies and defers the day of reckoning. God forbid we should have an honest monetary/banking system free of cronyism, inflation, central bankers(and their political hack accomplices like "Treasury Sec."), not to mention, cooked books(corporately), cooked numbers(State), and cooked gooses(you and me).
I think I'll wait to see how it ends before I give the Masters of the Universe a pat on the back for "saving" us. But I'm still thinking his head on a pike would be a more suitable reward. He did show that panicking the herd critters is still the best way to get their liberty and wealth. And even have the rubes thank you for the fleecing....er, I mean "saving".
Eric Cartman| 3.9.10 @ 2:38PM
I agree with your assessment of the "rat bastard". Thanking him would be like thanking the guy who shot you for calling an ambulance - from the next county; that has a flat tire; and is out of gas.
Inge| 3.10.10 @ 3:31AM
Did Soros fit into any of Paulson many words during the 'mysterious' crisis in 2008 to get Obama elected?
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