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on October 31, 2012
"Between March and September 2008, eight major U.S. financial institutions failed - Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Washington Mutual, and Wachovia --- six of them in September alone.....This, the most wrenching financial crisis since the Great Depression, caused a terrible recession in the U.S. and severe harm around the world. Yet it could have been so much worse."
Thus Hank Paulson summarizes, in the Afterword, the major challenges he faced as Secretary of the Treasury, a post he assumed on July 10, 2006 and left on January 16, 2009. And this does not mention other institutions that would have failed had they not been propped up (GE Capital, Chrysler, GM, and the entire money market industry after the Reserve Primary Fund broke the buck).
In the recently released "Bailout: an inside account of how Washington abandoned Main Street while rescuing Wall Street", Neil Barofsky, the former Special Inspector General in Charge of Oversight of TARP, details his efforts to constrain the Geithner Treasury from unconditional dispersal of hundreds of billions of TARP funds to the largest banks with no oversight. Former FDIC Chief Sheila Bair recently said of Geithner, "Tim seemed to view his job as protecting Citigroup from me, when he should have been worried about protecting the taxpayers from Citi." While Geithner did much to accelerate what the New York Times called a "no-strings windfall to bankers", the first $350 billion was dispersed under Paulson. Was he a hero who kept the world from falling over the "brink", or was he just rescuing his inept investment banker buddies and sending the tab to the taxpayer as some would contend? What evidence does On the Brink offer?
One indeed can make the case that Paulson was the right man at the right time since only a former CEO of Goldman Sachs had the necessary knowledge of financial markets and the professional gravitas to demand attention from the likes of Jamie Dimon of JP Morgan, John Mack from Morgan Stanley, Lloyd Blankfein from Goldman Sachs, Vikram Pandit from Citigroup, John Thain from (then) Merrill Lynch, Brady Dougan from Credit Suisse, and Robert Kelly from Bank of New York Mellon.
But, one can also argue that, having drunk the Goldman Sachs kool-aid, Paulson saw only one response to the crisis - save the big banks, everything is secondary. As the crisis unfolds, it seems that Paulson and his team move heaven and earth to accommodate financial institutions but underwater homeowners are given short shrift and then only to get more money for the banks: "...devising one [a mortage mitigation plan] would be critical to getting congressional approval to release the final tranche of TARP."
Paulson summarizes, "As first responders to an unprecedented crisis that threatened the destruction of the modern financial system, we had little choice [but to take the actions they did]." He repeatedly invokes images of "market panic", "grave distress throughout the world", "financial catastrophe", "serious risk", "the world falling apart", "all hell [breaking] loose", "[threats to] the entire financial system", etc, etc as justification for his actions.
But, throughout this crisis, many members of Congress asked Paulson to delineate the consequences of NOT bailing out the big banks, and, for the most part, he seems to duck the issue then and now. In one instance, he explains, "[Florida representative Adam Putnam] suggested that I needed to tell people more explicitly how bad it would be if the financial system collapsed....but scaring the public to win support would only make things worse economically." And, "...this dilemma haunted me throughout the crisis - how to make the public understand the grave situation we faced without inflaming the markets even further."
But what about now, in this Copyright 2010 book? Wasn't this the great opportunity to explain the Sum of All Fears and spell out how the dominoes could have fallen? The only clue we get here is that hundreds of billions were dispersed so that credit would continue to flow ("..if credit stopped flowing, businesses would shut down across America and many, many jobs would be lost."). But, you can't help but hear Eartha Kitt singing "Santa Baby" as you read about the fortune lavished on the big banks who promptly sat on the funds and provided no sugar for Daddy.
Whether you agree with his actions or not, ultimately the nation owes a debt of gratitude to Paulson for stabilizing a chaotic situation and you have to admire his fortitude in dealing with wave after wave of staggering problems. However, given the strong residue of resentment that still exists over how TARP (and related programs) were handled, On the Brink represents a missed opportunity to dispel some of that resentment.
A final note: the Afterword makes for interesting reading as Paulson lists his recommended actions for preventing another similar crisis. Guess how many of his recommendations have been implemented?