View from crisis central

Hank Paulson headed Goldman Sachs and the US Department of the Treasury. His book gives a flawed but copiously detailed view of the financial crisis from both perspectives.

Henry ‘Hank’ Paulson (his wife calls him ‘Pea’) was the 74th treasury secretary of the United States from July 2006 to January 2009 under President George W Bush. He secured himself a permanent place in the history books as the man in charge of the US exchequer during the financial crisis that started in mid-2007 and culminated in the collapse of Lehman Brothers in September 2008. On the Brink is a first-hand account of how the crisis unfolded and how the Bush administration grappled with it.

The book begins with a brief bio-sketch of Paulson. An investment banker by trade, Paulson rose to head the Wall Street blue-chip Goldman Sachs before moving on to the treasury. He started his career in government, however, working first at the Pentagon and then at the White House in 1973. Paulson, thus, has the somewhat dubious distinction of having begun his career in government with the Richard M Nixon administration and ended it with Bush junior, two of the least popular American administrations in recent history.

Contrary to the image that his choice of employers suggests, Paulson does not belong to a diehard Republican family. His mother, who is still alive and apparently still enjoys skiing, is a pro-choice liberal staunchly opposed to the Iraq war and George W Bush. She voted for Obama. Paulson’s wife Wendy was Hillary Clinton’s classmate, and hosted one of the first fundraisers of Clinton’s original, successful, Senate bid. Paulson himself is a committed Christian Scientist who believes in the power of prayer in physical healing as an alternative to conventional medicine.

Biography done, Paulson plunges headlong into an account of the financial crisis. He opens his account in the middle of August 2007 when the first fissures in the subprime mortgage market began to show. After 250 relentless pages recounting the sequence of events — including the collapse of Lehman Brothers, the bailout of insurance major AIG and the government takeover of mortgage finance giants Freddie Mac and Fannie Mae — On the Brink ends in November 2008, when the bailout package commonly known as TARP (the Troubled Asset Relief Program) was announced.

‘Crisis writing’ is by now a sizeable genre. A number of financial journalists have written books (Andrew Sorkin’s Too Big to Fail comes to mind) in an attempt to chronicle the crisis. Some have skillfully woven copious research onto the structure of what could be best described as a thriller. They flesh out the principal protagonists, build suspense and arrive at a climax.

Paulson’s book, instead, has the structure of a personal diary written by a not very inspiring diarist. The attention to minutiae is almost excruciating and the language an almost flat monotone which occasionally lapses into a caricature of American noir writing (“I knew that we had to ambush Fannie and Freddie”). The cast of characters is bewilderingly large and the reader is often clueless about their precise roles.

Paulson as head of Goldman Sachs was as much part of the problem as he was, later as Treasury Secretary, of the solution. Goldman was a big player in the exotic derivatives market that lay at the heart of the crisis. It was also one of the few banks that seemed to have been on “the right side of the trade”, weathering the crisis remarkably better than its peers. There is, however, surprisingly little discussion in this book, beyond trite generalities, on how the strains in the American and global markets built up over the years and on what finally caused the implosion. Paulson also has nothing to say on why Goldman took what appears to have been a contrarian stance on the future of the mortgage market that was the key to its relative success.

It is not entirely fair to dis On the Brink. For one, readers with a researcher’s interest in the crisis will gain from the meticulous telling. Lay readers, if they are not too intimidated by the barrage of detail, will gain from Paulson’s ability to explain the complex structure of institutions like Freddie Mac and Fannie Mae, and instruments like CDOs, with remarkable lucidity and without recourse to jargon. Freddie and Fannie appear to be Paulson’s pet peeve, yet I have not seen a more comprehensive analysis of what exactly went wrong with those two financial giants. Ditto for the author’s analysis of over-leveraging by financial institutions and how that finally triggered a crisis of confidence that caused money markets across the globe to freeze.

Besides, while Paulson glosses over a number of issues that deserved closer attention, there are some areas that he covers rather well. For one, he gives the reader a fairly close view of the politics of crisis management, particularly the hectic parleying between the administration and legislature to get key policies, particularly some of the controversial bailouts, passed. There is an interesting discussion of the role of key American economic allies like China and the UK in the crisis. While he lauds the patience and understanding of China’s economic czars, Paulson has no love lost for the British finance minister Alastair Darling. It was Darling’s refusal to play ball when it came to issuing regulatory clearance for the Barclays acquisition of Lehman that was the last nail in Lehman’s coffin.

On the Brink is no page-turner. Readers who want an introduction to the financial crisis might want to start with something else. For crisis aficionados, however, a book written by a man who was at the very heart of things is likely to have its own attractions.

Abheek Barua is chief economist, HDFC Bank

ON THE BRINK
INSIDE THE RACE TO STOP THE COLLAPSE OF THE GLOBAL FINANCIAL SYSTEM
Author: Hank Paulson
Publisher: Hachette
Pages: 458
Price: Rs 599