Update: This review looks like a kool-aid drinking review. Well, maybe Paulson 'got me'. Maybe.
On The Brink is unique for a 2008 crisis book in that it was written by one of the major participants: Hank Paulson, Secretary of the Treasury.
The book itself is absolutely top notch, as a book. I am surprised and somewhat baffled that a man who is widely criticized for his allegedly poor speaking ability has turned out this eminently readable piece of prose. It is clear, well written, engaging, interesting, and humanizing. Update: oh, duh. He had a ghostwriter.
However Mr Paulson is also a famous ex-CEO (of Goldman Sachs) and a power player in Washington politics. He was in the Nixon Whitehouse after all. Thus, the book does have a bit of that corporate-speak BS guache over it, a sort of dark shadow that you can't seem to shake as you read it. Most of the wonderfully colorful remarks and strategic leaking made by Paulson, as described in Too Big to Fail, by Andrew Ross Sorkin, and other places, are here missing.
Also missing is his place in ousting Dick Grasso from the NYSE and helping to get the brokers replaced with computers. Another example is when he talks about Robert Rubin in glowing terms as a public servant. If Paulson had been Secretary when Rubin called up the Treasury to ask them to talk to a ratings agency in order to help his employer Citigroup, somehow I think the 'displeased' side of Paulson would have come out.
Paulson, in the book, is not a cuddly kitten. He has sharp elbows. He just tries not to use them unless it is absolutely necessary, like he does with the Bank of America board, or Fannie and Freddie.
What else is missing? A true breakdown of the Synthetic CDO and the Credit Default Swap that it was made of. Mr Paulson describes CDS, roughly, as they are used in hedging, but he doesn't talk about the sort of 'gambling' aspect of them, which several other books do. As CEO of Goldman in 2005/2006, he surely would have known a little bit about these issues, or at least been curious about them after the fact. In the book, however, we find out almost nothing about his tenure at Goldman during the bubble.
However, the book is still an excellent education in the crisis. If you only read this book, and none of the others on the crisis, you will still understand a great, great deal about the overall view of what happened, and why it happened. Though many journalists have taken us inside the big banks and the highest drama within, this book gives us a first-person view of who those big bankers were talking to on the phone all through the crisis. Paulson gives us his perspective on Lehman, Morgan Stanley, and many others, quoting directly from his conversations with the executives involved.
Mr Paulson also breaks down just about each and every 'alphabet soup' Fed program that was created during the crisis; not only what it was, but the circumstances that lead to it's creation, what problems it was supposed to solve, who worked on it, what were the political issues that had to be worried about, etc.
This 'horse trading' aspect is one of the most fascinating. We see the Democrats and Republicans square off, factions take over the Republican party, while Democrats are painted as wanting far more concessions that Paulson is willing to give. It is a study in compromise and how our democratic system, with its two-house legislature and executive branch, actually works together in practice. It is eminently enlightening.
As for those who are not the biggest fans of President Bush, like myself, this book may change your mind a bit. You may have lost all respect for Bush due to the Iraq War, torture, the gay marriage baiting of Karl Rove, Katrina, and the other complaints us libtards tend to have. You may also blame Bush for not doing anything to prevent the financial crisis; particularly if you have read The Price of Loyalty, about Bush's first Treasury secretary, Paul O'Neill. However, in Mr Paulson's portrait, we see Bush as a man who realized an emergency was happening, and was prepared to hit the brakes and do a 180 turn in a split second. In this particular crisis, he threw his personal deeply held economic-political beliefs out the window, and did what he felt was necessary to save the planet. For supposedly ultra-free-marketers like Bush and Paulson to bail out a bunch of private companies, is, when you think about it, kind of a big deal. Not that 'conservatives' dont feed at the trough of big government. But the TARP and other programs enraged vast numbers of people in their own party. It would be like a liberal having to acquiesce to, I don't know, getting rid of the Department of Education or something.
So, if you are like me, a former anti-Paulson ranter, pouring my amorphous, half-baked hatred out into anonymous comment boards on the internet about the evil of bankers and the conspiracy of Hank, you may find this book softens you up a bit. Even if he leaves out a great deal of detail, even if he is putting a little of the ol' CEO/government positive spin on things, you cannot deny that the situation he faced was incredibly, horrendously, serious.
I found myself wondering, what would Al Gore or John Kerry have done, if they had been in power when the crisis hit? Who would have been their Treasury Secretary? How would they have handled a global, worldwide, run on the entire banking system of the whole planet? And, horror of horrors, what if the president had been Ralph Nader?
That is the picture, a global bank run, that this book really brings out like few other books. Paulson is plugged in to the worldwide network of power brokers, especially the Chinese government thanks to his China work at Goldman Sachs. From this vantage point, Mr Paulson tells us why everyone was freaking out so much. Let's take Fannie and Freddie for an example.
Fannie and Freddie were not simply big mortgage companies. They weren't simply government backed boondoggles. China, Russia, Europe, and other internationals owned hundreds of billions of dollars of Fannie and Freddie bonds. So did millions of ordinary people the world over, in the form of money-market funds in their 401-ks or pensions. Everyone began to wonder if those bonds were actually worth anything. If the rest of the world had dumped Fannie and Freddie bonds, it would have crushed all of those investors, and crushed the United States in particular, overnight. This problem would have ripped through every financial institution on the planet, overnight, destroying banks like some kind of massive shockwave wiping out a planet's atmosphere in a science fiction book. And this Fannie/Freddie problem was only one incident that Paulson had to deal with; there are maybe a dozen more situations just as dire and just as bad. We, the Planet Earth, upon several occasions, came extremely close to having a massive, worldwide, collapse of the entire financial system.
Not just the commercial and investment banks of the US. The banks of Europe, the banks of Japan, China, India, everywhere, were experiencing runs. And not just the banks, but also the nonbank financial companies, the GE Capital, the General Motor's GMAC, the monoline insurers, AIG, and on and on. They were all experiencing runs. And not just the nonbank finance companies, but ordinary companies that depended on the 'commercial paper' market for day to day operations - they were on the brink of collapse too. The whole system froze up.
On the Charlie Rose show, Paulson had an analogy. Imagine the highway system just self destructing. Every road just becomes unusable, overnight. That is what almost happened in the financial system. Several of the major highways crumbled, while people were driving on them. Other roads were beginning to wobble and shake. That is the problem he faced, with Tim Geithner and Ben Bernanke.
Most of the choices they had to make were bad ones, and ones they would get torn apart for making. Paulson in particular seems to have taken it on the chin for his work. Time Magazine called Greenspan, Summers, and Rubin "The Committee to Save the World" circa 2000. But when the world actually needed saving, Paulson happened to be manning the switch, and things could have gone far, far, far worse than they did.
The system came so close to completely falling apart so many times. It is a wonder it held together at all. And Paulson, with all his faults, and all his mistakes, and his sort of CEO/Goldman taint, was in the end, someone who was able to bridge the incredibly massive gap between Democrats and Republicans. These two groups were, at several points, screaming at each other instead of solving problems. It was also during an election, and both sides dipped their toes into the dirty water of using the crisis for political purposes. Paulson was able to navigate this murk and mud and somehow still get things done that needed to get done.
I am guessing that in the years to come, people will write books about this time, and more facts will be uncovered. I think that, then, Mr Paulson will be seen in the popular imagination in perhaps a much better light than we, in our present unemployment and anger, see him today.
Russia tried to get China to dump a bunch of our assets. China refused.
When Paulson, Bernanke, etc, went on TV blowing happy smoke, they were just doing their job. On The Daily Show and youtube, it makes it look like they are incompetent morons who didn't see any problems coming. This is not how it comes off in his book. If a high government official says a particular financial company is in trouble, that statement basically causes a run on the financial company, and completely obliterates it overnight. The worse the crisis got, the less frowny talk they could afford to do. Every word had to be analyzed for its effect on the markets. Paulson had to constantly walk the line between his guts, telling him things were desperate, and his head, telling him that his statements might destroy the entire financial system. It is fascinating to learn the 'flip side' of the little presentations and sound bite messages that political players give, in order not to rip things apart that they are trying to save.