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Paulson's 'On the Brink': Seven revelations about US financial crisis

In his account of managing America's financial crisis, former Treasury Secretary Henry Paulson recounts shock, disappointment, and own shortcomings. What lessons does 'On the Brink' hold?

By Staff writer / February 4, 2010

Former United States Treasury Secretary Henry Paulson shown on Capitol Hill in Washington, January 27. In his account of managing America's financial crisis, he recounts shock, disappointment, and own shortcomings.

Jose Luis Magana / Reuters

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This week America is getting it's first in-depth peek inside the financial crisis, as told by one of the principals on the US government's firefighting team.

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"On the Brink" is the first-person account of Henry Paulson, President Bush's secretary of the Treasury at the time when Bear Stearns was rescued, Lehman Brothers wasn't, and the TARP bailout fund was created. Federal Reserve Chairman Ben Bernanke and Timothy Geithner, who was then president of the Fed's regional bank in New York City, are still in crisis-fighting positions and have not written books about their actions in 2008.

What lessons does the book hold? Perhaps a few that remain relevant for the current occupant of the Oval Office, President Obama. Here are seven that aren’t necessarily conclusions Mr. Paulson himself draws, but they’re framed from what he reports in his book, "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System."

1. Prepare for what you can barely imagine. As storm clouds gathered in the spring of 2008, Paulson and his staff at Treasury prepared what they called a "break the glass" plan, named after the fire axes kept under glass cases for emergencies. The plan included elements of what would later take shape in the Troubled Asset Relief Program, as the crisis emerged in full force that fall. TARP has been unpopular from the get-go, but it helped to prevent a much deeper economic collapse.

Paulson hoped he wouldn't have to use it. He writes that in April, just after the collapse of the investment bank Bear Stearns, Congress was not "anywhere near ready to consider granting us such powers."

Paulson also shares his view on the nation's financial health when he arrived in office in 2006, after being chief executive at Goldman Sachs. He warned George W. Bush that "we were due for [a] disruption." Although he outlined risks including the unregulated derivatives market, "I misread the cause, and the scale, of the coming disaster. Notably absent from my presentation was any mention of problems in housing or mortgages."

2. When a crisis flares up, the rest of the world may fiddle. While in Beijing for the summer Olympic Games, Paulson says he learned that "Russian officials had made a top-level approach to the Chinese, suggesting that together they might sell big chunks of their ... holdings" in Fannie Mae and Freddie Mac debt. The Chinese declined to go along with this scheme to force the US government to prop up the mortgage giants, he writes. (By September, the troubles at Fannie and Freddie had led the firms into federal conservatorship.)

Also, when Paulson was trying to nudge Lehman Brothers into a bankruptcy-avoiding merger that fall, British regulators stood in the way, refusing to waive a required shareholder vote for Barclay's to be the buyer. While Paulson understood their hesitation, he also was surprised and frustrated that the best hope to save Lehman fell apart.

Whether the British acted rightly or not, the crisis – and the response to it – soon became a global affair. Shockwaves from Lehman's bankruptcy prompted nations around the world to act side by side to shore up their banking systems.

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