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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?

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3. Your “home team” may be an uncertain ally. Paulson said the Fed had no authority to backstop Lehman, because the firm lacked the kind of collateral that had enabled a loan to Bear Stearns. TARP had not yet been created. Paulson tried to line up private-sector bankers to help finance Lehman’s merger with another firm, arguing that it was in all of their interests. Such collective action had worked during a financial panic in 1907. This time, some of the leading bankers worked their way to a "maybe," but then the effort became moot as the Barclay's deal collapsed.

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As the Treasury and Fed mounted a widening financial rescue, which they saw as the lesser-among-evils option, Paulson recounts similar challenges in winning support for his views among politicians. He describes asking presidential candidate John McCain to tone down his antibailout rhetoric. (A Republican, Paulson ends up feeling grateful for Obama's victory, "comforted by the knowledge that our president-elect fully understood the threat our economy still faced.")

4. Having "resolution authority" would help. Obama and his Treasury secretary, Mr. Geithner, already know this lesson cold. After Lehman's disastrous failure and AIG's politically disastrous bailout, most policymakers agree that some middle ground is needed. Resolution authority would allow large financial firms to be put through a bankruptcy-style restructuring, but in a government-managed process designed to maintain financial-system stability.

5. Even with resolution authority, the problem called “too big to fail” may persist. It’s not clear that either Bush/Paulson or Obama/Geithner have come up with reforms to prevent new cycles of risky behavior from threatening the financial system. The next time a giant firm is on the brink, coupled with a wider financial crisis, it's easy to envision more government bailouts.

During the crisis, Federal Deposit Insurance Corp. Chair Sheila Bair asked at one point if CitiGroup should "go through the receivership process," Paulson says. The question was perfectly rational to many finance experts. But at that moment in November, after months of investor uncertainty and even panic, such an action would have required deftness, at the least. If markets saw Citi being taken over, who would they think was safe? Paulson says her words "made my jaw drop."

At the end of the book, he expresses optimism that "well-regulated capital markets can continue to provide economic progress around the world." Most experts agree, but that doesn't mean the progress will be crisis-free.

6. Get the best help you can. Paulson recounts one moment when he yearned for a way to revive investor confidence in the safety of their money-market funds. He was overjoyed when Steve Shafran, a Treasury aide, came up with the idea of using the Treasury's Exchange Stabilization Fund to guarantee those investments. "Go make that happen," Paulson says after slapping his desk.

The former secretary says he also leaned on prayer at times when he felt powerless. (Disclosure: Paulson is an adherent of the Christian Science Church, which publishes this newspaper.)

7. Don’t underestimate Nancy Pelosi. At a December 2008 White House reception, Clint Eastwood approached while Paulson was conferring with the House speaker, who, like the actor, is a Californian. "I don't know what she's talking to you about, but she's stronger than you, Mr. Treasury Secretary," Mr. Eastwood said. "I suggest you do whatever she wants." Paulson says he chuckled appreciatively, having been bested by Ms. Pelosi in some negotiations recounted earlier in the book.


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