On the Brink: Paulson's Memoir of the Financial Crisis

by: Ira Stoll

Henry Paulson's book, On the Brink, is one strange piece of work. The subtitle is "Inside the Race to Stop the Collapse of the Global Financial System," but a better subtitle might have been "Confessions of a Guilty Bully."

Mr. Paulson is admirably, even stunningly forthright about much of this. He acknowledges that his decision as Treasury secretary in the Bush administration to "seize control" of Fannie Mae (FNM) and Freddie Mac (FRE) was an "ambush" that was "to the disadvantage" of the companies' shareholders, who "we'd basically killed."

He acknowledges that this ambush took place just days after the firms' federal regulator had issued a letter judging them to be adequately capitalized. He acknowledges the ambush took place less than a month after Mr. Paulson himself had issued a statement saying he was focused on supporting the firms "in their current form as shareholder-owned companies," a statement he writes "hoped to calm market fears of a government takeover that would wipe out shareholders."

He acknowledges that he committed this ambush of Fannie and Freddie shareholders in part to satisfy the Chinese Communist government, which owned hundreds of billions of dollars of Fannie and Freddie bonds. After seizing Fannie and Freddie, Mr. Paulson says he called "my old friends Zhou Xiaochuan, the head of the central bank of China, and Wang Qishan, vice premier in charge of China's financial and economic affairs." Mr. Paulson said he told Wang, "I always said we'd live up to our obligations."

An offensive lineman on the Dartmouth football team, a Christian Scientist who married a college classmate and friend of Hillary Rodham Clinton, Mr. Paulson started his career in the Nixon administration and only afterward went to work at Goldman Sachs (NYSE:GS).

As a Goldman Sachs executive, Mr. Paulson writes, he made about 70 trips to China as the firm ramped up its staff there from "virtually no presence" in 1992 to "perhaps 1,500 people in the country" in 2006. (I wrote about the China-Goldman Sachs connection in the long Goldman post.)

As Mr. Paulson tells it, Zhou Xiaochuan played a pivotal role in talking Mr. Paulson into taking the Treasury job in the first place. "I think you should become Treasury secretary," Mr. Paulson quotes Zhou as telling him.

The other person pushing for it, the book says, was Jim Baker, who had recommended Mr. Paulson to the White House. The firm web site of Baker Botts, where Mr. Baker is a partner, declares:

China continues to dominate Asia's meteoric rise, and Baker Botts has built a strong and diverse practice that delivers sophisticated and time-sensitive expertise on resource intensive transactions involving China. Baker Botts has represented clients involved in major energy projects in Asia over the course of three decades.

In 2005, the firm decided to cement our practice in the region by establishing an office in Hong Kong. Hong Kong was the firm's first office in Asia, and it serves as a regional hub, supporting our work throughout the region.

In 2007, we expanded our Chinese presence by opening an office in Beijing. Baker Botts Beijing maintains close relationships with major PRC government authorities, ministries and departments at both the national and regional level providing clients with the most up-to-date and authoritative advice.

"When I accepted the job at Treasury, I told President Bush that I wanted to help manage our economic relationship with China," Mr. Paulson writes, citing "staving off potentially harmful anti-China protectionist legislation" as an early success.

Later, he writes, "I was fortunate to have a private breakfast in my hotel room with China's central bank governor, Zhou Xiaochuan, a charming, straightforward old friend and committed reformer."

Nearly every Chinese leader Mr. Paulson mentions gets this fulsome sprinkling of adulatory adjectives. Of Wang Qishan, Mr. Paulson writes:

I had known and worked with Wang, who I considered a trusted friend, for 15 years. A former mayor of Beijing, with an appetite for bold action and a sly sense of humor, he had guided his country out of the SARS crisis and led the preparation for the 2008 Olympic Games.

Describing his meeting with Wang, Mr. Paulson writes that he was "mindful that China was one of the top holders of U.S. debt, including hundreds of billions of GSE debt. I stressed that we understood our responsibilities."

At another point in the book, Mr. Paulson says he agreed to call "my old friend Wang Qishan" to help Morgan Stanley's (NYSE:MS) John Mack. Mr. Mack said "Morgan Stanley was looking to raise capital from strategic investors, and that the Chinese were a strong possibility. China Investment Corporation, the country's sovereign wealth fund, already owned 9.9 percent of his firm."

At another juncture, Mr. Paulson acknowledges being rude on the phone with the chairman of the Senate Finance Committee, Max Baucus, because he wanted to clear the line for "my old friend Wang Qishan:

That night I was short with him because I needed to speak with Wang. It was a miracle I was on time for our 9:30 p.m. call.

The takeaway for a reader is that the American Treasury secretary wouldn't want to keep a Communist Party bureaucrat waiting because of a mere United States senator.

There's a smattering of humility throughout the text; Mr. Paulson tells of the embarrassment of not being able to find his ringing cellphone during a meeting with President Bush and a visiting head of state, of difficulty sleeping, of suffering bouts of dry heaves. He regrets telling "a group promoting better Chinese-American relations" in late April 2007 that the subprime mortgage problems were "largely contained."

I've written before about lawyer H. Rodgin Cohen, but not until reading Mr. Paulson's book did I realize he represented Fannie Mae, Bear Stearns, and Lehman Brothers (OTC:LEHMQ). None of the three firms really made it out of the crisis alive, but Mr. Cohen's reputation seems intact.

Mr. Paulson's account offers insights into the thinking of policymakers beyond just the influence of the Chinese. Again and again there's this concept of markets as fragile. "Back in 1990, the junk bond giant Drexel Burnham Lambert had collapsed without taking the markets down, but they had not been as fragile then," Mr. Paulson writes.

Mr. Paulson recounts a conversation with Senator McCain in which the Treasury secretary says to the presidential candidate: "I can't tell you enough how fragile the system is." And he quotes the Federal Reserve chairman, Ben Bernanke, as telling a Senate Banking Committee hearing, "the financial markets are in a quite fragile condition."

In the midst of the crisis, there was a focus on the short term. "That night my team got on a conference call with the New York Fed, the Washington Fed, and the SEC. There must have been between 30 and 40 people on the line, all with one concern: getting Lehman to the weekend," Mr. Paulson writes.

There was also some concern with public opinion. Mr. Paulson recalls another conversation with Senator McCain: "I asked him to refer to our actions as rescues or interventions, not bailouts."

President Bush, Mr. Paulson writes, "had a genuine contempt for Wall Street and its minions." It's a contempt that was sometimes, one senses, shared by Mr. Paulson himself. A self-hating investment banker? He writes that when he was CEO of Goldman Sachs, "I knew compensation was too high industry-wide, but I couldn't change that."

Mr. Paulson's own political views are hard to figure. At one point, he writes that Senator John Kerry was "consistently on the right side of the issues about the financial crisis." At another moment, he recounts that he dropped to his knees before Speaker Pelosi, "genuflecting at the altar of the Speaker of the House." In this otherwise candid memoir, Mr. Paulson says he voted by absentee ballot, but he doesn't say for whom.

In the end, whether you call what Mr. Paulson did bailouts, rescues, interventions, or ambushes, the contradictions involved are enough to boggle minds. On the banks, Mr. Paulson writes, "I was philosophically opposed to any action that might smack of nationalization — government interventions always come with some undesirable influence or control." Yet when it comes to those interventions, he acknowledges in effect that the biggest banks were "forced to take the money," and expresses disappointment that only 700 banks, and not the 3,000 he had hoped, accepted TARP funds.

"To protect free-enterprise capitalism, I had become the Treasury secretary who would forever be associated with government intervention and bank bailouts. The speed with which the crisis hit had left me no other choice, and I had set aside strict ideology to accomplish a higher goal of saving a system," he writes.

That is a generous way of putting it. Mr. Paulson says he "set aside strict ideology," but someone else might say he abandoned capitalist or democratic principles, throwing property rights of Americans to the wind in the service of his masters -- sorry, "old friends" -- in Beijing.

A reader gets the sense in the end that Mr. Paulson is aware on some deep level of these contradictions, even if he won't go so far as acknowledging outright that his actions were wrong. "We must" Mr. Paulson writes, "demonstrate our commitment to…getting the government out of the private sector as soon as possible," and he concludes the book by expressing his hope that economic progress "inevitably leads to more political freedom and greater individual liberty."

It's a fine time for Mr. Paulson to have discovered freedom and liberty now that he's out of office, which is what makes me imagine that underneath it all there's a twinge of guilt. It all might strike some as water under the bridge now that Mr. Paulson is a private citizen and there is a new administration in charge in Washington.

Maybe when the members of the new administration are out of office they too will be writing memoirs extolling freedom and individual liberty, and stressing the need to undo "as soon as possible" what they did while in office. It's hard to undo an ambush, but the first step is probably recognizing the fact that it happened in the first place.