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On The Brink by Henry M. Paulson Jr.

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On the BrinkOn The Brink by Henry Paulson is the first book I’ve read cover to cover in the last year. You’re probably not surprised to hear that I don’t read every single page of the books I review on Bargaineering but for On The Brink, I read every last page. On The Brink is Henry Paulson’s, then Treasury Secretary, account of the financial crisis that nearly brought the United States, and must of the world, to its knees. Throughout the crisis, I was reading all the news stories about various rescues, bankruptcies, etc. but I always knew there was more to the story. I knew that there were things going on behind the scenes that we wouldn’t hear about for quite some time and I didn’t expect to read about it in a book so soon.

If you want to learn what happened, what caused it, and what some of the most brilliant and hardworking financial minds in the world did to prevent a complete meltdown, then you need to read this book. It reads like a novel, Paulson is frank (which is awesome), and you walk away feeling like you actually understand what happened and why certain things were done. And for $14, it’s a bargain.

There are three things the book shared that really stood out:

  • How absolutely horrible things actually were – I had no idea the extent and I read a lot,
  • How things were nearly derailed by political posturing (it was like arguing over who gets which deck chair on the Titanic, after it has hit the iceberg) – all the populist rhetoric about being anti-bailout was counterproductive,
  • How Russia tried to convince China to sell GSE holdings (Freddie Mac, Fannie Mae) to force the United States to use emergency powers to save them! (it was only a paragraph on page 160, but I thought it was alarming)

I think part of it was well crafted storytelling (to get across the seemingly frenetic pace) but the economic crisis was just one (or three) thing after another. First you had Fannie Mae and Freddie Mac, then there was Bear Stearns, then the failed attempt to sell off Lehman Brothers, then commercial paper freezing and money market funds breaking the bucks, Treasury yields going negative, then a liquidity rescue of AIG and a hurried sale of Merrill Lynch to Bank of America, and that only takes you to page 245 of a 434 page book! (not including afterword)

Remember when pundits complained about Paulson being an ex-Goldman Sachs CEO and how government and Wall Street were in bed together? If that wasn’t the case, I’m almost certain that our financial system would’ve collapse if we had non-financial types trying to rescue it. The relationships Paulson had with people on Wall Street and counterparts in other nations seem instrumental in engineering rescue after rescue after rescue.

Finally, one insight that the book never mentioned but seemed evident in Paulson’s account of what happened – the CEOs of these financial companies didn’t really care about money, they cared more about their legacy. Dick Fuld will forever be known as the guy holding the reins when the stagecoach called Lehman Brothers flew off the mountain. He was the FINAL Chairman and CEO of Lehman and he will forever be remembered for that. All those CEOs had enough money before they showed up for the job, it was about their legacy.

Honestly, I could write a lot more about what I thought of the book but it really wouldn’t do it justice. I think that if you want to understand what happened in the last two years, you must read this book. If you have ever made any statements about the crisis, reading this book will surprise you and probably make you eat some of yours words (or at least reconsider them).

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32 Responses to “On The Brink by Henry M. Paulson Jr.”

  1. Mark says:

    Pretty sure that the book should be catagorized as Fiction.
    I have not read it, but I am quite sure that he left out that he was the lead in lobbying Congress to remove the leverage limits of the investment banks. He tried to get them to do it several times ultimately succeding in 2003. With those limits removed, it paved the way for the titanic risk leverage that capsized the market.

    Jim, was there anything in there as to why Bear Sterns was bailed out and not Lehman? Just curious if there was any retribution stemming from Lehman walking away from the Long Term Capital Management debacle in 1997 (also from titanic leverage)?

    Hopefully, someday Hank will be in jail for what he did.

    • Jim says:

      Someone (JPMorgan Chase) was willing to buy Bear Stearns and it was in much better shape than Lehman. In the book, they tried to get Bank of America (who later acquired Merill Lynch) and Barclays to buy Lehman but the value of their assets was far under what their commitments were. According to Paulson, they had a private conglomerate (similar to how LTCM was bailed out) setup to take those bad assets if Barclays could get British regulatory approval but that was denied.

      I wasn’t aware of this (but understood it intuitively) but until TARP, taxpayers weren’t on the hook because the Treasury didn’t have the authority to commit public funds to these things. That’s why TARP was such a big deal, it gave them that authority.

      There are a lot of reasons the crisis happened and I’m not sure leverage limits were a significant cause when you compare it to all the other causes (huge incentives to homeowners, GSE’s buying every garbage mortgage, scammers selling garbage loans to people who couldn’t afford it, Gramm-Leach-Bliley Act, etc.). I’m by no means an expert but compared to the other culprits, I’m not sure that’s the first one I’d be shouting through a megaphone. That being said, I’m not saying removing leverage limit was a good idea, it certainly made things far worse.

      • Robert Ryan says:

        What is being missed in focussing on individual firms is the fundamental rottenness of America’s opaque derivatives-laden financial system that provides outsize rewards to executives who make reckless bets. The financial sector has become a gigantic casino instead of supporting productive activities in the economy like manufacturing. If we had a sane government opaque, convoluted, poorly regulated derivatives would not be allowed to exist. Where is the bailout money going to come from next time around when these dangerous instruments implode?

  2. Rhonda says:

    I will probably buy the book and give it a read.

    I urge you to watch the Frontline documentary, Inside the Meltdown. It’s an eye opening piece of media. It provides an almost hour by hour recounting of the beginning of Wall Street’s comeuppance, including Geithner’s role then (under Bush).

    Also, according to the documentary, Fuld was urged to the point of almost begged by Paulson to find a buyer and sell Lehman Bros. But until the end Fuld held out, sure that another bailout was in the works to benefit Lehman as it did Bear Stearns. Lehman Bros. was the “example” for Wall Street that the big guys couldn’t expect the treasury to bail them all out.

    I agree with Jim’s assessment that it was to the taxpayer’s benefit that Paulson was so intimate with many of his former peers on Wall Street and so knowledgeable of it’s workings during the immediate crisis.

  3. “I’m almost certain that our financial system would’ve collapse if we had non-financial types trying to rescue it. The relationships Paulson had with people on Wall Street and counterparts in other nations seem instrumental in engineering rescue after rescue after rescue.”

    Paulson converts another.

    Wall Street is the problem. Fiancial-types don’t understand that there is a world ouside of Wall Street.

    The banks should have been allowed to collapse. If that had happened, they would be running smoothly today – under new ownership – and they would be making loans and thriving. They would not be taking risk in the markets.

    Jim, as much as I respect you, this time you have been duped.

    • uci10 says:

      I would completely agree. Who is to say the financial system would have collapsed. At the end of the day this is merely an assumption.

      I have to say I am a bit surprised that you (Jim) would advocate this book. At the end of the day Paulson wrote this book to make money and to actually leave a legacy himself. I can tell you I’m not buying it.

      • Jim says:

        Why are you surprised that I’d advocate reading a book? I think it’s puzzling that you wouldn’t want to read, at the very least, his side of the story of what happened. One thing I realized was that all of these rescues were done during a Republican presidency, which runs counter to their core belief of a smaller less intrusive government. Doesn’t that lend credence to the fact that these moves were necessary?

        One of the things that really infuriates me about many “hot button” issues is that people are so unwilling to read the other side to gain a better understanding of their perspective, as if they were fearful of what they’d discover.

      • saladdin says:

        So it’s not an assumption by you that the banks would not have collapsed?

        Most leading economists of the day where saying “Do this.” Whose advice am I going to take if the choice was mine? Yours or economic leaders?

        Why can’t we have an discussion without questioning somone’s IQ or character? Saying Jim was “duped” or implying something negative about him for reviewing a book is disappointing.

        saladdin

        • Jim says:

          Even if you know nothing about how our financial system works (this includes every piece of it, not just the part that involves banks as the main subject), this book will give you an idea of how “main street” was in significant danger during this crisis. It’ll at least give you an educated perspective of the system so you can more appropriately formulate your arguments.

          Over the years I’ve developed a thick skin towards these veiled insults on my intelligence. I find that it’s usually not an intentional affront and more how people express their emotional response to something. Also, if you can’t beat the message, beat the messenger right? :)

    • Jim says:

      Mark,
      Have you read the book? There are so many factors at play here that it’s ridiculous. People were running to the banks and demanding their FDIC insured money, forcing what would otherwise be a healthy banks into insolvency. Do you think that’s a good thing? How does letting them collapse lead to this perfect world you speak of?

      Short term lending was also frozen, without that plenty of businesses would be gone along with their jobs. Is that better for the free markets?

      I think we have the benefit of hindsight and doubting the actions government took because they averted a completely meltdown of business in America.

      If I’m duped or converted or whatever, convince me I shouldn’t be with something more than conjecture and clairvoyance.

      • Maddhatter says:

        I would still have to question whether anything has been learned from the crisis? While I hate to sound like I’m only after vegence, did the banks feel enough pain to realize they cannot make such risky ventures? If nothing else thats why I question the bailout, but only time will tell.

        • Anonymous says:

          They will never feel the pain that the common folks do/did. It really is a moot point. If we really turn the screws to these guys at the end of the day “we” suffer be it as taxpayers or people looking to buy their first home.If you are looking for vengeance you will never get it.

          The one thing that does upset me is the idea that these actions surprise anyone. People are selfish and greedy. People run businesses.Easy math to do.

          The core fundemental issue is that the people who run these corporations are following the American Dream that is still pounded into kids every day. We exploit others for self gain. It is in our DNA. There is no changing this.

          saladdin

          • Maddhatter says:

            I agree with your point about humans are just that…human, but that my point as well. The banks can learn from all of this, but if they don’t feel sufficient pain they won’t learn and it will happen again. The point about exploiting others must make life sad for you. It is also not true. I would argue most people do not have to earn a living exploiting others. I digress. My point is that by giving a bailout to the banks (the big ones) they learn nothing and can even justify future risks by considering the ultimate outcome of sub-prime lending, or at least that is my concern. This is not because they think exploiting others is the way to go, but because negative consequences were…meh…not that bad for BOA, etc.

        • NateUVM says:

          I wouldn’t advocate “pain,” per se. I would be in support of new legislation to increase regulations on the financial industry. If they can’t be responsible enough to survive without the need of a bailout every now and again, they can suffer the slings of having to conduct their business more openly and within stricter guidlines.

    • Jim says:

      By the way, Iceland’s three major banks all collapsed… they don’t seem to be faring all that well in the aftermath and paint a far bleaker picture than what you predict as an outcome for us.

      http://en.wikipedia.org/wiki/2008%E2%80%932009_Icelandic_financial_crisis

      (not saying Wikipedia is a definitive source for news but it’s a good start)

  4. NateUVM says:

    This book, like any other publication, should be read with a healthy dose of skepticism. An author is always going to represent a bias that the reader should try to take into account when reading. In this case, in particular, the author stands a lot to gain, both financially and in reputation, by others taking seriously what he has written here.

    However, to suggest that something is not worth reading due to this ever-present bias is self-limiting and narrow-minded (yes, I like hyphens). Even if you disagree, even initially, with an overall premise, how can you really know what you are being critical of if you don’t look deeper? At least be able to cite what you disagree with, right?

    Without considering opposing viewpoints and their implications, the source being considered, how can we ever expect to learn and grow as rational, well-informed members of society?

    Oh yeah, and books are good, too.

  5. Steve says:

    I haven’t read the book, so I’ll have to pass on commenting on that, but I have to take one issue with something you said, Jim:  “…all of these rescues were done during a Republican presidency, which runs counter to their core belief of a smaller, less intrusive government.  Doesn’t that lend credence to the fact that these moves were necessary?”

    No.

    Republican rhetoric – not action – supports a smaller, less intrusive government.  From privacy intrusions (Patriot Act, restrictions on marriage, anti-choice) to financial matters they favor the opposite.  George W. Bush and his father, in 3 terms, ran the debt up as a percentage of GDP more than all of the other presidents in the last 50 years combined.  The federal government increased in size, any way you want to look at it (employees, budget, cabinet-level departments) under Bush.  He had a Republican congress for most of his presidency.  Smaller, less intrusive government?  Hardly.

    I’m not a fan of the current administration, either, before anyone wants to start calling me a socialist.  Obama’s going to break some “growth of government” records, too.

    Again, I haven’t read the book, but I was working in the corporate headquarters trying to help stave off one of the (if not the biggest) collapses during the crisis (I am a corporate governance/reglatory/audit consultant).  I had a fairly good view of what occurred, and my take is that nothing changed:  a lot of money got thrown down a hole and I can almost guarantee that without significant changes this will happen again.  Paulson and Wall Street put some makeup on a pig (the financial system) and now they tell us that it’s pretty, but you know what?  It’s still a pig.

    Sorry to get so worked up but I spent a lot of stressful days on Wall Street last summer and it pains me to see these guys trying to smile and say they “rescued” us from a crisis.  They postponed it.  Nothing got fixed.

    • Jim says:

      We are in agreement, my use of “core belief” matches your use of rhetoric and I agree, government only expanded under the auspices of terrorism.

      I’m not sure anyone is smiling but they did rescue us from a crisis even if it was a postponement. Would it have been better to just let everything collapse and not give ourselves a chance to reform things? Nothing fixed is every fixed forever, it’s only fixed until it breaks next time.

      I’m curious what would you have done differently given you also had an inside look?

      • Steve says:

        I understand what you’re getting at, Jim, but a postponement gives everyone a false sense of security.  I see a lot of people worried about health care, jobs, don’t-ask-don’t-tell, and so on.  The urgent screaming headlines should still be focused on fixing the US financial sector.  How would I fix it?  Off the top of my head:

        -A speculation tax:  a sales tax applied to stocks, derivatives and other financial instruments. Stop the insane churn of rapid-low-margin activity.

        -Re-enact Glass-Steagall, which would keep banks out of the business of hedge funds, private equity, and other excessive types of speculations

        -Harsh punishment of auditors by the SEC when needed (my theory is that after Andersen, the remaining “Big 4” now feel “too big to fail”)

        -Public institutions to oversee the quasi-governmental units like the Federal Reserve, which has far too much power to be completely unaccountable like it is now

        -Stronger capital and liquidity requirements for banks

        … and on and on.

        The biggest thing, though – and I’ve written about this on bripblap – is the concept of “too big to fail.”  If AIG, Citibank, GM, etc. are “too big to fail” then ALL government assistance should have come with a mandate to rapidly and completely split those companies up into smaller, not too big to fail units.  It’s appalling that stronger action hasn’t been taken to blow up entities that put our financial system at risk.  I’m not saying to shut them down, or drive them out of business, but allowing these behemoths to continue to exist just makes it likely we’ll see this again, and soon.  I know people will gnash their teeth and wail about capitalism and free markets and liberty, but something’s gotta give.

        • Jim says:

          I’m all for a speculation tax, I knew there was talk of it a few months ago but nothing recently. Glass-Steagall is kind of coming back, banks can’t trade their own accounts, but a stronger move to separate the risk taking from the basic business functions (like short term lending, etc.) will be crucial.

          I think it will be very important how we move forward, splitting up entities that are too big is also an important piece so we don’t put ourselves in a position where taxpayers forced to assist to save the whole system.

  6. Dude says:

    Steve, I agree with your suggestions but I don’t think that answers Jim’s question. On 9/2008 if you were treasury secretary and AIG and Lehman went to you for aid, would those suggestions have averted the crisis then and there?

    • saladdin says:

      Add to that, almost all economic minds of the day are saying “Do this or else.”

      saladdin

    • Steve says:

      Dude – first of all, it’s like asking “so if you had been in that bar fight in Mexico, wouldn’t you have killed the guy who pointed the gun at your head, too?” Having been in audit and compliance both here and in Europe for a long time I’d like to think I wouldn’t have been in that situation. But I’m still not answering, am I?

      Second question – would I have bailed out AIG if I hadn’t had the intimate inside knowledge that Paulson did about Goldman Sachs’ undisclosed exposure to AIG? Would I have agreed to pay 100 cents on the dollar on AIG’s debts and obligations to their creditors after a government takeover? Maybe not – I think Paulson’s lifelong connection to Goldman might have colored his actions dealing with a significant partner (AIG) and rival (Lehman). Maybe I’m crazy.

      I would have TRULY nationalized AIG, paid obligations at a significantly reduced rate and allowed Lehman to fail. Clearly Lehman could not be saved – nobody wanted it. AIG, however, has not suffered at all from their systemic meltdown – take a look at the stock price of this supposedly 80% government owned entity. So I might have done the same things in general but with far, far harsher terms, particularly for the biggest offenders (AIG and Citigroup).

  7. eric says:

    If anything, the book sure sparks an interesting conversation. Thanks for the heads up.

  8. I suggest you read Meltdown by Thomas Woods cover to cover.

  9. thomas says:

    I hate anything dealing with bailouts. horrible horrible time in our history.

  10. Dude says:

    Steve – no it’s not like the Mexico question. I wasn’t defending Paulson’s decision. I was merely asking you to answer Jim’s question. You finally did, and you admitted that you would have done the same albeit with much harsher terms (which I agree).

  11. Murray Hayutin says:

    I also read the entire book as Jim Wang did. My conclusions are entirely different. I believe President Bush was sold a bill of goods to appoint Hank Paulson Treasury secretary. I feel Hank Paulson was an alarmist and had little faith in Capitalism. Hank Paulson certainly helped create the leveraged mess that existed. He says in the book that he is not an economist. That statement was one I believe for sure. He is an alarmist. The term financial meltdown was used far too frequently. I am no genius but do have a B.S. in Economics from the Wharton School and ad MBA from the University of Denver. Saving companies that made huge money on flawed derivatives, highly leveraged, was the wrong long-run approach. All we have done is create a much too large Federal Government precence. The process needed to be far more natural, letting these large companies fail. Obviously, this is a simple statement to a complex situation, but I do not want to write a book here.

  12. Gary Mullennix says:

    I read it cover to cover. I am curious that there are deeply held views in the reviews of those who didn’t read it and suspect it and its author.

    It is worth a read and Paulson’s remarks in the Afterword about reforms needed should be available to all. As in, “Today the top 10 financial institutions in the U.S. hold close to 60% of financial assets versus 10% in 1990. Too Big To Fail, indeed.

    And, in what way is the current administration dealing with this concentration? Populist law suit and criminal investigation of a firm whose top execs gave Obama close to a fortune in campaign contributions? How about making more of them, and smaller?

  13. Scott Loomis says:

    Thanks for the opportunity to comment.
    I subscribe to the Journal & Barrons & like you, read pretty widely as the crisis unfolded.
    I’m now reading, On The Brink, for the third time. It is impossible to grasp the complicated issues that went into each incident on just one reading. I have never read a book that proceeds at such breath taking speed as HP, Ben, Tim, Sheila & crew traveled from one issue to the next. How they all managed to soldier on each day, while shouldering these immense burdens, is amazing.
    May we all thank them for their efforts.
    Thanks again


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