Thursday, February 18, 2010

On the Brink!

From the Desk of Joe Rollins

I am finding myself writing more and more blogs these days on books I’ve read than on financial matters. Maybe I need to become a book critic! So many books have been written on the meltdown of the banking system in 2008 that it’s too hot a topic for me to ignore. I’ve written before on three other books on the subject – House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan; The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System by Charles Gasparino, and; Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves by Andrew Ross Sorkin. If you want to read my thoughts on those particular books, check out my "Wall Street Debacle – Was It Really Greed" post from January 16th.

The book that I want to bring to your attention today is Henry M. Paulson, Jr.’s newly released, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System. As I’m sure you are aware, Henry Paulson was the U.S. Treasury Secretary under President George W. Bush from June of 2006 until the time that President Obama took office on January 20, 2009.

Paulson’s book is different from the others that I’ve read on the subject. First, this is first-hand account by someone who had an instrumental role in the financial debacle. Hank Paulson gives you the insider view of the actual happenings and first-hand accounts of the conversations that took place. The other books that I’ve discussed in this blog are based on conversations and impressions by third parties. None of the authors of the others books are expressing first-person knowledge of the financial meltdown.

As with the other books, this one is also extraordinarily long and detailed. Prior to Paulson’s service as the U.S. Treasury Secretary, he was the wildly successful Chairman of Goldman Sachs. According to reports, his compensation package from Goldman Sachs in 2005 was approximately $37 million. Even though his net worth has been estimated at over $700 million, he stated that took the job as U.S. Treasury Secretary because of his desire to give back to his country.

It was interesting to read about the politics associated with Paulson’s nomination. He says that his mother was a lifetime Democrat who despised President George W. Bush. When he finally told her he’d been nominated by Bush to succeed John Snow as the Treasury Secretary, and that he’d accepted the nomination, she became physically ill. Even though he doesn’t outright say it, he seemed to imply that he is a Democrat himself. His wife is clearly a Democrat, and I would be surprised to find out that he is anything other than a Democrat.

Throughout the book, I got the overwhelming feeling that Treasury Secretary Paulson and President Bush were both fighting the pressure against the government to be involved in private business. I found Paulson’s comments about making equity investments in the banks especially compelling. While you’d be hard-pressed to find a Republican that would support the nationalization of the banks, it wasn’t so clear that the Democrats did not think that was a good idea.

However, President Bush was clearly against the nationalization of the banks and Treasury Secretary Paulson was also fighting that concept. In the end, President Bush indicated he would take the political heat if need be, but in order to save the banking industry, equity investments in the banks were required. As we can now report, had it not been for those equity investments, it is unknown how bad the financial crisis would have become.

The first couple hundred pages of Paulson’s book are somewhat of a snoozefest. Hank Paulson is a devout Christian Scientist, and on several occasions in the book he discusses his doubts about the need for traditional medicine. He states that when he has been prescribed medicine in the past, he has instead chosen to rely upon prayer for relief. Paulson is also an environmentalist and an avid bird watcher. These are notable interests, but I didn’t find his discussions on those topics to be very exciting.

In contrast to the first half of the book, the second half of the book reads like a whodunit. He relays a day-by-day analysis of the financial crisis and how the country was truly on the brink of financial disaster. He gives an account of the failure of the numerous banks and the exact conversations that took place. I found it fascinating to read how Bear Stearns blew up within a three-week period of time. Paulson devotes a lot of chapters to the discussions about saving Lehman Brothers and why they ultimately elected not to do so. In retrospect, virtually everyone mentioned in this book now believes that they should’ve found a way to save Lehman Brothers.

Paulson discusses the work that was done to save the various major banks and companies from failing. In several of these cases, the tension leaps off the pages due to the fact that many of these institutions were on the verge of imploding before a package to save them could be put in action.

The following are the major banks and companies that failed:

Washington Mutual
Bear Stearns
Lehman Brothers
General Motors

And here are the major banks and companies that nearly failed:

Merrill Lynch
Morgan Stanley
Goldman Sachs
Bank of America
and numerous others – there are just too many to name them all!!

As a side note, the State of Georgia suffered the largest amount of local bank failures nationwide – a count of approximately 35 according to the FDIC. That’s not something to be particularly proud of…

What makes this book so interesting to me is the politics behind the transaction. In each case, you see how the Treasury Secretary is controlled by Congress and can only do what they approve. At that time, even though the Democrats controlled Congress, they did not have enough votes to get through any type of legislation without at least some participation by the Republicans.

I also found the comments regarding the 2008 Presidential election to be quite interesting. I found one of Paulson’s comments to be particularly interesting. Paulson was complimentary of Barack Obama during his candidacy, indicating that he was a quick study and understood the politics of everything that went on. The following statement, however, jumped off the page at me: “Through-out the crisis he played it straight [referring to candidate Obama]. He genuinely seemed to want to do the right thing. He wanted to avoid doing anything publicly – or privately – that would damage our efforts to stabilize the markets and the economy. But of course, there’s always politics at play; the day after the election, Obama abruptly stopped talking to me.”

Paulson is not so kind about Candidate John McCain. In various points throughout the book, Secretary Paulson documents that Senator McCain wasn’t particularly in tune with what was happening in the economy. On numerous occasions while on the campaign trail, McCain would interject on matters in which he did not have a clear understanding. The most famous of these occasions is when McCain suspended his political campaign in its entirety to go to Washington to help push along the TARP bill. After McCain made a gigantic show to call a meeting and return to Washington, Paulson reflects that at the meeting, John McCain clearly had no plan and the fact that he’d called so much attention to returning to Washington to work on the plan actually hurt, if not destroyed, what was left of his political campaign.

It amuses me to hear how politicians interacted with one another during the peak of the financial crisis. For those of you who find Sarah Palin annoying, you will be amused by Hank Paulson’s account of an exchange with her when she was the Vice Presidential candidate on Senator McCain’s ticket. This conversation took place when Governor Palin was first nominated as McCain’s Vice Presidential candidate, via a telephone conversation during the height of the financial crisis. Paulson recalled the conversation as follows:

“Right away, she [Governor Palin] started calling me ‘Hank.’ Now, everyone calls me Hank. My assistant calls me Hank. Everyone on my staff, from the top to the bottom, calls me Hank. It’s what I like. But for some reason, the way she said it over the phone like that, even though we’d never met, rubbed me the wrong way.”

Hank Paulson had been an incredibly successful businessman during his professional career, and he essentially accepted the Treasury Secretary position in gratitude for what his country had provided for him. Reading through the final chapters where Paulson outlines the financial meltdown, if you didn’t believe the country was on the brink of financial disaster then you really did not understand what was going on. There are numerous incidents in the final chapters where Paulson shows how the financial system bordered on the brink of a complete failure.

I found it interesting that Paulson admitted that he needed a moment to himself at one point. He relayed that he walked behind a marble pillar in the U.S. Treasury office in Washington, D.C. to call his wife. At that time, he confessed something to his wife that he thought he’d never have to admit. He explained to her that for the first time in his life, he had absolutely no clue what to do to make things better. She reassured him that all he could do was what he thought was best and that he needed to ignore the politics and governmental infighting.

The United States was fortunate to have Hank Paulson and Ben Bernanke involved during this scary period of time for our country. It was interesting to read Paulson’s praise for how President George W. Bush handled the situation, and he stated on more than one occasion that if it had not been for the President’s support, none of the actions could have been taken. In fact, he relays that in every case, even if it went against everything that President Bush believed in, he supported Paulson’s and Bernanke’s actions in the matter. The political fallout for President Bush will long be discussed, but I can tell you from reading these pages that we should all be thankful for the actions that these three men took during financially harrowing times.

If you can get through the first half of this book, I think you’ll be enlightened on the subject. There’s an important lesson to be learned from Paulson’s words; during the Great Depression, the government took a hands-off attitude regarding banking, the economy, and unemployment. During the 1930’s, there was very little banking regulation, virtually no Wall Street regulation, no unemployment insurance and no Social Security. When companies laid off employees during that time period, there was no safety net, and therefore, poverty was overwhelming. Anyone who believes that what we endured recently was as bad as what happened in the Great Depression simply does not have a clue. Unemployment reached 26% during the Great Depression and arguably, it lasted almost entire decade.

As we look back on this recent financial meltdown, we will see the government intervening to keep another crisis at bay. While the 10% unemployment percentage is disappointing, it is nowhere close to the 26% unemployment rate during the Great Depression. Likewise, we now have unemployment insurance that seemingly pays those who do not have a job forever. While approximately 150 banks failed during the recent financial meltdown, during the Great Depression over 1,000 banks failed at a time when there were only about 4,000 banks in the entire country. We currently have close to 8,500 banks in the United States, and frankly, some of them needed to fail.

When it’s all said and done, the recession we have suffered recently will have lasted no more than two years – from September of 2007 through September of 2009. It seemed traumatic at the time, but compared to the Great Depression in the 1930’s, it wasn’t even close.

In any event, if the events of the financial meltdown are of interest to you, then you should read Paulson’s, On the Brink to get a clear picture of exactly what happened and what actions were taken to avoid a huge catastrophe. If you do, let me know your thoughts on Paulson’s account of this historically important time period in the United States.

In closing, I want to provide you with Hank Paulson’s quote from On the Brink, that I found particularly meaningful:

“Let’s not forget that these markets helped tear down the Iron Curtain, lifted hundreds of millions of people out of poverty, and brought great prosperity to our nation. Efficient, well-regulated capital markets can continue to provide economic progress around the world. That inevitably leads to more political freedom and greater individual liberty.”