In his new book, former Treasury Secretary Henry Paulson strongly defends the massive bailout of Wall Street financial firms, including the controversial decision to rescue AIG -- though he neglects to describe the controversial counterparty payments that are the subject of today's Congressional hearing, where Paulson is set to testify.
Paulson depicts himself in the largely self-serving book as a strong believer in free markets who was forced to make tough decisions to help the country get through the worst recession since the Great Depression. When he left office, "I knew that we had succeeded in averting the collapse of the system," he writes in "On the Brink," a copy of which was obtained by Huffington Post.
When the former Goldman Sachs chairman took the position at Treasury in 2006, he vowed to avoid any substantive interaction with Goldman executives for his entire term. But he reveals that months before he received an ethics waiver to conduct discussions with his former firm, he talked to his successor, Goldman chairman Lloyd Blankfein, several times to discuss the firm's concerns.
Once, Blankfein even called Paulson at his home. On Saturday, March 15, 2008, six months before Paulson received his waiver on September 17:
The first call I received was from Lloyd Blankfein, my successor as Goldman Sachs CEO. It was as unnerving as it was unexpected, It was the first, and only, time Lloyd called me at home while I was at Treasury. Lloyd went over the market situation with me, providing a typically analytical and extraordinarily comprehensive overview, but I could hear the fear in his voice. His conclusion was apocalyptic.
Paulson also describes how closely he worked with then-presidential candidate Barack Obama to discuss Treasury's actions, sometimes speaking several times a day during the fall of 2008. He also reveals that he carefully coordinated public perception of the controversial bailout with both Obama and Republican candidate John McCain, convincing them to avoid making overly critical comments about the bailout.
Though he praises Obama for being "well-informed" and depicts him in a flattering light compared to McCain, he also says that politics was "always" at play -- "the day after the election, Obama abruptly stopped talking to me."
And he takes a shot at Sarah Palin, describing how McCain excitedly put her on the phone with Paulson. Palin annoyed Paulson by continually calling him "Hank" and did not seem knowledgeable of the issues:
Right away she started calling me Hank... 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. I'm also not sure she grasped the full dimensions of the situation I had sketched out - or so some of her comments made me think.
Describing President Bush's frustration with the incompetence of AIG's management, Paulson says that he convinced Bush to agree to bail out the giant insurer: "Like the president, I understood that we had to hold our noses and save the company in order to protect the frail financially system."
Though Paulson says that the AIG rescue was conducted by the Federal Reserve, he also approved the action at a TARP oversight board meeting with Fed chair Bernanke in November 2008.
Calling himself an advocate of free markets, Paulson claims the unusual TARP program was necessary -- "The intervention we undertook I would have found abhorrent at any other time. I make no apology for them, however. As first responders to an unprecedented crisis that threatened the destruction of the modern financial system, we had little choice."
And, typical for such memoirs, Paulson lauds his own prognostication. At his first meeting of Bush's economic team in August 2006 at Camp David, Paulson says "My number one concern was the likelihood of a financial crisis." And he fairly gushes when he describes how he warned Bush about the exponential growth of unregulated over-the-counter derivatives and excessive leverage.
He does admit that he failed to mention problems in housing or mortgages -- "I was right to be on my guard but I misread the cause and the scale of the coming disaster." And he later writes that he could kick himself for saying in April 2007 that subprime mortgage problems were "largely contained," emphatically concluding: "We were just plain wrong."
And he goes out of his way to defend Wall Street CEOs, even applauding their foresight by claiming that they "all were concerned with excessive risk taking in the markets and appalled by the erosion of underwriting standards" during a dinner at the NY Fed on June 26, 2007.
Anyone who has read through Andrew Ross Sorkin's "Too Big To Fail," will not learn very much from Paulson's book. If anything, it's more obvious than ever that Paulson was one of Sorkin's biggest sources, judging by their similar depictions of crucial events and the heroic depiction of Paulson. Both tomes adopt the same chronology of the fateful months of September-November 2008, though Paulson's features far less detail and fewer juicy anecdotes.
The former Treasury Secretary briefly touches on the controversy over the government's pressure on Bank of America to complete their acquisition of Merrill Lynch. When BofA chairman Ken Lewis called to say that the bank might back out of the deal, citing the material adverse change clause, Paulson demands that he go through with the merger.
Paulson doubts that the move was a ploy by Lewis to get a government support package for BofA similar to the billions recently offered to Citigroup, though he describes Lewis's demands for a letter committing to a support package:
I called the BofA CEO and told him straightaway: "Ken, we can't give you a letter."
Paulson continually praises Bush, even stating that "no one showed more courage than President Bush" throughout the financial crisis" although he is much more critical of McCain, Palin and Congressional Republicans Jim Bunning and Eric Cantor.
Paulson also reveals how his strong faith helped him through the financial crisis. He once came close to violating the precepts of his Christian Scientist faith by taking some pills to help him sleep but said a prayer instead. At the height of the crisis, he describes a conversation with born-again Christian Bush, in which Paulson compared himself to Job.
Among Paulson's recommendations to fix the financial system -- retool the regulatory system, which "remains a hopelessly outmoded patchwork quilt built for another day and age" and is "rife with duplication, gaping holes, and counterproductive competition among regulators." Though he admits that "too big to fail" firms pose a dangerously large risk, he doesn't offer many solutions other than a global accord requiring higher levels of capital, tighter regulation and clearer authority to unwind such firms.
On two of the biggest issues of the crisis -- compensation and complicated derivatives -- Paulson largely avoids advocating a major overhaul of Wall Street practices. He calls for executives "to show real restraint in their own compensation" as an example and he denies that credit default swaps and other derivatives were the cause of the crisis. Rather, he claims that the complicated transactions "provide a useful function in making the capital markets more efficient," suggesting that such derivatives should be traded on a public exchange and nonstandardized contracts should be centrally cleared.
But he remains skeptical of too much regulation, saying "there is a very real danger that financial regulation will become a wolf in sheep's clothing" for countries to use as a protectionist measure to limit competition.