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On the Brink: Inside the Race to Stop the Collapse of the Global Financial System

par Henry M. Paulson

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Business. Nonfiction. HTML:

When Hank Paulson, the former CEO of Goldman Sachs, was appointed in 2006 to become the nation's next Secretary of the Treasury, he knew that his move from Wall Street to Washington would be daunting and challenging.

But Paulson had no idea that a year later, he would find himself at the very epicenter of the world's most cataclysmic financial crisis since the Great Depression. Major institutions including Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Merrill Lynch, and Citigroup, among others-all steeped in rich, longstanding tradition-literally teetered at the edge of collapse. Panic ensnared international markets. Worst of all, the credit crisis spread to all parts of the U.S. economy and grew more ominous with each passing day, destroying jobs across America and undermining the financial security millions of families had spent their lifetimes building.

This was truly a once-in-a-lifetime economic nightmare. Events no one had thought possible were happening in quick succession, and people all over the globe were terrified that the continuing downward spiral would bring unprecedented chaos. All eyes turned to the United States Treasury Secretary to avert the disaster.

This, then, is Hank Paulson's first-person account. From the man who was in the very middle of this perfect economic storm, ON THE BRINK is Paulson's fast-paced retelling of the key decisions that had to be made with lightning speed. Paulson puts the reader in the room for all the intense moments as he addressed urgent market conditions, weighed critical decisions, and debated policy and economic considerations with of all the notable players-including the CEOs of top Wall Street firms as well as Ben Bernanke, Timothy Geithner, Sheila Bair, Nancy Pelosi, Barney Frank, presidential candidates Barack Obama and John McCain, and then-President George W. Bush.

More than an account about numbers and credit risks gone bad, ON THE BRINK is an extraordinary story about people and politics-all brought together during the world's impending financial Armageddon.

.
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There must be dozens of books detailing the financial collapse of Wall Streeet and the Economy in 2008, and I tried reading many of them. Maybe it's because I've gone through a number of them, or maybe it's because Paulson's book is easier to read than most of the others, but after reading "On the Brink", I felt I was starting to gain some understanding of the Wall Street collapse and the reasons for the bailout. This book doesn't try to get too deep into the world banking system, but instead focuses on Paulson's term as Treasury Secretary. You really get to feel the depth of the turmoil facing the Fed and Treasury, and the possible outcomes to the U.S. economy if no action was taken. Admittedly, Paulson's belief supports the actions taken by the Bush and later the Obama Administration, and doesn't answer critic's arguments of alternative responses, but at least I got a little more insight into why the Government took the actions they did. ( )
  rsutto22 | Jul 15, 2021 |
Secretary Paulson's work provides an incredible insight into the financial crisis that plagued his tenure as Treasury Secretary. There's an incredible wealth of information in this book, which is packaged in an easy-to-read manner. 5/5 for clarity in an incredibly dense and complicated subject.

However, if there is any book that will convince you of elite power in America, it is this one. Paulson makes a convincing case for the reasons behind his actions and those of his associates, but it doesn't wash away the stink of bailout and corporate welfare. Paulson does glance over some discussion of moral hazard and bailout, but not in substantial depth. When you read this book (assuming you aren't an investment banker), it will be difficult to swallow the casual-ness in the discussion between Paulson and bank CEOs regarding how these organizations catastrophically screw up and are lifted up at the expense of the taxpayer. I don't hold this against the book at all - in truth, I commend Paulson for being honest in his approach. He does offer some thoughts towards the end regarding the sheer impossibility of his situation, and will make you question whether or not other options were truly viable. For Paulson, the alternative of systemic bank failure would contribute to total global financial meltdown. ( )
1 voter bdtrump | May 9, 2015 |
Cette critique a été écrite dans le cadre des Critiques en avant-première de LibraryThing.
Regardless of your political views, this is a compelling first person account of the 2008 financial crisis by a Bush Administration insider. One is left with the clear impression that then Treasury Secretary Paulson along with Fed Chairman Bernanke and NY Fed President Geithner were the architects of the rescue efforts. Paulson clearly enjoyed the complete confidence and support of then-President Bush, and it appears that even President (then candidate) Obama trusted him.

Paulson's account reads like a thriller, although the reader knows the eventual outcome. Aside from being such a compelling read, it's must reading for anyone who wants to learn about the management of the crisis. ( )
  BrianEWilliams | Mar 3, 2011 |
The limits of knowledge and power

Hank Paulson joined the George W. Bush administration as treasury secretary in the latter days of his highly unpopular second term, and this is his memoir. It may not be what you would expect of such a book. There is almost no mentioning of the tasks of a treasury secretary under normal circumstances. Budgeting for current policies and new initiatives and balancing that against tax income and state borrowing are hardly mentioned in the 453 pages of text. It is also not a very personal memoir. We learn a bit about Mr. Paulson’s happy family live, his religious ethics, and his hobby of birding, but that is about all. Few pages are dedicated to his earlier career in government during the Nixon-years, and later at Goldman Sachs, which made him a very wealthy man.

When Mr. Paulson reluctantly accepted the job as treasury secretary in July 2006, he had wanted to concentrate on balancing long term entitlements, as well as reducing the overseas borrowing that stimulated America’s consumer boom. As a former investment banker he also wanted to prepare the government for dealing with the under-the-hood risks in financial markets. The treasury department seemed inadequately prepared with IT-systems, and was still calculating the interest rate on US government bonds by hand. Mr. Paulson also showed a keen interest in the relationship with China, a relationship that he had also expanded as head of Goldman Sachs (Europeans may take note of China’s importance as America’s financier vis-à-vis the dispatched powers in and diverse roles of Europe). However, he “had not come Washington to inject the government into the private sector".

However, his stint in government would be marked by the roller coaster ride the global economy took in 2007 and 2008: "The crisis in the financial markets that I had anticipated arrived in force on August 9, 2007. It came from an area we hadn't expected - housing - and the damage it caused was much deeper and much longer lasting than any of us could have imagined."

The blunt matter-of-factly tone of this statement is typical for this book, and supposedly for its writer. Mr. Paulson claims that he, like everybody else, did not understand the extent and consequent danger of the market in subprime home loans. They were an important ingredient in a dangerous cocktail, that, among many others included a lack of data and anecdotal evidence, credit default swaps, the aggressive mindset of brokers, and the odd mechanics of US bankruptcy law. There was also a lack of an appreciation of the conflicting interests of lending agents when they sold subprime mortgages to other investors. CDO's investing in other CDO's would finally create complete distrust. Bank CEO’s felt the competitive pressure and urged the regulators to clamp down. But bank CEO’s also underestimated liquidity risk.

And then there were Freddy Mac and Fanny Mae, two very large institutions with too much leverage and lax regulation that had employed and enriched a large group of Washington insiders. The book starts when they are put into “conservatorship”. Their precarious balance sheets with USD 5 Trillion of debt had become a danger to the financial system that could not only cause a run on the dollar (many of its debt was held by Asians and other foreigners), but also important market parties like Washington Mutual, Wachovia and Lehman in danger. The crisis is temporarily averted when Mr. Paulson and FED-Chairman Ben Bernanke force a reluctant regulator to act, bringing in a complete team of lawyers, valuators (borrowed by the FED from Goldman Sachs!) and computer specialists, as well as a new CEO. It had required an unlimited financial capacity to support these Behemoths and their creditors.

The crisis at Freddie and Fanny was only one in a row of crises. Bear Stearn was the first candidate. Bear Stearns had a huge exposure to bonds and mortgages, and was seriously underfunded when haircuts rose. As an investment bank, it could not be taken over by the FED, but as an important counterparty in an ever more intertwined market its demise would drive prices down, and everybody would want to be out of markets. More seriously, if banks stop lending to each other, banks stop lending to "real economy". Together with the FED, the American government manages to broker a takeover by J.P. Morgan, but only after the FED lends money for an SPV to reduce the balance sheet impact. Here the limits of what was legally possible were tested. The FED could only accept dollar denominated assets that were of sufficient quality. This was sufficiently secured by a letter from Blackrock (an investment manager that operated as valuator) that the risk of losses was minimal and by the treasury secretary stating in writing that the federal government would accept that any loss occurring would mean less income for the federal government.

Lehman was the next domino to fall in that memorable autumn. The authorities tried to broker for a buyer, but nobody seemed interested. Mr. Paulson tries to find a buyer for Lehman, but his hands are tied. Lehman’s legal status forbids an action like in the case of Bear Stearns, so no SPV can be created. In a meeting with "the people who controlled Wall Street and global finance" there is not much willingness among the investment banks to come to an LTCM like construction, but there is hope that Bank of America or Barclays may be willing to take over Lehman. The authorities understand that they have no control over markets and the economy if Lehman would collapse. At this time General Electric calls to tell that the important market for large corporations in commercial is drying up for them. Also AIG starts looming.

When a deal over Lehman fails, because the British government considers it too big a risk, bankruptcy proceedings are started with a special market session on Sunday to reduce complexity. On Monday panic strikes the markets. That not being enough, AIG, in itself an unregulated holding company, now gets a pounding when its credit rating is slashed. Its management of “stunning incompetence” had sold credit default swaps in massive numbers, and leveraged its lended securities by buying in the CDO-market. Because it basically has a liquidity problem and not a capital problem, the FED can fund it with an 85 Billion loan, accepting subsidiaries as collateral. This however is only done because of the number of US retail customers and pension funds exposed.

When Lehman’s UK administrator freezes all collateral, the repo market dries up and leads to failed settlements across the system. Money market funds are losing customers, and consequently reporting losses, causing the commercial paper market to freeze. Among the things Mr. Paulson does is calling the governor of the Chinese central bank to discuss "guidance" as Chinese institutions had reduced money market and secured lending.

Mr. Paulson now orders to move into a kind of Powell-doctrine for the markets, demanding an approach that is simple and overwhelming (but lacking the exit strategy). He toys with the idea of a ban on short selling, and urgently feels the needs new powers, and for a way to guarantee money market funds.

Mr. Paulson feels overwhelmed by the crisis. With the consent of the president he meets Speaker of the House Ms. Pelosi to obtain authority to buy about 500 billion of bad assets (unfortunately calculations are missing here as elsewhere throughout the book). Without action Paulson and Bernanke state, they are in a "matter of days from a global melt down". Paulson also talks about buying illiquid assets.

With the markets spiralling further (Morgan Stanley lost 60% of its reserves in one week, and I remember that in that week the money market and the foreign exchange market became almost dysfunctional for even the best of market parties), the first draft version of TARP is presented in the form of legislation. This annoys lawmakers and endangers the programme. The 700 Billion he requires is more a trade off between the required amount and what is politically achievable than the result of a serious calculation: at least it is less than one Trillion. Paulson so used to big numbers now that he has difficulty anticipating the reaction of outsiders to such numbers.

The Bush government, and Mr. Paulson in particular, now needs to sell TARP to a reluctant nation, and an even more reluctant Republican Party that requires tax-payer protection, oversight and limits on executive compensation. Mr. Paulson fears non-cooperation, while "facts don't seem to matter" for some of the ideologically-inclined, even at a time when Washington Mutal is declared bankrupt. The Democrats seem to act more responsibly. In a meeting with the president Ms. Pelosi and Mr. Obama steal the show with a good analysis of the situation and basic acceptance of the proposal. Still the meeting ends in chaos. It is after this meeting that Mr. Paulson famously went on his knees to Pelosi begging her not to blow this up. But politics remain politics, and in the next meeting staffers leak disagreement to the press from their Blackberries. Mr. Paulson is getting physically exhausted by the time a compromise is reached on Saturday.

On Monday the 29th of September TARP is voted down, largely due to the Repubicans. Fortunately, it backfires on the nay sayers. Consequently, with some sweeteners TARP passes by the end of that week, giving Mr. Paulson access to a first portion of 350 Billion dollars .

While the Americans start implementing TARP, the herd’s attention moves to Europe. To save their own banking systems, individual European governments start guaranteeing deposits to avoid bank runs, but these can cause monies to be moved out of lesser guaranteed accounts.

At the same time, Mr. Paulson and his people quickly change their mind. Buying illiquid assets would not give them the leverage they fear to need given TARP’s limited budget. They conclude that buying new preferred stocks without voting rights (which would not be the equivalent of nationalisation) would give them most bang for their buck. The regulatory framework is tweaked to make it match Tier-1 capital. A meeting is organised with the seven systemically most important banks where they are forced to sign up for a set of capital improvement measures. They accept.

Surprisingly, the authorities seem to have had little idea what to use the TARP money for. They are clearly improvising, while AIG looms over the market again. After the presidential elections are over and AIG has published whopping third quarter losses, massive amounts of TARP money are injected into the insurer. Mr. Paulson decides to announce that he would not pursue any illiquid asset purchases or foreclosure relief programmes, and would not request the second half of TARP-monies: "I had exhausted my political capital and credibility to keep the system from collapsing."

It is not the end of the crisis. Citibank and Bank of America also need to use TARP money, as do car makers and car credit units. By that time the Obama government is installed, and Mr. Paulson is replaced by Timothy Geithner.

Mr. Paulson’s memoir is an excellent summary of what happened in financial markets in the Autumn of 2008, with the additional benefit of insider details. It also proofs the limits of knowledge and power of global leaders in times when that would be most useful. Throughout the book Mr. Paulson presents himself as an outsider. This he was in politics, but as the former head of the world’s most influential investment bank and as acting treasury secretary with access to all the data of the FED, he was the ultimate insider around. At no stage did he seem to have had a complete overview of the state of financial markets. And then we are not even talking about all the cross-ownership relations in off-balance ABS/MBS-vehicles, but simply the ownership of derivative positions between banks: it was not very much better than the knowledge of individual market participants. Another example is the miscommunication with the Chancellor of the Exchequer regarding Barclays buying Lehman. Mr. Paulson does not understand British understatement, and Mr. Darling does not appreciate that the rest of the world has trouble grabbing that.

The book also clearly shows the limits of power. Without the authority required to quench a crisis like this one, he often resorted to the role of broker. Mr. Paulson often acted as a non-commissioned broker between take-over candidates and interested investors. It fitted his history at Goldman Sachs. The next major financial crisis will proof again that the instruments of government will be insufficient, because this is by definition the case. We can only wonder what tools his successor at that time may be able to use. In any case, you may expect cooperation between the government and major players in financial markets, if only to share information.

What also surprised me was the almost complete disengagement of the American president. George W. Bush not only left day-to-day operations to his team of experts, a laudable thing to do, but seemed to ask few questions about the state of affairs. The treasury secretary seemed to deal mostly with the FED and with the US Congress. Mr. Paulson is positive about the president, however. When he required so, the president acted, and in a non-ideological way. Overall, Mr. Paulson is mild in his judgment of people, with the exception of John McCain and his running mate Sarah Palin, and the one third of fringe elements in his own Republican Party. He is less sanguine about the Washington political machine in general: "You cannot get anything done in Washington without a crisis". Although he does not state so, Mr. Paulson must be less of a fan of Alan Greenspan. Mr. Paulson continuously stresses the importance of a better regulatory framework, where Mr. Greenspan thought nothing could be done about crisis, and we should just use monetary instruments to “mop up” the damage. Mr. Paulson may have had a lawyer reading over his shoulder when he wrote this book, but his praise for Ben Bernanke, Timothy Geithner and the members of his team seems sincere. He lauds them not just for their extreme working hours, but also for their intellectual capacities. Based upon this book we must conclude that they all underestimated every step of the crisis, but that operated surprisingly effectively when finding and implementing individual measures. Also, Mr. Paulson seems to have been able to act in the best interest of the American tax payer, given that it was a crisis situation, and that there was no time until the end of his tenure to implement regulatory improvements. On the other side, he hardly reflects on his own role at Goldman Sachs in the years before the crisis. Mr. Paulson opposed the huge salaries in investment banking, but on the other hand accepted it at Goldman, as “they only wanted to hire the best”. All other Wall Street organisations surely used the same argument.

At the time of writing, TARP is being wound down. TARP has cost some USD 50 Billion. The Congressional Research Service conservatively estimates the costs of the war in Iraq at about USD 2 Billion per week. Compared to that, TARP was a small financial price to pay for saving the world economy. It is not the only price, however. Moral hazard and banks that are too big to fail are still around (the top-10 banks in the US hold 60% of the country’s financial assets, Mr. Paulson states). Most improvements so far seem to be in more active central banks and Basel 3. Particularly in the United States the banks seem to have been successful in fending off legislation beyond measures in the OTC-markets. The FED is moving into the next step in quantitative easing, which also means that it urges investors to take more risks: they will get no return on savings or government bonds. Where this risk taking has lead under Mr. Greenspan’s tenure is what this book started with.

2011 research suggests that the bail out may have saved the banks, but may not have meant much lending:

A recent study by two professors at the University of Michigan found that banks did not significantly increase lending after being bailed out. Rather, they used taxpayer money, in part, to invest in risky securities that profited from short-term price movements. The study found that bailed-out banks increased their investment returns by nearly 10 percent as a result.

“If the goal was to support lending, it would have been sensible to require a portion of the money to support credit origination,” said Ran Duchin, one of the finance professors who completed the study. “Lending to prime consumers was not the most profitable use of their capital.”
( )
1 voter mercure | Oct 10, 2010 |
Cette critique a été écrite dans le cadre des Critiques en avant-première de LibraryThing.
I decided to request this book via LibraryThing’s Early Reviewers program because I wanted to understand the current economic meltdown better than I did, and I didn’t want to pay for a book by one of the people who helped create the conditions for the meltdown. I don’t like what Henry Paulsen and his ilk have done to this country: take advantage of the worst aspects of unfettered capitalism, resulting in the economic problems we now have, and then scaring the everyone into thinking that the taxpayers should bail out his company and others as the way to save the economy.

I wanted to read his side of the story. In “On the Brink,” he discusses the day-to-day decisions that arose during the last months of the Bush administration, but there is little about the philosophy of greed that got us into this mess in the first place. I winced whenever he wrote about the nice vacations he went on and thought of people who are now unemployed, losing their homes, etc., living on the streets – they could never afford any of the places Paulsen visited to get away from Washington, DC. The book is somewhat interesting in that I did get to see some of the behind-the-scenes process. But I really can’t recommend this book, since it is a component of a cover-your-ass strategy more than anything else, and it’s long and dry if you’re not very interested in the subject matter. I’ll donate my copy to the public library so someone else can read it without having to pay for it. ( )
  jnavia | Jun 20, 2010 |
Affichage de 1-5 de 17 (suivant | tout afficher)
Paulson’s “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System” zips through his career (including an early stint as an aide in the Nixon White House) and concentrates on his extraordinary 30 months at Treasury. Reflection is not Paulson’s strong suit.
 
Still, Paulson's memoir effectively nails its major point: the shock and unprecedented quality of the evolving crisis.
 
So here is Hank Paulson, an Atlas holding up the world – in his boxer shorts.
ajouté par mercure | modifierThe Independent, Stephen Foley (Feb 26, 2010)
 
The big question is whether Paulson's indomitable resolve helped or hurt during the crisis. Though On the Brink won't settle the matter, it does lay out Paulson's rationale for taking actions that were repugnant to his own free-market beliefs.
 
In "On the Brink," a principal architect of the bailouts that began in 2008 provides a revealing play-by-play account of the financial crisis.
 
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Business. Nonfiction. HTML:

When Hank Paulson, the former CEO of Goldman Sachs, was appointed in 2006 to become the nation's next Secretary of the Treasury, he knew that his move from Wall Street to Washington would be daunting and challenging.

But Paulson had no idea that a year later, he would find himself at the very epicenter of the world's most cataclysmic financial crisis since the Great Depression. Major institutions including Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Merrill Lynch, and Citigroup, among others-all steeped in rich, longstanding tradition-literally teetered at the edge of collapse. Panic ensnared international markets. Worst of all, the credit crisis spread to all parts of the U.S. economy and grew more ominous with each passing day, destroying jobs across America and undermining the financial security millions of families had spent their lifetimes building.

This was truly a once-in-a-lifetime economic nightmare. Events no one had thought possible were happening in quick succession, and people all over the globe were terrified that the continuing downward spiral would bring unprecedented chaos. All eyes turned to the United States Treasury Secretary to avert the disaster.

This, then, is Hank Paulson's first-person account. From the man who was in the very middle of this perfect economic storm, ON THE BRINK is Paulson's fast-paced retelling of the key decisions that had to be made with lightning speed. Paulson puts the reader in the room for all the intense moments as he addressed urgent market conditions, weighed critical decisions, and debated policy and economic considerations with of all the notable players-including the CEOs of top Wall Street firms as well as Ben Bernanke, Timothy Geithner, Sheila Bair, Nancy Pelosi, Barney Frank, presidential candidates Barack Obama and John McCain, and then-President George W. Bush.

More than an account about numbers and credit risks gone bad, ON THE BRINK is an extraordinary story about people and politics-all brought together during the world's impending financial Armageddon.

.

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Éditions: 0446561932, 1600249124

 

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