'Chronic Disorganization' Cited in Efforts to Fix Crisis
Friday, April 3, 2009
A former senior official in the Treasury Department under Henry M. Paulson says the Bush administration's response to the financial crisis was hamstrung by "chronic disorganization," "a broadly haphazard policy process," and "sometimes strained relations" between the Treasury and the White House.
The account by Phillip Swagel, Paulson's senior adviser on economic policy, is to be presented at the Brookings Institution this morning. It offers perhaps the most detailed public testimony to date about the last administration's struggles to control the rapid advance of an unexpected crisis.
Swagel's retrospective is broadly defensive of the Treasury's role in the response. A former assistant Treasury secretary, he admits that the department failed to communicate clearly with the public and therefore failed to win support for important programs. But he argues that the government's greater failures were the result of political and legal obstacles. The Treasury, in other words, was constrained in responding to the crisis not by lack of insight but by lack of power.
Swagel wrote, for example, that the Treasury considered options, including a plan to buy troubled assets from banks, in March 2008 and went through a dozen drafts over the next few months. But he said Treasury officials concluded that Congress would reject such a plan and that support would not be forthcoming until "Secretary Paulson and Chairman Bernanke could go to Congress and attest that the crisis was on the doorstep."
Swagel said officials knew that "by then it could well be too late."
The record shows that Paulson and Bernanke waited, that Congress said yes, and that it was too late.
The account, which dates from 2006, also offers insight into the administration's approach to the crisis, including the heavy and repeated reliance on the Federal Reserve, and the lack of emphasis on developing a plan to limit foreclosures.
Swagel wrote that the administration developed a preference for distributing rescue money through the Federal Reserve once it became clear that lawmakers didn't understand what was happening and therefore couldn't get in the way. He called this discovery "fortuitous."
This lesson was learned, he said, during the March 2008 rescue of Bear Stearns, the investment bank the government forced into J.P. Morgan Chase's hands in part by using the Fed's resources to limit J.P. Morgan's losses. The Fed's intervention was described as a non-recourse loan, and Swagel wrote that the language seemed to obscure from politicians the chance that the government could lose money.
Swagel also explained why the administration was restrained in its efforts to limit foreclosures. There was "no desire to put public money on the line to prevent additional foreclosures" because such measures would rescue some undeserving borrowers, he wrote. He said the administration thought that Americans -- and their elected representatives in Congress -- shared its reluctance. He said much of the rhetoric in favor of foreclosure prevention was bluster intended to conceal a dearth of options.
Swagel concedes two major failures: foresight and salesmanship.
He wrote that Paulson told Treasury officials to begin preparing for an inevitable "challenge" to the financial system as soon as Paulson took office in the summer of 2006, on the basis that good times don't last forever. But Swagel said planning didn't become urgent until the August 2007 disruption of the credit market -- a seminal event generally considered the onset of the financial crisis. He said officials underestimated problems in the housing market, ignoring the warnings and predictions of the Federal Deposit Insurance Corp.
Swagel defended the decision to allow the failure of investment bank Lehman Brothers. "It was almost as if Lehman management was in a game of chicken and determined not to swerve," he wrote. But when the Treasury also refused to swerve, officials were surprised by the broad flight from global financial markets.
He also said the Treasury should have done more to explain its efforts, calling the initial TARP blueprint, a three-page document delivered to Congress, "a communications mistake." The subsequent sales pitch should have been focused on the public as well as Congress, he wrote.
"An honest appraisal is that the Treasury in 2007 and 2008 took important and difficult steps to stabilize the financial system but did not succeed in explaining them to a skeptical public," he wrote.
Swagel says the Obama administration has responded by carrying forward the policies devised under Paulson but cloaking them in "populist rhetoric."