Henry Paulson's book offers a glimpse inside the economic crisis

Henry M. Paulson Jr. writes that he was impressed with Democratic presidential nominee Barack Obama, but less so with John McCain.
Henry M. Paulson Jr. writes that he was impressed with Democratic presidential nominee Barack Obama, but less so with John McCain. (Melina Mara/the Washington Post)
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By Zachary A. Goldfarb
Washington Post Staff Writer
Sunday, January 31, 2010

The Washington memoir, typically published after a calamitous event or the end of a political campaign, often brings a nugget or two of news. But that's a tall order for Henry M. Paulson Jr.'s "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System," as many authors have already published thick tomes examining the financial crisis of fall 2008.

As Treasury secretary, Paulson helped oversee the government's intervention, and his memoir is the first lengthy account of the crisis from a key decision-maker. The book offers a look at Paulson's thinking during those scary days, as well as his sometimes unvarnished opinions of other Washington characters, many of whom had central roles in managing the government's response.

Paulson writes that then-Sen. Barack Obama, at the time the Democratic presidential nominee, called him routinely, starting with the September weekend when the government seized mortgage finance giants Fannie Mae and Freddie Mac. Paulson was impressed with Obama as well as his vice presidential candidate, Sen. Joseph R. Biden Jr., but less so by their Republican counterparts.

After talking to Obama, Paulson called Sen. John McCain, in an effort to appear politically balanced, but the Republican candidate "had little more to say as I described the actions we had taken and why."

McCain put Sarah Palin on the line, but from the start, she and Paulson did not mesh well.

"Right away she started calling me Hank. Now, everyone calls me Hank. My assistant calls me Hank. Everyone on my staff, from top to 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," Paulson writes. "I'm not sure she grasped the full dimensions of the situation I had sketched out."

Not surprisingly, Paulson is effusive in his praise of Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy F. Geithner, who were his partners in most of the major decisions in formulating the government response. But the former Treasury secretary has more modulated views on other key lawmakers and government officials, with whom he worked to gain new powers and take steps to bail out financial firms.

Paulson had a strong relationship with Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, whom he called "a showman with a quick, impromptu wit. But he's also a pragmatic, disciplined, completely honorable politician."

But Frank's counterpart in the Senate, banking committee Chairman Christopher J. Dodd (D-Conn.), received less adulatory words from Paulson. "He had been distracted by his unsuccessful campaign for the Democratic presidential nomination and seemed exhausted afterward," Paulson wrote. "Though personable and knowledgeable, he was not as consistent or predictable as Barney."

Paulson, who hailed from Wall Street, never meshed well with Republicans on Capitol Hill, and this was particularly true of the top-ranking Republican on the Senate banking committee, Richard C. Shelby (Ala.). "He was a true conservative. I don't think he ever really trusted me, because I came from Wall Street and he hated the Bear Stearns rescue," he wrote.

Paulson had his share of tensions with other regulators. Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., exasperated him at times. Her job was to protect the FDIC's deposit insurance fund, and she raised concerns about Paulson's plans to bail out Citigroup.

"Sometimes she said things that made my jaw drop," Paulson wrote. "That morning she had said she wasn't sure that Citi's failure would constitute a systemic risk." Paulson said he thought Bair "was simply posturing."

Paulson also had an unusual relationship with James B. Lockhart III, who as the regulator of Fannie Mae and Freddie Mac made the official decision to seize the companies in early September 2008. Paulson depicted Lockhart as a nervous regulator, saying he had to invoke the president's name to convince Lockhart that action needed to be taken against Fannie and Freddie. Not long before, Lockhart had said they met robust financial requirements. Lockhart and President George W. Bush had attended the same high school, college and business school.

"I invoked the president's name repeatedly," Paulson wrote. " 'Jim,' I'd say, 'you don't want to trigger a meltdown and ruin your friend's presidency, do you?' "

As for the president himself, Paulson writes that Bush approved measures to rescue the financial system reluctantly, but he ultimately gave Paulson his full support. "He had a deep disdain for entities like Fannie and Freddie, which he saw as part of a permanent Washington elite, detached from the heartland, with former government officials and lobbyists cycling through their ranks endlessly while the companies minted money, thanks, in effect, to a federal entitlement," he wrote.

Paulson also discusses his relationship with his wife, Wendy, and how he shared his fears that the financial system could collapse. In the tense moments as Lehman Brothers slid toward bankruptcy, he stepped out of his office and called her. She had just been to church.

"Everybody is looking to me and I don't have the answer," he told her. "You needn't be afraid," she replied. "Your job is to reflect God, Infinite Mind, and you can rely on Him."

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