Wednesday, March 10, 2010

Henry Paulson as Captain Renault

He was shocked -- shocked! Except he saw it all coming. Except no one could.

Simon Johnson is exactly who you'd want to review Paulson's book ("memoir" implies a function opposite to Paulson's intent), and he does so.
The prose is flat, the chronology well known—almost cliché by now--but weirdly enough all this is fascinating and somewhat disturbing reading, because you know where it ends. The shakedown, when it comes, is so beautiful that it takes your breath away--rather like watching Nueve Reinas (Nine Queens), the brilliant Argentine financial scam movie.

Here's the set up. The core of the world's financial system teeters. Paulson doesn't want to do another bailout, he thinks. The politics stink, the economics are appalling, and Dick Fuld (the CEO of Lehman) is a difficult fellow. So Paulson lets Lehman fail. But it turns out that the bankruptcy of a major financial firm is an unspeakably messy affair. Paulson had been warned about this, including by the International Monetary Fund (not an ordinary event)--but he was oblivious. We can handle it ourselves, thank you, was Treasury’s attitude.

But they couldn’t. They were absolutely and completely unprepared. This was not a team that was expecting the unexpected; they were asleep at the wheel. Paulson thinks he hired the best people--mostly from Goldman, naturally--and honed them into a sharp-edged tool. The alternative view is that he and his people were incompetent bumblers who had no idea what they were doing or how dangerous modern financial markets have become. So here are the possible interpretations: either the former head of Goldman Sachs saw it all coming and prepared assiduously, or an old-fashioned deals guy--most definitely not a trader--was hopelessly out of his depth and floundered his way to the greatest financial crisis since 1929.
But Paulson does have something to be proud of:
So leading financial institutions were saved, which is not by itself an unusual event in some countries. It happens with some regularity in places with serious governance issues and endemic corruption. But even in troubled middle-income countries, such as South Korea, Turkey, Argentina, or even Russia, it is extraordinary to keep management in place when providing such support. Perhaps a few financial executives might be deemed beyond reproach and unfortunate victims of a system-wide panic. But to keep them all, with their base pay and their bonuses and their pensions? That is essentially unheard of. Perhaps there is a poor and benighted country somewhere that saved its massively incompetent financial firms in this manner, but you can search the historical records long and hard for a parallel to what Paulson pulled off.
When Paulson says he saved Wall Street, he's not kidding. Unfortunately, that's all he saved.

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