On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
Insider memoir: the Treasury Secretary's version of the same weeks.
Summary
Paulson was Treasury Secretary from 2006 to January 2009 and wrote this account of the crisis from inside the department, covering the period from his arrival through the Troubled Asset Relief Program and the transition.
The substantive material is the decision record. Paulson covers the Bear Stearns rescue, the conservatorship of Fannie Mae and Freddie Mac, the Lehman weekend and his account of why no rescue occurred, the AIG intervention two days later, the design and passage of the Troubled Asset Relief Program including its initial rejection by Congress, and the decision to inject capital directly into banks rather than buy troubled assets as the legislation had been sold on.
His explanation of Lehman is that no buyer would take it without government support, that the Federal Reserve had no legal authority to lend without adequate collateral, and that Lehman's collateral was insufficient. Critics including Bair and others argue the legal constraint was interpreted flexibly two days later for AIG and could have been for Lehman, and that political considerations were present. Paulson disputes this and the dispute is not resolvable from the public record.
The forced capital injection into nine large banks, including institutions that did not want it, is the decision he defends most strongly, on the ground that letting banks choose would have stigmatised those that accepted.
The book is a participant's defence written shortly after the events. It should be read alongside the accounts by Bernanke, Geithner and Bair, each of which places responsibility differently.
Key takeaways 7
- The Treasury and Federal Reserve had no pre-existing legal mechanism for resolving a large investment bank, which shaped every decision that followed.
- Paulson's account of Lehman is that no buyer would take it without government support and the Federal Reserve lacked authority to lend against insufficient collateral.
- Capital was injected into nine large banks simultaneously including institutions that did not want it, because letting banks choose would have stigmatised those that accepted.
- The Troubled Asset Relief Program was legislated as an asset purchase programme and was used for capital injection, because capital was the binding constraint.
- Fannie Mae and Freddie Mac were placed into conservatorship because their implicit guarantee had become explicit and their capital was inadequate to their obligations.
- Congressional rejection of the initial legislation caused an immediate market collapse, which demonstrated the market was pricing the rescue rather than the underlying assets.
- Crisis decisions were made with incomplete information under extreme time pressure, and the accounts of the participants place responsibility differently.
Who should read it
Investors and policy readers who want the Treasury's account of the crisis decisions, read alongside the other participants' memoirs.
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