Former U.S. Treasury Secretary Henry Paulson says in his new memoir that he was prepared to support a government backstop to prevent the bankruptcy of Lehman Brothers Holdings Inc. until he learned the firm’s assets were so mis- marked it would have guaranteed a loss to taxpayers.
Going into a Sept. 12, 2008, meeting at the New York Federal Reserve Bank with the leaders of the largest Wall Street firms, Paulson and then-New York Fed President Timothy Geithner agreed that “if a Bear Stearns-style rescue was the only option, we would take it,” the ex-secretary wrote in “On The Brink.”
Although the book isn’t scheduled for release until Feb. 1, Bloomberg News purchased a copy at a New York bookstore.
The government was able to facilitate the merger of Bear Stearns Cos., a failing New York investment bank, and JPMorgan Chase & Co. by having the Fed guarantee $29 billion of Bear Stearns’s assets. A similar rescue of Lehman proved impossible because a deal to sell the investment bank couldn’t be completed, Paulson wrote. The executives gathered at the New York Fed also concluded Lehman had overvalued its assets by at least $37 billion, he said.
“The toxic quality of Lehman’s assets would have guaranteed the Fed a loss,” Paulson 63, wrote, meaning the central bank couldn’t legally make a loan.
The U.K. government ultimately was responsible for forcing Lehman into bankruptcy, Paulson said. Lehman executives had reached a deal to sell the bank to Barclays Plc, a British bank, on Saturday, Sept. 13.
Chief Executives
The same day, the chief executives of the other New York banks gathered at the New York Fed had agreed their firms would, along with Barclays, collectively finance the Lehman shortfall, Paulson said. The group included Lloyd Blankfein of Goldman Sachs Group Inc., John Mack of Morgan Stanley, Jamie Dimon of JPMorgan Chase, Vikram Pandit of Citigroup Inc., Brady Dougan of Credit Suisse Group AG, and Robert Kelly of Bank of New York Mellon Corp. They agreed to backstop the deal even though under mark-to-market accounting rules, they would have to immediately recognize a $10 billion loss on the Lehman assets, he wrote.
The U.K. government, however, refused to waive a requirement that Barclays submit the deal to a shareholder vote, in spite of a personal plea by Paulson to Chancellor of the Exchequer Alistair Darling. Darling, Paulson wrote, was concerned that if Lehman’s bad assets hurt Barclays, it might affect the entire U.K. banking system.
“The British screwed us,” Paulson, a former chairman of Goldman Sachs, said he told the U.S. bankers the next day.
Accounts Frozen
The former Treasury secretary said he, Geithner, and Fed Chairman Ben S. Bernanke were well aware the bankruptcy of Lehman would cause havoc in financial markets, although the consequences were much worse than they had anticipated. That was in part because Lehman’s U.K. bankruptcy receiver, PricewaterhouseCoopers, froze all of the firm’s accounts in that country, refusing to transfer collateral back to Lehman creditors, Paulson said.
Panicked investors then tried to withdraw funds from other financial institutions, including Morgan Stanley and Goldman Sachs, and credit markets froze. Concerned that publicly admitting the government couldn’t help them would lead to a run that would bankrupt those firms, Paulson said he maintained at the time the government wouldn’t help because it would contribute to moral hazard, a belief the government would always bail out investors.
‘Strict Line’
“In retrospect I’ve come to see that I should have been more careful with my words,” Paulson wrote. “Some interpreted that to mean that we were drawing a strict line in the sand about moral hazard, and that we just didn’t care about a Lehman collapse or its consequences. Nothing could have been further from the truth.”
Paulson wrote that he personally liked Lehman chief executive Richard Fuld, and had made more than 50 phone calls to Fuld, discussing ways to save Lehman, in the months between the Bear Stearns rescue and Lehman’s bankruptcy.
Fuld “was direct and personable, a strong leader who inspired and demanded loyalty,” Paulson said. “But like many ‘founders’ his ego was entwined with the firm” and Fuld waited too long before making a serious effort to sell the company, Paulson wrote.
Bear Stearns savior Jamie Dimon is described in the book as “technically proficient and deeply self-assured.” Other bank executives, however, were convinced Dimon was working against them in an effort to put them out of business, Paulson wrote.
He praises Bernanke as “easily one of the most brilliant people I’ve known,” and Geithner, the current Treasury secretary, for his “keen analytical mind and a great sense of calm.”
‘Scary Smart’
Democratic Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, is “scary smart, ready with a quip and usually a pleasure to work with.” During the crisis, however, Senate Finance Committee Chairman Christopher Dodd, a Connecticut Democrat, was “distracted by his unsuccessful campaign” for president, Paulson said.
Much of the crisis played out during the 2008 presidential campaign, and Paulson said he spoke often with Democratic candidate Barack Obama. “I was impressed with him,” he wrote. “He was well informed, well briefed, and self-confident,” Paulson said. “The day after the election, Obama abruptly stopped talking to me.”
Sarah Palin
He spoke less frequently with Republican candidate Senator John McCain of Arizona, and he did not get along with vice presidential candidate Sarah Palin, then the governor of Alaska, according to the book.
“Right away she started calling me Hank” during the first briefing he gave her, Paulson said. While almost everyone addressed him by his nickname, “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 also wrote that Chinese officials were very helpful during the crisis. He spoke often with Wang Qishan, vice premier of China’s financial and economic affairs, who pledged his country wouldn’t sell its large holdings of U.S. Treasury and agency bonds.
Russia, however, tried to take advantage of the turmoil in U.S. markets, he wrote. While he was attending the Summer Olympic Games in Beijing in early August 2008, he learned that “top-level” Russian officials suggested to the Chinese that the two countries sell a large amount of the Fannie Mae and Freddie Mac bonds they owned in order to force the U.S. to bail out those firms.
The Chinese refused, Paulson said.
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