Michael Hanson
Business in Review

The Apologia of Hank Paulson

By, 02/19/2010

It'll depend on who you ask, but St. Augustine's Confessions (completed ~400 AD) and Jean-Jacques Rousseau's Confessions (first published in 1782) are still widely regarded as gold standards of autobiography. These are works of stark truths, profound revelations, deep and new philosophies, and finely wrought prose.

Don't expect any such thing from Hank Paulson. The autobiographical account of his tenure as Treasury Secretary (spanning a year or so before the panic to early 2009) offers no great insight, no great perspective, and no great candor. And that is the greatest disappointment—we simply didn't need another dreary play-by-play of the bear market. Where we hoped and wished for deep insight and a view not before heard from the man who presided over one of the nastiest periods in world economic history, Paulson instead tells us that he doesn't write things down or use email, so the entire book was done from his "facility" for memory.

Maybe we can alternatively compare Paulson's 500+ page missive to Plato's Apologia, where, condemned by the public, Socrates makes a final public defense of himself before his condemnation and death by hemlock. Indeed, Paulson's words are saturated with "This wasn't my fault! I'm a nice guy!" but aren't nearly so eloquent or pithy.

Paulson regards himself as a humble public servant in these proceedings who could generally only react to inevitable events. It's interesting to note Paulson—one of the titans of modern finance and fantastically wealthy—projects an image of modesty (his wife still wears clothes from the 70s), conservation (his main avocation is ecological conservation), and faith (he's a devout Christian Scientist). As such, he, like many, believes the crisis ultimately was the fault of consumerism and profligacy. There is no mention of infamous accounting rule FAS 157 or other regulatory mishaps now well documented through this episode.

While Paulson's stalwart ownership of his actions is both honorable and laudable, there is nary a mea culpa in any of it other than [paraphrasing] "I wish I would have communicated what happened with Lehman more clearly to the public." This is striking. Paulson is a lifelong investment banker—one of the best. Thus, he is a deal-maker, which means he thinks in terms of transactions and less holistically about the markets. He acknowledges this feature a few times ("I was never a trained economist") but consistently fails to grasp the gravity of that fact. Good public policy thinks about the system foremost. That is, where Paulson hopped from transaction to transaction (Bear Stearns to Fannie/Freddie to Lehman to AIG, etc.) as is expected of an investment banker, proper public policy calls for a consistent, methodical approach to all transactions so as to offer the public firm footing. In short, investors despise uncertainty, and under Paulson, they didn't know what would happen from one transaction to the next. This is an important feature of the panic but is left unrequited—and that is one of the book's foremost shortcomings.

To date, I've perused just about every account of the crisis. Most of them feature a requiem in the form of a laundry list of prescriptions for the future and advice about what we ought to do as a society. Most suggestions are unrealistic and pro-regulatory. Paulson, too, succumbs to this temptation—proclaiming over and again his belief in free markets while in the same breath recommending new regulation. In the end, the aphorism "never let a good crisis go to waste" seems to be his conclusion.

In stark relief comes Andrew Ross Sorkin's Too Big to Fail. Also a tome (500+ pages), this is not only one of the most lively and entertaining accounts of the panic, but it is also an excellent work of journalism. Sorkin often reconstructs events and conversations, but does it with great flair and copious citation. At the very least, there is no doubt of its rigor and fidelity.

The editor of "Dealbook" in the New York Times' Business section, Sorkin focuses chiefly on the personalities and drama of the handful of folks who determined many of the critical events of this period. Last week, I spoke about how large, impersonal forces tend to direct the course of history. In contrast, this book is a case study in those scant times when the larger market falls away and much of its fate is decided by the personalities of a few. The aloofness of Tim Geithner, the blue collar work ethic yet aristocratic hubris of Lehman's Dick Fuld, the milquetoast collegiality of Ben Bernanke, the sledgehammer will of Hank Paulson, the sleek opportunism of Jamie Dimon—all these and more come to life in this book. They teach us, one episode at a time, how it's ultimately people—with emotions that run the gamut—who play decisive roles in market behavior, not economic theory or complex mathematics.

Too Big to Fail is likely to end up the Barbarians at the Gate of its era—though ultimately a work of journalism and focused on narrative, Barbarians came to be a business classic and the definitive work about a specific financial event (the leveraged buyout of RJR Nabisco by private equity giant KKR). Too Big to Fail may take its rightful place in just such a niche (though we will have to see if Michael Lewis' much anticipated book due in a few weeks can change that).

Perhaps we are too hard on Mr. Paulson and too easy on Mr. Sorkin. After all, Thucydides, Tacitus, Gibbon—all the great historians—were better at describing history than the actors themselves. But for your time and money, Too Big to Fail is your best bet for the story of the Decline and Fall of ‘08.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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