Books Talk About the Financial Crisis

Introduction: -

"A mind needs books as a sword needs a whetstone, if it is to keep its edge" – this is the famous line of George R. R. Martin. The line is powerful enough to highlight the utmost importance of reading a good number of books. But there is a subtle difference between reading a book just to derive pleasure from it and reading a book to write a critical analysis of it. Well we are doing the latterand hope that the review that we are going to write will be helpful to others for future reference.

Rationale behind choosing this book: -

To begin with we shortlisted four books- a) Fault Lines by Rahguram G. Rajan, b) Too Big To Fail by Andrew Ross Sorkin, c) Good Value by Stephen Green and d) On the Brinkby Hank Paulson.

The reason behind choosing these books was simple. All these books talk about the financial crisis and aftermath of it in one way or the other. Barring ‘Too Big to Fail' all other books are written by Financial Leaders of various corporations and the Government. Eventually we were asked to write a critical analysis of the book ‘On the Brink' authored by Hank Paulson who was also the United States Secretary of Treasury at the time of the financial crisis of 2008 that shook the world economy.

Being the Secretary of Treasury, Mr. Paulson witnessed the crisis more closely than others and this was clearly evident in his book as well. In public vogue, he is widely considered to be one of the people responsible for the unfortunate set of events that unfolded during 2008-09. The financial crisis of 2008 left so deep a mark that every single person started to blame the system and the government. But it is easy to play the blame game. We were interested to know his view of the recession. What went wrong, what steps were taken and what could have been done to avoid it? These are the people, some of the greatest minds of their generation, tried their best to prevent the crisis from happening. But still it happened. We were interested to know what brought about this collective failure. And who better than Mr. Paulson who, as we said, was at the epicentre of it?

Hank Paulson: A Journey from Farmlands to Washington DC: -

Henry Merritt "Hank" Paulson Jr. was born to Marianna and Henry Merritt Paulson on March 28, 1946. His father was a wholesale jeweller. Paulson received his A.B. in English from Dartmouth College in 1968 and then went on to get a M.B.A. degree from Harvard Business School. After his MBA, he became the staff assistant to the Assistant Secretary of Defence at Pentagon and also worked for the administration of U.S. President Richard Nixon. He joined the investment banking giant Goldman Sachs in 1974 and eventually went on to become the CEO of the firm. It was during his tenure as the CEO when Goldman went public for the very first time. During this time he developed a very close relationship with China and went there for about 70 times.

In 2006, the then US President George W. Bush nominated Mr. Paulson as the new Treasury Secretary. Because of the position he was holding at that time, many people hold him responsible for the financial crisis that happened during 2008-09. They say he didn't do enough to prevent the disaster. After leaving his role in 2009, Paulson spent a year at John Hopkins University as a fellow. In 2011, Paulson announced the formation of an independent centre located at the University of Chicago named Paulson Institute. He dedicated this institute to nurture international engagement to address issues of global scope, and gave particular emphasis on cooperation between the United States and China. Paulson was also named as a senior fellow at the University of Chicago's Harris School of Public Policy.

Signs of Subprime Crisis- where Paulson was wrong!

In one of his first meetings with Mr. President at Camp David Paulson talked about a crisis that appears in the capital market every 4-8 years. He brought to the attention of Mr. President the exponential growth of unregulated OTC Derivatives like CDS, CDOs. However, he was humbled when Mr. President asked him, "How did this happen?" He was candid enough to accept in the book that it was weird for him to answer this question, for it was people like him- those from financial sector on the Wall Street who were to blame for this. While he talks about being prepared for the crisis in his book, he has failed to explain as to why he underestimated the potential of the Subprime Housing Loans & Mortgages. Although he accepts that he could not foresee this sector as being the trigger of a Crisis, it does seem weird that a person with such a profound experience failed to see the writing on the wall. This seems at odds with another of his narrative when Emil Hennery, Treasury Assistant Secretary briefed him about the two GSEs and Mortgage giants- Freddie Mac & Fannie Mae. He said- "it didn't take a genius to see that something had to be done".

The Crisis Arrives: -

The crisis he anticipated finally arrived in force in August 2007 with the dramatic tightening of Europe's Credit Markets and the announcement by the ECB for providing liquidity to the European Banks.As the Dow Jones fell nearly by 400 points, Paulson finally began to sense a big storm which was on its way. He has put the entire blame of this crisis to the housing bubble. The housing bubble meant that there was a big increase in the loans given to less creditworthy. And, because the various financial instruments from these loans involved cross-border capital flows, the crisis was taking a global shape. He says, "All bubbles involve speculation, excessive burrowing and risk taking, negligence, a lack of transparency, and outright fraud, but few bubbles burst as spectacularly as this one." This contrasts with his speech before a group promoting Chinese American Relations wherein he claimed that "mortgage problems are largely contained." Although he is candid enough to accept his fallacy, he does not really give us a credible explanation regarding the same. His statement- "…we did not realize then how changes in the way mortgages were made and sold, combined with a reshaped financial system had vastly amplified the potential damage to banks and non-banks financial companies", does not seem that credible considering he was a seasoned professional on the Wall Street. While he talks about market becoming opaque due to a growth of complex products, he refrains from taking any names which seems an attempt to be politically correct. This trend is maintained throughout the narrative. He has talked about various facets of the crisis without seeming to hold anyone accountable. Perhaps, this had to do with his liaisons with the Wall Street, but for an average reader like us, it does not leave us with a particularly good taste.

The HOPE Now Alliance- an experiment that went awry?

Mr. Paulson talks about a Foreclosure Initiative ordered by President Bush to minimize the pain of foreclosure for Americans as much as possible. His team along with the HUD came up with HOPE Now Alliance "created to reach out struggling burrower and encourage them to work with counsellors and their mortgage servicers". The program, he says, great many homeowners get loan modifications or refinance into fixed-rate mortgages. However he also mentions "we could not help people with larger financial issues- those who had lost their jobs." And, then