I've been reading Paulson's On the Brink the story of his tenure as Treasury Secretary during the financial crisis of 2008 and all the tough calls and decisions he faced.
http://www.amazon.com/Brink-Inside-Collapse-Global-Financial/dp/B006CDD6K0/ref=sr_1_1?s=books&ie=UTF8&qid=1372556590&sr=1-1&keywords=hank+paulson+on+the+brink
According to him, he never really wanted the Treasury job in 2006 initially. He was persuaded by friends who argued that you don't tell the President of the United State no, and after all, who knew the next time a Republican would get into the White House? He had wondered what he could possibly get done in the last 2 years of a lame duck White House.
Turns out he didn't need to worry about it being anti-climatic or being bored with nothing to do. It's a fascinating story and sure, much of what he, Bernanke, and Tim Geithner-who was of course NY Fed President at the time and would be Paulson's successor at Treasury in the Obama Administration-can, and has been endlessly dissected and second guessed.
I think that he did a good job on balance-I've always been impressed with him for his intelligence and the way he conducted himself during the crisis-which is not to say that I affirm his every move. If anything I think it's very interesting now to look back on it at this point and reconsider-what exactly he and the rest of the team got right and wrong.
A criticism you hear a lot of is that the banks were bailed out with terms way too generous and that no one has ever had to pay for all the suffering the country went through. I think a very interesting question is specifically the capital infusions that Paulson instituted in early October.
Recall that initially the TARP wasn't about capital infusions and equity stakes but rather the idea was to use the funds to buy troubled assets from the banks balance sheets-to create a 'good bank-bad bank' scenario; hence TARP-Troubled Asset Relief Program. However, it soon became clear that this would take way too long and what they didn't have was time.
So the decision was to use the first $250 billion dollar 'tranche' into systemically vital banks; $125 billion dollars went to the biggest commercial banks and the new holding company banks-Goldman Sachs and Morgan Stanley.
What I find interesting is to compare the terms of the U.S. infusion to the British capital infusion in it's banks. There's no question that the U.S. version was much more generous.
The U.S. infusion did prohibit 'golden parachutes'-even on previous contracts, with clawbacks for any bank with discovered fraud on their balance sheets, and limited tax deductions to $500,000 of income in the member banks. Still the British terms were much less generous. The British effectively nationalized the Royal Bank of Scotland and HBOS. They took seats on the firms' boards, fired the top executives, froze executive bonuses and leveled 12% dividend on preferred stock.
Paulson's argument was that he wanted healthy banks to take the capital infusion as well-or the weak banks-the weak ones were Citi, Morgan Stanley, and Bank of America-would lose investor confidence. So what can we say about this 'natural experiment' 5 years later? I don't know if there is any attempted analysis of this question but it would be a great 'white paper.'
It seems to me that while many in the U.S. have felt that we were much too easy on the banks, when the dust settles, which economy has done better since? Don't get me wrong, I don't think you can in anyway say 'We didn't nationalize our banks and drive such a hard bargain and yet our economy is doing better so our approach was superior'-my only point though is that it shows you how tough it is to evaluate.
I don't think the reason that the U.K. has lagged us has anything to do with the relative terms of the bank bailouts. I would say the reason the U.K. has lagged is because of it's ill advised fiscal austerity since Cameron came in.
Still, this would suggest that the case for or against the different treatments may not be in who's economy did better. For all those who think that we should have had tougher terms in what way has it benefited Britain and disbenefiited us? I think there can still be a good case. For one thing, a sense of social fairness cannot be ignored. You can also argue that while Paulson thought the British approach was wrong, is there anything that can be pointed to where the British financial system suffered because the healthier British banks stayed away from the bailout?
We're in the wild world of couterfactuals. It may also be that the U.K. and U.S. positions were not apples to apples as the financial system is so much bigger in Britian relative to GDP-3 times as large in Britain. While the U.S. financial industry is very large compared with GDP it's 'only' 50%.
P.S. Here is an interesting argument for nationalization of banks during a crisis.The blogger 'Symmetry Breaks' doesn't think even Britain did nationalization right as it made no effort to change the overall 'culture' of the banks even if the top executives were fired. He also thinks that the British government was way too eager to prematurely re-privatize.
http://symmetrybreaks.wordpress.com/2012/07/10/the-case-for-a-nationalised-bank/
http://www.amazon.com/Brink-Inside-Collapse-Global-Financial/dp/B006CDD6K0/ref=sr_1_1?s=books&ie=UTF8&qid=1372556590&sr=1-1&keywords=hank+paulson+on+the+brink
According to him, he never really wanted the Treasury job in 2006 initially. He was persuaded by friends who argued that you don't tell the President of the United State no, and after all, who knew the next time a Republican would get into the White House? He had wondered what he could possibly get done in the last 2 years of a lame duck White House.
Turns out he didn't need to worry about it being anti-climatic or being bored with nothing to do. It's a fascinating story and sure, much of what he, Bernanke, and Tim Geithner-who was of course NY Fed President at the time and would be Paulson's successor at Treasury in the Obama Administration-can, and has been endlessly dissected and second guessed.
I think that he did a good job on balance-I've always been impressed with him for his intelligence and the way he conducted himself during the crisis-which is not to say that I affirm his every move. If anything I think it's very interesting now to look back on it at this point and reconsider-what exactly he and the rest of the team got right and wrong.
A criticism you hear a lot of is that the banks were bailed out with terms way too generous and that no one has ever had to pay for all the suffering the country went through. I think a very interesting question is specifically the capital infusions that Paulson instituted in early October.
Recall that initially the TARP wasn't about capital infusions and equity stakes but rather the idea was to use the funds to buy troubled assets from the banks balance sheets-to create a 'good bank-bad bank' scenario; hence TARP-Troubled Asset Relief Program. However, it soon became clear that this would take way too long and what they didn't have was time.
So the decision was to use the first $250 billion dollar 'tranche' into systemically vital banks; $125 billion dollars went to the biggest commercial banks and the new holding company banks-Goldman Sachs and Morgan Stanley.
What I find interesting is to compare the terms of the U.S. infusion to the British capital infusion in it's banks. There's no question that the U.S. version was much more generous.
The U.S. infusion did prohibit 'golden parachutes'-even on previous contracts, with clawbacks for any bank with discovered fraud on their balance sheets, and limited tax deductions to $500,000 of income in the member banks. Still the British terms were much less generous. The British effectively nationalized the Royal Bank of Scotland and HBOS. They took seats on the firms' boards, fired the top executives, froze executive bonuses and leveled 12% dividend on preferred stock.
Paulson's argument was that he wanted healthy banks to take the capital infusion as well-or the weak banks-the weak ones were Citi, Morgan Stanley, and Bank of America-would lose investor confidence. So what can we say about this 'natural experiment' 5 years later? I don't know if there is any attempted analysis of this question but it would be a great 'white paper.'
It seems to me that while many in the U.S. have felt that we were much too easy on the banks, when the dust settles, which economy has done better since? Don't get me wrong, I don't think you can in anyway say 'We didn't nationalize our banks and drive such a hard bargain and yet our economy is doing better so our approach was superior'-my only point though is that it shows you how tough it is to evaluate.
I don't think the reason that the U.K. has lagged us has anything to do with the relative terms of the bank bailouts. I would say the reason the U.K. has lagged is because of it's ill advised fiscal austerity since Cameron came in.
Still, this would suggest that the case for or against the different treatments may not be in who's economy did better. For all those who think that we should have had tougher terms in what way has it benefited Britain and disbenefiited us? I think there can still be a good case. For one thing, a sense of social fairness cannot be ignored. You can also argue that while Paulson thought the British approach was wrong, is there anything that can be pointed to where the British financial system suffered because the healthier British banks stayed away from the bailout?
We're in the wild world of couterfactuals. It may also be that the U.K. and U.S. positions were not apples to apples as the financial system is so much bigger in Britian relative to GDP-3 times as large in Britain. While the U.S. financial industry is very large compared with GDP it's 'only' 50%.
P.S. Here is an interesting argument for nationalization of banks during a crisis.The blogger 'Symmetry Breaks' doesn't think even Britain did nationalization right as it made no effort to change the overall 'culture' of the banks even if the top executives were fired. He also thinks that the British government was way too eager to prematurely re-privatize.
http://symmetrybreaks.wordpress.com/2012/07/10/the-case-for-a-nationalised-bank/
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