Thursday 23 February 2017

Review: On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Hank Paulson

(Headline, £18.99)

Brendan Keenan

Brendan Keenan

'The first sound they'll hear is their heads hitting the floor." The opening lines of former US Treasury Secretary (Finance Minister) Hank Paulson's memoir on the global financial crash of 2008 are also among the most dramatic.

He was talking about the plan to nationalise the giant US mortgage providers known as Fannie Mae and Freddie Mac. The chief executives would not be told, and would immediately be fired. One wonders how different reactions here might have been had Finance Minister Brian Lenihan taken a similar line with the bosses of the Irish banks that had to be guaranteed.

The cost would be no less, but public anger at the bailouts might be, and there could be more national consensus on what has to be done.

Not that American public anger at their bank rescues seems any less. The politics of bank rescue are always terrible.

As Congressman Barney Frank told Paulson at one meeting: "No one gets re-elected preventing a crisis."

Yet rescue there had to be.

No one reading this book, in diary form from the man at the centre of the storm, can have any doubt about how close the world came to unimaginable financial disaster.

To take just one example from so many: the supposedly safe "money market funds" in which Americans had invested $3.5 trillion ($3,500bn) of their savings looked, at one point, as though they might collapse.

What never fails to impress is the speed with which the American system was able to deal with a crisis of this extraordinary scale and complexity. Between March and September 2008, eight major US institutions failed -- six of them in September alone.

So it seemed worth looking at Paulson's recollections of the weekend of September 29, 2008, when Mr Lenihan rescued the Irish banks. He records that the Bush administration had invoked previously unused powers to save a big bank, Wachovia, from collapse. Markets were in a panic because the US Congress had voted down a NAMA-type asset purchase scheme (when it saw the scale of the panic, Congress later changed its mind).

Ireland has been embroiled in bitter debate ever since that fateful weekend about whether the right thing was done in the right way.

But it wasn't just an Irish crisis, and the global crisis greatly narrowed Ireland's options.

Whether in Washington or Dublin, events, not politicians, were in charge. It was not a question of the best way of doing things, but of what was actually possible.

So Paulson -- himself a former boss of the legendary investment bank Goldman Sachs -- explains that he let Lehman Brothers fail, not because he thought it would set a stern example, but because he had no legal power to save it.

The lesson from actions as disparate as those of Mr Paulson and Mr Lenihan is that governments will not let banking systems fail. Individual banks, perhaps -- the system, no. The lessons to be drawn are vital, but still a matter of fierce disagreement.

Buy 'On the Brink: Inside the Race to Stop the Collapse of the Global Financial System' from Eason

Irish Independent

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