'I didn't know what to do'

Paulson admits to fear during 2008 collapse of Lehman Brothers

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BRUSSELS, Belgium -- Henry M. Paulson Jr. recalls dining with some of Wall Street's most powerful bankers on June 26, 2007, not long before the credit bubble imploded.

"All were concerned with excessive risk taking in the markets and appalled by the erosion of underwriting standards," he writes in his penetrating memoir, "On the Brink." Yet they felt forced by competitive pressure to make loans they didn't like, the former U.S. Treasury secretary says.

"Isn't there something you can do to order us not to take all of these risks?" was the gist of a question posed by Charles O. Prince, the chief executive who was still dancing at Citigroup Inc. as the bank bumbled toward disaster.

That comment encapsulates the bizarre tango that enveloped Mr. Paulson as he struggled along with Federal Reserve Chairman Ben S. Bernanke and New York Fed chief Timothy F. Geithner to save the free-market system from itself.

Banks, hedge funds and other financial institutions were playing a game of chicken, the economic equivalent of the Cuban Missile Crisis. Mr. Paulson's mission was to prevent mutually assured economic destruction.

No one can argue that Mr. Paulson, a former chief executive of Goldman Sachs Group Inc., didn't work hard enough. This day-by- day narrative -- written with the help of former Institutional Investor editor Michael Carroll -- reminds us of his punishing schedule. We see Mr. Paulson's nonstop phone calls, his late-night meetings, his tossing and turning at night.

In the middle of the meltdown, President George W. Bush pulled a Paulson adviser aside. "Tell Hank to calm down and get some sleep," he said by this account.

A devout Christian Scientist, Mr. Paulson got so worn out that he was tempted to take a sleeping pill one night. Instead, he flushed the drugs down a toilet.

Another night, he managed to fall into a deep sleep, only to get a call from the world's most famous value investor. "Hank, this is Warren," said the voice on the phone.

In his grogginess, Mr. Paulson says, he wondered why his mother's handyman, Warren Hansen, was calling. It was, of course, Warren Buffett.

The big question about Mr. Paulson is whether his indomitable resolve was an advantage or disadvantage during the crisis. Historians will debate that issue for years to come.

Though "On the Brink" won't settle the matter, it does lay out Mr. Paulson's rationale for taking actions that were repugnant to his own free-market beliefs.

The narrative goes behind closed doors, as Mr. Paulson and his team struggled to prop up the wobbling dominos -- Fannie Mae and Freddie Mac, Bear Stearns Cos., Lehman Brothers Holdings Inc., American International Group Inc. and on and on.

What we get is a persuasive portrait of a man caught between market, taxpayer and politician. He even had to contend with his own mother, who had supported his work for the Nixon White House but disliked Bush. "You started with Nixon and you're going to end with Bush?" she said in May 2006 after learning of his nomination. "Why would you do such a thing?"

Mr. Paulson writes that he worried about what his "old friends" in Beijing would think; the Chinese held hundreds of billions of dollars in U.S. debt.

Yet his biggest opponent was the market itself. "The market was determined to call our bluff," he says, in describing Bear Stearns' shotgun marriage to JPMorgan Chase & Co.

As Lehman tottered on the brink, Mr. Paulson and Mr. Geithner were prepared to consider a "Bear Stearns-style rescue," he writes. Yet Mr. Paulson told bankers ranging from Jamie Dimon to John Mack that there could be no government money in a Lehman rescue.

"I knew that unless I explicitly said this, some of them might think that Good Old Hank would come to the rescue."

Time and again, he admits his mistakes and concedes that he risked distorting markets. While you don't have to accept his arguments, it's useful to know the logic and legal constraints that motivated all those ad hoc decisions.

Mr. Paulson works hard to polish the former president's image. By this account, Mr. Bush was "all business, engaged and focused," courageously backing market meddling for the good of the country.

Yet Bush wasn't really up to speed with what was happening in the markets. During one meeting in August 2006, Mr. Paulson found himself giving the president "a quick primer on hedging." By then, the bottom was falling out of the subprime- mortgage market.



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