The Wall Street Journal's David Wessel's In Fed We Trust: Ben Bernanke's War on the Great Panic is just out to the usual accompanying publicity. It's a very pleasant read, written in that WSJ style adapted to books that hit its apotheosis with Barbarians at the Gate and has never returned to that height again. Wessel's book is well-done, commercial nonfiction, pitched at about the same level as his "Capital" column in the paper. It bounces along at a brisk clip, efficiently introducing characters and providing all those little details -- where Hank Paulson and Ben Bernanke had breakfast, how much gold bullion is in the basement of the New York Fed -- that publishers seem to believe readers crave.
I'll offer a full consideration of In Fed We Trust eventually (vacation looms). Right now, I want to focus on a single decision that continues to look like the key turning point in the crisis: the decision to let Lehman Brothers Holdings Inc. fail. Wessel opens with the events leading up to that decision, the context of which was the Bear Stearns Cos. crisis five months earlier. (It's shrewd narration, but a little annoying: After dealing with Lehman, Wessel dials back and doesn't hit Bear for 120 pages. Bear set up Lehman; it was essentially a continuum. That said, this isn't a very long book.) Hanging over the Lehman affair are a series of questions. Should Lehman not have been saved? If Bear was "saved," why not Lehman? What were the dynamics of the major decision makers? What was the logic behind the final decision? How could decision makers not realize the consequences?
Wessel moves so fast that many of these questions get asked but never truly answered. This is economic management by personality and meetings. Wessel has talked to each of the three major players -- Paulson, Bernanke and Tim Geithner -- but he has little new to add to the portraits that have already floated through the media. Wessel favors Bernanke, likes Geithner, but views Paulson, and his minions of former Goldman, Sachs & Co. (NYSE:GS) staffers, as a man cast in the wrong role: an investment banking dealmaker caught in situations in which those strengths did not exactly shine. Wessel suggests, in the mildest of ways, that Paulson screwed it up. Bernanke is conciliatory and thoughtful; Geithner organized and rational; Paulson impulsive with strange personality tics. Wessel gives Paulson very little credit, though he rarely comes right out and criticizes him. Instead he nibbles away at him in a kind of death by detail.
But again, it's very hard to get at the more substantive questions. For instance, did Paulson dislike Lehman's Dick Fuld so much that he let his firm die, as Lawrence McDonald, the author of the recent A Colossal Failure of Common Sense argues? In passing, Wessel offers two details about Fuld and Paulson: One, Paulson never thought much of Lehman as a firm; and two, he and Fuld had been talking on the phone for weeks before the crisis worsened, presumably discussing buyers. That's it. Fuld remains a shadowy, off-the-stage figure; at one point he's pointedly kept out of the meetings. The Korea Development Bank episode is barely alluded to. The result: When Paulson finally decides the government can't save Lehman, the decision remains deeply opaque. He mentions politics, and a moral hazard. But Wessel has already slyly suggested that perhaps his disdain for Lehman fed the decision. And the conspiracy claque, realizing how lousy the situation was with former and current Goldmanites, will eternally believe Paulson did it to help his old firm.
Paulson is coming out with his own book this fall, so perhaps some of these questions will be tackled.
There are fewer of those odd, discordant details with Geithner and Bernanke. Indeed, the theme of the book is how Bernanke saved civilization by realizing he had to do whatever it takes, an italicized refrain that annoyingly recurs like some particularly intrusive background music at key moments. And yet, Wessel can't take Bernanke completely off the hook with Lehman. "Bernanke and Paulson implied initially that they deliberately let Lehman go. But their accounts were, well, different." Even Bernanke spun the decision from a general powerlessness in the face of cataclysmic markets, to legal restraints on the Fed, which constrained it from putting up the money. Yes, Bernanke spins.
There are other thorny issues Wessel flies past in his recitation of emergency meetings and conference calls. You have to skip all the way to the Bear Stearns chapter to discover what happened to the Securities and Exchange Commission's Christopher Cox: He was simply not invited to the meetings, despite being Bear's and Lehman's regulator, because of a judgment (by whom?) that "he wasn't up to the job." Moreover, writes Wessel, "Apparently, he wasn't missed." Who knows he wasn't missed since he was never there? And his exclusion certainly calls for more explanation. What exactly happened? The comment is revealing: Cox was not part of the "in" crowd (for one thing, the SEC had no money) and therefore he wasn't important. True, the SEC had grave supervisory failures, but then so did the Fed.
Another detail: There were five months between Bear and Lehman. Bear clearly was a systemic threat because it was so densely interconnected with the rest of finance, which Wessel points out. Why, then, didn't the Fed or Treasury make some attempt to either reduce Lehman's interconnections (this frankly would have been difficult) or at least spend the five months trying to get a better grasp of the systemic consequences? Again, Wessel mentions that Paulson and Bernanke assured people that counterparties "had been given time to protect themselves" and that the Fed had "found new ways to lend to investment houses that might be hurt in a Lehman collapse." But, he adds, "They were wrong."
They were wrong? That's it? The real mistake of Lehman may not have been to let it die, but to fail to understand the implications of that failure. They may have been wrong on the single most important issue in this crisis -- and one that speaks directly to the job of systemic regulator -- and Wessel never goes into any detail as to why, and never asks. This was a Katrina-like failing. A disaster was clearly building and defenses were weak. What were the Fed and Treasury doing in those key months between Bear and Lehman? How would the acknowledgment, or the investigation of that failure, alter the heroic characterization of Bernanke that Wessel undertakes?
All this is not to blacken any of these names. They were all making it up under extraordinary conditions as they went along. But it does point out how many of the obscurities and mysteries still prevail around the major events of 2008. Well, there are many other books coming -- a veritable flood of them. We'll see what we learn.
See the book's profile at Amazon.com
Robert Teitelman is the editor in chief of The Deal.
David Jones: Page One Doesn't Reflect the Times
It would be nice to see a discussion about the serious implications this recession is having on those who aren't six-figure Wall Street types. It would be good for all New Yorkers.
GO FIGURE, this was a sop that Wall STREET DEMANDED because the WASP MAFIA did not deliver the Social Security FUNDS to them because they did not get Social Security privatized.
Goldman Sachs made a profit off of the Bear Stearns bailout and takeover.
Lehman Brothers was a Goldman Sachs competitor that was allowed to implode, taking the rest of the banking system down with it.
Goldman Sachs made enormous profits from resulting government intervention, and continues to do so.
... and Goldman Sachs lived happily ever after.
THE END
the "hit" on our economy would have been even bigger than it's been..but..myopic minds prevailed...I'm "glad" Lehman was allowed to fail, believe Bear should have failed...believe AIG should have failed...as others have said.."if it's too big to fail..it's too big"...we need a Teddy Roosevelt Trustbuster...do I live gov't intervention..no (unless it say...requires air traffic controllers to be trained..or bridges to be "safe",...get my drift...we NEED some government..if "people" were kind and not greedy..we'd need VERY little government interference OR protection..but..Greed is still good on Wall and K street)...so..I'd let them ALL fail...I'd have the gov't "buy" the annuities that AIG sold to older people who depend on that check to live"..but other assets (CMO's CLO's, CDO's)...bye bye.... ONLY in starting almost from scratch, could Wall Street have truly been cleaned up...at least for a few years.
AIG's 2005 10-K, page 127, states: "At December 31, 2005, the aggregate notional principal amount of AIGFP's outstanding swap transactions approximated $1,225 billion, primarily related to interest rate swaps of approximately $837.4 billion.” Additional information indicates the balance of the derivatives portfolio is in “Currency Swaps”, and “Swaptions, equity and commodity swaps”. It also says: “Such derivative transactions include interest rate, currency, commodity, credit and equity swaps, swaptions, and forward commitments.”
So, son-of-sam, since you seem to be familiar with this little scheme, perhaps you can enlighten the rest of us. How did GS "PURCHASE" $20 Billion in "credit default swaps" in 2005, and yet it had NO EFFECT on AIG's 10-K?
I'm also curious how AIG could price a "credit default swap" in order to sell such a thing. If I "buy" a "credit default swap", am I not purchasing some sort of "insurance"?
If so, why would the seller of this protection be excluded from regulatory capital requirements?
If not, please explain how such a transaction constitutes a derivative. I'm troubled to find any research relating to such a thing, but I'm really curious.
Thanks in advance for your assistance in illuminating these issues for me, and anyone else interested.
I worked for Lehman for 3 seconds in the 90's..as a female...accustomed to the good ole boys club..I have a pretty tough skin...but OMG....they were NUTS!..I mean NUTS...misogynists that floored even me.
The 3 other women in the Lehman office..would daily...run out crying...(and come back).... I don't usually burn bridges...but when I left..and the manager said "I'll give you a good reference"...I said "don't bbother...your name won't come up".....so for me...guess it WAS personal...but that does not negate my kknowledge..that like any business run poorly....they should have died.... as companies...period!
(obama..like Bill Clinton..so naive in this area....I adore Obama..but the clock IS ticking)
The sooner the investment banks and religion get out of politics or even political involvement the better for small scale economics in the country.
First, my little-old Aunt, 87, wife of an Air Force Sgt, lost $90,000 on Bear.
I don't see how the above is clear at all.
Goldman's closest rivals are and have been for quite some time Morgan Stanley and JP Morgan. Only Morgan Stanley was ever even slightly at risk (never believed it was actuallly - should have bought stock at $7!). The loss of Lehman has done nothing for the competitive landscape because as everyone expected, Barclays came in and bought all the people and set up a U.S. investment banking operation.
The other reason it is ludicrious is because Paulson must have known that the systematic shock to the financial markets would be worse for Goldman's stock than any benefit from the loss of a minor competitor. Now it seems obviously true that he greatly under estimated that shock...
BTW - he really had bigger fish to fry that weekend. Had Merrill gone down (and it likely would have - Citadel and others were lining the ibanks up like ducks), it would have been one of those buy guns and canned goods moments.
They're calling me Mr. bailout. I can't do that again.
Underestimated the shock - no kidding.
The answer to what happened between Bear and Lehman has been basically answered in testimony and in articles. They tried and tried to hold things together with ineffective fixes. It was a foreclosure tsunami, and its battering of the system escalated by the day.
Unless one thinks Bernanke and Paulson should have been capable of being financial comic book super heroes, I think they essentially were doing all that was possible to in failing to accomplish the impossible.