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Raising the Curtain on Paulson's On the Brink

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On Monday, Henry Paulson's book On the Brink will be officially published. (For true devotees, the Kindle version is available at 12:01 a.m. on Feb. 1, making this a kind of Harry Potter-like event. Ah, magic.) Now, even as the flood tide of books about every conceivable aspect of the financial crisis threatens to wash over the bulkhead of our sanity, Paulson's retelling is the one we've been waiting for. After all, he's the only principal player in the panic phase of the financial crisis who has so far chosen to put his thoughts down on paper -- or e-ink -- as opposed to defensively parrying hostile questions from congressmen or whispering recollections to journalists. This may not produce either a page-turner or a host of revelations. Indeed, given Paulson's ambivalence about opening up to the public, and the obvious complexities of the man, it would be surprising if he did.

Here's what I fully expect him to say: TARP was a swell idea that saved the world. He had no choice but to let Lehman Brothers Holdings Inc. go (moral hazard and all that). He did not favor Goldman, Sachs & Co. (NYSE:GS), except that a failure of that firm would mean the end of civilization as we know it. Ben Bernanke and Timothy Geithner acted heroically under his direction. Everybody was really tired. You had to be there to understand why Geithner didn't ask Goldman Sachs for a haircut on the American International Group Inc. (NYSE:AIG) collateral. He was always really tired. Free markets are best. Regulation is important but let's not stifle innovation, entrepreneurship, etc. Bush was a great guy who let me do my thing.

Then there are the topics I hope he tackles. First, very few saw the bubble building -- but very few had a perch like the Treasury secretary. When did he realize this was going to be more than just a cyclical hiccup? Did he ever really ponder either the break between real estate prices and any sense of underlying value? Did he worry whether the short-term leverage that kept Wall Street humming would last forever? Was he concerned about credit default swaps before they slapped him in the face?

Second, what was he thinking and doing between the fall of Bear Stearns Cos. and the collapse of Lehman? There are several parts to this. What was his relationship to Dick Fuld at Lehman and what was his evaluation of Fuld's ability to save that firm? Did he think he was out of control? A number of accounts describe Paulson urging Fuld to sell the firm during the summer of 2008, but how complete a view did he have of Lehman's difficulties -- and how early? Why didn't Treasury, or the Federal Reserve, develop a better grasp of Lehman's true interconnectivity in those months between Bear and Lehman? Why didn't someone map out the consequences of a Lehman bankruptcy on, say, credit default swaps or the money markets? Was that not possible? And if that's the case, isn't that a reason to limit certain risks going forward? In short, how could he and Bernanke say before the Lehman failure that counterparties had had enough time to disengage from Lehman?

The third topic involves the dynamic -- or lack thereof -- between major players. This is a subject on which the existing "I-was-there" books on the crisis provide only sketchy information. What was the relationship between Bernanke and Paulson from Bear onwards? Was Bernanke (and his man Geithner in New York) simply compliant, or was there a steady interchange of differences and debate? And if so, on what subjects? Paulson, by all accounts, made the sudden decision to force a low-ball bid on Bear. True, and how's he feel about that now? And Paulson often gets credit (or blame) for the decision to let Lehman go. (Both Bernanke and Paulson's explanation for the Lehman decision has shifted over time, which could use some explaining.) At any time before the TARP, was Paulson able to think ahead systemically? Did he recognize that he was leaving the Fed out on a long limb with the Bear rescue, and all but inviting the kind of politicization that is now occurring? Did Bernanke raise objections to, say, opening the discount window to Wall Street or accepting Goldman and Morgan Stanley (NYSE:MS) as bank holding companies, after rejecting Lehman? And what about the Securities and Exchange Commission, which seemed to have effectively no role in anything. What was that all about? Was Christopher Cox really that lame -- and what does that say about the Bush administration, deregulation or a reformed regulatory system?

Fourth, I hope Paulson discusses what may have been his greatest weakness throughout the crisis: his inability to deal effectively with the public and with the toxic politics released by the crisis and recession. Did he realize at the time how his tendency to suddenly change his mind -- save Bear, let Lehman go, use the TARP to buy back assets, use it to inject capital -- steadily undermined his standing with a frightened public and poisoned his relations with Congress? Did he foresee the damage he was doing to himself, the rescue and Goldman Sachs by continually hiring former Goldmanites for positions of power?

Finally, how does he feel about the three decades or so of financial deregulation now? How would he reform the financial system, particularly in regard to too-big-to-fail and moral hazard? And where does he think Goldman fits into a more prudent financial system?

It often seems to me that Paulson, Bernanke and Geithner have been unduly castigated for aspects of the bailout. In those few months, these men performed great feats under difficult conditions. That said there are major issues that only they, who stood at the center of the storm, can tell us. How did they miss it? Why weren't they more prepared when the storm broke, particularly in the period between Bear and Lehman? There is not a doubt in the world that these men -- these three in particular -- were smart, deeply experienced in fortuitous ways (Bernanke on the Great Depression, Geithner with his Japan and Asia crisis background, Paulson running the pre-eminent investment bank in the world) and working as hard as they could. But what kind of guarantee is that for future crises? And that's the real point here. We should not have to take that risk again. The real lessons from this experience should help us to avoid coming so close to the brink again. We'll see if Paulson helps this process.

Robert Teitelman is editor in chief of The Deal.