Battling Fannie and Freddie: On the brink
Title: On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
Author: Henry M. Paulson, Jr.
Publisher: Business Plus, 2010
ISBN-13: 978-0446561938, 496 pages
Review: On the Brink
By Rolf Dobelli, Chairman, getAbstract
If books about the 2008 financial collapse are starting to run together in your mind, rest assured that former Treasury Secretary Henry M. Paulson Jr.'s memoir is unique. In the first account by a high-ranking government official, Paulson lets out some juicy details. He describes the dry heaves and insomnia he suffered throughout the crisis, his pithy banter with President George W. Bush and his irritation with the ever-perky Sarah Palin. Even so, readers get the sense from his carefully scrubbed copy that Paulson is holding back. Alas, you may have expected as much - loose lips don't help one become Treasury secretary or CEO of Goldman Sachs (his former job). Still, this memoir is enlightening for his personal perspective. getAbstract recommends it to taxpayers and policy makers seeking insight into the interactions of Washington and Wall Street.
Taking Down Fannie and Freddie
On Sept. 4, 2008, U.S. Treasury Secretary Henry "Hank" M. Paulson Jr. initiated the government's takeover of mortgage giants Fannie Mae and Freddie Mac. He intended to take control of them, fire their CEOs and pump $100 billion into each one. When he spoke to President George W. Bush about the plan, Paulson said, "The first sound [the two CEOs will] hear is their heads hitting the floor." He knew secrecy and surprise were crucial. Fannie and Freddie had strong supporters in Congress, in part because they often hired public sector insiders who wanted to join the more lucrative private arena. He feared that if word of a seizure leaked, opponents would slow the takeover, imperiling the U.S. financial sector and the global economy.
Overleveraged and underregulated, the two companies were losing billions. Fannie's once-solid stock had plunged from $66 to $7.32 in a year. A few months earlier, Paulson had asked Congress for the authority to buy equity in Fannie and Freddie. Democrats loved the two controversial government-sponsored enterprises, but Republicans reviled them and were appalled that a Republican administration would shore them up with taxpayers' money. To Bush's credit, he put aside the ideological debate and focused on the pragmatic issue of keeping the financial system afloat. "It won't always look good, but we are going to do what we need to do to save the economy," Bush said. He faced another complication: Investors in Japan, China, Russia and elsewhere held more than $1 trillion in Fannie and Freddie debt; they could view a failure as expropriation of their money.
The two mortgage companies suffered the consequences of shaky business models and a regulatory scheme that seemed incapable of effective oversight. Jim Lockhart, head of Fannie's regulator, the Federal Housing Finance Agency, listed Fannie's shortcomings at a fateful Sept. 5 meeting with its CEO Daniel Mudd. Mudd felt the seizure was unjustified and he was angry, but Freddie CEO Richard Syron seemed "relieved." After the takeover, Paulson spoke to then-presidential candidates Barack Obama and John McCain. Obama struck Paulson as straightforward and well-versed in economic issues. McCain put running mate Sarah Palin on the phone. Her overly friendly approach and her fuzzy grasp of the situation irritated Paulson.
Paulson comes from a Republican family, but Democrats fill his personal life. His mother transformed from conservative to liberal in her later years. A staunch Bush opponent, she urged her son not to accept the nomination to Treasury secretary. "You'll be jumping on a sinking ship," she said. Paulson's wife, Wendy, and children, Merritt and Amanda, are all Democrats. Paulson's professional path began at Dartmouth College, where he did very well as a football offensive lineman despite competing against players 50 pounds heavier. He earned a Harvard M.B.A., served in the Naval Reserve Officers' Training Corps and worked in the Nixon White House in the early '70s, serving on the Domestic Council. In 1973, he became liaison to the Treasury. Watergate taught Paulson not to be overly impressed by his bosses' power. He joined Goldman Sachs' Chicago office, where he became known for his relentless work ethic...
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