Financial Crisis Memoirs 2.0

Ben Bernanke, Chairman of the Federal Reserve, wrote a memoir, The Courage to Act: A Memoir of a Crisis and Its Aftermath.
Tim Geithner, the President of the Federal Reserve Bank of New York also wrote a memoir: Stress Test: Reflections of Financial Crises.
Hank Paulson, the Secretary of the Treasury also wrote a memoir: On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.

So, after three separate memoirs, what next? How about a jointly written book!
Bernanke, Geithner, and Paulson: Firefighting: The Financial Crisis and Its Lessons

It is a surprisingly slim volume for covering such an important and complicated event. The authors sell the story as the event of the century, so is this slim volume all there is to say? Obviously, not. The goal is to be a one-stop shop. You can hear the advertisement: Everything you need to know straight from the guys who were there!

While a short version of the insider memoir is not an inherently bad idea, this particular book is even shorter than it looks.

It has 129 pages of text. That is followed by…I kid you not…74 pages of Power Point slides. Why? Because you know you want to read 74 pages of Power Point Slides. Because you know Power Point Presentations are so incredibly exciting.

How did this book happen? Three guys who have already written their own individual memoirs get together and think, “The world needs a joint memoir”? It is genuinely odd.

OK, so maybe there is a market for a quick overview of the financial crisis. Not everyone is going to slog through three different memoirs. How does this book do? Hard to say for sure. My students liked it, but they know some economic theory. I suspect it does not work as an introduction to the crisis for someone who does not already know the basic story or have a working knowledge of money and banking.

What then is the real virtue in this book? Well, at least, it surely can help explain the strangest moment of 2008:
Monday, September 15: Lehman Brother fails
Tuesday, September 16: AIG is bailed out

What happened in between Monday and Tuesday? Monday itself was surprising. A few months earlier, the Powers that Be had arranged a bailout of Bear Stearns. So, why let Lehman fail? And once you have let Lehman fail, why bail out AIG the next day?

It is a curious tale. Lots of speculation about why. Bernanke, Geithner, and Paulson offer what has to be the most incredible (literally not credible) explanation I have yet seen.

You see, they didn’t want to let Lehman fail. Really, cross their hearts and hope to die they did not want Lehman to fail. They really, really wanted to bail out Lehman. All three of them, see. They just, you know, couldn’t legally do it. Sure, they bailed out Bear Stearns and Fannie Mae and Freddie Mac. Sure they had bailed out Long Term Capital Management and the entire Savings and Loan industry. Sure they had bailed out Southeast Asia and Mexico. Sure, the very next day they would bail out AIG. But, gosh darn it, there was just no way to bail out Lehman.

Of course to even have a hope to sell that story, they have to explain the troubling fact that the Secretary of the Treasury had actually announced in advance that they had no intention of bailing out Lehman. If you really want to do something and have every intention of doing something if only you can figure out how, why would you announce to the world you will never do it? (And, let’s not forget, they didn’t bail out Lehman, so the claim they wouldn’t do it was right.)

As Lehman entered its endgame, Hank and his team put out the word that taxpayers would not subsidize a Lehman deal. This was a negotiating tactic, not a policy decision. He was trying to motivate the private sector to assume as much of Lehman’s bad assets as possible, to increase the likelihood that a Bear Stearns-like rescue would be possible. But this was one of the few moments during the crisis when we were not all on the same page. Tim thought that telling the private sector it was on its own would intensify the run, and he was concerned that a “no government money” proclamation would hurt our credibility if the Fed did get the opportunity to assist a buyer with a Bear Stearns-type loan.
But Hank said he would gladly reverse his position if we got an opportunity to save Lehman. We all knew that if the government needed to take some risk to get Lehman sold through a Bear-type deal, we would do it even if we didn’t like it, because a Lehman collapse would be far costlier in terms of financial and economic stability that a Lehman bailout. We were determined to avoid disruptive failures of major institutions until we could draw a circle of protection around the system’s core, and at that point we didn’t have the power to build that kind a firewall. Our disagreement was about negotiating and messaging tactics, not our ultimate determination to do whatever we could to prevent a destabilizing collapse of a systemic firm.

Uh…

What exactly are we supposed to make of that? Here we have the Paulson, former Secretary of the Treasury, signing off on a book where he says, “Yeah, I didn’t mean what I said. I was just haggling.” Yeah. Right.

Those two paragraphs undermine the entire book. The rest of the book tries to paint a portrait of three guys who understand the stakes, working hard behind the scenes to save the world. And then they drop in those two paragraphs which make you sit up and realize, this is all ex post rationalization. The world is melting down, they know the world is melting down, they are terrified of what will happen if Lehman fails, they want to bail out Leman…and the Secretary of the Treasury decides it is a good time to haggle by announcing Lehman will not be bailed out…which causes the whole thing to come crashing down? That is a little hard to believe.

Don’t get me wrong. Bernanke, Geithner, and Paulson did amazing work in 2007 and 2008. It isn’t clear that anyone could have done a better job. But, that is not the same thing as saying they were these calm, steady hands in the midst of a storm. They weren’t. They were scared. They didn’t know what to do. They made some good decisions and some bad decisions along the way. That is enough to praise them for the work they did.

Books like this are attempts to polish reputations. Perhaps it is inevitable that the authors would try to polish their reputations. But, it would sure be nice if they could just come out and say, “Faced with a massive crisis which had the danger of turning into a catastrophe, here were the mistakes we made.” I think we could all forgive them for those mistakes and genuinely thank them for their service.

But maybe I am just being naïve here. Maybe in the current world there really is only room for perfect heroes and dastardly villains. Maybe there is no longer room for the guys who just do good but imperfect work in a very hard situation.