Still, these explanations don’t address the question of why Paulson and the U.S. government didn’t do more to keep Barclays at the table during negotiations. In the series of hectic phone calls with British regulators on the morning of Sunday, September 14, 2008, neither Paulson nor Geithner ever offered to have the government subsidize Barclays’ bid, helping reduce the risk for the firm and possibly easing the concerns of wary politicians in Britain.
In Paulson’s view, Barclays’ regulators in the UK would never have approved a deal for Lehman within the twelve-hour period in which he believed a transaction would have had to be completed. From that perspective, further negotiations would only have been a waste of precious time. Paulson may be correct in his conclusions, but it is legitimate to ask whether he pulled the plug too early.
It will likely be endlessly debated whether Paulson’s decisiveness throughout the crisis was a benefit or a detriment, but the argument can also be made that any other individual in Paulson’s position—in a lame-duck administration with low and dwindling popular support—might have simply frozen and done nothing. It is impossible to argue he didn’t work hard enough. And a year later, it appears that many of the steps he took in the midst of the crisis laid the groundwork for the market’s stabilization, with the Obama administration, Geithner, and Bernanke often taking credit for the reversal. Thus far, many of the biggest banks that accepted TARP funds have returned it, taxpayers have made $4 billion in profit. However, that does not account for the hundreds of millions of dollars directed at firms like AIG, Citigroup, and elsewhere that may never get paid back.
Barney Frank perfectly articulated the dilemma that will likely haunt Paulson as historians seek to judge his performance. “The problem in politics is this: You don’t get any credit for disaster averted,” he said. “Going to the voters and saying, ‘Boy, things really suck, but you know what? If it wasn’t for me, they would suck worse.’ That is not a platform on which anybody has ever gotten elected in the history of the world.”
To attempt to understand how the events of September 2008 occurred is, of course, an important exercise, but only if its lessons are used to help strengthen the system and protect it from future crises. Washington now has a rare opportunity to examine and introduce reforms to the fundamental regulatory structure, but it appears there is a danger that this once-in-a-generation opportunity will be squandered.
Unless those regulations are changed radically—to include such measures as stricter limits on leverage at large financial institutions, curbs on pay structures that encourage irresponsible risks, and a crackdown on rumormongers and the manipulation of stock and derivative markets—there will continue to be firms that are too big to fail. And when the next, inevitable bubble bursts, the cycle will only repeat itself.
The financial industry had always been intended to be something of an unseen backroom support for the broader economy, helping new businesses get off the ground and mature companies adapt and expand. Yet in the years leading up to the crisis, the finance sector itself became the front room. The goal on Wall Street became to generate fees for themselves as opposed to for their clients. As this book went to press, the handful of proposals that have been introduced to put the financial system back in its right place and rein in risk have seemed tepid and halfhearted, at best. Relieved that the worst is supposedly behind us, the Obama administration seems to have moved on to other priorities.
Meanwhile, Wall Street, bent but not broken, rumbles on in search of new profits. Risk is being reintroduced into the system. Vulture investing is back in vogue again, with everyone raising money in anticipation of the collapse of commercial real estate and the once-in-a-lifetime bargains that might be available as a result. Perhaps most disturbing of all, ego is still very much a central part of the Wall Street machine. While the financial crisis destroyed careers and reputations, and left many more bruised and battered, it also left the survivors with a genuine sense of invulnerability at having made it back from the brink. Still missing in the current environment is a genuine sense of humility.
As this behind-the-scenes tale has, I hope, illustrated, in the end, whether an institution—or the entire system—is too big to fail has as much to do with the people that run these firms and those that regulate them as it does any policy or written rules. What happened during this period will be studied for years to come, perhaps even by a new generation of bankers and regulators facing similar challenges.
When the post-bailout debate was still at its highest pitch, Jamie Dimon sent Hank Paulson a note with a quote from a speech that President Theodore Roosevelt delivered at the Sorbonne in April 1910 entitled “Citizenship in a Republic.” It reads:
It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.
It was a remarkable quote for Dimon to have chosen. While Roosevelt’s words described a hero, they were deeply ambiguous about whether that hero succeeded or failed. And so it is with Paulson, Geithner, Bernanke, and the dozens of public-and private-sector figures who populate this drama. It will be left to history to judge how they fared during their own time “in the arena.”
AFTERWORD
The people on Wall Street still don’t get it. They don’t get it. They’re still puzzled: Why is it that people are mad at the banks? Well, let’s see. You guys are drawing down ten-, twenty-million-dollar bonuses after America went through the worst economic year that it’s gone through in decades, and you guys caused the problem. And we’ve got ten percent unemployment. Why do you think people might be a little frustrated?
—President Barack Obama, December 7, 2009
Nearly two years have passed since the peak of the financial crisis, but the debate over its ultimate causes and the decisions that were made during those sleepless days in September 2008 to rescue the financial system is still raging. Disputes about how to fix the banking industry to prevent another crisis from occurring have become a fixture of global conversation. Although legislation to reform the financial industry is about to be signed by the president as of this writing, questions persist about whether it goes far enough. Indeed, the phrase “too big to fail” has become as common on Main Street as it is on Wall Street, as everyone from small businessmen to farmers finally have come to understand the dangers of a financial sector that has grown so large and interconnected.
The debate has been spurred, at least in part, by an ongoing disconnect between the public and the financial industry that, despite the damage left in the wake of the crisis, seemed to quickly return to business as usual while the rest of the nation struggled.