Steve Weisman over at The Peterson Institute posted a nice riff yesterday about James Stewart's recent New Yorker piece reconstructing the week Lehman collapsed. His (and Stewart's) conclusion? Hank Paulson screwed up massively:
My takeaway is that while Lehman executives were oblivious to the warning signs over the imminent failure of their storied investment firm, Treasury Secretary Henry Paulson may have increased the odds of a Lehman collapse by taking a hard line opposing a government role in its rescue. And Barclays and British authorities may have contributed to the problem by dithering, or at least not making their own intentions clear.
Stewart’s lengthy magazine piece also reinforces the impression of Paulson, a former Goldman Sachs executive, as slow to realize that the Bush administration and the Fed had to go to Congress to get emergency approval of a bailout fund as Lehman took the global financial system on a downward spiral. While the Treasury secretary fretted over what might happen if they asked for the money, and Congress refused, Ben Bernanke, the Fed chairman, lost his patience for one of the only times in the crisis. “Hank! Listen to me,” he implored the Treasury secretary. “We are done!”
Regarding Lehman, Paulson is described, as he was in the Wessel book, as drawing lines in the sand as he might in a financial negotiation—but as erring calamitously when he told all potential investors interested in buying or providing a lifeline to Lehman that the Federal government would play no part in any rescue. In other words, he rejected any repetition of the Federal role played the previous March to facilitate the acquisition of Bear Stearns by J. P. Morgan Chase.
Paulson’s upcoming book may shed light on his thinking, but in a remarkable confession to Stewart, the Treasury chief acknowledges that the government was “more amenable to funding a rescue than it let on,” Stewart writes. “We said, ‘No public money,’” Paulson told Stewart, adding: “We said this publicly. We repeated it when these guys came in. But to ourselves we said, ‘If there’s a chance to put in more public money and avert a disaster, we’re open to it.’”
I agree with almost all of this. Paulson's hardball tactics seem to have been better suited for negotiating a merger as an investment banker than as Treasury secretary when the world was melting down. (David Wessel makes this point in his book-length treatment of the crisis.) And Paulson did initially seem too proud to go hat-in-hand to Congress, even though there weren't really other options.
But here's the thing: Paulson did go to Congress once Bernanke pushed hard enough. Just like he eventually agreed to use TARP money for capital injections rather than toxic-asset purchases, which was the original plan. And just like he agreed to backstop $4 trillion worth of investments in money market funds despite not being especially keen on expensive government interventions. I guess my point is that, while Paulson made his share of mistakes, and these mistakes cleary exacerbated the crisis, a less flexible, less pragmatic character (Paulson's former boss comes to mind) could easily have doubled down on those mistakes rather than concede he was wrong. I think he deserves a non-trivial amount of credit for that.