Isaac: Paulson On Paulson

Alex Pollock of the American Enterprise Instituteassembled a collage of quotes from former Treasury Secretary Henry Paulson’s memoir of the financial crisis,On the Brink.

The collage paints a stunning and frightening picture of a confused and panicked government without a coherent strategy for containing the financial crisis and preventing worldwide financial panic.

Judge for yourself:

  • “I misread the cause, and the scale, of the coming disaster. Notably absent from my presentation was any mention of problems in housing or mortgages.”
  • “The crisis . . . came from an area we hadn’t expected – housing – and the damage it caused was much deeper and much longer lasting than any of us could have imagined.”
  • “All of this led me in late April 2007 to say . . . that subprime mortgage problems were ‘largely contained.’ I repeated that line of thinking publicly for another couple months. Today, of course, I could kick myself. We were just plain wrong.”
  • Lehman’s UK bankruptcy administrator, PricewaterhouseCoopers, had frozen the firm’s assets in the UK. This was completely unexpected.”
  • “General Electric. . . was having problems selling commercial paper. This stunned me.”
  • “I never expected to hear those troubles spreading like this to the corporate world.”
  • “In a celebratory mood, [Rep.] Pelosi, [Sen.] Reid, [Sen.] Dodd, [Rep.] Frank, [Sen.] Schumer, and I walked together to Statuary Hall to announce the [TARP] deal. Perhaps I should have foreseen the problems ahead . . . .”
  • “I expected the [TARP] program to be politically unpopular, but the intensity of the backlash astonished me.”
  • “I began to seriously doubt that our asset-buying program [TARP] could work. This pained me, as I had sincerely promoted the [toxic asset] purchases to Congress and the public . . . . I dropped a bomb when I informed them we had decided against buying illiquid assets.”
  • “AIG was again bleeding. It astonished me.”
  • “AIG would need a massive equity investment. I was shocked and dismayed.”
  • “The Chairman of Standard Chartered Bank [London] . . . asked in a low voice about Citigroup and GE. ‘Are either of those two going down?’ This jolted me.”
  • “I headed over to the Oval Office to tell the President that Citigroup was teetering on the brink of failure. ‘I thought the programs we put in place had stabilized the banks,’ he said, visibly shocked. ‘I did, too, Mr. President.’”
  • “We got hit with a surprise when the Wachovia deal with Citi was suddenly thrown into doubt.”
  • “I had been falsely reassured by the fact that the markets had supported the bank [Citigroup] for so long.”
  • “We had no choice but to fly by the seat of our pants, making it up as we went along.”

I did not have the benefit of reading Secretary Paulson’s account on the handling of the 2008 crisis before I wrote Senseless Panic: How Washington Failed America. But I believed, based upon my experience leading the Federal Deposit Insurance Corporation in the 1980s, that the 2008 crisis had been badly mismanaged, creating a senseless worldwide financial panic.

Some 3,000 bank and thrift failures, including many of the largest firms in the country, were handled during the 1980’s without creating a panic. This compares to roughly 300 failures this time around. The 1980’s provided a recent and highly successful model for handling a major financial crisis. Secretary Paulson clearly did not have to “fly by the seat of his pants and make it up as he went along.”

In the crucible of 2008, virtually the entire leadership of our nation was in lock step at Secretary Paulson’s side. Yet, fundamental reform has not taken place either in the U.S. or globally, and we remain as vulnerable as when Mr. Paulson stumbled his way through the crisis of 2008.

I end with this passage from Senseless Panic:

“Financial markets and the public can handle almost anything except uncertainty. If they believe they are being told the truth, someone is in charge with a sensible plan for dealing with the problems, and the system is aboveboard and fair, they can accept almost any negative news.

“When the problems surfaced at major financial institutions in 2008, the government’s actions were ad hoc and inconsistent. No one appeared to be in charge with an overall plan, statements were made that proved false, the public was provided with inadequate information, and decision making seemed dominated too much by political considerations, and specifically by Wall Street. The markets and the public lost confidence and financial panic swept the world.”

Isaac is Chairman of LECG’s Global Financial Services and serves as Chairman of Fifth Third Bancorp. Isaac is the author of "Senseless Panic: How Washington Failed America"the foreword by Paul Volcker. You can read more about the book and Mr. Isaac at his web site,