There is absolutely no question that the 2008-2009 meltdown was a financial Armageddon that required extraordinary efforts by the administration to combat it. As the author himself repeatedly points out, it is difficult to convince people on counterfactuals, as in how bad it could have been that was prevented. But if we take the 1929 depression that took much more than a decade for the country to recover from and even Japan's recent troubles in the 1990s from which it is still recovering (the Lost Decade as it is famously known), it is not difficult to see that financial world problems of this magnitude, when not addressed aggressively, can drag the economy down for more than a decade. To that extent we need to give a lot of credit to Obama's team that includes the author, Fed Chairman Ben Bernanke, Economics adviserLarry Summers, even Hank Paulson (President Bush's TS), Paul Volker and others that fought the fire with overwhelming force bringing the economy back to a decent state within 2, 3 years. If we look at the numbers like number of jobs being lost when Bush left office, number of companies closing down, etc. this will be easy to see.
On the flip side, author argues relentlessly that they tried all they could but were not able to bring big bank company CEOs to justice, throwing them in prison. He has repeated the assertion that Main Street was looking for "Old Testament justice" more than 100 times in the book arguing that while he understood the sentiment, it would have had negative effects that I still find difficult to swallow. He is so mad that everyone thought of him as the Wall Street insider who is out to help the big banks bereft of any care for the main street. It is true that he hadn't worked for Wall Street or other big banks before becoming Treasury Secretary (unlike people like his predecessor, who was the CEO of Goldman Sachs before he became Treasury Secretary). But he doesn't seem to understand why that image persisted all along. After stepping down from the TS position, naturally now he works in Wall Street managing a private equity firm! :-)
His boyhood years are rightly glossed over in few pages in an early chapter, so that the bulk of the book can focus on the financial crisis years. After talking about Mexican peso crisis, Asian turmoil in the last decade, he gets into the last few months of Bush presidency years detailing the Bear Sterns, Lehman Brothers stories we all know well. Then dives into TARP fund. Book does explain several interesting financial world detail in a way that is easily accessible to the people outside. For example, if a bank has $1 Trillion in mortgage assets and just $25B in capital, this has a 40:1 leverage ratio that is pretty bad. If the Govt wants to bring the ratio to a more acceptable 1:20, it can use its funds (like TARP) to buy $500B of the bank's assets. But this is such a big investment just for one bank. Alternate option is to just give a loan of $25B to that bank so that the level of capital raises to reach the same acceptable 1:20 leverage ratio. This is not too complicated but is a good way to leverage TARP like funds so that its utilization is more effective.
While the text remains accessible, often he makes arguments that don't seem to stand up to scrutiny. In page 222, he talks about the $2 Billion Washington Mutual sale they arranged with Citigroup with tax payer help. Within a day Wells Fargo came up with a $15Billion offer without tax payer subsidy for the same WaMu asset and so FDIC supported the sale to WF. He claims he was livid since this makes US Govt look less reliable. While I understand US Govt should remain credible, is the WF deal that difficult to explain and accept when it is seven times better with no tax payer money on the line?
There is a lot written about how he missed his family to work long hours in the treasury, how a deputy once tracked him down in the gym while he was jogging on the treadmill to get him to sign on a $80B deal, etc. These details may be interesting to readers who want to be fly on the wall observers interested in trivia. But I'd prefer such books focusing solely on policies. Reminded me of a scene in the movie Remains of the Day where a delegate participating in a conference to prevent Hitler from taking over most of Europe keeps complaining about few blisters in his foot and refuses to pay attention to the serious discussion in front!
We understand that banks by design use leverage and so if there is a run, such financial institutions can collapse (remember the movie "It's a Wonderful Life"?). Just for that reason, banks should not take unnecessary risks and should maintain enough capital to manage runs. When things are going well, naturally 1:200 leverage will yield better profits compared to 1:20. But despite the possibility of increased profits, 1:200 leverage is unsafe. This is banking 101. But pretty much all the big bank CEOs (Dick Fuld of Lehman Brothers for example) used extreme leverage (think of CDOs) and then came to Treasury when things started going south during the crisis to complain that the world/other banks are being unfair and so Govt should step in and help them out! The fact that they can do this and get away with it is what irritates the main street and energizes the Occupy Wall Street crowd and even the Tea Party. But get away they did! He argues that the investors in such banks got haircuts (i.e. lost money) and many CEOs lost their jobs later. This reminded me of Indian corrupt politicians just stepping down from their offices as punishment for their misdeeds while retaining all the ill gotten gains! While losing their job is the correct starting point for meting out justice, it is often cheered as the end as well, which is flabbergasting! Despite pages and pages of his argument, it is hard to accept that legally none of those CEOs or boards could be touched and all the bonuses companies like AIG were giving out at the end of 2009 to their employees could not be curtailed.
He also does the politically correct thing of never blaming the common public for all the excesses they indulged in buying homes that they simply could not afford. I do understand that in US where saving is not part of the ingrained culture due to easy availability of credit, common public will buy things they can't afford if they are egged on by financial industry. But I see that as part of the reason for mortgage debacle. But since he is not ready to blame/punish even experienced bankers, it should be easy to let go the general public. :-)
In books that discuss a huge crisis, it is customary to offer solutions in the end. The Dodd-Frank financial reforms act that was subsequently passed, neatly dove-tails as one of the last chapters automatically. That law did clean up few things in US and strengthened the system. But I don't think it went as far as it should have as the author argues. For example, though "too big to fail" was talked about so much, there are no break ups of huge banks similar to the way AT&T was broken up in the 1980's. We now just identify all the huge institutions (Metlife was added to this list recently) as "Systemically Important" that triggers a bit more stringent monitoring. This doesn't eliminate the idea that those institutions are still too big to fail and so tax payers need to step in and save them if the management throws caution to wind seeking profits quoting their fiduciary responsibilities. As the cliche goes, only time will tell if the systemic fixes are strong enough.
Managing national level financial crisis is counter-intuitive that ends up in a Morton's Fork. When the economy is going down, as the US economy did in 2008-9, the Keynesian school of thought will tell the government to increase spending, cut taxes to stimulate growth. This is opposite to what individuals or small businesses need to do to balance their budget. Even in the ongoing European economic crisis, Germany after initially pushing countries like Greece to tighten their belts a lot in order to receive any aid, is backing off a bit supporting public spending to stimulate growth. This may be the right approach to stimulate the economy. But in good economic times, as in the late 90's, politicians tend to spend the extra tax revenue and cut taxes again. Expecting politicians in a representational democracy where they want to keep getting reelected, to make the opposite choices compared to what appears intuitive to general public (i.e. increase spending when the economy is down and vice versa) is fairly difficult. So, laws and reforms when enacted should ensure the correct behavior with appropriate triggers setup in the system to respond to changes in the economy. Instead we (including the author) are accepting that we will always be getting into such crisis periodically and central bankers should just keep fighting it. In my view, refusing to concede that point and pushing for solutions that would prevent such crisis perpetually while limiting the size of institutions from reaching the "too big to fail" level will be much more preferable.
-sundar.
