On the Brink (61 page)
Authors: Henry M. Paulson
Tags: #Global Financial Crisis, #Economics: Professional & General, #Financial crises & disasters, #Political, #General, #United States, #Biography & Autobiography, #Economic Conditions, #Political Science, #Economic Policy, #Public Policy, #2008-2009, #Business & Economics, #Economic History
In a world where virtually everyone agrees we have had inadequate regulation of banks and capital markets, there is a very real danger that financial regulation will become a wolf in sheep’s clothing, rivaling tariffs as the protectionist measure of choice for those nations that want to limit or eliminate competition not only in financial services but also in any other sector of their economy. Though this is not a new development, the risks are greater today because the U.S. model of capitalism appears more vulnerable than in the past, even as the economic crisis pushes nations toward short-term measures to protect jobs. One of the lessons of the Great Depression is that protectionist actions by industrial nations seeking to wall off their countries to protect their jobs and industries were self-defeating and made that awful downturn longer and more painful.
The European Union has already introduced regulation that mandates that certain securities can count toward regulatory capital only if their credit ratings are issued by an agency located in the EU. The EU proposal on alternative investment funds similarly would require fund managers to have established offices in the EU or operate under “equivalent” regulations; otherwise they would not be allowed access to the EU market. And the EU is requiring that credit default swaps be cleared through clearing parties located in its member states. As a result, a number of other countries have indicated that they are considering similar territorial restrictions.
The potential fragmentation is not limited to Europe. The U.S. has prohibited banks receiving certain federal funds from issuing H-1B visas to hire highly skilled foreign nationals, even though such people would add value to the economy. The February 2009 U.S. stimulus bill contained a “Buy American” provision that has led to similar protectionist language in other bills. Both federal and state officials are seeking to insert protectionist restrictions even where they are not required by law.
The best way to combat protectionism, whether by tariff or regulation, is with strong leadership from the U.S. We must keep our markets open for trade and investment, enact previously negotiated trade pacts, work toward a successful Doha round, and forge new trade agreements and investment treaties. We must also demonstrate our commitment to rebuilding our economy, fixing our regulatory system, and getting the government out of the private sector as soon as possible. The world needs to know that we are serious about reducing our budget deficit and cleaning up our other messes.
I am quite hopeful that we will put in place the necessary reforms for the financial system. There is finally a broad consensus among policy makers in the U.S. and internationally as to the causes of the crisis. I also remain optimistic about the economic future of the U.S. and its continued leadership role in the global economy. I don’t mean to minimize our troubles, but every other major country has more-significant problems. As the richest country on earth, with the biggest, most diverse, and most resilient economy, we have the capacity to meet our challenges. Though what happened over the past few years was a difficult chapter in our nation’s economic history, it is just one chapter, and there will be many more that are marked by economic gains and rising prosperity if we learn from our mistakes and make the necessary corrections.
If we don’t lose our sense of urgency, and if the needed reforms are put in place domestically and internationally, markets will adapt and continue their positive trend of the past 25 years. Let’s not forget that these markets helped tear down the Iron Curtain, lifted hundreds of millions of people out of poverty, and brought great prosperity to our nation. Efficient, well-regulated capital markets can continue to provide economic progress around the world. That inevitably leads to more political freedom and greater individual liberty.
ABCP: asset-backed commercial paper
AIG: American International Group
AMLF: Asset-Backed Commercial Paper Money Market Fund Liquidity Facility
ARM: adjustable-rate mortgage
ASF: American Securitization Forum
BofA: Bank of America
CDO: collateralized debt obligation
CDS: credit default swap(s)
CIC: China Investment Corporation
CPP: capital purchase program
ECB: European Central Bank
ESF: Exchange Stabilization Fund
FDIC: Federal Deposit Insurance Corporation
FHA: Federal Housing Administration
FHFA: Federal Housing Finance Agency
FSA: Financial Services Authority
FSB: Financial Stability Board
GAO: Government Accountability Office
GDP: gross domestic product
GSE: government-sponsored enterprise (Fannie Mae, Freddie Mac)
HERA: Housing and Economic Recovery Act
HUD: U.S. Department of Housing and Urban Development
IASB: International Accounting Standards Board
IMF: International Monetary Fund
KDB: Korea Development Bank
LIBOR: London Interbank Offered Rate
LIBOR-OIS: London Interbank Offered Rate–overnight indexed swap
LTCM: Long-Term Capital Management
MAC: material adverse change
MBS: mortgage-backed securities
MLEC: Master Liquidity Enhancement Conduit
NAV: net asset value
NEC: National Economic Council
OCC: Office of the Comptroller of the Currency
OFHEO: Office of Federal Housing Enterprise Oversight
OTC: over the counter
PDCF: Primary Dealer Credit Facility
PWG: President’s Working Group on Financial Markets
S&P 500: Standard & Poor’s 500 Index
SARS: severe acute respiratory syndrome
SEC: Securities and Exchange Commission
SED: Strategic Economic Dialogue
SIV: structured investment vehicle
TAF: Term Auction Facility
TALF: Term Asset-Backed Securities Loan Facility
TARP: Troubled Assets Relief Program
TIAA-CREF: Teachers Insurance and Annuity Association of America and College Retirement Equities Fund
TLGP: Temporary Liquidity Guarantee Program
TSLF: Term Securities Lending Facility
WaMu: Washington Mutual
W
riting
On the Brink
required me not only to live through the crisis the first time, but also to live through it again. Both times I was aided by my team at Treasury, and by the White House staff. They dedicated an enormous amount of time to helping me remember and reconstruct events that took place at warp speed. We didn’t always have notes or paper to rely on, but I had many, many hours of help from Dan Jester, David Nason, Michele Davis, Kevin Fromer, Neel Kashkari, Bob Hoyt, Phill Swagel, David McCormick, Dan Price, Steve Shafran, Joel Kaplan, Josh Bolten, Jim Lambright, Jim Wilkinson, Ken Wilson, Bob Steel, Taiya Smith, Karthik Ramanathan, Jeremiah Norton, Keith Hennessey, and Christal West. My chief of staff, Lindsay Valdeon, who worked around the clock organizing much of our effort and sharing her sound judgment, deserves special praise. And I extend my thanks to my former boss, President George Bush, for his support on this project.
I was very fortunate to have as a collaborator Michael Carroll, formerly editor of
Institutional Investor
, whose understanding of finance and narrative helped my story come alive. His discipline, thoroughness, and talent were invaluable. He assembled a very able and dedicated team, including Deborah McClellan, Ruth Hamel, Katherine Ryder, and Will Blythe, who worked long hours to complete this book.
I am grateful to my attorney, Robert Barnett of Williams & Connolly, and my able editor, Rick Wolff, for their spot-on advice, steady support, and encouragement throughout the project. My thanks also to the Business Plus team, including Dorothea Halliday, Mark Steven Long, Tracy Martin, Harvey-Jane Kowal, Bob Castillo, Tom Whatley, Ellen Rosenblatt, Barbara Brown, Jimmy Franco, Rob Nissen, Deborah Wiseman, Susan Benson Gutentag, Lynn von Hassel, and Stephen Callahan.
FactSet Research Systems Inc. and Credit Market Analysis Ltd. provided us with market research. The assistance of Monica Boyer and David Wray was also helpful.
I thank Jessica Einhorn, dean at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University, for bringing me to this great institution, which benefits from her strong leadership. I am appreciative of the fact-checking and research support I received from SAIS students and from Seth Colby.
And to my wife, Wendy, in particular, I extend my gratitude for her support throughout my tenure as Treasury secretary and for enduring what turned out to be an all-consuming eight-month project—the writing of this book.
H
enry M. Paulson, Jr., served under President George W. Bush as the 74th secretary of the Treasury from July 2006 until January 2009. As Treasury secretary, Paulson was the president’s leading policy adviser on a broad range of domestic and international economic issues.
Before joining the Treasury Department, Paulson had a 32-year career at Goldman Sachs, serving as chairman and chief executive officer following the firm’s initial public offering in 1999. He is involved in a range of conservation and environmental initiatives, having served as chairman of the Peregrine Fund, chairman of the board of directors for the Nature Conservancy, and co-chairman of its Asia-Pacific Council.
Prior to joining Goldman Sachs, Paulson was a member of the White House Domestic Council, serving as staff assistant to the president from 1972 to 1973, and as staff assistant to the assistant secretary of Defense at the Pentagon from 1970 to 1972.
Paulson graduated from Dartmouth in 1968, where he majored in English and was a member of Phi Beta Kappa and an All-Ivy, All-East football player. He received an MBA from Harvard in 1970.
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