“He doesn’t strike me as the most reflective guy, but he must have been sitting there—everybody was sitting there—thinking, ‘My god, we may be presiding over the second Great Depression.’” Paul Krugman’s assessment of Henry Paulson is striking. Even as it reframes the usual line on the former Treasury Secretary, that he’s a tough decision maker and quick on his feet, it also reframes the frame. He was making those tough, fast decisions at a time—late 2008—when “everyone” was aware of the historic dimensions of those decisions.
Krugman’s emphasis on Paulson’s character echoes a similar emphasis throughout Frontline: Inside the Meltdown, which premieres tonight on PBS. Part investigation, part damn scary story, the program suggests that events unfolded as they did largely because of the personalities involved. Paulson’s primary associate and opposition during the crisis was, of course, Federal Reserve Chairman Ben Bernanke. Their dissimilar inclinations—born of fundamental disparities in belief and training—shaped their responses and, crucially, the timing of those responses. Their differences, the program suggests, shaped their management of the meltdown, a management that left more than one interested observer wondering if they knew what they were doing.
Inside the Meltdown
Joe Nocera, Jon Hilsenrath, Charles Duhigg, Chris Dodd, Barney Frank, Bryan Burrough, Kate Kelly, Paul Krugman
Regular airtime: Tuesday, 9pm ET
US: 17 Feb 2009
Proceeding without interviews with the principals—Paulson, Bernanke, or Tim Geithner, then chair of New York’s Federal Reserve and “Larry Summers’ protégée,” now Barack Obama’s Treasury Secretary—Inside the Meltdown features frequent slow zooms onto black-and-white photos of each. The men’s faces look grim, as does file footage of DC traffic and Wall Street edifices (usually viewed from low angles). The accompanying soundtrack includes wailing emergency vehicle sirens, news reports of various market declines, and somber strings, all underscoring the seriousness of the events and the moment-by-moment sense of urgency.
While the story of the housing bubble hovers in the background, the program begins, essentially, with the Bear Sterns bailout. On March 10, 2008, remembers Vanity Fair‘s Bryan Burroughs, a rumor emerged that the company was “running out of money.” Even if these were not exactly true, the rumors themselves were enough to “kill a company,” and so corporate officials tried to stem the flow. But when former chairman Alan Greenberg appeared on CNBC to call the rumors “ridiculous, ” the damage was already in process, and his appearance only fueled it. Soon “everyone” had heard about Bear’s “toxic assets” (its subprime mortgage investments, as well as credit default swaps), partly because “everyone” was involved in the same risky business. Bear’s CEO of asset management Jeffrey Lane says now, “It was a formula for disaster, a traditional game of hot potato hot potato and, as it turned out, everybody ended up with a potato.”
Paulson, Geithner, and Bernanke decided that Bear could not fail because, the New York Times’ Charles Duhigg says, it was part of “a huge web that connects everyone in these completely unforeseen ways.” While the “completely unforeseen” part might be a stretch, the point is the interconnectedness, and the ensuing piecemeal efforts to hold the web together emerged from this premise. The apparent chaos of these efforts had to do with the conflict between adamant free-marketeer Paulson and Bernanke, who was determined to be an “activist” governor of the Fed.
The “unprecedented plan” for Bear, Chris Dodd asserts, “almost immediately backfired.” That is, other companies began to imagine similar plans on their own horizons. Paulson, opposed to bailouts on the basis of “moral hazard” (which the New York Times’ Joe Nocera defines as: “If you bail somebody out of a problem they themselves cause, what incentive will they have the next time to avoid making the same mistake?”), determined Bear’s federally mandated shotgun wedding with JP Morgan was the end of it.
At least, until the government had also to rescue Fannie Mae and Freddie Mac.—then that was the end, for Paulson. Showing signs of what Jon Hilsenrath calls “bailout exhaustion,” the secretary refused next to save Lehman Brothers, in part, Inside the Meltdown submits, because of his personal outrage at CEO Dick Fuld’s apparent expectation that the government would step in (the program notes that Paulson and Fuld were once corporate rivals, back when Paulson ran Goldman Sachs). “It was a very high stakes game of signaling that [Paulson] was playing,” says Nocera. “He wanted to show these guys, you know, all of his old buddies on Wall Street, that they needed to step up and do something themselves.”
Using the moral hazard argument, Paulson let Lehman fail. The resulting dry-up of loans, says Duhigg, was cataclysmic: “This one decision made all the difference.”
That difference was the ascendance of Bernanke’s interventionist policies, including capital injections (anathema to Paulson, just a few weeks earlier). A scholar of the Depression, Bernanke was, Inside the Meltdown asserts, determined not to oversee another, and so made the case for the government to step in on a large scale. When Paulson agreed “to step in directly with government capital into the banking system,” Mark Landler says, “For him, this is a true crossing of the Rubicon.”
Inside the Meltdown emphatically illustrates the drama of this crossing , with descriptions of Paulson’s alarming meeting with congressional leaders (Dodd and Barney Frank included), as well as a list of nine names and photos—the bank heads Paulson called in to the Treasury office and instructed on their proceeding good behavior.
And with that, the program says, “the happy warrior capitalist” Paulson was transformed—in history if not in his own mind—into “the biggest interventionist Treasury Secretary we’ve had since the Great Depression.” Whether you see this transformation as tragic or courageous, inevitable or the result of years of bad decisions by many who will escape blame, Paulson’s story reflects that of the administration he served.