The big headline from your book, The Courage to Act, is that you and Hank Paulson couldn’t save Lehman Brothers but obfuscated about it.
When Lehman failed, the financial system almost went into cardiac arrest. We were very worried about runs on other companies. So, for a few days, we agreed to be vague. We deflected questions. Whether it was the right decision, I don’t know. If we’d explained that we didn’t have the power, that would have created fear. People would say, “Who’s next?” There was a feeling that what we had done was arbitrary, that we’d decided to let Lehman fail and save AIG. The failure of Lehman was something we tried to avoid but couldn’t.
When it came time to save AIG, you felt you had no choice?
We had no choice. It was the world’s largest insurance company. It was connected with all the other major firms in the world. And on top of the Lehman failure, I think it would have basically brought the system down. There’s a very good chance the financial system would have gone completely into stasis. And then, even though we were able to arrest the panic, the economy took a very serious blow. And of course, we’ve still not completely recovered.
When you rescued AIG, did you have any control over what they did with all that money?
Oh, yes. We did. With the money we gave them, they had to meet their obligations. The basic problem was, they came to us and said, “Look, we’ve got $85 billion of collateral calls, margin calls, payments that we have to make this week. We haven’t got the cash. Lend us the cash against our firm, taking the firm as collateral, and we can make those payments.” After that, we sent people in just to make sure we understood what was going on inside the firm. So yes, we were very involved in what AIG did after they received the money.
Do you think the Dodd-Frank reforms were the right response to the crisis?
I think that with the combination of Dodd-Frank and the Basel III agreements on bank capital requirements a lot of progress has been made. I wouldn’t say every provision of Dodd-Frank meets a cost-benefit test. But I think the basic structure and goal of the reforms was to make banks a lot more self-reliant, to make particularly big banks face tougher supervision, and also to give a stability to unwind a failing bank in a way we couldn’t do with Lehman. What happened was that, when Lehman failed, it went into the usual bankruptcy process, which was very inefficient. It took years. If we had the powers then that we have now, we could have done it in a much more expedited way that would perhaps reduce the impact.
One criticism you’ve faced is that you should have seen the crisis coming.
We did understand that house prices were awfully high. In 2005 I made a presentation to President Bush of a sort of analysis of what might happen if prices came down. We said there would be a recession. What we didn’t understand was that the losses in subprime mortgages would infect the system and lead to a broad-based financial panic.
Didn’t you say that some individuals should have gone to jail for their role in the crisis?
I raised some concerns about the Department of Justice’s strategy. What Justice did was it generally went after firms. And firms that were convicted, so to speak, of selling bad mortgages or whatever had to pay very large fines. But any inappropriate action is taken by an individual. Instead of penalizing firms as a whole—and their shareholders—it would have made better sense to determine who the individuals were.
Describe the relationship between you, Hank Paulson, and Tim Geithner.
We’re very different, but we’re quite complementary. Hank’s the consummate Wall Street guy, always on the phone. I was the academic, much quieter personality. Geithner had spent his career helping the Treasury Department deal with financial problems around the world, so he was a crisis fighter from way back. I think it was a good combination. But as I’ve said, I certainly wouldn’t want to go through it again.
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