How the U.S. made the best of the crisis (Part 2)

Pfäffikon SZ, Switzerland – On 12 October 2008 Hank Paulson, the then Secretary of the Treasury of the U.S., met with representatives from the nine largest banks in the country. Paulson is not known for tiptoeing around. It was soon clear that Paulson played a tough game. Each bank was given a $25 billion injection under very flexible terms. A number of bankers, including the solid Wells-Fargo, fiercely argued that the money was not required. But Paulson stood his ground because it would be ‘good for the nation’. All nine bankers signed because of Hank Paulson’s heavy pressure. This was just the beginning of a rescue operation, unprecedented in modern history and it was for the benefit of the U.S. in particular.

Cooper Union Speech
I take you to 27 March 2008, the day on which Obama gave the so-called, ‘Cooper Union Speech’ against Wall Street. Everyone was stunned because Obama called for more supervision of the financial markets. Wall Street itself should have taken this step earlier, but it was Obama, the presidential candidate, who laid down the rules. Moreover, during that period Obama had a mole within the bankers’ world: UBS banker Robert Wolf. An interesting fact given the current squabbling over phone tapping under Obama’s reign and his earlier promises concerning this.

Meanwhile, the news did not get any better. President Bush commanded Paulson to solve the crisis and to save the U.S. economy. Nothing else mattered. Paulson actually got a free licence to act from Bush, because Bush at that time admitted to having no understanding of the economy and above all, stressed his optimism. One economic ‘red flag’ after the other was raised and Paulson decided to do nothing, which is particularly striking in the process.

Debt Spiral
It soon became clear that Lehman Brothers was in a so-called debt spiral. But the Board of Lehman Brothers was not worried because they were convinced the U.S. Government would save them. And what did Paulson do? On 12 September 2008 he called a meeting of all CEOs from the major American financial institutions. He explained that Lehman Brothers would not be saved. Everyone was bewildered. On 15 September 2008, Paulson gave a speech in which he told everyone that from now on, they had to care for themselves. Under no circumstances would the U.S. Government provide any more help. Paulson used the famous phrase ‘Moral Hazard’. After rescuing Bear Stearns, he would not be helping any more U.S. financial institutions.

Problems for AIG
It is interesting to note that as a former CEO of Goldman Sachs, Paulson must have already known that AIG, the largest insurer in the world, would be next to experience problems. And that it would make Lehman seem like child’s play. Paulson decided to save AIG. Lehman’s impact on the world economy had been sufficient. Paulson knew that if he pressed on now, the U.S. would get the last laugh. And so it happened. The AIG bailout was unique. Normally, bailouts work through a series of ‘haircuts’. Not this time. All large banks on Wall Street were fully compensated by the U.S. government. Paulson took the rescue of, particularly, the U.S. economy very seriously. And Ben Bernanke, who encouraged Paulson to do more, backed him.

Congress Under Pressure
Pressure was then placed on U.S. Congress; they were warned of a complete meltdown within a few days if no money was provided immediately to rescue the U.S. economy. Through the unprecedented rapid action of the Americans, $700 billion was released. In my eyes, this demonstrated tremendous decisiveness. It was only the beginning; Paulson, assisted by Bernanke and Geithner, knew exactly what he was doing. Interestingly, Janet Yellen was already closely involved in the process as well.

On 12 October 2008, Paulson followed Obama’s wishes. Meanwhile, U.S. banks returned to their usual business. They were rescued by Paulson and actually, by an insistent Obama. Since the outbreak of the crisis, many have called for the banks to be split up. My expectation is that this will not happen. In its core, the ‘Volcker Rule’ is simple, but it consists of more than 300 pages of complex financial material. The banks deliberately made it complex. Through their expertise, the banks often win against the regulators.

Successful Operation
Meanwhile, Hank Paulson can look back on a very successful operation. I have great respect for the way he guided the U.S. through this period. The U.S. is back as a(n) (economic) Super Power. The impact will be felt in Europe for a long time and in the end even the once deemed untouchable Chinese could be paying the price. The U.S. made the best from the crisis thanks to the super trio of Paulson, Bernanke and Geithner. Over the next decade, the task for Janet Yellen is to turn this into hard currency.

It remains for me to wish you a good weekend.


Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.