Appealing to the Lowest Common Denominator

CHICAGO, Feb. 11 /PRNewswire/ -- "Everything from delays in the reappointment of Federal Reserve Chairman Ben Bernanke, to the ignorance shown by our elected officials when querying Treasury Secretary Tim Geithner and Former Treasury Secretary Hank Paulson on the financial crisis, has me wondering whether anyone in Congress remembers or grasps the severity of the financial crisis that we faced in the fall of 2008," says Diane Swonk, chief economist of Mesirow Financial, in her February edition of Themes on the Economy located at: http://www.mesirowfinancial.com/economics/swonk/themes/themes_0210.pdf

In her February newsletter, Swonk discusses Former Treasury Secretary Hank Paulson's new book entitled, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, in which he chronicles the financial crisis and how it was handled — the first and only book to date that is written entirely from the perspective of an insider rather than an observer.

"As a primer, it is worth noting that Paulson never really wanted the job of Treasury Secretary. He actually turned down the White House when they first approached him, fearing he would have little to do in an administration that had only two years left of its term (if he only knew then what he knows now)," notes Swonk.

"'It was Thursday, September 4, 2008, and we were in the Oval Office of the White House discussing the fate of Fannie Mae and Freddie Mac, the troubled housing finance giants. For the good of the country, I had proposed that we seize control of the companies, fire their bosses, and prepare to provide up to $100 billion of capital support for each. If we did not act immediately, Fannie and Freddie, I feared would take down the financial system, and the global economy, with them.'" (Paulson 2010)

"In less than two weeks, Lehman was under siege with AIG close behind it. The seizure of Fannie and Freddie had created more uncertainties than reassurances about the underlying value of mortgage portfolios, and tipped off a more severe run on financial institutions. Financial market participants believed that Lehman would be bailed out as well, despite efforts by Paulson to counter such bets," says Swonk. "Paulson said that he never anticipated the backlash to AIG, which was only one of Former Treasury Secretary's political blind spots."

"'I came to Washington with no close contacts on the Hill, but the way I saw it, I now had 535 clients with whom I needed to build relationships, regardless of their party affiliation'" (Paulson 2010).

"Paulson was constantly annoyed by the procedures of Congress, especially the public hearings, while many of his cohorts in Congress were getting increasingly annoyed with him. Add to that, the fact that he represented Wall Street and not Main Street, and the politics of getting things done got even more difficult," states Swonk.

"Paulson and Bernanke met with the President, his Cabinet, and then Congress. They had a meeting set with congressional leaders for 7:00 p.m. on Thursday, September 18, 2008. Bernanke laid out the dire consequences of the financial market crisis for the broader economy, while Paulson broke the difficult news of how much he wanted — hundreds of billions of dollars," said Swonk.

"The plan was for Treasury to draft a proposal that Congress could then work from to make into legislation. The ploy backfired, and when the document was released to the public on Saturday morning, it was already dead on arrival. Everyone was outraged because of the document's brevity and reach," notes Swonk. "Paulson knew almost immediately that the three-page document was a mistake. Upon reflection, he said that he wished that he had just sent Congress some bullet points to work with as guidelines for legislation, instead of the actual legislation. Paulson's back and forth with Democrats and Republicans was clearly frustrating and exhausting."

"After the first vote for TARP failed, financial markets imploded, and Paulson reentered round-the-clock negotiations. Rahm Emanuel saw him get sick again in Judd Gregg's office, and all of a sudden, compromises were reached. On October 3, just two weeks after it was announced, the TARP was finally passed," states Swonk.

"Paulson ended his book with what he thought he learned from the crisis, which is not a pretty picture:

• Structural imbalances were the root cause of our problems. Ultimately, we must spend less and invest more if we ever hope to get out of this.
• Our regulatory system remains hopelessly outdated and unable to respond nationally and globally to problems as they arise.
• We have become way too leveraged for our own good. Capital ratios, in particular, will need to be raised to better protect the system from the excessive risk-taking that led up to the crisis.
• The largest financial institutions are now even more complex and harder to manage than before. If they don't want to be considered "too big to fail," and dismantled, then they should do some dismantling on their own.

Paulson also worried about over-bloated compensation packages and the persistence of large federal budget deficits. He is still optimistic, however, that we our system can be saved," says Swonk.

"I truly believe that we were lucky to have Hank Paulson at the helm of the Treasury and Ben Bernanke at the helm of the Fed when everything went down. Financial markets and the economy would clearly be worse off without their outside-of-the-box ideas and quick thinking. That said, Paulson's lack of political acumen during the crisis clearly cost him — and those around him, including Bernanke and Geithner — some credibility, which is weighing on our ability to make sound policy decisions today," concluded Swonk.

The February issue of Themes on the Economy as well as archived issues can be found at mesirowfinancial.com.

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Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with more than $30 billion in assets under management and 1,200 employees in locations across the country and in London. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit its Web site at mesirowfinancial.com.

SOURCE Mesirow Financial

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