Slapped by the Invisible Hand is not an easy book, but that’s mainly because much of the material is unfamiliar, and some of it is abstruse. It contains enough tables and diagrams to help readers follow the argument where it leads (to some equations, naturally), along with a timeline to help readers reconstruct what they knew in the past three years and when they understood its significance. It’s possible to skip the hard parts and still master the frame. If you do, this is the book that, some years from now, you will be most glad to have read.
A Pair of Paulsons
Gary Gorton’s book has become the framework through which I view almost every other book I have read about the crisis, especially those that fill in parts of the crisis map that might otherwise be labeled “Here There Be Tygers.” The first of these, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, is from former U.S. secretary of the Treasury Henry M. Paulson Jr.
Paulson is a lovely person: an Eagle Scout, college football star, and devoted family man who made his way via mergers and acquisitions to the top job at Goldman Sachs. But he will probably become the crisis fall guy. Whereas Ben Bernanke had studied all his life for his task as central banker, a reluctant Paulson was thrust into the job and at first had little grasp of the situation he faced. He favored measures that might have been good for a firm — mark-to-market accounting in particular — but that were not suitable to a fire sale. And he focused on the wrong problem: Fannie Mae and Freddie Mac. When he ousted their managers, he thought he had saved the world. Lehman began to collapse the next day.
What, then, makes On the Brink so worth reading? In a word, candor. Paulson conveys the experience of the fog of war, one surprise after another, as his team pieces things together and the impending collapse is finally, expensively, halted. The Treasury’s “Break the Glass” bank recapitalization plan gradually evolves behind the scenes into the Troubled Asset Relief Program (TARP) as the situation deteriorates. “What we did not realize then, and later understood all too well, was how changes in the way mortgages were made and sold, combined with a reshaped financial system, had vastly amplified the potential damage to banks and nonbank financial companies,” writes Paulson. That about sums it up. The Bush administration may have been a little late to the party, but, thanks to Bernanke and Paulson, it finally arrived.
The Paulson from the economic events of 2007–09 who will be remembered longest, however, will probably be John rather than Henry. John Paulson is the hedge fund proprietor who learned how to use credit default swaps to short the subprime market with almost none of the downside risk associated with traditional short selling, and who then made exactly the right series of bets. In The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History, Wall Street Journal reporter Gregory Zuckerman, with exemplary clarity, explains how John Paulson groped until he understood the developing situation better than anyone else and, by trading the ABX index in the summer of 2007, made $16 billion for his investors and $4 billion for himself.
The Greatest Trade has been overshadowed in bookshops by The Big Short: Inside the Doomsday Machine (W.W. Norton, 2010), in which Michael Lewis, the best-selling author of Liar’s Poker: Rising through the Wreckage on Wall Street (W.W. Norton, 1989) and Moneyball: The Art of Winning an Unfair Game (W.W. Norton, 2003), covers much of the same subprime territory — but without Paulson, who was telling his story to reporter Zuckerman. Lewis is, I suppose, the more gifted storyteller, and he mobilizes a colorful cast of characters. But the subprime scandal without Paulson is Hamlet without the prince. The Greatest Trade Ever is the perfect companion to Slapped by the Invisible Hand, which, it should be noted, is so antiseptic in its determination to stick to banking and economic issues that it contains not so much as an anecdote. Zuckerman, on the other hand, turns the bubble and its highly profitable pricking into an adventure story.