Financial History Issue 130 (Summer 2019) | Page 40
BOOK REVIEW BY GREGORY DL MORRIS
Firefighting: The Financial Crisis
and Its Lessons
By Ben S. Bernanke, Timothy F. Geithner
and Henry M. Paulson, Jr.
Penguin Random House, 2019
129 pages text, 82 pages charts, index
Ten years after the near-immolation
of US and global financial markets, the
three men who led the effort to contain
and control the conflagration have writ-
ten a superb short history of the dev-
astating events. Despite being brief it is
sufficiently detailed, enough indeed to
quicken the pulse of any reader as they
relate unheeded warnings, infamous acts
of venality and the extreme efforts ulti-
mately necessary to battle the crisis. Those
efforts took the trio and their departments
to the edge of legal authority.
The book is surprisingly well written,
brisk and approachable. There is no doubt
of the erudition of the authors, but eco-
nomics is not called the dismal science
for nothing. Financial history, even recent
history of great and terrible events, tends
to be dry. The tone is clear and mostly
free of the coded language of bankers and
regulators so that any reader can follow
the narrative. Still, there is strong and
precise terminology for financial profes-
sionals. Serious technicians can geek out
to the dozens of pages of tables and charts.
It is vitally important that the book is
equally relevant to technical and non-
technical readers alike, because it delivers
urgent warnings. The clear theme of the
story is that like Waterloo, the financial
crisis was a near-run thing and as bad
as it was, it could easily have been much
worse. It is plain throughout that even
the brightest and most adept firefighters
had to scramble and improvise with insuf-
ficient tools.
Often the authors clamor for systemic
oversight and coordinated responses with
adequate apparatus. Ominously they note
at the end of the book that the necessary
protections, regulations and measures are
already being dismantled in the name of
growth.
“The Fed has lost its power to res-
cue individual firms, and faces new con-
straints on its lending powers, while the
Treasury has lost its ability to use the
Exchange Stabilization Fund for guaran-
tees,” the authors warn. “This has all been
done in the name of avoiding government
rescues, a worthy goal. But the better way
to avoid government rescues is not to
hobble the first responders but to avoid
crises in the first place. Eventually risk
tends to weave its way around even the
best designed safeguards. [T]hat is a rea-
son to give crisis managers the authority
they need to respond with overwhelming
force. You can’t wish away fires by closing
the firehouse.”
This book is remarkable for its straight-
forward narrative of the crisis, and also
for its well-founded warnings. There is
surprisingly strong criticism of some com-
panies. Fannie Mae and Freddie Mac get
well lashed: “These government-spon-
sored enterprises had deep influence with
both parties in Washington and exploited
assumptions that the government would
never let them fail to borrow heavily at
below-market rates without much of a
38 FINANCIAL HISTORY | Summer 2019 | www.MoAF.org
capital buffer. They were basically the
corporate embodiment of moral hazard,
enjoying the upside of their risk taking
while taking comfort that taxpayers would
cover any downside.”
Emergency legislation “gave the Trea-
sury and the Fed a chance to look under
the hood of Fannie Mae and Freddy Mac,
uncovering some ugly surprises. Fed and
OCC examiners concluded that both firms
were functionally insolvent, with flimsy
capital cushions that were mostly account-
ing fictions.”
A term like “accounting fiction” is a
polite way of saying fraud, and the reader
wonders why no one was held to criminal
prosecution. The authors are also at pains
to reiterate several times how they set
aside punitive measures in the name of
resolving the crisis in front of them. There
was a near-constant call for haircuts for
creditors, but the authors note that such
provisions would have made enabling leg-
islation more difficult to pass or enforce.
Similarly, some notorious malefactors
in the crisis—such as Angelo Mozilo, the
former CEO of Countrywide—are let
off with barely a mention. Instead, the
authors heap their scorn on the haphazard
regulation that was allowed to accumulate,
like a jacket of all patches, and on the lack
of authority vested in what regulators
there were. And while the cats were away,
the mice did play.
The near-death experience of Bear Stea-
rns, ultimately acquired by JP Morgan
Chase, hardly filled the authors with con-
fidence. “We did not feel triumphant after
the Bear rescue,” the authors recall rue-
fully. “We felt uncomfortable. The episode
demonstrated how confidence in heavy
leveraged and loosely regulated nonbanks
with too much short-term funding could
disappear in a heartbeat.
“And Bear was not the only financial
institution that had borrowed too much
and too short with too little oversight,
or invested too much in sketchy mort-
gages and structured credit that nobody
trusted anymore….Suspicions were also
mounting in the markets that Lehman
[Brothers] would be ‘next,’ which can