Inevitably, the new film Hank: Five Years from the Brink, with former Treasury Secretary Henry Paulson, will be compared to Errol Morris' Oscar-winning documentary, The Fog of War: Eleven Lessons from the Life of Robert S. McNamara.
Both are serious, thoughtful, probing, candid, and revealing interviews with men who are looking back on their government service during a time of turmoil and controversy, with some archival footage illustrating their recollections. Both men are there to set the record straight, both make their best case, and both confess to some misjudgment. Both have thoughts about how their experiences should shape current policy. Director Joe Berlinger (Crude, Some Kind of Monster) uses Morris' innovative Interrotron camera, which allows the interview subject to look into the camera and speak directly to the audience.
But McNamara was trying to justify his decisions about Vietnam decades after he oversaw the escalation of American involvement in the war. For Paulson, it is not even six years from the brink of a global economic catastrophe. In 2008, he was literally on his knees before Nancy Pelosi, begging her to agree to a $700 billion bailout that was essentially a blank check for him to use as he saw fit to prop up the financial services industry collapsing under the weight of subprime/derivative instruments that turned out to be worthless. As Paulson says with regret in the film, that program had a worse approval rating with the public than torture. People were asking, "Why were those fat cats being given money while I am losing my house?"
Paulson has updated his book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System and made the film to explain what happened and, more important, to get people interested in making things better.
Unquestionably, one highlight of the documentary is Paulson's flinty wife, Wendy, who talks about how they met when he was at Dartmouth and she was at Wellesley, how she insisted he had to come home for dinner and spend time with their children instead of working late at Goldman Sachs, and how her commitment to frugal living was so severe that she made him return a cashmere winter coat because he already had a perfectly serviceable coat and did not need a second one. Her description of the stress he was under in negotiating the bailout and overseeing the emergency mergers of major financial institutions and the demise of one of them is more vivid than the news clips and headlines.
Paulson says modestly in the documentary that when he was at Goldman Sachs, where he was ultimately Chairman and CEO, he was not known for being the smartest, but for being the most dedicated to learning as much as he could and synthesizing what he had learned. He is still doing that and he comes across as a man of enormous integrity, decency, and statesmanship.
In an interview, Paulson said that he wrote the book and appeared in the film because "it was really important to learn from our mistakes and clean up our messes." And it was important to address some popular misconceptions. Most people know about the $700 billion bailout. Most do not know that it was paid back into the treasury, with interest.
Paulson says that while many people put a lot of emphasis on the failure of regulators to impose adequate capital requirements on financial institutions, for him the more important issue is liquidity. He has very deep concerns about "shadow banking." And he is surprised and very disappointed that Fannie Mae and Freddie Mac ("at the vortex of the crisis") are still operating. He said if you had asked him five years ago whether they would exist in 2014, he would have been certain that it was out of the question.
When asked whether "too big to fail" is still a problem, he said, "That's not the issue that I'm really focused on. It's not just 'too big to fail.' It's too complicated, too interconnected. The big banks were a major problem. We made it worse in terms of the concentration, during the crisis. But there's been huge focus on this, so I believe the banks are not just better managed and much better regulated, but really importantly, better capitalized, and that's the ultimate defense, liquidity and capital cushion." He notes that under the new rules, "when a bank fails, they will not be propped up in their current form." Having been in government, though, he knows regulators and enforcement actions are limited. "My biggest caveat here is that we're going to have to see how they work. It's not just having the authority; it's how the people with responsibility for using that authority are going to act." It is especially difficult because there are many different regulators and political oversight is hampered by entrenched interests.
Paulson discussed the actions the Bush administration took during the bailout, where, as the movie reminds us, it was not just one but a series of crises, each an enormous threat to the global economy. The responses were extreme. "It is unacceptable for any bank to be too big to fail," he said. "But in the middle of a crisis, any bank is too big to liquidate. You can't liquidate them immediately without doing huge damage." There was no time for nuance. And once the crisis was over, there was no interest in the details.
The implication of his statements is that those 2008 emergency measures were undertaken with two important assumptions and expectations. First, they assumed that Wall Street would have the same understanding of the severity of the problem and the importance of re-establishing their credibility by demonstrating some accountability. Second, they assumed that the actions they took would be the first step, followed by thoughtful and significant reforms. Neither has been adequate. Paulson supports the Corker-Warner legislation to replace Fannie Mae and Freddie Mac with a privately capitalized system that preserves market liquidity and protects taxpayers from future economic downturns. He hopes that people who see the film will understand why that is important.
He made the film to tell the story of what happened, but more importantly, to remind policy-makers and voters of the work that is still to be done.