Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Recapitalization was a more direct way of intervening in a bank. It was also efficient. Every dollar of bank capital was leveraged. So a dollar of government capital would support ten, twenty or thirty times as much in lending. But recapitalization was rejected on political grounds. Paulson had no desire to go down in history as the Treasury secretary who nationalized America’s banking system. And even if Paulson had been willing to pay the personal price, an open call for government recapitalization would never have passed Congress. The Republicans would have voted en bloc against nationalization, and without bipartisan cover the Democrats could not take the risk.45 Already in the spring of 2008 the Treasury team thus decided that asset purchases were the path of least resistance. Buying debts did not involve ownership of banks. It did not raise issues of control or corporate governance. It could all be done through “the market.” An auction mechanism could be used to determine the price. It was also, admittedly, slow moving and expensive: $700 billion would cover barely more than half the outstanding subprime securitization. It wasn’t the perfect solution. But after Lehman, AIG and WaMu, the Treasury and the Fed were desperate. They needed something that might pass, and pass quickly.