Business Books: A policy wonk looks back, and forward

By Ross Kerber

BOSTON Dec 24 (Reuters) - University economists are already teaching courses on the history of the financial crisis of 2008 and the policy responses that followed. Robert Pozen's new book could become required reading.

"Too Big to Save? How to Fix the U.S. Financial System" (Wiley, $29.95), provides both a detailed look at the run-up to the financial system's brush with disaster and many prescriptions in response.

Pozen, the chairman of MFS Investment Management in Boston, at one point was a possible pick to head the Securities and Exchange Commission. The result, though Pozen does not say so, is that his book is also something of a what-I-would-have-done had he received the summons to Washington.

In some places, Pozen's agenda seems more forceful than what the administration has put forward. Most striking is his treatment of the banks that accepted money from Washington starting at the tail end of the Bush administration. In Pozen's view the terms on this support did too little to increase lending and were too sweet to justify the public investment.

For instance, he suggests using market rates to set the value of the warrants that the banks issued to the Treasury, which would have raised their worth to at least $20 billion from about $4.2 billion.

But it is hard to label Pozen a firebrand, a reminder he has also worked for Republicans including President George W. Bush and, when he was governor of Massachusetts, Mitt Romney. In the charged area of restrictions on executive pay, for instance, Pozen generally argues against crowd-pleasing compensation caps introduced so far. He urges instead that salaries be coupled with longer-term metrics that tie earnings to both a company's upsides and downsides -- such as tying bonuses to a firm's three-year performance record.

He also worries that the higher insurance limits on bank deposits, though popular, won't prove cost-effective. And he is lukewarm on the suggestion to create an overall financial regulator he thinks would do little to rein in abuses in credit default swaps or by hedge funds with influential friends in government. Their excesses, Pozen writes, "were issues of political power, not organizational structure."

Pozen argues for "accountable capitalism," and in sum his is a policy wonk's tome. He avoids giving an opinion of the overall record of either the Obama or Bush administrations, or Congress.

Pozen also dodges some tricky areas, such as the role of mutual funds like those he oversees at MFS, few of which take an active role in the companies they control.

But the upside is Pozen's his mastery of the interconnected details of the financial system, showing how it worked or failed in subtle ways. In a series of chapters he walks the reader through how the slow decline in U.S. housing prices snowballed into a worldwide economic crisis.

For instance, foreigners piled into U.S. mortgages because interest rates on their traditional favorite, U.S. savings bonds, had dropped to historic lows. That was due to previous Fed decisions to keep banking lending rates early in the decade. But rising foreign ownership also meant several foreign bank collapses when the U.S. mortgage system melted down.

Another fresh analysis is Pozen's review of the collapse of Lehman, now seen as a disaster, after Bush's team had helped Bear Stearns and set expectations the government would protect any institution considered "Too Big to Fail."

Yet Pozen writes that massive federal aid wasn't necessarily needed for Lehman, and that regulators only had to make clear they would protect most of Lehman's commercial paper holders and to guarantee the completion of trades.

Pozen's plethora of footnotes shows that, in some areas, Washington is already moving in his direction.

It's also not clear that a job running the SEC would have given Pozen the authority to do all he suggests. But Pozen's voice would have been a precise and influential one in the tangled debate over the future of markets and the financial system, both on the details and on the view from 10,000 feet. (Reporting by Ross Kerber; Editing by Eddie Evans)