Hank Paulson, Revisionist

Did you know that Hank Paulson is one of the most powerless finance ministers in the world? While his counterparties in other countries feel responsible for saving systemically-important banks, Paulson's hands, until recently, were tied, and he could do nothing but sit and watch as Lehman Brothers failed.

With all options closed, he said, the government's hands were tied. Although the Federal Reserve had helped bail out Bear Stearns -- and was within days of bailing out the giant insurer American International Group -- it could not help Lehman, even as its default threatened to wreak havoc on financial markets.

"We didn't have the powers," Mr. Paulson insisted, explaining a decision that many have since criticized -- to allow Lehman to go bankrupt. By law, he continued, the Federal Reserve could bail out Lehman with a loan only if the bank had enough good assets to serve as collateral, which it did not.

"If someone thinks Hank Paulson could have made the Fed save Lehman Brothers, the answer is, 'No way,' " he said...

"I didn't want to see Lehman go," Mr. Paulson said. "I understood the consequences better than anybody."

Does Paulson seriously believe that anybody is going to swallow this -- the idea that he didn't want to see Lehman's failure, but was powerless to prevent it? Ben Bernanke has said the same thing, and it's an insult to the public's intelligence -- especially as this whole "we really wanted to, but it would have been illegal" argument was nowhere to be seen at the time.

Joe Nocera and Edmund Andrews of the NYT, to their credit, make it clear that its reporters don't buy Paulson's revisionism either: they explain that Tim Geithner worked hard on a bailout plan for Lehman, and even quote Paulson, at the time, saying that "I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers". It is a bit weird that he was talking about whether a bailout was appropriate when all along, he's now saying, it would have been illegal.

I'm not sure why the meme of Paulson as Obama's Treasury Secretary refuses to die: the chap has no credibility any more. (But this article will do no harm at all to Geithner's chances of getting the job, should he want it.) Just consider this astonishing quote:

He also defended Treasury's recapitalization plan against critics who say that he did not extract a high enough price from the banks getting taxpayers' money. "I could not see the United States doing things like putting in capital on a punitive basis that hurts investors."

He didn't want to hurt investors? Tell that to shareholders in Bear Stearns: he was the person who forced Jamie Dimon to lower his initial bid. And, since when is "don't hurt investors" an important priority of a Treasury Secretary facing a crisis?

When Paulson arrived in Washington, he had a reputation as a strong and smart technocrat with an ability to make things happen. He will leave, in January, with that reputation shredded. A keen environmentalist and amateur ornithologist, he's said in the past that the next act of his career will be philanthropic. Which is about right, I think, since no one's done a better job in reducing the US economy to something for the birds.

Comments

[nym:]

Yesterday I came across in my archives what I think was the cover story for Business Week 12 June 2006. There is much from Paulson, then still at Goldman, but headed for Treasury. He expressed concern about how risk on mortgage-backed securities was estimated. Is there any evidence he did anything about it after he got to Treasury?

2008 Oct 23 11:30 AM

[Alex Filonov:]

Paulsen as treasury sec for Obama? Come on, give us Bob Rubin or Larry Summers back! Even Jim Cramer might be a better choice than Paulsen (although he is way too emotional, I don't think Congress would ever confirm him). But maybe the most radical idea: Erin Burnett. Young, smart, worked at Goldman Sachs, what else do you need? Financial America knows her and she knows financial America.

As for the article, I agree. If Paulsen and Bernanke had enough will, they would engineer some kind of rescue. Something similar to Long Term Capital liquidation in 1998, just quiet backroom deal, no need for illegal official government moves.

2008 Oct 23 11:42 AM

[daytrader:]

to muddling investor

are you freakin' kidding me?cramer?all your crediblity goes out the window with that stupid comment!

do you know how much money he cost people.the average person listening to his show or reading his books.the guy is a SCHMUCK!!!

2008 Oct 23 01:00 PM

[Smarty_Pants:]

Looks like Felix is adopting the memes of moonbat and myself. Even someone with a financials background like Felix can read between the lines of cr@p these guys are spouting and determine that it doesn't pass the smell test.

Good article Felix. Welcome to the Dark Side.

2008 Oct 23 01:10 PM

[Jason Rines...:]

Great site and contacts you have Mr. Rockwell. I sent you a private email. Let's talks soon.

Regards,

Jason

2008 Oct 23 03:12 PM

[Alex Filonov:]

To daytrader:

I actually made money on Cramer's advice. A lot. Maybe somebody lost, those people probably didn't read Jim's book "Mad Money. Sane Investment In Insane World". Doesn't matter whose advice you listen to, you are responsible for all your decisions, investment and trading are not exceptions.

2008 Oct 23 03:46 PM

[Moon Kil Woong:]

You left out the part where he told Goldman Sacs to multiply their CDS bets because he knew all the mortgage backed securities they were writing for clients were going bad. That's why Paulson couldn't let AIG go down. AIG was one of their main writers of the CDS' for Goldman. So if AIG doesn't pay Goldman Goldman is bankrupt. The fox is guarding the henhouse.

2008 Oct 24 12:46 AM