Paulson: The Exit Interview 13 comments
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I generally prefer systemic explanations for events, but it is obviously worthwhile to complement this with a careful study of key individuals. And in the current crisis, no individual is as interesting or as puzzling as Hank Paulson.
The big question must be: How could a person with so much market experience be repeatedly at the center of such major misunderstandings regarding the markets, and how could his team - stuffed full of people like him - struggle so much to communicate what they were doing and why?
Hank Paulson’s exit interview with the Financial Times contains some potential answers but also generates at least some new puzzles.
Paulson argues that he lacked the legal powers and resources necessary to intervene decisively and early on in the crisis, and this may account for some of his actions through mid-September. Still, the Fed has plenty of powers and essentially unlimited resources in a crisis, and it’s not clear why Paulson and Bernanke, acting together, couldn’t have done more - for example, after Bear Stearns revealed (to most observers, private and official, and presumably to them) the depth of the systemic problems. It’s odd that Paulson feels the severity of the crisis was only apparent after the intervention in Fannie Mae and Freddie Mac.
The greatest puzzle, of course, is why Lehman was not saved. Paulson essentially says that letting Lehman fail was not his idea, and the well-informed FT article implies it was definitely not due to Geithner. Yet it’s not plausible that Bernanke would have taken such a stand. So who did it?
(The excellent recent WSJ article on that critical weekend - link here, but subscription required - also jumps that key moment; it’s as if there is a cone of silence on this point. Perhaps Geithner’s upcoming confirmation hearing will reveal more.)
But there is also a more analytical puzzle. In his interview, Paulson stresses the role of capital flows and the so-called “global savings glut” in driving down risk premia and encouraging a system full of bad decisions (and the FT rightly regarded this as an important statement, and put it on the front page). Paulson also implies that more urgent multilateral action on this dimension would have helped.
Yet Paulson himself was instrumental in blocking, or not taking forward (and that’s close to the same thing), the deal brokered in the Multilateral Consultation between the world’s major trading areas. This was a major opportunity to advance policies both in the US and elsewhere that would have exactly addressed what Paulson now says was an evident first-order system problem.
Of course, the idea of de-emphasizing any kind of multilateral approach might have come from the Bush White House, but this level of detail is almost always delegated to the Treasury. And there is every indication that Mr. Bush trusted completely and listened carefully to Paulson at every stage, including throughout this fall’s downward spiral.
Corroborating evidence for the idea that Paulson did not want to work in a multilateral fashion comes from the fact that in fall 2007 he called for sharp spending cuts at the IMF (see his IMFC statement, near the top of the last page). The US Treasury continued to push for these cuts in the ensuing months, despite the obvious onset of a serious worldwide financial crisis - about which they, of all people, surely had the most inside knowledge. In fact, despite the current series of urgent crises, the IMF still finds itself constrained by the roughly 20% budget cut that the US insisted upon. Quite why these limits on spending were not immediately relaxed after September - which would have been easy to do under G7 or G20 leadership - is yet another mystery that can presumably be traced back to the attitude of the US authorities, although the crisis-deniers in Europe probably also played a supportive role.
In any case, Paulson was entitled to choose a strategy to address global imbalances other than that of the Multilateral Consultation. But what was his global strategy? No one has yet been able to explain that to me, but please do make suggestions in comments on this post.
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This article has 13 comments:
Paulson has looked positively frightened on occasion, never offering up a coherent explanation to the American people, let alone the financial community, of what it is that he wants to see happen.
To complain about a lack of powers, when you've been given $700 billion to spend in a matter of a few months, strikes me as a bit odd. Paulson, and indeed, Goldman Sachs and its alumni network in Washington once held the reputation as wizards . . . no more.
I don't buy that. Where are these assets going? All the assets that were here on Jan 1 2008 were still here Jan 1 2009-- what's changed is their value. What seems to have happened is that the financial community treated an overly optimistic projection of asset price appreciation as a given, and borrowed against that.
I'd say that the true economic value of the assets as a whole was never as high as they were valued by the markets. This allowed us to live better than our actual wealth would have permitted, consuming more and saving less. We fought a war, dropped taxes . . . when was the last time an Administration punted on the hard choice of "guns or butter" and said "we'll have both, please"? LBJ & GWB are two of a kind, Texans who wanted to earn their spurs-- without asking anyone to pay for it. Wall Street are the folks who said, "sure, no problem, your credit's good".
The role of Paulson, Goldman Sachs, and the financial community as a whole is more as a facilitator of the Administration's imprudent policies than as an instigator; IMO.
Just follow the money. :-)
he used the same strategy with derivatives. While Goldman sold bad packaged mortages and helped AIG write derivitives on them he quietly had Goldman buy up tons of them so he would profit off of the collapse of the mortgage crisis and the ensuing mahem. Little did he know his patsy AIG would mess up so bad it threatened to unravel all the bond deals due to the denuding of the derivatives that backed them.
So he used the taxpayers to bail out the dupe AIG. And he bailed out Bear Stearns to keep the derivitive market as hidden to the public as he could (derivitives are unregulated, unreported, and off balance sheet in most cases thanks to Base I accounting).
Unfortunate for Lehman the derivitives fiasco was already coming to light and they weren't on the short end of the stick with Goldman so they got ruined. What a great tit for tat against old enemies you have when you get to run a government agency.
So in summation, Paulson, who was given the greatest leeway in spending the greatest amount of money with no strings attached in US history dumped all $350 billion of it to AIG and his banking friends after lying about using it to buy bad home loans. And then he says, I was powerless. And you expect me to believe that. Really? Please, play the innocent humpty dumpty saga to someone else. I don't buy it. Paulson is about as innocent as Madoff. It's just that he didn't get a Tarp to hide his companies misdeeds under.
Am I demonizing him too much? Nawww... If you want to see the root cause of the financial storm have the SEC investigate Goldman Sacs. Will they do it? After we know how they handle the Bernie Madoffs of the world. Not a chance.
No one is above the market, not even Buffett.
Lehman was a shell of its former self after its previous reorganization and was taken over by pirates. No one could save it and it was not necessarily worth saving. The shame is that it traded on the old brand long after it was a sham.
AIG was doing ok with Greenberg in charge. When Sullivan took over they got much more careless with risk and in a short time were id deep water. How could Paulson have known it went south that soon?
IMO he did better than we could have hoped in a thankless job and we were lucky to have him there. I would take him and Ben over Rubin and Greenspan any time.
What Paulsen (and Bernanke) apparently failed to recognize was the impact that Lehman bankruptcy would have on the perception of the CDS network that links financial institutions arounf the world. This network was perceived to be like a circle of dominos stacked on end. The perception was that, with the tipping over of the Lehman domino, the entire circle would fall.
This has not happened (at least not yet), in part because of the TARP legislation. However, there is still no transparency in this area and we can not be sure the crisis has passed. If another major financial institution fails, or is rumored near failure, the entire fear cycle could be repeated. Financial stocks would drop further and the rest of the market would follow.
One way to relieve this overhanging threat would be to broker the swapping out of CDSs in self-cancelling trades. This is something that CDS holders and issuers should welcome because it is believed that many of the CDS instruments offer guarantees by those with insufficient assets to make the "insurance payments" specified in the case of default in the "protected" securities. Government expenditure to operate this brokerage might be much less costly and far more effective than such grandiose schemes as the TARP.
Dismantle the pyramid, don't finance it!
Paulson for President ........... of Zimbabwe !
It's a real real mess. Until people go bankrupt to sterilize the losses it will never end. Well maybe not never. 20 years may be enough or depreciating the dollar to $0.20 on the buck.