I listened to the audio book version and bought the hard copy of On the Brink by Henry M. Paulson, Jr. What I found was a careful, often convincing, defense of his tenure and decisions as the U.S. Treasury Secretary during the worst financial crisis in the U.S. in my lifetime. Paulson and the huge team that produced the book in eight months did a good job. If I had the half a billion dollars that Hank got to pocket tax free when he went into “public service,” I would hire the lot of them to write my blog, pick up my dry cleaning, and wax my car.
I learned from the book that when Paulson’s friends ran a company, their firm found a willing (dupe) merger partner, with Hank’s help, and/or got bailed out by taxpayers. There are three notable examples.
Hank’s Golden Boys
1. John Thain
At Goldman Sachs (GS), Thain was one of the members of the committee that promoted Hank to the top job at Goldman Sachs. When Thain was the CEO of Merrill Lynch and busy decorating his office, but his buddy Hank pushed Ken Lewis, the then CEO of Bank of America (BAC), away from Lehman Brothers (where he could have gotten a deal) to Merrill Lynch where BofA’s shareholders got hosed. Paulson made it abundantly clear, going into the weekend of Lehman’s bankruptcy, that the government would not give a “Jamie” (Dimon) deal to BofA to buy Lehman. That decision made Merrill Lynch a much more appealing merger partner and helped preserve Thain’s stock compensation. Thain’s weekend of admiring himself in the mirror got ruined just before Lehman collapsed, but he did dump his worthless company for $29 per share.
2. Robert K. Steel
Robert K. Steel served under Hank Paulson at Goldman Sachs before helping out his country and Hank for a couple years at the U.S. Treasury. He then left to serve the shareholders of Wachovia as its CEO. Serve them he did! He used his connections at Treasury to win Wachovia the honor of being the first and only bank to ever receive the systematic risk exemption in the FDIC Improvement Act of 1991. Hank, of course, by law had to personally approve that, but Hank says he was asleep at 11 P.M. when one of his dedicated deputies, with Hank’s authorization, made the approval. If Wachovia had gone through FDIC receivership, Mr. Steel’s stock would have been worthless. We can’t let that happen to Hank’s friends!
Contrast this with Washington Mutual which a few days before did go through receivership, its debts were written down and its shareholders were wiped out. It was bought by JP Morgan Chase without government assistance which emerged strong and healthy because WaMu had fewer liabilities than it had before the FDIC receivership.
Instead of Mr. Steel losing his stock, Wachovia got a government assisted deal that allowed Citigroup (C) to buy the company. Yet, the story does not end here. No, it turns out the IRS, which last I heard, was part of the U.S. Treasury Department, decided to hand a favorable tax ruling to Wells Fargo (WFC) so it could pay more than even Citigroup. If Well Fargo saves money on taxes, and hands most of that money to Wachovia’s shareholders, that is not a bailout! Wells Fargo today sits atop a pile of bad loans and all the liabilities that almost brought down Wachovia, but it can borrow like Fannie Mae and Freddie Mac because it is now “too big to fail.”
3. Lloyd Blankfein
We all know this story. Through many phone conversations which were edited out of Hank’s book, the CEO of Goldman Sachs, Lloyd Blankfein, impressed upon Hank the deep trouble that Goldman Sachs, Hank’s former baby, would be in if AIG went down. The three amigos, according to Paulson’s On the Brink—Hank, Ben (Bernanke), and Tim (Geither)—bailed out American International Group (AIG). Goldman Sachs took out a small sum of money, $14 billion, from AIG. Yet, we all know Goldman would have been fine if AIG would not have been bailed out. Those edited-out conversations with Mr. Blankfein were just two old friends swapping war stories.
I hope you have learned the lessons of Hank Paulson well. Hank teaches us that it is not what you do, it is not what you know, but it is who you know. If you wanted to run an insolvent bank in 2008, you should have been good friends with Henry M. Paulson, Jr.
Disclosure: I only have long positions in broad-based index funds. I do not own individual securities in the companies mentioned.