Henry Paulson was as close as you could get [to being] the king of Wall Street, the single most important player on Wall Street. He ran Goldman Sachs, the most storied, respected of the investment banks. He was known as "the bulldog," this really opinionated guy who went with his gut and went with it with full gusto and was part of this just behemoth of moneymaking. ... Paulson is not a guy who spent a lot of time with the geeks building the complicated structured financial instruments. ...
There were rumors that [Paulson] might be Treasury secretary. And if I remember, the smart word on the street was absolutely not. This is actually a man for whom Treasury secretary would be a step down in power and influence. ... This is one of the few people in America who you feel could really sit down with the president of the United States and start dictating what he needs before he takes a Cabinet-level position. ...
It was sort of a puzzle, a head scratcher. Why did this guy take this job? ... I remember talking to one person who said the president must have just pulled the "I'm your president; you've got to do what the president says" card. And Paulson finally decided, OK, I'll do it.
When he went to Washington, that seemed to be the case. It didn't seem to be the case that he had gone with a deal, because he didn't do much. He was a boring Treasury secretary. ... And then the crisis hits, and really all eyes were on Ben Bernanke as the guy who matters. ...
Chris Dodd Chair, Senate Banking Committee (D-Conn.)
Read the full interview »
He was very certain about what he wanted early on. He kept on arguing. I remember I called him one night -- woke him up, he claimed -- and talked to him about purchasing the equity, investing into the equity of these financial institutions. And again, I'm listening to others who are very knowledgeable -- I must have a stack of e-mails and letters from people all over the country who are ... knowledgeable about this, work in this industry -- who almost unanimously were wondering why the Federal Reserve, and particularly the Treasury, were not making the direct equity investments. Why was he hung up on this idea of only purchasing the toxic instruments?
You buy a toxic instrument for a dollar, that's all you get is a dollar's worth, whereas you make an equity investment of public monies, you can leverage private capital, maybe 10-, 12-, 15-to-1. ...
So when you call him, what does he say?
He says: "It takes too long. You have to do it institution by institution. There are too many institutions I have to deal with." That was the argument at the time. And again, I'm not arguing with a guy who spent his lifetime on Wall Street and running one of the most successful, if not the most successful, investment bank on Wall Street.
That's a hell of a journey for a free-market guy like Hank Paulson, too. ... Sitting with a bunch of senators and congressmen saying, "Give me a blank slate, and I'll go solve this problem."
And again, that was the arrogance of it, in a way. And I think it's also naivete. The idea that you send up at 1:30 in the morning, on Saturday morning, a three-page bill saying, "Give me $700 billion, and by the way, no agency can intervene, and no court can intervene," that's rather remarkable. You know, a subprime mortgage is four pages long. Here he was asking for $700 billion, [it was] twice the cost of the Iraq war, and nobody can ask any questions.
Barney Frank Chair, House Financial Services Committee (D-Mass.)
Read the full interview »
He has been, on the whole, a very good influence, because he came to be secretary of the Treasury at the request of the administration. He was able to stand up to right-wing ideologues in the Bush administration who previously had disregarded Treasury secretaries.
For example, one of the first things that I did when I became chairman was to work with him to get the regulations of Fannie Mae and Freddie Mac in place that people had been talking about for a long time. … What he understood and what was important to me was to combine the regulation of Fannie Mae and Freddie Mac with the provision that took some of their funds and put them into affordable rental housing. ... And he did a very good job of persuading the administration to accept an approach to Fannie Mae and Freddie Mac that included an affordable housing trust fund.
Then, when the economy began to go sour in the end of '07 and, as we now know, was entering the recession, he overcame rigidities among the Bush administration officials to get them to support a stimulus. And he continued to push them to do more about mortgage foreclosure. Until fairly recently under the rescue plan, I think he has been very good. I have serious differences with him recently.
Do you imagine it's been a long walk for Hank Paulson to go from Goldman Sachs to the guy presiding over all of this?
Oh, yeah. It's been a long walk for a lot the conservatives. Remember, Paulson is conservative in his thinking. I was elected to Congress in 1980, so I was standing on this Capitol plaza there when Ronald Reagan in his first inaugural said, "Government is not the answer to our problem; government is the problem," a stark, very extremely conservative view. Twenty-seven years later, you have the secretary of the Treasury in another very conservative administration, and his motto is what used to be a bad joke that conservatives would tell: "I'm from the government. I'm here to help you."
It is even an evolution from 2006. When the Democrats won the election in 2006 and I was about to be the chairman, I was told that our important job was to deregulate. There was a committee in Harvard Law School run by a very thoughtful professor, Al Scott, and it was called the Paulson Committee, because Paulson had brought it into existence. And they were saying: "You know what? We are overregulating. People are going to leave America and go to England. We are not going to have IPOs, initial public offerings. We've got to cut back on Sarbanes-Oxley [Act]."
So as recently as two years ago, the philosophy of Paulson and others is that we have overregulated. I give him credit for being pragmatic. He understood that the absence of regulation was a problem. ... It hasn't been so much that we have deregulated as that we did not regulate in the first instance with new phenomena. And I give Paulson a lot of credit for the flexibility there. ...
My criticism of him is, I think he's had a hard time breaking away from his kind of cultural identity with the people in the financial institutions. He tends to trust them more than I think reality justifies. He has been reluctant to push them as hard as he should.
Paul Krugman The New York Times
Read the full interview »
Paulson is an investment banker, and investment bankers make a living, you might say, by making silk purses out of sows' ears. They make a living by repackaging and engineering financial assets to create value, at least temporarily, in the eyes of the market, where there was no value before.
And if you actually go back to the early stages of this crisis, go back to the fall of 2007, Paulson had a stillborn idea for solving the problem, never got anywhere, called the Master Liquidity Enhancement Conduit [MLEC]. ... Most of us looked at it and said: "There's no there there. I don't understand where this is supposed to create any relief." But he tried to sell it, and it was the kind of thing that an investment banker might actually do, which would somehow manage to take a bunch of subprime assets, subprime mortgages, and create AAA assets out of them. It was that sort of thing, which may work to let a bank make some profit, but doesn't actually work when it comes to policy.
And I think that may have been what was going on here, that Paulson continued to believe, even up to the bitter end, that somehow rearranging the deck chairs was going to save the Titanic, and [it was] probably coupled with an ideological dislike for the idea of the government taking an ownership stake in financial institutions.
posted february 17, 2009