Thursday, October 23, 2008

Hank Paulson, Revisionist

(Felix Salmon) 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 he NYT, to their credit, makes 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.

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