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In 2006, Goldman Sachs C.E.O. Henry Paulson reluctantly became Treasury secretary for an unpopular, lame-duck president. History will score his decisions, but the former Dartmouth offensive lineman definitely left everything on the field. In private conversations throughout his term, as crisis followed crisis—Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G., and so forth—Paulson gave the author the inside track, from the political lunacy and bailout plans to the sleepless nights and flat-out fear, as he battled the greatest economic disruption in 80 years.
By TODD S. PURDUM October 2009
Goldman bet against the mortgage meltdown, yet Paulson was taken aback and surprised by the whole thing?
I'm sorry Henry, but your story doesn't ring true.
Have at it.
In 2006, Goldman Sachs C.E.O. Henry Paulson reluctantly became Treasury secretary for an unpopular, lame-duck president. History will score his decisions, but the former Dartmouth offensive lineman definitely left everything on the field. In private conversations throughout his term, as crisis followed crisis—Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G., and so forth—Paulson gave the author the inside track, from the political lunacy and bailout plans to the sleepless nights and flat-out fear, as he battled the greatest economic disruption in 80 years.
By TODD S. PURDUM October 2009
Henry Paulson’s memoir, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, will be published next month, and its appearance will reopen all the old debates over his tenure.
[..]
If Paulson was taken aback by the ways of Washington, he was just as surprised at how the crisis in the subprime-mortgage market became, by the fall of 2008, a global economic meltdown. He told me repeatedly that he had always known that, because the country had gone eight years without a major financial shock, “the next shock we had was going to really stress the modern financial system.” He was certainly aware, and frequently mentioned, that the subprime-mortgage problem had the potential to spread. He recalled telling President Bush that “there’s a dry forest, and we don’t know what’s going to ignite the fire or set the spark,” but suspected that housing might be it. During a conversation late in his tenure, Paulson said he believed that he and Ben Bernanke, the chairman of the Federal Reserve Board, “were ahead of a lot of people in understanding how serious” the gathering economic crisis was. But, he added, “it was always bigger and more systemic even than I had for a good while anticipated it to be, or expected it to be.” At another point, he said simply, “We’ve been late on everything.”
[..]
“It was in August, O.K., where there was real stress, where credit spreads blew out, and there was fear,” he told me, referring to the late summer of 2007, when the mortgage crisis began. “I always talk public ly about ‘extreme risk aversity,’ or something. Treasury secretaries don’t use ‘fear.’ But there was this—you know—there was fear, O.K.?”
By the winter of 2008, this extreme risk aversity—this fear—had prompted Paulson to persuade reluctant free marketeers in the Bush administration that it was time to devise some kind of government package of tax rebates and other actions aimed at stimulating the economy. On January 16, he gave me a preview of his thinking and a summary of his forecast for the future. He was clearly trying to get ahead of economic trouble, though it turned out that his forecasts were well wide of the mark.
“We’ve said, let’s proceed with—that I can tell you because this is confidential and longer-term, because right now we haven’t announced that it’s official—but, let’s proceed with a stimulus package,” Paulson explained. “This would not be one where we’re doing it because we’re in recession or because we know we’re going to go into recession. As a matter of fact, if I had to guess, I would say the odds are that we will continue to grow.” He saw the stimulus package more as an “insurance policy” against recession rather than a lifeline out of one. A month later, in February, he referred to the “likelihood” that the economy was “going to be growing.” A month after that, in March, he told me that recession was “not the most likely case,” and repeated that he believed the economy would continue to grow. He didn’t minimize the impact of home foreclosures, but insisted that they be seen in perspective: “You know, last year, there were a million and a half, maybe. This year people are estimating up to two million. So this increment of unusual foreclosures is not huge relative to the 55 million mortgage holders. There’s 2 percent in default. You wouldn’t get that from reading the newspapers, would you?” The National Bureau of Economic Research, a private group of leading economists charged with charting the country’s official economic condition, would eventually determine that the United States had entered a period of recession the previous December, before Paulson spoke any of these words.
When I asked Paulson how conditions had deteriorated to this point, his answer was succinct. “Going back for some good period of years, housing prices have appreciated at a rate that’s clearly not sustainable. And as in any situation like this that’s got global-like aspects, the investors all assume that prices will keep going up, and so they do things that don’t seem foolish at the time, but in retrospect seem utterly ridiculous. And it’s not so ridiculous to buy a home with little money down or negative amortization or whatever, if the price is going to keep going up. And then we have in our capital markets—in general, innovation precedes regulation, and that’s generally been good because we grow quicker because of it. But then regulation policy needs to catch up with innovation.” In short, Paulson said, the go-go vehicles—the credit-default swaps, the hedge funds, the mortgage-backed securities, and other devices—had made the world financial system more interconnected than ever. “This is the first time we’ve gone through a crisis where we’ve had this level of complexity and this degree of global integration of the capital markets.”
[..]
G. bailout, some of Paulson’s critics have suggested that he had a particular interest in protecting A.I.G., because its failure would have threatened Goldman Sachs, where he spent his entire career. In August, The New York Times reported that Paulson had sought, and received from Treasury lawyers, permission to talk with Lloyd Blankfein, his successor as Goldman’s C.E.O., and ultimately spoke with him 24 times in the six days following the A.I.G. crisis. In Paulson’s conversations with me, many casual references gave the impression of a man continually on the phone with players on Wall Street, and at one point he singled out Blankfein (along with Ben Bernanke) as someone “at a different intellect level than some of the rest of us.” It would be natural enough for Paulson to talk with a trusted former colleague about such momentous events, and Paulson’s aides have insisted that he showed Goldman no special favors. No evidence to the contrary has ever emerged, but Paulson’s harshest critics have focused their attention on Goldman’s ties to A.I.G. Paulson has taken pains to note—most recently in congressional testimony this summer—that he himself didn’t fashion the A.I.G. deal. As he told me right after the A.I.G. bailout, “Much of what has been done hasn’t been done with any power we had at Treasury. It’s been done with the Fed. I’ve been a good team player. I’ve given them advice. I’ve been willing to take the hits for things that weren’t done with my authorities.” The truth is, coordination among all the relevant parties—Ben Bernanke, Tim Geithner, financiers outside government—was intense throughout the crisis. In addition to countless phone calls, Paulson said he and Bernanke had lunch once a week. Sometimes, Paulson said, he spoke to Geith ner “every hour.” In this environment of mutual consultation, even the principals sometimes seem to have trouble delineating their roles. Once, in explaining the purchase of Bear Stearns by J. P. Morgan, Paulson began, “So anyway, the deal was, we cut the deal—,” then corrected himself. “We didn’t cut the deal. Tim cut the deal.”
[..]
If Paulson was taken aback by the ways of Washington, he was just as surprised at how the crisis in the subprime-mortgage market became, by the fall of 2008, a global economic meltdown. He told me repeatedly that he had always known that, because the country had gone eight years without a major financial shock, “the next shock we had was going to really stress the modern financial system.” He was certainly aware, and frequently mentioned, that the subprime-mortgage problem had the potential to spread. He recalled telling President Bush that “there’s a dry forest, and we don’t know what’s going to ignite the fire or set the spark,” but suspected that housing might be it. During a conversation late in his tenure, Paulson said he believed that he and Ben Bernanke, the chairman of the Federal Reserve Board, “were ahead of a lot of people in understanding how serious” the gathering economic crisis was. But, he added, “it was always bigger and more systemic even than I had for a good while anticipated it to be, or expected it to be.” At another point, he said simply, “We’ve been late on everything.”
[..]
“It was in August, O.K., where there was real stress, where credit spreads blew out, and there was fear,” he told me, referring to the late summer of 2007, when the mortgage crisis began. “I always talk public ly about ‘extreme risk aversity,’ or something. Treasury secretaries don’t use ‘fear.’ But there was this—you know—there was fear, O.K.?”
By the winter of 2008, this extreme risk aversity—this fear—had prompted Paulson to persuade reluctant free marketeers in the Bush administration that it was time to devise some kind of government package of tax rebates and other actions aimed at stimulating the economy. On January 16, he gave me a preview of his thinking and a summary of his forecast for the future. He was clearly trying to get ahead of economic trouble, though it turned out that his forecasts were well wide of the mark.
“We’ve said, let’s proceed with—that I can tell you because this is confidential and longer-term, because right now we haven’t announced that it’s official—but, let’s proceed with a stimulus package,” Paulson explained. “This would not be one where we’re doing it because we’re in recession or because we know we’re going to go into recession. As a matter of fact, if I had to guess, I would say the odds are that we will continue to grow.” He saw the stimulus package more as an “insurance policy” against recession rather than a lifeline out of one. A month later, in February, he referred to the “likelihood” that the economy was “going to be growing.” A month after that, in March, he told me that recession was “not the most likely case,” and repeated that he believed the economy would continue to grow. He didn’t minimize the impact of home foreclosures, but insisted that they be seen in perspective: “You know, last year, there were a million and a half, maybe. This year people are estimating up to two million. So this increment of unusual foreclosures is not huge relative to the 55 million mortgage holders. There’s 2 percent in default. You wouldn’t get that from reading the newspapers, would you?” The National Bureau of Economic Research, a private group of leading economists charged with charting the country’s official economic condition, would eventually determine that the United States had entered a period of recession the previous December, before Paulson spoke any of these words.
When I asked Paulson how conditions had deteriorated to this point, his answer was succinct. “Going back for some good period of years, housing prices have appreciated at a rate that’s clearly not sustainable. And as in any situation like this that’s got global-like aspects, the investors all assume that prices will keep going up, and so they do things that don’t seem foolish at the time, but in retrospect seem utterly ridiculous. And it’s not so ridiculous to buy a home with little money down or negative amortization or whatever, if the price is going to keep going up. And then we have in our capital markets—in general, innovation precedes regulation, and that’s generally been good because we grow quicker because of it. But then regulation policy needs to catch up with innovation.” In short, Paulson said, the go-go vehicles—the credit-default swaps, the hedge funds, the mortgage-backed securities, and other devices—had made the world financial system more interconnected than ever. “This is the first time we’ve gone through a crisis where we’ve had this level of complexity and this degree of global integration of the capital markets.”
[..]
G. bailout, some of Paulson’s critics have suggested that he had a particular interest in protecting A.I.G., because its failure would have threatened Goldman Sachs, where he spent his entire career. In August, The New York Times reported that Paulson had sought, and received from Treasury lawyers, permission to talk with Lloyd Blankfein, his successor as Goldman’s C.E.O., and ultimately spoke with him 24 times in the six days following the A.I.G. crisis. In Paulson’s conversations with me, many casual references gave the impression of a man continually on the phone with players on Wall Street, and at one point he singled out Blankfein (along with Ben Bernanke) as someone “at a different intellect level than some of the rest of us.” It would be natural enough for Paulson to talk with a trusted former colleague about such momentous events, and Paulson’s aides have insisted that he showed Goldman no special favors. No evidence to the contrary has ever emerged, but Paulson’s harshest critics have focused their attention on Goldman’s ties to A.I.G. Paulson has taken pains to note—most recently in congressional testimony this summer—that he himself didn’t fashion the A.I.G. deal. As he told me right after the A.I.G. bailout, “Much of what has been done hasn’t been done with any power we had at Treasury. It’s been done with the Fed. I’ve been a good team player. I’ve given them advice. I’ve been willing to take the hits for things that weren’t done with my authorities.” The truth is, coordination among all the relevant parties—Ben Bernanke, Tim Geithner, financiers outside government—was intense throughout the crisis. In addition to countless phone calls, Paulson said he and Bernanke had lunch once a week. Sometimes, Paulson said, he spoke to Geith ner “every hour.” In this environment of mutual consultation, even the principals sometimes seem to have trouble delineating their roles. Once, in explaining the purchase of Bear Stearns by J. P. Morgan, Paulson began, “So anyway, the deal was, we cut the deal—,” then corrected himself. “We didn’t cut the deal. Tim cut the deal.”
I'm sorry Henry, but your story doesn't ring true.
Have at it.
Comment