Panning Paulson’s Performance

Richard Lehmann Publisher, Forbes/Lehmann Income Securities Investor

Richard Lehmann, publisher of Forbes/Lehmann Income Securities Investor, says the former Treasury secretary and Fed chairman Ben Bernanke made some bad decisions.

“On the Brink—Inside the Race to Stop the Collapse of the Global Financial System” is [former] Treasury Secretary Henry M. Paulson’s book of the financial crisis and how it was handled during his administration. It should be a road map for future leaders on how to handle a major financial crisis. It proves to be, however, a case study in just the opposite.

One gets the distinct impression that our leadership in this crisis suffered the same blindness as the Federal Reserve and Treasury leaders of 1929, and this from Ben Bernanke, a student of the Great Depression.

What comes through here is that Paulson and Bernanke where in a unique situation in that a crisis was at hand for which no one in the political arena really [had] a clue and feared getting blamed. Hence, they had carte blanche to experiment with previously untried solutions. The problem was, they, too, proved to be clueless.

What is missing in Paulson’s description of the major decisions taken is why a particular alternative was chosen when hindsight tells us that another alternative would probably have been better. For example, the decisions to pump over $100 billion into AIG to meet collateral calls arising from a credit rating downgrade.

Had Treasury or the Fed simply provided a guarantee to AIG creditors for these obligations, no money would have been needed. Also, we are now told the government will lose some $30 billion on this bailout while the company’s stock trades at $28 instead of for pennies. Obviously, someone screwed up in designing this bailout.

Given that Goldman Sachs, [of] which Paulson was [previously the chief executive officer], was a major recipient of this AIG largess, it gave rise to a lot of suspicion which this book does nothing to assuage.

Paulson goes into detail about the various financial mergers which were facilitated for failed institutions; then they ended up putting billions of dollars of capital into the deals and providing billions more in loan guarantees. As a result, the top ten financial institutions in the US now hold 60% of all financial assets, up from just 10% in 1990.

Wouldn’t it have been better to pump the same subsidies into the failing entities and let them work themselves out of their problems? Shouldn’t that have at least been considered given that you have now created behemoth institutions that truly are too big to fail?

As it turned out, the whole TARP program mutated into a capital injection program rather than the mortgage purchase program that was sold to Congress.

The overall impression of Paulson’s stewardship of the financial crisis is that he was almost always behind the curve of events. Hence, his policies and actions were fire fights which left consequences which have still to play out.

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