Why Hank Paulson has failed as Treasury secretary

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As Hank Paulson seeks to resubmit his action plan to save the US financial system, Euromoney considers whether he was ever the right man for the job, asks the questions that he desperately needs to answer, and analyses the mistakes he has made which mean, whether his bill is eventually passed or not, he has failed as Treasury secretary. By Clive Horwood and Peter Lee.

The last master of the Universe

Paulson demanded unprecedented power, but his track record did not warrant it

Why the Treasury and the Fed's previous actions failed

Paulson's Tarp was not his first half-baked plan

The SEC's restrictions on selling were beyond a joke

The lack of detail that helped scupper the Treasury bail-out

How Paulson failed to grasp the political, rather than market, imperative

When Hank Paulson stood on the lawn of the White House on September 29, just hours after the US House of Representatives had failed to pass his proposal to rescue the US banking system, it was almost too painful to watch.

Here was one of the former titans of Wall Street, the most powerful man in international finance, at his wit’s end: drawn, haggard, desperate – seemingly almost on the point of collapse, just like the global economy he was trying to save.

Less than 24 hours earlier, the deep bags under his eyes telling of days huddled in Washington meeting rooms steeped in history, he had thought that the pleading, the plea-bargaining and the planning had been worthwhile. Congressional leaders had agreed to his plan, albeit having extracted numerous caveats. The worst, surely, was over.

Now, in the Rose Garden, he was still fighting, but was diminished. How could he not be? A lame-duck president with no authority over his own party, let alone the country, had just offered a few glib words from the Oval office about the need for action. We’d heard it all before, in many different contexts.

It was left to Paulson to answer the baying hounds of the press pack. He was on his own; with no White House spin doctor at his side to manage the process, he leant forward, squinted, strained to hear the questions, and was reduced to repeating: “We need a plan that works.”

It wasn’t supposed to be like this. When Paulson became Treasury secretary in 2006,  he was the latest star in the long-running series “Mr Goldman goes to Washington”. Having reached the pinnacle of the highest peak in investment banking, and earned the fortune that goes with it, here was a chance, in that very Goldmanesque way, to give something back.

For a lifelong Republican, and professed fan of George W Bush, a two-year stint in public service for a commander-in-chief who could not seek re-election was the perfect end to a glittering career. The economy was set fair. Wall Street was about to have its most profitable years in history. The Chinese had bought a little too much US treasury stock for most people’s tastes but hey, this was all part of the new global economy – and how could the US maintain the moral high ground and lecture others on free markets if they kicked up a fuss about this?

Paulson felt on strong ground here. He could speak to the Chinese. His familiarity with the country's political and business elite, honed through senior partner at Goldman Sachs, would stand him in good stead during his short tenure at the Treasury, distinguishing him as a model leader of US interests in the new world economic order. He would enjoy continuing his travels there. This could be fun.

Fast forward two years and Paulson had the task of a lifetime. He had a plan. He knew what he was talking about. He understood the systems and processes that had caused the greatest financial mess since the Great Depression. He told the people: Trust me, I can take the weight of the world on my shoulders and save you. He was clearly the man for the job.

But the tragedy of Hank Paulson is that he never was; never really could be. For every box he checks, the negatives more than balance him out. Here is a man inextricably bound up in the excesses that Wall Street had created. To Main Street, as typified by the members of the House of Representatives, he was one of them, not one of us. For every discussion around the table about executive pay, he was the guy who had earned about $35 million in 2005; and been forced to divest his Goldman stock at the top of the market for about $500 million, free of capital gains tax, when he joined the Treasury. For every time he told Congress that bailing out the banks was the only solution, Congress barked back on behalf of the people – let’s bail out the homeowners and secure the taxpayers.

For all the pros and cons of the plan, and the fact that Hank Paulson was the right man in the right place at the right time, the sad reality was this: he was the wrong man for the job.

And to complete the tragedy this supposed insider, this Wall Street icon, was the man who had presided over the end of the independent investment banks with which his doubters so closely associated him. It was more than the end of an era; here was Hank Paulson, the last master of the universe.

The mistakes that will haunt him

At the time of writing all was not lost for Paulson, or his plan – it was about to be resubmitted to Congress in a new format, although no one quite knew what the revisions would be. But the Treasury secretary’s authority had been all but wiped out. It would now surely be up to others to reach agreement and drive a plan through. In mid September, Barack Obama had even made noises about retaining the Republican Treasury secretary to help in the early stages of a Democratic administration in 2009. That plan will no doubt now be quietly dropped.

This loss of authority, not just of Paulson but also of his main partners – Ben Bernanke of the Federal Reserve and Christopher Cox of the SEC – did not happen overnight, however.

At every step of the way, at each turning of the screw in the crisis, the response of the three key US regulators has been at best confused, often conflicted, and at times downright destructive.

By the time Paulson & Co had to assert their will, through their supposed superior knowledge and the influence their position bestowed on them, the doubts were simply too great.

Paulson now has a maximum of three months to do his best to shore up a financial system weighed down by the sense of panic he himself and president Bush have engendered by insisting that financial system failure and economic depression must ensue if their so-called plan for a bail-out was not enacted.

What is no longer in any doubt is that the next US administration will have a lot of work left to do.

There are some lessons senators McCain and Obama, whoever their respective choices for the next Treasury secretary might be, and financial regulators and politicians around the world might like to consider, and some unanswered questions that secretary Paulson will no doubt rue in his retirement. 

Q: If you know so much, why didn’t you see the crisis coming?

Q: Every time you’ve spent money, you’ve said it would solve the problem. What’s different this time?

Q: If you’re going to cook up a plan, why not make sure it isn’t half-baked?

Q: As a former investment banker, couldn't you have told SEC chairman Cox how ridiculous his short-selling restrictions were?

Q: Why was the bail out plan as originally presented so desperately short on detail?

Q: Did you forget that the negotiations were about politics as much as they were about saving the banking system?



Other options to the Paulson bail-out plan 
Despite approval from the US Senate yesterday, it's not too late to enact a better plan than the one the Treasury has put on the table. Peter Lee looks at alternative strategies that might prove sharper than Paulson's bailout plan. 

Alternative strategies
  • Take equity stakes in the banks
  • Change the accounting rules and suspend mark to market
  • Forgive a portion of the underlying debt
  • Do nothing.





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