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

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.

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

Although it is inevitable that a former Wall Street chief executive will be treated with suspicion by politicians and ordinary citizens coming to terms with the consequences of a financial crisis, less apparent was the extent to which Paulson had also, by September, already lost the respect of many of his natural constituents in the financial world.

To them, he was the chief representative of an administration that, having been slow to grasp the seriousness of the crisis in the first place, was now shouting panic and producing incoherent plans.

John Taylor, chief investment officer at FX Concepts, was moved on September 18 to inform investors in the firm’s currency funds of his lack of faith in Paulson, Bernanke and the authorities: “Up until the last few weeks they have always described this as a ‘sub-prime’ crisis, something that concerned only a few poor and financially sloppy families who had overstretched their budget, but it was never anything of the sort, not from its first days. It was and is a crisis of leverage among financial institutions.”

Taylor distrusted the media’s representation, in the days following the Bear Stearns rescue, of Paulson and Bernanke as the new committee to save the world. It reminded him of the early glamorizing of Donald Rumsfeld and the Iraq war team. And this economic war seemed to be following a similar path to the one in Iraq: great early successes but getting bogged down in repeated and escalating problems.

Paulson’s own credibility was stretched by the apparent lurches in policy as he and Bernanke dealt with a series of crises at individual firms.

Did they save Bear when they should have let it go, nationalize the GSEs when they didn’t have to, let Lehman go when they should have propped it up?

Although it is unfair to attribute to Paulson or Bernanke any primary responsibility at all for the unholy mess the financial system had created, their inconsistent handling of the growing number of crises at individual firms at least partly contributed to the sense of panic that gripped the money markets as first Lehman and then AIG collapsed.

As Charles Dumas, a director of Lombard Street Research, eloquently puts it: “Paulson and Bernanke had six months after the crisis struck to prepare for Bear Stearns, for which the Lehman solution was the right one. They were not ready. They then had another six months to get ready for the next round of crises. They were still not ready, and tried to distract attention by holding a gun to the head of Congress. They have been bouncing off the walls for 15 months, and the world is going to pay a huge price.” 

Why Hank Paulson has failed as Treasury secretary

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: Surely as a former investment banker, let alone Treasury secretary, you could 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?

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