Paulson's Conflicts Of Interest Spark Concern

As the financial markets took a turn for the worse over the past few weeks, conventional wisdom on Wall Street and Washington was that Hank Paulson, the Treasury Secretary, was the right man for the difficult job. A seasoned hand on financial matters, the former Goldman Sachs head had an acute understanding about how markets work, and had earned accolades from both political parties for his willingness to take a level-headed approach on these matters.

Now, however, confidence in Paulson is eroding, with critics questioning whether the Treasury Secretary's Wall Street connections have impacted his approach to the current crisis. Both progressive and conservatives and sounding the alarm.

"Some are saying that we should simply trust Mr. Paulson, because he's a smart guy who knows what he's doing," wrote Paul Krugman of the New York Times. "But that's only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half -- a period during which Mr. Paulson repeatedly declared the financial crisis 'contained,' and then offered a series of unsuccessful fixes -- justifies the belief that he knows what he's doing? He's making it up as he goes along, just like the rest of us."

Then there was conservative pundit Michelle Malkin, hardly of the same ideological ilk of Krugman, who declared on Fox News: "I think that Hank Paulson's corporate...record is very important. While he was a Goldman Sachs, the company was buying up a lot of Chinese banks in particular, and at the time of his nomination, there were very serious questions raised about the conflicts of interest involved, and where his priorities are, and who he really is looking after."

Malkin was referencing the stipulation, in Paulson's bailout plan, for the U.S. Treasury to help prop up some foreign banks. But the main thrust of her point -- that Paulson's past mattered -- was echoed among economists, analysts, and lawmakers throughout Monday. Some of Paulson's former associates and colleagues are the very people he now is in position to help aide with taxpayer dollars. As McClatchy News reported, "Paulson's former assistant secretary, Robert Steel, left in July to become head of Wachovia, the bank based in Charlotte, N.C., that has hundreds of millions of troubled mortgage loans on its books."

Moreover, as Bloomberg News reported: "Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid..."

On Monday, Oregon Democratic Rep. Peter DeFazio put a voice to this concern, warning House colleagues against being "rolled by a Wall Street executive who is masquerading as the secretary of the Treasury."

There is a certain irony to a former head of a major investment firm now being tasked with reforming the very system that made him so wealthy. Goldman, while never a huge player in the mortgage bond industry, nevertheless reported pre-tax earning of more than $6.2 billion in its trading division - which included such bonds - in 2005. Similarly, under lax federal oversight, Goldman's investment banking division had pre-tax earnings of $413 million during that same year, according to an annual report.

Story continues below

advertisement

Having been steeped in this environment, observers argue, Paulson is seeking to tackle the current crisis from too narrow an angle; in essence, ignoring the cause (the failing housing market) in favor of the symptom (the crisis among investment banks).

"He does have potential personal conflicts of interest - not only regarding his associates, and his next finance position, but also the fact that part of his wealth almost certainly is in a blind trust that includes large holdings in Goldman Sachs and other funds," said Robert Shapiro, president of Sonecon and the undersecretary of commerce in the Clinton White House. "But even if Paulson is unaffected by such issues - and he may be, I just don't know - the more important issue is whether his former and future positions create a distorting prism for the bailout design. This crisis is ultimately driven by the falling housing market, and we will not finally get past it until the housing market stabilizes, which is why almost all economists say we're probably only halfway through this crisis. Yet, instead of trying to stop mortgage foreclosures and stabilize the housing market with loans to homeowners facing foreclosure, a Treasury headed by one of this period's leading investment bankers focuses only on loans and other bailouts for institutions that borrowed huge amounts to invest recklessly in the securities and derivatives based on those mortgages."

Economists have additional concerns with Paulson's approach, also related to the secretary's background. In his last report at Goldman Sachs, Paulson received a compensation package of $38 million. And while he was reportedly instrumental in decreasing the size of the former New York Stock Exchange head Richard Grasso's golden parachute in 2001, others see him now as too willing to protect the earnings of the big-time CEOs in the current bailout proposal.

Then there is the issue of transparency and judgment. "I would borrow directly from Ronald Reagan, trust but verify," said James Galbraith, a professor of economics at the University of Texas, when asked about Paulson. "The guy is clearly competent. He has worked with Democratic leadership in the Congress very well. If this was John Snow still in the Treasury, there would be no question you couldn't do business. On the other hand, I wouldn't want to turn my back on him... This is a guy who thought he could weaken the SEC and even a couple of weeks ago, when he wanted advice on the risks with Fannie and Freddie, he went to Morgan Stanley."

To some extent, the political world is still grappling with how much responsibility Paulson deserves for the current crisis he has now been tasked with remedying. As it stands now, the Treasury Secretary still enjoys tremendous deference within the halls of power, with everyone from the Obama campaign to Michael Bloomberg and Mitt Romney expressing, at a minimum, basic confidence in his competency for the task. His past statements, specifically, his declaration six months ago that "our institutions, our banks and investment banks, are strong," is chalked up as a forgivable attempt to soothe public concern. And while backlash to his initially proposal for handling the financial crisis is growing on Capitol Hill, the consensus seems to be that - with the end of the Bush administration in site - criticism and vetting of Paulson won't be overtly intense.

"If this were to the end of Bush's first term and is going to be reelected, this stuff would matter more," said Steve Hayward of the conservative American Enterprise Institute. "But he is going to be gone in three months. It is the next Treasury Secretary who will be doing the deeds and overseeing the money."

Comments

[bossone]

Yola, thats what the Dems are doing now. The system must be bailed out. But not the way Pualsen wants it with no explanation or oversight. Whether you like it or not, and I don't , it has to be done. But make sure no CEO's get those "golden parchutes" like they thought, no way!

[standup2them]

I agree the system is sinking. But no way no how should the CEO's get a golden parachute.

[ebanks84]

http://www.c-span.org/Watch/C-SPAN3_wm.aspx

To continue watching the C-span coverage, click above. It is quite evident that the powers that be is trying to remove our attention from these procedures by allowing the president to intercede on every channel.

[dadw5boys]

WATCH C-SPAN and see Republcains make all kinds of false claims .

[LouisianaLiberal]

Dennis Kucinich has a plan that gives every man, woman and child shares in America. Therefore each American would own $2300 in shares. I don’t have all the details in the plan he brought to Congress yesterday, but I think he’s on to something. We should all check it out and start making some noise.

Chris Dodd has a plan that in addition to helping the banking industry, helps bail out Americans in or near foreclosure. This plan may be workable as well. What is needed here is a cooler head. As Arianna wrote yesterday http://www.huffingtonpost.com/arianna-huffington/the-bailout-plan-welcome_b_128450.htmll), this sounds eerily close to the way going to war with Iraq was presented to us. We had to act NOW. We would be in grave DANGER if we didn’t. I would also add that the underlying premise here is that we should not worry our little heads about this because we have big brains on the problem_and we can trust them. We should just get back to work_shopping.

These people are shameless and we should not allow a trillion dollars out the door unless we, the people, have a stake. Remember, these people have robbed OUR treasury already. We should not allow them to place us in further jeopardy with this risk without giving us a stake in our own futures.

[Sparty1]

Oh hell no!

[Morpheus008]

Please read Reggie Middleton BoomBust blog. He is spot on and exposes much the babble, accounting and other slights of hand that keeps the drunk financial men standing.
http://boombustblog.com/

[nastyvirus]

Did I mention the GOP would like to stop McCain, if it's not too much trouble? And can I have a pickle with that? Thanx.

[TrevorAlan]

Well, he IS a smart guy who knows what he is doing, THAT'S the problem.

He's getting his millionaire and billionaire buddies out of a fix that would have made them have to sell their second yacht at a loss and in return he knows he'll get some plum board chairmanships after his government work.

AND he is making sure the nation won't be able to afford universal health care, which would have just made the hoi-poloi too upity for those same billionaires anyway and jepordized the profits of another economic sector.

So that he's a smart guy was NEVER the question.

[spinns17]

and he is protecting the bottom line, for these companies.did i say he also ,owns stocks in these companies .lol

[schatsie]

heck I think Paulson should pay back his Goldman Sachs pension.....

[Lemeritus]

This is what I'm TOLD about Paulson:
1. He's already made his money and isn't motivated by greed.
2. He intimately understands Wall Street and, so, should be #1 with a bullet to make the bail-out work.
3. We can thank our lucky stars it's Paulson (not Snow or O'Neill) who's helming the Treasury in these dark times.

Here's what I feel (subjectively):
1. Greed knows no bounds.
2. He not only understands Wall Street, HE IS WALL STREET.
3. No one with a lick of integrity would work (or, it often seems, has worked) for Bush (okay, that REALLY subjective). It does not help that "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." That's bull from the get-go.

I think we're all agreed that the purpose of the plan should be to stabilize Wall Street, not reward it, and Paulson's resume raises serious questions. Further, we've had precious little success with oversight where provision was made for it -- I reject, on the face of it, codifying omnipotent powers for Paulson (or anyone else who might be tapped for the job).

[nastyvirus]

Like I said, the GOP and Neocongs will do anything in their power to stop McCain. He is a threat to their very existence, and he must be stopped. And if they could stop him, it would be a plus.

[HypnoToad]

Conflict of interests? You think? This administration has only been one huge conflict of interest. A conflict against the true interests of the citizens of our country. I am tired of the fox running the hen house. To prey upon us, our savings, our future at their own person whims and desires is just too much to be allowed to continue any more.

ENOUGH!

[studioh!]

Remove SECTION 8. This is a democracy, not the imperialist regime Bush hopes for.

[cultkicker]

Burn all the derivitives... not ONE PENNY to prop them up. There are over $100 TRILLION worth out there... maybe three or four times that... they should simply be null and void... PEROID.

[paixa3]

I do not understand by politically correct citizens refuse to think that you have an EVIL government and EVIL people on wall street. Gawd, your nievety is mind boggling.

[schatsie]

I don't think they are EVIL, JUST GREEDY... Take away the incentives and put the Income tax rate back up to 90% and no more PENSIONs, Benefits and Expenses for these jerks....

You do not want to know about all of the corporate jets and financed vacations....Remember Jack Welsh and the GE benefits that included his apartment in NYC... If I have to pay taxes, then they do too...

We need to get responsible so that the next generation is not sold down the river.. Jack Welch had 33 people reporting to him and 1 was black and none were women.

[deliriousgod]

he doesn't have to be dishonest be untrustworthy; George Bush thought that things were going well for the last eight years because everyone at his backyard BBQ parties is in the oil industry. The Congress has every right and responsibility to impose whatever they think protects the interests of the people they represent. But you can't assume that Paulson is going to do everything right for the American people; he wasn't elected and his interests are as narrow as his field of interest.