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Hank Paulson Rewrites History Before Congress
Hank Paulson could not keep his story straight during his nonstop dissembling session before Congress. When asked why the government did not step in to avert a Lehman Brothers bankruptcy, Paulson said, "We were unable to find any buyer to come in and make the acquisition on an assisted basis or an unassisted basis."
That particular whopper stood out, and was quickly corrected. "Did Bank of America request your assistance to purchase Lehman?" asked Rep. Mike Quigley, D-Ill.
Paulson pivoted, but kept contradicting himself. "We went to Bank America repeatedly,' he said, "and Bank America asked each time for more assistance and we had the -- we had the private sector ready to fill the gap. But Bank America in my judgment was never serious about it, because each time they showed less interest. And it turns out they were interested in Merrill Lynch."
His story, involving repeated discussions about a transaction with government assistance, doesn't jive with his earlier version of events. "I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers," he said the day Lehman filed for bankruptcy. Ten months later, he claims, "If Tim Geithner, Ben Bernanke and Hank Paulson had found something legal we could have done to save Lehman, we would have."
Fortune reported a different story. BofA's CEO Ken Lewis said he would acquire Lehman so long as the government would take over $65 billion of troubled real estate loans off of Lehman's books. That was more than twice the $29 billion secured loan the Fed had made to JPMorgan as part of the Bear Stearns takeover, but the amount also reflected the subsequent deterioration in mortgage securities. When Bear Stearns was taken over in March 2008, the AAA tranche of the ABX index for subprime mortgage securities was still selling at close to par; by September 2008, its value had fallen by cose to 20%, and the lower-rated ABX tranches were trading at pennies on the dollar. So Paulson decided there would be no further discussions that involved a government-aided takeover of Lehman.
Barclays also tried to negotiate a deal to take over Lehman, which our government's unwillingness to help seemed to kill that effort. On Sunday, September 14, 2008, Britain's Financial Services Administration, "concluded based on the amount of diligence, the risk profile, and the lack of any assistance from the U.S. that they were not going to let it proceed." [Emphasis added.]
Later that same Sunday, the U.S. government announced that it would help out all investment banks except for Lehman:
First came a tantalizing ray of hope with the word that the Federal Reserve Board agreed to expand the collateral that investment banks could pledge to the Fed as part of both the Primary Dealer Credit Facility - the name given to the historic measure that allowed investment banks to borrow directly from the Fed window after the demise of Bear Stearns on March 16 - and the Term Securities Lending Facility, a $70 billion "collateralized borrowing facility" created on Sunday by banks to enhance liquidity in the marketplace.
When the Lehman executives started to hear on Sunday afternoon that these windows of emergency financing were opening up, they called the New York Fed to see if it were true. If the Fed allowed Lehman to pledge its shaky collateral to the discount window "we might get a reprieve," one Lehman banker said. But the Fed told Lehman, according to this Lehman banker, "'Yeah, we're doing that for everybody else but you. We're going to let you guys go.'"
Paulson's spin that, "it turns out they [Bank of America] were interested in Merrill Lynch," is, to put it charitably, disingenuous. The specter of a Lehman bankruptcy was the only reason that Merrill considered a BofA takeover. In his sworn testimony, Merrill CEO John Thain said that the only reason he initiated talks with Bank of America was because he was concerned that Merrill would face a liquidity crunch - not insolvency - following Lehman's collapse. Sources to The Financial Times claim that Thain only initiated calls to Lewis after Paulson, Thain's former boss at Goldman, gave "a stern talking to." Specifically, "These witnesses, who represented different parties in the talks, add that it was only after Mr. Thain returned from his one-on-one with Mr. Paulson, looking somewhat shaken, that he placed the call to Mr. Lewis."
Merrill's multibillion dollar losses, which prompted Ken Lewis to reconsider closing the merger, were also traceable to Paulson's bad faith tactics. The popular media narrative is that Merrill's losses suddenly became apparent in mid-December 2008, when Lewis contacted Paulson and Bernacke to say he wanted to back out of the deal. In fact, Merrill's budget plans had assumed that its mark-to-market losses would reverse before year-end. When it became clear that time was running out, Lewis realized that he could not go forward with the deal. As Lewis said in his deposed testimony, "We earlier on had more days on the month so that at least some of the marks would come back, but now we had not very many business days because Christmas was coming and all that. So we became concerned just of the acceleration of the losses."
When were those mark-to-market losses first become apparent? Mid-November, according to a Fed advisor, whose e-mail to Ben Bernacke said, " There are clear signs in the data we have that the deterioration at Merrill Lynch has been observably under way over the entire quarter, albeit picking up significantly around mid-November." Mid-November was when Paulson announced his about-face on using TARP to deal with the collapse in mortgage securities.
The credit market was thrown into turmoil by Henry Paulson's sudden changes to the $700bn Troubled Assets Relief Programme, announced late on Wednesday...'Paulson has really messed up everything. His news really couldn't have been worse for financials,' said a credit trader in New York yesterday...
If the banks were hard hit by the news, the indices that track distressed and mortgage related assets were cratered. "This has really not been good news for ABS and CMBS. It has sold off pretty fast," said a London credit trader yesterday. The triple-A portion of the ABX dipped below 37 yesterday, a level described by Citibank analysts as "truly shocking." "Banks count cost of Paulson's Tarp U-turn'," EuroWeek, November 14, 2008
Markit's ABX HE PENAAA 06-02 index of first lien subprime mortgages is a typical benchmark for valuing all sorts of mortgage investments similar to those held by Merrill.
Notice how the slope of the line becomes almost vertical by mid-November. The decline in value between November 3 and November 20 was 29%. This kind of precipitous free-fall, among the very safest tranches within this type of AAA-rated securities, was unprecedented. Declines of similar magnitudes were seen in all for types of mortgage securities, such as the CMBX index for commercial properties.
After November 20, benchmark prices started shooting upward, reflecting an unprecedented level of price volatility. Nobody felt very confident about measuring the true economic value of these mortgage instruments, and BofA was apparently hoping for a year-end price recovery.
The fallout of Paulson's two disastrous decisions -- to let Lehman fail and reverse his position on foreclosure relief -- prompted the former Treasury Secretary to abuse his powers further, with some not-so-veiled threats. He threatened Lewis, telling him not to back out of the Merrill deal, not to renegotiate the terms, and not to disclose the problems until after the deal closed. Paulson concealed the situation from the SEC, the Office of Currency Control and the TARP Oversight Panel. After the fact, Paulson tried to place the blame on the Fed. In his prepared statement, Paulson writes:
Some have suggested that there was something inappropriate about my conversation of December 21st with Mr. Lewis in which I mentioned the possibility that the Federal Reserve could remove management and the board of Bank of America if the bank invoked the MAC [material adverse change] clause.
Except no one at the Fed recalls ever suggesting any such thing. When Rep. Dan Burton, R-Ind., challenged him, Paulson explained, "I do not know whether someone in those conversations or calls expressly said it or if my understanding came from just the tone and the forcefulness." The exchange below is typical of how congressmen struggled to get a straight answer out of the former treasury secretary:
BURTON: First of all, I asked Mr. Bernanke if he talked to you about telling Mr. Lewis if they used the MAC clause, that they were going to be fired. And he said he didn't give you any instruction or say anything to you about that.
And yet when you spoke, you said that -- in -- in your testimony, you said you were confident that that was a strong opinion of the Federal Reserve. How did you know that?I mean, there must have been some communication. How did you know that -- that you were confident that was their position?
PAULSON: Well, I -- I would say two things they are. First of all, you're right that I do not remember been Bernanke ever suggesting to me that the Fed...
BURTON: You don't remember.
PAULSON: The -- the...
BURTON: You know, Mr. Bernanke said the same thing. He said he didn't remember.
PAULSON: But -- but what I -- what I do -- so you asked where I came away with that -- with that view.
BURTON: Yes.
PAULSON: And I participated in a number of meetings and calls where Chairman Bernanke participated. There were lawyers from the Fed, staff members from the Fed, people from Treasury. And I came away from that -- those calls -- with that understanding.
BURTON: Well, who's -- wait a minute. Wait. You came away from that, from those phone calls...
PAULSON: Let me just -- let me just...
BURTON: Well, no, listen. Just a second. If you came away from that -- from those phone calls -- somebody must have said, "Hey, we can't let them do this."
PAULSON: Well, I just...
BURTON: And I would suggest that it might have been Mr. Bernanke.
PAULSON: Well, what -- what I would say to you -- I do not know whether someone in those conversations or calls expressly said it or if my understanding came from just the tone and the forcefulness.
BURTON: You know, you're a very smart man. I don't think anybody's buying what you're saying right now. I mean, you -- you guys were on a phone call. There was a number of conversations and e- mails, and you're saying that you didn't get any -- any suggestion from Mr. Bernanke that -- that he wanted you to let them know they were going to be fired, if they didn't do what you said.
PAULSON: I -- I said I clearly came away with the understanding that this committee has, which was substantiated by the e-mails that have been released and some of the other things, that that was the view of the Fed. But I -- I also don't remember Ben Bernanke ever -- ever talking about that possibility with me.
BURTON: It's interesting that both you and Mr. Bernanke can't remember.
Except there were no e-mails from the Fed backing up Paulson's story, which cannot withstand close scrutiny.
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I can't believe Larry Kudlow defended Pauson on the Kudlow report last Thursday. He said Paulson should be given an award for saving the economy. He included Bush in his praise for Paulson
I don't think this article is really fair. Sure they really dropped the ball by not bailing Lehman out but you have to remember there is more that goes that decision that just what's the best economic course of action. After all we live in a democracy and we are a nation of laws the US government can't just go around doing whatever they want whenever they want. It's not in the best interest of the government to bail out big banks cause there is so much political backlash. I believe they let Lehman go because they didn't want to back them with taxpayer money. It wasn't until they realized the world was about to end that they started throwing money at the banking system.
"Inspector general overseeing the financial bailout says the government's maximum exposure to financial institutions since 2007 could total nearly $24 trillion."
Where were our federal financial regulators (Federal Reserve Board, SEC, Treasury Department) from circa 2005 until October 2008? Why were they allowing the toxic financial instruments to be traded and to be owned by our financial institutions?
Paulson is guilty of robbery and blackmail. He needs to be arrested now, along with the rest of the republican mafia.
From Europe, we are amazed that this guy is not in prison.
Will you EVER get balls and truth?
Let's see...since Obama's economic team consists of Geithner, Rubin and Summers...I'm gonna have to say never.
Paulson and the rest of GS alumni need to be kept as far away from American tax payer money as time and space will allow.
..
Lies on top of LIES holding the truth underwater till it DROWNS.
Repeat the LIE enough and it becomes the truth.
What is TRUTH, except the excuse for a LIE?
Goldmann destroyed its bitter enemy Lehman, with the force of the American government.
Capitalism. HA.
.
The only thing Paulson did right was allowing Lehman to fail.
There is no evidence whatsoever that this was a bad decision.
except for the disastrous cascading effect outlined in the article above ... geez
Congress isn't going to do a damn thing about it either.
this man is a real reason for the return of public hangings. think of the good it would do for the mental health of the american people.....................
As much as I sympathize, don't even joke about stuff like that.
If there is one thing this whole insanity has taught me, is that we have to be better than them. We can't let ourselves react in the same kind of selfish way that they have.
Personally, I feel sorry for Paulson, et al. They are so blinded by greed and self interest that they allowed a great opportunity to help the masses slip past their fingers.
We are having a hard time finding a ex-GOLDMAN employee who tells the truth!
No we hear they have wrangled a new rule to prevent anyone tracking their automated trades!
A fumbling liar. Hmmm, that's impressive. The best and brightest?!!
Our economic overlords use labyrinthine jargon and what appear to be rigorous mathematical analyses. Which usually keep the rest of us from concluding the words and numbers may not refer to anything real. And from thinking about an inherent contradiction:
Economics is considered to be the most rational of the social sciences. Economic theory says that the only motivator is the utility function, maximizing one's economic position. But science is supposed to be about the acquisition of knowledge for its own sake. If economists are scientists, then the theory is wrong, since there is another motivator other than the utility function. If it's claimed that the utility function holds, then their science is suspect, especially when economists are among those most rewarded by their own theoretical assumptions.
If the foundations and the assumptions based on them are questionable, then the common approach of adjustments to theory amounts to complex Ptolemaic epicycles of the kind used to keep the heliocentric theory going. But eventually the bloated theory will show its absurdity.
I like your point that the utility function is the only motivator as that is far to simple in our World with major environmental problems.
D0 you mean the absurdity of Economics has NOT yet been shown after nearly 100 years of FED Failures? They call themselves the CHIEF Economists!
Many blame the FED for the First Depression and Greenspan has to be a central cause of this one with Bernanke a major contributor and manipulator.
Audit the FED!
Paulson's tombstone will read that he is the man who tried to shake down Congress for a 700 billion dollar blank check with no oversight.... Worse than Bush himself.
Bush's wars cost a lot more. He killed people too.
"Cannot withstand close scrutiny."
Read this article: "Ron Paul vs. Bernanke". It is well documented. illustrated with fun picture and video and accompanied with relevant quotes:
"I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan.
Most of my arguments will not be new to the policy board and staff of the BOJ, which of course has discussed these questions extensively.
However, their responses, when not confused or inconsistent, have generally relied on various technical or legal objections—- objections which, I will argue, could be overcome if the will to do so existed."
Prof. Benjamin Shalom Bernanke
Japanese Monetary Policy: A Case of Self-Induced Paralysis?
For presentation at the ASSA meetings, Boston MA,
January 9, 2000.
"Plea for a New World Economic Order."
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