"Treasury's Paulson: Super Hank To the Rescue?"
For those who know Paulson primarily as Secretary of the Treasury, his request for a blank check from Congress with which to bailout financial firms appears to be the Herculean act of a masterful financier operating at the height of his powers.
Truly, Paulson’s latest has all the hallmarks of a masterpiece. It is his 9th Symphony, his King Lear: the final act in a long and illustrious career spanning four decades at the top of business and politics.
However, for anyone familiar with the details of Paulson’s past, this latest episode is just another chapter in a life rife with cronyism, corruption, centralism, and “above the law” thinking. It is indeed a masterpiece, much in the same way that the atom bomb is a masterpiece—a horrific creation whose damage is irreparable. But before we go into the details of Paulson’s latest and greatest, let’s take a trip down memory lane.
Paulson’s flirtation with the idea that governments can do whatever they please began when he was in his 30s working as assistant to John Erlichman, the chief architect of the Watergate Scandal. Having gotten a taste of politics, Paulson then shifted into the private sector where he learned the art of making a deal while someone else picks up the tab at Goldman Sachs.
Investment banking as an industry runs almost completely contrary to wealth creation since it thrives on fees rather that capital appreciation. It’s one of the few industries on the planet in which you can get rich by creating debt for others to pay off. Paulson excelled in this environment working his way up to Goldman CEO in 1999. By the time he retired in 2006 he was worth well north of $600 million.
However, it was during his reign as Secretary of the Treasury that Paulson truly achieved greatness. His ability to say one thing and mean another was invaluable when it was time to convince Americans that the dollar was strong while simultaneously persuading Asians—mainly China and Japan—to fund the US’s lavish lifestyle. Under Paulson’s tenure the dollar lost 16% of its value. That’s quite an accomplishment for someone who’s only been on the job for two years. But then again, Hammer Hank did have help from his buddy Bailout Ben when it came to the dollar’s destruction.
So to see Paulson approach Congress to ask for a blank check to aid his Wall Street buddies—including Fannie Mae (FNM) which was previously run by James Johnson, the guy who decided Paulson’s compensation at Goldman Sachs—is to see a man combining all of his talents—dealmaking at other’s expense, cronyism, and putting oneself above the law—in the deal of the century. The fact that he wants you and I to bankroll it is just the icing on the cake.
Setting aside the fact that a blank check would mean massive amounts of monetary stimulus in an already highly inflationary environment, it’s not clear to me how the US could even pick up the tab for Fannie Mae and Freddie Mac’s (FRE) $5 trillion mortgage portfolio, let alone the $170+ trillion worth of derivatives sitting on other financial institutions’ balance sheets. This would essentially render the US insolvent. Small wonder that investors have been betting on the US defaulting on its debt in record numbers.
The SEC and federal regulators already gave financial firms a blank check. And they did it more than a decade ago when they decided to ignore the explosive growth of structured investment vehicles, over the counter derivatives, and other financial instruments. Assuming Wall Street and financial firms can regulate themselves during a credit bubble is like assuming frat boys will drink responsibly when there’s an unlimited supply of booze.
Now that Wall Street is trying to cash that blank check, we’re watching the entire financial system teeter on the brink of a fullscale meltdown. And Hank Paulson’s solution is to write another blank check, this time to the mortgage lenders who threw lending standards out the window and created the biggest housing bubble in the history of this country!?!?
Someone get the kryptonite quick, Super Hank’s out of control."
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