“I operated very consistently within the ethics guidelines I had” – Henry Paulson

Nothing I have ever read about Henry Paulson suggests he would be the kind of guy I would want to have a beer with. In fact the same can be said for nearly all of the high ranking Goldman sachs men who have found their way into “Public Service”. As it turns out I don’t go out for beers with my buddies all that often, but it seems this is the way to get across to the general public how one feels about a public figure. In the elections of G.W. Bush both times he was well ahead of his opponents on the “have a beer with” metric, and Mr. Obama chose to mediate his recent meeting with the Professor and the Policeman over a couple of brewski’s.

My impression of Mr. Paulson is that of an ambush killer, and a cutthroat guy you’d turn your back on at extreme risk. It seems the culture at Goldman forces the guys who make it to the top to have these qualities. Reading Charles Gasparino’s account of the Richard Grasso affair in his book “Blood on the Street” re-affirmed these feelings. As more and more information comes out regarding the whole of our current economic crisis nothing I have read, and none of his public statements lead me to conclude anything else.

Recent articles in both the blogosphere and mainstream media have called into question Mr. Paulsons ethics and actions and implied his conflicts of interest may have been a motive for his actions preceding and during the crisis. My inclination is to believe this to be the case so take the following as influenced by that bias.

Some facts:

Mr Paulson was Assistant Secretary of Defense during the Nixon Administration (1970-72), and left that position to serve as assistant to John Ehrlichman during the events of the Watergate scandal (1972-73)

He joined Goldman right after that in 1974 and became partner in 1982, managing partner in 1988, Co-Head of Investment banking in 1990, COO in 1994, and CEO in 1998. He Resigned from Goldman in 2005

He became Secretary of the Treasury in may of 2006.

In 2004, at the request of the major Wall Street investment houses—including Goldman, then headed by Paulson—the SEC agreed unanimously to release the major investment houses from the net capital rule, the requirement that their brokerages hold reserve capital that limited their leverage and risk exposure

In August 2007, Secretary Paulson explained that U.S. subprime mortgage fallout remained largely contained due to the strongest global economy in decade

On Friday March 14, 2008 Bear Stearns corp CEO Alan Schwartz was told by Mr. Paulson and Mr. Bernanke that he had to sell the firm by the opening of the asian markets the following monday. J.P. Morgan merged the firm into itself for $2/share (later changed to $10/sh)

On July 20, 2008, after the failure of IndyMac bank, Paulson reassured the public by saying, “it’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”

On August 10, 2008, Secretary Paulson told NBC’s Meet the Press that he had no plans to inject any capital into Fannie mae and Freddie Mac. On September 7, 2008, both Fannie Mae and Freddie Mac went into conservatorship.

Lehman brothers filed for Chapter 11 bankruptcy on Monday September 15th 2008
Now up to this point Mr Paulson was confident and upbeat in his public statements. He also was fine with, and in fact orchestrated to a great deal the demise of two of Goldmans primary competition. No talks of bailouts or stimulus plans were being discussed publicly.

Now we come to the sequence of events that gives me pause.

On Sept 12th Goldman stock closed at 154.21. Over the course of the next two trading days the market was unbelievably jittery and by the 17th the S&P had lost a couple hundred points and GS was at 114.50. Talk all over the street was Armageddon. On Sept 18th GS opened at 106 and by 11am was at 86.31 (a 5yr+ low). It was reported by CNBC (Gasparino) that Mr. Paulson had left Treasury and was heading to a meeting with Mr. Bernanke and members of congress at Speaker Pelosi’s office. It was assumed to be to discuss an economic stimulus package of mammoth proportions, GS went up to 120 before settling to close at 108.

Apparently Mr. Paulson was fine with letting his former competitors to swing on the economic gallows but was in full Battle mode when his alma mater was being fitted for a hood and noose. Does this constitute a conflict of interest? In and of itself, no. The market as a whole was going down the tubes that day and he could certainly make the case that that was his motivation.

Evidence:

Mr Paulson who had previously not supported any direct bailouts of individual companies was an architect of the AIG bailout. It can be argued that the number one beneficiary of this was not even AIG itself but Goldman Sachs.

On Sept 17th 2008 Mr Paulson was granted a waiver from the ethics ban on contacting his former firm (Attributed to Reuters in the Washington Post today ) but also in the article linked is a report based on a Freedom of Information Act request showing Mr. Paulson spoke to Mr. Blankfein (Goldman CEO Lloyd Blankfein) prior to being granted the waiver, and even more times to John Mack (CEO of Morgan Stanley and to whom the ethics ban would have also applied at the time).

Mr. Paulsons actions in the Bank of America incident also call into question his ethics. A disturbing allegation is the one that Paulson largely confirmed at the hearing that he, and possibly others including Federal Reserve Chairman Ben Bernanke, pressured Bank of America CEO to deceive BofA shareholders and not report the extent of losses at Merrill Lynch at the time BofA was attempting to acquire it. According to testimony before New York state Attorney General Andrew Cuomo, Lewis was seriously considering backing out of the deal, under a “Material Adverse Change”clause in the merger agreement, because of bigger losses than predicted on Merrill’s balance sheet. According to Lewis, Paulson said, “we would remove the board and management” if BofA did so. So Lewis and the BofA board backed down.

Republican Congressman Cliff Stearns, during Mr. Paulsons recent testimony before congress, attacked Mr. Paulson for a “Bait and switch” when he used the original bailout not to purchase toxic debt but to bail out financial institutions. Here’s a quote from Congressman Stearns “You came here and you said this two and a half page bill that you wanted $750 billion dollars, then immediately after you got approval from Congress you changed it, you baited us and you switched it, and then you started giving money to these institutions”. During earlier congressional testimony Mr. Paulson had stated “that there would be martial law, civil unrest and even food riots if they did not pass the bailout bill”. ( Here’s a link to an article from Prison planet)

Remember, Mr. Paulson’s initial plan for $750 billion included giving himself unparalleled power and nearly total control of the funds. That alone is fascinating, so astonishingly brash as to raise eyebrows.

Conclusion:

While none of these, nor in fact all of these things in total, are proof of a conflict of interest, or compromised ethics, I believe they are enough to warrant a congressional investigation and or proceedings by the Department of Justice into Mr. Paulson’s actions. I also believe some of the information coming to light now puts the veracity of Mr. Paulson’s sworn testimony before Congress in doubt and warrants investigation into potential charges of perjury or contempt.

Calls to Mr. Paulson to discuss this matter over a couple of Stella Artois were not returned.

Aiki14


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