naked capitalism

At this point, the New York Times story reporting that Treasury Secretary Hank Paulson and Goldman chief Lloyd Blankfein spoke frequently during the crisis is close to a “dog bites man” news item. After Goldman was the only Wall Street player involved in the discussions of what to do about the rapidly unravelling AIG, and Goldman then turned out to be the biggest beneficiary of the dubious credit default swaps unwinding, any other cases of undue attentiveness to the needs of Paulson’s former firm are likely to pale. The amusing bit is that the public is looking for more signs of behind the scenes winks and nods, when what is in the open is so blatant that there really wasn’t much need to do things in a covert fashion. You already have a very steep yield curve, FDIC guaranteed debt, the Fed engineering massive liquidity facilities, which reduces the risks of holding the types of paper the Fed is targeting (the Fed is working mightily to keep interest rates in a certain range, which reduces the risk of loss), all hugely props to the industry that no one seems to think about too much.

The real issue here is that this is yet another sign of how much standards have shifted. One of the curbs on behavior, believe it or not, was having a sense of propriety. Even though Treasury secretaries often came from the financial services industry, they were supposed not to try to look too close to it. In fact, believe it or not, past Treasury secretaries weren’t terribly involved in the markets, in part because investment banks were not huge donors and more credit intermediation was done through traditional loans that actually stayed on banks’ books. The sea change occurred the Clinton Administration, when Wall Street saved the flagging president’s bacon by amping up contributions after the 1994 Congressoinal rout. Rubin, as newly-installed Treasury secretary, promptly undertook a wave of Wall Street friendly initiatives: a strong dollar policy, balancing the budget (which if you read the record, was done much more to appease bond vigilantes than out of more general economic concerns) and a questionable Mexican rescue, which again was more a rescue to US firms exposed to Mexico, over a Congressional veto to boot (Rubin raided the Exchange Stabilization Fund, a Depression vehicle to defend the dollar, if need be, without needing to make potentially disruptive special budget allocations).

Even though a sense of proprietary does not stop chicanery, it does curb it. Fewer people will take part, and those who do have to go to considerable lengths to disguise their actions, which increases the costs and time needed.

However, Morgenson does muster up an outrage that is sorely missing. Many of us have become jaded, and that is part of the problem. Consider this telling bit:

Before he became President George W. Bush’s Treasury secretary in 2006, Henry M. Paulson Jr. agreed to hold himself to a higher ethical standard than his predecessors..

But today, seven months after Mr. Paulson left office, questions are still being asked about his part in decisions last fall to prop up the teetering financial system with tens of billions of taxpayer dollars, including aid that directly benefited his former firm. Testifying on Capitol Hill last month, he was grilled about his relationship with Goldman.

“Is it possible that there’s so much conflict of interest here that all you folks don’t even realize that you’re helping people that you’re associated with?” Representative Cliff Stearns, Republican of Florida, asked Mr. Paulson at the July 16 hearing.

“I operated very consistently within the ethic guidelines I had as secretary of the Treasury,” Mr. Paulson responded, adding that he asked for an ethics waiver for his interactions with his old firm….

Mr. Paulson did not say when he received a waiver, but copies of two waivers he received — from the White House counsel’s office and the Treasury Department — show they were issued on the afternoon of Sept. 17, 2008.

Rep. Stearns’ comment is key. The standards have fallen so low that people can fool themselves about what is acceptable. And that is pronounced among Goldman employees, since the firm is a cult. Even though the industry is known for violating personal boundaries (a big cult habit) and keeping people in a closed community of the likeminded, Goldman does that one better, making a point of hiring people when they are young and malleable, having a strong sense of elitism and resultant belief that leaving the firm to work anywhere else would be an admission of personal failure, and making even more extreme demands than the norm. For instance, it is not uncommon for Goldman to ask staff members to reschedule weddings if they will conflict with a deal.

As a result, Goldmanite are particularly prone to “all animals are equal, but some are more equal than others” thinking, and of course, the “more equal” ones hail from Goldman. Recall the bizarre incident revealed in May, in which Steve Friedman, former co-chairman of Goldman and then chairman of the New York Fed, not only failed to recuse himself on Goldman’s application to become a bank holding company, but while waiting for a waiver of his newly-conflicted status, he then also bought Goldman shares! Friedman resigned over the scandal, and sent a peturbed-sounding letter, clearly indicating he did not get it. A conflict of interest is not a conflict of interest if Goldman is involved. But the NY Fed’s general counsel didn’t back down on the Friedman waiver, so in his little ethics bubble, he got reinforcement of his dubious position.

Morgenson does give the required caveats, but the record show Goldman had much better access. And lobbyists are paid fortunes to secure “access”:

It is common, of course, for regulators to be in contact with market participants to gather valuable industry intelligence, and financial regulators had to scramble very quickly last fall to address an unprecedented crisis. In those circumstances it would have been difficult for anyone to follow routine guidelines.

While Mr. Paulson spoke to many Wall Street executives during that period, he was in very frequent contact with Lloyd C. Blankfein, Goldman’s chief executive, according to a copy of Mr. Paulson’s calendars acquired by The New York Times through a Freedom of Information Act request.

During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives…

Ms. [Michele] Davis [a Paulson spokeswoman] also said that Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout.

But Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential.

And government ethics specialists say that the timing of Mr. Paulson’s waivers, and the circumstances surrounding it, are troubling.

“I think that when you have a person in a high government position who has been with one of the major financial institutions, things like this have to happen more publicly and they have to happen more in the normal course of business rather than privately, quietly and on the fly,” said Peter Bienstock, the former executive director of the New York State Commission on Government Integrity and a partner at the law firm of Cohen Hennessey Bienstock & Rabin.

And some observers were more critical:

“I think it’s clear he had a conflict of interest,” Mr. Stearns, the congressman, said in an interview. “He was covering himself with this waiver because he knew he had a conflict of interest with his telephone calls and with his actions. Even though he had no money in Goldman, he had a vested interest in Goldman’s success, in terms of his own reputation and historical perspective.”

And let us not lose sight of what was at stake:

Ms. Davis reiterated.. that Mr. Paulson’s involvement in the A.I.G. bailout was meant to forestall a collapse of the entire financial system and not to rescue any individual firms exposed to A.I.G., like Goldman. However, she said, federal officials were worried that both Goldman and Morgan Stanley were in danger themselves of failing later in the week and it was in that context that Mr. Paulson received a waiver.

“The waiver was in anticipation of a need to rescue Goldman Sachs,” Ms. Davis said, “not to bail out A.I.G.”

With all this talk of banks repaying TARP money, only a teeny portion of the subsidies they’ve received, too many people have lost sight of the real issue: these banks would have collapsed were it not for the generosity of the American taxpayer. And the real crime here, as Roger Ehrenberg, is that the Treasury Department, in a deal Paulson was deeply involved in, badly underpriced the TARP warrants. Do you think that was an accident? If so, I have a bridge I’d like to sell you.