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Quelle Surprise! Hank Paulson and Goldman CEO Talked to Each Other a Lot!

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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.

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14 comments

  1. attempter

    “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….

    Yes..this is called "begging the question". He's either very flip or just doesn't get it.

    This whole circumstance – the complete abdication of any sense of propriety, shame, any sense of civic responsibility or the slightest sense that one should even pretend that one is part of a community, or that there should ever be the slightest restraint on psychopathic greed – is by now comepletely ingrained. It is existential.

    That's a core reason why it is impossible to "reform" this system. There can simply be nothing done so long as this cadre continues to exist in any postion of power and influence. They comprise an objective obstruction to the public interest, which no policy tweaking can remove, no "reasoning" or moralizing can mitigate.

    No half-measures will ever fix anything.

  2. David Habakkuk

    From the introduction to the 1996 edition of Robert Bellah et al, Habits of the Heart:

    "Among this powerful elite the crisis of civic membership is expressed in the loss of civic consciousness, of a sense of obligation to the rest of society, which leads to a secession from society into guarded, gated residential enclaves and ultra-modern offices, research centers, and universities. Its sense of a social covenant, of the idea that we are all members of the same body, is singularly weak.

    "What is even more disturbing about this knowledge/power elite than its secession from society is its predatory attitude towards the rest of society, its willingness to pursue its own interests without regard to anyone else. Lester Thurow has spoken of the difference between an establishment and an oligarchy. Japan, he argues, has an establishment, while much of Latin America suffers under an oligarchy. Both are privileged elites; the essential difference is that an establishment seeks its own good by working for the good of the whole society (noblesse oblige), whereas an oligarchy looks out for its own interests by exploiting the rest of society. Another way of putting it would be to say that an establishment has a strong sense of civic membership while an oligarchy lacks one. One of the principal differences has to do with taxation: an oligarchy taxes itself least; an establishment taxes itself most. In American history we have had establishments — most notably in the founding generation and the period after World War II — but we have also had oligarchies. It is not hard to see what we have today."

    Doubtless one could disagree with much of this, but it clear that some elites are far more predatory than others — and hardly foolish to see the decline in concern for propriety to which Yves refers as a symptom of the kind of 'crisis of civic membership'.

    What would be of interest would be to reflect further on why some elites are more predatory than others — and also on occasions when establishments turn into oligarchies, and oligarchies into establishments, and how these transitions are to be explained. In particular, if one thinks that Bellah's history is right, how does one explain the degeneration in U.S. elites since the period following the Second World War?

  3. rd

    I think we are seeing the corrosive effects of the growing income and wealth inequality. These "elite" groups that are shuttling back and forth between Wall Street, lobbying firms, and Washington public service have lost touch with most of the country at a similar level that we saw with Leona Helmsley. Back then, her "only little people pay taxes" was viewed as a somewhat humorous unusual punch line. Now the view that there are truly two sets of rules in general, not so much on taxes, is embedded in public policy.

    I believe that the Hank Paulsons and Lloyd Blankfeins really believe that what they are doing is for the good of the country becasue whatever is good for them and their friends must be good for the country. As a result, conflicts of interest will be few and far between because by definition there will be almost none. It is also difficult to understand why there would be an appearance of conflict of itnerest since what they are doing is for everyone's good.

    "Too big to fail" institutions need to look like Canadian banks in order to comabt much of this corrosiveness. If people want to become fabulously wealthy, they need to be a Thomas Edison or Henry Ford. In the financial sector, they should be a George Soros willing to put there own net worth in the line in a relatively small entity that can fail without too many people blinking. People who are effectively corporate bureaucrats in publicly owned companies should not be rewarded at the same level.

  4. moslof

    This moment in time will go down in the history of human progress. Real progress started to slow in the sixties, topped in the nineties, and the mood which is reflected in stock prices hit an all time high for arrogance/greed/complacency in 2000. Since we are talking about a cycle of hundreds of years the bear market periods of the last ten years have only been able to put deep cracks in the mood of society. From this point forward the cracks will open and everything will come undone. Nothing can stop it. Read Socionomics for more insight.

  5. Hugh

    It is always important to remember that at the very same time that Paulson and Blankfein were working to save AIG which Goldman had a firm ending exposure to. Paulson was letting Lehman go down the drain. If the idea was that saving AIG was needed to save the system, how is that saving Lehman was not?

    As I have said before, the untold story here is how the very same people who knew who had exposure to AIG, somehow did not know and did not ask who had exposure to Lehman.

    Remember too Paulson's infamous conference call to bankers which was taped and leaked. It is hard to imagine anyone being more biased in their favor. If this is the way he sounded with them, just think of how those conversations with Blankfein and his old firm would have gone.

    The capture of our government and Fed by Goldman goes on. Sure Friedman stepped down at the NY Fed but another Goldman alum Dudley took over Geithner's old post there. And Geithner demonstrated his own capture by making a Goldman alum his chief of staff. And is Neel Kashkari, Paulson's mini-me still at the TARP?

  6. Blissex

    «The capture of our government and Fed by Goldman goes on.»

    It is more the opposite: Cheney and Paulson started as Republican administration operatives, and then captured positions of high power in business.

    It is more that there is a largely hereditary oligarchy that moves indifferently between political and business roles, and uses political power to secure business positions, and business power to secure political positions.

    This has been happening in Great Britain for hundreds of years, where those who run the City and those who run the State were cousins, brothers, or the same person at different times.

  7. fresno dan

    Well, my opinion isn't worth much, but I think looking at this from an ethical point of view misses the boat – although it may be unethical.
    My real problem is that our treasury secretary (oops, I meant former secretary ….double oops, it doesn't matter)and the "investment"(what don't we call them the kind of bankers they were??? – clueless)bankers are both limited by there lack of thinking. Bankers who don't know how to bank being bailed out by treasury secretaries. No apparent understanding of all the people and institutions who need help, these investment banks are Last, Last, Last on the list.

  8. kackermann

    I am stunned that the $78 billion freebie has not generated more noise.

    Just because Paulson wrote a clause that claimed he was exempt from the law doesn't mean you or I have to honor it. We were not asked about it, and it affects us.

  9. Doc Holiday

    If all the fraud at Enron would have unfolded at a slower rate, there never would have been problems and Ken Lay would be alive today and probably on Obama's Economic Council, guiding policy. I never really did understand Enron and it seemed so surreal in retrospect, because obviously the only bad boy to have been whipped in the last decade was Martha Stewart.

    Justice has been blind for a long time, but this story with Paulson just helps establish that these crooks all are on the same page and on the same team and all working for Change.

    In retrospect, it was criminal that Enron had to be dragged through the mud, instead of glorified as a corporation that succeeded at being efficient at piracy and fraud; the financial engineering they helped evolve along with various accounting firms and rating agencies, in collusion with government agencies (who looked the other way) helped set the stage for the latest tsunami of derivative packaged casino speculation — so why should anyone be shocked that Paulson was in bed having a financial orgy with his buddies? I just think it is criminal that Ken Lay and all the guys at Enron are not in on this (current) orgy, because if things would have gone their way (The American way) we could still be a nation of happily employed people, buying homes, instead of falling for this recovery bullshit to put every jobless American into a brand new Klunker, and then having them driving off the F'ing showroom floor like they just won one of those F'ing lottos.

    In the good ol' days, you'd be turning the F'ing key to a brand new McMansion and saying, damn, this is some cool shit dude — let's go by some shit to fill this F'er up …… and now, Ken's dead and the stuff of worms or floating around like pixie dust — and the F'ing Dream is over, and what can I say?

    I

  10. polyblog

    perhaps I'm missing the snark here, but shouldn't "the generosity of the American taxpayer" read "the fleecing of the American taxpayer"?

  11. skippy

    @Doc Holiday,

    In my reading of the Enron implosion G W Bush threw them under the bus so as not to have made good on all the flavors he owed them, after they assisted (free usage of lawyers and corporate jet) him in securing the presidency after the Gore tussle.

    Skippy…Ken's last x-mas card to bushie "see ya in the White House this time next year", must be his ghostly cry of "ROSEBUD"!!!.

    PS. verification is cotchy lol.

  12. Anonymous

    Endrun was the test bed that gave us ultra accounting, with that 'make your own book' accounting then derivatives are easy plus everything else that goes with it like 'power grid broker.'

    Congress gave Paulson a 'get out of jail free' card, why pound Treasury, Federal Reserve or any other entity under Congressional control?

    Looks like outrage is napping for the time being.

  13. Anonymous

    Yes, the profound corruption between Wall Street Casino and the government, viz Treasury and the Fed, is well-known. That the Gambino mafia had politicians and judges and police chiefs in their pockets is just as well-known.

    So what? So what can anybody do anything about it? The FBI busted up the mafia. Who is going to bust up US fascism?

  14. aNewEraBegins

    We have Stockholm Syndrome and the banks are our captors. Listen to how everyone always kinds of objects to the bailouts and how they actually tell you they didn't want to do it. There is a constant justification for what they know to be an immoral act. It's collective Stockholm Syndrome. You'd see the same kind of thing in Patty Hearst when she was abducted by bank robbers and started working with them. WAKE UP! They're enslaving our children with all their bad loans AND taking a pound of flesh whenever they can.

    If we would have taken all the money used in the crisis we could have BOUGHT every mortgage and credit card bill in the entire country! Instead we let Paulson extort the money by saying "otherwise the system will crash". NO, No…. Paulson you were a Goldman CEO…. you and your banksters EXTORTED the money from us.

    Paulson doesn't even use e-mail. What does that tell you about the man.

    Are we debt slaves?

    http://www.youtube.com/watch?v=-vzVsxE98ZE

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