Treasury’s changed man
Henry Paulson was supposed to bring a fresh dose of Wall Street to Washington. As it turns out, he’s doing the very opposite.
As Treasury secretary, he has become the Bush administration’s point man and chief spokesman on a series of government interventions in the economy -- including the plan likely to be approved by Congress to put the full resources of the U.S. Treasury behind faltering home mortgage giants Fannie Mae and Freddie Mac.
But if Paulson’s new role irritates conservatives and clashes with his long-standing faith in unfettered markets, the question is how the former chief executive of Goldman Sachs will react if the economy develops new or deeper problems, as it has repeatedly during the last year.
From his earliest response to the subprime lending debacle to the Freddie-Fannie rescue operation, Paulson has been widely seen as a reluctant dragon. Critics say he has been slow to act and sometimes appears more concerned about shoring up financial markets than helping ordinary citizens.
“He’s a man who came in with one agenda and is having another one forced upon him by circumstances,” said T.J. Marta of RBC Capital Markets in New York. “He’s in full defense mode at this point.”
So ready has Paulson become to support government intervention in the face of economic crisis that last week he offered only the barest comfort to members of Congress worried about open-ended federal support for Fannie and Freddie. If the commitment is sweeping, he suggested, the Treasury might not have to use its new power.
“If you’ve got a bazooka and people know you’ve got it, you may not have to take it out,” he said.
That’s a big change for a man who came to the nation’s capital after three decades at Wall Street’s premier market player. He became Goldman Sachs’ chairman and chief executive in 1998.
During his Senate confirmation hearing in 2006, he offered a paean to the private sector and financial markets, lauding them as “a model of strength, flexibility, dynamism and resiliency.”
His top domestic goal, he said, was to revive President Bush’s efforts to partially privatize Social Security by creating individual investment accounts.
But events moved quickly against Paulson.
Within less than a year, the Democrats took over both houses of Congress. And the Social Security proposal proved so unpopular with politicians and the public that in pushing it, Paulson told one interviewer, he felt as though he was “playing solitaire.”
Then the economy and financial markets started coming unhinged.
Paulson wouldn’t comment for this article, but David Nason, assistant Treasury secretary for financial institutions, explained Paulson’s current willingness to advocate government action: “These are the cards he’s been dealt. He’s handling this in a very pragmatic, results-oriented way.”
Indeed, Paulson’s pragmatism, together with the fact that the Democrats control Congress, has allowed the Treasury secretary to do something his two immediate predecessors, John W. Snow and Paul H. O’Neill, were never able to do: pursue an agenda substantially independent of the White House.
Like Paulson, Snow and O’Neill had big reputations based on having run big corporations. But Snow and O’Neill quickly found themselves overruled or disregarded by the president’s close advisors.
Paulson by contrast, after initially embracing such administration touchstones as the need to extend the president’s 2001 and 2003 tax cuts, has appeared to go almost entirely his own way. He has become the administration’s most prominent voice on economic matters, at times even drowning out Bush.
“He and Bernanke have teamed up to help reality to break through the ideological field” of the waning administration, said Rep. Barney Frank (D-Mass), chairman of the House Financial Services Committee, referring to Federal Reserve Chairman Ben S. Bernanke. Frank has worked closely with Paulson.
Despite his comparative independence, Paulson has been slow to chart courses that would rub the White House the wrong way or offend key Republican constituencies.
For example, his aides say Paulson was vividly aware of the danger of financial freeze-ups well before the current crisis and ordered up plans to handle such an occurrence. “He told us over and over that every seven to 10 years, our capital markets undertake a financial shock, and we have to be ready to respond,” Nason said.
However, a close look at key Paulson speeches suggests that the Treasury secretary’s chief concern was saving companies money and ensuring that the financial services industry remained globally competitive -- hardly firebrand stuff for someone from Wall Street.
His goal does not appear to have been preventing the sort of repeated market clutches the country has suffered since last summer. Even as the financial markets began deteriorating in August, with the value of mortgage-backed securities falling precipitously, Paulson did not go beyond trying to orchestrate voluntary efforts by the industry.
He pulled big mortgage lenders and servicers into a voluntary group called the Hope Now Alliance to help struggling homeowners. But though Hope Now claims to have helped 1.7 million homeowners avoid foreclosure, its statistics show that from January to May of this year, member companies agreed to ease the terms of less than 6% of the most troubled type of mortgages -- subprime loans in which the interest rate was set to rise.
That amounted to only 37,500 mortgages out of 718,000, according to the group.
Paulson also tried to persuade big banks, such as Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., to kick in as much as $80 billion for a voluntary fund to buy up troubled asset-backed securities called SIVs, or structured investment vehicles. The banks refused.
“He spent an awful lot of time on insider baseball things like SIVs, and not enough on rising foreclosures and what was happening to the markets,” said Roger M. Kubarych, a Wall Street veteran and chief U.S. economist for Unicredit Global Research in New York. “He’s got a lot to answer for.”
Only in the last few months, with financial instability spreading first to investment bank Bear Stearns Cos., then to government-chartered but shareholder-owned Fannie and Freddie, did Paulson finally forsake his voluntary approach in favor of decisive government action.
In March, he helped organize a $30-billion Federal Reserve loan to partially underwrite JPMorgan’s fire-sale purchase of Bear Stearns. Last week, he asked Congress for permission to make essentially unlimited loans to Fannie and Freddie and even buy shares in the two companies over the next 18 months to ensure the firms’ continued operation.
Perhaps most surprising, Paulson has strongly backed Fed Chairman Bernanke’s call for substantial new government regulation of investment banks. Such a move would be a big step beyond the one-time bailouts of individual institutions, and allow the Fed to intervene in parts of the financial system that have been comparatively free of regulation.
Paulson’s support for the move has brought sharp criticism from free-market advocates who have backed him.
“What he’s doing on investment banks is very disappointing,” said Peter J. Wallison, a veteran financial markets analyst at the American Enterprise Institute in Washington.
Paulson “is very good at understanding things that are happening right in front of his eyes, but he doesn’t seem to understand why the problem arose in the first place,” Wallison added. Wallison’s answer for why: too much, not too little, government intervention.
So far, however, the economy is pressuring Paulson to sail even further away from free-market advocates such as Wallison. And the key to what he does in the months ahead may lie in his embrace of pragmatism.
Asked how Paulson, 62, would like to be remembered when his tenure ends, Robert K. Steel, his former top lieutenant and recently named chief executive of Wachovia Corp., said that “he’s kind of been a wartime secretary of the Treasury, war in the financial markets.
“I think he’d like to be remembered as someone who guided the country through a dangerous time effectively.”
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