Paulson's Pep-Talk Op-Ed: an Exercise in Specious Statements and Omissions

by D. Cupples |   Yesterday's New York Times ran an op-ed by Treasury Secretary Henry Paulson, which seems riddled with vague, specious statements.  That and a few important details are conspicuously absent.  In the first paragraph, for example, Mr. Paulson states:

"We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and the American International Group. Each of these failures would be tremendously consequential in its own right. But we faced them in succession, as our financial system seized up and severely damaged the economy."

Our financial system's "seize up" wasn't caused by forces of physics beyond our control.  The system seized up partly because the human beings making business decisions for the now-troubled companies had repeatedly chosen to make very risky investments.

Mr. Paulson likely knows this, given his level of sophistication -- yet his op-ed doesn't address this.  Incidentally, Mr. Paulson was CEO of Goldman Sachs (a now-troubled company) before becoming Treasury Secretary; his compensation during just his last 5-years as CEO was nearly $47 million. (Forbes)

Mr. Paulson's op-ed continues:

"...By the time the legislation had passed on Oct. 3, the global market crisis was so broad and so severe that we needed to move quickly and take powerful steps to stabilize our financial system and to get credit flowing again. Our initial intent was to strengthen the banking system by purchasing illiquid mortgages and mortgage-related securities. But the severity and magnitude of the situation had worsened to such an extent that an asset purchase program would not be effective enough, quickly enough. Therefore... we quickly deployed a $250 billion capital injection program, fully anticipating we would follow that with a program for buying troubled assets.

"There is no playbook for responding to turmoil we have never faced."

As reported nearly a month after the bailout legislation was passed, credit markets were not unfreezing. 

Why?  Partly because the people receiving bailout funds had chosen to not use the funds to generate loans: instead, they sought to use the funds to buy other banks, raise employees' pay, and give bonuses to executives.

How was that allowed to happen, given the crisis state of our nation's economy? 

Secretary Paulson, President Bush, and Congress had failed to legally require companies receiving bailout funds to actually use the funds to generate loans.  Mr. Paulson's op-ed does not cover those facts.

Mr. Paulson and Congress did not need a "playbook" to know that companies receiving bailout funds might not spend the funds on generating loans unless they were legally required to.

Mr. Paulson also wrote this:

"I have always said that the decline in the housing market is at the root of the economic downturn and our financial market stress. And the economy, as it slows further, threatens to prolong this decline, as well as the stress on our financial institutions and financial markets."

I question whether he's right.  Declining housing prices did cause the value of mortgage-backed securities go down, but there are at least two things closer to the root of our economic problems:

1) Artificially depressed interest rates caused housing prices to artificially inflate in the first place, and

2) The people making business decisions for now-troubled financial institutions continued buying mortgage-backed securities despite overwhelming evidence that our nation was in a housing bubble.

Given the housing bubble, sophisticated Wall Street folks likely knew that -- at some point -- housing prices would come back down to Earth and would send the value of mortgage-backed securities downward.

And yet, those sophisticated folks kept placing risky bets on shaky, mortgage-backed securities.   Mr. Paulson, as CEO of Goldman Sachs, likely was among the many Wall Street executives who either required or allowed underlings to place such risky bets with shareholder dollars.  His op-ed does not mention that.

Mr. Paulson's op-ed continues:

"The current $250 billion capital purchase program is strong medicine for our financial institutions. More capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is essential to increasing lending, which is vital to economic recovery."

Mr. Paulson is correct to a point: more money in the hands of lenders is essential to increasing lending. 

But does it matter that funneling money to banks "is essential to increasing lending" -- given that  Congress and Mr. Paulson failed to ensure that the tax dollars funneled to banks would actually result in increased lending?

As noted a few paragraphs above, Congress and Mr. Paulson failed or refused to ensure that lending would increase by failing or refusing to legally require companies receiving bailout funds to spend those funds on generating loans.

By this point, the horse has passed on to the nether world, so I'll stop. At Economist's view, one author comments as follows about Mr. Paulson's op-ed:

"This financial crisis has been going on a long, long time, and they should have been planning long ago about how to deal with various contingencies. Plans should have been on the shelf and ready to go.  Even now, they don't have an agreed upon plan to address the foreclosure problem, something Paulson says he has believed all along is the key to stopping the deterioration. Then why don't we have a plan? It has been in the planning stages for who knows how long, and the plans are now being abandoned since the clock has run out. It's hard not to wonder if the delaying tactics are ideologically based and intentional. Hem and haw long enough so that nothing gets done.

"A committed and competent Treasury could have done a lot to help the situation, but unfortunately, that is not what we got."

Memeorandum has commentary.

Other Buck Naked Politics Posts:

*  Are Bailout Funds Being Misused?

* More Sleight of Hand re: Bailout Funds?

* Lehman Execs Redistributed Shareholder Wealth (to Themselves)

* AIG Execs Redistributed Shareholder Wealth (to Themselves)

* Cutting Executive Pay Would Save Jobs

* Bush "Op-Ed" Riddled with Self-Contradiction & Non-Facts

* Execs Made Millions While Driving Companies into Ditch

* Senate Considers Another $25 Billion Auto-Industry Bailout: Why?

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Comments

[Disgusted]

I think Mr. Paulson is paving the way for his own departure from Treasury and his highly likely return to Goldman-Sachs. And he will probably go back there like Santa Claus, with a bag full of taxpayers' money so that they can buy out other companys. It will not be used to help the taxpayer maintain his standard of living or keep his home. The sheer arrogance of the business executives of this country and in our government boggles the mind. If they had to do any honest labor, it would finish them off.

[Deb Cupples (Buck Naked Politics)]

Disgusted,

I suspect that you are right.