fox

Former Treasury Secretary Henry Paulson Redefines Chutzpah* (Again)

“I believe that the root cause of every financial crisis, the root cause, is flawed government policies.”  — Henry Paulson

–Andrew Ross Sorkin, “Five Years After TARP, Misgivings on Bonuses“; The New York Times (8/26/2013)

Surprise, surprise, Henry Paulson exonerates himself and the banking industry generally for its role in the 2008 financial paulsoncrisis.

Ditto for the government’s subsequent decision — which he personally oversaw — to bail out the Too Big to Fail (“TBTF”) banks with trillions in loans, federal guaranties, and free money (the last one courtesy of the Federal Reserve).

Just one little problem with Paulson’s non-mea culpa:  at least for the last two decades, Wall Street’s fingerprints are all over the so-called “flawed government policies” he cites as the real culprit.

That would include the repeal of Glass-Steagall, separating investment banks from their deposit-taking brethren; the industry’s successful efforts to prevent any regulation of credit derivatives (Warren Buffet’s “financial weapons of mass destruction”); and obtaining a waiver from the Securities and Exchange Commission (in 2004) allowing the TBTF banks to expand their leverage from 8:1 to an incredible 40:1.

Most recently, Wall Street has sabotaged Dodd-Frank, the legislation enacted in the aftermath of the 2008 financial crash to correct the most egregious abuses.

Revolving Door

None of the above should be surprising when you consider who has staffed the senior-most positions at the Federal Reserve, SEC, and Treasury since at least 1990.

revolving_doorIf you didn’t know:  a parade of senior Wall Street officials such as Paulson, himself a former chief executive of Goldman Sachs (a fact nicely buried near the end of Sorkin’s article).

Of course, Wall Street-friendly (“flawed”) government policy is exactly what billions in lobbying dollars and campaign contributions buy.

Lost Opportunity

If you don’t want your blood to boil, skip Sorkin’s nauseating puff piece — timed to coincide with Paulson’s upcoming book — and jump to the reader comments (90 in total, almost all of them scathing).

In particular, I liked this one:

The right response in 2008 would have been to manage the Wall Street banks through bankruptcy, transfer good assets to the many banks which did not engage in massive leveraged speculation, and liquidate the trillions in bad debt, forcing the gamblers to take their losses rather than transferring them to taxpayers and holders of dollars.

Wall Street would have learned a lesson that would have lasted for generations and, while the recession might have been somewhat deeper, the rebound would have been stronger and US financial system foundation would be more solid and stable.

Now we’re back to square one, the U.S. financial system is more unstable than ever, bailout is priced into every activity of the Wall Street banks and large financial institutions, and the game of leveraged speculation with free money from the Fed is in full swing.

Once upon a time, there was a saying that if you owed a bank $100, they had you over a barrel, but if you owed the bank $100 million, you had them over a barrel.

Today, the corollary is, when the biggest banks control trillions in (taxpayer-guaranteed) assets, they have everyone over a barrel.

*My favorite definition of “chutzpah”:  killing your parents, then throwing yourself on the mercy of the court because you’re an orphan.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

Leave a Reply