Crony capitalism isn’t usually this bald. But then again, this is Hank Paulson we’re talking about.
This week, Bloomberg reported that in the summer of 2008, while serving as Treasury secretary under president George W. Bush, Paulson gave a gathering of Wall Street titans detailed, inside information about the government’s plans for the troubled mortgage giants Fannie Mae and Freddie Mac.
It was July 2008, and Paulson had been insisting in public that Fannie and Freddie would remain privately owned. In private, Paulson gave his former colleagues in the investment banking world a preview of his true intentions: The government would be taking both Freddie and Fannie into conservatorship, largely wiping out stockholders.
The generosity of the tip — which likely led the investors to short shares in the mortgage giants — shocked even the bankers, in particular Bloomberg’s source for the piece, a hedge funder:
The fund manager says he was shocked that Paulson would furnish such specific information – to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.
But no one should have been shocked that Paulson was handing out secrets worth billions behind closed doors. The record is clear: Even while he was supposed to be working as a public servant, Paulson never stopped working for Wall Street.
In July 2007, Bush tapped Paulson, then the head of Goldman Sachs, to guide the nation’s economy. To his nomination ceremony Paulson invited his friend and hand-selected successor to helm the investment bank, Lloyd Blankfein. And as the financial crisis unfolded, Paulson repeatedly acted as though he were still a partner at the firm that made him a $700 million man.
According to Paulson’s own memoir, Blankfein kept on him on speed dial. On a Saturday morning in mid-March 2008, the chairman of Goldman Sachs called the Treasury secretary, at his home, to demand the Bush administration find a buyer for faltering investment bank Bear Stearns — to whose debt Goldman was significantly exposed.
“Lloyd went over the market with me,” Paulson writes, “His conclusion was apocalyptic. The market expected a Bear rescue. If there wasn’t one all hell would break loose.” Goldman got its wish, Treasury married off Bear to rival JP Morgan — after agreeing to make taxpayers responsible for up to $30 billion in Bear’s bad debts, then a record bailout.
Three months later, during a state visit to Moscow in June 2008 that coincided with a Goldman board meeting in the Russian capital, Paulson invited his former partners to his room at the Grand Marriott for an off-the-record — and off-the-official-calendar — powwow. “Let’s keep this quiet,” Paulson’s chief of staff told his Goldman counterpart, according to Andrew Ross Sorkin’s book Too Big to Fail. Paulson greeted Blankfein & Co. with bear hugs and proceeded to give his old firm an insider briefing on Treasury’s overview of the state of the economy and the likelihood of further bailouts. His ex-colleagues pressed him for details on Lehman Brothers.
In mid-September, Paulson refused to provide a bailout to Lehman. But two days after the investment bank went belly up, Paulson did provide an $85 billion bailout of AIG — $13 billion dollars of which went straight to the dangerously over-leveraged Goldman as a counterparty.
Less than a week later, Paulson pulled out all the stops to prevent bankruptcies by Goldman as well as JP Morgan. The Bush administration allowed the firms to incorporate as bank holding companies, giving them access to a lifeline of dirt-cheap loans from the Federal Reserve. (Bloomberg also reported that those loans of last resort to faltering banks totalled $1.2 trillion and created $13 billion in excess profits for banks like Goldman.)
With the passage of the massive TARP bailout that Ocotober 2008, Paulson gained unprecedented command over the American economy, and he decided to inject hundreds of billions of bailout dollars into the nation’s banks. At the time, Paulson assured his fellow Americans that the government would be receiving valuable assets exchange for the flood of liquidity: “This is an investment, not an expenditure,” he said.
This was a baldfaced lie. Paulson required all banks, even those with relatively healthy balance sheets to participate in TARP. And he gave every bank a sweetheart deal. For every $100 in bailout funds handed over to healthy banks, the American taxpayer received just $78 worth of assets, according to a report by the Congressional Oversight Panel (COP) chaired by Elizabeth Warren. The exchange rate for struggling banks was $44 for every 100 taxpayer dollars.
All in, COP reported, Treasury paid $254 billion, for assets worth just $176 billion — a stealth bailout of $78 billion to the financial sector never approved by Congress, including a cool $2.5 billion for Paulson’s cronies at Goldman.
For the record, that $78 billion would more than cover the infrastruture improvements proposed for the country’s schools, roads, airports and bridges proposed in president Obama’s jobs bill.