Journalism in the Public Interest

Crony Capitalism? Hank Paulson’s Extraordinary Meeting

Bloomberg story shows that while we still haven’t had a full accounting of the financial crisis, we did have a Treasury Secretary sharing what amounts to inside information with a few elite Wall Street traders. Here are some questions that demand answers.


Yesterday, federal judge Jed Rakoff slammed the Securities and Exchange Commission for making a toothless settlement with Citigroup over financial crisis misdeeds, arguing that it obscured the basic facts of what actually happened. Today, Bloomberg Markets Magazine has an important story by Richard Teitelbaum that, from a very different vantage point, demonstrates the same infuriating point: Despite the economic wreckage we are still trying to repair, we have yet to have an adequate accounting of how the financial crisis happened, what caused it, and who knew what when.

According to the story, on July 21, 2008, then-Secretary of the Treasury Hank Paulson met with “a dozen or so hedge- fund managers and other Wall Street executives” and discussed “a possible scenario for placing Fannie [Mae] and Freddie [Mac] into ‘conservatorship.’” That’s a fancy term for a government seizure that would have allowed the entities to keep operating, but would have caused severe adverse consequences to holders of the Frannies’ equity and, possibly, debt. A fund manager told Bloomberg 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.” After the meeting, this manager consulted a lawyer, who told him to cease trading immediately in the Frannies, lest he later be accused of – here’s the rub – insider trading.

The Bloomberg story cites law professors to say that Paulson did not break the law. But the story’s implicit allegation is that the former head of Goldman Sachs was so clueless – or contemptuous – of his role as Secretary of the Treasury of the United States of America that he engaged in a clubby tête-à-tête with his former peers and handed them what Bloomberg says “amounted to inside information.”

It’s actually worse, because as Bloomberg also reports, Paulson was publicly playing down the possibility of dramatic government action -- practically the opposite of what he confided behind closed doors to those elite traders.

Paulson didn’t comment for the Bloomberg story, and his spokesperson referred questions to his book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System – which, Bloomberg points out, doesn’t mention the meeting.

There are limits to what a reporter can get – starting with whether any of those powerful and canny Wall Street sharks profited on the information. They may have shorted the Frannies, but, as the Bloomberg story points out, "tracking firm-specific short stock sales isn’t possible using public documents." We need a more powerful entity -- perhaps a Congressional committee? --to find that out. And, here are a few more questions that cry out for answers:

1. What is the justification for such a meeting? Former St. Louis Federal Reserve bank president William Poole suggests that the Treasury needs to be able to prep the market with information.

Fair enough. A Treasury Secretary should talk to smart market participants, and needs to know how the market might react to any given action.

But there’s a difference between meeting to receive information and telling a chosen few market-moving plans. Hank Paulson and now Timothy Geithner should receive information from all types of parties. If they want to float a trial balloon, they have to float it in such a way that doesn’t give select participants market sensitive information.

2. Why did Paulson meet with these people specifically? The Bloomberg piece notes that Eric Mindich, a hedge fund manager who is a former Goldman Sachs employee, hosted the meeting. Several Goldman Sachs executives attended.

If the Treasury secretary is going to hold meetings with market participants, the attendees should be chosen based on – you are going to laugh here – merit, not connections. And they should be transparently disclosed at the time.

3. How many other meetings like this were there? As Felix Salmon recalls, Andrew Ross Sorkin in his book “Too Big To Fail” revealed that Paulson met with the board of Goldman Sachs in June 2008 in Moscow -- a month before the meeting Bloomberg has revealed -- and discussed market conditions, and even contemplated that Lehman Brothers might fail.

Here’s how Sorkin wrote about this:

“For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink's BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.

Anxious about the prospect of such a meeting, [Paulson Chief of Staff Jim] Wilkinson called to get approval from Treasury's general counsel. Bob Hoyt, who wasn't enamored of the "optics" of such a meeting, said that as long as it remained a "social event," it wouldn't run afoul of the ethics guidelines.

Still, Wilkinson had told Rogers, "Let's keep this quiet," as the two coordinated the details. They agreed that Goldman's directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the "social event" on his official calendar.” END OFFSET

One possible defense for Paulson floating government conservatorship of Fannie and Freddie is that by the time of his July meeting with traders and executives, the market was widely anticipating the government would take that action. But what if the market only anticipated this because there were other, previous meetings between Treasury officials and well-connected investors in which such plans were floated?

4. What did this meeting do for the Treasury?

My sense of Paulson’s approach – act first, act boldly, move on and dwell no more – is that his actions weren’t well thought out at all.

But let’s concede, arguendo, that Paulson and the Treasury held this meeting as part of a carefully thought-out strategy to prep the market for the Frannie conservatorship. What did that get the government? If anything, the prepping only would make the investors more likely to extrapolate and short or sell other financial stocks.

If preparation was indeed the rationale and justification, then Paulson and Treasury needed to have a contingency plan for investor reaction. Which they almost certainly didn’t, since Lehman then failed and they were forced into a series of desperate actions. Over the next weeks, they scrambled to create the Troubled Asset Relief Program, or TARP, and then remake it into the preferred equity-buying program (rather than the toxic asset purchasing program).

Without a full and convincing accounting, we are left with a picture of a Treasury Secretary who took care of his buddies while allowing the system to blow up. This is the kind of thing that a crony capitalist system – and only such a corrupt system – would allow.

Stephen A. Cohen

Nov. 30, 2011, 2:48 p.m.

I hope the appropriate Congressional committees will convene hearings on this event - and other similar events - and subpoena Paulson to testify.

This ***hole was recently hired by my alma mater, University of Chicago!
Not bad, Maroons—bringing on board one of the biggest goniffs on Wall Street.

Duuh!  you think?

I always wondered if Paulson played football.  He had that kind of bearing.  It seems that not only did he play football, but he played it without a helmet too many times.  A newly minted business major graduate would have known better than to do what Paulson did as reported here.  Either he is criminal, or criminally stupid. 

I am one who believes that dramatic intervention was necessary to forestall an even worse disaster than what we are now in, but this is ridiculous. 

And while we are on ridiculous, why on earth did the government (read: Paulson) not place requirements/specifications on what uses the money handed to the banks could be put, and in what time frame the funds had to be put to use.  It seems the only restrictions were on compensation while the banks were under TARP.  The only thing that did was ensure that the money got paid back so bankers could begin writing fat checks to themselves again.  Yet, they did nothing for stimulating the economy, and still haven’t.

At the time of this meeting, the S&P was trading roughly where it closed today.  The market, and “leaders” like Paulson and Bernanke, was still basking in the false dawn after the Bear “rescue,” more or less oblivious to the catastrophe coming head on (excepting the GSEs implosion).  So it’s hard to excuse Paulson’s action as being taken in the heat of battle or fog of war, although some offer that defense.

Nothing surprises me any more. There are far too many obvious events involving former Goldman employees to investigate them all and they know it.


Dec. 1, 2011, 7:15 a.m.

How about the rigged up loans given to Obama’s green buddies that are currently going down the drain. Its not just republicans who are guilty of crony capitalism.


Did anyone of the commenters reserve foolishness for one party or the other, umm, no I do not think so.

As I think about it, I keep coming back to the same thing (from the article):  “[T]he prepping only would make the investors more likely to extrapolate and short or sell other financial stocks.”

Assume this is what really happened (though we won’t know without the recommended investigation), and I think we need to suspect that this meeting is what tanked the economy, with Freddie and Fannie (and CDOs and other mortgage-backed securities with them at the bottom) made scapegoats even as new government management insulates them from accusations.

And given that the results are obvious to anybody asking “what would happen” by holding that meeting, then the act was clearly intentional, and Paulson used this meeting to mount an attack on our economy in order to create the “need” for the bailouts (need enough that both Obama and McCain, remember, broke from campaigning to make sure they rushed to Washington to vote for them) and other policy decisions.

If, on the other hand, there wasn’t any insider shorting, then the only rationale I can imagine is that there was serious insider trading occurring and Paulson was warning them away, knowing this would be big enough to prompt an investigation.

Appropriately, Paulson probably holds the Milton Friedman chair at the University of Chicago.  No doubt he didn’t break the law because he had a lot to do with what banking regulation became. In 2004, while piloting Goldman Sachs, he convinced the SEC to eliminate the net capital rule for banks - this was on the heels of bonehead Clinton Administration decisons to sign legislation to eliminate the wall between community banks and investment banks, and then another law making derivatives trading legal.  These were both Robert Rubin (Goldman CEO emeritus) initiatives, cheered on by the fool running the Fed at that time. (Paulson was with Goldman when this happened.)  Then Paulson convinced the SEC to allow banks to report voluntarily regarding their net capital, and then he convinced the SEC to allow banks to report on their net capital voluntarily, i.e., to self-attest.  This kind of crap was going on government-wide.  In the Medicare program we called sellf-attestation, “trusting you to trust us to trust you” - it was, and is, a running farce.  When I hear conservatives whine about onerous regulation I remember these events.  When I was an analyst for the feds I couldn’t even let a lobbyist pay for my lunch much less discuss pending policy decisions.  Federal staff on regulations teams were reported to the Inspector General when they jumped ship and became hired guns for the same corporations that would be impacted by proposed rules.  Now this clown, Paulson, who ran a cabinet level agency, meets with his rich cronies in order to sell out their investors, pension funds, etc., and of course, it’s all legal.


Dec. 1, 2011, 10:18 p.m.

Max, as I hope you will agree: Just because it’s legal doesn’t mean it’s right.
If we step back, no further, back, back… we begin to see the forest. These guys changed the rules to facilitate the reaming of America.
As recent Progressive advances in the November elections show, the tides are about to change.
In my wildest dreams, I see these rapists going to federal prisons and Glasss-Steagull being brought back and mortgages being, across the board, written down to restore Americas equity.

James T - In my unenlightened legal view Paulson is a criminal.  I share your desire to have these gentlemen locked up.  A modern version of Glass-Steagell needs to be reinstated, derivatives trading needs to be made illegal, international commodities speculation needs to be tightly regulated, the large banks must be forced to open their books and display their actual assests and liabilities, and the mega banks need to be broken up into bite sized chunks that can rise of fall like other for-profit publicly traded entities.  Move your assets into a non-for-profit credit union.  Boycott companies that make political contributions that hurt you and the nation economically.  Vote with your wallet.  The biggest untapped political asset in the U.S. is the potential power of consumers.  Put the Hank Paulsons of the world and other Wall Street predators out of business.

M. Rutledge McCall

Dec. 2, 2011, 10:23 a.m.

Last year I ghostwrote a book for a former stock broker and licensed “financial advisor” who insisted that the CRA was greatly to blame for the financial meltdown. However, even the most rudimentary research proved this not only wrong, but wholly impossible. After mentioning this to my then-client, he resolutely maintained his position. I then advised that he at least soften his language to state that the CRA had “also played some role” in the meltdown. His response to my desire for an honest recitation of the facts was, ultimately, to stiff me and my agent out of thousands of dollars for my hard work on his book—and then to go on the lecture circuit, peddling his version of reality under the canard of being a “financial services professional” (while never disclosing that he had walked away from the mortgage on his golf course manse and was only sporadically making his child support payments). People like this, who perpetrate their deeds while flashing the badge of “conservative Christianity” (as this man did) give us true Christians a bad name—and Independents like me bad tastes in our mouths for American style “every man for himself”-capitalism.

I’ve long gotten over being amazed or even surprised by the actions of our leaders as it pertains to the financial crisis.  So many wrong decisions by so many intelligent people could not have been accidental.  The only logical conclusion is that these people… Mr. Paulson, Bernenke, Geitner, Blankfein, Dimon, etc. had a different game plan that the one presented to the American public. I do not believe it was ever their intention to prevent the collapse of the US financial markets.  I suspect that what they wanted was a controlled collapse, with our financial entities merging with those of the rest of the world and it appears that’s exactly what they’ve got - control of the world’s finances in the hands of an unelected and self-appointed elite group of bankers.

“We need a more powerful entity—perhaps a Congressional committee?—to find that out.”

Why would you think that a Congressional committee, a wholly-owned subsidiary of the financial industry (“the bankers own the place.” Dick Durbin on the Senate) is a powerful entity for investigative purposes?

M. Rutledge McCall, why not name names?

maddof is in jail,why the rest of these ponzi schemers who took the taxpayers for fools are not in jail is because the justice system rewards wall street for the ponzi .what is needed is racial diveresity in our prision system,lock all the suits up and throw away the key.

I wonder why the mainstream media refuses to pick up this story. America is absolutely ridiculous. The media is more of a hinder and a burden on the people of America. It feels almost as if the media is a tool of censorship, brainwashing, and exploitation for the corporate oligarchs of this country…

Shouldn’t the media’s primary job be to truly inform and educate the population? Not continually attempt to get them to consume and remain complicit to this unsustainable credit consumerist system…

It angers me how the media has been taken over by a few multinational corporations, some of which have no business in the media industry (such as GE)... what ever happened to the media being diverse? Nowadays, you barely, if ever, get both sides of a story - you only get a certain spin - in which is only limited to left leaning or right leaning…

I fear for this country’s future.

The republicans have so contaminated the WORD-Capitalism that Luntz now tells them to use “Economic Freedom”. On the other hand, I think the Progressives ought to hone in on CRONY CAPITALISM as opposed to capitalism with a conscience which grew our economy and secured our democracy. Crony capitalism is in direct conflict with democratic values because it favors advancement of “special interests” and subsidizes business with public funds. Instead of serving the people, CRONY CAPITALISM has the economy serving and enriching the few, while the many are left behind. There was criminal activities on WALL STREET and I think Eliot Spitzer should be hired by the DOJ to go after the CHEATERS< LIARS AND TRAITORS who would enrich themselves while letting the whole country FALL. That is treason, betraying your country for personal or financial gain.


Dec. 4, 2011, 12:40 p.m.

Even the lowest form of street urchin, that’s purchased the wares of sleazy dealers in the “hood”, would recognize at a glance, that this Paulson character is not someone to trust with your money!  It’s easier for me to accept a conspiracy, than to believe our Congress was actually taken in by this fraudulent jerk!

Gabor Steingart’s book, “The War for Wealth,” (published in 2008) begins with a very interesting conversation between Mr. Steingart and Hank Paulson in 2006.  Mr. Paulson had heard that Mr. Steingart was writing a book that would, in essence, accurately describe what was actually happening—what was about to happen—and he was on the offensive. The questions Mr. Steingart asked, and Mr. Paulson’s answers, are extremely interesting today.  As I read the book, I really wondered if Mr. Paulson wasn’t already trying to prevent the truth from coming out.  On page 88, he discusses “the full extent of [the banks] self-delusion . . .” he points out that “[A]t the end of 2009 . . . [the IMF will conduct] a general review of the U.S. financial system is set to take place in the context of the so-called Financial Sector Assessment Program.  The audit will affect investment banks, hedge funds, mortgage companies, credit card issuers, and retail banks.  In interviews with bank employees and regulators . . . the IMF will probe the U.S. financial system for hidden risks.”

This book was published in 2008.  It was written long before that year.  This would seem to indicate that the IMF was already talking about a potential crash long before it happened.  Did those involved go out and buy credit default swaps?  Did the planned investigation ever happen?  Is there a paper trail about who was privy to the talks leading to the planned review? 

More investigation needs to be done.

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