After that post, I almost changed my mind about posting this one which is now practically light-hearted.
Man in the News: Hank Paulson
By Krishna Guha
Published: September 26 2008 18:32 | Last updated: September 26 2008 18:32
Henry M Paulson illustration
Until this week closing a deal had never been a problem for Hank Paulson, the former Goldman Sachs chief executive turned US Treasury secretary. But in his effort to compel a stunned Congress to give him blanket authority to use $700bn (£380bn, €480bn) in taxpayers’ money to rescue Wall Street and the US economy, he turned to desperate measures, self-mockingly going on bended knee and genuflecting before Nancy Pelosi, the House Speaker, who in turn joked: “I didn’t know you were Catholic.” (Paulson is not, in fact. He is a devout, teetotalling Christian Scientist.)
Not since the 70-year-old JP Morgan intervened to quell the Bankers Panic of 1907 – or even since Alexander Hamilton, the first US Treasury secretary in 1792 stepped in to stabilise US banks by borrowing money to buy government bonds – has one man attempted to assemble so much financial firepower to end a crisis. In a nod at the unprecedented nature of the power grab, Newsweek magazine put him on its cover as “King Henry”.
The fraught effort has revealed much about the strengths and weaknesses of the 62-year-old – his aggressive determination to solve problems, ability to make the unlikely happen through sheer energy, lack of political gifts, a practitioner’s not an economist’s grasp of market economics and a tin ear for the constitutional separation of powers.
His approach in the crisis has been that of a hard-driving chief executive, not a politician. This was no time for bureaucratic niceties; it was a moment of peril. He needed authority to spend $700bn in whatever way he saw fit, buying different financial assets to stabilise the system. Mr Paulson sent the request to Congress in a two-and-a-half page legislative proposal.
The brevity was not intended as an insult to Congress. But it had that effect, smacking of the elite closed circle deal making of a “Wall Street Master of the Universe” (when not talking to members of Congress he favours rapid, brusque phonecalls to gather information and shuns e-mail). The draft proposed half-yearly reports and decisions would not be reviewable. “I can only conclude that it is not just our economy that is at risk but our constitution,” said Chris Dodd, chairman of the Senate Banking Committee.
A politically savvier man might have proposed an oversight board including members of Congress and legendary investors. Yet his career has not been founded on political skills or charisma but on working punishing hours, attention to relationships and analytical insight.
He was born in 1946 in a Chicago suburb and had aspired to be a forest ranger, but ended up at Dartmouth and Harvard. His was a classic American alpha-male story – he was an Eagle scout, an Ivy League football star and married his university love, Wendy. On graduation he worked in the Nixon administration, setting out his philosophy in a 1973 memo: “I take a hard-nosed critical approach.” Before Watergate swept Nixon away, he had already moved on to Goldman Sachs in 1974. Returning to Washington 34 years later, he had expected to tackle the tax code and social security reform, amid doubts about whether he could forge much of a legacy in the dying years of the Bush term. Now the question is not whether he will have a legacy, but what it will be. “Rather than trying to revise history afterward, I’m going to make it and get something done. It may not be perfect,” he told Fortune.
This is by far the biggest challenge of Mr Paulson’s career. After staggering from one crisis to another – standing firm against public support for Lehman Brothers, then backing an $85bn rescue loan for AIG 48 hours later – he is desperate to fight the underlying causes of stress. After the AIG rescue a top US official told the FT the political system could not deliver big reform ahead of February and a new president . Then the market cycle overtook the political cycle.
Like the client-focused investment banker he was, Mr Paulson has deliberately cultivated close relationships with key members of Congress, such as Barney Frank, chairman of the House financial services committee. In his first weeks at Treasury he held 48 meetings with members.
But Mr Paulson has never been a salesman. That has showed too. One congressional aide said his awkward style had hindered the sale of the rescue plan. “You watch him, he stutters and stops. He’s not eloquent. He has a hard time, the quotes don’t come off well,” the person said. In one case Mr Paulson blurted out that he did not want to be accountable to taxpayers. What he meant was that he regretted having to ask for the bail-out. At another hearing, he stumbled over “everyday needs” (“every nay deed”), he paused. “Sometimes the words don’t – they never do come out that smoothly for me, but it’s been a long couple of days.”
His efforts to save Wall Street have caused outrage among taxpayers, some of whom protested at hearings. Picking up the cynical mood, Stephen Colbert, a comedian, lampooned Paulson’s pitch. “Oh My God Society Is Collapsing And We Will Soon Be Devouring Each Other In The Streets Like Dogs And A Crippled One-eyed Boy Will Be King If We Don’t Fix This By Next Week.”
Yet it is the reaction of the right which has done most to thwart progress. While Democrats have been largely supportive – Barack Obama has said he wants him to be “deeply involved in the transition process” – Republicans have been in philosophical disarray, with some denouncing the plan as “trickle down communism”. Mr Paulson, a fan of free-markets, has long been seen as suspect by the right for being a pragmatist not an ideologue, and for his environmental credentials. He defended the Nature Conservancy because it compromised to achieve its goals. “That bothers some people. It attracts me.” That pragmatism is evident now. “I hate the fact that we have to do this. But it is better than the alternative.”
Having left Goldman worth about $700m, some saw it as hypocritical for him to express shock at Wall Street’s excesses. While most on Wall Street dismiss conspiracy theories that he acted to protect his old company, a minority mutter that he only asked for the $700bn after it came under fire. Staff at Lehman stuck pins in a picture of him, along with their reviled boss, Richard Fuld.
If Mr Paulson can pull off the biggest deal of his life, he could be remembered as the most powerful Treasury secretary. For a believer in free markets and deregulation, it may be a legacy he has mixed feelings about.
Copyright The Financial Times Limited 2008
