Guardian.co.uk
Paulson's banking ties taint Wall St bailout plan
* Reuters
* Friday September 26 2008By Pedro Nicolaci da Costa
NEW YORK, Sept 26 (Reuters) - Henry Paulson spent his life amassing a fortune on Wall Street. Now, as Treasury secretary, he is demanding unprecedented authority -- and $700 billion in cash -- to bail out the teetering U.S. banking sector.
That some sort of action is needed to rescue the financial system from itself is hardly a point of contention. But Paulson's blueprint has drawn widespread criticism, in part because his close relationship with the industry is perceived as clouding his perspective.
In legal terms, Paulson's actions are perfectly acceptable. He is simply acting as the Treasury secretary in setting policies that will apply to the financial sector as a whole. Indeed, he divested himself of Goldman Sachs shares reportedly worth $485 million when he took office, to comply with government ethics rules.
Still, experts say that because of his background as a banker, Paulson may be prone to overstating the importance of Wall Street to the health of the overall economy.
"His mind-set is one that has been molded by a Wall Street-centric view," said Anthony Sabino, professor of law and business at St. John's University. "What I find as a shortcoming is that he's refusing to acknowledge that Wall Street has to pay for its mistakes."
Paulson presided over Goldman Sachs during the boom times for housing and was a staunch advocate of the lax regulatory approach that many blame for the current financial crisis.
The timing of Paulson's change of heart has also raised questions. Until recently, the secretary said repeatedly that the housing slump was contained and would not infect the banks or the real economy.
His rescue plan came just as it seemed that Goldman was next in the cross-hairs of a panic that has taken down financial giants like Lehman Brothers, Bear Stearns and AIG.
In addition, the draft legislation contained language that would excuse Treasury officials, including Paulson, from any court review of their actions -- the bailout's own get-out-of-jail-free card.
"I find this particularly troubling," said Jared Harris, professor of ethics and strategy at the University of Virginia's Darden School of Business.
As if to anticipate the rescue's passage, Warren Buffett's Berkshire Hathaway announced last Sunday that it was investing $5 billion in Goldman Sachs on terms that give Berkshire a 10 percent dividend and warrants to buy Goldman shares at a preferential price.
In contrast, taxpayers would enjoy no such privilege under the Treasury's plan, a major sticking point in the negotiations with Congress.
TOO MUCH MONEY
The issue of executive pay also looms large in discussions surrounding any bailout. Both voters and lawmakers have expressed concern about a taxpayer rescue of financial institutions that does not include severe monetary penalties for those banks.
"This round-about doubtful solution for sure helps the secretary's friends on Wall Street and maybe not much else," said Edward Leamer, director of UCLA's Anderson Forecast.
Yet while Paulson argued this week that he shares the concerns of Congress on executive compensation, the former banker, whose net worth has been estimated to be as much as $700 million, did not initially make the issue a priority in his plan.
Indeed, the first drafts of the Treasury's legislative proposal were a scant three pages and made no mention of executive pay.
Faced with opposition from Congress, Paulson did come around to the view that restraints on compensation should be part of any bailout. "Many of you cite this as a serious problem and I agree," he said in testimony this week.
He has also made clear throughout the latest leg of the crisis that it is not the government's intention to boost profits for investors who took imprudent risks.
"A stable system requires that risk-taking bring both reward and loss," he said in June.
Examples of high-flying pay packages not matched by corporate successes abound. Richard Fuld, who ran now-bankrupt Lehman Brothers, earned nearly half a billion dollars between 1993 and 2007.
In this context, economists are especially outraged by some of the language included in the rescue plan, especially its preclusion of future legal action against Paulson and his team.
"I don't think it looks good," said Paul Kasriel, chief economist at Northern Trust, in Chicago. "I'm not accusing him but it raises questions."
This is not to say that Paulson is actively deceiving Congress to protect the interests of his former Wall Street peers. The secretary is highly regarded by his peers in Washington. Still, his background as a banker does inform his approach to tackling the crisis.
Harris, of The University of Virginia, puts it succinctly: "It's clear that Paulson brings a particular viewpoint to this challenge and hence it's obvious that the proposed solution represents the view of thinking from the perspective of the banks." (Reporting by Pedro Nicolaci da Costa; Editing by Dan Grebler)
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