Black: Paulson “Waited” to Allow Goldman Subprime Holdings Unwind Before Crash
You may have missed this hard hitting McClatchy article over the weekend. It essentially accuses then Treasury Secretary (and former Goldman Sachs CEO) Hank Paulson of “willful inaction in late 2006 and 2007 during a period when lending criteria were disintegrating in favor of so-called “liars’ loans,” for which applicants weren’t required to document their income.”
The reason? To give Goldman Sachs a chance to exit their soon to be crumbling sub-prime loan portfolio. (See video) They also got short subprime derivatives. GS became the only major Wall Street firm to safely exit the housing market before it crashed. McClatchy had previously reported that Goldman Sachs failed to report dumping their subprime positions to the SEC for 9 months, while making public statements to the inapposite to that.
These accusations come from William Black, the former senior thrift regulator, now law professor. Black states that Paulson “knew that if he acted the way he should, that would have burst the bubble. Then Goldman Sachs would have been left with a very substantial loss, and that would have been the end of bonuses at Goldman Sachs.”
Personally, I lean towards the belief that Paulson was merely an incompetent Treasury Secretary, not maliciously reckless or willfully corrupt, as Black asserts (but what do I know?). That alternative is certainly worth exploring, as the timing sure worked out well for both Goldie and Hammering Hank:
“The most dangerous loans offered teaser interest rates that would shoot higher in two to five years and saddle borrowers with crushing monthly payments. From Jan. 1, 2006, through 2007, mortgage lenders issued more than $1.6 trillion worth of these types of loans, according to data from the industry newsletter Inside Mortgage Finance.
Black and other former regulators said that Paulson could have reined in this flood of loans by:
Directing the Office of Thrift Supervision to beef up its dwindling number of thrift examination teams and to prohibit subprime lending by federally insured firms such as Countrywide Savings and Loan, the IndyMac Bank and WaMu, which together issued more than $360 billion in dicey mortgages in 2006, according to International Monetary Fund data and company disclosures.
• Pressing Comptroller of the Currency John Dugan to rescind his agency’s 2004 rules barring state enforcement agencies from cracking down on abusive lending tactics.
•Using his influence in the Bush administration to stop Fannie Mae and Freddie Mac from buying subprime securities and allowing the industry to grow even bigger.
• Weighing in against proposed international banking standards, which subsequently went into effect, that would allow foreign banks to hold low reserves when they bought Triple A-grade securities, such as subprime bonds whose ratings were grossly inflated.
A second Paulson critic, retired senior thrift examiner Richard Newsom, wrote to Congress about the regulatory lapses that he said contributed to the crisis. In a phone interview, he said that it was “simply implausible that Paulson couldn’t see the relation between delaying strong action by Treasury and the benefit to letting places like Goldman” reduce their risks.”
Here’s the greatest irony of all: While ignoring the burgeoning subprime crisis, Paulson focus was on Deregulation: He “repeatedly voiced opposition to what he considered over-regulation of banks and investment banks. He particularly complained about a provision in the 2002 Sarbanes-Oxley securities restructuring law that requires corporate officers to submit sworn statements to the SEC vouching that their firms’ internal financial controls were adequate.”
Incompetent, or criminally corrupt? You decide.
>
Source:
How Hank Paulson’s inaction helped Goldman Sachs
Greg Gordon
McClatchy, October 10, 2010
http://www.mcclatchydc.com/2010/10/10/101753/inaction-by-treasurys-paulson.html
Goldman didn’t tell SEC about mortgage moves for months
Greg Gordon and Chris Adams
McClatchy, April 30, 2010
http://www.mcclatchydc.com/2010/04/30/93252/goldman-sought-to-shed-risky-mortgage.html
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October 14th, 2010 at 7:16 am
~Incompetent, or criminally corrupt?~
These attributes are not necessarily mutually exclusive.
October 14th, 2010 at 7:32 am
I don’t see how you could call the man incompetent. He ran GS for years and we all know they are the best and brightest the world has to offer. He exited that position for the treasury in 2006, at or near the peak of the housing bubble, and sold $500M of GS stock without having to pay a nickel in capital gains taxes. While Treasury secretary it’s documented that he was in constant contact with Lloyd Blankfein during the fall of 2008 crisis; he even had Sir Lloyd sit in on his AIG bailout meeting. Certainly he made his speeches with claims of wanting a strong dollar and claiming that the sub-prime crises was contained but for anybody to not see those statements as nothing more as self-serving lies demands a level of naivety that rarely exists in the human species. The man belongs in an orange jumpsuit in a bunk next to Bernie Madoff.
October 14th, 2010 at 7:32 am
Didn’t we hear about Paul O’Neil not playing ball with Robert Rubin with allowing Citi to unwind its holdings back in 2000 before that crash? Who was it that replaced O’Neil?
October 14th, 2010 at 7:41 am
Incompetent, or criminal?
I know GWB rose to the Presidency of the US, despite his often demonstrated incompetence, but that was at the whim of an insane American electorate (twice). Paulson, OTOH, ran GS.
I seriously doubt incompetence, but if that’s the case, it was felonious incompetence.
In a criminal enterprise as extensive as that we are witnessing in our banking industry, there might be some incompetents — people used by others to advance the scheme — but those patsies don’t usually end up as the primary beneficiaries of the scam.
October 14th, 2010 at 7:50 am
“Personally, I lean towards the belief that Paulson was merely an incompetent Treasury Secretary, not maliciously reckless or willfully corrupt, as Black asserts (but what do I know?).”
You know Barry they can’t have it both ways. First they said that the brightest and most talented Americans work at these companies and therefore they need to be paid millions to keep them. And then when something like this happens they can’t claim incompetence. So yeah I with Black on this one after all he had plenty of experience dealing with very corrupt bankers.
October 14th, 2010 at 7:59 am
How is it possible that wall street denizens can spot a nickel at a thousand miles but can’t see a criminal sleazebag at 10 paces?
October 14th, 2010 at 8:14 am
Google Hank Paulson in image mode, switch the results to “face mode” on the left, to get rid of the cartoons and charts, and look. Take the time, let it sink in and just take a good look at the man….
He is very expressive, he makes faces, but his eyes tell and very different story.
Ruthlessness is what comes to mind, but that’s just me.
Do the experiment, see for yourself.
That he ascended to head Goldman Sachs is certainly indicative of such a trait.
Pretty much excludes incompetence doesn’t it? But as Righline insightfully remarks, these traits are not necessarily exclusive. And we don’t know if he is really clever.
Here is the “table of truth” as it’s called in circuit logic;
Incompetent, Innocent, Ruthless
Incompetent, Criminal, Ruthless
Competent, Innocent, Ruthless
Competent, Criminal, Ruthless
Which is more likely ? You choose !
October 14th, 2010 at 8:20 am
Alan,
to your Q: , above, see http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=O%27Neill+Snow+U.S.+Treasury
A: Snow, as in Job..
~~
and, given this..”…GS became the only major Wall Street firm to safely exit the housing market before it crashed. McClatchy had previously reported that Goldman Sachs failed to report dumping their subprime positions to the SEC for 9 months, while making public statements to the inapposite to that…”
~~
inapposite (adjective) alien, aside from the point, at variance, beside the mark, beside the point, clashing, discordant, discrepant, disproportionate, extraneous, far-fetched, foreign, ill-adapted, ill-timed, illogical, immaterial, impertinent, improper, inaccordant, inadmissible, inapplicable, inappropriate, inapt, incidental, incompatible, incongruent, incongruous, inconsequent, inconsistent, inept, inessential, infelicitous, inharmonious, inopportune, insignificant, irreconcilable, irrelative, irrelevant, isolated, jarring, lacking importance, lacking relevance, malapropos, negligible, non idoneus, of little importance, pointless, remote, trivial, unallied, unapt, unbecoming, unbefitting, unconformable, uncongenial, unconsonant, undue, unessential, unfavorable, unfit, unfitting, ungermane, unharmonious, unimportant, unnoteworthy, unrelated, unseasonable, unsuitable, untimely, untoward, wrong
http://legal-dictionary.thefreedictionary.com/inapposite
http://www.thefreedictionary.com/inapposite
~~
no wonder..”…Paulson focus was on Deregulation: He “repeatedly voiced opposition to what he considered over-regulation of banks and investment banks. He particularly complained about a provision in the 2002 Sarbanes-Oxley securities restructuring law that requires corporate officers to submit sworn statements to the SEC vouching that their firms’ internal financial controls were adequate.”
~~~
LSS: not incompetent.
as an aside, We injure ourselves when we *believe that such things can collapse so beautifully..
buy, hey, what would I know? I, still, think that O’Neill countersigned FRNs should trade at a Premium..
and, in that vein, can scarcely believe that Ol’ TTT versions trade at parity..
October 14th, 2010 at 8:29 am
Come on, Barry, Paulson himself said that he told the President in August of 2006 about the “problems” in the housing industry….
Anyway, there are people out there who “smelled the rat” the moment Paulson was announced as the next treasury secretary (I refuse to capitalize when it comes to this criminal.) The housing peaked in 2005, and rolled over by May 2006, when market went south by 10%+.
Snow-man was out, and the CEO of the MOST profitable Walls t bank ( de facto the Leader of Wall St) was placed in DC to… bailout his cronies, what else? oh, and by their own admission, Paulson and Cash ‘n carry, and the blueprint for TARP in April of 2008!!!! The claims Paulson made in October 2008 that they had to deal really fast is bogus as well!
October 14th, 2010 at 8:39 am
Incompetent, or criminally corrupt? You decide.
Criminally corrupt.
October 14th, 2010 at 8:40 am
Criminally corrupt! This whole mess involves fraudulent activity on so many levels. A large part of our financial/ real estate/ governmental membership was involved in this giant ponzi rip off. There aren’t enough orange jump suits, but the big fish should be hauled in.
In total “they” blew a huge hole in the hull of our economy. Everyone on this site saw it coming.
The only types that can claim ignorance are guys like Bernanke who suffer from intellectual blindness. He didn’t have a clue, and still doesn’t. His Q.E. 2 will only add to instability and uncertainty which is the last thing we need- more misallocation.
October 14th, 2010 at 8:43 am
Why frame the issue as incompetant OR criminally corrupt? If you ask me, they were incompetant AND criminally corrupt.
October 14th, 2010 at 8:47 am
Seems like the incompetence inference is a criminal’s alibi or at least an in place means to lower the charges from murder 1 to manslaughter.
October 14th, 2010 at 8:50 am
HEHEHE or anyone else,
Question: How did Paulson manage to cash out of GS stock w/o paying any cap gains tax?
October 14th, 2010 at 8:50 am
Well – since it appears that no real legal discovery and prosecution is going to occur; it is useful to see the truth coming out for those who are willing to listen and learn.
October 14th, 2010 at 9:03 am
Paulson himself said that he told the President in August of 2006 about the “problems” in the housing industry…
Oh, well, if he said so then of course it must be true.
In any case, my biggest disappointment with President “Hope and Change” is that he has not brought people like William Black back into government. And I will be voting accordingly in November and again in 2012.
October 14th, 2010 at 9:12 am
Oh, and why hasn’t the villianous John Dugan been pilloried at the corner of Wall and Broad?
October 14th, 2010 at 9:43 am
Paulson should be sitting in a jail cell right now with many other big fish.
October 14th, 2010 at 9:49 am
@BR: You, yourself, have said before, “there are no coincidences”. So having said that, how can you believe this was due to mere “incomptence”? No way. You’re still sipping at the Wall Street kool aide here even as you poke at the industry. I know you work in the biz, but wake up.
October 14th, 2010 at 9:52 am
One of the risks of earning lots of money in a high-stress, high-profile job is the tendancy to become an asshole. Traders are especially susceptible to developing a belief of entitlement, that the prestige, pressure and money of their job means they allowed to behave in any way they want. This is generally limited to being loud and obnoxious in bars and restaurants, then throwing money around to pay off the peons who were annoyed. But at the darker end of the spectrum, traders start cutting corners, lying, cheating, and stealing when the market or their employer doesn’t reward them adequately.
This behaviour, while occasionally recognized as illegal, is not really considered wrong. The Rules, like lunch, are for wimps.
Paulson knew what he was doing was not legally right, but he probably felt the rules were wrong since they kept traders and bankers from maximizing profits. By allowing GS to sneak out of their positions, he probably knew he was being technically corrupt, but he also believed that GS was doing God’s work and that the people there were entitled to their money.
The end result is a crime. If you let Paulson skate by calling him incompetent, then you need to shut down every Wall Street bank and send the employees to work in factories (good luck finding THOSE jobs). If he was simply dumb, then you must claw back every dollar of bonus he was ever paid.
No, the true answer is that Paulson is a criminal, along with the rest of them. And anyone on this blog who has worked on Wall Street, like I have, knows that we are, or were, all bent.
October 14th, 2010 at 10:01 am
Don’t let Paulson slip away.
http://www.youtube.com/watch?v=e8r-YD3FdlE
October 14th, 2010 at 10:13 am
No one rises to the top of GS because they were financially incompetent or naive. Paulson was known for his ruthlessness:
Former Goldman Sachs CEO Henry Paulson is a major-league hard-ass with serious Wall Street credibility. In other words, he’s just the Treasury secretary we need.
Paulson, on the other hand, can operate and sell. First, let’s look at the operator side of the equation. At Goldman, Paulson won a reputation as a major son of a bitch, one of the meanest, most ruthless people who has ever worked there (full disclosure: I worked at Goldman in the eighties, and was a large hedge-fund client of the firm’s during the Paulson era). Paulson also was known to be singularly effective. During his seven-year tenure as CEO and chairman at the premier investment house, he built untold wealth, helped take the company public, and forced it to become international in scope, a move that assured its dominance for years to come. He also effectively outmaneuvered everyone to become Goldman’s sole leader, including former Goldman co-chairman turned New Jersey governor Jon Corzine, whom Paulson brought down on his way to the top.
Hank Will Hammer ’Em
October 14th, 2010 at 10:14 am
i love william black…
and his book THE BEST WAY TO ROB BANK IS TO OWN ONE
is a must read
but i feel we are a bit judging from later.
now we say “Of course we should have burst the bubble early.
not a widely held view then
including among the bank regulators more directly in charge of this than P
A complete early reform and bubble bursting would have revealed CITI merrill and all the other subprimers american home countrywide etc insolvent,
compared to GS losing their bonuses.
no one ready then to weed out the bad apples
a close reading of both black and newsom are consistent with this? and i will grant that it would ba a challenge gor P to ditinguish saving GS from “saving? the system
P makes my pitchfork and rope list, but way down.
October 14th, 2010 at 10:21 am
Fortunately, with the Bush Administration, one is not forced to choose. Both.
October 14th, 2010 at 10:24 am
Paulson got an exemption from paying capital gains taxes on his GS stock sale as he was “forced to sell it” in order to take over his position in Treasury as it would be a conflict of interest for him to oversee GS while running the treasury department while holding the stock; the same exemption is given to any other person going from private to public sector as we “want the best and brightest” running our government:
http://www.marketwatch.com/story/paulson-files-to-sell-500-mln-in-goldman-stock
October 14th, 2010 at 10:28 am
And most ruthless.
October 14th, 2010 at 10:33 am
I have long held tht both Bernankeand Paulson are guilty of criminal conduct in bailing out AIG to the benefit of Goldman in additon to otheer thefts from the country….of course the apologists grab on to the “:fearof systemic failure” argument to defend their actions to which I say “are you really that naive and stupid….no wonder noone is in jail”…
October 14th, 2010 at 11:12 am
Nothing to worry about.
They can just get the Inspector General to tell us that there was no malfeasance.
That should clear everything up.
October 14th, 2010 at 11:28 am
Criminally corrupt, ruthless, and sociopathic.
These people are dangerous. But he’s sitting somewhere in the lap of luxury chuckling away to his cronies, no doubt. Disgusting and enraging.
October 14th, 2010 at 11:29 am
you mean stammering hank not hammering hank paulson.
that son of a bitch deserves a dungeon. in any other nation on planet, he would be there.
usa is a criminal corporate militaristic fascist country now. from wall st to pentagon, we have become just a nation of grifters, now feeding on each other, as the world moves on.
amerika was a decent country at one time. never great. that hubris was the problem.
fed res needs to go. where is andrew jackson????
October 14th, 2010 at 1:48 pm
As much as I enjoy the snarky comments, I read the big picture for facts that I would not see in the other media. So let’s see if I can add some to this discussion.
Last year Vanity Fair magazine did a puff piece on Neil Kashkari. Not much of importance but one key revelation:
“In February 2008, that meant drafting an emergency plan in the unlikely event of an economic meltdown. Kashkari and a colleague wrote, “Break the Glass: Bank Recapitalization Plan.” When the banks actually tanked later that year, the 10-page plan laid the basis for TARP. Amid the chaos, Kashkari was appointed czar.”
When the crisis hit in the fall of 2008, Paulson said Treasury was blindsided. In fact he claimed they were so surprised that he only had time to prepare a three-page outline of his plan to Congress when he requested his $700,000,000,000.00. Kashkari’s plan is at . Note that the February 2008 plan is 10 pages. The September 2008 plan is three pages. It’s fun to compare the two.
Also note that in late 2007 the Federal Reserve changed its rules to permit the Federal Reserve for the first time in its history to print money to purchase assets from banks. Why would they do this if they had no idea the crash was coming?
Barry, these guys are not incompetent. They’re very smart and they’re doing exactly what they need to do to get their shareholders the greatest return. They have been fabulously successful at accomplishing their goals.
October 14th, 2010 at 1:50 pm
Sorry the link to the Kashkari “we had no idea the crash was coming” plan didn’t appear in my post somehow. It is http://www.andrewrosssorkin.com/?p=368>.
October 14th, 2010 at 1:59 pm
Incompetent, or criminally corrupt? You decide.
Criminally Corrupt wrapped in an ‘ah shucks blanket of incompetance
You gotta love the McClastchy reporters, at least someone is trying to keep the heat on … just need to see these as DOJ press releases and perp walks instead
October 14th, 2010 at 2:43 pm
Very upsetting. But we do live in a world where it’s every man for himself – especially the billionaires.
Perhaps Gates & Buffett could visit with Hank and ask him to donate most of his millions. And Lloyd at Goldman could learn to share his ill-gotten gains t00. The rich are indeed different, but just as corrupt.
October 14th, 2010 at 2:55 pm
@Marc P
Barry, these guys are not incompetent. They’re very smart and they’re doing exactly what they need to do to get their shareholders the greatest return. They have been fabulously successful at accomplishing their goals.
— Reply
The goals was unjust enrichment to the senior exec and cronies; shareholders, yeah right – the fact is they lost shareholder value since 2007 — but they sure returned $$ to the exec’s and employees in outrageous compensation and bonuses.
2007 2010
GS 250/sh 150/sh
AIG 1300/sh 42/sh
BAC 50/sh 12.50/sh
Citi 42/sh 4/sh
JPM 48/sh 38/sh
WFC 35/sh 25/sh
can’t see how share holder value could be the driver for those large bonuses
The only reason they are even still alive is the extraordinary bailout from the USG (Taxpayer)
Reagan era: Mr. Gorbachev TEAR DOWN that wall —-> Current: Mr. Obama CLAW BACK those BONUSES
October 14th, 2010 at 2:57 pm
@Marc P
Barry, these guys are not incompetent. They’re very smart and they’re doing exactly what they need to do to get their shareholders the greatest return. They have been fabulously successful at accomplishing their goals.
— Reply
The goals was unjust enrichment to the senior exec and cronies; shareholders, yeah right – the fact is they lost shareholder value since 2007 — but they sure returned $$ to the exec’s and employees in outrageous compensation and bonuses.
October 14th, 2010 at 4:03 pm
HEHEHE,
Thanks for the reply and link. I didn’t know about that provision.
October 14th, 2010 at 4:45 pm
The problem is how we define “best and brightest”. I would bet that lots of amazing talent like George Eastman, Sam Walton, or Mary Kay would never have been hired by a GS. The GS “measure” of talent might measure this country into a steady decline because it is a measure based on exploiting arbitrage and lesser-informed people versus adding marketplace value. Exploiting arbitrage and lesser-informed people both require a great deal of intelligence and hard work but what is the outcome of rewarding that intelligence versus adding marketplace value?
October 14th, 2010 at 5:52 pm
@obsvr-1:
OK. I stand corrected. I should have said:
“Barry, these guys are not incompetent. They’re very smart and they’re doing exactly what they need to do to get themselves the biggest paycheck. They have been fabulously successful at accomplishing their goals.”
October 15th, 2010 at 2:37 pm
[...] record bonuses are needed to retain the best and the brightest, but when they crash the system they play naive: They can’t have it both ways. First they said that the brightest and most talented Americans [...]