Hank Paulson, Serial Revisionist

First, Hank Paulson said that he wasn’t willing to use government money to rescue Lehman. Then he said that he would have loved to save Lehman, but he didn’t have the powers. Now he’s on his third version: he did have the powers after all, and he tried his hardest, but the Brits scuttled the whole thing.

Paulson had long believed that free markets work only if companies, no matter how big or vital to the financial system, could pay for their mistakes by failing. Nothing is as powerful a motivator as the possibility of a collapse, he would say.

He articulated this philosophy in a July speech in London and continued to maintain this viewpoint in public even as troubled Wall Street giant Lehman Brothers edged toward the brink in September… Just three days before Lehman failed, Paulson reinforced the point, telling reporters and Wall Street executives that no government money would be used to save the 158-year-old investment bank.

But behind the scenes, Paulson had already shifted his position. He communicated a different message to executives at Barclays, a British bank that he had recruited to buy Lehman and save it from collapse.

"I said, ‘There wouldn’t be government support,’ " Paulson said. "They said they wouldn’t buy it without government support."

"Then I said, ‘Well, give us your best deal with government support, and let me try to figure out how to make it work.’ " Though he had concluded that the Treasury Department did not have the authority to give Lehman money, he was willing to see whether the Federal Reserve would help bail out the bank, much as the Fed had provided crucial guarantees for the sale of the ailing investment bank Bear Stearns in March.

In the end, Barclays’s British regulator blocked the Lehman deal. The Fed, in turn, refused to prop up a company without a buyer from private industry.

Clearly Paulson is having a lot of difficulty picking one story and sticking to it. Instead, as Jim Surowiecki says, "everyone at this point is trying to make sure their reputations emerge intact from what was clearly an abysmally bad decision, whoever made it". It’s an unedifying specatcle.

And despite the fact that Paulson admits to being behind the curve, he’s also trying to spin the story that he was sketching out plans for massive government intervention in the financial markets as far back as January, a good two months before Bear Stearns failed:

Paulson also came around to the idea of massively intervening in the markets to prevent the failures of financial firms, despite his worries that such a bailout would motivate companies to take excessive risks because of the prospect of a government backstop — a problem known as moral hazard.

As far back as January, Paulson said, he began to discuss the outlines of this plan with Fed Chairman Ben S. Bernanke.

I’m beginning to think that Paulson’s book, if he ever writes one, won’t be nearly as useful or interesting as I imagined it would be a couple of months ago: he’s clearly not a reliable narrator. And the legion of financial journalists who are writing books about this crisis are going to have their work cut out for them, trying to disentangle the truth about what really happened from the revisionist spin.

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