Andrew Ross Sorkin lets Hank Paulson spin away this morning in a column about the former Treasury Secretary’s thoughts on the financial-reform bill.
His critics might say that his suggestions are a bit too convenient, but Mr. Paulson earnestly said that he and the Bush administration were blindsided by the development of the market for collateralized debt obligations and the importance of “repos,” or repurchase agreements, that kept investment banks afloat, often literally on a overnight basis.
It’s amazing that reporters are still letting somewhat like Paulson, former chief executive of Goldman Sachs, get away with this nonsense. Here’s my late pal Mark Pittman, back in 2007:
Treasury Secretary Henry Paulson says the U.S. is examining the subprime mortgage crisis to ensure that “yesterday’s excesses” aren’t repeated. He could be talking about himself and his former firm, Goldman Sachs Group Inc.
Paulson, 61, doesn’t mention that Goldman still has on the market some $13 billion of almost $37 billion in bonds backed by subprime loans or second mortgages that it created while he was chief executive officer. Those bonds have an average delinquency rate of almost 22 percent, higher than the average of other subprime bonds from the period, according to data compiled by Bloomberg.
So Paulson was “blindsided by the development of the market for collateralized debt obligations” despite having created $37 billion of them? I don’t think so. Remember, Paulson was CEO of Goldman (an Audit funder) until June 2006, which happened to be the very month the housing bubble popped and prices started their long collapse.
And what about the importance of repos? Here’s how The Wall Street Journal described the repo market in early 2008:
The $4.5 trillion repo market isn’t a newfangled innovation like subprime-backed collateralized debt obligations. It is a decades-old, plain-vanilla market critical to the smooth functioning of capital markets. A default by a major counterparty would have been unprecedented, and could have had unpredictable consequences for the entire market.
The repo market—short-term loans backed by assets—was part of the foundation of how Wall Street funded itself. That also blindsided Mr. Paulson, CEO of Goldman Sachs, recipient of close to a billion dollars in compensation over his career? Sure, boss!
It’s true that Goldman relied less on repo than its competitors. But it still funded 15 percent of its assets (in 2007) with repos and Paulson was surely aware of the extent his competitors used repos.
Sorkin does balance, however weakly, Paulson’s bogus assertion that his hands were tied with Lehman:
As he recalled those sleepless days in September, he suggested that had he had resolution authority, he would have been able to take over Lehman Brothers and the American International Group without the financial system crumbling. (Of course, there remains a running debate about why Mr. Paulson didn’t seek to have the government bail out Lehman Brothers; he says he didn’t have the powers.)
But then there’s Paulson’s unquestioned assertion that “The root causes of all this are housing policies — not just Fannie and Freddie”—which is a bit of jujitsu to try to deflect blame off Paulson and his cohort on Wall Street. Housing policies (problematic though many of them were) meant to encourage homeownership did not force Paulson et al to invent a grotesque system of predatory lending whose sole purpose was to enrich themselves.
So, Paulson’s hoocoodanode? schtick is seriously bogus, as John Gapper wrote back in 2008, and the Times and Sorkin shouldn’t type it down without calling him out.
But then again, this isn’t the first time Sorkin has let Paulson off easy. Here’s Audit CEO Dean Starkman in a review of Too Big to Fail a few months ago:
A Martian reading TBTF would have no inkling that Fuld, Paulson, Citigroup, and the like were essentially cleaning up their own mess…
It was Goldman, with Paulson at the helm, that strenuously lobbied for looser capital requirements in 2004, unleashing the sort of leverage that Paulson is seen fretting about. And it was Paulson’s Goldman (as Pittman’s reporting revealed back in 2007) that did more than its share to create the defective securities that are seen melting down in TBTF. Sorkin explains none of this.
And he still doesn’t.
— Further Reading:
The Price of Admission: Andrew Ross Sorkin’s debut and the limits of access journalism.
The Great Man Theory and Hank Paulson: Business press iconography is over the top.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum.