Matt Yglesias

Paulson’s Funny Business

Felix Salmon brings us what looks to me like a blockbuster scoop about Hank Paulson’s inappropriate hanky-panky with Goldman Sachs. From Andrew Ross Sorkin’s Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves (don’t think this one needed the subtitle):

If all that weren’t enough to deal with, [Lehman president Bart] McDade had just had a baffling conversation with [CEO Dick] Fuld, who informed him that Paulson had called him directly to suggest that the firm open up its books to Goldman Sachs. The way Fuld described it, Goldman was effectively advising Treasury. Paulson was also demanding a thorough review of Lehman’s confidential numbers, courtesy of Goldman Sachs.

McDade, though never much of a Goldman conspiracy theorist, found Fuld’s report discomfiting, but moments later was on the phone with Harvey Schwartz, Goldman’s head of capital markets. “I’m following up at Hank’s request,” he began.

After another perplexing conversation, McDade walked down the hall and told Alex Kirk to immediately call Schwartz at Goldman, instructing him to set up a meeting and getting them to sign a confidentiality agreement.

“This is coming directly from Paulson,” he explained.

In a separate incident Paulson held a secret meeting (in Moscow!) with the Goldman board at which he gave them a private briefing of his views on the economic outlook. I can’t think of any non-corrupt possible rationale for that, but it also doesn’t seem like a huge deal. This other thing, by contrast, you could imagine being on the up-and-up (understanding Lehman’s books was a legitimate policy issue and arguably Goldman was better-equipped to do it than the government) were there not the appearance of corruption granted by Paulson’s past as a Goldman guy. But at the same time, it’s a very big deal. And when you put the two anecdotes together you have a very, very ugly picture—something that strikes me as easily worthy of some congressional hearings.

Sweet Bailout

Looks to me like the $700 billion rescue package may have been $1.6 billion too large:

Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.

The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.

Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.

The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.

A lot of people are going to read this as a confirmation of the Sirota/Pence view that government intervention was unnecessary. I don’t see it that way. Credit conditions really did improve post-bailout, rather than get worse as it looked like they might have. The right thing to do is keep the crosshairs where they belong — on George W. Bush and Hank Paulson who decided to implement their recapitalization scheme in an irresponsible manner. Normally, when you “inject capital” into an enterprise you get a share of the action — board seats, voting shares, etc. — not just a dividend. That way, the public’s representatives would have had a way to ensure that the public interest was safeguarded as banks played with the public’s money. But Bush and Paulson care more about ideological correctness (free market!) and helping their buddies (Goldman!) than they do about safeguarding the public interest. Since there was no way to bring an alternative, less horrible administration to power back in October, I see no real alternative to doing something and then letting Bush and Paulson implement it poorly.

The question is, can Barack Obama do any better? With good reason, we’re not ordinarily comfortable with the government exerting vast control over the banking sector. But also with good reason, we’re not ordinarily comfortable with the government “injecting” hundreds of billions of dollars into the industry. But if the latter step is necessary, then so is the former.