Sunday, May 8, 2011

Henry Merritt 'Hank' Paulson: The Face to This Financial Debacle

Henry Paulson
From Wikipedia, the free encyclopedia
Henry M. Paulson

74th United States Secretary of the Treasury
In office
July 3, 2006 – January 20, 2009
President          George W. Bush
Preceded by     John W. Snow
Succeeded by   Timothy Geithner
Born     March 28, 1946 (age 65)
Palm Beach, Florida
Political party    Republican Party

Profession        Investment Banker
Religion            Christian Scientist
Henry Merritt 'Hank' Paulson, Jr. (born March 28, 1946) served as the 74th United States Treasury Secretary. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs. He is currently a fellow at Johns Hopkins University's School of Advanced International Studies (SAIS). 
Paulson was born in Palm Beach, Florida, to Marianna (née Gallauer) and Henry Merritt Paulson, a wholesale jeweler.[1] He was raised in Barrington Hills, Illinois, as a Christian Scientist.[2] Paulson attained the rank of Eagle Scout in the Boy Scouts of America.[3][4]
A star athlete at Barrington High School, Paulson was a champion wrestler and stand-out football player, graduating in 1964. Paulson received his A.B. in English from Dartmouth College in 1968;[5] at Dartmouth he was a member of Phi Beta Kappa and Sigma Alpha Epsilon and he was an All-Ivy, All-East, and honorable mention All American as an offensive lineman.
He met his wife Wendy Judge, a Wellesley College graduate, during his senior year. The couple have two adult children, sports-team owner Henry Merritt Paulson III, more commonly known as Merritt Paulson, and journalist Amanda Paulson. The Paulsons became grandparents in June 2007. They maintain homes in both Barrington Hills and Chicago.
Paulson received his Master of Business Administration degree from Harvard Business School in 1970.[6]
[edit]Early career

Paulson was Staff Assistant to the Assistant Secretary of Defense at The Pentagon from 1970 to 1972.[7] He then worked for the administration of U.S. President Richard Nixon, serving as assistant to John Ehrlichman from 1972 to 1973, during the events of the Watergate scandal for which Ehrlichman was convicted, and sentenced to prison.
[edit]Goldman Sachs

He joined Goldman Sachs in 1974, working in the firm's Chicago office under James P. Gorter. He became a partner in 1982. From 1983 until 1988, Paulson led the Investment Banking group for the Midwest Region, and became managing partner of the Chicago office in 1988. From 1990 to November 1994, he was co-head of Investment Banking, then, Chief Operating Officer from December 1994 to June 1998;[8] eventually succeeding Jon Corzine as chief executive. His compensation package, according to reports, was US$37 million in 2005, and $16.4 million projected for 2006.[9] His net worth has been estimated at over $700 million.[9]
In January 2003, Paulson was criticized for stating, "I don't want to sound heartless, but in almost every one of our businesses, there are 15 to 20 percent of the people who really add 80 percent of the value. I think we can cut a fair amount and not get into muscle and still be very well-positioned for the upturn." He later issued an apology to all of the company's employees via voice-mail.[10]
Paulson has personally built close relations with China during his career. In July 2008, The Daily Telegraph reported "Treasury Secretary Hank Paulson has intimate relations with the Chinese elite, dating from his days at Goldman Sachs when he visited the country more than 70 times."[11]
In 2004, at the request of the major Wall Street investment houses—including Goldman Sachs, then headed by Paulson—the U.S. Securities and Exchange Commission agreed unanimously to release the major investment houses from the net capital rule, the requirement that their brokerages hold reserve capital that limited their leverage and risk exposure. The complaint put forth by the investment banks was of increasingly onerous regulatory requirements—in this case, not U.S. regulator oversight, but European Union regulation of the foreign operations of U.S. investment groups. In the immediate lead-up to the decision, EU regulators also acceded to U.S. pressure, and agreed not to scrutinize foreign firms' reserve holdings if the SEC agreed to do so instead. The 1999 Gramm-Leach-Bliley Act, however, put the parent holding company of each of the big American brokerages beyond SEC oversight. In order for the agreement to go ahead, the investment banks lobbied for a decision that would allow "voluntary" inspection of their parent and subsidiary holdings by the SEC.
During this repeal of the net capital rule, SEC Chairman William H. Donaldson agreed to the establishment of a risk management office that would monitor signs of future problems. This office was eventually dismantled by Chairman Christopher Cox, after discussions with Paulson. According to The New York Times, "While other financial regulatory agencies criticized a blueprint by Treasury Secretary Mr. Paulson proposing to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency."[12]
In late September 2008, Chairman Cox and the other Commissioners agreed to end the 2004 program of voluntary regulation.
[edit]U.S. Secretary of the Treasury

Paulson (right) with President George W. Bush as his nomination to become Treasury Secretary is announced.
Paulson was nominated on May 30, 2006, by U.S. President George W. Bush to succeed John Snow as the Treasury Secretary.[13] On June 28, 2006, he was confirmed by the United States Senate to serve in the position.[14] Paulson was officially sworn in at a ceremony held at the Treasury Department on the morning of July 10, 2006.
Paulson identified the wide gap between the richest and poorest Americans as an issue on his list of the country's four major long-term economic issues to be addressed, highlighting the issue in one of his first public appearances as Secretary of Treasury.[15]
Paulson conceded that chances were slim for agreeing on a method to reform Social Security financing, but said he would keep trying to find bipartisan support for it.[16]
He also helped to create the Hope Now Alliance to help struggling homeowners during the subprime mortgage crisis.[17]
Paulson was known to have persuaded President George W. Bush to allow him to spearhead U.S.-China relations and initiated and led the U.S.-China Strategic Economic Dialogue, a forum and mechanism under which the two countries addressed global areas of immediate and long-term strategic and economic interest. In spring 2007, Paulson warned an audience at the Shanghai Futures Exchange that China needed to free up capital markets to avoid losing potential economic growth, saying: "An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention." In September 2008, in light of the economic crisis experienced by the U.S. in the interim, Chinese leaders evidenced hesitation to follow Paulson's advice.[18]
[edit]Notable statements
In April 2007 delivered an upbeat assessment of the economy, saying growth was healthy and the housing market was nearing a turnaround. "All the signs I look at" show "the housing market is at or near the bottom," Paulson said in a speech to a business group in New York. The U.S. economy is "very healthy" and "robust," Paulson said.[19]
In August 2007, Secretary Paulson explained that U.S. subprime mortgage fallout remained largely contained due to the strongest global economy in decades.[20]
In May 2008, The Wall Street Journal wrote that Paulson said U.S. financial markets are emerging from the credit crunch that many economists believe has pushed the country to the brink of recession. "I do believe that the worst is likely to be behind us," Paulson told the newspaper in an interview.[21]
On July 20, 2008, after the failure of Indymac Bank, Paulson reassured the public by saying, “it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”[22]
On August 10, 2008, Secretary Paulson told NBC’s Meet the Press that he had no plans to inject any capital into Fannie Mae or Freddie Mac.[23] On September 7, 2008, both Fannie Mae and Freddie Mac went into conservatorship.[24]
[edit]Credit Crisis of 2007–2009

Main article: Late-2000s financial crisis

The neutrality of this article is disputed. Please see the discussion on the talk page. Please do not remove this message until the dispute is resolved. (May 2011)
[edit]Lehman's bankruptcy
The support given by Federal Reserve Board, under Ben Bernanke, and the US Treasury with Paulson at the helm, in the acquisition of Bear Stearns by J.P. Morgan and the $200bn facility made available to Fannie Mae and Freddie Mac attracted a great deal of criticism in congress by both Republicans and Democrats.[25] When Barclays required support for acquiring Lehman Brothers, both Geithner and Paulson were reluctant. Instead, they pressured Lehman into chapter 11 bankruptcy, believing the effect wasn't systemic.[26]
"Well, as you know, we're working through a difficult period in our financial markets right now as we work off some of the past excesses. But the American people can remain confident in the soundness and the resilience of our financial system." [27]
This proved to be a colossal miscalculation, as the money markets began to free-fall between September 15, 2008, and September 19, 2008.
[edit]U.S. government economic bailout of 2008
Paulson was the designated leader of the Bush Administration's efforts in 2008 to nationalize the cost of bad loans made by financial institutions.
Through unprecedented intervention by the U.S. Treasury, Paulson led government efforts which he said were aimed at avoiding a severe economic slowdown. He pushed through the conservatorship of government agency mortgage giants Fannie Mae and Freddie Mac. Working with Federal Reserve Chairman Ben Bernanke, he influenced the decision to create a credit facility (bridge loan & warrants) of US$85 billion to American International Group so it would avoid filing bankruptcy.
In late September 2008, Paulson, along with Bernanke, led the effort to help financial firms by agreeing to use $700 billion dollars to purchase bad debt they had incurred.[28] He faced criticism from economists for initially refusing to consider injecting large amounts of cash into financial institutions directly by purchasing stock, an option which other countries in similar circumstances had pursued.[29] This was the option favored by Bernanke, and the one that was eventually followed.[30]
On September 19, 2008, Paulson called for the U.S. government to use hundreds of billions of Treasury dollars to help financial firms clean up nonperforming mortgages threatening the liquidity of those firms.[31] Because of his leadership and public appearances on this issue, the press labeled these measures the "Paulson financial rescue plan" or simply the Paulson Plan.[32]
With the passage of H.R. 1424, Paulson became the manager of the United States Emergency Economic Stabilization fund.
As Treasury Secretary, he also sat on the newly established Financial Stability Oversight Board that oversees the Troubled Assets Relief Program.
Documents obtained by government watchdog group Judicial Watch reveal that in an October 13, 2008, meeting with executives from 9 major American banks, Paulson told bankers that they would be forced to accept government bailout money, whether they wanted it or not.[33] One of the documents, a talking points memo, gave bankers the ultimatum: "If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance." The logic was that if everybody were forced to accept the money, then doing so would destigmatize the process in an attempt to avoid threatening the already-eroded market confidence in some of the weaker banks.
Time named Paulson as a runner-up for its 2008 Person of the Year, saying, with reference to the global financial crisis, "if there is a face to this financial debacle, it is now his..." before concluding he "is really bad at explaining why he made the choices he did" and that "given the ... realities he faced, there is no obviously better path [he] could have followed".[34]
[edit]Conflict of interest claims
It has been pointed out that Paulson's plan could potentially have some conflicts of interest, since Paulson was a former CEO of Goldman Sachs, a firm that may benefit largely from the plan. Economic columnists called for more scrutiny of his actions.[35] Questions remain about Paulson's interest, despite the fact that he had no direct financial interest in Goldman, since he had sold his entire stake in the firm prior to becoming Treasury Secretary, pursuant to ethics law.[36] The Goldman Sachs benefit from AIG bailout was recently estimated as USD 12.9 billion and GS was the largest recipient of the public funds from AIG.[37] Creating the collateralized debt obligations (CDO's) forming the basis of the current crisis was an active part of Goldman Sach's business during Paulson's tenure as CEO. Opponents[who?] argued that Paulson remained a Wall Street insider who maintained close friendships with higher-ups of the bailout beneficiaries.[citation needed] If passed into law as originally written, the proposed bill would have given the United States Treasury Secretary unprecedented powers over the economic and financial life of the U.S. Section 8 of Paulson’s original plan stated: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."[38] Some time after the passage of a rewritten bill, the press reported that the Treasury was now proposing to use these funds ($700 billion) in ways other than what was originally intended in the bill.[39]

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