Paulson tries to rewrite history

Hank Paulson is ringing out the old year with an interview in the Financial Times that attempts to rehabilitate his reputation and rewrite history. He fails miserably on both counts.

“Hank Paulson feared the world financial system faced meltdown three times in the past six months,” the article begins.

The first time, the US Treasury secretary told the Financial Times in an interview, was in August when he realised that Fannie Mae and Freddie Mac, the mortgage giants with $5,400bn (£3,650bn) in global liabilities were in serious trouble.

If August was the first time he realized Fannie and Freddie were in deep doo-doo, he just confessed to monumental ignorance and negligence. But in fact, the month before he offered up Treasury’s explicit backing for Fannie and Freddie paper. Why would he have done that if he thought everything was hunky-dory?

By the way, if you haven’t seen/heard the interview with BMO analyst Don Coxe about that move, do check it out. He argues that single declaration had a number of world-changing effects, all of them intentional: It shored up financial stocks for the moment. More significantly, it forced the hedge funds shorting the financials to cover their shorts. And it forced the hedge funds to dump their long commodity positions to raise the cash to cover those shorts. And sure enough, you can date the downdraft in commodities to the very weekend Paulson made that announcement.

The second was in mid-September, when Lehman Brothers, the investment bank, collapsed and a string of other financial institutions were on the brink of failure.

This makes it sound as if Lehman’s failure was some sort of organic phenomenon. But even at the time we knew there was a deliberate decision to let Lehman go under. And as I pointed out last month, it was a truly boneheaded move if you’re approaching it from the standpoint of a bankster like Paulson or his presumed successor Timothy Geithner.

The third was at the end of that month, when the House of Representatives initially voted to reject his request for a $700bn bail-out fund to shore up the financial system.

“That was the bottom as far as I was concerned because I had said we were looking at the abyss there if we could not get something done,” he says. Mr Paulson recalls Barney Frank, the wisecracking Democratic chairman of the House financial services committee, trying to reassure him all was not lost.

“He says, ‘they’ll come back. Sometimes the kids have got to run away from home and get hungry before they come back’.”

Leave aside the patronizing characterization of bailout opponents as wayward teenagers (although it certainly applies to those who switched their votes once they got some pork added to the bill). Leave aside Paulson’s threat to a couple of the stalwarts who maintained their opposition that martial law would ensue if the bill didn’t pass. The really brazen part of this is that Paulson threatened martial law if he didn’t have his $700 billion to buy up the banks’ toxic assets… and then he changed his mind and pumped the money directly into the banks instead. So he didn’t even have a clue about what he was going to do with his $700 billion; he just wanted the money and the power. He pretty well says as much:

The Treasury secretary says he was forced to battle the crisis “without all the authorities that a major nation like the US needs”.

Only when Congress authorised the $700bn troubled asset relief programme in early October, was he able to deploy public capital both in rescue operations and in support of the wider financial system.

The article concludes with Paulson telling us the new president’s team — Summers, Geithner, — will handle the transition seamlessly and pick up right where he left off.

He actually means this by way of assurance.

What it really signals is that 2009 is shaping up to be another momentous year. You need the best information you can get to help prepare. Agora Financial’s team of analysts saw the Fannie-Freddie storm as long ago as 2005. You can start the new year with lifetime access to all of our services — including our new premium forex and income services — for a single low price. Our semi-annual membership offer for the Agora Financial Reserve expires at midnight EST tomorrow. The details are here.

Best wishes for the new year.

The Daily Reckoning