Defoliating JC Flowers

September 2, 2009

William Cohan has a great takedown of J. Christopher Flowers and his struggling private equity firm in Fortune.

The story sheds light on how Flowers lost a good deal of money for his investors over the past few years and how this has tarnished the reputation he earned years ago at Goldman Sachs.

Cohan also does a great job chronicling the Flowers’ publicity machine, which excels at getting him linked in the business press to numerous potential deals. Even though Flowers’ firm never completes many of the deals he’s said to have interest in.

But the most intriguing part of Cohan’s story is Flowers’ claim that he was one of the people who alerted former Treasury Secretary Hank Paulson to the desperate situation facing American International Group a week before Lehman Brothers collapsed. Flowers says he learned of AIG’s terrible plight in early September when the giant insurer reached out to him as potential savior.

Cohan doesn’t spend much time exploring this conversation between Flowers and Paulson but it’s probably worthy its own investigative story. With the anniversary of Lehman’s collapse fast approaching, this intriguing incident is another reminder of just how clueless our public officials were to the problems that almost sunk the global financial system.

I think Flowers’ account of his talk with Paulson is probably accurate. In the summer of 2008, Paulson was going around the country privately telling news organizations that the financial crisis was nearing an end. What’s particularly shocking is that Paulson was trying to sell this story just a few weeks before the federal government bailed out mortgage giants Fannie and Freddie.

There’s no doubt Paulson didn’t understand just how dire the situation was at AIG. Maybe if he did, he would have done more to avert Lehman’s bankruptcy–an event which nearly turned a very bad credit crunch into the second Great Depression.

Of course, what we still don’t know is just when Fed Chairman Ben Bernanke and then New York Fed Chairman Tim Geithner became aware of the gravity of the situation at AIG. Were they as out of touch as Paulson appears to have been a year ago?

That’s a question the folks on Capitol Hill should ask Geithner, now Treasury secretary, the next time he testifies before a Congressional Committee. And it certainly should be something that comes up during the hearings on Bernanke’s reappointment.

It’s amazing. One year after the collapse of Lehman and the expenditure of trillions of dollars in federal bailout money, loans and debt guarantees, we still don’t know just what our public officials were thinking in the two weeks leading up to that event.

It’s finally time to start getting some answers.

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