Felix Salmon

Paulson vs Fuld, cont.

By Felix Salmon
August 31, 2009

Vanity Fair scores another bullseye this month with Todd Purdum’s 8,000-word article on what Hank Paulson was thinking over the course of the financial crisis, as revealed in a series of embargoed interviews he gave at the time — VF has, improbably, become the home of the best financial journalism in the world of magazines.

There’s more good stuff in this article than can easily be excerpted — go read the whole thing, which kicks off with Paulson throwing up in his private bathroom and just gets better from there. Barney Frank comes out very well indeed — better than Paulson, actually — while Barack Obama’s choice of Tim Geithner as Treasury secretary looks more than it did already like a vote for the continuation of the Bush administration’s status quo.

This article is interesting in that it does somewhat back up the official side of the story as regards Treasury’s (in)ability to bail out Lehman Brothers:

The meltdown at Lehman was catastrophic enough, and Paulson took enormous heat for its failure. Barclays, the British bank, had hoped to buy it, but British regulators blocked the deal, and Paulson saw no alternative. “Lehman Brothers was something that we had been focused on and worked on and worried about for a year. And we knew, and Dick Fuld [the Lehman C.E.O.] knew, and we kept telling him every way we knew how that if he announced earnings like he thought he was going to announce—right after he announced the second-quarter earnings—the company would fail. And when you’ve got an investment bank, no one had any powers to deal with that. I certainly didn’t have any powers to deal with that.”

It’s not clear when exactly Paulson said this, which is important: the decision not to bail out Lehman went quite quickly from being seen as bold and decisive to being seen as utterly catastrophic, and the story about Treasury’s hands being tied only really started to emerge after the latter view became conventional wisdom. But there’s no doubt that Paulson is throwing Fuld under the train here. Which is the kind of thing which Henry Paulson, former CEO of Goldman Sachs, probably wasn’t too upset about doing. Could Henry Paulson, Treasury secretary, really silence such internal thoughts? I doubt it, somehow.

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When I say that I wanted Lehman to be saved, I mean that the Treasury Dept. could have sweetened the deal for the B of A. Also, that the Fed could have advanced funds to Lehman. My evidence would be that the Fed advanced funds to AIG, and the Treasury Dept. worked frantically to get the B of A to take over Merrill, only a few days later.

Now, I realize that Bernanke says that Lehman had no collateral, and Paulson says the Lehman couldn’t be saved, implying that what’s being mooted is the Treasury Dept. doing something other than terrorizing the B of A into a merger. But, really, given their performance after the disaster struck, neither man seems a stickler to the rules when he’s got a fire under his rear. I just wish that they hadn’t needed to be terrorized into action.


I continue to believe that Paulson did the right thing in letting Lehman fail on for both moral and economic reasons. Fuld was told repeatedly to sell the firm and he had a willing buyer in the Japanese, but he wanted to hold out for independence or a better price. Fuld believed that his company was too big to fail and he pushed that belief to the max, he was going to take maximum advantage of “too big to fail”.

Unlike AIG, Lehman’s failure didn’t have the potential to destroy the entire financial system. A lot of other firms used AIG to hedge their portfolios, AIG failing would have put those firms in question. Lehman’s failure did not cause the crisis, it only signaled how bad the situation was to everyone else. Had Lehman been saved, we still would have had a crisis, bad loans and high leverage were what caused the crisis.

There is no reason why the taxpayer should bail out firms if it does not have to. That is if Lehman could fail without destroying the financial system, then it should be allowed to fail. I believe that there was probably room for only one big failure that the market could absorb, and Lehman was it.

How quickly people forget the circumstances and the sentiment during the Lehman failure. Congress had just rejected TARP, Paulson was a whole week early but Congress wasted that time debating. There was absolutely no political will to bail out both Lehman and AIG. The AIG bailout is still controversial and not liked! Paulson did what he had to do and I believe he made all the right decisions regarding AIG and Lehman. Even in retrospect.

I find it amazing that some of those who criticize the bailout of AIG and the “Wall Street Fat Cats” also blame Paulson for not saving Lehman! Seems like he can’t win either way, but I guess that comes with the job. I’m glad we had a Secretary who was able to put the interests of the country ahead of his stature or image.

I’m just angry at all the criticism leveled at a person who I think did a good job versus the people who put the country in danger, those being the politicians who voted against TARP and Shelia Bair who constantly advocated bad policy ideas and who also refused to go along with Bernanke and Paulson until forced to.

Posted by BJ Feng | Report as abusive

“the decision not to bail out Lehman went quite quickly from being seen as bold and decisive to being seen as utterly catastrophic, and the story about Treasury’s hands being tied only really started to emerge after the latter view became conventional wisdom.” Sad but true. As this version has become conventional wisdom the growing consensus has also become that the problem was liquidity, not solvency. The failure of Lehman should have underlined the dangers of taking on excessive risk and brought about a renewed emphasis on strong balance sheets.


From Vox and Mark Thoma:

http://economistsview.typepad.com/econom istsview/2009/08/triple-timeinconsistent -policy.html

“A financial crisis is not the best time for reform or building credibility, especially if those actions go against the private sector’s expectations. Policymakers should focus their attention on putting out the fires and minimize the short-run social costs.”

Here’s a comment I posted on Reason Oct.9th:

“The market’s reaction after the Lehman refusal showed that the markets and investors were expecting a bailout. In other words, there was an implicit government guarantee to intervene in a crisis such as this. In this instance, to try and go against the expectations of the market would be very hard and complicated. On the other hand, going forward, it will be clear that this implicit guarantee, which will now be explicit, was partly responsible for this crisis. I believe that this will come to be widely understood. Contrary to what you are saying, the moral hazards of this arrangement are more widely understood and accepted, and will finally have to be addressed.

I know that you’re not going to like hearing this, but the uncertainty was caused by the government not bailing out Lehman. The reaction of the credit markets showed that people were expecting a bailout, and when they didn’t get one, they started to panic. believing that they might be on their own. I’m not defending this belief or the bailout here, but simply calling attention to the real conditions under which the market and investors were operating”

The Calvo post gets it right.


I’ve said it before and I’ll say it again: democracy doesn’t work when the majority aren’t heard, only the loudest are. Politicians are weak-willed and arrogant and think of themselves before the majority. I believe that Paulson did his best, and I also don’t doubt for a second that Washington stooges blocked his every path because they didn’t/couldn’t understand what he was trying to say, or in fact didn’t/couldn’t care less. Change can be enacted very easily, and I think a third party introduced into American politics that has the cajones to stand up FOR the majority (not TO the majority) is a necessary first start.

Also wanted to say, b/c I want to say it as much as possible to Americans, that America now has an enormous structural deficit, i.e. little nips ad tucks won’t cut it (people love to say pork spending, which amount to maybe $80-100b, not $1.5t). Face it now – expect higher taxes, regardless of Reps or Dems, and expect your tax dollar to not go nearly as far for a long time. It’s either that or default in 10-15 years.

Posted by the Shah | Report as abusive

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