How Paulson gave Goldman the Lehman heads-up

By Felix Salmon
October 21, 2009
secret Paulson-Goldman meeting wasn't the only time that Hank Paulson treated his buddies at Goldman Sachs especially well while at Treasury. In fact, it wasn't the only time he did so before he got the now-famous waiver.

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The secret Paulson-Goldman meeting wasn’t the only time that Hank Paulson treated his buddies at Goldman Sachs especially well while at Treasury. In fact, it wasn’t the only time he did so before he got the now-famous waiver.

A bit further on in the Sorkin book, while Paulson is trying to work out what should be done with an imploding Lehman Brothers, we find this:

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 many ways, this is worse than Paulson’s meeting with Goldman’s board: in this case, Paulson is forcing Lehman to open its books fully to a direct competitor, for no obvious reason. And in this case it’s not at all obvious that Paulson got a sign off from Treasury’s general counsel before doing so.

I suspect this is what happens when you do all your business by phone rather than by email: you’re so comfortable with the fact that you’re not leaving any kind of paper trail, it becomes much easier to cross the line and abuse your position as the most powerful Treasury secretary in living memory to the benefit of your former firm. If the Moscow meeting wasn’t enough to precipitate some kind of Congressional investigation of Paulson, this should be.

Update: There’s more, a few pages later:

As they were making yet another pass through the earnings call script, Kirk’s cell phone rang. It was Harvey Schwartz from Goldman Sachs, phoning about the confidentiality agreement that Kirk was preparing. Before Schwartz began to discuss that matter, however, he said that he had something important to tell Kirk: “For the avoidance of doubt, Goldman Sachs does not have a client. We are doing this as principal.”

For a moment Kirk paused, gradually processing what Schwartz had just said.

“Really?” he asked, trying to keep the shock out of his voice. Goldman is the buyer?

“Okay. I have to call you back,” Kirk said, nervously ending the conversation, and then almost shouted to Fuld and McDade, “Guys, they don’t have a client!”…

McDade, reasonably, was concerned about sharing information with a direct competitor: How mcuh did they really want to divulge? At the same time, he felt they couldn’t take a stand against a plan that he believed had originated with Paulson…

McDade, turning back to his preparations for the fast-approaching call, made his position clear: “We were told by Hank Paulson to let them in the door. We’re going to let them in the door.”


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Outside of mal-intent, there other reasons why this might happen. Switching domains (say from GS to Treasury) is tough, since old habits die hard. Some of the most spectacular professional failures in recent years have come from just that, e.g. Summers as Harvard Pres. and Wolfowitz as World Bank Pres.

Posted by Anonymous2 | Report as abusive

Is the punishment for treason still death?? Hank Paulson would like to know.

Posted by the cronk | Report as abusive

Goldman wasn’t Paulson’s “former” firm — it’s the only place he’s ever worked.

As a Treasury secretary he would have been working for ALL Americans. He hasn’t done a minute’s work for anyone other than Goldman his entire life.

Why should I assume he was “being impartial” simply because his business card included the letters “U.S.” in his job title? I do not believe Paulson is/was/will be for one moment remotely interested in the nation as a whole.

Posted by Unsympathetic | Report as abusive

What did you think of Neel Kashkari’s interview on CNBC?

Posted by Boabdil | Report as abusive

This is only news if you like really old news. I already knew the substance of all this and I live in the middle of freaking Idaho. Lucky for Paulson he gave Lehman the shaft and not Goldman, gosh he would have lost his 700 million dollar stake.

Posted by Jim | Report as abusive

I don’t have the book yet, so I can’t check the context, but how is this different from the Vanity Fair excerpt where Paulson and Geithner keep calling up every bank to try to get them to merge with Morgan Stanley? Isn’t this just the same thing a few weeks earlier?

Posted by right | Report as abusive

” Some of the most spectacular professional failures in recent years have come from just that, e.g. Summers as Harvard Pres. and Wolfowitz as World Bank Pres.”

Yeah, Wolfowitz was *so* brilliant at the Pentagon, right?

His failure at the World Bank was just more of the same from that tool.

Posted by Jon H | Report as abusive

I can hear Paulson now: “But the business was so complex that only another IBank could have understood their books. I had to call in GS and I knew, based on their/our long historical relationship with Treasury that they would never have abused that information.”

But isn’t this exactly when everyone else brings in McKinsey or Bain? Isn’t the whole point to have YOUR OWN experts?

That’s why it’s either corruption of incompetence. There are only two choices.

Posted by Dollared | Report as abusive

I remember reading in the VF article along the lines of “We must save these guys somehow” from Paulson reg. GS.

It is pretty clear that there were long lengths of time where the duty to the taxpayer was the last thing on Paulson’s mind during that weekend. He was in the “Save GS at all costs” mode throughout.

Posted by Sam | Report as abusive

Put yourself in Hank Paulson’s situation. The whole financial ecosystem is collapsing around you. It’s happening extremely fast; days and hours, not weeks and months. (It’s like a dinosaur walking around 70 million years ago, then BAM, there’s a flash in the distance, the sky goes dark, and within days, all your food starts dying.) Suddenly, the mountains on which the world stands have been turned to sand, and the tide is coming in to wash the sand away. What do you do?

Nothing. You can do nothing. Why? Because YOU DON’T KNOW WHAT’S GOING ON! Events are unfolding rapidly, capital markets are extremely complex, and all the major players are hiding the truth in order to maintain a thread of confidence in their firms and prolong their survival. All you have is conflicting, fleeting, unreliable rumors.

The #1 thing you need is information. WHAT IS GOING ON? HOW IS THIS HAPPENING? Now if you’re Hank Paulson, who do you call for information? You don’t have many good options, as information is being actively concealed on all fronts, and even those in the eye of the storm have only a narrow view. You need a source that can see the big picture, with tentacles in the farthest reaches and deepest depths of the markets. Just as importantly, you need a source you can trust to (1) not feed you bullsh!t, and (2) not go out and repeat or leak what you say.

If you are Hank Paulson, there is only one option: Lloyd Blankfein, your former colleague, trusted friend, and CEO of Goldman Sachs. Who has a clearer picture of the markets than he who resides at the core of the Squid? Who has smarter, more perceptive subordinates collecting information? Who observes every trade, knows every deviation and regression, than the masters of HFT and the kings of the biggest dark pool on earth? And who can be more trusted, on the brink of collapse, when approached by a desperate man? Lloyd Blankfein, CEO of Goldman Sachs.

I wasn’t in the room, but I suspect that we should be commending Hank Paulson, not sniping at him. Standing on the edge of that chasm, Paulson put “optics” aside. He decided to let the politics sort themselves out when it no longer mattered. He knew it would make him an easy target at some later date (Oct 21, 2009, to be exact), but his responsibility was too great to act on such narrow considerations. He needed information, he needed it now, and there was probably not a single person on Earth better placed to gather and provide that information than Lloyd Blankfein. So he did what needed to be done.

Did Goldman benefit? Probably. Did Hank Paulson make bad decisions? Almost certainly. But do I think that Paulson put the bottom-line of Goldman Sachs above his duty as Treasury Secretary? That he decided bigger bonuses for his former employees were more important than saving the financial heart of the world? No, I do not.

Posted by scrilla_gorilla | Report as abusive

Only problem is Hank Paulson thinks Goldman Sachs is the financial heart of the world.

Posted by grape_ape | Report as abusive

Care to compare In Fed We Trust to To Big to Fail?

Posted by Steve | Report as abusive

This entire picture is disgusting. Really Paulson do not have a clue because the markets are too complex or simply, he has huge stakes at GS? Is he the only one in the USA gov that is directly or indirectly alleged to GS?

What are you going to drop next, that USA went to IRAQ because of the fear of mass destruction weapons?

Oh, My God. It’s hilarious when people try turn the simple crystal clear truth into complex scenarios that absolve everyone from their responsibilities because of “complex” scenarios.

This is just the re-assurance of what everyone knew. Goldman Sachs is the key-problem of the financial system because it manage to exploit every weakness in the best way. The current lesson is: If the financial system collapses we all lose money, otherwise they gain huge amounts of (non existent) money and we still.. starve.

Paulson should be driven in prison and GS as AIG should had left alone to die and nationalize only the healthy parts.

How can we expect from those who created the basis for this financial collapse to adjust it? Obama lost a big chance of rebuilding the system, instead he saved the world biggest mob.

“Insanity: doing the same thing over and over again and expecting different results.” Albert Einstein

Need more be said in reference to this situation?

Posted by econobiker | Report as abusive