Friday, October 3, 2008

Paulson Did It?

 In an article this morning NY Times reporter Stephen Labaton reports that former Goldman Sachs chief, and current Treasury Secretary Hank Paulson was one of five Wall Street executives pushing for a rule change that would later evolve into the most ominous and dangerous part of our current financial debacle.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

Could what appears to be the largest and most dangerous part of the current meltdown have been avoided? I am not an expert, but it does appear that a warning was sent to the SEC.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.

John McCain may not have been completely off base when last month he all but called for the firing of SEC Chairman Christopher Cox. At the time, it seemed like an odd way to begin restoring confidence in markets around the world, i.e. US financial, credit and stock markets. Clearly the firing would not have solved any current problems in the markets, but it does appear the Cox has been asleep at the switch.

The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.

But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.

Like the Bush appointee he is Cox did not exercise his authority to oversee this very risky rule change therefore did not see the crisis coming until it roared in like a lion. It is also now very clear why Hank Paulson wanted unchecked authority to write $700 billion in checks to other Wall Street executive. He and his buddies screwed the pooch and he wants to bail them out.

Its time for Hank to go. Hank should be fired today.

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