The 11 Blunders of Hank Paulson

Mark to Market Accounting

I would expand point 6 to add "and perpetuating the impression that the mortgage-backed securities are toxic assets." I don't get it. Replacing MTM with any other method would be more accurate, and instantly recapitalize the affected financial institutions. Let's use an extreme example: Let's say that, for a given security, half of the securitized mortgages are bad, foreclosed, and will sell at a sheriff's sale at 10 cents on the dollar. What that would mean is that the security is only worth 55% of its face value. Under MTM, we're saying that, because no one's buying or selling, the security is worth zero. How accurate is that? This isn't smoke and mirrors accounting, this is a correction of a basic misrepresentation of the capital structure of every institution with sub-prime mortgage securities. Replacing MTM with a more objective measure would be the single greatest way to recapitalize the affected institutions.

Bob Schaefer of OH @ Nov 21, 2008 16:06:11 PM

You are right

What you write is true - Hank Paulson has been a disaster. There really are no words to express how stupid it was to let Lehman fail - except may hubris - hubris that the American financial system would shake it off and that his buddies from Goldman would survive and prosper with one less competitor. I disagree that more transparency is needed - the Treasury should be working like the Fed - mysteriously. We are in a vicious deflationary spiral and the market should believe that Treasury might buy any asset at any time. That gives investors confidence they are buying alongside the government and makes shorts fear they are selling the asset that the government is about to come in and buy. There will be plenty of time a few years from now to review what was actually bought and when.

Paulson's plan now seems to be punting the ball to the Obama administration - really capping the abject failure that his tenure has been. In light of the market's recent moves - especially the dangerous sell off in financials - one must wonder if our economy and financial system can wait 2 months for someone to come in and straighten this mess out.

When the historians write the books on the Great Depression II, they will certainly write about how Hank Paulson was the WORST TREASURY SECRETARY EVER.

Lloyd of NY @ Nov 19, 2008 19:10:29 PM

Paulsen's 12th Mistake

Paulsen'd 12th --- and most significant --- mistake was to accept the position of Secretary of the Treasury because he thought he could do the job.

rgwilliams of NJ @ Nov 18, 2008 11:21:44 AM

"Not on my watch" attitude

This ordeal has, in a positive sense, a "not on my watch" attitude, that is, taking responsibility and not passing it on to the next guy.

In a negative sense, it seems typical CYA, cover-my-backside bureaucracy, doing action-for-the-sake-of-action so that you don't get blamed, regardless of consequences elsewhere.

(This is the same drive for Shiela Bair - unnecessarily force Washington Mutual into bankruptcy in order to same her territory, in this case the Deposit Insurance fund, confiscating assets and forcing unnecessary default of debt, when more patience could have found a fair solution; similarly the hyper-push with Wachovia, which also caused loss of confidence, instead of a more measured approach or waiting for a better solution)

The net result in any case is that Hank, well intentioned as it may be, drove headlong into doing something - anything - and boldly, in all these cases, which induced panic and deep loss of confidence, a huge spike in uncertainty.

Things were rolling along - not good, but not awful - indeed most of this is a confidence game, and until the government acted, confidence was rollling along and even improving a bit with a "let's bear this housing downturn and after a couple of years it may pick up" consumer attitude.

It was all about confidence.

(This is the same drive for Shiela Bair - unnecessarily force Washington Mutual into bankruptcy in order to save her territory, in this case the Deposit Insurance fund, confiscating assets and forcing unnecessary default of debt, when more patience could have found a fair solution - but by God, no one has touched my insurance and I say out of the fire and blame game, CYA)

The bottom line: The deep crisis that we have now did not have to turn into an urgent crisis in the first place, but government induced panic did the job and broke the confidence.

Hank Paulson is a take-charge guy and deserves respect for taking responsibility and working at super-charged inhuman levels, although I suspect that the "not on my watch - let's fix it now" drive was re-inforced by his boss, just like with the response to terrorism (over-reaction IMHO) and Iraq (unfortunately misguided), and the start of some more big unsustainable government programs to fix some imagined problem. (compassionaate conservatism, even if we can't pay for it).

What is missing with his boss is an ability to understand and foresee the total consequences of well-intentioned (but not fully informed) action and decisions. While he thinks he is doing the right thing, it turns out not to be the "right" as in correct and well-thought through thing.

It seems to me that this ought to be part of the history when it is written.

JFK with Vietnam and Bay of Pigs and LBJ with Vietnam and Great Society has a similar history, as does Nixon with his price controls.

I suspect that in next months the government's response to the crisis will be just as well-intentioned but lead to serious problems.

Kent Howell of MI @ Nov 18, 2008 10:54:08 AM

Well said

the emperor has no clothes, glad someone has the guts to say it.

of CA @ Nov 17, 2008 13:05:37 PM