Former Treasury Secretary Henry Paulson’s turn in the hot seat just concluded, and while he sang about the same tune as Tim Geithner, Paulson was far less convincing.
Like Geithner, Paulson defended the decision to sink $85 billion into AIG in the fall of 2008. Had AIG gone under, Paulson says, “it would have buckled our financial system and wrought economic havoc on the lives of millions of our citizens… it would’ve been an economic nightmare.” Specifically, Paulson says we could’ve easily seen 25% unemployment and much greater losses in retirement savings.
But unlike Geithner, Paulson’s ownership of these decisions was shaky at best. In this exchange, John Tierney (D-Mass) asked where the Fed got the $85 billion:
Paulson: (Stumbling for words) They used their funds.
Tierney: And their funds emanate from where?
Paulson: From the US government.
Tierney: Were they fees from other banks, did they come from your Treasury? Where did they come from?
Paulson: They come from, uh… the Fed can obviously print money.
I expected that the former Treasury Secretary could easily explain the source of this money. But he continued to stumble, and Tierney pressed him further:
Paulson: My best understanding is that all dollars are green, so that those are ultimately taxpayer dollars…
Tierney: We are painfully aware that these were taxpayer dollars.
Paulson: And that was why the Treasury was supportive. We were very supportive of that transaction (with AIG).
What?? The Treasury was supportive of the transaction because these were taxpayer dollars?
Later, he reiterated his support of the AIG rescue but couldn’t explain how AIG’s financial products division, which took so many risks, was intertwined with the rest of the company. And he said he had no involvement in the payment to AIG counterparties, including the company where he was CEO, Goldman Sachs.
Paulson was then asked why it seemed that he and Geithner weren’t aware of certain aspects of these transactions, even though they were heading up the organizations making the decisions. One Congressman said: “It seems as though some clerk somewhere was calling the shots.” Paulson’s answer: “I was very supportive of the decision to save AIG.” That’s it.
Paulson’s solution to the TBTF problem continues to be a systemic risk regulator. He says the government should have the authority to wind down companies outside of the bankruptcy process.
Other than that, Paulson gave no answers that could be classified as insightful. Perhaps in hindsight, his actions in 2008 were heroic or the right call to make under extreme duress. But he sure can’t explain what happened or why with much authority.
Time to move on and focus on reform efforts. As much as Congress might want real, clear explanations about the past, Paulson can’t or won’t provide them.
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