Paulson’s thankless task of trying to solve US banking crisis

It is just over a half-decade since the US financial earthquake shook, taking down one of Wall Street’s biggest banks and crumbling the foundations of others to the point of near-collapse.

The architect tasked with preventing an outright collapse of the US banking metropolis, former US treasury secretary Hank Paulson, appointed by then US president George W Bush, remains a figure loathed by many for the taxpayer-funded bailouts he engineered to save the US from a deep depression.

In an engaging new character study of Paulson, Hank: Five Years from the Brink, a film by Oscar-nominated documentary maker Joe Berlinger, the former Goldman Sachs boss jokes that the best case is he will remembered as Mr Bailout, but he believes he prevented a far worse disaster.

Paulson is the man who saved Fannie Mae and Freddie Mac, the cornerstones of the US mortgage market, as well as General Motors, Bank of America, insurer AIG and Citigroup. He is the man who asked Congress for $700 billion (€514 billion) to buy the toxic assets that the banks couldn't shift from their books.

Berlinger's portrait attempts to humanise his subject by splicing confessional-like direct-to-camera interviews with Paulson and his wife Wendy with news clips of the meltdown. Beyond the familiar raspy voice and stressed-out pallor, Paulson is depicted as a man close to breaking point as the options to save Lehman Brothers ran out – the
mushroom-cloud moment of the crisis.

At one point, Paulson stole away to a private room, leaving an epic meeting of Wall Street’s top bankers to call his wife and admit that he was feeling the burden of the world on his shoulders and that he had failed. His wife read him some scripture, a verse from the second book of Timothy, that snapped him out of his despair, filling him with a sense of peace and a renewed confidence, he says.

Stresses of the crisis
Wendy also recalls how on one of their weekend cycles around a Washington DC park Paulson was so distracted by the stresses of the crisis that he cycled his bike into a traffic barrier. On another occasion, he slipped away from a meeting in Congress for a bout of "dry heaves", a condition of stress he suffers from.

Paulson reveals his nightmare was that he did not want to be Andrew Mellon, the reviled treasury secretary who with president Herbert Hoover plunged the US into the Great Depression. In late 2008 Bush joked with a sleep-deprived Paulson that while few people had heard of Mellon, "they have heard of Hoover".

Speaking in Washington last week, Paulson said he participated in the documentary “so we don’t have to replay this movie all over again”. Remarkably, he admits that one of the greatest threats to the financial system is of his own making, a measure he was forced to take to save the system.

The "too big to fail" phenomenon that pushed Paulson into providing bailouts totalling hundreds of billions of dollars is worse now due to the consolidation he led – the mergers of banking goliaths such as JP Morgan and Bear Stearns, Bank of America and Merrill Lynch. This is "definitely not acceptable", he says.

He finds the continued state control of the Fannie and Freddie mortgage giants “abhorrent” because the US government insures well over 90 per cent of the new mortgages as a result . He describes the situation as “preposterous”, giving the state the whip hand when it comes to setting market price and terms. “We are just sowing the seeds of a future crisis,” he says.

The most striking feature of Paulson is that he is a product of the system he helped save. He maintains that he was unable to save and punish the banks at the same time, so he plumped for stability.

Blame deflected
Five years on, no American banker has been charged or jailed for the excesses that led to the worst financial crisis in generations. Earlier this week, I asked Paulson why this was.

He deflected blame from the bankers on to government and the policies that created the system these bankers overheated. Although there may have been significant excesses, they may not amount to crimes, he said: "If you look at any financial crisis since the beginning of time, and Ireland and the US would be cases in point, the roots of those crises are in flawed government policies.

“Then, once the crisis comes – and a financial crisis, no matter what the economic system is, no matter what the financial system , no matter what the regulatory system is, you will have excesses, you will have bubbles, they will manifest themselves as a financial crisis – the bankers get most of the blame.”

Paulson conceded that bankers made mistakes but said this overlooked the root cause. He understood the public anger but did not know more than anyone else as to whether bankers broke the law. “I do know during the crisis I looked at chief executives who were dealing in a once-in-a-75-year kind of phenomenon, the likes of which they had never seen before,” he said. “They were working very hard to keep their companies afloat.”