In what may only be described as, possibly, one of the--if not
the--most stunning articles about the US government's actions with regard to its response to Wall Street's collapse last September, Pulitzer Prize-winning journalist Gretchen Morgenson, along with Don Van Natta, Jr., in Sunday's New York Times, fully detail numerous, clearcut ethical violations by then-Treasury Secretary Henry Paulson with regard to his communications with his former employer, Goldman Sachs.
The precise chronological order of events provided by Morgenson and Van Natta in, "Paulson's Calls to Goldman Tested Ethics During Crisis," with regard to Paulson's damning actions, lay out for the readers what this diarist may only conclude is sufficient grounds to now wonder aloud, "How many days will it be before Paulson is brought up on charges related to perjuring himself in front of the US Congress, just a few weeks ago?"
I don't believe I'm exaggerating when I say that this piece may be up there with the initial Watergate break-in coverage by Woodward and Bernstein, in terms of its historical importance.
Drop what you're doing and read this article.
UPDATE:
Morgenson and Van Natta tell us that Paulson, prior to becoming Treasury Secretary in 2006...
...agreed to hold himself to a higher ethical standard than his predecessors. He not only sold all his holdings in Goldman Sachs, the investment bank he had run, but also specifically said that he would avoid any substantive interaction with Goldman executives for his entire term unless he first obtained an ethics waiver from the government.
The journalists tell us that they obtained Mr. Paulson's calendars via the filing of a Freedom of Information Act by the New York Times.
Paulson's calendars document that he spoke with his successor at Goldman, CEO Lloyd Blankfein, "24 times during the week of the AIG bailout," alone, including multiple times prior to receiving waivers permitting him to do so. According to their story, Paulson did receive waivers from the White House and the Treasury Department on the afternoon of September, 17th, 2008.
...government ethics specialists say that the timing of Mr. Paulson's waivers, and the circumstances surrounding it, are troubling.
"I think that when you have a person in a high government position who has been with one of the major financial institutions, things like this have to happen more publicly and they have to happen more in the normal course of business rather than privately, quietly and on the fly," said Peter Bienstock, the former executive director of the New York State Commission on Government Integrity and a partner at the law firm of Cohen Hennessey Bienstock & Rabin.
He went on: "If it can happen on a phone call and can happen without public scrutiny, it destroys the standard because then anything can happen in that fashion and any waiver can happen."
--SNIP--
Concerns about potential conflicts of interest were perhaps inevitable during this financial crisis, the worst since the Great Depression. In the weeks before Mr. Paulson obtained the waivers, Treasury lawyers raised questions about whether he had conflicts of interest, a senior government official said.
Indeed, Mr. Paulson helped decide the fates of a variety of financial companies, including two longtime Goldman rivals, Bear Stearns and Lehman Brothers, before his ethics waivers were granted. Ad hoc actions taken by Mr. Paulson and officials at the Federal Reserve, like letting Lehman fail and compensating A.I.G.'s trading partners, continue to confound some market participants and members of Congress.
And, indeed, it has been widely noted that Goldman's massive, recently-stated trading profits are, in large part, due to the reality that much of their competition was vanquished by the subsequent bad-mortgage-induced downturn of which we've all since become familiar over these past 10-plus months.
In my diary on August 4th, "Wall St. on the Fed: 'It's a joke. Everyone picks their pockets,'" I referenced a story on the Naked Capitalism blog, by publisher Yves Smith, quoting InformationArbitrage.com publisher Roger Ehrenberg:
"...Roger Ehrenberg's comments posted at InformationArbitrage.com. Ehrenberg is still young, but prior to retiring from the industry just a few years ago, he was a Wall Street insider and widely recognized as one of the sharpest derivatives traders in the world."
Here's his professional opinion about Goldman's dealings with the Federal Reserve and the Treasury Department...
What we have is a return to business-as-usual. Except it's worse than that. The US taxpayer has been systematically looted out of hundreds of billions of dollars, yet the press is focused on Andy Hall and his $100 million payday. Whether this is too much pay for Mr. Hall misses the big picture. Yes, the Wall Street pay model is messed up, and I recently provided an alternative approach. But how about the fact that Goldman Sachs is posting record earnings and will invariably be preparing to pay record bonuses, not nine months after the firm was in mortal danger? Whether anyone will admit it or not, without the AIG (read: Wall Street and European bank) bail-out and the FDIC issuance guarantees, neither Goldman nor any other bulge bracket firm lacking stable base of core deposits would be alive and breathing today.
--SNIP--
...When the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities....In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm...
--SNIP--
...There is not a Wall Street derivatives trader on the planet that would have done the US Government deal (with Goldman Sachs) on an arms-length basis. Nothing remotely close. Goldman's equity could have done a digital, dis-continuous move towards zero if it couldn't finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren't discriminating back in November 2008. If you didn't have term credit, you certainly weren't getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let's just say that it is a tad north of $1.1 billion in premium. And the $10 billion TARP figure? It's a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won't let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down....
--SNIP--
Where we are left today, dear taxpayer, is a lot poorer. Unless you are a major shareholder and/or bonusable employee of Goldman Sachs...Further, such a crisis could have provided the opportunity and the impetus for a re-look at capital markets risks, getting CDS users to support a central credit derivatives exchange and revised capital rules to incentivize better gap management. The banks lobby like hell against these changes, because it cuts into their fees, notwithstanding the systemic benefits such changes could have on the global financial markets. Banks now lobbying with US taxpayer dollars against changes that could protect the US taxpayer from more harm in the future. SOMETHING IS TERRIBLY WRONG WITH THIS PICTURE, yet all anyone wants to talk about are executives getting paid too much. It's called missing the forest for the trees, and it is a fixture of both those trying to sell newspapers (get clicks) and run our Government, and it pisses me off.
UPDATE II:
Getting back to Morgenson's and Van Natta's story...
In Paulson's testimony before the House, last month, the authors report that the following was stated by the former Treasury Secretary:
"I want you to know that I had no role whatsoever in any of the Fed's decision regarding payments to any of A.I.G.'s creditors or counterparties."
And, it's at this point where it becomes difficult for me to convey the story directly without hitting a wall regarding copyright infringement, so you'll just have to either read the piece, yourself, or take my word for it. (I'd recommend the former!)
But, it's also at this point where the Times' reporters uncover what may be the biggest smoking gun in the piece, which I form as a question in the headline of this diary: Did Paulson commit perjury before the House last month?
We're told by anonymous sources that Paulson, contrary to his testimony in July, did play a very active role in the AIG negotiations, and related matters to it, in general. Apparently, this was highly-documented and common knowledge throughout the upper echelons of the Treasury Department and the Fed, as well.
And, it's here where it appears--in this story in any event--where Paulson's actions seem to be most questionable, in terms of their intent.
In fact, as we're told by the Times, the day before Paulson received his waiver, he called AIG CEO Robert B. Willumstad, and dismissed him.
We're then informed that Paulson spoke "far more often with Mr. Blankfein" than with any other Wall Street executives, according to his calendars, as obtained in the Times' FOIA Request. The authors note, in contrast, Paulson "...spoke six times that August with Richard S. Fuld Jr. of Lehman, four times with Jamie Dimon of JPMorgan Chase and only twice with John Thain of Merrill Lynch."
Morgenson and Van Natta quote Harvard Business School professor emeritus Samuel L. Hayes, a Treasury Department consultant, as finding this information to be "disturbing."
"We don't know what they talked about," Mr. Hayes said. "Obviously there was an enormous amount at stake for Goldman in whether or not the A.I.G. contracts would be made whole. So I think the burden is now on Mr. Paulson to demonstrate that there was no exchange of information one way or the other that influenced the ultimate decision of the government to essentially provide a blank check for A.I.G.'s contracts."
Obviously, the fallout from all of this is unknown, but it bodes very badly for Paulson, tacitly confirming much of what Ehrenberg references early in this diary, IMHO.
In make-believe, big, big, bold letters, I will add three words to conclude this: "To be continued..."