WASHINGTON - Henry Paulson, a veteran of more than three decades of Wall Street booms and busts, knew the good times couldn’t last forever when he left his perch as head of Goldman Sachs two years ago to become President Bush’s third Treasury secretary.
He just didn’t know yet what form the downturn would take.
“I didn’t realize I would have to learn so much about housing,” Paulson said in an interview in his office at the Treasury Department, just steps from the White House. But, he added, “the possibility that I might be sitting here in the middle of all this didn’t seem that unlikely to me.”
Now, 10 months into housing and credit crises that are reverberating across financial markets, Paulson faces a long list of complicated economic problems. The dollar is weak, oil prices are high and, with home prices tumbling, foreclosure rates are spiking. Plus, Wall Street is reeling from its exposure to home-loan defaults, as evidenced last week by Lehman Brothers’ decision to oust two top executives and raise $6 billion to offset its mortgage market risks.
Paulson’s imprint on the Bush administration’s response is clear. He was pivotal in negotiating the $168 billion economic stimulus package with lawmakers from both parties and played a key role in brokering the Federal Reserve-backed purchase of the troubled investment bank Bear Stearns by J.P. Morgan.
Yet to be seen is how history will judge these interventions.
The jury is out, for example, on whether the rebate checks will spur enough consumer spending to head off a recession. And while the Bear Stearns rescue may have prevented a potentially destabilizing collapse, the deal has some economists worried the government may have encouraged more unhealthy risk-taking down the road by not allowing the investment bank to fail.
At the same time, Democrats complain that Paulson and the Bush White House are not doing enough to stem the tide of foreclosures and keep more Americans in their homes.
Roger Porter, a Harvard University professor and former economic adviser in several Republican administrations, gives Paulson credit for playing a difficult hand well.
“Henry Paulson has skillfully and competently managed the situation he inherited,” Porter said. He added, however, that it is too soon to know how successful Paulson will be in pushing his own longer-term priorities. One top priority, a sweeping overhaul of financial services regulations, has gained little traction.
And the challenges facing Paulson as he seeks to calm a turbulent economy and establish his legacy may only get tougher since he serves under an unpopular, lame-duck president at a time when much of the action has moved to the Federal Reserve and a Democratic-controlled Congress.
Hank Paulson, a graduate of Dartmouth College and Harvard Business School, arrived at the Treasury Department following a long career at Goldman Sachs. An Illinois native, Paulson had started in Goldman’s Chicago office in 1974. Twenty-five years later he was named chairman and CEO.
Paulson, who is married with two grown children, is also a strong proponent of moving the U.S. beyond the petroleum age — for the sake of the economy and the environment. An avid bird-watcher, he is past chairman of the Peregrine Fund and the Nature Conservancy. His office is adorned with dozens of pictures of birds and other creatures.
Recognizing this interest, Bush has put Paulson in charge of a planned international fund to help finance clean energy technologies in developing nations. Paulson is also likely to press his concerns about the environment in economic talks this week with a delegation from China, which is expected to be a major producer of global warming gases in the years ahead.
But it was the risk of financial turmoil that led White House chief of staff Joshua Bolten, himself a former Goldman executive, to aggressively recruit Paulson for the Treasury job. Paulson’s Wall Street experience set him apart from his two predecessors: Paul O’Neill, a former Alcoa executive, and John Snow, a former railroad executive. And it has been critical during the current crisis, Bolten said.
“Henry Paulson knows financial institutions and markets, and that makes him credible with policymakers, politicians and market participants,” explained Timothy Geithner, president of the Federal Reserve Bank of New York.
That credibility was vital when Paulson teamed up with Geithner and Fed Chairman Ben Bernanke to negotiate the frantic purchase of Bear Stearns by J.P. Morgan for $2 a share in March.
Looking back, Paulson says the buyout was necessary to head off a bankruptcy that might have destabilized the entire financial system. That view is echoed by many on Wall Street, in Congress and even in academia.
According to New York Democrat Charles Schumer, who sits on the Senate Banking, Housing and Urban Affairs Committee, the Bear
Stearns rescue pushed Paulson’s stature “way up.”
But Dean Baker, co-director of the Center for Economic and Policy Research, said that while the government was probably right to step in, the deal created a “moral hazard” by making creditors less likely to shy away from backing investment banks that engage in risky behavior in the future.
In an administration that doesn’t always listen to Democrats, Paulson has earned a reputation as a pragmatist and a deal maker. He has developed a particularly good working relationship with House Financial Services Committee Chairman Barney Frank, D-Mass. The two have collaborated on a House bill that would give the government more power over mortgage finance companies Fannie Mae and Freddie Mac.
Still, Senate Banking Chairman Christopher Dodd, D-Conn., complains that the administration has been slow to recognize the magnitude of the problems facing the economy and has shown “a great deal of timidity” in its response.
Dodd and other Democrats are particularly critical of Hope Now, an administration-organized effort that works to prevent foreclosures, for not helping enough troubled borrowers. They also admonish the White House for threatening to veto a House bill that would let the Federal Housing Administration back up to $300 billion in new loans for struggling homeowners.
The Bush administration appears more receptive to a similar Senate bill that would use profits from Fannie and Freddie to pay for an affordable housing fund, and tighten regulation of the mortgage finance companies.
With a weak president who is on his way out, however, it is the Democrats in Congress — not Paulson or the White House — who are shaping the agenda. “Treasury secretary is a powerful position, but you can’t do it without a strong president,” said Robert Reich, a public policy professor at the University of California at Berkeley and a former secretary of labor under President Clinton. “So Henry Paulson has a lot of responsibility with no real authority.”
FACING ISSUES NOW
Even as he confronts the current turmoil, Paulson continues to press ahead with a broader proposal to streamline regulation of the financial services sector. Among other things, his plan would expand the Fed’s authority to oversee the financial markets and merge the federal agencies that supervise the securities and commodities futures markets.
Some have assailed the blueprint as an attempt to push through broad deregulation in the midst of an economic crisis that resulted from too little oversight. Critics are particularly concerned that the plan would weaken the Securities and Exchange Commission, which serves as a watchdog over Wall Street.
“If there is one lesson here, it is that Wall Street is under-regulated or misregulated,” Reich said. “And the blueprint is little more than an attempt to preserve Paulson’s deregulatory agenda.”
Paulson said the proposal does not aim to either expand or reduce regulation, but to update an antiquated system. He added that after all the Wall Street excesses he has witnessed over the years, he sees an important role for regulation and investor protection.
Although the blueprint stands little chance of passage before Bush leaves office, Paulson hopes it will shape the debate for the next administration.
For now, though, his top focus is stabilizing the economy.