What on earth did Hank Paulson think his job was in the summer of 2008? As far as most of us were concerned, he was secretary of the US Treasury, answerable to the US people and to the president. But at the same time, in secret meetings, Paulson was hanging out with his old Goldman Sachs buddies, giving them invaluable information about what he was thinking in his new job.
The first news of this behavior came in October 2009, when Andrew Ross Sorkin revealed that Paulson had met with the entire board of Goldman Sachs in a Moscow hotel suite for an hour at the end of June 2008. He told them his views of the US and global economies, he previewed a market-moving speech he was about to give, and he even talked about the possibility that Lehman Brothers might blow up. Maybe it’s not so surprising that Goldman Sachs turned out to be so well positioned when Lehman did indeed do just that a few months later.
Today we learn that the Goldman meeting in Moscow was not some kind of aberration. A few weeks later, on July 28 2008, Paulson met with a who’s who of the hedge-fund world in the headquarters of Eton Park Capital Management — a fund founded by former Goldman superstar Eric Mindich.
The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into "conservatorship" — a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets…
Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out…
The fund manager who described the meeting left after coffee and called his lawyer. The attorney's quick conclusion: Paulson's talk was material nonpublic information, and his client should immediately stop trading the shares of Washington- based Fannie and McLean, Virginia-based Freddie.
When we found out about the Moscow meeting, I asked how on earth Paulson thought such behavior was OK. But now I think he was downright pathological in giving inside information to his old Wall Street buddies. And the crazy thing is that we have no idea how many of these meetings there were, or how long they went on for — the only way that we ever find out about them is when reporters like Sorkin or Bloomberg’s Richard Teitelbaum manage to find a source who was in the meeting and is willing to talk about what happened.
Given that it’s taken two years since the release of Sorkin’s book for the Eton Park meeting to be made public, it’s fair to assume that there were other meetings, too — possibly many others. Paulson was giving inside tips to Wall Street in general, and to Goldman types in particular: exactly the kind of behavior that “Government Sachs” conspiracy theorists have been speculating about for years. Turns out, they were right.
Paulson, says Teitelbaum, “is now a distinguished senior fellow at the University of Chicago, where he's starting the Paulson Institute, a think tank focused on U.S.-Chinese relations”. I’d take issue with the “distinguished” bit. Unless it means “distinguished by an astonishing black hole where his ethics ought to be”.
Can’t he be prosecuted?
Given the number of Goldman alumni in the new “technocratic” European governments, the ECB and the IMF, one has to wonder what meetings are going on right now. There are banks with no liquidity, sovereigns than may well default and a monetary union that may fail — all in the near future. Inside information at such a time could be pretty helpful, no?
“Can't he be prosecuted?”
Only if Zero Hedge is appointed Attorney General.
Truly genuinely unbelievable. So Paulson discussed the possibilty LEH might go under in June 2008 and this was private news? I mean nobody was saying there were issues with LEH right? I mean Einhorn was not talking about LEH in public speeches right? and people were not making fun of LEH executives putting on korean accents at the time? How was GS particularly well positioned between June 2008 and sept 2008? What exactly did they suddenly rush out and do?
Rather than repeatedly fake the outrage why don’t you actually point to something the guy did wrong, amidst the things he did right during that year
“Can’t he be prosecuted?”
Maybe if he sleeps out in Zuccotti Park; or is caught shop-lifting a candy bar at Wal-Marts. Let’s say that he’s “too big to be prosecuted”.
maynardGkeynes, and judge and jury.
aquacalc, you mean if he commits a crime?
If the shareholders sue H.Paulson, I can’t imagine the crippling liabilities if that happens!! Could the shareholders sue the U.S. government? This is pretty hard stuff!
PAULSON’s AIM: THE ASSAULT ON FnF BY THE BIG BANKS He wrote in the government’s warrant, Treasury may assign its 79.9% stake in Fannie and Freddie, upon exercise the warrant, to any "Person" (private lenders,"¦) and that Person shall be deemed holder the exercise day in order to not make the Administration appear to be selling its stake in FnF to private lenders and avoid a public outcry. Point 2.1 http://www.treasury.gov/press-center/pre ss-releases/Documents/warrantfrec.pdf
His plot should fail and FnF ought to resume independent operations.
Paulson is nothing more than a sef-serving carnival barker for the cognitive elites.
Serfdom has many names, many guises, but it is always with us.
What the hell is Sen. Levin waiting for?
Indict Goldman, Paulson and the whole rotten Wall Steet edifice.
This seems like a really odd way to try to profit from inside information. Getting a group of sharks around a table (who would sell each other out in a second) and then expect the secret to be kept? The meeting was on Paulson’s agenda and FOIA was bound to reveal the details eventually. Any person at that meeting would have to be certifiably insane to trade Fannie or Freddie after that. Plus, the treasury secretary *knows* you have material inside information on those two companies. Also, this was 7 weeks before the GSEs were taken over.
This sounds more like a handcuff than a tip.
GJOA, sues the goverment for taking over a company that is not only insolvent but has remained so for over 3 years? Love to be an observer at that trial.
I’d hate to be only person here defending Paulson, but one of the jobs of the Secretary of the Treasury is to liason with industry, that is the financial industry, and to poll their opinions on where the economy is heading as well as their likely responses to upcoming shifts in policy. The Fed performs similar actions with private briefings.
It is a good thing that Paulson was communicating with his former colleagues; he undoubtedly gained valuable insight on what was, and what wasn’t possible in 2008.
Mind you, I agree with all of the above comments that Paulson likely gave out privileged information which benefited his former colleagues, and that was wrong. Still, it is important for the Treasury Secretary to communicate with the “Titans of Finance”.
Danny_Black, you should know FnF’s charters say Treasury may purchase FnF’s obligations “at an appropiate rate”. That’s the so called government’s implicit guarantee. Hey! It’s not my fault, it’s written in the charters approved by Congress. The government’s implicit guarantee is a bailout, and it’s the Law because it’s written in their charters. Even Congress must abide by the Law.
Personally, I enjoy reading these comments when they help me understand what is going on. Usually what is going on is too big for any one person to understand all of it, all the time.
I do not enjoy comments that boil down to “Felix, you suck,” “Obummer is an Obozo,” “It’s all the fault of the CRA,” and the like.
If the shoe fits, please change it.
If you read the article in Bloomberg, you’ll see that at least one of the hedgies immediately went to his lawyer and restricted himself from trading Fannie or Freddie.
On the face of it, this was an extraordinarily stupid thing for a government official to do–the kind of thing a naive business person does, thinking there *is* such a thing as an off-the-record conversation.
Never assume mendacity when stupidity will suffice.
I had occasion to listen to Ron Suskind talk informally about Paulson & Geithner last year, before his latest book came out. He had qualified admiration for both men, & noted that what seemed to drive Paulson’s thinking and actions during the recent financial crisis was his study of the bank failures during the Great Depression, which he saw at the decisive “tipping point.” So saving the banks was always first on his agenda. The question is, how much real “inside information” was shared in his private meetings with banking friends back in 2008? Not sure this blog post really opens up long-concealed can(s) of worms. I kind of like what Kosta0101 said, above.
There isn’t enough information to come down very hard on either side. I have been in a lot of meetings were we talk through different possible scenarios and just because I might mention that one outcome is bankruptcy doesn’t necessarily mean that I know ahead of time what the actual outcome will be. Should Paulson, or any other person in positions of power, be prohibited from having conversations about how things might play out? That doesn’t seem practical, and might even be counterproductive. Did Paulson cross the line on this occasion? The article gave me enough information to decide.
Correction: The article DIDN’T give me enough information to decide.
Felix, that’s what insider of last resort is SUPPOSED to do!
LIBERTARIAN Friedman-ites REJOICE!……unlimited corruption and insider trading is EXACTLY what you like!
your boy Paulson is following your nihilist self destruction playbook to a T.
FREE MARKETS … FREE MARKETS !!!
Unless he’s going to share the information with all the players, Paulson was a gov’t bureaucrat “picking winners”… No?
I don’t see how Paulson could have been picking winners. Every hedge fund manager in that meeting received material inside information. If anyone traded on it, Paulson owned them lock stock and barrel. He could ask the SEC for the records and if any of them bought or sold the GSEs he could either turn them in at that point or threaten them with doing so.
So, in return for some inside information these fund managers have a choice: be locked out of trading the GSEs (which prevents them from attacking the stocks via shorts), be owned by Paulson, or be arrested for insider trading. Given that Paulson could have been lying (public figures do that), that further complicates things from the point of view of the managers.
Given what a bad deal it was for the fund managers, the real questions are: Why communicate this to a group instead of individually? Why do it on the record instead of in a more clandestine fashion?
Bizarre all around. Unless Paulson was trying to lockout the biggest GSE shorts without getting a decree from the SEC.
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