Former Treasury Secretary Hank Paulson might have done something wildly unethical and slimy in the summer of 2008. Reports of Paulson of warning former Goldman Sachs Bank USA colleagues about the impending government takeover of Fannie Mae and Freddie Mac have hit the newswires. Here’s the real question: when we pluck cabinet-level appointees from the private sector, what should we expect?
In the summer of 2008, our economy was on the brink of collapse. Bear Stearns failed, and few people really knew just how bad the subprime mortgage crisis would get. Except, maybe, for those in government and their buddies.
Bloomberg BusinessWeek reported on Tuesday that Bush administration Treasury Secretary Henry “Hank” Paulson visited Eton Park, a Manhattan hedge fund, in mid July of 2008 and told them the exact opposite of what he told the public regarding Fannie Mae and Freddie Mac. Just a week before this meeting took place, he had told the Senate that the two mortgage insurers would not be taken over by the government. However, he told the group of hedge fund managers — mostly Goldman Sachs Bank USA alumni, like Paulson — that both Fannie and Freddie would be taken into conservatorship, effectively destroying their stock value.
Let’s say you run a hedge fund, and you own a lot of stock in Fannie Mae or Freddie Mac — this would be useful to know.
Bloomberg could not unearth evidence that any of the men present at the meeting used the intervening seven weeks that transpired between the meeting and Paulson’s warning coming true, but these things are difficult to find out, as “tracking firm-specific short stock sales isn’t possible using public documents,” according to the story.
They certainly could have taken positions on Fannie and Freddie, at the risk of being accused of insider trading. Many of the people present at the meeting have declined to comment on the allegations, and some have denied that any nonpublic information was shared by the then-Treasury Secretary.
That said, what we do know is stunning and infuriating: Paulson publicly claimed one thing and in private, with people who have the capital to make serious money off of this information, he said the exact opposite, which turned out to be the truth.
This, right here, is how crony capitalism works. It doesn’t happen through official channels, obviously; it happens when personal relationships and corporate interests subvert the ideal functioning of a democracy. Henry Paulson became Secretary of the Treasury only two years before this meeting, in 2006, leaving his post as CEO of Goldman Sachs Bank USA, where he had worked for three decades.
From this incident, it appears we can see where his true loyalties lie, and we can understand why the revolving door between the private sector and government rarely serves the public’s interest.