Henry Paulson Could Have Done Better

I expected US Treasury Secretary Henry Paulson, being the ex-head of Goldman Sachs (GS), to be more effective at deploying the $700 billion financial bail-out package handed to him by Congress. I expected him to manage what is essentially one of the world’s largest hedge fund with the acumen of a shrewd trader.

I did not expect him to openly declare his change in policy of using the funds to purchase shares in banks directly instead of buying up their toxic assets. He changed his mind too early, and tipped his hand too clearly, that not only does he appear he does not know what he is doing, he also exacerbated a crisis in confidence that has unintended cascading effect on the rest of the system. What he should have done instead was to keep his options opened.

His explicit switch of focus from the toxic ABS to bank shares removed the floor from ABS prices, which made the balance sheets of the major banks deteriorate further, pushing behemoths like Citigroup (C) to the brink of collapse.

He should have made the entire range of policy options available instead of tying one hand behind his back by explicitly limiting the type of assets he can buy. His policy should simply be this: starting with a profit motive from the tax payers’ perspective, he will buy any distressed financial assets that become cheap enough that we can reasonably expect to turn a profit in the long run.

In this confidence game, his mere mention of buying up cheap financial assets would prevent them from getting too cheap, thus preventing further deterioration of the balance sheets of the banks that hold these assets. A policy that keeps his options open would have been a force multiplier that puts a floor on the prices of assets all across the system instead of the distortion we have now.

Another side-effect of a profit motive would be that he would have to focus the funds on helping competent organizations or purchasing assets that can reasonably recover in the future and turn a profit, but are only hurt in the short term due to collateral damage from the crisis.

I had expected the best of Goldman Sachs to be better than this.

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One Response

  1. Also on Seeking Alpha:

    http://seekingalpha.com/article/107623-henry-paulson-could-have-done-better

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