Henry Paulson

Paulson joined Goldman Sachs in 1974, working in the firm's Chicago office under James P. Gorter, covering large industrial companies in the Midwest.[14] He became a partner in 1982. From 1983 until 1988, Paulson led the Investment Banking group for the Midwest Region, and became managing partner of the Chicago office in 1988. From 1990 to November 1994, he was co-head of Investment Banking, then Chief Operating Officer from December 1994 to June 1998,[15] eventually succeeding Jon Corzine as chief executive. His compensation package, according to reports, was $37 million in 2005, and $16.4 million projected for 2006.[16] His net worth has been estimated at over $700 million.[16] Paulson earned an estimated $480 million in total compensation from Goldman Sachs.

Paulson has personally built close relations with China during his career. In July 2008, The Daily Telegraph reported "Treasury Secretary Hank Paulson has intimate relations with the Chinese elite, dating from his days at Goldman Sachs when he visited the country more than 70 times."[17]

Before becoming Treasury Secretary, he was required to liquidate all of his stock holdings in Goldman Sachs, valued at over $600 million in 2006, in order to comply with conflict-of-interest regulations.[18] Due to a tax provision passed under President George H. W. Bush, Paulson was able to defer his capital gains tax, saving himself an estimated $50 million.[19]

In April 2007, he delivered an upbeat assessment of the economy, saying growth was healthy and the housing market was nearing a turnaround. "All the signs I look at" show "the housing market is at or near the bottom," Paulson said in a speech to a business group in New York. The U.S. economy is "very healthy" and "robust," Paulson said.[27]

In August 2007, Secretary Paulson explained that U.S. subprime mortgage fallout remained largely contained due to the strongest global economy in decades.[28]

On March 26, 2008, Secretary Paulson said in remarks at the U.S. Chamber of Commerce,

As we work our way through this turbulence, our highest priority is limiting its impact on the real economy. We must maintain stable, orderly and liquid financial markets and our banks must continue to play their vital role of supporting the economy by making credit available to consumers and businesses. And we must of course focus on housing, which precipitated the turmoil in the capital markets, and is today the biggest downside risk to our economy. We must work to limit the impact of the housing downturn on the real economy without impeding the completion of the necessary housing correction. I will address each of these in turn. Regulators and policy makers are vigilant; we are not taking anything for granted.[29]

In May 2008, The Wall Street Journal wrote that Paulson said U.S. financial markets are emerging from the credit crunch that many economists believe has pushed the country to the brink of recession. "I do believe that the worst is likely to be behind us," Paulson told the newspaper in an interview.[30]

On July 20, 2008, after the failure of Indymac Bank, Paulson reassured the public by saying, "it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."[31]

On August 10, 2008, Secretary Paulson told NBC's Meet the Press that he had no plans to inject any capital into Fannie Mae or Freddie Mac.[32] On September 7, 2008, both Fannie Mae and Freddie Mac went into conservatorship.[33]

On November 18, in testimony before the United States House Committee on Financial Services, Secretary Paulson told lawmakers,

There is no playbook for responding to turmoil we have never faced. We adjusted our strategy to reflect the facts of a severe market crisis always keeping focused on Congress's goal and our goal – to stabilize the financial system that is integral to the everyday lives of all Americans.[34]

On November 20, 2008, during remarks at the Ronald Reagan Presidential Library, Secretary Paulson said,

We are working through a severe financial crisis caused by many factors, including government inaction and mistaken actions, outdated U.S. and global financial regulatory systems, and by the excessive risk-taking of financial institutions. This combination of factors led to a critical stage this fall when the entire U.S. financial system was at risk. This should never happen again. The United States must lead global financial reform efforts, and we must start by getting our own house in order.[35]

On March 31, 2008, Paulson released "The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure". In remarks announcing the release of the report, Paulson cited the need to overhaul the financial regulatory system, saying:

But capital markets and the financial services industry have evolved significantly over the past decade. Globalization and financial innovation, such as securitization, have provided benefits to domestic and global economic growth; while highlighting new risks to financial markets. We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions and one that will better protect investors and consumers.[36]

Paulson with Russian President Dmitry Medvedev, June 30, 2008

The support given by the Federal Reserve Board, under Ben Bernanke, and the US Treasury with Paulson at the helm, in the acquisition of Bear Stearns by J.P. Morgan and the $200bn facility made available to Fannie Mae and Freddie Mac attracted a great deal of criticism in congress by both Republicans and Democrats.[37] Paulson and Geithner made every effort to enable Barclays to acquire Lehman Brothers, including convincing other large Wall Street firms to commit their own funds to support the deal. In light of the recent Bear Stearns criticism, Paulson was against committing public funds towards a bailout, for fear of being labelled 'Mr Bailout'.[38] When British regulators indicated they would not approve the purchase, Lehman went into bankruptcy, and Paulson and Geithner worked to contain the systemic impact.[39]

"Well, as you know, we're working through a difficult period in our financial markets right now as we work off some of the past excesses. But the American people can remain confident in the soundness and the resilience of our financial system." [40]

In the aftermath of Lehman's failure and the simultaneous purchase of Merrill Lynch by Bank of America, already fragile credit markets froze, so that companies that had nothing to do with banking but needed financing (e.g. General Electric) could not get daily funding requirements which had the effect of sending the US equity/bond markets into turmoil between September 15, 2008, and September 19, 2008.

Paulson, Ben Bernanke and Christopher Cox in September 2008 as President Bush speaks about the economy

Paulson, acting as U.S. Treasury Secretary, caused outcries from both the Republican and Democratic Parties as well as the general populace as he tried to get the situation under control.

Through unprecedented intervention by the U.S. Treasury, Paulson led government efforts which he said were aimed at avoiding a severe economic slowdown. After the Dow Jones dropped 30% and turmoil ensued in the global markets, Paulson pushed through legislation authorizing the Treasury to use $700 billion to stabilize the financial system. Working with Federal Reserve Chairman Ben Bernanke, he influenced the decision to create a credit facility (bridge loan and warrants) of US$85 billion to American International Group so it would avoid filing bankruptcy, after having been told that AIG held teacher pension plans, 401k plans, $1.5 trillion in life insurance plans for Americans, and the French Finance Minister called to let Paulson know that AIG held the interests of many Eurozone countries.

On September 19, 2008, Paulson called for the U.S. government to use hundreds of billions of Treasury dollars to help financial firms clean up nonperforming mortgages threatening the liquidity of those firms.[41] Because of his leadership and public appearances on this issue, the press labeled these measures the "Paulson financial rescue plan" or simply the Paulson Plan.[42]

With the passage of H.R. 1424, Paulson became the manager of the United States Emergency Economic Stabilization fund.

As Treasury Secretary, he also sat on the newly established Financial Stability Oversight Board that oversaw the Troubled Assets Relief Program.

Paulson agreed with Bernanke that the only way to unlock the frozen capital markets was to provide direct injections into financial institutions so investors would have confidence in these institutions. The government would take a non-voting share position, with 5% dividends for the first year on the money lent to the banks and 9% thereafter until the banks stabilized and could repay the government loans. According to the book Too Big To Fail, Paulson, Bernanke, New York Federal Reserve Chairman Timothy Geithner, and FDIC Chairman Sheila Bair attended the meeting on October 13, 2008, at which this plan was presented to the CEOs of nine major banks.

Time named Paulson as a runner-up for its 2008 Person of the Year, saying, with reference to the global financial crisis, "if there is a face to this financial debacle, it is now his ..." before concluding that "given the ... realities he faced, there is no obviously better path [he] could have followed".[43]

It has been pointed out that Paulson's plan could potentially have some conflicts of interest, since Paulson was a former CEO of Goldman Sachs, a firm that might benefit largely from the plan. Economic columnists called for more scrutiny of his actions.[44] Questions remain about Paulson's interest, despite having no direct financial interest in Goldman, since he had sold his entire stake in the firm prior to becoming Treasury Secretary, pursuant to ethics law.[45] The Goldman Sachs benefit from the AIG bailout was recently estimated as US$12.9 billion and GS was the largest recipient of the public funds from AIG.[46] Creating the collateralized debt obligations (CDOs) forming the basis of the current crisis was an active part of Goldman Sach's business during Paulson's tenure as CEO. Opponents argued that Paulson remained a Wall Street insider who maintained close friendships with higher-ups of the bailout beneficiaries. Some time after the passage of a rewritten bill, the press reported that the Treasury was now proposing to use these funds ($700 billion) in ways other than what was originally intended in the bill.[47]

On June 27, 2011, Paulson announced the formation of the Paulson Institute, a non-partisan, independent “think and do tank” dedicated to fostering a US-China relationship that serves to maintain global order in a rapidly evolving world. Paulson was also named as a senior fellow at the University of Chicago's Harris School of Public Policy.[1] His five-year appointment took effect July 1, 2011.[56]

In his memoirs, On the Brink, Paulson describes his experiences as Treasury Secretary fending off the near-collapse of the U.S. economy during the Great Recession.[57] His second book, Dealing with China, details his career working with scores of China's top political and business leaders and witnessing the evolution of China's state-controlled capitalism.[58] The book was chosen by Facebook founder Mark Zuckerberg for the Mark Zuckerberg book club.[59]