Hank Paulson's recent appearance on Bloomberg should remind us of the ongoing media fail, which simply accepts his statements at face value. Paulson's backdoor maneuvers have escaped critical scrutiny by the press and by government investigators.
Why, for instance, has no one pursued the documentary evidence that shows how his office colluded with JPMorgan to subvert a private rescue plan for Lehman Brothers?
Certain emails, which reveal how Paulson's chief of staff illegally leaked confidential government information to JPMorgan, take a bit of explaining. But they put to bed any doubts about one of the allegations set forth in a court filing by the Lehman Estate against JPM, which acted as Lehman's primary clearing bank:
JPMorgan's top management were the ultimate insiders to the evolving crisis, enjoying real-time access to the key decision makers at the United States Treasury and the Federal Reserve Bank of New York...The smoking gun proof is the continual correspondence between Jes Staley and Jim Wilkinson.
JPM's Jes Staley and Treasury's Jim Wilkinson
Staley was a JPMorgan executive who was promoted to head up JPM's investment banking unit one year after the September 2008 meltdown. At year-end of 2012, he left the bank to join the hedge fund that unwound JPM's money-losing London Whale position six months earlier.
Wilkinson was Paulson's Chief of Staff. Though he had no background in finance, he had teamed up previously with Paulson's press secretary, Michele Davis. Wilkinson and Davis burnished their reputations in Washington in the late 1990s, when they both worked for Rep. Dick Army of Texas, who impressed the GOP establishment by the way he ruthlessly warded off challenges to his position as majority whip.
At the risk of belaboring the obvious, a high level executive at a global bank is supposed to respect the concept of Chinese walls, and a chief of staff's first obligation is to protect highly sensitive information from leaking out.
But first, we need to step back and dispel some of the myths surrounding those fateful three days, from September 12 through September 14, 2008, when US government and America's largest banks convened at the New York Fed to ponder the fate of Lehman Brothers.
Lehman's Imminent Demise And Conflicting Messages About Government Support
We've all heard the standard Too Big To Fail narrative. On 5:00 pm on September 12, 2008, Paulson summoned the CEOs at Goldman, Merrill, Morgan Stanley, JPMorgan and Citigroup to meet with him at the New York Fed. At 6:15, Paulson looked them in the eye and said, "There will be no bailout for Lehman. The only possible way out is a private-sector solution."
All well and good, but every negotiation is a game of chicken, and documentary evidence indicates that Paulson was bluffing. He had already given a different story to Bank of America and to Britain's Financial Services Authority. And the five CEOs, who were all very sharp, would have figured out that the "no government support" line could not be taken too literally.
Paulson said that the deadline for private sector solution was Sunday evening, when financial markets open and Asia. But the reality was that it was a physical impossibility to perform even rudimentary due diligence, negotiate and then close any private sector deal of that magnitude within 48 hours. The CEOs might have come up with a firm commitment to finance something, subject to various approvals. But until the final closing, any deal would be subject to execution risk. And that's when government support came in.
Lehman could not continue operating with adequate liquidity for even a few hours if there were any doubt that a private financing plan would close on schedule. And there was no reason to expect that Lehman's exotic investment holdings would not continue to lose value prior to the eventual closing date. So a private sector solution was impossible unless the U.S. government were willing to offer some kind of temporary liquidity backstop. But how far would that backstop go? Who would be left holding the bag if Lehman's "saviors" backed out of the deal?
Which is why the concept of a totally private sector solution with "no government support," seemed unworkable.
Either Paulson was telling the CEOs, in effect, give me your absolute best offer, because we want to minimize the level of government support, or alternatively, his "no government support" statement meant that the decision to force Lehman into bankruptcy was the fait accompli, and this meeting was an empty gesture to deflect away blame for the market turmoil that was sure to come.
The Government's Real Position
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