Paulson's Calls to Goldman Tested Ethics
By Gretchen Morgenson and Don Van Natta Jr.
August 8, 2009
Before he became President George
W. Bush’s Treasury secretary in 2006, Henry M. Paulson Jr. agreed to
hold himself to a higher ethical standard than his predecessors. He not
only sold all his holdings in Goldman Sachs, the investment bank he had
run, but also specifically said that he would avoid any substantive
interaction with Goldman executives for his entire term unless he first
obtained an ethics waiver from the government.
But today, seven months after Mr.
Paulson left office, questions are still being asked about his part in
decisions last fall to prop up the teetering financial system with tens
of billions of taxpayer dollars, including aid that directly benefited
his former firm. Testifying on Capitol Hill last month, he was grilled
about his relationship with Goldman.
“Is it possible that there’s so
much conflict of interest here that all you folks don’t even realize
that you’re helping people that you’re associated with?” Representative
Cliff Stearns, Republican of Florida, asked Mr. Paulson at the July 16
hearing.
“I operated very consistently
within the ethic guidelines I had as secretary of the Treasury,” Mr.
Paulson responded, adding that he asked for an ethics waiver for his
interactions with his old firm “when it became clear that we had some
very significant issues with Goldman Sachs.”
Mr. Paulson did not say when he
received a waiver, but copies of two waivers he received — from the
White House counsel’s office and the Treasury Department — show they
were issued on the afternoon of Sept. 17, 2008.
That date was in the middle of the
most perilous week of the financial crisis and a day after the
government agreed to lend $85 billion to the American International
Group, which used the money to pay off Goldman and other big banks that
were financially threatened by A.I.G.’s potential collapse.
It is common, of course, for
regulators to be in contact with market participants to gather valuable
industry intelligence, and financial regulators had to scramble very
quickly last fall to address an unprecedented crisis. In those
circumstances it would have been difficult for anyone to follow routine
guidelines.
While Mr. Paulson spoke to many
Wall Street executives during that period, he was in very frequent
contact with Lloyd C. Blankfein, Goldman’s chief executive, according
to a copy of Mr. Paulson’s calendars acquired by The New York Times
through a Freedom of Information Act request.
During the week of the A.I.G.
bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the
calendars show, far more frequently than Mr. Paulson did with other
Wall Street executives.
On Sept. 17, the day Mr. Paulson
secured his waivers, he and Mr. Blankfein spoke five times. Two of the
calls occurred before Mr. Paulson’s waivers were granted.
Michele Davis, a spokeswoman for
Mr. Paulson, said that the former Treasury secretary was busy writing
his memoirs and that his publisher had barred him from granting
interviews until his manuscript was done. She pointed out that the
ethics agreement Mr. Paulson agreed to when he joined the Treasury did
not prevent him from talking to Goldman executives like Mr. Blankfein
in order to keep abreast of market developments.
Ms. Davis also said that Federal
Reserve officials, not Mr. Paulson, played the lead role in shaping and
financing the A.I.G. bailout.
But Mr. Paulson was closely
involved in decisions to rescue A.I.G., according to two senior
government officials who requested anonymity because the negotiations
were supposed to be confidential.
And government ethics specialists
say that the timing of Mr. Paulson’s waivers, and the circumstances
surrounding it, are troubling.
“I think that when you have a
person in a high government position who has been with one of the major
financial institutions, things like this have to happen more publicly
and they have to happen more in the normal course of business rather
than privately, quietly and on the fly,” said Peter Bienstock, the
former executive director of the New York State Commission on
Government Integrity and a partner at the law firm of Cohen Hennessey
Bienstock & Rabin.
He went on: “If it can happen on a
phone call and can happen without public scrutiny, it destroys the
standard because then anything can happen in that fashion and any
waiver can happen.”
Inevitable Questions
Concerns about potential conflicts
of interest were perhaps inevitable during this financial crisis, the
worst since the Great Depression. In the weeks before Mr. Paulson
obtained the waivers, Treasury lawyers raised questions about whether
he had conflicts of interest, a senior government official said.
Indeed, Mr. Paulson helped decide
the fates of a variety of financial companies, including two longtime
Goldman rivals, Bear Stearns and Lehman Brothers, before his ethics
waivers were granted. Ad hoc actions taken by Mr. Paulson and officials
at the Federal Reserve, like letting Lehman fail and compensating
A.I.G.’s trading partners, continue to confound some market
participants and members of Congress.
“I think it’s clear he had a
conflict of interest,” Mr. Stearns, the congressman, said in an
interview. “He was covering himself with this waiver because he knew he
had a conflict of interest with his telephone calls and with his
actions. Even though he had no money in Goldman, he had a vested
interest in Goldman’s success, in terms of his own reputation and
historical perspective.”
Adding to questions about Mr.
Paulson’s role, critics say, is the fact that Goldman Sachs was among a
group of banks that received substantial government assistance during
the turmoil. Goldman not only received $13 billion in taxpayer money as
a result of the A.I.G. bailout, but also was given permission at the
height of the crisis to convert from an investment firm to a national
bank, giving it easier access to federal financing in the event it came
under greater financial pressure.
Goldman also won federal debt
guarantees and received $10 billion under the Troubled Asset Relief
Program. It benefited further when the Securities and Exchange
Commission suddenly changed its rules governing stock trading, barring
investors from being able to bet against Goldman’s shares by selling
them short.
Now that the company’s crisis has
passed, Goldman has rebounded more markedly than its rivals. It has
paid back the $10 billion in government assistance, with interest, and
exited the federal debt guarantee program. It recently reported
second-quarter profit of $3.44 billion, putting its employees on track
to earn record bonuses this year: about $700,000 each, on average.
Ms. Davis, the spokeswoman for Mr.
Paulson, said Goldman never received special treatment from the
Treasury. Mr. Paulson’s calendars do not disclose any details about his
conversations with Mr. Blankfein, and Ms. Davis said Mr. Paulson always
maintained a proper regulatory distance from his old firm.
A spokesman for Goldman, Lucas van
Praag, said: “Lloyd Blankfein, like the C.E.O.’s of other major
financial institutions, received calls from, and made calls to,
Treasury to provide a market perspective on conditions and events as
they were unfolding. Given what was happening in the world, it would
have been shocking if such conversations hadn’t taken place.”
Although federal officials were
concerned that Goldman Sachs might collapse that week, Mr. van Praag
said the only topics of discussion between Mr. Blankfein and Mr.
Paulson at the time involved Lehman Brothers’ troubled London
operations and “disarray in the money markets.” Mr. van Praag said
Goldman was fully insulated from financial fallout related to a
possible A.I.G. collapse in mid-September of last year.
However, Mr. Paulson believed he
needed to request the ethics waivers during that tumultuous week, after
regulators had become concerned that the same crisis of confidence that
felled Bear Stearns and Lehman might spread to the remaining investment
banks, including Goldman Sachs.
At a conference call scheduled for
3 p.m. on Sept. 17, 2008, Fed officials intended to discuss the
financial soundness of Goldman Sachs, Merrill Lynch and Morgan Stanley,
and they had asked Mr. Paulson to participate, according to Mr.
Paulson’s calendars and his spokeswoman.
That was the first time during the
crisis that Mr. Paulson’s involvement required a waiver, Ms. Davis
said. The waiver was requested that morning and granted orally that
afternoon, just before the 3 p.m. conference call.
A few minutes later, in an e-mail
message to Mr. Paulson, Bernard J. Knight Jr., assistant general
counsel at the Treasury, outlined the agency’s rationale for granting
the waiver.
“I have determined that the
magnitude of the government’s interest in your participation in matters
that might affect or involve Goldman Sachs clearly outweighs the
concern that your participation may cause a reasonable person to
question the integrity of the government’s programs and operations,”
Mr. Knight wrote.
Goldman’s Windfall
For investors in the United States
and around the world, the days after the A.I.G. rescue were perilous
and uncertain; the Dow Jones industrial average fell 4 percent on Sept.
17 as credit markets froze and investors absorbed the implications of
the insurance giant’s collapse. That day, Mr. Paulson and his
colleagues at the Federal Reserve were scrambling to contain the damage
and shore up investor confidence.
But Mr. Paulson has disavowed any
involvement in the decision to use taxpayer funds to make Goldman and
A.I.G.’s trading partners whole. In his July testimony to the House, he
said: “I want you to know that I had no role whatsoever in any of the
Fed’s decision regarding payments to any of A.I.G.’s creditors or
counterparties.”
Ms. Davis reiterated this, saying
that Mr. Paulson’s involvement in the A.I.G. bailout was meant to
forestall a collapse of the entire financial system and not to rescue
any individual firms exposed to A.I.G., like Goldman. However, she
said, federal officials were worried that both Goldman and Morgan
Stanley were in danger themselves of failing later in the week and it
was in that context that Mr. Paulson received a waiver.
“The waiver was in anticipation of a need to rescue Goldman Sachs,” Ms. Davis said, “not to bail out A.I.G.”
Treasury Department lawyers said a
waiver for Mr. Paulson regarding A.I.G. was not necessary, Ms. Davis
said, because the A.I.G. rescue was conducted by the Federal Reserve.
The Treasury had no power to rescue A.I.G., she said. Only the Fed
could make such a loan.
But according to two senior
government officials involved in the discussions about an A.I.G.
bailout and several other people who attended those meetings and
requested anonymity because of confidentiality agreements, the
government’s decision to rescue A.I.G was made collectively by Mr.
Paulson, officials from the Federal Reserve and other financial
regulators in meetings at the New York Fed over the weekend of Sept.
13-14, 2008.
These people said Mr. Paulson
played a major role in the A.I.G. rescue discussions over that weekend
and that it was well known among the participants that a loan to A.I.G.
would be used to pay Goldman and the insurer’s other trading partners.
Over that weekend, according to a
former senior government official involved in the discussions, Mr.
Paulson said that he had been warned by lawyers for the Treasury
Department not to contact Goldman executives directly. But he said Mr.
Paulson told him he had disregarded the advice because the “crisis”
required action.
Ms. Davis said: “Hank doesn’t
recall saying that. Staff had advised that he interact one on one with
Goldman as little as possible, not because it would be a violation but
for appearances, recognizing someone would likely attempt to read too
much into it.”
On Sept. 16, 2008, the day that the
government agreed to inject billions into A.I.G., Mr. Paulson
personally called Robert B. Willumstad, A.I.G.’s chief executive, and
dismissed him. Mr. Paulson’s involvement in the decision to rescue
A.I.G. is also supported by an e-mail message sent by Scott G. Alvarez,
general counsel at the Federal Reserve Board, to Robert Hoyt, a
Treasury legal counsel, that same day.
The subject of the message,
acquired under the Freedom of Information Act, is “AIG Letter,” and it
contains a reference to a document called
“AIG. Paulson.Letter.draft2.09.16.2008.doc.” The letter itself was not
released.
Ms. Davis said this letter was
intended to confirm that the Treasury and Mr. Paulson supported the
loan to A.I.G. and that its officials recognized that any Fed losses
would be absorbed by taxpayers. She said the existence of the letter
did not confirm that Mr. Paulson was extensively involved in
discussions about an A.I.G. bailout.
Since last September, the
government’s commitment to A.I.G. has swelled to $173 billion. A recent
report from the Government Accountability Office questioned whether
taxpayers would ever be repaid the money loaned to what was once the
world’s largest insurance company.
Constant Contact
In the ethics agreement that Mr.
Paulson signed in 2006, he wrote: “I believe that these steps will
ensure that I avoid even the appearance of a conflict of interest in
the performance of my duties as Secretary of the Treasury.”
While that agreement barred him
from dealing on specific matters involving Goldman, he spoke with Mr.
Blankfein at other pivotal moments in the crisis before receiving
waivers.
Mr. Paulson’s schedules from 2007
and 2008 show that he spoke with Mr. Blankfein, who was his successor
as Goldman’s chief, 26 times before receiving a waiver.
On the morning of Sept. 16, 2008,
the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show
that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson
received the ethics waiver regarding contacts with Goldman between 2:30
and 3 the next afternoon. According to his calendar, he called Mr.
Blankfein five times that day. The first call was placed at 9:10 a.m.;
the second at 12:15 p.m.; and there were two more calls later that day.
That evening, after taking a call from President Bush, Mr. Paulson
called Mr. Blankfein again.
When the Treasury secretary reached
his office the next day, on Sept. 18, his first call, at 6:55 a.m.,
went to Mr. Blankfein. That was followed by a call from Mr. Blankfein.
All told, from Sept. 16 to Sept. 21, 2008, Mr. Paulson and Mr.
Blankfein spoke 24 times.
At the height of the financial
crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any
other executive, according to entries in his calendars.
The calls between Mr. Paulson and
Mr. Blankfein, especially those surrounding the A.I.G. bailout, are
disturbing to Samuel L. Hayes, a professor emeritus at Harvard Business
School and a consultant in the past for government agencies, including
the Treasury Department.
“We don’t know what they talked
about,” Mr. Hayes said. “Obviously there was an enormous amount at
stake for Goldman in whether or not the A.I.G. contracts would be made
whole. So I think the burden is now on Mr. Paulson to demonstrate that
there was no exchange of information one way or the other that
influenced the ultimate decision of the government to essentially
provide a blank check for A.I.G.’s contracts.”
In a letter accompanying the
government’s production of Mr. Paulson’s calendar under the Freedom of
Information Act request, Kevin M. Downey, a lawyer for Mr. Paulson,
raised questions about how comprehensive the schedules were. He noted,
for example, that the calendars did not reflect the Treasury
secretary’s attendance at several public events. Mr. Downey did not
return phone calls or e-mail messages seeking further comment.
Moreover, because the schedules
include only phone calls made through Mr. Paulson’s office at Treasury,
they provide only a partial picture of his communications. They do not
reflect calls he made on his cellphone or from his home telephone.
According to the schedules, Mr.
Paulson’s contacts with Mr. Blankfein began even before the height of
the crisis last fall. During August 2007, for example, when the market
for asset-backed commercial paper was seizing up, Mr. Paulson spoke
with Mr. Blankfein 13 times. Mr. Paulson placed 12 of those calls.
By contrast, Mr. Paulson spoke six
times that August with Richard S. Fuld Jr. of Lehman, four times with
Jamie Dimon of JPMorgan Chase and only twice with John Thain of Merrill
Lynch.
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