Henry Paulson on the trade war with China

It should concern every one of us who cares about the state of the global economy that the positive-sum metaphors of healthy economic competition are giving way to zero-sum metaphors of military competition.

~ Henry Paulson, former Treasury Secretary, in a speech in Beijing

(as cited in the November 25, 2019 print version of Barron's)

Kevin Duffy on why Henry Paulson failed to fix the financial system in 2008

To the Editor,

In his recent interview (“’I had to deal with raw fear’,” September 17, 2018), former Treasury Secretary Henry Paulson claimed, “The timing, cause, and severity of the next financial crisis are impossible to predict.  Of course someone will get it right and will be credited with doing so, but he or she won’t spot the next one.”  Having warned about the late ‘80s Japan bubble, late ’90s tech bubble and mid ‘00s credit bubble (“For Whom Do the Bells Toll?,” June 18, 2007), I’ll take that as a challenge.  The root cause is always artificially low rates set by central banks.  Since this period of low rates was longer (7 years vs. 2 ½ from 2002-04), deeper and more global, the next crisis will be more widespread and prolonged.  As for timing, it’s anyone’s guess but with rising rates, narrowing leadership (just 5 of 35 country stock markets up on the year), investor euphoria (record low cash levels at Schwab), and wild speculation (first cryptocurrencies, now cannabis stocks), the lights are flashing red.

There are plenty of areas of fragility.  Within the U.S., since the end of 2008 student loan debt is up 127%, auto loan debt 57%, corporate debt 76%, public debt 98%.  Margin debt has more than tripled.  Outside the U.S., Canada and Australia are experiencing housing bubbles while emerging market debt has gone from 110% of GDP to 194% according to the Bank for International Settlements.  Other potential landmines: Chinese corporate debt has increased by 64% of GDP, Italian government debt by 40% of GDP, and Japanese government debt by 61% of GDP.

Unlike the tech and credit bubbles, which were sector-specific, the bubble today is in “everything.”  This is the true legacy of Paulson, Geithner, Bernanke, Frank & Co.

~ Kevin Duffy, letter-to-the-editor sent to Barron's, but never published, September 21, 2018

Kevin Duffy on the legacy of the 2008 financial bailouts

In his recent interview in Barron's (“Hank Paulson Says the Financial Crisis Could Have Been 'Much Worse’,” September 17, 2018), former Treasury Secretary Henry Paulson claimed, “The timing, cause, and severity of the next financial crisis are impossible to predict.  Of course someone will get it right and will be credited with doing so, but he or she won’t spot the next one.”  Having warned about the late ‘80s Japan bubble, late ’90s tech bubble and mid ‘00s credit bubble (“For Whom Do the Bells Toll?,” June 18, 2007), I’ll take that as a challenge.  The root cause is always artificially low rates set by central banks.  Since this period of low rates was longer (7 years vs. 2 ½ from 2002-04), deeper and more global, the next crisis will be more widespread and prolonged.  As for timing, it’s anyone’s guess but with rising rates, narrowing leadership (just 5 of 35 country stock markets up on the year), investor euphoria (record low cash levels at Schwab), and wild speculation (first cryptocurrencies, now cannabis stocks), the lights are flashing red.

There are plenty of areas of fragility.  Within the U.S., since the end of 2008 student loan debt is up 127%, auto loan debt 57%, corporate debt 76%, public debt 98%.  Margin debt has more than tripled.  Outside the U.S., Canada and Australia are experiencing housing bubbles while emerging market debt has gone from 110% of GDP to 194% according to the Bank for International Settlements.  Other potential landmines: Chinese corporate debt has increased by 64% of GDP, Italian government debt by 40% of GDP, and Japanese government debt by 61% of GDP.

Unlike the tech and credit bubbles, which were sector-specific, the bubble today is in “everything.”  This is the true legacy of Paulson, Geithner, Bernanke, Frank & Co.

~ Kevin Duffy, September 21, 2018

Nassim Taleb on deflation and Henry Paulson

I know that we're going to have massive deflation. The overhang of debt, massive deflation. Debt needs to be reduced. And [Henry] Paulson seems to be doing a good job. Particularly that they were part of the cause of what happened. It's quite commendable.

~ Nassim Taleb, "A conversation about economics with Nassim Taleb," Charlie Rose, December 3, 2008

Henry Paulson on TARP changes

Since announcing the injection of capital into big banks we have been examining a wide range of ideas that can further strengthen the financial system and get lending going again to support the broader economy. And to adequately reform our system, we must make sure we fully understand the nature of the problem which will not be possible until we are confident it is behind us.

~"Paulson Shifts Focus of Rescue to Consumer Lending", Bloomberg, November 12, 2008

Henry Paulson on the $700 billion financial bailout and expanded powers at Treasury

I'm not looking for extraordinary power.

~ Henry Paulson, Treasury Secretary, House Panel Q & A, September 24, 2008

Bethany McLean on Henry Paulson's intention not to go into politics

[Henry] Paulson says that he "wouldn't put a time limit" on his tenure at Goldman [Sachs], and that he has no intention of following in the Washington-bound footsteps of former Goldman CEOs like Bob Rubin, Steve Friedman, and [Jon] Corzine.

~ Bethany McLean, "Inside The Money Machine," Fortune, September 6, 2004

(Just to clarify, this was Paulson's lie, not McLean's.)

Kevin Duffy on the Henry Paulson led government takeover of Fan/Fred

It's official: The U.S. economy is headed for its worst recession in three decades. Henry Paulson's scheme to keep Fannie Mae and Freddie Mac on government life support and bail out its creditors (i.e. Wall Street, Big Banks, and Bill Gross at PIMCO) removes any doubt. The only question remaining: Will this downturn rival the Big Kahuna of the 1930s? Paulson was interviewed today on Bloomberg. Here is the money quote:

“No one likes to put the taxpayer into situations like this. No one does; I certainly don't. Government intervention is not something I came down here wanting to espouse, but it sure is better than the alternative.”

The alternative, of course, is that Paulson’s friends are actually forced to take huge losses on their reckless, ill-fated loans to Fannie and Freddie. Unthinkable! Paulson assures the naïve interviewer that the taxpayer will come before the shareholder, forgetting to mention the shareholder has already been wiped out, putting the taxpayer last in line behind the creditors. Under Hanky Pank’s scheme, the taxpayer is simply the bagholder of last resort. Paulson was obviously a quick study under former Goldman Sachs CEO and Treasury Secretary, “Mr. Bailout” himself, Robert Rubin.

The initial reaction of the stock market was to celebrate with a 300 point rally in the DJIA. Our guess is the euphoria will fade quickly as investors realize bailout money does not grow on trees, and the cash will either be taxed, borrowed or printed. The only question: How much will the final tab run?

The more pressing concern, however, is the economy. This economy needs to break its addiction to cheap credit, remove the waste of the previous credit binge, shed its political parasites (e.g., friends of Hank), and rebuild on a solid foundation. Every intervention prolongs the process and deepens the malaise. A wholesale government takeover of the mortgage market virtually guarantees the economy will be mired in deep recession for years.

The only winners (besides whiners like Bill Gross)? Those who are short the market.

Note to self: Move those inflation hedges from the attic to the front hall closet.

~ Kevin Duffy, Bearing Asset Management, "Paulson's gift to the bears," Azimuth blog, September 8, 2008

Warren Buffett on Henry Paulson's plan to takeover Fannie Mae and Freddie Mac

I think the Secretary did exactly the right thing. I don't think there was an alternative that was anywhere close to this one in terms of calming the markets, in terms of providing an ongoing function for the two that makes any change less abrupt... I wouldn't change anything in the plan myself.

~ Warren Buffett, interview on CNBC, September 8, 2008

Henry Paulson on the government takeover of Fannie Mae and Freddie Mac

No one likes to put the taxpayer into situations like this. No one does; I certainly don't. Government intervention is not something I came down here wanting to espouse, but it sure is better than the alternative.

~ Henry Paulson, Treasury Secretary, Bloomberg TV, September 8, 2008

Washington Post: Henry Paulson's plan to rescue Fannie Mae and Freddie Mac is really a bailout of the banks

Investor uncertainty over the long-term fate of the companies has left a pall over credit markets. It has been unclear which investors, if any, would suffer should the government intervene to prop up the firms.

The answer, in Paulson's plan, is that holders of preferred shares and subordinated debt, a riskier but higher-paying class of debt, might be made whole. Government leaders were reluctant to allow holders of those assets to incur major losses because they are widely held by banks, and major losses could cause a wave of bank failures.

~ Washington Post, "U.S. nears rescue plan for Fannie, Freddie," September 5, 2008

Henry Paulson on GSE bailout

If you have a bazooka in your pocket and people know it, you probably won't have to use it.

~ Henry Paulson, US Senate meeting, July 15, 2008

Henry Paulson on the congressional package to rescue Fannie Mae and Freddie Mac

We recognized quite early on that if there was some concern or lack of confidence in their access to capital, this could create a serious problem. But we certainly couldn't go to Congress and ask for these powers that would make it a self-fulfilling prophecy - - or we wouldn't have gotten the powers.

~ Henry Paulson, Treasury Secretary, "Paulson Risks Goldman Standard as Fannie, Freddie Shares Erode," Bloomberg, August 21, 2008, by Rebecca Christie and Matthew Benjamin

Henry Paulson on the dollar

I'm a strong dollar man, we have a strong dollar policy. Our long-term economic fundamentals compare very favorably when I look around the world, and I think they're going to be reflected in the value of our currency.

~ Treasury Secretary Henry Paulson, "Paulson Says U.S. Credit-Market Crisis Is 'Closer to the End'," Bloomberg, May 1, 2008, by Peter Cook and John Brinsley)

Henry Paulson on the credit crunch

We are closer to the end of this problem than we are to the beginning. [Even with] headwinds and despite some of the things that we're going through, this economy is still growing, albeit modestly.

~ Treasury Secretary Henry Paulson, as appeared on Bloomberg Television, May 1, 2008

(Quote taken from "Paulson Says U.S. Credit-Market Crisis Is 'Closer to the End'," Bloomberg, May 1, 2008, by Peter Cook and John Brinsley)

Henry Paulson on bailouts

"I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street." The secretary added one caveat: "It would be imprudent not to have contingency plans, but we are so far away from seeing something that would have me calling for a bailout that I don't see it."

~ Henry Paulson, Treasury Secretary, "Paulson Dismisses Mortgage Rescue Plan," The Wall Street Journal, February 28, 2008

Henry Paulson on the latest stimulus package

There are signs the economy is slowing down fairly rapidly. If something were to be done here, I think the focus would be on something that's temporary and that could get done and make a difference soon. We are looking at things that could be done quickly. Time is of the essence.

~ Henry Paulson, Treasury Secretary, "Paulson Says Time 'of the Essence' in Any Stimulus", Bloomberg, January 11, 2008

WSJ on another mortgage bailout plan

Among the bailout ideas is a plan that would ask lenders to take a small, 10%-15%, haircut on these subprime loans but then bring in the Federal Housing Administration to insure the rest. This idea has backers on Capitol Hill, and we're told it even has takers at Hank Paulson's Treasury.

But if Mr. Paulson embraces it, he'll be putting taxpayers at risk if housing values decline further. He'll also be sending a terrible signal to lenders, borrowers and investors -- to wit, that Congress will save them from bad decisions. Treasury has spent years warning about the risk to taxpayers from expanding Freddie Mac and Fannie Mae. If it now embraces a larger role for their federal housing cousin, the FHA, Treasury's credibility on Fan and Fred will be zero.

All of these plans reflect the political imperative, or should we say panic, to rescue individuals from bad mortgage decisions. But you can't bail out borrowers without also bailing out lenders and investors -- and down that route lies endless taxpayer liability. Before embracing a radical restructuring of the relationships between American homeowners and mortgage companies, it's worth reviewing the facts: Roughly 35% of homeowners have no mortgage debt remaining on their homes. Of those homeowners still paying a mortgage, 95% are paying on time. And even in the risky category of subprime adjustable-rate loans, more than 83% are still paying on time.

~ The Wall Street Journal, "Review & Outlook: Mortgage Meltdown," October 24, 2007

Henry Paulson on expanding the role of Fannie Mae and Freddie Mac to deal with the mortgage mess

If we ever need them it's during times like today, and they're most valuable when there is distress in the mortgage market. I'd like to see them playing an even bigger role.

~ Henry Paulson, Treasury Secretary, "Paulson Shifts on Mortgages; Treasury Secretary SeeksBroad Moves by Lenders;'Not Business as Usual'," The Wall Street Journal, November 21, 2007

(Mr. Paulson faulted Congress for failing to pass several bills that could potentially provide relief for borrowers, and took aim at a Republican senator who is holding up a piece of legislation that would allow the Federal Housing Administration to play a greater role in the cleanup. While the Bush administration and Democrats in Congress backed the bill, Oklahoma Republican Sen. Tom Coburn objected, saying it will result in additional risky loans for which taxpayers will be liable.

Mr. Paulson said he understands Mr. Coburn's concerns, but notes: "This is not business as usual. This is an extraordinary situation.")

Henry Paulson: Subprime troubles "largely contained" (2007)

I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained.

~ Henry Paulson, U.S. Treasury Secretary, Reuters, April 20, 2007

(Quote provided by Kevin Depew, "Five Things You Need to Know: Housing Slump Well Contained; Well Contained to Existing Home Sales; Well Contained to Largest Cement Producer in U.S.; Well Contained to Spain; Well Contained to Auto Sales," Minyanville, April 24, 2007)