When President Bush announced in May 2006 that he was naming Hank Paulson as Treasury secretary, the appointment was greeted with great fanfare—and relief—in both Washington and New York. The two previous secretaries of the Treasury had proved to be problematic, to say the least. Paul O’Neill, the former head of Alcoa, was prone to rash statements that sent the markets reeling. John Snow, the accomplished chairman of the railroad company CSX, was considered ineffectual in government, and rumors swirled for months about when he would be replaced.
Paulson seemed cut from better cloth. As the head of Goldman Sachs, the most prestigious of the brokerage houses, he was the latest in a long line of Goldman men turned statesmen: Republicans like Steve Friedman, Bush’s director of the National Economic Council; John Whitehead, a major figure in the Reagan State Department; and Democrats like Clinton Treasury secretary Robert Rubin and New Jersey governor Jon Corzine. Unlike O’Neill or Snow, who both hailed from rust-belt industries, Paulson was thought to be, in the mold of Rubin, a market whisperer who could soothe a jittery financial world. Jim Cramer, the Goldman trader turned television star, said Paulson would rank with Rubin and might prove to be as great as the first Treasury secretary, Alexander Hamilton. The Senate confirmed his appointment unanimously.
Paulson is the kind of man Washington likes to this day, even as the economy suffers. He may have been known as a tough and demanding leader at Goldman, but the capital sees him less as a hard-ass and more as a courtly and preternaturally bipartisan official. Democratic senator Chuck Schumer, chairman of the Joint Economic Committee, is one of his most ardent supporters. (Although he’s a Republican, Paulson has been a Schumer contributor.) When I asked Barney Frank, the liberal Massachusetts Democrat who chairs the House Financial Services Committee and has worked closely with Paulson on the credit and housing mess, he positively kvelled, saying, “I think he’s been a very good partner. We’ve worked very closely with him and his staff. It’s totally different” from the relationship with Snow and O’Neill. Aside from having an amiable mien—the devout Christian Scientist doesn’t drink—Paulson also scores points inside the Beltway for being, well, not an ideological nut job. He’s a Republican and an environmentalist, a former chairman of the Nature Conservancy and even a serious bird-watcher. Everyone I spoke to for this piece calls him a pragmatist. Most important, Paulson made his name on Wall Street, which is what Washington wants from its Treasury secretaries these days.
But if you examine Paulson’s record at Treasury, it’s terrible. Really. Never mind his handling of the credit crisis, which hasn’t been exactly Hamiltonian. In some ways, the subprime mess has given Paulson cover for his broader failings. Indeed, if you judge Paulson in terms of his own goals, the things he vowed to tackle after he was confirmed, they remain unmet, and the things he wanted to fix are unimproved or worse.
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I think of Paulson as being a bit like Andrew Mellon when he was Treasury secretary (remarkably, serving under three presidents—Harding, Coolidge, and Hoover). Mellon was, of course, a giant of finance, a legend in American banking. But his reaction to the crash of 1929—favoring credit tightening and budget cutting—was dead wrong and helped lead to the Depression. Just because he had been a financial titan didn’t mean that Mellon chose the right course as a cabinet secretary. Nor, it could be said, has Paulson.
“They’ve been in slow motion, slow to understanding the depth of the problem,” said one top Wall Street executive I spoke to about Paulson’s Treasury team and its response to the credit and housing predicament. He added that he’s “baffled” as to why a Wall Street vet like Paulson would be so out of touch.
Step back a bit. When Paulson took over the secretary’s chair, he vowed to look closely at financial-services regulation, as would befit a Goldman alumnus. “This is something that had been on his mind for years,” recalls Rob Nichols, who worked with Paulson when the Goldman leader chaired the Financial Services Forum, an organization representing the nation’s top financial institutions. Paulson saw that a company need not be traded on an American exchange like Nasdaq when it could just as easily be listed in London. So he directed Treasury to come up with strategies to keep companies listed in the U.S. Its goal dovetailed with the Bush administration’s focus on deregulation.
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