Black: Paulson “Waited” to Allow Goldman Subprime Holdings Unwind Before Crash

You may have missed this hard hitting McClatchy article over the weekend. It essentially accuses then Treasury Secretary (and former Goldman Sachs CEO) Hank Paulson of “willful inaction in late 2006 and 2007 during a period when lending criteria were disintegrating in favor of so-called “liars’ loans,” for which applicants weren’t required to document their income.”

The reason? To give Goldman Sachs a chance to exit their soon to be crumbling sub-prime loan portfolio. (See video) They also got short subprime derivatives. GS became the only major Wall Street firm to safely exit the housing market before it crashed. McClatchy had previously reported that Goldman Sachs failed to report dumping their subprime positions to the SEC for 9 months, while making public statements to the inapposite to that.

These accusations come from William Black, the former senior thrift regulator, now law professor. Black states that Paulson “knew that if he acted the way he should, that would have burst the bubble. Then Goldman Sachs would have been left with a very substantial loss, and that would have been the end of bonuses at Goldman Sachs.”

Personally, I lean towards the belief that Paulson was merely an incompetent Treasury Secretary, not maliciously reckless or willfully corrupt, as Black asserts (but what do I know?). That alternative is certainly worth exploring, as the timing sure worked out well for both Goldie and Hammering Hank:

“The most dangerous loans offered teaser interest rates that would shoot higher in two to five years and saddle borrowers with crushing monthly payments. From Jan. 1, 2006, through 2007, mortgage lenders issued more than $1.6 trillion worth of these types of loans, according to data from the industry newsletter Inside Mortgage Finance.

Black and other former regulators said that Paulson could have reined in this flood of loans by:

Directing the Office of Thrift Supervision to beef up its dwindling number of thrift examination teams and to prohibit subprime lending by federally insured firms such as Countrywide Savings and Loan, the IndyMac Bank and WaMu, which together issued more than $360 billion in dicey mortgages in 2006, according to International Monetary Fund data and company disclosures.

• Pressing Comptroller of the Currency John Dugan to rescind his agency’s 2004 rules barring state enforcement agencies from cracking down on abusive lending tactics.

•Using his influence in the Bush administration to stop Fannie Mae and Freddie Mac from buying subprime securities and allowing the industry to grow even bigger.

• Weighing in against proposed international banking standards, which subsequently went into effect, that would allow foreign banks to hold low reserves when they bought Triple A-grade securities, such as subprime bonds whose ratings were grossly inflated.

A second Paulson critic, retired senior thrift examiner Richard Newsom, wrote to Congress about the regulatory lapses that he said contributed to the crisis. In a phone interview, he said that it was “simply implausible that Paulson couldn’t see the relation between delaying strong action by Treasury and the benefit to letting places like Goldman” reduce their risks.”

Here’s the greatest irony of all: While ignoring the burgeoning subprime crisis, Paulson focus was on Deregulation: He “repeatedly voiced opposition to what he considered over-regulation of banks and investment banks. He particularly complained about a provision in the 2002 Sarbanes-Oxley securities restructuring law that requires corporate officers to submit sworn statements to the SEC vouching that their firms’ internal financial controls were adequate.”

Incompetent, or criminally corrupt? You decide.


How Hank Paulson’s inaction helped Goldman Sachs
Greg Gordon
McClatchy, October 10, 2010

Goldman didn’t tell SEC about mortgage moves for months
Greg Gordon and Chris Adams
McClatchy, April 30, 2010

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