By Rebecca Christie and Matthew Benjamin
Nov. 13 (Bloomberg) -- Henry Paulson became Treasury secretary 28 months ago, when he was at the top of the financial world: Wall Street's best-paid chief executive officer, capping his career with a high-profile sojourn in public service.
Today, two months before he leaves office, some say Paulson is a reduced figure, damaged by the financial-market meltdown that happened on his watch and by the government's struggles to respond to it.
Like many others who have served in President George W. Bush's administration -- among them former Secretary of State Colin Powell and former Treasury chief Paul O'Neill -- Paulson, 62, will leave office casting a smaller shadow than when he arrived.
``Paulson's credibility has certainly been substantially diminished,'' said Peter Wallison, who was general counsel at the Treasury under former President Ronald Reagan and is now a fellow at the American Enterprise Institute in Washington. ``There has been a lot of shifting back and forth and he clearly hasn't thought through much of these policies. He has lost a lot of confidence from the market from all of this.''
The latest blow was his announcement yesterday that the Treasury is abandoning his plan to buy devalued mortgage assets -- the one he unveiled dramatically just eight weeks ago, and defended against congressional and market skeptics.
`A Flip-Flop'
``This is a flip-flop, but on the other hand, when they first proposed the thing, they didn't really know what they were doing,'' said Bill Fleckenstein, president of Fleckenstein Capital Inc. in Seattle and author of the book ``Greenspan's Bubbles.'' Paulson has pushed some ``cockamamie schemes,'' he said. ``So one has to ask, does he have any clue?''
``This is not something he's going to be proud to put on his resume,'' said James Cox, a law professor at Duke University in Durham, North Carolina, who has testified on securities regulation before Congress and served on legal advisory panels for the New York Stock Exchange and National Association of Securities Dealers. ``It does tarnish Paulson's image, because it shows that a lot of political capital was spent on something that most of us thought was not a good idea to begin with.''
Only history will render a final verdict on Paulson's handling of this year's cascading economic crises. But he surely couldn't have wanted to spend his final days in office this way: spearheading the massive government intervention in the banking, insurance and mortgage industries; fielding requests to bail out automakers General Motors Corp., Ford Motor Co., and Chrysler LLC, and even heating-oil retailers.
No Sunset Ride-off
``He's ended up really in kind of a hair-on-fire thing,'' said Stephen Stanley, chief economist at RBS Greenwich Capital. ``Particularly in his position, of somebody who was going to be a government official for a very short time and then ride off into the sunset, it's been very different from what he had in mind.''
The Treasury chief yesterday said he had no regrets over reversing his plans for the bailout program. ``I will never apologize for changing a strategy or an approach if the facts change,'' Paulson said at a press briefing in Washington.
In an interview with Bloomberg Television today, he said ``the original plan was a good plan. What changed was our understanding of the magnitude of the problem.''
When Paulson took office in July 2006, the Dow Jones Industrial Average was near a six-year high and Goldman was selling at $149 a share, making the former CEO's stake worth about $485 million. Today the Dow is down by more than a third for the year. Goldman, which weathered the crisis far better than Lehman Brothers Holdings Inc., Merrill Lynch & Co., and Bear Stearns Cos., trades more than 70 percent below its October 2007 peak of $250.70.
Original Goals
Paulson came into office determined to use his credibility and reputation to advance an agenda that included easing regulation of Wall Street -- citing concern that too-stringent oversight would drive investors to other markets like London and Hong Kong -- and an overhaul of Social Security to allow for taxpayer-funded private accounts.
But Bush's falling political fortunes -- anger over the botched response to Hurricane Katrina, voter weariness over the Iraq War, the Republicans' loss of congressional control -- stymied much of that agenda. Then came the credit crisis of summer 2007 -- and the subsequent market and economic meltdown that have overtaken the Bush presidency.
Paulson's defenders say he's the victim of the worst financial crisis in seven decades, and has helped prevent a deeper collapse by using his knowledge and contacts on Wall Street.
History to Judge
``He's been in a trial by fire,'' said Allan Hubbard, former director of Bush's White House National Economic Council. ``History, looking back'' will say Paulson ``responded as well as one could hope'' under the circumstances, he said.
When Paulson in mid-September unveiled plans for a broad market rescue that went beyond ad-hoc interventions in troubled companies, he was hailed by some, including Democrats, for willingness to take bold action. Former Federal Reserve Vice Chairman Alan Blinder called it a ``giant step toward a cure'' for the crisis. Paulson's expertise in finance also distinguished him from his Bush administration predecessors, who had headed industrial companies.
Paulson proposed an unprecedented $700 billion package to purchase distressed mortgage assets, aiming to unfreeze credit markets hobbled by losses stemming from record foreclosures. The Dow soared 7.3 percent in two days as officials prepared their plan Sept. 18-19.
Paulson's star waned again when he shifted the bailout program's focus in a matter of weeks.
Debating Lawmakers
At first, Paulson rebuffed calls from some lawmakers to buy stakes in financial companies as a more direct way of getting capital to lenders. He told lawmakers at a Sept. 23 Senate Banking Committee hearing ``that's what you do when you have failures, you know?'' Instead, it was better to rely on ``market mechanisms,'' holding auctions for devalued assets, he said.
Less than a month after his initial plan, he agreed to use the first $250 billion of bailout funds for capital injections. Yesterday he officially abandoned any intention of holding auctions for distressed investments.
The Dow fell as investor confidence weakened. The average yesterday closed 27 percent lower than on Sept. 19, when Paulson unveiled his plan.
``Paulson's very public and frantic panic of a few short weeks ago, along with his current state of bewilderment and indecisiveness, is most likely the single greatest explanation for the persistent doldrums in the markets,'' said Richard Armey, 60, the former House Republican leader who is now a senior policy adviser at the DLA Piper law firm in Washington.
New Focus
Now, the Treasury plans to aid the markets for automobile purchases, student loans and credit-card debt. Consumer financing has been throttled by the crisis, with issuance of student-loan and car-loan securities drying up in October.
The U-turn on the Troubled Asset Relief Program isn't Paulson's first. In July, he asked Congress for authority to provide a federal backstop for mortgage financers Fannie Mae and Freddie Mac, saying that granting the power would shore up investor confidence and that he didn't plan to use it. Less than two months later, he engineered the government seizure of the two companies.
Paulson has also been criticized for ruling out a government rescue of Lehman in September, when he argued that the industry was long aware of the investment bank's problems and should have been prepared. Lehman's downfall precipitated a worsening in the credit crisis and contributed to the near- collapse of American International Group Inc. that month.
`Decisive Mistake'
``That was the worst and, in fact, the decisive mistake on the part of the administration,'' Mortimer Zuckerman, billionaire chairman of Boston Properties Inc., said in an interview earlier this month, referring to letting Lehman go. ``When financial historians write about this, they are going to say that was the disaster.''
So far, taxpayers have provided about $1 trillion for rescues of private companies, which Paulson has called ``terribly objectionable'' to his belief in free markets.
``The Treasury is advocating things in the name of damage control that one would never have thought a Republican administration, or any administration, would have been actively seeking,'' said Alice Rivlin, former vice chairman of the Federal Reserve and former budget director under President Bill Clinton.
New measures are likely under incoming President Barack Obama, who with other Democrats have called for action to stem foreclosures and ease falling home prices.
``If you want to stop this next year of rather terrible pressure on the housing market, you have to intervene in some way,'' said Thomas Zimmerman, a UBS AG mortgage market analyst in New York.
To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Matthew Benjamin in Washington at mbenjamin2@bloomberg.net
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