Hank Paulson talked to a packed auditorium at Hong Kong University yesterday about his role in the financial crisis, the nature of China-US relations and the nobleness of being a banker.
Victor Fung, chairman of the Li & Fung Group, moderated the conversation with the former US Treasury secretary and decided to start with a question on the role Paulson played in the global financial crisis. “Why did the US government save AIG and Bear Stearns and let Lehman fail?” asked Fung, adding that he might as well tackle the question the 1,000-odd people listening wanted answered before he moved onto other topics.
“Ben Bernanke, Timothy Geithner and I have all said we tried to save Lehman, but did not have the regulatory authorities necessary at the time to bail out a non-banking institution,” said Paulson. Bear Stearns was bailed out because J.P. Morgan stepped in to buy it and guaranteed the trading book, but Lehman had a bigger capital hole and liquidity problem, he added.
The US Treasury and Fed tried to replicate the Bear solution and lined up two buyers, Barclays and Bank of America. Bank of America went on to bail out Merrill Lynch, which Paulson termed a good thing, because otherwise Merrill Lynch would have gone bust, which would have been much worse. And the takeover by Barclays could not secure the necessary approvals from the British, said Paulson, who has been quoted in the past as saying that during the financial crisis the Chinese proved to be better friends to America than the British, as the Chinese bailed out the US while the British failed them.
AIG was perceived to have a liquidity problem, said Paulson, so the Fed was able to make a loan to ease its difficulties. When it became clear a few weeks later that it was a capital problem, the Tarp (troubled asset relief programme) was in place and could be used to bail out AIG, he added.
When pressed by Fung on whether, with the benefit of hindsight, he would have done things differently, Paulson insisted that the big decisions taken at the time were correct. “Nationalising Freddie and Fannie, saving Bear, putting in place Tarp, using the exchange stabilisation fund to save the money markets, all these were the right decisions,” he said. Paulson said his mistake lay in not communicating better with the US public and Congress, who were never convinced that they were taking the right steps.
Fung next asked about accountability and why nobody had been taken to task. Paulson agreed that the US public is angry and feels bankers should have been found guilty, and that a lot of people made mistakes, including bankers. However, he blamed the crisis on poor legislation that over-stimulated the housing market. He also said that legislation that has been enacted since the crisis, such as the 2,000-page Dodd-Frank Act, and new measures to make derivatives more transparent were steps in the right direction. But Paulson conceded that there was plenty still to do.
Fung then started laying the ground for some more China-specific questions. “Since the financial tsunami there has been a tectonic shift towards Asia,” he said. “How will American people, who are coming from the position of being the world’s only superpower, adapt to a multi-polar world?”
Paulson agreed that the biggest change in the world has been the increasingly important role played by emerging markets and that a new, innovative way of operating was needed as the US cannot continue to operate the way it has in the past. He said the financial crisis has shown how important it is to be more inclusive across the developed and emerging markets, and that it is key for the US to work with China and other countries.
How much progress has really been made in US-China relations, asked Fung. Paulson downplayed issues such as renminbi valuation and intellectual property rights, saying that healthy disagreements will arise between any two countries with a big trading relationship. “I need to explain to people in the US all the time that our problems are of our own making and China did not cause them,” he said. That was not news to most people in the room, but it was a good insight as to where many people in the US lay blame for the economic downturn.
Paulson, who was secretary of the US Treasury from 2006 to 2009, following a 32-year career at Goldman Sachs, which included a seven-year stint as chairman and chief executive officer between 1999 and 2006, generally steered clear of the topic of investment banking. “Banking is a noble profession,” he said briefly, while trying to provide some career guidance to students attending the lecture, which was part of Hong Kong University’s centenary celebrations.
In general, Fung asked Paulson all the right questions, but the conversation still had a rehearsed feel about it, with Paulson neatly avoiding any hint of controversy and taking care to adopt a very conciliatory tone when asked anything about China. Perhaps his days of setting policy are truly behind him and he is eager to focus his efforts on the conservation, climate and nature-related activities, which are now his passion.