Goldman Sachs chairman and CEO Henry Paulson faces
ethical, political and economic challenges if confirmed as Bush's latest
Treasury Secretary.
In the coverage of President Bush’s nomination of
Henry J. “Hank” Paulson to replace John Snow as Treasury Secretary, I’ve lost
count of the number of mainstream media discussing the “well-worn path” between
Goldman Sachs and official Washington. But just because a road is well traveled
doesn’t mean it leads in the right direction.
Tapping officials from the venerable investment bank
for policy-making positions in government is a practice that dates back to the
Eisenhower Administration, when John Foster Dulles, whose law firm represented
Goldman Sachs, was appointed Secretary of State.
In more recent history, Goldman Sachs co-CEO Robert
Rubin instigated massive banking deregulation in the five years he served as
Treasury Secretary in the Clinton Administration. Rubin quit in 1999 for a multimillion-dollar
position at Citigroup. Around the same time, Jon Corzine lost an internal
political battle as Paulson’s co-CEO, rebounding first as the Democratic
senator of New Jersey and now as governor.
In March 1999, Joshua Bolten left Goldman Sachs to
become policy director of the Bush-Cheney campaign, later serving as policy
adviser, director of the Office of Management and Budget and ultimately White
House Chief of Staff. Stephen Friedman, former Goldman co-CEO with Rubin, was
appointed National Economic Council director by Bush from 2002 to 2005.
Enter Hank Paulson, who has spent the past eight
years as Goldman Sachs chairman and CEO. He joined the firm in 1974 after
serving as a member of the White House Domestic Council in the Nixon
Administration.
Under Paulson’s leadership, Goldman Sachs has become
one of Washington’s most generous patrons. Paulson is a top donor–mostly to the
GOP. (To the chagrin of critics on the right, Paulson is also an ardent
environmentalist and is chairman of The Nature Conservancy.) As Treasury
Secretary, Paulson may have to dump some stock (he is the single largest
shareholder in Goldman Sachs according to its 2006 proxy statement, with 4.6
million shares) to decrease his overwhelming conflict of interest, but even if
he sells his unrestricted stock, he’ll still have several hundred million bucks
in RSU (restricted stock unit) awards, which are not immediately sellable. This
could place him in a position where maintaining his financial well-being could
necessitate supporting policies positive to Goldman’s short-term stock price
over long-term needs of the general economy, like dividend tax cuts.
What first struck me upon news of Paulson’s possible
appointment was that he’s too smart to take on this task, with Bush’s approval
ratings for his economic policies hovering around 40 percent. Then, I got it.
Paulson is Bush’s last hurrah–and his last chance. Known as a pragmatic and
decisive leader, Paulson will likely be more proactive than Snow, whose sole
job essentially was traipsing up to Congress once a year and urging lawmakers
to raise the US debt cap by another trillion dollars so we wouldn’t default on
our interest payments to China.
Bush’s economic legacy is a weak dollar (who wants to
invest in a country teetering on the brink of default?) and tax cuts for the
super-wealthy that have created an outrageous deficit and debt. And that legacy
benefits men like Paulson at the expense of middle-class Americans and the
working poor. It will be a stretch for him to argue for prudent budgeting,
while facing the country’s highest national debt ever, without cutting social
programs to get there.
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This shaky economic legacy also makes Paulson’s
possible appointment more challenging and hence more potentially dangerous than
Rubin’s. He must rally citizens into believing their individual economic
condition is better than it is. Plus, he needs to convince international
investors that the dollar isn’t in free-fall, despite the abundance of American
debt. That’s a lot harder than convincing a board of peers as chairman to
compensate your fellow senior executives hundreds of millions of dollars.
When Robert Rubin hit Washington, mega-consolidation
in the banking industry that led to “Enronian” corporate scandals had yet to be
given the 1999 legislative go-ahead that smashed Glass-Steagall, FDR’s New Deal
Act separating commercial banking from investment banking. Today, things are
more complicated and less regulated.
Separately, the fact that Paulson presided over
Goldman Sachs during a period when the firm increasingly transformed itself
from a classic investment bank relying heavily on profit from stable fees into
something resembling a hedge fund, in which record profits were based on
trading bets made with borrowed funds, doesn’t make him the most credible
proponent of debt or deficit reduction.
So for Paulson to nab the top Treasury spot is
multiples worse. Still, he is strong and confident. That’s the scary part. Bush
gets a cheerleader to help cement his ideas of individualism, from more tax
cuts for the rich to privatization of anything politically viable at the
moment.
In a highly touted post-Enron-implosion speech at the
National Press Club in mid-2002, Paulson urged reform in the financial system
in three areas: accounting policy, standards of corporate governance and
conflict of interest. “Conflicts are a fact of life in many, if not most,
institutions, ranging from the political arena and government to media and
industry,” he said. “The key is how we manage them.”
Or how we ignore them. The question isn’t how it’s a
conflict of interest for Paulson to preside over our country’s economy but how
it’s not. According to the first general statement laid out in the “Standards
of Ethical Conduct for Employees of the Executive Branch”: “Public service is a
public trust requiring employees to place loyalty in the constitution, the laws
and ethical principles above private gain.” Even if Paulson ultimately sells
all his stock and finds a way to offload his restricted stock, he will wield in
the meantime enormous influence over the Treasury bond and foreign currency
trading positions of Goldman, with every policy decision on debt issuance or
the dollar that he makes. What’s good for Goldman isn’t necessarily good for
Middle America. Therein lies the conflict of a man whose entire career has been
predicated on successfully promoting corporate welfare over public interest.
Nomi Prins is a senior fellow at Demos, a
nonpartisan public policy think tank. Before becoming a journalist, she served
as a managing director for Goldman Sachs in New York. She is the author of
Other People's Money: The Corporate Mugging of America, Jacked: How
"Conservatives" Are Picking Your Pocket and It Takes a Pillage:
Behind the Bailouts, Bonuses, and Backroom Deals From Washington to Wall
Street. She is a frequent commentator on CNBC and the BBC.
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