Henry Paulson: Mr. Risk

Posted by: Michael Mandel on September 10

When Paulson was appointed Treasury Secretary in 2006, I wrote a cover story entitled “Mr. Risk Goes To Washington”.

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The inside language said: “Hank Paulson’s profound understanding of risk and reward makes him the perfect pick for the Treasury.”

After this week’s events, I still can’t tell whether I was prescient in that story or completely and totally wrong.

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Reader Comments

Brandon W

September 10, 2008 12:21 PM

Paulson does profoundly understand risk and reward. Bankers can take a huge risk with the financial system, and if the trick works they're rewarded with untold wealth. If the trick fails, they're rewarded with a government bailout necessary to rescue the entire national economy from their shenanigans. See? Risk and Reward.

Joe Cushing

September 10, 2008 02:40 PM

Brandon W.

If you think they get too much reward, why not join them? By increasing the supply of bankers you can bring down their cost. If you think somebody is making too much money, the answer is always, do what they do or by into their firm. Otherwise, just shut up and stop wining.

It's like when people complain that they don't' get paid enough. If you don't get paid enough, go find a job that pays you more. You get exactly what you are willing to work for--exactly what you are worth.

Another way to look at this issue is this. If you think CEO or X position is overpaid, then why don't you move into that position? Answer: because that position doesn't pay enough to motivate you to do what it takes to get that position. You think it is too much money for him, but clearly it's not enough money for you or you would be doing that job.

Mike Reardon

September 10, 2008 04:16 PM

Paulson is removing the risk from those banks and investment trusts who own FF’s properties. Insuring the investments of those buying FF’s securitized properties is what he is trying to put into place. Its firmly changing the rules to keep them from collapsing.

Kartik

September 10, 2008 07:11 PM

".. the answer is always, do what they do or by into their firm. "

Joe Cushing - You are not thinking in leftist terms. The solution is not to emulate the successful and also make money, the solution is to punism them so that everyone feels as bad as the leftist.

Leftism is an attractive ideology for the unhappy/lazy/envious set. It allows one to cloak the aforementioned vices in the guise of altruism/concern, while also acting as social currency among the similarly vice-ridden.

LAO

September 10, 2008 10:17 PM

I encountered an interesting term recently: "risk homeostasis". An example stems from a taxi fleet study. When half the fleet had acquired cars with ABS brakes, it was shown that the drivers with ABS drove more aggressively than those without. In other words, individuals have a certain risk tolerance, so when one risk shifts up or down, others will be shifted to compensate and return overall risk to the original tolerable level. I thought the concept had some merit, and attempted to apply it to the financial system and the economy.

Risk homeostasis provides a way to think about companies and investors hoarding cash after the dot.com crash, and a way to understand the current frozen credit markets.

Correct me if I'm wrong -- your perception in 2005 was that the message of the Paulson appointment was: Risk -- bring it on. Nothing ventured, nothing gained. Go for it, Henry.

My risk homeostasis reading of the appointment in hindsight would be that the risk was already known to government insiders and becoming intolerable, so let's get an expert in here to manage it. Indeed, Henry Paulson was sent off to look under the hoods of hedge funds, and came back saying not to worry and don't look too closely. It gave me a queezy feeling that he was seeing a house of cards.

I don't get the sense that Paulson has been given the implied new power to invigorate the economy, rather he's been sent (or allowed) to repeatedly and ineffectively beat up China over currency, while Rome began to burn. Now he's conveniently positioned to dampen the fires before the whole place is gutted.

Back to risk homeostasis -- what was in it for Paulson? The master of risk management could surely have found a more lucrative or rewarding role than U.S. Treasurer. It's easy to imagine now that he understood too well what was unfolding and felt that his own fortune or something more precious was at risk if he did not try to exercise some risk management at the system level, nationalizing institutions that have assumed excessive risk, for instance. The timing of the appointment would tend to indicate that things were already over-leveraged. It's hard to believe now that he would have been seduced simply by implied promises of power and glory.

Honestly, though, with the lack of transparency, how can anyone judge?

Brandon W

September 11, 2008 02:04 PM

Joe (and Kartik),
I think you're badly misunderstanding my sarcastically made point. And I think Kartik jumped in and played along. What Paulson did was communistic. THAT is extreme "leftist", as Kartik likes to call it. First, if people want to engage in honest business activity and that makes them money, I have no problem with that. What I have a problem with is fraudulent accounting and Ponzi schemes being used to make people wealthy. What I have a problem with is corporations buying government favors that let them get away with it. What I have a problem with is bankers playing games that could collapse the financial system, knowing that their friends in Washington will bail them out if the game goes bad. And what I have a problem with is Paulson the Communist fulfilling their wish and nationalizing the two largest mortgage backers so American taxpayers have to foot the bill for their irresponsible risk-taking.

Only a Communist, "leftist", would think what Paulson did was rational. A true free-market proponent would demand that the banks go down in flames of "creative destruction".

Brian Goldstein

September 11, 2008 02:58 PM

Joe Cushing -

You make a good point, in an ideal free market economy everyone is getting what they're worth. But do you really believe that the events that have recently taken place are those of a free market economy?

Investment banks and mortgage companies made big bets that went against them. They deserve to fail. Those in charge of those bets deserve to lose there jobs, and the value of their jobs deserves to be reduced.

I choose not to be an investment banker because:

A) I see very little potential in it to add real value to the economy. That doesn't mean i believe there isn't a valuable place for bankers/investors to distribute capital to those best able to put it to use, however...

B) I believe the supply of bankers at this point to be far greater than what should exist in a healthy balanced economy. The marginal utility of another banker or hedgefund is probably negative for the economy as a whole. This point would be self evident if our financial system was not propped up by the government (taxpayers), who are not able to anticipate who is going to get bailed out when in this faux free market.

Dominic

September 12, 2008 09:41 PM

Brandon and Brian

Joe Cushing has an understanding of the economy and the real world alike the one of an average teenager...why bother?

Kartik...you disappointed me my friend for playing along..you totally misunderstoond what Brandon was trying to say...

Regards

Arthur

September 24, 2008 11:04 AM

this "bail-out" is a robbery on the american people. if the wealthy banks and investors don't like losing money, they don't take great risks. don't try to ripp off the public for your high rollig gain mr paulson!

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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