I am glad that Hank Paulson, who wants to raise a $700bn US government fund to buy distressed mortgage securities in an effort to restore confidence to financial markets, is an old Wall Street hand.

In a world where Sarah Palin, the US Republican vice-presidential nominee, claims expertise about Russia because it can been seen from her home state of Alaska, it is reassuring to have a US Treasury secretary with actual experience.

It is definitely more comforting to have Mr Paulson in the hot-seat than John Snow or Paul O’Neill, his predecessors.

That said, Mr Paulson’s background as the former chairman and chief executive of Goldman Sachs, does raise questions.

Mr Paulson went on the Sunday talk shows in the US this weekend to tout his plan and promise to tighten up regulation of Wall Street. He denounced “irresponsible practices” under which mortgages were sold to unqualified buyers and “sliced and diced” all over the world.

He concluded:

“We very much need new regulations, new policies. What has gone on here is terrible, inexcusable and we need to deal with it. But that is going to take some time to figure that out and do it well.”

Well, fine but where was Mr Paulson when this “inexcusable” behaviour was going on? Until May 2006, when he was nominated by George W. Bush as the Treasury secretary, he was running an investment bank that was doing quite a bit of this slicing and dicing.

According to page 20 the Goldman Sachs 10-Q regulatory filing for the first quarter of 2006:

During the three months ended February 2006 and February 2005, the firm securitised $19.25bn and $15.24bn, respectively, of financial assets, including $18.15bn and $14.43bn, respectively, of residential mortgage loans and securities.

Meanwhile, on page 22, we find that Goldman had big exposures to Variable Interest Entities “which primarily issue mortgage-backed and other asset backed securites and collateralised debt obligations”. The exposures included $22bn of CDOs, $2.9bn of “asset repackagings and credit-linked notes” and $6.5bn of “mortgage-backed and other asset-backed” securities.

Mr Paulson now declares himself shocked, shocked that structured finance was going on on Wall Street but he was there at the time, and the $18.7m bonus he received for the first half of 2006 presumably reflected it.

I wonder if, as a public gesture, Mr Paulson might consider handing that bonus over to the Treasury’s fund and lowering the US taxpayer’s bill by $18.7m?

September 22, 2008 2:05am in Finance | Comment