All the Devils Are Here [152]
No, the SEC’s real failure was something else. By setting up CSE, the SEC gave the impression that it had the manpower, the skill, and the savvy to see risks developing at the holding company level. It did not—something even its own commissioners seemed to understand at the time. In a recording of the fifty-five-minute meeting in which the five members of the SEC signed off on the CSE, commissioners can be heard saying things like, “This is going to require a much more complicated compliance, inspection, and understanding of risk than we’ve ever had to do.... You think we can do this?” and “What if someone doesn’t give us adequate information? How will we enforce it?” The greatest note of caution came from Harvey Goldschmid, a Democratic commissioner. “We’ve said these are the big guys and clearly that’s true,” he said. “But that means if anything goes wrong, it’s going to be an awfully big mess.”13
“I equate the CSE regime to the USDA putting its imprimatur on rancid meat,” says a former Bush administration official. “Bad regulation is much worse than no regulation because you create conditional expectations of safety. It helped feed the fiction that these risks could be quantified or even understood.”
This, then, was the situation in May 2006: risk was building up everywhere in the system; the housing bubble was reaching its frenzied finale; Wall Street firms were madly churning out CDOs; subprime originators were making loans to anyone with a pulse; everything was interconnected in ways that were dangerous for the financial system; and the regulatory apparatus, charged with protecting the safety and soundness of the banking system, was in complete denial. This was what Henry Paulson Jr. was going to have to deal with, as his nomination to be secretary of the Treasury was announced late that month.
To the outside world, the news that Paulson was leaving Goldman Sachs to become Treasury secretary could not have been less surprising. Didn’t every senior Goldman Sachs executive eventually join the government? By that point, the list included John Whitehead (deputy secretary of state in the Reagan administration), Steve Friedman (National Economic Council), Joshua Bolten (OMB director and George W. Bush’s chief of staff), Jon Corzine (senator and later governor of New Jersey), Robert Rubin (of course), and many others.
Yet to Goldman insiders, Paulson’s departure was startling. He had never expressed the slightest interest in the job. He didn’t make lavish campaign contributions, or serve as finance chairman for ambitious politicians, or even hang around politicians. He told everyone, whether they were close confidants or passing acquaintances, that he was staying put at Goldman. Head fakes had never been his style. As he later related in his memoir, when he first got the call from the White House in the spring of 2006, he agreed to a meeting with the president, but then quickly canceled when John Rogers, the firm’s veteran Washington hand, told him that going to the meeting was tantamount to accepting the offer.
Having been through several ineffectual Treasury secretaries, Bush wanted Paulson badly, largely because his Goldman Sachs credential gave him a stature his predecessors had lacked. Paulson was initially deterred by “fear of failure, fear of the unknown,” he later wrote. But he finally said yes. “I didn’t want to look back and have been asked to serve my country and declined,” he later explained. “So I just took the plunge.” He did so after getting an unprecedented agreement from Bush that he would have real power: regular access to the president, on a par with the secretaries of State and Defense, and the ability to bring in his own people.
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