Behind the Scenes Look at Paulson’s Treasuryby Tim Manni
Not even three months after the last administration left office, we have our first in-depth view inside the inter-workings of the former Treasury Department.
Phillip Swagel, assistant Treasury Secretary from December 2006 until January 2009, will present his 50-page essay tomorrow to the Brookings (Institution) Panel on Economic Activity entitled “The Financial Crisis: An Inside View.”
Swagel says that former Treasury Secretary Henry Paulson’s original intentions were to buy bank assets, not shares with the TARP money, and that he knew he would receive significant backlash for changing his course of action.
Here’s a short preview:
This paper reviews the events associated with the credit market disruption that began in August 2007 and developed into a full-blown crisis in the fall of 2008. This is necessarily an incomplete history: the paper is being written in the months immediately after I left Treasury…
The focus here is on key decisions made at Treasury with respect to housing and financial markets policies, and on the constraints faced by decision makers at Treasury and other agencies over this period. I will focus on broad policy matters and economic decisions and not go into the financial details of transactions such as with the GSEs and AIG. A key point of emphasis is to explain constraints on the policy process—legal, political, and
otherwise—that were perhaps not readily apparent to outsiders such as academic economists or financial market participants.
Paulson “truly meant” to the use the $700 billion in TARP money to buy assets from the banks, not to buy shares in the banks, because he saw it as “a fundamentally bad idea to have the government involved in the ownership of banks.” He changed is mind when markets deteriorated and “he well understood that directly adding capital to the banking system provided much greater leverage.”
Paulson will have his own opportunity to share his side of the story, as he plans to publish a book before the end of the year.