Image: Henry Paulson
Charles Dharapak  /  AP
Former Treasury Secretary Henry Paulson has been tagged with the blame for the scope and haphazard nature of D.C.'s reaction to the financial crisis.
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updated 9/22/2009 7:35:47 AM ET 2009-09-22T11:35:47

One year later, we have entered a new phase of the economic crisis, where the bailout's architects have moved from worrying about CDOs, MBS, and SIVs to fretting about a new toxic asset: That's CYL, or “cover your legacy,” and it's being offloaded on former Treasury Secretary Hank Paulson. It’s now clear that Henry Paulson is experiencing a remarkable abandonment by his former compatriots in last year's bailouts. In a cast of dozens of lawmakers, regulators, and Wall Street CEOs who bicker endlessly, they nearly all agree on this: Paulson deserves the bulk of the blame for designing a hasty, sloppy, expensive series of last-minute bailouts of the financial system.

It's a startling state of affairs because Paulson didn't work alone. He had less power than Fed chief Ben Bernanke, was farther from the heartbeat of Wall Street than Tim Geithner, and had less political influence than Congress, which passed reams of legislation. In many of the accounts published about the crisis, Paulson looks like part of the problem while Geithner and Bernanke, who marched in political lockstep with him, have somehow been hailed as part of the solution. This doesn't add up, and it's a dangerously convenient misrepresentation of those desperate days. The legacy of the financial bailouts will become as important as the legacy of the New Deal. If we allow prominent officials to fudge what happened last year, they will only become emboldened to blur other important facts. It will be hard to move forward with future emergency responses in the market when prominent regulators can't agree on what contributed to the past. We need a consistent account of the bailouts of 2008, and so far, we haven't gotten it. Everything is still, a year later, at loose ends.

It's all the more remarkable that no one can agree on who said what since there's not all that much to agree on. Most of the stories and congressional investigations are devoted to hashing out just three situations: Lehman Brothers' bankruptcy, the shotgun marriage of Bank of America and Merrill Lynch, and the bailout of AIG. These are no mere quibbles; in most cases, the various versions of events during the bailouts are so different that they resemble Kurosawa's famous samurai movie, "Rashomon," about wildly divergent alibis.

Paulson's chief and savviest rival, when it comes to saving his legacy, is Bernanke, the bearded academic who was by all accounts the real capo di tutti capi of the bailouts. Bernanke's unassuming demeanor belies the fact that he held more power during the credit crisis than any other human being, as Wall Street Journal economics editor David Wessel points out in his new book, "In Fed We Trust." While Congress reamed Paulson about Lehman, Merrill, and AIG in July, they respectfully bowed their heads before Bernanke, who spent 10 full days prepping for his testimony. The Fed chief has also not been shy about spinning his own legacy, openly taking some credit in a recent speech for saving the system. The financial press has been quick to agree, crediting Bernanke with the beginnings of the turnaround. Geithner has also watched his own back. In his first speech as treasury secretary, he immediately swore not to repeat the mistakes of Paulson's bailouts: "Last year, the zigs and zags of a series of emergency responses created too much confusion for the markets, for the public and for bankers, undermining trust in the program and the process," Geithner said, as if he were not involved. Geithner adopted Paulson's toxic-asset plan, but, when confronted on Meet the Press in March, he never mentioned Paulson's participation at all.

As far as political hot potatoes go, Lehman's bankruptcy was the hottest. The story varies. Paulson's first line, like Bernanke's, was that they lacked the authority to save Lehman . Then Paulson’s second line was that it was inappropriate to use public money to save the firm. Few people believed either excuse , and Jim Stewart, in The New Yorker, casts doubt on both rationales by quoting Paulson saying he would have been happy to use public money if it were possible. Stewart's reporting shows that Geithner, Bernanke, and Paulson were all involved in the decision to let Lehman go. Yet Paulson is the one most often blamed for the controversial decision to let Lehman die.

That is largely because Paulson's compatriots — Geithner and Bernanke — were astute enough to distance themselves right away. Bernanke gave one speech that mentioned Lehman, in October 2008, then stayed so silent on the subject that he didn't mention it again until August 2009, when his reappointment as Federal Reserve chairman looked like a lock. Geithner backed away as well, disowning his part in the unpopular Lehman decision perhaps to win enough political support to become treasury secretary. It is a somewhat nonsensical part of politics that the more you talk about a disaster, the more you are implicated in it. So it went with Paulson.

Stuck with no one to blame in the United States, Paulson has recently turned his eye overseas. He blamed U.K. financial services overseer Alistair Darling for refusing to let Barclays save Lehman. According to Paulson, Darling refused to import "the American cancer" into Britain, thus scuttling the Barclays-Lehman merger that would have prevented the market-destroying bankruptcy. The only problem? In the wry words of the Guardian, the charge was "strongly denied" by Darling.

Lehman was just the start, however. The Bank of America-Merrill Lynch debacle brought out the real fault lines between Paulson and his compatriots. Earlier this year, Bank of America CEO Ken Lewis revealed, shockingly, that Paulson and Geithner threatened his job if he did not complete the merger with Merrill Lynch. Paulson quickly defended himself, objecting that he strong-armed Lewis only at Bernanke's command. Bernanke, in his turn, could not wait to openly deny Paulson's account; when Bernanke testified in front of an incredulous Congress, he used the "deny, deny, deny" strategy. Bernanke disowned any role. He remarked coldly, "I think (Paulson) has revised his statements since then."

Bernanke won that round: Paulson later demurred that he didn't remember where he got the impression that he should threaten Lewis. It sounds like a case of soft authority — where Bernanke may have implied a course of action without explicitly giving an order — but we'll call it a draw until Paulson's memoirs come out.

It's not just Bernanke and Geithner who disagree with Paulson's memory. Paulson's former colleagues at Goldman Sachs didn't seem to like his version of events around the AIG bailout. In a blockbuster New York Times story about Paulson's role in the bailouts, Michele Davis, Paulson's spokeswoman, told the Times that Paulson requested a federal ethics waiver back in September in order to speak to Goldman Sachs CEO Lloyd Blankfein. Davis, playing defense for Paulson, told the paper, “The waiver was in anticipation of a need to rescue Goldman Sachs,” Ms. Davis said, “… not to bail out A.I.G.” Compare Davis's implication of Goldman's danger, however, with the story line from within Goldman itself: “We did not have a near-death experience,” Gary D. Cohn, Goldman’s president, told the Times about those dark days of September. “The government saved the financial industry as a whole, but it did not save Goldman Sachs."

Davis subsequently sent out a clarifying statement explaining that she meant that AIG was not saved for the sake of one firm. Market observers would agree; Goldman's stock price fell 36 percent in the 10 days after Lehman collapsed, putting the firm at the obvious risk of the same kind of senseless bear raid and market panic that destroyed Lehman and Bear Stearns and pushed Merrill Lynch into a shotgun marriage.

Nor is Cohn the only Wall Street executive to take issue with Paulson's version of events. The Wall Street Journal recently reported that the Fuld household doesn't hold any Paulson fans, either: "Mr. Fuld’s wife, Kathy, would frequently email him news commentaries critical of Mr. Paulson’s role, say people familiar with the matter. She sent him one column from Portfolio.com, headlined ' Hank Paulson, Revisionist .' The piece asked: 'Does Paulson seriously believe that anybody is going to swallow this — the idea that he didn’t want to see Lehman’s failure, but was powerless to prevent it?' ” Fuld, still licking his wounds in Idaho, has been silent except for a single interview with an enterprising Reuters reporter who ambushed him.

Fuld didn't talk about Paulson directly, although he did say wearily that he believed the good guys always win. Most of America, at this point, isn't worried who the good guys are, if indeed there are any. We're all wondering who the right guys are.

Copyright Washington Post.Newsweek Interactive

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