Paulson's Blurring of Public and Private Power Ethics

Introduction: Paulson and the Crisis of Public Trust

The continuing crisis facing the United States and the global economy is generally traced to a pattern of deregulatory behavior, corporate corruption, and the global dissemination of labor markets in America. The fiscal policies implemented by the U.S. Treasury demonstrate a clear connection between this federal department and the overall state of the economy (Brewer, 2009). Key among the figures who bear some responsibility for this paradigm of failure is former Secretary of the Treasury Henry Paulson, who was appointed to the position by President George W. Bush in 2006.

As Secretary of the Treasury, Paulson was accountable to the American people and presented himself as more principled than his predecessor. He sold all his stock in Goldman Sachs — the investment bank he had previously managed — and alleged that he had no extensive meetings with Goldman Sachs chief executive Lloyd Blankfein. Paulson also sought an ethics waiver from the U.S. government. However, after leaving office, allegations arose that he had made decisions resulting in the loss of billions of dollars in taxpayer money (Clemmens, 2009).

These concerns emerged immediately subsequent to his departure from Goldman Sachs, the most powerful financial firm in the United States. As its CEO, Paulson is reported to have worked closely with the Bush Administration and the Securities and Exchange Commission to deregulate federal oversight of bank lending procedures. While Paulson and Goldman Sachs were not the only players in this unfolding crisis, they serve as core examples of how markets may be manipulated — whether for explicitly greedy purposes or not.

Deregulation, Goldman Sachs, and the Road to Crisis

As this paper argues, Paulson, as a trusted governmental figurehead, acted unethically by blurring the line between private enterprise and government policy, applying his influence in both spheres to perpetrate a massive transfer of wealth to the benefit of Goldman Sachs and to the detriment of the global economy.

Zalta et al. (2009) underscore that the policy ideology espoused by Paulson, Federal Reserve Chairman Ben Bernanke, and the Bush Administration was constructed on the premise that global trade liberalization is the path to shared economic vitality. The policies of private deregulation that the administration pursued — at the active behest of figures such as the pre-appointed Paulson — were obscured by claims about the intended benefits of globalization. The balance suggested is that "on the one hand, the diminishing marginal utility of material resources exerts pressure in favor of more equal distributions of resources. On the other hand, the need to promote productivity exerts pressure in favor of incentive schemes that have the foreseen consequence of material inequality" (Zalta et al., 2009, p. 8). Yet none of these policies exist in a vacuum; instead, the synthesis of economic forces and market fluctuations acts in concert within a larger paradigm of causality.

This ideology amounted to little more than rhetoric for Secretary Paulson and the Bush Administration, who operated with a much clearer intent to benefit irresponsible bank owners and administrators. This began during Paulson's tenure at Goldman Sachs, when he helped broker the conditions by which America's banks could lend frivolously to high-risk borrowers. Simultaneously, banks were permitted to voluntarily comply with or resist Treasury oversight requirements that firms demonstrate sufficient reserve funds to back up their loans (Tong, 2009). With the initiation of the subprime mortgage crisis — in which countless homeowners and business owners found themselves unable to contend with skyrocketing interest rates — the banking system collapsed (Brinsley, 2008).

TARP, the Bailout, and Conflicts of Interest

After helping drive these destructive policies, Paulson was appointed Secretary of the Treasury, where he adopted a new position in support of massive government interventionism. To some accusers, Paulson effectively authored — independent of meaningful oversight — the largest bailout in U.S. history. The Wall Street Journal reported the price tag of the Emergency Economic Stabilization Act at over $700 billion, much of it flowing through the Troubled Assets Relief Program (TARP) and into the coffers of the banks and financial firms that had created the crisis (Shindelar, 2008). Paulson's decision to sell his Goldman Sachs stock before taking office, and his efforts to obtain an ethics waiver, underscore the deep unease surrounding his conduct — particularly given that he was a senior member of the government while his former company was simultaneously in financial distress.

Paulson also assisted both Bear Stearns and Lehman Brothers — direct competitors of Goldman Sachs — though he ultimately allowed Lehman to collapse while bailing out American International Group (AIG) and its trading associates. This choice baffled members of Congress and market participants alike (Clemmens, 2009). Although Paulson held no direct financial stake in Goldman Sachs by that point, the firm stood to benefit substantially from the decisions he made. Paulson was later questioned about his role in ensuring that Goldman Sachs received $13 billion in taxpayer funds as a consequence of the AIG bailout (Morgenson & Van Natta, 2009).

When AIG collapsed, it cost billions of dollars to its associated relationship with Goldman Sachs. A consequence of TARP was the return of many billions of dollars in profits to Goldman Sachs. All evidence also suggests that, from his position in public office, Paulson maintained close communication with high-ranking Goldman Sachs personnel while developing the bailout package. As reported in August 2009, "seven months after Mr. Paulson left office, questions are still being asked about his part in decisions last fall to prop up the teetering financial system with tens of billions of taxpayer dollars, including aid that directly benefited his former firm" (Morgenson & Van Natta, 2009, p. 1).

Conclusion: Unethical Blurring of Power

The allegations against Paulson demonstrate the clearly unethical blurring of lines precipitated by Paulson's authority both as CEO of the most powerful financial firm in the U.S. and as administrator of one of the most powerful departments in the federal government. The consequence was a grave financial crisis and a criminal transfer of wealth away from ordinary Americans and toward the continued financial largesse of irresponsible financial actors. Far from being a simple figurehead, Paulson's actions were standard operating procedure in an era of avarice, and they serve as effective examples of the manner in which a short-term approach to accumulating wealth can carry disastrous long-term costs.