Why has Hank taken all the heat for bailout missteps?

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 (BAC) and Merrill Lynch, and the bailout of AIG (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.