The Spanish Inquisition Comes For Henry Paulson

A man runs from a burning house covered with soot and with his hair and clothing aflame. A fireman stops him and asks, "What was your strategy for coming out of the front door instead of the side one?"

Welcome to the world of the Congressional evaluation of the use of the $700 billion bailout fund, or at least the $350 billion that Treasury Secretary Henry Paulson has had access to so far.

The two biggest objections that the Congress, the FDIC, and nearly anyone else who is asked has with the way the money was used is that Paulson did not buy-up toxic assets like he said he would and he did not help the average citizen with their mortgages. Confronted with the very real chance that the US banking system would fail, he told a number of the largest financial houses that they were going to take big infusions of capital whether they wanted to or not.

The banking systems did stabilize, after a fashion. Citigroup (C) ended up needing some more capital but Bank of America (BAC), Wells Fargo (WFC), JP Morgan (JPM), Goldman Sachs (GS), and Morgan Stanley (MS) are OK for the time being.

The real gripe against Paulson is that he did not sit back and analyze the economic situation, hire a number of analysts, and spend his bailout money with more care. In any normal world, there would be a set of powerful arguments that Treasury should have acted with more equanimity. It should not have panicked the way Fed Chairman Ben Bernanke did when he opened an emergency lending window for troubled banks. Paulson should have avoided operating the Treasury like the circus show in Congress when it passed the bailout bill after a sleepless week of raging debate.

In many ways, Paulson is the luckiest of men. For the most part, he accomplished what he set out to do by keeping the credit and banking systems from catastrophe and, with the current administration about to go on permanent holiday, he will not be dragged in front of klieg lights to be badgered by sweating Congressmen. He can retire to his mansion on Long Island and be left alone.

Douglas A. McIntyre