Paulson's Revealing Phone Records

While the economy was crashing last year, exclusively analyzed telephone records reveal the ex-Treasury secretary was talking far more to Obama and Geithner than Bush and McCain.

Timothy Geithner's just-released phone records caused quite a stir last week--specifically, the absurdly small Wall Street circle Obama's Treasury secretary has consulted during one of the most critical economic periods in U.S. history. Yet as Winston Churchill once said, "The farther backward you can look, the farther forward you are likely to see." Understanding the situation we're now facing requires an examination of how things went down among him, former Treasury Secretary Hank Paulson, and the most influential financial titans on the planet, during the bailout and bank landscape carve-out period.

So, I spent a fair portion of the weekend digging through 415 pages of Paulson's calendar--which has received almost no scrutiny compared with the Geithner logs--during the seven most critical financial crisis months (March, 2008 and August 2008 through January 2009). August through October 2008 were particularly packed, encompassing 237 pages worth of calls. Categorizing these records by incoming and outgoing, individual and conference, calls per day and month, during that crucial period, I also crosschecked them against Geithner's calendar.

The information doesn't come in ready-made easy-to-digest classifications, but combing the logs reveals four interesting facts:

1) Paulson and Geithner Were Tight.
Sure, you'd expect close contact during a crisis, but we're talking really tight. During those seven months, the two chatted 416 times compared to the 268 times Paulson spoke with Federal Reserve Chairman Ben Bernanke, who had final approval on all the mergers and bank holding company designations.

Even the nature of the Paulson-Geithner records indicates just who Paulson's "go-to" guy really was: Bush's Treasury secretary made almost twice as many outgoing calls to his eventual successor (279) as to Bernanke (150). With Geithner at the helm of the New York Fed, it extended $4 trillion, or 76 percent of the $5.3 trillion of Fed facilities, cheap loans, and other monies made available to the banking industry at the height of the fall crisis. While the Fed refuses to disclose the exact nature of collateral and recipients of that aid, we now know that there were almost no calls to smaller bank leaders during the crisis.

2) Obama Was Fully Engaged With Paulson During the 2008 Campaign
That the meltdown dovetailed with a presidential general election was extraordinary; equally extraordinary was how much both candidates, then-Senator Barack Obama and Senator John McCain, were interacting directly with Paulson, in comparison with his boss, President George W. Bush. And between the former pair, it was the candidate from the opposition party, Obama, who was far more plugged-in, engaging in 26 direct calls with Paulson, compared with 14 for McCain. (For comparison, Bush logged in 24 direct calls, plus 27 conference calls or meetings). Paulson placed more than twice as many individual outgoing calls to Obama (14) as to President Bush (6).

After Obama was elected, his conversations with Paulson dropped off dramatically. Clearly, he was then engaging with his own team.

3) Paulson's Big Three: Goldman, Morgan Stanley, BofA
As bank monikers and sizes were changing, Paulson gave the most access to the trio of Lloyd Blankfein, who succeeded him as Goldman Sachs CEO, Morgan Stanley CEO John Mack and Bank of America CEO Ken Lewis. Not shocking given the frenzied, desperate times; Blankfein and Mack were trying to transform their investment banks into bank holding companies, to gain greater access to federal capital. Lewis, of course, was dealing with the whole Merrill Lynch merger issue. (With that out of the way, Geithner's calls to Lewis dropped considerably.)

But, the four-day period of greatest call concentration is particularly striking. This was after Lehman tanked and Bank of America got stuck with Merrill. Between September 18 and 21 (when advantageous bank holding company status was approved for Goldman and Morgan Stanley), Blankfein far outpaced Mack in terms of calls with Paulson. He put in 11 and received eight outgoing (19 in total), whereas Mack only placed four calls to Paulson and received five (nine in total). This indicates the level at which Goldman Sachs and Morgan Stanley coordinated their bank holding company push--with the world crumbling, these former competitors united as friends--but also the extent to which Goldman was the main driver. During those four days, Paulson and Geithner kept up their pattern of firm contact. Paulson called Geithner 28 times, whereas he only called Bernanke 11 times, even though bank holding company approval came from Bernanke.

Other bankers were looped in, too. But again, these were mostly megabank officials, including Citigroup's senior counselor, Robert Rubin, and its CEO, Vikram Pandit (34 between them); Merrill Lynch CEO John Thain (24); JPMorgan Chase CEO Jamie Dimon (21); followed more distantly by Wells Fargo CEO John Stumpf (three).

4) Robert Rubin Was Paulson's Guy at Citigroup
Pandit may have been the CEO, but it was Robert Rubin who was Paulson's preferred Citigroup contact, engaging in 26 calls versus just eight for Pandit. No surprise: Paulson and Rubin had both been Goldman Sachs CEOs and Treasury secretaries. That's the most exclusive club out there.

Frankly, this whole group forms a little club. The New York Fed and Wall Street are historically tight. Goldman Sachs, the New York Fed, Treasury, and the White House (Goldman was Obama's second-largest campaign source of contributions) are recently tight. The day after Citigroup got a massive $301 billion federal government guarantee, plus an additional $20 billion from one TARP program, and $25 billion from another, Obama selected New York Fed Chief Geithner as his Treasury secretary, and appointed former Treasury Secretary (and Rubin mentee) Larry Summers to lead his National Council of Economic advisers. The baton had been passed. Paulson effectively groomed Geithner, just as Rubin had groomed Summers and pioneered the path between the top spot at Goldman and Treasury for Paulson.

Whenever you have too much power concentrated in the hands of a few men, things don't turn out so well for everyone else. That's strikingly evident by the fallout from the crisis, and the selective bailout and favoritism of the firms in control of the access and money flow. As the FDIC comes close to shutting down its 100th small bank, Goldman and JPM Chase are getting set to announce another set of stellar quarterly results and gearing up for record bonuses. Bank of America and Citigroup are hoping to post some great numbers of their own, floated on public capital and federal aid.

What's wrong with this picture? Absolutely everything.

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