You have to be kidding me:
This quote, from Newsweek’s piece on former Treasury Secretary Hank Paulson, strikes me as a bombshell:
Paulson–by his own admission–was not paying much attention to the way banks were slicing and dicing mortgages and selling them as complex securities. “I didn’t understand the retail market; I just wasn’t close to it,” he told NEWSWEEK.
If Newsweek won’t play prosecutor, I will: “Hank Paulson, you were Goldman’s chief executive as mortgage securities boomed in 2004-5. Your earned an incredible severance, partly because of it. And you say you didn’t understand mortgage securities? How is that remotely possible?”
I don’t have anything to add to that, really.
El Cid
The only thing I would add is that he knew about the tranches etc. very well, but he just didn’t care about what their potential future effects on companies and the economy were, because his interests lie elsewhere.
beltane
Paulson and the rest of them were too busy cramming their jockstraps with money to pay attention to where it all was coming from. When you’re having millions of dollars thrown your way, who’s to quibble over details. According to the folks at Calculated Risk, Geithner is not much better; he’s still blaming the borrowers for the crisis.
schrodinger's cat
OT: When is Shayla/Jillie coming home? Inquiring minds want to know.
Little Dreamer
He’s lying? It’s a common behavior in humans when they don’t want to face angry crowds and explain themselves. ;)
Col. Klink
I’ll bet Hank new more about mortgage securities than Brownie knew about natural disasters. Not knowing was always a great vehicle for promotion back in the Bush days.
Little Dreamer
@El Cid:
His interests were only in his bank account?
El Cid
@Little Dreamer: Not just his own. His peers’ and class group as well.
downtown Lad
Goldman, unlike most of the other big retail banks, does not have a retail side. It did not sell mortgages either.
The banks that did a lot of mortgage business. Bear Stearns, etc, are no longer here.
You should also keep in mind that Goldman has remained profitable last year and this year. I think they had one quarter where they had a loss.
Bob In Pacifica
Some people make their money by seeing. Some make their money by not seeing.
Now I’m going to see the new Pamela Anderson video.
Little Dreamer
@downtown Lad:
Are you really trying to pose the idea that Paulson, as a very senior officer, didn’t understand the instruments that went through his office?
The Other Steve
I’m not sure anybody understood them.
That’s why they lost so much money.
The Other Steve
Actually there were guys within Goldman who understood very well. In 2007 they shorted mortgage securities and made billions.
John Cole
@Little Dreamer: No, he is saying that Goldman had nothing to do with them, because they have no retail side. But that ignores the fact that so much of their business dealt with companies who were NECK DEEP in mortgage securities. It doesn’t strike me as much of a defense.
maya
Dick Cheney, while CEO and President of Halliburton, didn’t know nuthin ’bout nuthin re those US law evading, off-shore subsidiaries that sprang up during his
reigntenure there, either.Someone really needs to keep a closer eye on those insidious corporate mail room clerks.
Xecklothxayyquou Gilchrist
Heckuva job, Paulie!
Gordon, The Big Express Engine
Very anecdotal, but a possible sign of increased trade and economic activity:
I live along a freight rail line leading from the Houston container terminal (one of the largest in the US). We bought the house in July and there were A LOT of freight cars of Chinese origin (Hanjin, COSCO, China Shipping). After September, the frequency of the trains and the number of freight cars per train (often over 100 cars) really came down and there have been no Chinese freight containers.
Starting last weekend, we are seeing Chinese freight cars again on the line. The frequency and length of the trains appears to be ticking up as well.
Gordon, The Big Express Engine
@John Cole: Nice “Being There” reference in the title!
patrick
I believe him when he says he didn’t understand (at the time) Remember the Wire’s article on “Recipe for Disaster: The Formula That Killed Wall Street”
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant.
A few guys in the math department of the large financial houses thought they understood, but they had reached to far with their mathematical metaphors and it did not holdup.
As for the rest — they didn’t try to understand, just sold these oblique derivitaves, the profits are huge. Some believed, some knew better, all went ahead and sold for profit.
Complex, oblique, not understandable magic money making is the heart of a Ponzi scheme, and that is exactly what happened here. They know it now, even if they pretend not to.
Little Dreamer
@John Cole:
You and I were saying the same thing, there was still involvement with these mortgage securities as part of the business they performed even without retail. I cannot believe Paulson wouldn’t know.
I guess I just worded that strangely, I understood it fine, but, apparently I wasn’t clear enough for you.
Rick Taylor
He didn’t understand mortgage securities, but he did understand it was vital to our national interest to funnel billiions of dollars to his former company through AIG. Uh huh.
stacie
Here’s what I think happened:
Very smart business folks like Hank Paulson, Tim Geitner, etc., spent about five minutes of their time considering what was happening with mortgage-backed securities. They quickly deduced that very smarter math folks in obscure departments that had been tucked away in London or other out-of-the-way locales were, in effect, splitting every mortgage-backed penny into its component atoms, tucking the atoms under half-shells of coconuts, and shouting, “Where’d the atom go?” to crowds of very smart business folks. They would then raise a coconut half-shell to reveal a shiny penny. “My God,” the very smart business folks in the bazaar known as Wall Street would then shout. “We can make billions!”
And they did — investing heavily in the magic coconut half-shells while slicing and dicing their mortgage-backed pennies, until the more jaded and curious among them began to notice the sleight of hand involved in sliding shiny new pennies into their magic money machines.
PeakVT
@Gordon, The Big Express Engine: The data shows a slight increase in intermodal, but the YoY data is still down. And the increase could just be seasonal.
John Cole
@Gordon, The Big Express Engine: I aim to please.
Dennis-SGMM
A riot is an ugly thing, and I think it’s just about time we had one.
harlana pepper
This is OT but I missed the TunchTube thread. Now I know what his mrwowr sounds like! (head tilt)
JoFish
This is absolutely no surprise. Executives all throughout the 90’s and into this century were compensated well, even though they knew little to nothing of the company they ran.
I worked for a huge travel services company in the 90s, and when it was having some severe problems the President/CEO had everyone show up at one of the call centers, and asked for everyone to “pitch in” that Saturday to help getting call center “on track”. He then stood there and admitted in front of about 600 employees that he knew nothing about their jobs, but could and would be happy to stuff tickets/travel documents into FEDEX envelopes.
About 400 people went on a smoke break and never came back that day.
So hearing Paulson’s admission doesn’t surprise me. The BoD of Goldman we probably well-paid by them to keep Paulson around and not ask too many uncomfortable questions.
It’s Mourning in America, right?
Anton Sirius
@El Cid:
Oh please. He was getting his, and that’s all that mattered. Do you believe Paulson sat in his office thinking, “It pleases me to see that those in my social class are also profiting by these transactions?” Who do you think writes his internal monologue, Ayn Rand?
asiangrrlMN
@Anton Sirius: Actually, I do. Not like you put it, but the fact that his cronies were making serious coin was the icing on the cake, probably.
I have a hunch that Paulson didn’t care if he understood what went on or not. He couldn’t be bothered with it, really. I am not so sure Geithner is much better. It’s the assumption that the market will do what the market will do, and in the end, it will all be good. It’s probably why Greenspan also believed that the marketeers would regulate themselves. Or, it could be the Peter Pan Principle. At this point, I don’t particularly give a fuck what Paulson did or didn’t know except in the context of it not happening again. I am not sanguine that the people in charge of our monies have learned the right lesson.
@Xecklothxayyquou Gilchrist: Damn you! I was gonna say that. Of course, it was a fat hanging curve ball just waitin’ to be hit out of the park.
Brian J
From that Atlantic leak, as the first commentator suggested, it’s possible someone took Paulson’s quote out of context. It seems hard to believe that someone would rise that high up in a company and know so little about the specific issues regarding his department, regardless of how feckless senior management might end up being in a variety of settings. This isn’t to say Paulson didn’t have his issues, just that it seems likely a major financial firm would have someone in a powerful position with more knowledge of the instruments than, say, me.
gbear
The only thing I can add to this is Iron Man as run thru the LOLCats translator:
HAS HE LOST HIS MIND?
CAN HE C OR IZ HE BLIND?
CAN HE WALK AT ALL,
OR IF HE MOVEZ WILL HE FALL?
IZ HE ALIV OR DED?
HAS HE THOUGHTS WITHIN HIS HEAD?
WELL JUS PAS HIM THAR
Y SHUD WE EVEN CARE?
HE WUZ TURND 2 STEEL
IN DA GREAT MAGNETIC FIELD
WER HE TRAVELD TIEM
4 DA FUCHUR OV MANKIND
NOBODY WANTS HIM
HE JUS STAREZ AT TEH WURLD
PLANNIN HIS VENGEANCE
DAT HE WILL SOON UNFOLD
NAO TEH TIEM IZ HER
4 IRON MAN 2 SPREAD FEAR
VENGEANCE FRUM TEH GRAVE
KILLS TEH PEEPS HE ONCE SAVD
NOBODY WANTS HIM
THEY JUS TURN THEIR HEADZ
NOBODY HELPS HIM
NAO HE HAS HIS REVENGE
HEAVY BOOTS OV LEAD
FILLS HIS VICTIMS FULL OV DREAD
RUNNIN AS FAST AS THEY CAN
IRON MAN LIVEZ AGAIN!
Sorry, it’s a holiday. I’m not doing politics today.
gbear
Wow, 40 minutes without a comment on the second post down? Now that was a nuclear thread-killer.
Svensker
@beltane:
No, sorry, wrong. Tiny jockstraps don’t hold much cash. Your theory’s right though, I think, just the placement is off.
grumpy realist
Speaking as someone who almost got hired by Moody’s to put together CDOs, a whole lot of people managed to convince themselves that the quants had managed to figure out how to manufacture free gold through mathematical magic. A lot of the quants had convinced themselves as well. Quite of a few of them hadn’t. (See Wilmott for example.) And since everybody was making so much money, all the equations still seemed to look right, and everyone said “ok, so this works, let’s continue.”
Unfortunately, the pure mathematicians involved had never had to deal with the messiness of reality and what could do wrong, and the physicists forgot that getting to equilibrium in a tank of gas molecules is much quicker than getting to equilibrium in a tank of financial molecules, i.e., the financial markets. Add to that the number of feedback loops and the fact that there were enough players linking up to each other that the supposed independence of the individual financial motions (supposedly like the jitter of gas molecules) was, in fact, not independant at all. Plus, a lot of the estimations of risk of default had been made pulling historical data of defaults made under much stricter lending conditions.
Result? The system gummed up and crashed…..
I don’t blame for Paulson not knowing. I doubt he was in the back room, getting the math of the crazier versions of the CDO-squared stuff explained to him. Much more likely was “the quants have come up with a new product that we think has lower risk and which we can charge much more money for.” And everyone signed off on it, ignoring the potential downside.
Thus, the resultant round of hoocodanode that they’re all playing.
Mike G
Paulson was making short-term profits, and that was all he gave a shit about.
Combine with the slimy political skills to take credit and avoid blame, and some backslapping bonhomie for socializing, and you have the “skill set” of 95% of senior executives in corporate America. Not to mention GW Bush.
jcricket
Is it any surprise that the party that thinks government is always the problem and never the solution governs incompetently? Which they can then use as proof the government is bad/evil and should be defunded, and so on. It’s a nice tautology there.
This is also a failure of Democrats – to articulate affirmative/positive reasons for government, and make clear the connection between proper funding and proper oversight.
Republicans in California are using the same logic. And the wingnut commenters that populate every major city’s newspaper forums (what’s up with that, btw?) also say the same thing, over and over.
So until Democrats get people to understand that higher taxes are necessary (but not sufficient) for good government, we’re going to have idiots in charge of various government functions with dire consequences like the size and breadth of the current bubble (not saying we could ever fully prevent this type of bubble, but you could limit it, perhaps a little, with competent regulators).
jl
Nice.Note that Robert Rubin, the Democrat’s capitalist philosopher king and titan of finance, world shaker and mover of epochs, said the same thing. Rubin’s statement could be paraphrased as
itwasnmeitwasnmeitwasnmeitwasnme! I didn’t unerstan all them mad wack financial skillz, dude. I was just executatin things at the top.
Sounds almost identical to Paulson’s whiny excuse.
So, our overlards, from both sides of the aisle, admit that they are empty bankrupt fools. So, I guess that is why the little snot nose punks (aka wise corporate-paid media pundits) sagely explain that we should all scrape and bow our heads to these fools.
J. Michael Neal
@gbear: I aim to please.
Gah! That’s not what Geithner said. I really respect CR, but he blew this one. What Geithner said was that, among the numerous causes of the crisis, was the fact that Americans borrowed too much money. I can’t believe that this is even controversial.
What really pushed CR’s button was that Geithner didn’t include a couple of things in his list. I think he jumped way overboard, because I don’t see any indication that Geithner thought the list was comprehensive.
Nothing to see here. Move along.
HyperIon
I heard the head of Judicial Watch say yesterday on CSPAN’s Q&A that they had filed a FOIA request re the “take the TARP money or else” conversation between the bankers and Paulson and Bernanke last fall. They got Paulson’s notes and said: yeah, that’s basically how it went and Geithner was in the room at the time.
pseudonymous in nc
Nobody understood morgage securities. Especially not in the executive suites. That was for the maths PhDs with their models, as Patrick says, and the bosses were happy as long as the balance sheet and ticker symbol looked green.
I just wonder what you could have done with those mathmos if you’d paid them six figures, given them big TVs and DVD collections, and put them to work in other fields, instead of hiring them to model mezzanine tranches and credit default swaps.
Yutsano
I think that’s part of Obama’s plans for emphasizing science education and careers and making sure they can pay decent money vis a vis Wall Street.
jl
@pseudonymous in nc:
IMHO the mathmos didn’t understand them either. There was a disconnect between economic and financial fundamentals and the financial engineering, which due to no connection with fundamentals, degenerated into junk.
To do the mathematical whizzbang stuff right, you would need decades of data on regional default rates on mortgages, regional recovery rates on loans, and other stuff.
They didn’t have all that data, so they persuaded themselves that they could just use market prices for the last two years (that didn’t even go back to 2000 recession) instead.
Doesn’t take a math genius to see potential problems there. It is not that Rubin and Paulson are not math whizzes, it is that they are high toned conmen and frauds, who managed to technically avoid breaking the law.
jl
The point is that the math geniuses were tools locked away in the back rooms. The vast majority never learned the basic facts of the real estate market, or macroeconomics or finance. If you do not know the basic facts, then all the fancy math formulas and theorems in the universe will not save you from epic fail.
So, to repeat. Paulson and Rubin did not need to be math geniuses to get a basic understanding of the financial engineering. They just had to be honestly doing what they were paid to do.
But they didn’t, because they are skanky oligarch authoritarian frauds, like something over 50% of the asshats who run this country.
Problem is that if the GOP and their allies like Rush get their way, the the oligarch authoritarian frauds will be 100% of the government, and then may the Lord help us all.
grumpy realist
No, it wasn’t that sufficient data didn’t exist; it was the results that people pulled from it.
Look–the major assumptions lying behind all of quantitative finance are that the movements of individual stocks can be treated as uncorrelated over the short term and that the jitter in stock prices is that of a random walk. Gas molecules all over again.
The problem is that we actually don’t have a large enough (or uncorrelated enough) of a system in finance for the probabilistic assumptions to actually hold true. This is especially true if you have enough of the players trying to game the system according to the same rules–> it’s really not uncorrelated any more because everyone is acting using the same strategy or you have sufficiently large players. One of the reasons LTCM got into trouble is that their movements were driving the market. (They also assumed that Russia wasn’t going to default on its sovereign bonds. Oops.)