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A Conversion in 'This Storm'
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A former Wall Street chief executive who knew Paulson would try to save Lehman with public money said this exemplified his pragmatism. He had made the tough call to do what was necessary for the financial system even if this meant betraying his earlier convictions, said the executive, who spoke on condition of anonymity.
While critics on Wall Street now accuse Paulson of inconsistency, some senior government officials said he has been ideally suited to grapple with a fast-moving and complicated financial meltdown. His shifting views, while startling, are not that surprising because his beliefs have never been grounded in ideology, these officials said.
"These are unprecedented times," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., who has worked closely with Paulson and occasionally clashed with him. "He doesn't have an ideological bias one way or the other. He's tried to be receptive as he developed responses, and to his credit, he is willing to go where folks have dared not to go in terms of regulation."
It was Paulson, for instance, who pressed the Securities and Exchange Commission to temporarily ban short selling of financial stocks in September, according to three sources familiar with the matter.
"If you had asked me, that was one thing in 100 years I would have never done before I came down here," Paulson recalled. "But in the middle of this storm with everything going on, I said, 'Whatever we are doing right now isn't working, so go ahead and do it.' "
A short sale allows an investor to profit when the price of a stock declines. Wall Street bankers traditionally avowed that short selling is a fundamental part of stock trading and crucial to proper pricing. But the chieftains of the big banks, including John J. Mack of Morgan Stanley, John A. Thain of Merrill Lynch and Richard S. Fuld Jr. of Lehman Brothers, were telling Paulson they were convinced that traders were using the practice to drastically drive down the share prices of their companies, Paulson said.
Paulson said in an interview that the decision to ban short selling belonged to SEC Chairman Christopher Cox. But Paulson said he strongly supported it.
"Cox wanted to do it, but he wanted to do it only with the support of me and the Fed," Paulson said. "For me, it was a little like book burning."
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Paulson also came around to the idea of massively intervening in the markets to prevent the failures of financial firms, despite his worries that such a bailout would motivate companies to take excessive risks because of the prospect of a government backstop -- a problem known as moral hazard.
As far back as January, Paulson said, he began to discuss the outlines of this plan with Fed Chairman Ben S. Bernanke.
After Bear Stearns nearly imploded in March, Paulson asked his staff to start sketching out the initiative on paper, said two federal sources familiar with the matter.
