Hank Paulson Accidentally Reveals How He Fostered The Bailout Mentality

Hank Paulson

We haven’t yet made it through Hank Paulson’s new book about his time at Treasury, On The Brink.

So we were fascinated by the cheat sheet put together by Wall Street Journal editor David Wessel.

Some things weren’t surprising. Paulson thought Barney Frank was smart and Chris Dodd was “more of a challenge.” He thought Sheila Bair was reckless, saying things off-the-cuff that deviated from the official script, like insisting that Citigroup wasn’t systemically important.

More surprising is a couple of inside the crisis tidbits we hadn’t heard before. The first is that Ken Lewis thought Bank of America should be given a regulatory reprieve on capital reserve requirements after it acquired Countrywide. Lewis believed he was doing the country a service by acquiring the failing mortgage giant, so he thought he should get a break from regulators in exchange. When the Federal Reserve Bank of Richmond started hassling Bank of America, Lewis called Paulson for assistance. Paulson agreed to give Ben Bernanke and Tim Geithner a call to see what could be done.

This is an indication about how entrenched the bailout mentality was in the boardrooms of our leading banks and in our nation’s capital. Remember, the reserve requirements do not exist simply to allow regulators to harass bankers. They are supposed to be the backline defence against financial catastrophe, assuring that banks are not so thinly capitalised that they are operating at the risk of imminent collapse. Relief from capital requirements means that banks are being allowed to operate despite greater risk of collapse, that they are allowed to push themselves even closer to the edge of insolvency.

What Lewis assumed—and Paulson apparently agreed—was that the acquisition of Countrywide would open the door for Bank of America to do business with lower capital reserves. To put it differently, the assumption was that banks would be allowed to increase their risk as long as they did it in the way that regulators wanted.

Is it any surprise that banks were unwilling to organise a private bailout of Lehman Brothers or Bear Stearns? They had been taught that the government would be their partner in bailouts.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.