Paulson's actions wrong even if not illegal

By DAVID MOON, Moon Capital Management, LLC
December 11, 2011

Sign me up. I’m ready to join Operation Wall Street.

No, I’m not going to forsake personal hygiene and go on a silly urban camping trip. I have a job.

I am, however, increasingly frustrated at the ugly, incestuous relationship between people who work in my government and their buddies who work in the real world. Crony capitalism, that is.

Maybe I’m just jealous that I never worked at Goldman Sachs, forfeited my conscious and became ruler of the world – or his friend.

A story distributed recently by Bloomberg Business News recounts several July 2008 meetings between then Treasury Secretary Henry Paulson and various groups in which they discussed the plight of Fannie Mae and Freddie Mac. On July 13 Secretary Paulson told reporters that the two companies must remain shareholder owned.

A week later he told the New York Times about a federal examination that he expected to provide a signal of confidence to the investment markets.

Later that day, however, Paulson met with a group of hedge fund managers. In this private meeting, Bloomberg reports that the US Treasury Secretary described a scenario under which Fannie's and Freddie's shareholders would be completely wiped out and the companies placed into receivership – effectively government ownership. Paulson said that he made a mistake in not punishing the Bear Stearns shareholders more severely four months earlier in negotiating a forced acquisition by JP Morgan and didn’t want to repeat the mistake.

Those hedge fund manage were in possession of billions of dollars worth of inside information. Paulson was publicly praising the two companies – driving up their share prices – while privately telling this small group of investors that the stock prices of the shares were likely about to go to zero.

Apparently the Treasury Secretary did nothing illegal. He just misled every investor in the world except the handful he invited to this private “material, non-public information lunch.” If those hedge fund managers chose to trade on that inside information, they would likely be breaking the law, but that would be their decision, not Paulson’s.

As long as he didn't personally profit by knowing that he was about to force the companies to fail, Paulson could pass that information along to anyone he chose. His hands would be clean, if not his conscience.

It is ironic that the information about Paulson’s meeting with the hedge fund managers comes to light at about the same time Congress is considering subjecting itself to insider trading laws. The recent Congressional stock market impropriety that has been revealed is wrong, but is mostly chump change compared to what Hank Paulson could do.

Consider Paulson’s attitude. He was – or apparently considered himself – the god of finance. Anyone who regrets not having sufficiently punished a group of shareholders has an ego problem. Once someone with the power of a Treasury Secretary decides that his role is to choose winners or losers, he can then rationalize almost anything.

And if the Bloomberg report is accurate, on July 13 Paulson did.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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