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Hank Paulson: The Wolf in Sheep’s Clothing

Posted by Larry Doyle on April 9, 2013 10:07 AM |

Have you ever encountered an individual who seems to be so ingratiating that you are immediately attracted to him and desire to learn more of what he has to offer?

I would imagine that many who frequent this blog have been in meetings or other situations where a strong willed, dynamic leader lays out a host of propositions that would have everybody in attendance salivating for more; however, once having set the table so to speak, the leader quickly and surreptitiously delivers a powerful message incorporating proposed enormous changes so as to leave all in attendance wondering “what just happened here.” This scenario is often compared to the children’s fable The Wolf in Sheep’s Clothing.

As I continue to navigate back through the annals of Wall Street while working on my book (In Bed with Wall Street to be released in early 2014 by Palgrave/MacMillan…sorry for the shameless plug) I recently came across testimony from then Goldman Sachs CEO Hank Paulson that struck me as a quintessential example of this aforementioned simple story of deceit. 

Let’s navigate back to the year 2000 as Paulson delivered testimony to the Senate Banking Committee on the Financial Marketplace of the Future:

. . . we and other members of the securities industry are recommending comprehensive, structural reform. We will state our views in detail in response to the Commission’s Concept Release on Market Fragmentation published on February 23rd, but I can give you a preview of what Goldman Sachs’s response to that Release will be.

We believe there are 5 core principles underpinning our proposals. These are:

First, the protection of all investors should be paramount, from the largest institutional investor to the smallest of our 80 million investors.

Second, competition among exchanges and other trading venues should be preserved and promoted, but it is the competition of the buy and sell orders of all market participants that will assure the integrity of the price discovery function.

We believe in a level playing field that does not allow any particular exchange or market participant to have an undue advantage or to become entrenched.

Third, markets should be open, accessible and transparent. Consistent with the concept that no exchange or venue should enjoy unfair advantage or entitlement, we believe that price discovery information and execution quality should be easily accessible to a much broader cross section of market participants.

Fourth, liquidity venues should be linked to encourage aggregation rather than fragmentation. The market structure that aggregates pools of liquidity will enhance efficiencies, enabling investors to achieve the best possible execution.

Fifth, the regulatory regime should stand for fairness, integrity and protect against conflicts of interest. It should also be efficient and consistent in the application and enforcement of rules.

Protection, competition, level playing field, transparent, liquidity, fairness, integrity, enforcement of rules? A Sense on Cents virtuoso it would seem. Principles promoted by a leader with vision and values as pristine as the fallen snow or was Paulson merely setting the bait to lure his prey? What did he really want?

After navigating through a host of similar niceties to entice those on the committee who might have needed to share how Wall Street was going to be changed, Paulson took off his sheep’s disguise and revealed himself as the wolf that was instrumental in leading our markets, economy, and nation to slaughter via calls to consolidate regulation on Wall Street and the relaxation of net capital rules so as to allow the banks to dramatically increase their leverage. He aggressively moved on his prey by asserting:

. . . reform the structure of broker/dealer regulation, a function now shared by the SEC and the self regulatory organizations (“SROs”), principally the New York Stock Exchange and NASD Regulation Inc. . . . we think it is time to seriously consider the creation of a single, independent SRO to adopt, examine and enforce a core body of financial responsibility, customer protection and margin rules.

He then went in for the kill in stating that he:

. . . urged the SEC to reform its net capital rule to allow for more efficient use of capital.

The wolf-like Paulson may have wanted to appear meek and mild in this statement but what he meant was “allow us on Wall Street to leverage up to the hilt!!’

As for those previously mentioned virtues of transparency, integrity and the like, last I checked we were still looking for the implementation of anything of the sort.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.


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