In taking the top job at Treasury two years ago, Hank Paulson said he wouldn’t be content to keep the seat warm. He was running Goldman Sachs, the preeminent investment bank, and he had no need to come to Washington if he wasn’t going to make an impact. Until Sunday, it was pretty hard to see where Paulson’s impact lay. His environmental interests had not caused a sprouting of green policies. His strong contacts in China had fostered a bilateral talkfest but no tangible breakthroughs. And his efforts to manage the financial crisis had been conventional and tentative — until his bold gamble on Lehman Brothers.
President Bush’s first Treasury secretary, Paul O’Neill, trumpeted his distaste for bailouts while still bailing out Argentina, Brazil and Turkey. Paulson began in similar vein, declaring his belief in markets while presiding over the March bailout of Bear Stearns, extending credit from the Fed’s discount window to all investment banks, and nationalizing Fannie Mae and Freddie Mac, the two monster mortgage-lending companies. Going into the weekend, most people assumed that Paulson would do the same again. But instead he refused to extend taxpayer-backed loans to Lehman, causing prospective buyers of the firm to walk away and forcing Lehman to declare bankruptcy.
After the Bear Stearns bailout, it seemed that a new financial doctrine had been born. It used to be said that a bank was “too big to fail,” meaning that its collapse would cause heavy losses at other banks that had lent to it, inflicting unacceptable pain on the economy.