Paulson--by his own admission--was not paying much attention to the way banks were slicing and dicing mortgages and selling them as complex securities. "I didn't understand the retail market; I just wasn't close to it," he told NEWSWEEK.If Newsweek won't play prosecutor, I will: "Hank Paulson, you were Goldman's chief executive as mortgage securities boomed in 2004-5. Your earned an incredible severance, partly because of it. And you say you didn't understand mortgage securities? How is that remotely possible?"
I'd like to offer a bit of analysis, but all I've got is bewilderment. The reason I find the revolving door between Wall St. and Washington somewhat acceptable is that I think it's important that those who govern Wall Street understand it. But Paulson, by his own admission, didn't really. Think about this: A guy whose $46 million compensation package was made possible by leaving during Goldman's mortgage-security boom "was not paying much attention" to the mortgage-security boom! I don't know if Paulson is fibbing, or if mortgage-securities were such a specialized and esoteric money machine that basically nobody understood what was going on, but either way, this seems devastating.
Also in the department of buried leads, Paulson denies "secretly arranging" Bank of America's merger with Merrill Lynch. That also seems impossible to believe. New York Attorney General Andrew Cuomo testified in April that Paulson and Ben Bernanke did strong-arm Ken Lewis into eating Merrill's big ugly balance sheet. The article claims that B of A's chief exec Ken Lewis was interested in snagging Merrill's retail brokers. Well look, retail brokers are nice things to have, but clearly Lewis was more interested in the Feds not gutting his board in retribution!
Apparently Paulson is resuscitating his reputation like a doctor defibrillating a patient with wooden stakes, but just as culpable here is Newsweek. This was the magazine's fresh attempt to appear like something other than a bullhorn for conventional wisdom. It seems to me that one really good way to stop seeming like a mouthpiece for the half-truths of powerful people isn't more dynamic graphics -- it's to stop being a mouthpiece for the half-truths of powerful people.
I would love to see a transcript of that interview because that "I didn't understand the retail market; I just wasn't close to it" strikes me as being utterly out of context.
Just for starters, the slicing and dicing of mortgages, complete with credit default swaps and so on, was hardly a story of retail investing gone mad - the big losers were hedge funds, pseudo hedge funds like AIG-FP and Bear Sterans, Lehman, Citi, FNMA, Freddie, and so on.
Besides, even if you want to think of homebuyers as driving the mortgage bubble in some fashion, that is not what is normally meant by "retail" on Wall Street.
If I had to guess, I would say that Paulosn's "I didn't understand retail" was made in the context of discussing the Merrill merger. Merrill is famous for its army of brokers selling things to a larger army of "retail" investors; Goldman and Lehman have a tiny "retail" presence but are huge sellers to institutional investors.
Anyway, Paulson said he didn't understand retail, not that he didn't understand mortgage securities; that latter may well be true but this quote is not evidence of it.
Greenspan also said he did not understand how subprime mortgages were being repackaged into AAA rated securities. They did not understand the detailed mathematics of how this transformation was accomplished. that is easy for me to believe. These are really powerful guys who focus on the big picture.
My guess is that there are a bunch of business writers who still don't understand the detailed mathematics of how subprime mortages were transformed into AAA rated securities.
I think the 1st commenter got it right that the quote was likely out of context. The "retail market" in mortgages would be the broker or financial institution selling or writing a mortgage to a prospective property owner, not the intra-institutional transactions involved in the securitization of mortgages.
There's no real excuse for management or regulator ignorance. As the housing bubble took off, there were plenty of anecdotal reports of insanely low standards on home loans, and mortgage mills willing to overlook absolutely any income or credit problem, just to create a mortgage and resell it for the fees.
The NINJA acronym (No Income, No Job or Assets) was in use well before the bubble became extreme. If management and regulators weren't alarmed by a phrase like that, they just weren't paying attention.
Or more likely, they thought it was someone else's problem. Some dumb investor would buy that trash and suffer the consequences. They didn't realize that during a bubble, even banks were fooled (by the high returns) into buying their own trash.