Hank Paulson Admits He Never Really Understood How Mortgage-Backed Securities Worked

Here’s more proof that the people who probably should have known how they were making all that housing bubble money never did—even those who personally made tens of millions off of it. The Business blog at The Atlantic notes a quote Hank Paulson, former Goldman Sachs CEO and Treasury Secretary, gave Newsweek: “I didn’t understand the retail market; I just wasn’t close to it.”

Derek Thompson at The Atlantic writes,

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.

We’ll admit, before we read that Wired article we thought a quant was a Star Trek term. We still don’t know how mortgage-backed securities really work. But we didn’t make close to $50 million on them, either.

“Hank Paulson Admits He Doesn’t Understood Mortgage Securities” (Thanks to B!)

“Paulson’s Complaint” [Newsweek]
(Photo: cogdogblog)


Edit Your Comment

  1. I Love New Jersey says:

    I am sure that nobody in Washington understands it either, other than the “donations” and “honorariums” they have been getting from those involved with it.

  2. Possinator says:

    I wish I could inadvertently make $50 million.

    • MerryLifeAndaShortOne says:

      Live in New Zealand. Might happen….

      This is bewildering. I thought the most important rule in investing was “Invest in what you know.” I know hotels, I know the sport fishing industry. I’ll probably invest in a hotel chain (sport fishing is pretty fickle).

  3. thefunnyone says:

    That’s the thing about wall street. No one has to understand anything. They only have to know how something will make them money. After-effects are after-thoughts. Besides, once one person understands the securties and makes money off of it, the next person will only learn the money making aspect as that’s the only part beneficial to them. It’s why wall street regulation is good because people only pay attention to the parts of things that make them money.

  4. costanza007 says:

    well thank you very much, congress, for giving him hundreds of billions of dollars to play with.

    • savdavid says:

      Well, hun, don’t forget he worked for Bush. Bush and Paulson requested the money from Congress. Congress made a mistake of believing this wall street guy knew what he was talking about but Bush putting this incompetent fool in charge was the biggest mistake of all. Give credit where credit is due, sweetie.

    • Trai_Dep says:

      @costanza007: Report back to us once you’ve read up on the immediate aftermath of Lehman* being allowed to fail (market indexes, commercial paper market, inter-bank loans…), okay?
      You’re missing a bewildering amount of context.

      * And, who’s bright idea was that? Oh yeah: Paulson.

      • HomersBrain says:

        @Trai_Dep: The day after Lehman failed Paulson invited Moral Hazard over for lunch but instead strangled him on the back lawn of the White House. Viva capitalism !

        • Trai_Dep says:

          @HomersBrain: They could have penalized shareholders, stakeholders and (gods yes) the execs thru mid-level earners. Used a scalpel rather than a blunderbuss.
          But Paulson wanted to fire his bazooka like a child, so he did, so he precipitated the global financial meltdown by shutting the doors over a weekend.
          The same simplistic approach that, well, people like you favor.

          Do you guys learn NOTHING from history? I suppose relying on facts is above your pay grade.

    • costanza007 says:

      @costanza007: So, the keepers of the money are at no fault, I see. I should have just told them myself that I could wave a magic wand and make everything better. Then you could blame everyone except those with responsibility.

      It was stupid to start down this path, and its stupid to continue. Nobody gets a free pass here, not the previous executive administration, and not the congress which included senators Obama and Biden.

  5. savdavid says:

    Bush and Paulson requested the money from Congress. Congress made a mistake of believing this wall street guy knew what he was talking about but Bush putting this incompetent fool in charge was the biggest mistake of all.

    • Megalomania says:

      @savdavid: It was taken for granted that the man knew what he was doing since he had managed to make so much money. The idea that he could have been bumbling along comes as a shock now and would not have even come up previously.

  6. Trai_Dep says:

    Ah, hell. He should have just asked for $800 billion instead.
    That way, he’s have another $100 billion to learn, y’know, his job.

    Although he DID know enough to ask for unitary authority to spend the $700B as he saw fit, with no Congressional or Judicial review. Guess he mistook himself for Bush, not realizing they share only the stupid part.

    Thank the gods Congress shut that down and slipped in language allowing capital injections for equity.

    Any chance we can track down that guy that punched Feld in the nose? I think we could get a pretty decent kitty if he promised to do the same to Paulson.

    Or heck, the financial news networks for being more obsequious than a White House Correspondant’s Dinner.

  7. Ronin-Democrat says:

    We don’t understand the difference between torture and enhanced interrogation either but we use them.

    First rule of the con; sound like you know what you’re talking about.
    Second rule of the con; get the money and run.

  8. xkevin says:

    It depends. The underlying concept of mortgage backed securities is relatively straight forward. However, its the slicing and dicing of the loans in the different credit quality categories where it gets cloudy. They’re essentially statistic models where the underwriters run various monte carlo simulations to determine default rates and such, then package the loans in different tranches based on said risk.

  9. James Corn says:

    This is one of the things I dislike about viewing the internet as a credible news source. An entire Paulson interview and this one-sentence quote is all that you include in your article? The article is about Paulson not understanding an aspect of the system that he managed, and yet the quote that’s offered doesn’t even address that. The Paulson quote might as well have been “I don’t really like cauliflower.” Because neither this nor the actual words quoted have anything to do with the title or topic of this piece.

  10. Spammy Jones says:

    LOL, is anyone really surprised by this? ROTFL


  11. Sean Masters says:

    Paulson has to say this to maintain plausible deniability.

  12. James Vickers says:

    I agree with James Corn. I think there must be much more story than this.

    It is also refreshing to see people who have been in positions of power aware of their own limitations, and not trying to cover it up either.

    Paulson is in no way a ‘dunce’, he is a very intelligent man. He is not perfect either. He is a person with feelings too, so it would be best to avoid being unnecessarily insulting.

  13. Daniel Doran says:

    His name is Hank Paulson.