Bloomberg Markets magazine has two big scoops this week. Both might leave you with the impression that every person in charge of the economy is doing a horrible job, all of the time. That's only partly true.
On Sunday, Bloomberg Markets reported that the Federal Reserve conducted a secret bailout of the country's largest banks, putting $7.7 trillion at risk, and ultimately netting Wall Street $13 billion in profits. That fact sounds outrageous. It isn't. The Federal Reserve is our lender of last resort. Up against Armageddon, it did a lot of lending as a last resort. The only scandal is that the Fed kept its job a secret and has taken its foot off the pedal in the last year.
Today, Bloomberg released another bombshell alleging that in 2008, then-Treasury Secretary Hank Paulson tipped off his hedge fund buddies about the government's plans for Fannie Mae and Freddie Mac. The nut of the story:
The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into "conservatorship" -- a government seizure designed to allow the firms to continue operations despite heavy losses in the mortgage markets...
Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out...
The fund manager who described the meeting left after coffee and called his lawyer. The attorney's quick conclusion: Paulson's talk was material nonpublic information, and his client should immediately stop trading the shares of Washington- based Fannie and McLean, Virginia-based Freddie.
Now this is what a scandal looks like. As Felix Salmon writes, it appears that Paulson was "downright pathological in giving inside information to his old Wall Street buddies."
Yesterday, I wrote that Bloomberg had exposed the Federal Reserve doing its job. Today, it's safe to say that Bloomberg has exposed Secretary Paulson really, seriously, truly, not doing his job. There's a bright white line between doing everything you can to help our financial sector survive the credit crunch and doing everything you can to help your buddies survive the credit crunch. If the allegations are true, Paulson crossed it.
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