Hank Paulson in a hard place

Hank Paulson was between a rock and a hard place. American taxpayers had already bailed out a leading bank (Bear Stearns) and the two biggest mortgage lenders in the US. Paulson also knew that he would shortly be forced to come to the rescue of AIG, an insurance company that had behaved like a bank, thus posing an even greater systemic risk than Lehman. Both Congress and the general public were at the limits of their tolerance. Bailing out yet another Fat Cat on Wall Street, particularly one as loathsome as Dick Fuld of Lehmans, was simply not on. What’s more, it was perfectly obvious that if Lehman was saved, the markets would move on to the next weak link in the chain such as Merrill Lynch or Morgan Stanley. The fact is that the world economy had been trashed by trade imbalances and insane banking practices. The extreme excess of credit, with its roots in the Greenspan “put”, had resulted in a massive misallocation of capital. A recession was absolutely inevitable as the bad debt was worked out of the system.

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