Paulson's banking ties taint Wall Street bailout plan

By Pedro Nicolaci da Costa - Analysis

NEW YORK (Reuters) - Henry Paulson spent his life amassing a fortune on Wall Street. Now, as Treasury secretary, he is demanding unprecedented authority -- and $700 billion in cash -- to bail out the teetering U.S. banking sector.

That some sort of action is needed to rescue the financial system from itself is hardly a point of contention. But Paulson's blueprint has drawn widespread criticism, in part because his close relationship with the industry is perceived as clouding his perspective.

In legal terms, Paulson's actions are perfectly acceptable. He is simply acting as the Treasury secretary in setting policies that will apply to the financial sector as a whole. Indeed, he divested himself of Goldman Sachs shares reportedly worth $485 million when he took office, to comply with government ethics rules.

Still, experts say that because of his background as a banker, Paulson may be prone to overstating the importance of Wall Street to the health of the overall economy.

"His mind-set is one that has been molded by a Wall Street-centric view," said Anthony Sabino, professor of law and business at St. John's University. "What I find as a shortcoming is that he's refusing to acknowledge that Wall Street has to pay for its mistakes."

Paulson presided over Goldman Sachs during the boom times for housing and was a staunch advocate of the lax regulatory approach that many blame for the current financial crisis.

The timing of Paulson's change of heart has also raised questions. Until recently, the secretary said repeatedly that the housing slump was contained and would not infect the banks or the real economy.

His rescue plan came just as it seemed that Goldman was next in the cross-hairs of a panic that has taken down financial giants like Lehman Brothers, Bear Stearns and AIG.

In addition, the draft legislation contained language that would excuse Treasury officials, including Paulson, from any court review of their actions -- the bailout's own get-out-of-jail-free card.

"I find this particularly troubling," said Jared Harris, professor of ethics and strategy at the University of Virginia's Darden School of Business.

As if to anticipate the rescue's passage, Warren Buffett's Berkshire Hathaway announced last Sunday that it was investing $5 billion in Goldman Sachs on terms that give Berkshire a 10 percent dividend and warrants to buy Goldman shares at a preferential price.

In contrast, taxpayers would enjoy no such privilege under the Treasury's plan, a major sticking point in the negotiations with Congress.

TOO MUCH MONEY

The issue of executive pay also looms large in discussions surrounding any bailout. Both voters and lawmakers have expressed concern about a taxpayer rescue of financial institutions that does not include severe monetary penalties for those banks.

"This round-about doubtful solution for sure helps the secretary's friends on Wall Street and maybe not much else," said Edward Leamer, director of UCLA's Anderson Forecast.