FORMER US treasury secretary Henry Paulson said bets against the survival of Bear Stearns before the firm’s sale to JP Morgan Chase amounted to “the wolf pack trying to pull down the weak deer”.
“I don’t use the word collusive because it’s got a legal connotation,” Mr Paulson said yesterday at a hearing of the financial crisis inquiry commission in Washington. “It sure looked to me like some kind of co-ordinated action.”
Mr Paulson (64), who served as chairman and chief executive of Goldman Sachs before his appointment to the treasury, said he was not “saying there was behaviour that was illegal” and he believed shortselling was “essential for the price-discovery process”.
JP Morgan agreed to buy Bear Stearns in March 2008, with the US Federal Reserve buying illiquid Bear Stearns assets to help facilitate the transaction.
Mr Paulson, who was treasury chief from 2006 to 2009, said Bear Stearns was planning to file for bankruptcy had a buyer not been found.
He also told the committee credit-rating companies were “a dangerous crutch” that too many investors and banks depended on before the global financial crisis.
Companies such as Standard and Poor’s, Moody’s Investors Service and Fitch Ratings “should give their advice just like equity research houses do, and I think investors should look at those as one tool”, Mr Paulson said.
“I don’t want the ratings agencies to be held up as the font of all truth and have the ratings be part of our securities laws.”
Legislation being debated in Congress to overhaul US financial regulations would require greater disclosure about how much money-ratings firms receive from Wall Street, force regulators to reduce their reliance on credit-rating firms, and make it easier for investors to sue the firms.
Mortgage bonds that received top rankings from Moody’s, Standard and Poor’s and Fitch began souring in 2007, spurring a financial crisis that has cost global financial companies more than $1.7 trillion (€1.3 trillion).
Mr Paulson also said future financial crises were probably unavoidable. “The next crisis is inevitable,” he said. “I don’t think it’s going to happen right away, but there will be stresses and problems in the capital markets sometime in the future.” – (Bloomberg)
