Paulson, Bernanke Blamed for Economic Meltdown in PBS Special

Feb. 17 (Bloomberg) -- Looking for someone to blame for the economic crisis?

Former U.S. Treasury Secretary Henry Paulson is the designated goat in Frontline’s “Inside the Meltdown,” which airs tonight on PBS at 9 p.m. New York time. Also taking heat are Federal Reserve Chairman Ben Bernanke, a few chief executive officers and a confederacy of right-wingers.

There’s no major surprises here -- Paulson is already a favorite punching bag -- but the show does explain how personality clashes and ideological passions probably made a bad situation worse. Of course, that won’t make Americans who’ve lost a big chunk of their savings and seen the price of their homes plummet feel any better. Maybe what the country needs more than a bailout is a purge.

The one-hour program starts by recounting a Sept. 18, 2008, emergency meeting between Paulson, Bernanke and key congressional members. Paulson dramatically announced that if Congress didn’t pass a $700 billion bailout “tomorrow, we won’t have an economy on Monday.”

“There was literally a pause in that room where the oxygen left,” Senator Christopher Dodd, a Democrat from Connecticut, says in an interview.

The show contends that Paulson repudiated his belief in “moral hazard,” which holds that one bailout is likely to beget more bailouts.

Fannie, Freddie

“Inside the Meltdown,” produced and directed by Michael Kirk, traces the snowballing catastrophe beginning with the collapse of Bear Stearns, which was followed by crises at Lehman Brothers, AIG, Fannie Mae and Freddie Mac before spreading overseas.

Along the way, viewers are reminded of the central role perception plays in the markets.

“Rumors are such that they can just plain put you out of business,” says former Bear Stearns CEO Alan “Ace” Greenberg. He should know.

After CNBC reported that Stearns was “dragging the rest of the markets down,” Greenberg (though no longer running the company) phoned the network to insist rumors of the firm’s “eminent demise” were false. Jitters remained, so CEO Alan Schwartz went on the air to stem the panic.

But when reporter David Faber asked about rumors that Goldman Sachs might desert Stearns, Schwartz’s less than reassuring response was “the kiss of death” that led to JP Morgan Chase’s takeover of the company, according to Bryan Burrough, co-author of “Barbarians at the Gate.”

Fuld, Paulson

Former Lehman Brothers chief Richard S. Fuld also comes in for criticism. Michael Petrucelli, a former Lehman vice president, says the company “kept pushing the envelope on acceptable loan terms.”

“I think in hindsight it’s easy to see there was a bubble, but when you’re at a party having a good time, sometimes it’s hard to stop and leave the party,” Petrucelli says.

Paulson’s refusal to bail out Lehman was partly personal: He didn’t like Fuld, a former competitor of his on Wall Street. Though Paulson demanded that Fuld find a buyer for Lehman, the show says, Fuld declined because he “had watched the government save Bear Stearns.”

While the show generally portrays Bernanke as a reasonable man, Paulson gets no breaks.

Nobel-winning economist Paul Krugman dismisses Paulson as not “the most reflective guy” and, in a bit of hyperbole, describes his decision not to bail out Lehman as one that may have “destroyed the world.”

‘Blank Check’

Piling on is congressman Barney Frank, chairman of the House Financial Services Committee, who performs a bit of ideological ax grinding.

“You had a conservative secretary of the Treasury and conservative administration,” Frank says. “There was a lot of right-wing criticism over Bear Stearns.”

As there was over the demand for $700 million to buy up toxic assets which, according to journalist Mark Landler, was “as close to a blank check as you can get without asking for a blank check.”

That’s fine, as far as it goes. But “Meltdown” fails to examine how Congress helped create the subprime problem through its cozy relationship with Fannie Mae. I guess that’s a topic for another day.

(Dave Shiflett is a critic for Bloomberg News. The opinions expressed are his own.)

To contact the writer of this story: Dave Shiflett at dshifl@aol.com.

To contact the editor responsible for this story: Manuela Hoelterhoff in New York at mhoelterhoff@bloomberg.net.