Henry Paulson's Little White Lie

It seems that Henry Paulson was a bit too optimistic about the prospects of several banks which received TARP funds at the end of last year. The Treasury Department’s inspector general Neil Barofsky reports that the  Department “lost credibility” when its top officials claimed that the first capital injections from the $700 billion financial rescue were for healthy banks. At the time, Bank of America (NYSE:BAC) and Citigroup (NYSE:C) were actually in a great deal of trouble.

The inspector’s report states “Treasury may have created unrealistic expectations about the institutions’ condition and their ability to increase lending.”

It was, perhaps, only a little white lie. Paulson and Bernanke knew that confidence in the credit markets was worse than being fragile as the financial crisis spun nearly out of control. They also knew that the TARP was likely to keep large banks from failing, at least for a few months, while the world credit system had a chance to catch its breath.

Paulson probably believed that misleading the public was the lesser of two evils. He could have disclosed everything he knew about the health of the banking system, particularly  information about the most troubled banks, and caused a panic worse than the one which was already in progress, or he could have kept his mouth closed and hoped for the best from the TARP investments.

Paulson chose to omit all that he knew when talking to the public and the media, a type of moral relativism.It was probably an excellent idea.

Douglas A. McIntyre