From Investment Banking to Policy-Making?

In the coverage of President Bush's nomination of Henry J. "Hank" Paulson to replace John Snow as Treasury Secretary, I've lost count of the number of mainstream media discussing the "well-worn path" between Goldman Sachs and official Washington. But just because a road is well traveled doesn't mean it leads in the right direction.

Tapping officials from the venerable investment bank for policy-making positions in government is a practice that dates back to the Eisenhower Administration, when John Foster Dulles, whose law firm represented Goldman Sachs, was appointed Secretary of State.

In more recent history, Goldman Sachs co-CEO Robert Rubin instigated massive banking deregulation in the five years he served as Treasury Secretary in the Clinton Administration. Rubin quit in 1999 for a multimillion-dollar position at Citigroup. Around the same time, Jon Corzine lost an internal political battle as Paulson's co-CEO, rebounding first as the Democratic senator of New Jersey and now as governor.

In March 1999, Joshua Bolten left Goldman Sachs to become policy director of the Bush-Cheney campaign, later serving as policy adviser, director of the Office of Management and Budget and ultimately White House Chief of Staff. Stephen Friedman, former Goldman co-CEO with Rubin, was appointed National Economic Council director by Bush from 2002 to 2005.

Enter Hank Paulson, who has spent the past eight years as Goldman Sachs chairman and CEO. He joined the firm in 1974 after serving as a member of the White House Domestic Council in the Nixon Administration.

Under Paulson's leadership, Goldman Sachs has become one of Washington's most generous patrons. Paulson is a top donor--mostly to the GOP. (To the chagrin of critics on the right, Paulson is also an ardent environmentalist and is chairman of The Nature Conservancy.) As Treasury Secretary, Paulson may have to dump some stock (he is the single largest shareholder in Goldman Sachs according to its 2006 proxy statement, with 4.6 million shares) to decrease his overwhelming conflict of interest, but even if he sells his unrestricted stock, he'll still have several hundred million bucks in RSU (restricted stock unit) awards, which are not immediately sellable. This could place him in a position where maintaining his financial well-being could necessitate supporting policies positive to Goldman's short-term stock price over long-term needs of the general economy, like dividend tax cuts.

What first struck me upon news of Paulson's possible appointment was that he's too smart to take on this task, with Bush's approval ratings for his economic policies hovering around 40 percent. Then, I got it. Paulson is Bush's last hurrah--and his last chance. Known as a pragmatic and decisive leader, Paulson will likely be more proactive than Snow, whose sole job essentially was traipsing up to Congress once a year and urging lawmakers to raise the US debt cap by another trillion dollars so we wouldn't default on our interest payments to China.

Bush's economic legacy is a weak dollar (who wants to invest in a country teetering on the brink of default?) and tax cuts for the super-wealthy that have created an outrageous deficit and debt. And that legacy benefits men like Paulson at the expense of middle-class Americans and the working poor. It will be a stretch for him to argue for prudent budgeting, while facing the country's highest national debt ever, without cutting social programs to get there.

This shaky economic legacy also makes Paulson's possible appointment more challenging and hence more potentially dangerous than Rubin's. He must rally citizens into believing their individual economic condition is better than it is. Plus, he needs to convince international investors that the dollar isn't in free-fall, despite the abundance of American debt. That's a lot harder than convincing a board of peers as chairman to compensate your fellow senior executives hundreds of millions of dollars.