Paulson’s Magic Wand

October 28th, 2008 by Phil Mattera

Henry Paulson’s Treasury Department has chosen key private-sector advisors for the Big Bailout (whatever that includes this week) and is apparently getting ready to hire the money managers who would carry out a huge federal purchase of toxic assets from banks. In recent weeks, I’ve been raising questions about the conflicts of interest that exist for many of the firms that have been mentioned as likely choices. Now the Wall Street Journal is reporting that Treasury will soon announce the selection of one of the most conflicted firms of all: Pimco, the big bond trader owned by the German financial conglomerate Allianz.

Paulson and his fellow Goldman Sachs alumni at Treasury apparently don’t read the Journal, which reported last week that Pimco has been raising its holdings of mortgage-backed securities—exactly the sector that the federal purchasing would focus on. This means that Pimco and its clients will have a larger position that could be affected one way or the other depending on how Treasury’s purchase plan proceeds.

Pimco is not the only firm with conflicts. Business Week points out in this week’s issue that Simpson Thacher & Bartlett, the law firm chosen by Treasury to be its legal advisor for the bailout, has done extensive work for banks that will be receiving capital infusions from the federal government. The magazine also notes that “the firm represents private equity kings Kohlberg Kravis Roberts and Blackstone, which may try to profit from the bailout later.” 

Such conflicts of interest used to be a reason for a law firm to decline to take on a client, but Simpson Thacher, like Pimco, is apparently counting on Paulson to wave a magic wand and make the conflicts disappear.

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