When President Bush announced in May 2006 that he was naming Hank Paulson as Treasury secretary, the appointment was greeted with great fanfare—and relief—in both Washington and New York. The two previous secretaries of the Treasury had proved to be problematic, to say the least. Paul O’Neill, the former head of Alcoa, was prone to rash statements that sent the markets reeling. John Snow, the accomplished chairman of the railroad company CSX, was considered ineffectual in government, and rumors swirled for months about when he would be replaced.

Paulson seemed cut from better cloth. As the head of Goldman Sachs, the most prestigious of the brokerage houses, he was the latest in a long line of Goldman men turned statesmen: Republicans like Steve Friedman, Bush’s director of the National Economic Council; John Whitehead, a major figure in the Reagan State Department; and Democrats like Clinton Treasury secretary Robert Rubin and New Jersey governor Jon Corzine. Unlike O’Neill or Snow, who both hailed from rust-belt industries, Paulson was thought to be, in the mold of Rubin, a market whisperer who could soothe a jittery financial world. Jim Cramer, the Goldman trader turned television star, said Paulson would rank with Rubin and might prove to be as great as the first Treasury secretary, Alexander Hamilton. The Senate confirmed his appointment unanimously. (View slideshow.)

Paulson is the kind of man Washington likes to this day, even as the economy suffers. He may have been known as a tough and demanding leader at Goldman, but the capital sees him less as a hard-ass and more as a courtly and preternaturally bipartisan official. Democratic senator Chuck Schumer, chairman of the Joint Economic Committee, is one of his most ardent supporters. (Although he’s a Republican, Paulson has been a Schumer contributor.) When I asked Barney Frank, the liberal Massachusetts Democrat who chairs the House Financial Services Committee and has worked closely with Paulson on the credit and housing mess, he positively kvelled, saying, “I think he’s been a very good partner. We’ve worked very closely with him and his staff. It’s totally different” from the relationship with Snow and O’Neill. Aside from having an amiable mien—the devout Christian Scientist doesn’t drink—Paulson also scores points inside the Beltway for being, well, not an ideological nut job. He’s a Republican and an environmentalist, a former chairman of the Nature Conservancy and even a serious bird-watcher. Everyone I spoke to for this piece calls him a pragmatist. Most important, Paulson made his name on Wall Street, which is what Washington wants from its Treasury secretaries these days.

But if you examine Paulson’s record at Treasury, it’s terrible. Really. Never mind his handling of the credit crisis, which hasn’t been exactly Hamiltonian. In some ways, the subprime mess has given Paulson cover for his broader failings. Indeed, if you judge Paulson in terms of his own goals, the things he vowed to tackle after he was confirmed, they remain unmet, and the things he wanted to fix are unimproved or worse.

I think of Paulson as being a bit like Andrew Mellon when he was Treasury secretary (remarkably, serving under three presidents—Harding, Coolidge, and Hoover). Mellon was, of course, a giant of finance, a legend in American banking. But his reaction to the crash of 1929—favoring credit tightening and budget cutting—was dead wrong and helped lead to the Depression. Just because he had been a financial titan didn’t mean that Mellon chose the right course as a cabinet secretary. Nor, it could be said, has Paulson.

“They’ve been in slow motion, slow to understanding the depth of the problem,” said one top Wall Street executive I spoke to about Paulson’s Treasury team and its response to the credit and housing predicament. He added that he’s “baffled” as to why a Wall Street vet like Paulson would be so out of touch.

Step back a bit. When Paulson took over the secretary’s chair, he vowed to look closely at financial-services regulation, as would befit a Goldman alumnus. “This is something that had been on his mind for years,” recalls Rob Nichols, who worked with Paulson when the Goldman leader chaired the Financial Services Forum, an organization representing the nation’s top financial institutions. Paulson saw that a company need not be traded on an American exchange like Nasdaq when it could just as easily be listed in London. So he directed Treasury to come up with strategies to keep companies listed in the U.S. Its goal dovetailed with the Bush administration’s focus on deregulation.

As the department did its work, along came the mortgage and credit mess. Paulson never anticipated the crisis that has come to dominate his tenure as Treasury secretary. To be fair, it also caught other smart people unawares, but Paulson has seemed particularly clueless at times, as in April 2007, during a speech to the Committee of 100—a Chinese American business group—when he predicted that the trouble in the housing market and with subprime loans wouldn’t amount to much. “I don’t see it imposing a serious problem. I think it’s going to be largely contained,” he declared.

Yes, Paulson has worked with the Fed to bring more liquidity into the market, but it was the Federal Reserve’s New York bank that ultimately engineered the J.P. Morgan Chase-Bear Stearns deal, even though Paulson was on the phone that weekend too. Paulson has also worked with mortgage providers to renegotiate terms for beleaguered borrowers (but only those with good credit histories) and on expanding Fannie Mae’s role in solving problems in the home-lending market. He hasn’t been sitting on his hands.

But after he faced the greatest financial crisis to hit the U.S. since the Depression, the vaunted Paulson’s biggest response was the regulatory blueprint that he unveiled in March. It was as if Paulson had gone ahead with his original plan for deregulation, oblivious to the housing crisis. The blueprint does little to mitigate the subprime woes—the predatory lending, undercapitalization, and other dubious practices that brought us to where we are now—and it doesn’t take on the Wild West of hedge funds, derivatives, and financial innovations that’s crying out for more government oversight. It just rearranges the agencies already in charge—cutting some, augmenting others—and it provides for no new regulatory authority, save for a kind of SWAT team that could open fire if it felt that the whole financial system was under siege. “The Fed has been much more creative than Treasury,” said the Wall Street executive I spoke to, pointing out the Bear deal and the Fed’s other efforts to rescue an economy in peril.

Beyond the credit problems, perhaps Paulson’s biggest failure has been his policy toward China. When Paulson took office, much was made of the more than 70 trips he took there while he was at Goldman. He was hailed as the man who could sway Beijing to move on its currency, the yuan, the value of which has remained artificially and stubbornly low against the dollar, making Chinese goods cheaper than they would be if Beijing didn’t limit its fluctuation and allowed it to float upward. With Chinese merchandise so cheap, the U.S. trade deficit with China continues to expand. Under Paulson, the yuan has indeed risen, but far less against the dollar than free-floating currencies like the euro. And the Chinese, much to Paulson’s public dismay, aren’t unpegging. “He has been doing this for, what, two years, and there don’t seem to be any appreciable results,” says Clyde Presto­witz, a trade hawk who served in the Reagan administration and is now head of the Economic Strategy Institute. “Maybe what’s happening is that the Chinese listen politely, give him tea, and then they do what they damn well please.”

How does Paulson deal with defeat? To his credit, friends and allies say the All-Ivy football star dusts himself off and does what he can. That’s been the case with controlling entitlement-program spending, one of the top priorities he set during his confirmation hearing before the Senate Finance Committee in June 2006. Since he took office, spending on Social Security and Medicare has continued to soar. Meanwhile, the administration’s ideas, such as creating private Social Security accounts, have gone nowhere since Congress balked in 2005. In the wake of this setback, Paulson did help promulgate reports about the nation’s fiscal woes and tried to revive interest in Bush’s moribund Social Security plan. “He worked with all the stakeholders,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “He talked to everyone.”

But as David Walker, a former comptroller general of the U.S., says, “Even though Paulson had a sincere desire and ended up spending a significant amount of time and effort to try to revive Social Security reform, he wasn’t able to do it.”

I’ve scratched my head as to why Paulson’s record has been so spare. Even the basics of the job—talking up the economy—seem to have eluded him. Tongue-tied, he’s never been able to soothe the markets with Rubinesque grace. But because Paulson is good at massaging Washington’s erogenous zones, he continues to get good press while the economy staggers. He’s our Andrew Mellon—except the press and Washington eventually turned on the famed financier. If things keep getting worse, the same fate may befall Hank Paulson.

-- Additional reporting by Jessica Liebman