Treasury Secretary Hank Paulson

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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.

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