The American Spectator

They said it was “too big to fail.” This multi-billion dollar firm was now on the brink of bankruptcy. Although not a bank, the firm held complicated financial assets such as derivatives and traded with just about every big bank on Wall Street.

So company officials called on the administration of George W. Bush, hoping to get a lifeline. Big Wall Street executives, including former government officials, phoned the Bush Treasury Department to plead their case to save this company.

Treasury’s response? “Not a chance!”

The company described above was not Bear Stearns or American International Group, although it had a lot in common with those firms that the government this year decided must be bailed out by taxpayers. It was Enron Corp., just before it went bankrupt in 2001.

Did Enron’s failure somehow pose less of a systemic risk than that of Bear Stearns, AIG, or the thousands of other financial firms that could now be bailed out under the administration’s new plan? Not really. Enron was the seventh largest public company in the U.S., employing nearly twice as many as Bear did prior to its bankruptcy.

And like Bear, Enron traded derivatives and other financial instruments with counterparties that were some of the biggest commercial and investment banks in the country, such as Morgan Stanley and Citigroup, which would have been heavily exposed to its losses And these instruments were concentrated in energy, a sector equally as important, if not more important, to our economy than housing is.

No, what was really different in 2001 was who was heading Treasury and other economic agencies. The Enron failure shows how much the Bush administration, as much as conservatives ripped it, has moved in an interventionist direction under Treasury Secretary Henry Paulson.

ACCORDING TO KURT EICHENWALD’S Conspiracy of Fools, an authoritative account of Enron’s demise, Enron head Ken Lay was on speed dial to government officials looking for “a lifeline.” He called then-Federal Reserve Chairman Alan Greenspan and then Treasury Secretary Paul O’Neill. And Robert Rubin, who had just gone on to become an executive at Citigroup after serving as the Clinton administration Treasury Secretary, phoned a Treasury aide to see if the Department could intervene to keep Enron from being downgraded by the credit rating agencies.

The responses? Nada, nada and nada. Enron’s bankruptcy was complicated, but despite Lay and Rubin’s dire predictions of what would happen if Enron failed, the economy kept growing in 2002 and 2003.

But Enron most likely would have had more luck if it had gotten into trouble after Hank Paulson left his post as CEO of Wall Street investment bank Goldman Sachs to become Treasury Secretary in 2006. With the exception of Lehman Brothers, Paulson is truly “Dr. Yes,” having never met a Wall Street bailout he doesn’t like: $29 billion here, $200 billion there, and now possibly upwards of $700 billion over there, and pretty soon even Washington starts to realize it’s real money.

In terms of not just the bailout, but the unprecedented intervention in setting prices of company stock in mergers, picking new CEOs, and encouraging the abrogation of mortgage contracts, Paulson has gone where no Treasury Secretary — Republican or Democrat — has gone before on the road to socialism. In the way he has persuaded a GOP administration to betray what conservatives stand for, he is — metaphorically speaking — the late Dick Darman on steroids.

Darman’s convincing of the elder Bush to raise taxes pales in comparison to these bailouts and the new $700 billion bailout scheme before Congress. If this “mother of all” bailouts passes, it will leave an albatross around conservatives’ necks for years, allowing new arguments for intrusive regulations to prevent taxpayers from paying for business failures.

YET CONSERVATIVE CRITICISMS of Paulson so far (maybe until this week) have largely been muted because of two myths propagated by the media. One is he was a free-market believer until catastrophic economic events forced him to intervene. The other is that no matter how bad the financial industry woes are now, the economy would be much worse off but for his interventions. The first myth is demonstrably untrue, and the second is under contentious dispute.

Paulson did raise a lot of money for the GOP — more than $100,000 in 2004 — but has always been something of a political chameleon and has never been an ideological conservative of the fiscal or social type. As Robert Novak reported last year, he has also contributed to Bill Clinton, Bill Bradley, the feminist Emily’s List, and “Wall Street’s favorite Democrat, Chuck Schumer.” And, in moves leading my organization — the Competitive Enterprise Institute — to oppose his nomination, Paulson supported and Goldman Sachs partnered with anti-property rights “green” groups.

As to the second myth, Paulson certainly isn’t responsible for all the factors that have caused the credit crunch, such as the growth of the government-sponsored enterprises Fannie Mae and Freddie Mac. But far from saving the economy, there is ample evidence that the March bailout of Bear Stearns’ creditors simply prolonged, postponed and added to the pain.