Paulson’s Pretext

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Of all the palaver that is being propagated as a pretext for the government seizure of Fannie Mae and Freddie Mac, some of the least credible relates to the attack on the so called dual missions of the enterprises. The secretary of the Treasury, Henry Paulson, spoke of “the inherent conflict of attempting to serve both shareholders and a public mission.” He spoke of what he called “the conflict between public and private purposes.” The public mission is expanding home ownership by offering cheap mortgages, while the private purpose is making a profit for shareholders.

This makes sense until you think about it and realize that just about every company faces conflicts between serving its shareholders and the public, or customers. And it isn’t just the obvious examples, like Ben & Jerry’s Ice Cream having a “social mission” that exists within the publicly traded global consumer products giant Unilever. Or newspaper companies, which have a public service watchdog mission in addition to their profit missions.

The firm for which Mr. Paulson formerly worked, Goldman Sachs, managed the investments of wealthy private clients. One of Goldman’s missions was to serve its clients well. Another was to maximize profits for its shareholders. Charging clients the highest possible fees is good for shareholders, but bad for clients. Charging the lowest possible fees is bad for Goldman shareholders, but good for clients.

Or to take a more timely example, Goldman stuck some of those private clients with auction-rate securities that became illiquid, or worth less than their face value. Goldman’s mission of serving clients would have dictated reimbursing clients for the value of the securities it had touted as cash-equivalents. But that would have cost Goldman’s shareholders money. So the firm didn’t take action until it was pressed by regulators such as Attorney General Cuomo.

There are similar examples in nearly every industry. A military contractor has a mission of maximizing profit for shareholders but also a patriotic mission of building the best weapons for the American military — and of not selling them to our enemies. An automaker has a mission of maximizing profit for shareholders but also building safe cars for drivers. An airline has a mission of maximizing profits but also flying passengers safely. A hockey team or baseball team owned by a public company, such as Tribune’s Cubs or the New York Times Company’s Boston Red Sox, has a mission to its fans to win but a mission to shareholders not to pay so much for player salaries that the team loses money. A for-profit hospital chain has a duty to shareholders to maximize profits but a duty to patients to give them the best health care it can.

Company managements like to claim that these missions don’t conflict — that the investment manager that serves its clients best will also be the most profitable, that the safest cars will also sell best, that the newspapers that invest the most in newsgathering and the hospitals that treat patients the best will also be the most profitable ones, that the safest airlines will be the most popular with customers. And in some cases the missions are complementary. But it doesn’t always work out that way. The conflicts are more common and deeply rooted than are often admitted.

The question is, what to do about such conflicts. Mr. Paulson’s plan for Fannie Mae and Freddie Mac is to eliminate the conflict by wiping out the company’s shareholders, letting the government own the company. He did so without so much as a howdy-do to the shareholders, who were given no chance to vote on it. The same principle would dictate a government seizure of all sports teams so that they are run in the interests of the fans rather than the owners. It would dictate a government seizure of all military contractors so they are run in the interests of the armed services rather than the shareholders.

It would dictate a government seizure of for-profit hospitals so they are run in the interest of patients rather than shareholders, and a government seizure of airlines so they are run in the interest of passengers rather than shareholders. There would be a government seizure of newspapers so that they are run in the interests of readers rather than shareholders. And a government seizure of Mr. Paulson’s old firm, Goldman Sachs, so it is run in the interest of account holders rather than shareholders.


We don’t expect Mr. Paulson to take such steps anytime soon. But there is something afoot in the country that is worrisome to those of us who believe that capitalism and private enterprise, for all their flaws, are the most efficient and dynamic and growth-creating systems. Republicans, who had been the party that touted its respect for property rights, are now expropriating private companies. The party’s standard-bearers in 2008, Senator McCain and Governor Palin, yesterday released a campaign commercial in which, as our Russell Berman reports today on page one, a narrator intones, “He took on the drug industry. She took on big oil.” Where is this headed? Mr. Paulson has established a pretext, and the only question that remains for the next administration, whether Democrat or Republican, is which industry will be the next target.

The New York Sun

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