John Crudele: Did Paulson tip Wall Street after meeting Bernanke?

By John Crudele
New York Post
Thursday, October 11, 2007

http://www.nypost.com/seven/10112007/business/market_sos_to_the_sec.htm

Did Federal Reserve Chairman Ben Bernanke give away any secrets to Treasury Secretary Hank Paulson when the two had an hour-long lunch on Aug. 16?

And did Paulson share what he and Bernanke discussed with anyone in the hours immediately after that lunch?

Those are two key questions that the Securities & Exchange Commission needs to address if the integrity of the financial markets is to be protected.

Those points are particularly pertinent because Paulson has confessed that he "talks regularly to market participants," the kind of folks who could profit handsomely from the slightest hint as to what the chairman of the Fed is thinking.

The lunch in question took place between noon and 1 p.m. on Thursday, Aug. 16, according to documents received from Bernanke by Wharton School lecturer Ken Thomas.

That's the day stock prices were sharply lower because banks and mortgage companies were starting to give the bad news about the amount of subprime loan defaults on their books.

But in the final hour of trading on Wall Street stocks suddenly reversed course, turning what had been a 344-point rout in the Dow Jones industrial index into just a 16-point loss.

The stock market rally took place within two hours of Bernanke and Paulson breaking bread.

The only explanation at the time for the final-hour rally was a rumor that the Federal Reserve was going to "hold a press conference." The next day newspapers said the stock move was puzzling.

The Fed never holds press conferences and there weren't any on Aug. 16.

But Bernanke and his colleagues at the Fed did enact a surprise reduction in the so-called discount rate the next morning, on Friday, Aug. 17, sending stock prices sharply higher.

According to Bernanke's phone records, he held two conference calls -- one between 7:30 a.m. and 8:30 a.m. and the other between 10:30 a.m. and 11 a.m. -- on Aug. 17.

That would have been right before and right after the discount rate cut -- one meeting before the stock market opened and the other after the first hour of trading.

Bernanke's records don't say who was on the calls.

But at 11 a.m. Bernanke participated in a conference call with the "PWG," which stands for the President's Working Group on Financial Markets. Fed Governor Kevin Warsh and Patrick Parkinson also took part in that conference call.

Parkinson is a deputy director of research at the Fed and is an expert on hedge funds.

Paulson is the head of the PWG, which is also called the Plunge Protection Team.

It was formed by order of President Reagan in the late 1980s and has been extremely active since Paulson took over as Treasury Secretary.

In fact, Paulson wastes no opportunity to make people aware that the PWG is on the job.

On Aug. 21, in an interview on CNBC, Paulson said, "We've reenergized the President's Working Group on Financial Markets."

The lunch on Aug. 16 was part of an unusual full-court press on the Fed chairman by Wall Street players that began early that month.

Thomas said "Bernanke didn't get it on Aug. 7 when the Fed met and maintained rates at the same level. The next day, at 5 p.m., when Bob Rubin called from Citicorp, he started to get it."

Rubin is a former Treasury secretary and once headed Goldman Sachs. Paulson was also chairman of Goldman before moving to Washington. In that same lengthy Aug. 21 interview Paulson also disclosed -- unprompted -- his relationship with Wall Street.

"I think it's my job to talk regularly to market participants, but also talk regularly to key regulators and make sure that we are seeing the same issues, the same problems and working toward the same solutions," he said.

So did Paulson share the issues and problems he discussed with Bernanke at the lunch meeting with "market participants" so they'd be on the same page?

That isn't, by the way, the "job" of the Treasury secretary.

In fact, keeping Wall Street insiders abreast of what regulators and, especially, the Federal Reserve are thinking is about the furthest thing from Treasury's role.

But if I had snitched about something confidential and I thought that a defense would be necessary, I'd also go with the tried and true excuse -- it's my job.

We are in the process of trying to get Paulson's phone records for the afternoon of Aug. 16.

So far the Treasury has refused to disclose anything about any of the meetings The President's Working Group is supposed to be having.

Who knows? Maybe Bernanke's willingness to turn over a list of his phone calls will put pressure on his lunch mate.

Or maybe investigators will step in and clear up what could be nothing more than one big coincidence.

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