Treasury's changed man

He pulled big mortgage lenders and servicers into a voluntary group called the Hope Now Alliance to help struggling homeowners. But though Hope Now claims to have helped 1.7 million homeowners avoid foreclosure, its statistics show that from January to May of this year, member companies agreed to ease the terms of less than 6% of the most troubled type of mortgages -- subprime loans in which the interest rate was set to rise.

That amounted to only 37,500 mortgages out of 718,000, according to the group.

Paulson also tried to persuade big banks, such as Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., to kick in as much as $80 billion for a voluntary fund to buy up troubled asset-backed securities called SIVs, or structured investment vehicles. The banks refused.

"He spent an awful lot of time on insider baseball things like SIVs, and not enough on rising foreclosures and what was happening to the markets," said Roger M. Kubarych, a Wall Street veteran and chief U.S. economist for Unicredit Global Research in New York. "He's got a lot to answer for."

Only in the last few months, with financial instability spreading first to investment bank Bear Stearns Cos., then to government-chartered but shareholder-owned Fannie and Freddie, did Paulson finally forsake his voluntary approach in favor of decisive government action.

In March, he helped organize a $30-billion Federal Reserve loan to partially underwrite JPMorgan's fire-sale purchase of Bear Stearns. Last week, he asked Congress for permission to make essentially unlimited loans to Fannie and Freddie and even buy shares in the two companies over the next 18 months to ensure the firms' continued operation.

Perhaps most surprising, Paulson has strongly backed Fed Chairman Bernanke's call for substantial new government regulation of investment banks. Such a move would be a big step beyond the one-time bailouts of individual institutions, and allow the Fed to intervene in parts of the financial system that have been comparatively free of regulation.

Paulson's support for the move has brought sharp criticism from free-market advocates who have backed him.

"What he's doing on investment banks is very disappointing," said Peter J. Wallison, a veteran financial markets analyst at the American Enterprise Institute in Washington.

Paulson "is very good at understanding things that are happening right in front of his eyes, but he doesn't seem to understand why the problem arose in the first place," Wallison added. Wallison's answer for why: too much, not too little, government intervention.

So far, however, the economy is pressuring Paulson to sail even further away from free-market advocates such as Wallison. And the key to what he does in the months ahead may lie in his embrace of pragmatism.

Asked how Paulson, 62, would like to be remembered when his tenure ends, Robert K. Steel, his former top lieutenant and recently named chief executive of Wachovia Corp., said that "he's kind of been a wartime secretary of the Treasury, war in the financial markets.

"I think he'd like to be remembered as someone who guided the country through a dangerous time effectively."

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peter.gosselin@latimes.com