As the Senate Finance Committee considers President Bush’s nomination of Henry Paulson to be the next secretary of the Treasury, the question is not whether he will be confirmed. That seems assured, as senators in both parties behave like star-struck groupies in the presence of a Wall Street “master of the universe,” whose net worth, from his time as a senior executive of Goldman Sachs, is estimated to be on the order of $600 million.
Rather, the question is: Will any of his Senate interlocutors even bother to explore the nominee’s troubling fifteen-year ties to Communist China and the potential for serious conflicts of interest they pose, with national security as well as economic implications for our country?
It is hard to overstate the enormity of this problem. For calibration purposes, consider an historical parallel.
In the last century, the Soviet Union enlisted a relative handful of prominent Western capitalists to serve as financial advisers, engines of economic assistance, and agents of influence in Washington and other foreign capitals. Typically, these businessmen were rewarded with access to lucrative Soviet energy and other natural resources and exclusive arrangements for marketing their products inside the USSR.
Arguably, the most prominent of these Soviet fellow-travelers and enablers was Armand Hammer, who created a vast personal fortune and an oil and gas conglomerate in no small measure thanks to sweetheart deals he secured from the Kremlin. For decades, he found it to be good for business to use his wealth and favored standing in Moscow to promote the USSR’s interests among his peers in the capitalist world and politicians in their thrall.
Henry Paulson has been Communist China’s Armand Hammer. In fact, he has been vastly more effective than Hammer ever was in promoting his clients’ interests and enabling their access to Western economic assistance and high technology.
Under Mr. Paulson’s leadership at Goldman Sachs, the company has been instrumental to the growth of Chinese economic power and particularly to its penetration of Western capital and other markets. He has been directly involved in developing his firm’s relationships with the PRC, priding himself on having made 70 trips there since late 1991. Consider just a few of the deals Goldman has managed, underwritten or otherwise facilitated under Henry Paulson’s leadership:
In 2005, Goldman Sachs not only advised the China National Offshore Oil Corporation (CNOOC) in its attempted takeover of Unocal. It also strove to ensure that the Chinese state-owned company’s bid prevailed after ChevronTexaco offered $17 billion in an effort to keep Unocal in U.S. hands. CNOOC was able to up the ante to $18.5 billion for the American concern, thanks to a bridge-loan Goldman Sachs arranged (along with J.P. Morgan). Fortunately, despite the assiduous efforts made by Mr. Paulson and his firm to secure Unocal for Communist China, the American people and Congress strenuously opposed the transaction, leading ultimately to its derailing.
In late January 2006, Goldman Sachs purchased a stake in the Industrial and Commercial Bank of China (ICBC), China’s biggest bank, for $2.58 billion. According to press reports, Mr. Paulson’s personal stake in this transaction was $25 million.
This is but one of many such state-owned banks the Chinese are interested in bringing to Hong Kong and other Western capital markets. As I told the U.S.-China Economic and Security Review Commission last August:
These are
foreign government-owned entities, not private firms. The Chinese government appears to be actively working with leading international banking houses [notably, Goldman Sachs] to shape the appearance, assets, liabilities, profit margins and public relations tactics of these state-owned enterprises.
Despite such efforts, the PRC seems simply to be dressing-up what were, until recently, insolvent banks in the hope that international capital markets will contribute to bailing them out. This process involves the off-loading of non-performing loans onto asset management companies in a fashion very reminiscent of the U.S. savings and loan crisis. Indeed, the PRC appears, in fact, to have modeled its strategy on the American experience.
No less worrisome is the fact that these banks’ assets include not only its non-performing loans, but also the loans made to various Chinese enterprises of grave concern to the United States, including elements of the PRC’s military-industrial complex; entities involved in the manufacture and perhaps the proliferation of weapons of mass destruction and their delivery systems; human and labor rights abusers; environmental despoilers; etc.
Speaking of banks, in May 2006, Goldman Sachs helped with the underwriting of the Bank of China’s IPO, listing $9.7 billion worth of its shares on Hong Kong's stock exchange. Among other problematic activities the Bank has engaged in has been the financing over the past fifteen years of extensive infrastructure projects like dam-building for the mullahocracy in Iran.
Along with the Unocal deal, one of Goldman Sachs’s few setbacks in its efforts on Beijing’s behalf was its planned launch of an initial public offering for another Chinese state-owned company, the China National Petroleum Company (CNPC). This IPO was expected to garner $10 billion, which would at the time have been the largest such transaction in the history of the New York Stock Exchange.
There was only one problem: CNPC owned a 40 percent stake in the national oil consortium of Sudan, the Greater Nile Petroleum Operating Company. (By contrast, the Sudanese government had only a 5 percent share.) Millions of Americans were outraged that Khartoum’s genocidal, slave-trading and WMD-proliferating government was using murderous “ethnic cleansing” techniques to clear Christians and animists from oil-rich areas in the southern part of the country and that anger was came to be focused on the CNPC IPO.
Faced with intense opposition, Goldman Sachs helped its client came up with a gambit aimed at finessing the Sudan problem by creating a wholly owned subsidiary, called PetroChina, ostensibly involving only Chinese domestic assets. Fortunately, the opposition did not buy the feint and the value of the NYSE listing was driven down by over 70 percent. (Even the $2.8 billion it attracted would likely have been unachievable had Goldman Sachs and the Chinese government not made concessionary deals with “friends of China” like BP and Hong Kong-based billionaire Li Kai-Shing.)
Li Kai-Shing owns, among other lucrative enterprises, Hutchison-Whampoa, regarded by many as the de facto Chinese merchant marine. In Goldman’s 2001 annual report, a Hutchison-Whampoa official was quoted as saying: “Goldman Sachs has been our valued counselor — advising us on key strategic transactions…Goldman Sachs continues to be loyal and dedicated to our business.” Among the most worrisome of Hutchison-Whampoa’s “strategic transactions” have been its acquisitions of facilities at choke-points in places like the Panama Canal, the Bahamas, Africa, and throughout Asia.
Goldman also advised Hutchison in its attempted buyout of the one-time telecommunications giant, Global Crossing, a bid that was withdrawn only after coming under heavy criticism. The Pentagon opposed the sale as it was deemed a “threat to national security because it would put Global Crossing's fiber-optic network, which is used by the U.S. government, under foreign control.”
Importantly, in his capacity as Treasury Secretary, Mr. Paulson would chair the already-controversial Committee on Foreign Investment in the United States (CFIUS), the entity responsible for evaluating whether foreign acquisitions of American assets are consistent with U.S. security interests.
It seems predictable that a man with Henry Paulson’s background, track record and relationships with Communist China will play a worrisome role in U.S. government deliberations. Unless he recuses himself from involvement in the following sorts of issues, Mr. Paulson assuredly will be participating in and exercising great influence over far-reaching decisions in which he has a vested policy, if not financial, interest. These will likely include, for example:
Contending with China’s ongoing manipulation of its currency which it uses to help sustain its advantageous trade relationship with the United States;
Addressing the strategic implications of the PRC being the largest holder of U.S. debt;
Considering the need to impose economic and perhaps other sanctions on Chinese proliferators, not at the subsidiary level (as has been done to date) but against their parent companies, when some of the latter may include Mr. Paulson’s former clients;
Allowing China to purchase strategic U.S. companies and assets;
Deciding whether to permit the export to the PRC of sensitive technology with ominous military applications;
Responding to continuing Chinese trade abuses and infringements on intellectual property rights; and
Evaluating how to end China’s unhelpfulness on such matters as the growing threat from North Korea and Iran — whether by offering it more “carrots” in the form of “grand bargains,” or by penalizing it including through U.S.-led efforts to encourage systemic political change in Beijing.
It is unimaginable that during the Cold War any president would appoint — let alone that a majority of senators would vote to confirm — a man like Armand Hammer as secretary of the Treasury. Now President Bush has nominated his Chinese counterpart and, all other things being equal, Henry Paulson will have the votes to be confirmed.
Since Communist China’s interests and those of the United States are likely to diverge ever more sharply in the years ahead, the very least that should be required of Paulson is that he recuse himself from involvement in matters of interest to the PRC. Unfortunately, as the foregoing list suggests, since China’s interests and activities figure so prominently in the Treasury portfolio, such a recusal would reduce the job to a part-time one.
In the absence of such a recusal, however, Paulson’s China-related work at Treasury will require an extraordinary level of transparency and accountability by members of Congress, the media, and the American public. We must be assured he is working for us in this job, not for Communist China as he did so successfully in the last one.
— Frank J. Gaffney, Jr. is president of the Center for Security Policy, the lead author of War Footing: Ten Steps America Must Take to Prevail in the War for the Free World, and a contributor to National Review Online.
