Paulson's Puzzling New Strategy: Save the Rainforests

As a former investment banker of some standing at Goldman Sachs—to say nothing of being its former CEO—Treasury Secretary Hank Paulson has a proven record of being a fine multi-tasker. But does he also suffer from a touch of political tone-deafness?

Amid the ongoing maelstrom in the world's credit markets that remain anything but calm, Paulson took the time out to announce, on October 21, his latest accomplishment. In exchange for reducing the government of Peru’s debt payments to the United States by $25 million during the next seven years, Peru agreed to commit this same $25 million to, theoretically anyway, protecting the tropical rain forests in the southwestern Amazon basin and in the dry forests of the Central Andes. "This agreement will build on the success of previous U.S. Government debt swaps with Peru and will further the cause of environmental conservation in a country with one of the highest levels of biodiversity on the planet," Paulson said. "Such debt-for-nature agreements are a successful model of government and citizen cooperation to improve and expand conservation efforts."

Surely the program is a noble cause for a rich and powerful country dedicated to preserving the environment. But is it the best use of Paulson’s time and our cash?

For those not familiar with the Treasury's "debt-for-nature" initiative, it stems from the Tropical Forest Conservation Act of 1998, which authorized the Treasury to exchange debt payments owed to the United States for agreements to protect rain forests from countries whose obligations are being forgiven. The new agreement with Peru marked the fourteenth such agreement reached with 12 different countries worldwide, ranging from Bangladesh to the Philippines, since program started. To date, some $188 million has been earmarked to save tropical forests. The deal with Peru was the second one with that country under the Tropical Forest Conservation Act and the country has avoided $35 million in debt payments to the United States as a result. Surely a noble cause for a rich and powerful country dedicated to preserving the environment. But given the credit crisis and the country's much-depleted treasury these days, is this program the best use of Paulson's time and our cash?

While the program predates Paulson's tenure at the Treasury, it no doubt has his considerable sympathy. He has been on the board of The Nature Conservancy for many years, including serving as its chairman of the Board of Directors prior to joining Bush's cabinet. He also has given $100 million of his large fortune to conservation causes and has pledged to give much of the rest of it to conservation causes, such as the prevention of global warming, upon his death.

When he was CEO of Goldman, the firm made a controversial gift of 680,000 acres of forested land on the Chilean side of Tierra del Fuego to the Wildlife Conservation Society, which manages the preserve along with a Chilean advisory board. The land contained a rare hardwood forest that had been targeted for logging. A private equity fund had bought the land but then ran into financial difficulty, and then Goldman swooped in. In 2002, a team of Goldman bankers showed Paulson that the firm owned a loan portfolio that contained one loan secured by the 680,000 acres. "I kissed them on both cheeks!"; Paulson reportedly said when he saw the loan. In 2003, Goldman purchased the land and then donated it “for conservation and preservation.”

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