Interview with Treasury Secretary Paulson

PETER COOK: Deirdre, thanks very much. Over the last two-and-a-half years, I've had several conversations with the Treasury secretary of the United States and Henry Paulson is back with me now for one more extending conversation before he leaves office in just 11 days. Mr. Secretary, thank you for the time; we appreciate it.

SECRETARY HENRY PAULSON: Peter, it's very good to be with you.

MR. COOK: I want to look back over the last two-and-a-half years, if I could with you, but let's start with the current state of the U.S. economy. We got this jobs report today showing 2008 goes down as the worst year for job losses since 1945. My question to you is, is this recession getting worse or perhaps turning for the better?

SEC. PAULSON: Peter, there's no doubt we're going through a real tough period right now and when we went to Congress in September to get the rescue package, we had seen that the frozen credit markets were having a big impact on the economy. We saw that, we said that to the American people. Fortunately, we were able to stem the tide in terms of the failing financial institutions, so there's stability there and I think that's a major step.

I think it would be a lot worse if we hadn't done that and I think we need to, you know, be able to get from stability of the financial system, which is still the first priority, to recovery and repair and I think there's a lot of work that still needs to be done with the economy. We've got a president-elect and his team focusing on a robust stimulus package. I think that will be important and the financial system is going to continue to be very important because until that is working the way it needs to work and until we - it's going to be difficult to have a recovery. But I am confident -

MR. COOK: You said it's stabilized now, but not where it should be, right?

SEC. PAULSON: Yeah, it's stabilized - stability has still got to be the first priority but we need recovery and then repair. And I think we're making progress.

MR. COOK: Are we looking at the prospect for a prolonged recession year? That's what Barack Obama seemed to suggest yesterday.

SEC. PAULSON: Everything I see here and around the world convinces me that we still have a significant challenge.

MR. COOK: All right. Let me ask you about the stimulus plan that Barack Obama has at least put on the table. We don't know all the details about it right now. You say a robust plan is in order: $800 billion, a trillion dollars? What should this thing cost?

SEC. PAULSON: Listen, I'm not going to get into that. That's - we're going to have a new president. We've got a new economic team. That's their job that, you know, they're just going to get my full support and we're all pulling for them. We are a wealthy country. I think if history teaches any lesson, it is that you need to do everything you can to put out the fire here and that will be less costly to the United States in the long run. So again, I'm very supportive with the general concept. I think we're going to need to do something in the short term and longer term, we can have significant fiscal issues to deal with so it needs to have a short-term focus.

And again, I think a big part of any recovery is to get the credit markets and the capital markets and the financial system working the way they need to work because until that happens, it's - recovery's going to be difficult and we also need to continue to make sure there's plenty of financing available for housing because again, this price decline has been at the root of the problem and the financial markets and with the economy. It's now much broader than that but again, there's more work to be done there.

MR. COOK: All right, that leads me to my next question, that is, the future of the TARP program. Even today, Congressman Barney Frank, the chairman of the House Financial Services Committee expected to spell out a more detailed what should happen with that remaining $350 billion. He says a good chunk of that should be devoted to housing to helping Americans facing foreclosure. You resisted that up until now in terms of the additional - the original TARP money. Tell me, is that a mistake on Barney Frank's part to do that?

SEC. PAULSON: Well, now, I'm not just going to say it's a mistake on Barney Frank's part. Our initial focus with the TARP was to stabilize the financial system and I think that capital program for the banks has been absolutely essential. When that was completed, I was reluctant to move ahead with a foreclosure plan immediately for a couple reasons, that we had talked to the American people about making an investment, not spending, okay. And so buying liquid assets or investing - in which we did investing with the capital.

Number one and number two, that I want to make sure we got the maximum bang for the buck. And there was a lot of work still being done and the numbers that were coming in were not encouraging in terms of some of the earlier modification plans and the re-defaults. So there was more work to be done there. But again, I think this is something that Congress and the American people want and this is - I'm going to look with interest at what the next team does here because I think it's important.

MR. COOK: Have they asked you for your ideas, how should we spend this remaining 350 billion (dollars)?

SEC. PAULSON: Listen, we've had a very, very good dialogue during this transition and we've talked in detail about the various foreclosure plans. We've done a lot of work at Treasury and done - you know, Ben Bernanke has talked about a number of alternatives. We worked closely with the Fed on those and with the FDIC. There's been a great deal of work on in this and again, I would say apart from the TARP, we have been working very hard on foreclosures. And I gave some remarks the other day about Fannie Mae and Freddie Mac and what we've been doing for those vehicles.

So, again, this is of great importance to the American people. It's something I've been working on, going back for a long time since August of 2007. And, again, that will be part of - I'm sure, something that the next administration will have with their - with the TARP plan. What I have said publicly and been very clear on - I believe that the big focus, a critical focus of the TARP is going to need to be to continue to add the capital to the financial system. And I've also been very clear that we have spent a lot of time at Treasury developing future investment programs for financial institutions.

We spent time working with the Fed and the FDIC and other regulators, developing programs that will take that TARP resources and leverage them many times over to do things like provide financing for consumers outside of the banking system, so called TALF, too. We've thought a lot about expanding the program significantly to provide term funding for liquid assets. We've thought in terms of programs to help municipal finance and so there's a lot of work that's been done but the only thing that matters now is what the next administration is going to decide.

MR. COOK: Do you think more than $700 billion is going to be needed for that? Is there, perhaps, the need for Treasury to have access to something on a permanent basis to help with financial crises in the future?

SEC. PAULSON: Well, I would just say this: I think one thing that Congress should look at is what are all the authorities that this administration should have because there are things beyond the TARP, which in my judgment, are necessary. And there's a range of things. We've talked about authorities to allow the government, when there's a systemic risk to intervene and have an orderly wind-down of non-banking financial institutions, where the only alternative now is the normal bankruptcy procedures.

But there's a variety of things that TARP has been essential and I believe that the decisions we've made with the 20/20 hindsight will prove to be the right ones, with the TARP. But the TARP - there's a lot more that still needs to be done and again, I think there's - hard luck should be given to what needs to be done beyond the TARP.

MR. COOK: Sir, as you know, the TARP program may be the legacy item for your tenure at Treasury and it has faced criticisms. You've faced criticisms for it. I won't run through all of them. You've heard them. Let me run through a new one, even in a Bloomberg story today: economists today questioning whether you drove a tough enough deal with some of the banks - and I want to give you a chance to respond to this.

Joseph Stiglitz - he's a Nobel Prize winner. He's one of those raising questions about it and there's a specific comparison here to the deal that Warren Buffett got for his investment in Goldman Sachs, which was your investment - Treasury's investment was twice what Warren Buffett invested into Goldman. He received - or you all received weren't worth over a quarter as much as what Warren Buffett. Should you have gotten the same deal Warren Buffett got?

SEC. PAULSON: Well, what we were looking to do was not to replicate one off private sector deals. The market was under great stress and the private sector was extracting very, very severe terms and what we were attempting to do, which I think we did successfully was design a program that would be accepted by a large group of healthy banks with terms that replicate what you would get in normal market conditions. And the other point I will make here - this is an investment and I find it highly, highly likely that the taxpayer will get this money and get this money back with a profit because these are preferred, these are - as long as the financial system remains intact and stable, which it will, that these will come back to the taxpayer.

And our objective was not to say how tough a deal can we give to the banks because then what we would have is we would have a - not a program for healthy banks. We would have a failing bank program and it would have a much different complexion. And again, I think history will show that the financial system needed a lot of capital and if you leave it to the banks to say I really need capital, what you're going to get is you're only to get them when they're desperate. And otherwise, what they're going to do is shrink and not play the role we need them to play and pull in their horns. And we needed to get a program that would be accepted by a lot of banks and would provide very much needed capital. So that was the philosophy of the program.

MR. COOK: All right. Let me ask you about another criticism and I know you've been asked a lot about the Lehman Brothers situation. There's been a lot of second-guessing about whether or not the government should have stepped in there. Now, I've heard your responses to it and you've defended it and you said there weren't really any options for the government. So my question for you is a little bit different. Is, in hindsight now, did you all fully comprehend what the ripple effects would be from Lehman's collapse at the time?

SEC. PAULSON: I would say we clearly saw that there would be a ripple effect. And did I see the effect being as severe as it was? No, but I am still not sure whether this was the ripple effect from Lehman or whether Lehman was an effect as opposed to a cause or a symptom because again, think back and at the same time Lehman was going, we had AIG, at the same time, Merrill was on the brink. We had - we were dealing with WaMu and Wachovia and all over Europe, we had a wave of failures and what we had seen happening, in my judgment, was this thing was always bigger than anyone had anticipated.

I thought that Ben and I were pretty close to it and we were quite concerned and we were more negative than most but it was always bigger than I had hoped or anticipated at any point in time. This is a historic situation; we didn't have a play book. And again, when I look back on it, I'm looking and saying wherever we could, we intervened and we did some things that were pretty extraordinary and we move pretty quickly.

MR. COOK: There are reports out there, suggestions that perhaps you and Tim Geithner - your successor at Treasury, if he's confirmed, perhaps did not see eye-to-eye on Lehman, true or false?

SEC. PAULSON: Absolutely false. So absolutely false. I worked hand-in-glove with Tim on that. We - you know, I called would-be buyers, was on the phone with them, often with Tim, worked with regulators, did everything we could to bring a buyer to the table. And when buyers said we may not be able to fund all of the assets, we said give us your best proposal because we were hoping we would be able to get some private-sector solution or cobble something together.

But at the end of the day, Peter, there wasn't a buyer for Lehman Brothers, just plain wasn't a buyer and when we were talking with buyers seriously, buyers were saying we can't fund all of this. We have to leave this pool of assets behind and we think there were substantially less than they're on the books for. That's what we - and so I believe Treasury clearly didn't have the authorities.

We had to go to Congress for the TARP. So no one's arguing we had authorities. And at least I have not seen an opinion from anyone - legal opinion that would indicate that the Fed could have made a loan on assets and it would be a non-recourse loan to let a buyer complete a transaction and pay a price to the shareholders where the Fed would have been secure.

MR. COOK: The question - the second-guessing about Lehman, the criticism, perhaps that bothers you the most? Or tell me what is the criticism that bothers you the most?

SEC. PAULSON: I've got to say that doesn't, you know, the Lehman was a tragedy so it doesn't - it really doesn't. As a matter of fact, I read all the, you know, all the op-eds from all the economists and my phone is ringing off the hook, coming into that weekend saying you better not - so no one better do anything to have there be a government bailout. I knew the sentiment could change. That doesn't bother me. Now, when I look at this, I'm not surprised by any of their criticism for things we did and things we didn't do because as I said, this was historic. I did a heck of a lot of things that I found objectionable and I'd be critical of myself except that they were - they were better than the alternative.

MR. COOK: How will history treat you, do you think, as Treasury secretary?

SEC. PAULSON: History will have to - history will have to figure that out. All I know is I did my very best. I confronted some pretty formidable challenges. We confronted - without all of the tools and authorities we would have liked and as I look at the major things we did, I think they were the right things. I think going to Congress when we did for the TARP authorities was critical and when I look at what we've done with the TARP authorities after receiving them with the benefit of 20/20 hindsight, I'm absolutely convinced they are the right things. And I think it will become increasingly apparent that they were.

MR. COOK: Over the last two-and-a-half years, particularly last couple of months, the toughest moment for you, that you've had.

SEC. PAULSON: Well, because there have been so many tough moments.

MR. COOK: There are some people who wonder it's had an impact on your health. There were some suggestions that you fainted from going to these marathon meetings.

SEC. PAULSON: No, I would say that, you know, fortunately, I've had very strong health and a lot of energy, although there - you know, I've got to admit, there were times when you - extended periods without sleep. At late meetings, there were times that I might not have looked great but I've never missed one day in two-and-a-half years because of health or because of sickness or whatever. So I'm very, very grateful for that.

I, you know, I wouldn't say one thing in particular. I would say the most difficult thing for me, generally, was to be in an environment where you knew you needed authorities - and I could think of this in a couple of instances and when knowing that in our system, you can't get them unless there is a crisis and then when there is a crisis and when you absolutely have got to get them and when our system makes a Treasury secretary talk in a way in which it - it actually scares people. The thought of what would happen if we couldn't get the authorities, I think, was the most difficult time. And I went through this a number of times. I mean, when we went up to get the authority we knew we needed for Fannie and Freddie. That was a big ask and before we did, I had a -

MR. COOK: The bazooka - the bazooka line seemed to have an impact.

SEC. PAULSON: I heard a number of people say to me, you know, you're not going to be able to get this done. This is pretty extraordinary. And I would just simply say that there have been - there's been strong leadership in Congress to help us get things done that needed to get done and I'm very grateful for that.

MR. COOK: Let me just ask you finally. What are you going to do next?

SEC. PAULSON: Peter, I answer this question and honestly, I think people are skeptical and that is I really haven't decided yet. I have not accepted a lot of engagements. As a matter of fact, I'm going to go down and do one thing - one small thing for a friend a couple days after I leave but other than that, I have accepted no speaking engagements. I'm - I have spent my whole life going from one thing to another so where some of my colleagues are saying they'd be distressed if they go through a period not knowing what they want to do. And I may be but I'm looking forward to it.

There's a lot of things I'm interested in. I've got great interest in conservation and the environment. I've always enjoyed the time I spent with academia, going to business school classes and speaking. I've always enjoyed writing. I - and then I'm looking forward to skiing with my kids. I've got like three saltwater fly-fishing trips planned so I'm just looking forward to spending time with family.

MR. COOK: Well, sounds good. We hope you spend a little time with us in the future as well when you return to the private sector. Henry Paulson, thank you very much. We appreciate you joining us.

SEC. PAULSON: Peter, thank you.

MR. COOK: All right, Deirdre. We will have more on our conversation with Secretary Paulson and his tenure at Treasury coming up tonight on "Money and Politics" but we'll send it back to you in New York, now. Mr. Secretary, thanks, really appreciate it. I'm going to extend that invitation to you formally that you come back and talk with us sometime.