Hank Paulson Reflects On Economic Crisis, Five Years Later
ROBERT SIEGEL, HOST:
Five years ago, it looked like the world really was ending when Lehman Brothers collapsed. The demise of the venerable investment bank sent shockwaves through the banking system. There were fears of a global financial meltdown.
The man charged with averting that was Henry Paulson, President Bush's secretary of the Treasury. He was a Wall Street veteran himself, former boss of Goldman Sachs. And while a meltdown was averted, a disastrous recession was not.
Henry Paulson acknowledges the fifth anniversary of Lehman going bust with a new prologue to his book "On the Brink." He says he thinks we've licked the problem of banks so big that even when they're terribly imprudent, the government can't let them go under.
HENRY PAULSON JR.: I believe very clearly too-big-to-fail is unacceptable, number one. Number two, thanks to Dodd-Frank, regulators now have the tools to wind down any large financial institution and do it in an orderly manner. But the test will only come when we have the next financial crisis and see how regulators use that tool.
SIEGEL: You've written that this time five years ago, when Lehman Brothers collapsed, was the worst week of your life. I wonder, when anniversaries like this one require you to relive it, do you sometimes think, we shouldn't have let Lehman's go down? If we had acted more aggressively, the way we did later with AIG or Fannie Mae and Freddie Mac, we might have averted some of what befelled the country then.
JR.: Rob, thanks for that question. I get it a lot, and I will tell you despite the fact that Ben Bernanke and Tim Geithner and I have repeatedly said we did everything we could to prevent the failure of Lehman and there was no legal means of doing so, we continually get that question.
Frankly, today, thanks to Dodd-Frank, regulators have the authorities to wind down any large failing financial institution. And I wish we had those authorities, but we didn't. And the other thing I remind people all the time is Lehman was not the cause of the crisis. Lehman was a symptom.
SIEGEL: But just to be clear, Secretary Paulson. When you say that there was no legal authority to avert the Lehman's collapse, had there been a TARP in place, wouldn't that have done it? Wasn't that an improvisation by the federal government to do this?
JR.: If we had a TARP in place to be able to inject capital, we could have done it. No doubt about it. Frankly, the earliest we could have got a TARP in place was when we got it. I had started working, for instance, to try to fix Fannie and Freddie, working with Barney Frank and members of Congress in the fall of 2006.
It took them getting ready to go down for us to get the kinds of authorities we got from Congress. The TARP, even after Lehman had got - going down, the first vote was lost in the House of Representatives. Now, with a five-year perspective, I view it as a huge success that we are able to work throughout the administration and with Democrats and Republicans in Congress to get them to make two very difficult and politically unpopular votes to avoid catastrophe.
SIEGEL: But you have expressed regrets about bankers rescued with taxpayer dollars paying out huge bonuses. Did you and those bankers overestimate the public's fondness for bankers?
JR.: I think we all underestimated the public uproar. One of the real regrets that I have, Robert, is that I was never ever able to help the public understand that what we did wasn't for the bankers. What we did was to protect the lives and the livelihood of the American people.
SIEGEL: But the bankers did pretty well at the same time, given their situation.
JR.: One of the things I've said repeatedly is if you look at the TARP programs, those programs worked and the money came back. You know, so far, more than $32 billion in excess of what went out has come back to the taxpayers. But those programs were enormously unpopular.
SIEGEL: As you know, one of the arguments that's critical of current policy is that the issue isn't quantitative when we talk about what's too big, but qualitative. Lehman's wasn't that big, but it was that well-positioned and not much connected to everyone. One solution, some critics say, is bring back some version of the old division between banks and investment houses. There would be fewer mega millionaires on Wall Street, but otherwise the country would be on a sounder, safer, if more boring footing. Why not?
JR.: Robert, this is something that I supported very actively through the late '70s and the early '80s, the idea of creating firewalls between some of the underwriting and market-making activities and the pure banking activities. I just think given the way the world has gone, that may be politically impractical and difficult.
SIEGEL: That strikes many people as circular reasoning. What you're saying is because we took away something like the Glass-Steagall division between investment and commercial banking - and that's the way the world does banking - we can't go back to the way the world used to do banking. Why not? It hasn't been a great few years.
JR.: Robert, I wasn't giving a circular reasoning. What I said was I supported that for a great part of my career. Now, what I'm saying to you is we have powers and authorities to deal with failing banks. And they shouldn't be propped up. They should be liquidated if they fail. And if people want to take it the next step and firewall the risk-taking, market-making, underwriting activities off and separate that from deposit-taking activities, I think that would be a good thing. But I hasten to add the fact that those weren't separated was not a cause of the crisis.
SIEGEL: You actually had to urge some of the foreign countries that hold U.S. debt not to bail on us. As we all look ahead to another debt ceiling crisis, how do you regard the threat of a possible default? How dangerous could that be?
JR.: Well, as a former Treasury secretary, I take the view that it is unthinkable that Congress wouldn't live up to our commitment to make good on past spending commitments and obligations.
SIEGEL: But as you know, it is being imagined and it is being thought about right now.
JR.: What I say is that's our political process, there's going to be brinksmanship, but at the end of the day, we will not default. And what I say to members of Congress and to people in the executive branch, what is important here is to get together and make some of these important decisions so that we can take some positive constructive steps to deal with our debt problem, and at the same time we focus on growth because those are twin problems. We need to increase our competitiveness. And when that happens it's going to be easier for us to rein in our debt.
SIEGEL: Former Treasury Secretary Henry Paulson, thank you very much.
JR.: Thank you, Robert.
SIEGEL: Henry Paulson speaking as we near the fifth anniversary of the collapse of Lehman Brothers. He has added a new prologue to his memoir of those days, "On the Brink."
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