"There was such a total lack of awareness from the firms that paid big bonuses during this extraordinary time."
That is what Henry M. Paulson Jr., the former Treasury secretary, said last week. We were discussing the 2008 financial crisis in light of the approaching five-year anniversary of those white-knuckled days, when Lehman Brothers collapsed and the government stepped in to bail out the American International Group and then the banking system.
Mr. Paulson's comments about the outsize bank bonuses paid after the bailouts might sound de rigueur given all the frustration that has already been expressed by others. But Mr. Paulson had never been so emphatic about the bonuses in public.
Five years on, Mr. Paulson, assessing the success of a bailout program that clearly helped stabilize the economy, said that the bonuses that the banks paid after the bailouts — a record $140 billion in 2009 — were a primary reason for the public outrage over the program he worked so hard to persuade Congress to pass and the country to support.
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"To say I was disappointed is an understatement," he said. "My view has nothing to do with legality and everything to do with what was right, and everything to do with just a colossal lack of self-awareness as to how they were viewed by the American public."
For Mr. Paulson, the bailout, known as the Troubled Asset Relief Program, was his crowning achievement during a historic financial crisis in which the global economy nearly toppled. While TARP was terribly unpopular, most economists now credit it and the extraordinary measures taken by the Federal Reserve with helping to prevent another depression.
Yet questions about the bailouts remain.
One of them is: Why did Mr. Paulson and Congress not seek tighter restrictions on pay, especially given Mr. Paulson's new acknowledgment?
It is a question Mr. Paulson said he hears often and alludes to in a new prologue to his book, "On the Brink," which looks back on the crisis and is being reissued this week to coincide with its anniversary. He told me he is as convinced today as he was then that it would have been impossible to persuade the majority of the banks to participate in the program with significant restrictions on pay. And, to him, the most important aspect of TARP's success in stabilizing the system was that the entire industry participated at the same time.
"We got out in one fell swoop, recapitalized the banking system," he told me. "The other way to do it is wait until they serially fail, which is what the Europeans did. It's what the Japanese did. It's what the British did with R.B.S. and Lloyds."
When I pressed him about whether the United States banks would have truly been in a position to reject the recapitalization plan had tighter restrictions been put in place, he replied, "Just look how fast so many of them tried to pay back the capital once it was stigmatized." He added: "How do you ever implement restrictions like that on pay and do it in a way" that included all the banks, and not just those that "desperately needed the capital or were getting ready to fail? I don't know."
Indeed, the biggest banks sought to pay the money back more quickly than anyone in the Treasury Department had ever expected, some in less than a year. In truth, the quick return of the bailout money, which the White House heralded as a success, may have slowed down the recovery by making it even harder for some banks to make loans.
Which brings us to another lingering question of the bailout, as Mr. Paulson articulated it to me: "Why didn't you track the capital? Why didn't you make them say how they spent their dollars to see whether they loaned it?" It is a question that Mr. Paulson said he gets regularly, but that he said he believes "borders on the ridiculous."
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"I don't know anyone in the banking community that believes that you could realistically measure that or force them to do that," he said. "If you have a banker say, 'Here's my capital: I levered it 8 to 1 and here's where this dollar went,' and the banks fill out a report every quarter on their lending, you'll know whether it's going up or down. But of course their lending goes down in a recession! When you say you want them to lend, lend more than what? More than they would have lent if they collapsed? More than they would have lent at the height of the bubble? Of course not, you don't want that, there's not the demand."
Mr. Paulson speaks a sensible yet uncomfortable truth about the bailouts. And for all the Monday-morning quarterbacking, the bailouts worked. The United States banking system is much more highly capitalized than those in most European countries.
And for all the talk of reform on Wall Street, Mr. Paulson said he was still most concerned about rule-making in Washington.
"I believe that the root cause of every financial crisis, the root cause, is flawed government policies," he said. He added that while he is hopeful that the tools in the Dodd-Frank financial overhaul law will help avoid the next crisis, "We're not going to know how these rules work until we have a crisis, until we have someone sitting in the seats to say how are they going to use these authorities. Given how unpopular our actions were, I think it makes it even more difficult for those that come after us."
He said he remained particularly anxious about the number of regulators overseeing the industry, especially in the midst of a crisis. "I'm most concerned about the multiple regulators falling all over each other and the confusion that regulatory competition creates." He said he did not advocate cutting back regulators for the sake of it, but instead favors streamlining the number of agencies with overlapping interests.
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In the new prologue to his book, he addresses the crisis's catchphrase, "too big to fail." " 'Too big to fail' is a misnomer in any case," he said. "Complexity and interconnectedness matter as much as size in assessing risk in banking." But he acknowledges a thorny reality: "No bank should be too big or too complex to fail, but almost any bank is too big to liquidate quickly, particularly in the midst of a crisis."
Asked why he held his tongue until now about his misgivings on the way Wall Street paid bonuses after the crisis, Mr. Paulson, who was formerly the chief executive of Goldman Sachs, said he didn't want to be "piling on."
Banking is "not only a very honorable profession," he said, "it's a very necessary profession."
He said the hardest part of the bailouts for him was in the disconnect between the bailouts' ugly image with the public and his faith that the bailouts would help keep the economy from collapsing.
"I understood that people were angry," Mr. Paulson said. "They wanted to hear that those that made the mistakes were going to be held responsible. Then on the other side was stability. It's hard to punish and save the banks at the same time." He paused for a moment. "I was much more concerned with stability."
—Andrew Ross Sorkin is a CNBC anchor and the editor-at-large of DealBook at The New York Times. Follow him on Twitter @andrewrsorkin.