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CNBC Transcript: CNBC's Larry Kudlow's Exclusive Interview With Secretary Of The Treasury Henry Paulson On "Kudlow & Company" (Transcript Included)

In a CNBC EXCLUSIVE INTERVIEW, Secretary of the Treasury Henry Paulson discusses U.S. competitiveness, U.S. housing correction, U.S. capital markets, subprime mortgages, taxes and regulation.

Please see transcript below. All references must be sourced to CNBC.

Hank Paulson
Hank Paulson

DATE: March 13, 2007
NETWORK: CNBC
PROGRAM: "Kudlow & Company"
TIME: 5:45 pm ET


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LARRY KUDLOW: OKAY. ADDING TO OUR DISCUSSION THIS EVENING OF REGULATORY, LEGAL, AND TAX THREATS TO AMERICA'S PROSPERITY, WE ARE PLEASE TODAY WELCOME TREASURY SECRETARY HENRY PAULSON WHO CON SEENED THE CAPITAL MARKETS COMPETITIVE CONFERENCE AT GEORGETOWN UNIVERSITY TODAY. SIR, BEFORE WE GET TO THE COMPETITIVE ISSUE, CAN YOU GIVE US A BRIEF THOUGHT ON TODAY'S STOCK MARKET CORRECTION ON THE SUBPRIME ISSUE AND THE GENERAL HEALTH OF THE AMERICAN ECONOMY?

HENRY PAULSON: LARRY, FIRST OF ALL, IT'S GOOD TO BE HERE. SECONDLY, I BELIEVE -- WELL, FIRST OF ALL, I FOCUS ON THE ECONOMY AND FUNDAMENTALS. I THINK THAT'S WHAT DRIVE IT IS MARKET OVER ANY REASONABLE PERIOD OF TIME. AND I CONTINUE TO BELIEVE THEU.S. ECONOMY IS HEALTHY. NOW, LET ME COMMENT ON THE SUBPRIME MORTGAGE MARKET. WE HAVE HAD A SIGNIFICANT HOUSING CORRECTION IN THE U.S. HOUSING WAS GROWING AT A LEVEL THAT WAS UNSUSTAINABLE. THE CORRECTION HAS BEEN SIGNIFICANT, YOU CAN'T HAVE A CORRECTION LIKE THAT WITHOUT CAUSING SOME DISLOCATIONS. IT'S TOO EARLY TO TELL WHETHER IT'S BOTTOMED. I BELIEVE IT HAS. WE'LL KNOW MORE IN THE NEXT MONTH OR TWO. YOU KNOW, THAT HOUSING STARTS, THERE HAVE BEEN SOME OF THAT DATA HAS SHOWN SOME CONTINUED SLOWDOWN, BUT IN TERMS OF THE DEMAND IT'S HELD IN THERE PRETTY WELL. WHEN WE GET FARTHER INTO THE SPRING WE'LL GET A BETTER SENSE OF THAT. SO IF, AS I THINK IS THE CANDIDATE, AND AGAIN, I DON'T HAVE A CRYSTAL BALL, THE HOUSING CORRECTION HAS BOTTOMED, AGAIN, IT SHOULDN'T BE A SURPRISE TO ANYONE THAT THERE'S SOME FALLOUT IN THE SUBPRIME MORTGAGE MARKET. AGAIN, AS I'VE SAID BEFORE, I BELIEVE THAT IS, THERE ARE GOING TO BE DISLOCATIONS. IT'S PAINFUL TO SOME MORTGAGE HOLDERS, IT'S GOING TO BE PAINFUL TO SOME LENDERS, BUT IT'S LARGELY CONTAINED.

LARRY: CONTAINED? NOT A CREDIT CRUNCH ECONOMY WIDE?

PAULSON: NO, I SEE THE CONSUME NEAR THIS COUNTRY CONTINUES TO BE VERY HEALTHY. THIS IS A DIVERSE ECONOMY. WE'VE GOT EXPORTS GROWING FASTER THAN IMPORTS RIGHT NOW, THAT'S ADDING TO GROWTH. WE'VE GOT A VERY, VERY HEALTHY CONSUMER INFLATION WOULD APPEAR TO BE CONTAINED, SO, AGAIN, I CONTINUE TO BELIEVE THAT WE'VE, WE ARE MAKING A SUCCESSFUL TRANSITION TO AN ECONOMY THAT WAS GROWING AT AN UNSUSTAINABLE RATE, THE ONE THAT'S GROWING AT A MORE SUSTAINABLE RATE.

LARRY: LET'S GO BACK TO THE COMPETITIVENESS, CAPITAL MARKETS, IN YOUR JUDGMENT HOW SIGNIFICANT ARE THE REGULATORY AND LEGAL LAWSUIT THREATS TO AMERICAN MARKETS TO THE AMERICAN ECONOMY? ARE WE LOSING, ARE WE IN DANGER OF LOSING THE GLOBAL RACE FOR CAPITAL?

PAULSON: WELL, LARRY, LET ME AGAIN SAY THAT I BELIEVE TODAY WE HAVE THE BEST CAPITAL MARKETS IN THE WORLD. THEY ARE THE MOST LIQUID, THEY'RE THE MOST COMPETITIVE CAPITAL MARKETS IN THE WORLD, AND THEY'RE VERY IMPORTANT TO OUR ECONOMY BECAUSE IT'S, THIS IS NOT JUST ABOUT WALL STREET, THIS IS ALL ABOUT CREATING JOBS, GROWTH AROUND OUR COUNTRY, DRIVING PRODUCTIVITY, PUTTING CAPITAL BEHIND IDEAS, BEHIND PEOPLE, BEHIND NEW BUSINESSES, SMALL BUSINESSES, SO IT'S VERY, VERY IMPORTANT. NOW, IN TERMS OF THE ISSUES THAT WE WERE DEALING WITH TODAY, WE WERE DEALING WITH THREE ISSUES, AND I WAS VERY, VERY ENCOURAGED BECAUSE WE BROUGHT A DIVERSE GROUP OF PEOPLE TOGETHER. VERY, VERY KNOWLEDGEABLE PEOPLE. AND EVERYONE WAS THERE SAID IT'S VERY IMPORTANT THAT WE KEEP OUR CAPITAL MARKETS COMPETITIVE. AND ALL OF THEM, THERE MAY BE ONE OR TWO PEOPLE, BUT I CAN'T THINK OF ANY, THAT DIDN'T AGREE WITH THE THESIS THAT THE AREAS TO CONCENTRATE ON WERE REGULATION AND REGULATORY STRUCTURE AND HERE IT WAS NOT ABOUT LET'S ROLL BACK SARBANES-OXLEY. I THINK MOST OF US BELIEVE SARBANES-OXLEY, THE PRINCIPLES BEHIND IT ARE VERY GOOD, IT'S ABOUT BALANCE. IT'S ABOUT HOW DO YOU HAVE THE RIGHT BALANCE IN TERMS OF IMPLEMENTATION BETWEEN INVESTOR PROTECTION, INTEGRITY OF OUR MARKETS, AND COMPETITIVENESS? IT'S THE COST/BENEFIT TRADE-OFF.



LARRY: WOULD YOU DROP SMALL BUSINESSES FROM THE STAR BOX 404 WHICH SEEMS TO BE THE PRIMARY FOUNTAIN OF COMPLAINTS?

PAULSON: WELL, I WOULD SAY THIS, LARRY, IT'S AGAIN ABOUT IMPLEMENTATION. I THINK THE WAY CHRIS COX AND OTHERS ARE THINKING ABOUT IMPLEMENTING IT, FIRST OF ALL, IS GIVING THE REGULATIONS MORE TIME, GIVING SMALL BUSINESSES MORE TIME TO PREPARE, AND THEN Am RISK-BASED APPROACH WHICH IS GOING TO BE VERY IMPORTANT. YOU KNOW, 404 SARBANES-OXLEY IS AN AUDIT STANDARD FOR CONTROL SYSTEMS. IT'S GOOD TO HAVE AN AUDIT STANDARD FOR CONTROL SYSTEMS FOR SMALL BUSINESS, BUT IT SHOULD BE RISK BASED. WE SHOULD BE FOCUSING ON THE MOST IMPORTANT RISKS, AND WE SHOULD RECOGNIZE THERE'S A COST TO EVERY BENEFIT. AND SO WE NEED TO GET THAT RIGHT AND THE IMPLEMENTATION RIGHT.

LARRY: IT'S INTERESTING, THERE'S A DEBATE, WE'VE HAD A DEBATE ON THIS PROGRAM EARLIER, NOT EVERYONE AGREES, A, THAT SARBANES-OXLEY IS THE VILLAIN IT'S BEING MADE OUT TO BE, AND SECONDLY, NOT EVERYONE AGREES THAT WE CAN POINT TO SPECIFIC EVIDENCE THAT IT'S BEEN A PROBLEM. WHEN YOU LOOK TO THIS ISSUE, HOW DO YOU MEASURE IT? WE'VE SAID IT'S THE CANARY IN THE COAL MINE, BUT HOW DO WE KNOW THAT?

PAULSON: I THINK THESE ISSUES ARE SO COMPLICATED IT'S HARD TO KNOW ANYTHING FOR CERTAIN. BUT AS WE'VE LOOKED AT IT, AGAIN, I TAKE COMFORT IN THE FACT THAT ALL OF THE PEOPLE ON THE LEADERSHIP PANELS WE HAD IN THE MORNING AND VIRTUALLY ALL OF THE PEOPLE ON THE PAMS WE HAD IN THE AFTERNOON SAID THERE'S THREE ISSUES WE'VE GOT TO DEAL WITH, AND I THINK WE'VE GOT TO DEAL ITH ALL OF THEM. WE HAVE TO DEAL WITH REGULATION AND REGULATORY STRUCTURE, AND GET THE COST BENEFIT RIGHT, AND THERE'LL BE SOME THINGS WE CAN DO ADMINISTRATIVELY IN THE SHORT TERM AND OTHER THINGS THAT ARE GOING TO TAKE LONGER TO DO, THAT'S NUMBER ONE. NUMBER TWO, ACCOUNTING. THESE SCANDALS WERE, TO A LARGE EXTENT, ACCOUNTING SCANDALS.
AND THE ACCOUNTING INDUSTRY HAS BORNE, HAS BEEN THE FOCUS OF MOST OF THE REGULATION. AND MUCH OF IT HAS BEEN VERY GOOD. BUT AGAIN, THE FUNDAMENTAL RELATIONSHIP BETWEEN AUDITORS AND THE BOARDS AND MANAGEMENTS THEY DEAL WITH HAS BEEN CHANGED FUNDAMENTALLY, NOT ALL OF IT POSITIVE. HRA R DO WE HAVE TO HELP THE ACCOUNTING INDUSTRY? FIRST OF ALL, IT'S SLUNK QUITE A BIT, SOME PEOPLE SAY WE SHOULD HAVE PUT THEM OUT OF BUSINESS EARLIER, AND SOME PEOPLE ARE SAYING THEY SHOULD BE ALLOW TODAY RAISE SOME CAPITAL PUBLICLY AT LEAST TO INSURE THEMSELVES AGAINST LAWSUITS. WELL, THE FOCUS TODAY, AGAIN, WAS WHAT KIND OF OUTCOME DO WE WANT? AND WHAT WE WANT IS HIGHER QUALITY AUD ADMITS. WE WANT TO LOOK AT THE INDUSTRY AND SAY DO THEY HAVE A SUSTAINABLE BUSINESS MODEL? I ACTUALLY THOUGHT THE DISCUSSION THERE WAS AS INTERESTING AS ANY DISCUSSION WE HAD. AND AGAIN, THERE ARE GOING TO BE A NUMBER OF INCREMENT AM THINGS THAT CAN BE DONE TO MAKE THE SYSTEM BETTER, BUT SOMETHING HAS TO BE WRONG WHEN WE HAVE 1500 RESTATEMENTS THIS LAST YEAR.

LARRY: I ASK YOU A COUPLE OF LIGHTNING ONES JUST TO GET THROUGH THIS PART. HEDGE FUND REGULATION, DO YOU HAVE A THOUGHT ON THAT? BARNEY FRANK HAD HEARINGS TODAY, HEDGE FUND REGULATION.

PAULSON: AGAIN, WITH REGARD TO HEDGE FUNDS, THE PRESIDENT'S WORKING GROUP CAME TOGETHER, AND I ACTUALLY THOUGHT IT WAS QUITE IMPORTANT TO HAVE ALL OF THE REGULATORS AND POLICY MAKERS IN THE U.S. COME TOGETHER AND COME UP WITH A SET OF GUIDELINES, SOME PRINCIPLES FOR DEALING WITH THIS TOPIC. AND THE CONCLUSION WAS PRIVATE POOLS CAPITAL, HEDGE FUNDS PRIVATE EQUITY VALUABLE TO THE ECONOMY, THEY'RE A NET POSITIVE, MAKE FOR MORE COMPETITIVE CAPITAL MARKETS, HELP US DISPERSE RISKS, BUT THERE ARE CHALLENGES. SO THIS WAS NOT BUSINESS AS USUAL, THIS WAS HOW DO WE COME TOGETHER AND DEAL WITH THE CHALLENGES? HOW DO WE DEAL WITH THE SYSTEMIC RISK THAT REALLY GETS TO THE RELATIONSHIP THAT THE HEDGE FUNDS HAVE WITH THE REGULATED FINANCIAL INSTITUTIONS? IS THERE ENOUGH TRANSPARENCY THERE?
IS THERE ENOUGH MARGIN? IS THERE ENOUGH LIQUIDITY IN THE SYSTEM DEALING WITH DERIVATIVES? DO WE HAVE THE RIGHT CLEARANCE AND SETTLEMENT PROCEDURES? AND THE SINGLE-NAME DERIVATIVES, IS THERE -- IN THE EVENT OF DEFAULT, IS THERE A CASH SETTLEMENT PROCEDURE? THOSE KINDS OF THINGS.

LARRY: YOU MENTIONED PRIVATE EQUITY. SOME PEOPLE IN CONGRESS WANT TO RAISE THE TAX ON IS SO THE CALLED CARRIED INTEREST OF PRIVATE EQUITY FUNDS.

PAULSON: THAT IS NOT SOMETHING WE CONSIDERED. IT WAS NOT SOMETHING THAT, THAT WAS HIGH UP ON OUR AGENDA.

LARRY: CHARLES RANG GET, A NEW FRIEND OF YOURS FROM WHAT I UNDERSTAND.

PAULSON: AND A GOOD FRIEND.


LARRY: ALL RIGHT, HE'S A GOOD MAN.HE'S ALL ABOUT GETTING THINGS DONE.HE'S TALKING ABOUT REARRANGING TAXES. HE HAS AN IDEA TO PAY FOR A PATCH ON THE ALTERNATIVE MINIMUM TAX HE WANTS TO CHANGE THE TOP TAX BURDENS. HE WANTS TO EXPAND THE INCOME ELIGIBLE FOR TAXATION BY LOWERING THE INCOME BRACKETS ON THE TOP TWO RATES, THE 33 AND 35% RATE. DO YOU HAVE A THOUGHT ON THAT? TO THE UNINITIATED LIKE ME, THAT SOUNDS LIKE THE WAY TO LOWER TAXES IS TO RAISE TAXES SOMEWHERE ELSE.

PAULSON: CERTAINLY, LARRY, THOSE WHO FIND THEY'RE SUDDENLY IN A HIGHER BRACKET, FOR THEM, THEIR TAXES WILL BE RAISED. LET ME COMMENT BECAUSE I HAVEN'T TALKED SPECIFICALLY TO CHARLIE ABOUT THAT. WE AGREE THAT THE AMT WOULD BE A CRUEL AND UNINTENDED TAX IF IT WENT INTO EFFECT, SO CLEARLY WE'RE IN AGREEMENT THERE. WHAT THE ADMINISTRATION HAS DONE IS WHAT HAS BEEN DONE FOR THE LAST SIX YEARS AND WHAT CONGRESS HAS DONE FOR THE LAST SIX YEARS APPROXIMATE POSED A PATCH SO THAT WE WOULD HAVE OVER A YEAR. I THINK WE'D HAVE ABOUT 20 MONTHS TO DEAL WITH THIS ISSUE. AGAIN, I DON'T THINK THE WAY TO DEAL WITH IT IS TO RAISE TAXES. I DON'T THINK IT'S NECESSARY TO RAISE TAXES, AND GIVEN WHERE WE ARE RIGHT NOW IN THIS ECONOMIC EXPANSION, I THINK IT WOULD BE COUNTERPRODUCTIVE.

LARRY: MIDMARCH OF THE LEDGIVE SESSION, THE BUDGETS ARE OUT, THE FINANCE COMMITTEE AND THE WAYS AND MEANS, IS IT NOT TIME FOR THE TREASURY OR THE ADMINISTRATION TO COME OUT WITH AT LEAST ITS FIRST OFFER ON THIS TAX MATTER IF NOT ITS BEST?

PAULSON: WELL, LET ME SAY THIS, THIS IS A TOUGH ISSUE, SO WHAT WE'VE DONE IS WE'VE COME FORWARD AND WE'VE PROPOSED, AS I SAID, THE ONE-YEAR SOLUTION WHICH IS WHAT WE'VE DONE FOR THE LAST, FOR THE LAST SIX YEARS.

LARRY: PATCH, FOR ONE YEAR, WITH NO CHANGES IN RATES AND BRACKETS ON THE OTHER SIDE.

PAULSON: NO CHANGES BECAUSE WE DON'T THINK YOU NEED TO RAISE TAXES TO SOLVE THIS. YOU KNOW, SO AGAIN, I'M LOOKING FORWARD TO WORKING WITH CHARLIE RANGEL AND OTHER MEMBERS ON THE HILL TO COME UP WITH A SOLUTION

LARRY: HE'S A CRAFTY MAN.

PAULSON: LET ME TELL YOU SOMETHING, HE'S AN EFFECTIVE LEGISLATOR, AND HE TAKES A BIPARTISAN APPROACH, AND I APPLAUD HIM FOR THAT.

LARRY: ONE OTHER ONE, ON CHINA, A LOT OF GREAT HEADLINES, BUT I WANT TO READ YOU SOMETHING. FORMER TREASURY SECRETARY LARRY SOMERS, WHO I'M SURE YOU KNOW.THERE'S A GREAT DEAL OF LOGIC AND EVIDENCE TO SUPPORT THAT --CAN DO SUBSTANTIAL DAMAGE TO FINANCIAL STABILITY WITH VERY SERIOUS CONSEQUENCES FOR AMERICAN INTEREST RATES AND THE STOCK MARKET, AND FINALLY, HE SAYS, HE'S IN FAVOR OF NEGOTIATING WITH THE CHINESE, BUT HE SAY THIS IS, WHATEVER THE OUR BANKER, PUT AGO STICK IN YOUR BANKER'S EYE DOESN'T TEND TO BE A VERY EFFECTIVE STRATEGY. I KNOW YOU'RE NEGOTIATING CHINESE EXCHANGE RATES R YOU CONCERNED THAT THERE MAY BE SOME BAD BLOWBACK?

PAULSON: LET ME SAY THIS, FIRST OF ALL, I HAVE A HIGH REGARD FOR LARRY SOMERS. I CLEARLY DO. NOW, IN TERMS OF EXCHANGE RATES TO, ME I WOULD AGREE WITH LARRY IF WE WERE TALKING ABOUT ABOUT MARKET-DETERMINED EXCHANGE RATES. RATES ARE SET IN AN OHM COMPETITIVE MARKETPLACE, BUT CHINESE STILL HAVE A MANAGED PEG, AND THEY NEED TO SHOW MORE FLEXIBILITY. I DO AGREE WITH HIM THAT WE NEED TO PERSUADE AND NEGOTIATE AND BECAUSE IT'S IN THEIR BEST INTERESTS AS MUCH AS OUR BEST INTERESTS, AND WE NEED TO PERSUADE THEM TO MOVE.

LARRY: SECRETARY PAULSON, THANK YOU SO MUCH, WE HAVE TO LEAVE IT THERE. IF YOU WANT TO HEAR BARNEY FRANK'S THOUGHTS, CATCH HIM ON FAST MONEY TONIGHT WITH DYLAN RATIGAN. WE WILL SEE YOU TOMORROW EVENING, THANK YOU, SECRETARY PAULSON.

PAULSON: THANK YOU, LARRY.


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