Struggling to Keep Up as the Crisis Raced On

A "complicated and difficult sell."

In response, Mr. Paulson said that only now that the bailout bill has been passed does the government have the authority to intervene in a nonbank failure in cases of firms that lack adequate collateral, like Lehman.

A Difficult Sell

Lehman’s failure was followed by another strategic misstep by Treasury, critics say. They assert that Mr. Paulson initially pushed the wrong systemic fix: a bailout plan that revolved around buying up toxic securities, rather than putting capital into the banking system, a far more direct way of providing assistance.

Mr. Paulson rejects this view. In the interview, he cited several reasons he and Mr. Bernanke concentrated initially on purchasing distressed assets. First, he said, this plan had been in the works for months and was much further developed. “If we had felt going in that the right way to deal with the problem was to put equity in, we would have taken some time and developed a program,” he said.

He also worried that Congress would not be receptive to the idea of Treasury taking an ownership stake in banks: “This is a very complicated and difficult sell. We want to put equity in, but we don’t want to nationalize the banks. And I don’t know how to sell that.”

But he doesn’t dispute that he changed direction. Mr. Paulson said that by Oct. 2, as he was departing for a weekend getaway to an island with his family — his first weekend off in nearly two months — he told his staff, “We are going to put capital into banks first.”

Although the bailout bill still had not passed, the financial markets had deteriorated. He did not, however, inform Congress of his change of heart, and the House debate revolved almost entirely around the asset-purchase plan.

Just 11 days later, Treasury had come up with a plan to inject capital into the banks — which Mr. Paulson sold to the nation’s nine largest financial institutions on Oct. 13. “I can imagine being dinged for some things,” he said, “but not for moving that quickly.”

He also defended Treasury’s recapitalization plan against critics who say that he did not extract a high enough price from the banks getting taxpayers’ money. “I could not see the United States doing things like putting in capital on a punitive basis that hurts investors. And we don’t want to run banks.”

The Global Extent

Asked what he might have done better, Mr. Paulson replied, “I could have made a better case to the public.”

He added, “I never felt worse than when the House voted no” on the bailout plan Sept. 26, its initial rejection before ultimately passing the plan.

As for Lehman, Mr. Paulson insisted that it was “a symptom and not a cause” of the financial meltdown that took place in recent weeks. The real problem, he contended, is that banks all over the world made wrong-headed loans that have now come back to haunt them. After meeting recently with European central bankers, he said, “the thing that took your breath away was the extent of the problem. Look at country after country that said they didn’t have a problem, and it turned out they had a huge problem.”

Mr. Paulson added, “Ten years from now no one is going to say that this crisis was brought about because Lehman Brothers went down.”

Nelson D. Schwartz and Stephen Labaton contributed reporting.