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Jennifer Dauble



Following is the unofficial transcript of a CNBC interview with Former Treasury Secretary Hank Paulson today on CNBC's "Squawk Box." Excerpts from the interview will run throughout CNBC's Business Day programming today.

All references must be sourced to CNBC.


STEVE LIESMAN, host: Thanks for joining us.

Mr. HENRY PAULSON: It's good to be here, Steve.

LIESMAN: Let me just tell you--I just want to ask you--I had a chance to talk to some of your staff while this book was being written, and they said that they forgot that they weren't working for you. So I wonder if the publication of this book released your staff from the indentured servitude that they were under.

Mr. PAULSON: Actually, there's a lot of jokes about that. But seriously, I needed them. We--I don't take notes, we didn't have official papers, I don't use briefing memos anyway. And there was so much going on that, you know, would be--it helped us recall, put things together. And in many ways the book is a story about how, with a very special group of people, we worked together under extraordinarily difficult circumstances.

LIESMAN: And there weren't any e-mails.

Mr. PAULSON: No. No.

LIESMAN: Must have been the--well, not only to live through the time that you were in the government, but to relive, it must have been a really trying experience to relive.

Mr. PAULSON: It was trying in two respects. First of all, I always thought I was a talented writer. I learned that I--it was a humbling experience and it was--it was a miserable, humbling experience. And I have now much more respect for every journalist and everyone that's--that writes.

LIESMAN: It's about time.

Mr. PAULSON: About time. And to try to--it's easy to take the simple things and make them complicated. It's very difficult to take complicated things and make them simple, number one. And then number two, I found myself waking up again at 2 in the morning as I was working on some of these chapters and reliving--I felt--I felt my stomach knot up again and just what it was like.

LIESMAN: I've always...(unintelligible)...this direct line back to the time period that you wrote about in this book. Yesterday, the confirmation...(unintelligible). What do you think about...(unintelligible)?

Mr. PAULSON: Well, first of all, I'm absolutely delighted that he was confirmed, and I--and I wasn't worried about it. I knew he was going to be confirmed. I think that the--that the president really got to it in the State of the Union. And he simply said something to the effect of, `Republicans didn't like the bailouts, Democrats didn't like the bailout, I didn't like the bailout, but we needed to do it.' And I--so I think all of us that were here in the midst of the crisis had to do some very objectionable, politically unattractive things. But they were far, far better than the alternative, which would have been a meltdown of our economy and an absolute economic disaster.

LIESMAN: (Unintelligible)...senators still blame Ben Bernanke.

Mr. PAULSON: It is--it sort of goes with the territory. It's not about fairness or unfairness. If you're a leader, and a strong leader, during a difficult time like a crisis, it's--there's going--there's always going to be a little bit of flak. And then those who are in the top economic jobs when the economy isn't doing well, regardless of what hands they've been dealt, are always going to draw a certain amount of controversy.

LIESMAN: Want to go back and start with some of the interesting histories that we hear. And I thought one of the amazing things was that you had studied housing, and there was a conclusion in both the Treasury and the Federal Reserve, you two, that housing was not a problem. And you said it, but no one's regretting it. What did you miss?

Mr. PAULSON: Well, I think what we missed was to step back even further. We have a history, the recent history in this country going back to--since World War II, residential housing prices have essentially gone up. Over time they've just--they've gone up. We haven't had dramatic declines in the residential housing prices. And so this--a collapse like we saw wasn't in any--in any of the models, any of the analytical models. No, I didn't hear experts say that this could cause a crisis of this magnitude.

Now, I knew that--and as you'll recall from the book, in one of the early chapters I recount a--one of the first substantive, important meetings I had with President Bush and the economic team. And I asked for that meeting to be on what I thought was the strong possibility that there would be some credit crisis while we were here. And the president said to me, `What would cause it?' And I said to him, `I don't know, because you never know. It's obvious after the fact, but there's a lot of dry tinder. I don't know what's going to light the spark.' No one predicted the Russian default or the Asian crisis.

And to get more specifically to your question, we had made comments, a number of--a number of us had made comments and said that subprime was--issue was going to be contained. And we said that in the context that the subprime mortgage market was not a big part of the--of--not being relative to the overall economy. But of course, this was much greater than subprime. It was the mortgage market overall, it was housing overall. And we saw a kind of behavior that we've never seen before.

LIESMAN: I was amazed also, reporting the story but also reading your book, that you didn't understand, and many couldn't understand, the way all of this stuff was financed. The SID...(unintelligible). Hank Paulson was from Goldman Sachs. How did you not know how--what was going on inside the shadow banking?

Mr. PAULSON: Well, the SID, it's one thing to know that there were some of these conduits for housing. But I came from a firm where we didn't have an SID, and I didn't--the idea that you could have so much financing done off balance sheet with--is pretty remarkable.

LIESMAN: (Unintelligible)...but the Federal Reserve was supposed to be the all-knowing agency...(unintelligible). The Treasury had unlimited resources as far as anybody could tell.

Mr. PAULSON: (Unintelligible)...I think one lesson is that you can never count totally on regulation to solve the problem. Need a balance between regulation and work and discipline. And so that's why it is so essential that no organization ever be too big to fail. That is why I think the most important thing we need to get done with regulatory reform is to have the resolution of authority so that any financial institution, if it is going to fail--and, you know, here I'm talking about regardless of type of institution or size, if it's going to fail it can be liquidated in a way in which it doesn't bring down the system and hurt the economy.

LIESMAN: Want to get to the dramatic Lehman weekend in a second, but one thing's that's always bothered you, the time period...(unintelligible)...Bear Stearns. Why wasn't some form of...(unintelligible)...or some form of a structure created--plan created in case there was another Bear Stearns?

Mr. PAULSON: (Unintelligible)...bothered me too because you get at the fact that although Bear Stearns came on us suddenly, that Lehman was like seeing a plane flying into the side of the mountains and seeing it for some time. I'd say--I'll answer your question one way by just saying, `Well, look today.' Here we--it should be painfully obvious to everyone that's thought how desperately we need this--we don't ever want a Treasury secretary to be sitting where I was sitting with--without the tools you need to present--to prevent disaster. And now, you know, how long has it been since Lehman, and we have a popular president who's asking for it, we've got congressional leaders that--a number of them that know how important it is, and we still don't have it.

And so one of the things, if you'll look at the record, that I was talking about publicly, about the need for resolution authority to wind down failing nonbanks in June. Made speeches here and in the UK. We went out and consulted with Congress. These are complicated, difficult issues, you know, in terms of how they're structured. And it was pretty clear that in our system, unless there's a pending crisis, an immediate crisis, you don't get Congress to act. And if we'd gone up and said, `Guess what. We have a desperate situation. If we don't get resolution authority, Lehman's going to fail and we're going to do nothing about it,' it would have happened immediately. And so that which we most feared would have come upon us. So instead, what we did was we talked quietly about it, we made a few speeches, we consulted, and then we raced--I was racing to stabilize Fannie and Freddie before Lehman announced their earnings, and then there was all the discussions we had on Lehman and all their work to try to find private capital buyers, investors and so on.

LIESMAN: I want to get to the Lehman weekend, but I want to start with a kind of personal thing for me because I...(unintelligible). I get a call from Michele Davis, your spokesman, and she says to me that you're not going to use government money...(unintelligible). But I have never understood...(unintelligible)...strategy? Or was that a negotiate...

Mr. PAULSON: That was a tactic. I think, when we...

LIESMAN: But you were prepared to use government money.

Mr. PAULSON: (Unintelligible)...and we lay out in the book. And it's very interesting because Fannie and Freddie had been--went in conservatorship on the 7th of September. And we find out on--right afterwards the North--you know, the Korea Development Bank wasn't going to make the investment in Lehman, and the Lehman situation started to unravel. We also knew that Lehman had been all over the world looking for buyers, money for people to put in capital. So it was pretty clear that there was no one that was going to step up. You know, and everyone was going to want to try to do a Bear Stearns. And as we talked about it, as we say in the book, I think that was sort of the best reasonable case you're looking at. But we wanted to, if possible, have the private sector ready to do that because it wasn't at all clear that we were going to have a situation where the Fed had the--where it was legally possible for the Fed to make a loan, OK, that'll be secured to the satisfaction of the Fed board.

So what we did was we wanted to make sure that people didn't show up, the industry didn't show up, expecting that the government was going to be there with a checkbook. We thought the best way--yeah, I think we made this pretty clear in the book that the best way to maximize the chance that there was going to be a deal done was to have the banks, the private sector there ready to assist in an acquisition, and to talk with the two potential buyers, you know, as the week, you know, dragged on--or it didn't drag on, it raced on. But talk with first B of A and then Barclays, and say, `We want you here. We'd like you to do it on an unassisted basis, but if it takes assistance, you know, give us your best offer and we'll get the private sector to help finance it.'

LIESMAN: I get that, but so you're saying this--that you would have been willing to...(unintelligible)...government...(unintelligible).

Mr. PAULSON: First of all, I didn't have--Treasury didn't have government funds. We didn't have the TARP, OK? So we--Treasury didn't have it. The Fed, we can--I believe that if there had been a situation where we had a buyer--and remember, we didn't have a buyer, so there was nothing to look at, because Bear Stearns you had a capital problem and a liquidity problem. But JPMorgan was there to solve the capital problem and guarantee the trading book, you know, to--while there was a shareholder vote. So--but if we had had a situation where we had a buyer and could have done that, and so the Fed wouldn't have had to lend into a--to a run on the bank and there was a way that the Fed could have--could have done something similar to Bear Stearns, we would have all talked about it very quickly and made a decision. And--but my judgment is we would have made the decision to do what we'd done with Bear Stearns, because Lehman--the system was so fragile that I may not have known that the results were going to be as disastrous as they were. But I knew it was going to be bad, and it was something I didn't want to see.

LIESMAN: There were some incredible things that were going on inside the...(unintelligible). Talk about how you got these rivals together, they eventually come up with a $30 million fund that they're going to use. At the same time there's a lot of mistrust amongst them. Willumstad didn't trust Flowers and nobody trusted Jamie Dimon. Talk about that.

Mr. PAULSON: What I'll--I would say first of all, you got to separate the two things because Willumstad and Flowers were in the room. OK, that was--that was sort of the interesting thing. We got together and we were--we were--in the industry, they were focusing on Lehman. And meanwhile, the same weekend, we learned that AIG is facing a crisis. So we had two separate meetings. And the--in terms of the Willumstad and Flowers, the--while we were having a meeting with B of A, which was about Lehman, and while it was pretty clear that B of A had no interest in Lehman from what they were--from what they were saying and the way were acting, as I explain in the book, Flowers took me aside, and Chris said to me, `You know, Hank, you should be aware of what's going on at AIG, and it's not a pretty picture. And I think that there's a disaster waiting to happen unless they do something. I think you should--you all should talk to them.' So I--that was on the margin of the meeting, not where the other bankers were there. The other bankers were all downstairs in the room, and Tim and I were having a meeting with B of A, which we were dealing separately with the two potential buyers for Lehman. And so on the margin of that meeting, B of--B of A's financial adviser had said that, and so then--and it was pretty clear that we had--and I just--I just talked...(unintelligible)...Willumstad. I just--because I was his--whether Chris Flowers was representing them or not and whether Chris should be at the meeting. And he said, no, he didn't--he didn't see Chris as playing a constructive role there. And Chris, for his standpoint, said what he saw was totally his view, which he said to us was just totally inept management there. Now...

LIESMAN: And everybody thought Jamie Dimon wanted to take over the world, too.

Mr. PAULSON: Well, the--in terms of the meeting we had were all of the--the banks and investment banks were there. I will--I will say this. Jamie played a very constructive role in that meeting because Jamie was working and helping us drive toward a--toward a rescue of Lehman, and I think would have played a significant role if we had been able to get a buyer for Lehman. But there's always going to be a certain amount of mistrust. I mean, these are competitors. I came from that world. I mean, it's--you know, we competed very hard.

LIESMAN: When it all collapses Sunday night...(unintelligible)...that you were scared. Talk about that.

Mr. PAULSON: Oh, that was one of the low points in--of my life because I had--if you've run a financial institution, you know what it means. You know, so my heart just went out not only to the--to the Lehman management and all the people at Lehman. And then I knew, which was much more important to me--because as Treasury secretary, I certainly didn't want my record to be, while I was sitting in the seat, the economy and the financial system collapse. So I was just saying, `What do we do?' And I didn't have answers. We'd been trying to turn over every stone. I knew how difficult it is to sell an investment bank over a weekend, and particularly where the markets are so fragile. But I said--I just--my stomach knotted up. And usually when I'm playing offense, I--the fear goes away because I know what to do. But from that moment there I had no idea what to do, and I knew everyone was going to be looking to me for answers.

So as I say in the book, I stepped out of the room--and I just didn't want to do this in front of other people--took my cell phone out of my pocketbook and called my wife at home and just simply said, `Wendy, this is--this is really tough. I'm scared. People are looking at me. I don't know what to do. Pray for me.' And then I--you know, I pulled myself together and put back on my armor and...(unintelligible) like I knew what we were going to do, and we were going--we were all going to get together and we're going--we're going to manage this. And we've been preparing for it for a long time and, you know, we've got one team. You know, Tim and--Tim Geithner was president of the New York Fed and just a really able person, a very able crisis manager. And divided the industry up in teams to deal with one aspect or another, and we just went into execution mode on that.

LIESMAN: In the book, it's a little difficult to see what you think about Dick Fuld. (Unintelligible)...doesn't get it during a lot of...(unintelligible).

Mr. PAULSON: Well, it's certainly not...(unintelligible).

LIESMAN: (Unintelligible)

Mr. PAULSON: Well, I would say...

LIESMAN: (Unintelligible)...Lehman back together.

Mr. PAULSON: Yeah, I would say this about Dick Fuld. I knew Dick, when I was...(unintelligible) the private sector, as a really able and strong competitor. I think what comes out in the book is--the story we tell is someone who's very engaged and focused, but it--sometimes if you've got your ego and your whole life tied up in a company, you're not as realistic as you should be. So I think he was--he was engaged and focused. No, he wasn't as realistic as he should be. And then afterwards--and there was a guy struggling with tragedy. Who knows what would have--you know, I just can't imagine--I could imagine something worse. I can imagine being Treasury secretary when the economy melts down and we have another Great Depression. That would be worse. But to be running a financial institution when it fails, I mean, obviously Dick was in great pain after that happened, and there'd be something wrong with him if he wasn't.

LIESMAN: (Unintelligible)...TARP was passed...(unintelligible).

Mr. PAULSON: Well, it wasn't after TARP was passed. After we talked to Congress, I think.

LIESMAN: Right after you talked to Congress, yeah.

Mr. PAULSON: Yeah. Well, he was--yeah, that was--that was a--that was a sad--that was a sad conversation. And I remember calling Tim Geithner and saying--because things were moving so fast, we really didn't have a lot of time to talk about it. But I said, `Boy, I just had a really upsetting call from Dick.' And he said, `Yeah, I know. Did he...(unintelligible)?' And he'd had the same call.

LIESMAN: This is--on the personal, but there's an incredibly poignant moment...(unintelligible)...who as a Christian Scientist...(unintelligible)...but have to get to sleep and you have a set of sleeping pills. Could you tell us that story?

Mr. PAULSON: Well, the--first of all, I think there's no prohibition against taking medicine as a--as a--as a Christian Scientist. I generally have--rely on spiritual means for--but I clearly didn't want to be addicted or get dependent on taking sleeping medication. I'd never done it. And I was--I was having trouble sleeping. And so I'd had a friend give me something, and I thought, `Well, won't this be good to have a--to get a great night's sleep?' And then I just--I just looked at it and said, `I don't want to go Neverland.' I flushed it down the toilet.

And I would say this, Steve. I--sure, I didn't sleep as much as I would have liked to have slept during big parts of the crisis, but I always got enough sleep. And some of the waking hours I spent in the evening, I did my very best thinking. And as Wendy explained to me, she said--when I would talk about sleeplessness, she said, `You need to put that into context. You know, you're used to sleeping seven or eight hours.' She said I would--my head would hit the pillow at 9:30 and I'd be snoring in five minutes. I then would wake up, you know, bad nights--as I tell the story in the book, I'd wake up at midnight or 1:00 and then I'd be awake for much of the night.

LIESMAN: It's amazing in the book how hard you worked, and as a reporter covering you...(unintelligible). Must be difficult for you right now, given the anger that's out there, people really blame you for what happened. How do you deal with that incongruity, that people think you messed up, and you worked so hard to try to--and you think you openly saved the system.

Mr. PAULSON: Yeah, I--first of all I'll say, which is quite remarkable, that I have people come up to me all the time, no one has ever said a rude thing, no one has ever said anything but thank you. The closest I had was some guy come to...(unintelligible). That was in the airport the other day when he came up and said, `You're Hank Paulson, the Treasury secretary, aren't you?' And I said yes. He said, `Well, doesn't it bother you to be recognized like this?' I said, `People usually say pretty good things.' Then he looked at me perplexed and said, `Gee, yeah, I guess people are pretty polite, aren't they?'

But to get to your question, I really--I feel so strongly that, looking in hindsight, that the major decisions we made were the right ones. And we made them without a playbook, dealing with very, you know, unprecedented challenges, with imperfect tools to work with and in a really heated political environment. And they worked, because the system didn't collapse. We don't have--we didn't have 25 percent unemployment like we had in the Great Depression. And so that, to me, is what's important. Because when the system froze and that week after Lehman went down and the money market funds--you know, $3.8 trillion, 30 million Americans, you know, getting ready to, you know, to break the buck and have a run on the money market funds--and when blue chip industrial companies couldn't raise money, I knew that, as sure as I was sitting there, the economy was going to stall a number of weeks out.

Now, the legislators didn't understand that, Congress didn't see it, because they hadn't seen it yet. But I knew that was going to happen. And when you have a--in a meltdown, I look at it and say we would have millions more unemployed if the system had melted down. We would have had millions more people lose their homes. We would have had trillions of additional savings lost, because when basic middle America business, mainstream business, can't raise bank funding to finance their basic business operations, they don't pay suppliers, they don't pay their employees, this ripples through the economy and you get economic disaster.

LIESMAN: Switch gears just a little bit and talk about--oh, sorry...(unintelligible).


LIESMAN: Want to switch gears. I want to talk about Goldman Sachs. Back during the crisis, how much trouble...(unintelligible).

Mr. PAULSON: Steve, the weekend--the week after Lehman failed and Merrill Lynch had to be acquired by B of A, there was real--a real crisis of confidence among investors about the investment banking model. We initially recall the UK bankruptcy administrator for Lehman Brothers, went in and seized--took third-party customer collateral. So Morgan Stanley in particular was under a huge pressure of liquidity draining off. And both investment banks were under a lot of pressure. So you just got to recognize that, well, one of the things that I'd seen happen was everything that--bad that could happen was happening, and it was always much worse than I had imagined. But the regulators, we all felt that there was a real chance that Morgan Stanley might go down, and if they went down, they could very well take down Goldman and the whole system. And, of course, what we cared about was then there'd be a meltdown and what would--what the impact would be on the American people. It just would have been an economic disaster.

And so I remember--and I tell the story in the book--I think one of the conversations that was the most meaningful to me was one from Bob Scully, who is a really senior banker at Morgan Stanley and had been very helpful working with me and folks at Treasury to prevent the collapse of Fannie and Freddie. And he's very understated. And he called me and I had a conversation with him the Tuesday or the Wednesday after--when Lehman had failed on Monday, and talked to me about the liquidity disappearing in Morgan Stanley, and wondering whether they were going to make it. And of course, John Mack was heroic all through this.

LIESMAN: But Goldman had said it wasn't in jeopardy. You think it was in jeopardy?

Mr. PAULSON: Well, I got to tell you, I sure believed it was in jeopardy. I--and I believed that if any major financial institution, Goldman Sachs or any other major financial institution, had gone down right then, with everything else going on in the market, it would have been all...(unintelligible)...for the American economy. And so I think the jeopardy, as I said, came from the questions that had to do with the model. This was--people weren't being rational anymore. This was--this was, you know, investment banks. What did they see? OK, Bear Stearns, Lehman, Merrill, and there was--it was like serial attacks, these banks. So we stayed in very close touch because we needed to know what was going on in the banks and what was going on in the markets.

And again, this week--this week was a nightmare to end all nightmares because we had the money markets frozen, so industrial companies not able to raise money. The--one of the scariest things that's been written about very little and one that--which I tell the story in the book is the story to--where we needed to step in and on very short notice guarantee the money markets funds. And so with all of that going on, making the decision to go to Congress with the TARP, and then staying up quite late worrying about whether one of the investment banks would go down and take the whole economy with it.


LIESMAN: In the book, you get a call from Lloyd Blankfein...(unintelligible). Doesn't that reinforce the notion among people of "Government Sachs" that's been out there?

Mr. PAULSON: They--well, what I was really focused on was doing my job. I had--and I think what you're talking about is the Saturday of Bear Stearns weekend. And I remarked that was the only time that I ever heard from Lloyd at home when I was Treasury secretary. And it was--I knew it was very, very much my job to know what was going on in the markets and what was going on with the major investment banks.

LIESMAN: If you were back at the helm of Goldman today, how would you be negotiating the public outrage...(unintelligible)?

Mr. PAULSON: I'm not there, and I'm not--I'm not going to--not going to give it my side. I am very pleased that I'm no longer in the private sector. And my next act is going to be conservation of the environment. I'm not going back to banking.

LIESMAN: Do you think the outrage over compensation on Wall Street is warranted?

Mr. PAULSON: Here's what I think. OK, here's what I think. And it's very--the American public, and me included, none of us like to see private business of any kind, and particularly banking--no one likes bankers--but likes to see the benefit from public assistance, number one. In our system, risk takers are supposed to--supposed to have their--have the impact of their losses. They're supposed to take their own losses. So of course the public is angry, but what I keep saying to people is let's not let that divert us from what we need to do. Let's channel that anger and then frustration to getting the kinds of reforms we need so that we never again see a situation when the taxpayer needs to bail out big banks. And so that's why I keep coming back over and over again and saying we need really strong resolution authority so that when any institution, regardless of type, financial institution, is facing failure, that whoever is sitting in the seat where I was sitting has the ability to liquidate them and liquidate them in a way in which it doesn't hurt the markets and the economy. And that's really where the--where the problem came from.

LIESMAN: (Unintelligible)...channeling the anger. Bankers are taking almost 16, $18 billion in bonuses.

Mr. PAULSON: Now, what--but--what I say in the book is that when I ran with Goldman Sachs, even during benign times, I had felt the compensation in the industry seemed out of whack, and I would occasionally go off in partners meetings and say something to the effect, `I hope you guys all understand,' and remind them, `people don't like you. Very few people do.' And sometimes I'd even say, `Your mother likes you, and if you're lucky, your wife and kids like you and some clients do. But you make life more difficult for yourself with conspicuous, ostentatious consumption.' And that was during benign times.

So I understand, and I understand that at a time when the government had to do what it did, not for the banks--and I just keep reminding people it wasn't done for the banks, it was done for the American people who were going to be the victims if there was a collapse on them. When government did what it did and saved the entire financial system--and my personal view is every financial institution benefited from that action. I even believe hedge funds, private equity, all of them benefited. And these paychecks just seem so out of whack and out of tune with what's going on with the public because...

LIESMAN: (Unintelligible)...big investment bank right now...(unintelligible).


LIESMAN: Can I get the...(unintelligible).

Mr. PAULSON: No, I'm not running a big investment bank. And that's something that I think they're all struggling with because just like the banks, when they seized up, it was a while--there was a lag before the economy turned down. We could see it coming. And we should all be very pleased that the banks are doing better now and they're...(unintelligible). It's got to help the economy do better.

As a government official, what was--what's important in looking at it from that standpoint is safety and soundness of the system. What's really important is incentives behind the bonus. But, as I've said, this anger is understandable, it is intense, and it--again, I just say let's not let us divert us from doing what we need to do. What we need to do is to fix the system, so we don't unleash this anger again.

LIESMAN: Let's talk about fixing the system, but I want--I want to first do some of that...(unintelligible). You had some interactions with Obama and politicians. One that stands out for me is you threatened John McCain. Was that...

Mr. PAULSON: Well, I wouldn't use the word "threaten" at all, but I would say--here's what I would say. First of all, the--this book is a story in many ways about the collision of politics and markets. So the crisis couldn't have come at a worse time because it was--the election was six weeks away or whatever. And so everyone who's running for office, Congress or the presidential candidates, needed to have one eye on the markets and they other eye on the elections. And then so I had some difficult hours and days, you know, where I worried about John McCain and conversations with him. What I--what what my enduring memory is, is great gratitude, because John McCain supported TARP and didn't speak out against any of the bailout efforts. And it would have been very easy, as he was falling behind in the polls, to give in to the populist pressure. It would have been very easy to do that, and then we would have been left defenseless and we would have gone down the tubes.

But I did have, you know, conversations which I recount in the book where--when he came back to Washington and we had that meeting which is kind of unique, sort of one-of-a-kind in American history, where--in the Cabinet Room, which ended up very chaotic into almost a free-for-all and with my heart in my throat. And going into that meeting, I just had a conversation that--where he just didn't sound very happy and very supportive. And I just let him know that I'm not a politician, but if the system collapsed it wasn't just going to be on me. If someone did something, I was going to say publicly what I thought about it. And--but I sure--I look--as we went through it and as I look back now, I feel great respect for him and--because this had to be very difficult, and he was supportive of TARP. We wouldn't have got TARP done if John McCain hadn't been supportive of it.

LIESMAN: What did you tell the British chancellor of the exchequer on Sunday when you--when you killed the Lehman deal?

Mr. PAULSON: Well, it was--well, again, remember that this is a--we were leaving no stone unturned. We were--we were desperately fighting to get this done, and the--and the British regulator had not approved it. Wouldn't disapprove it, but just wouldn't approve it, which was tantamount to getting it done. I was--you know, was quite frustrated. In fairness to him, you know, he had--you know, on Friday he had--he'd given me a warning. He'd put up a yellow flag. And again, I just couldn't leave any stones unturned. And so I felt--I felt great frustration and I--what I say in the book is something that I wish I hadn't said. And I didn't say it to him on the phone, but when I went down and met with the bankers afterwards, told them the deal was dead, I said, `The British screwed us.' And I--and as I say in the book, that's really pretty unfair when you look at how fragile their system was and the questions that they must have had about Barclays and, you know, and capital raising plans and risks that would have gone along with acquiring Lehman. So--but it was a--it was a heated, intense moment and I hadn't had a lot of sleep, and I went from the brain to the mouth.

LIESMAN: (Unintelligible) What about the president? For some president, it's very decisive. What role did the president play during the crisis?

Mr. PAULSON: He played a much bigger role than is understood. He was--he couldn't have been more supportive. He was engaged. I could get to him at any time, talked with him a lot, met with him a lot. And this is a man that believes in--first of all, he's no fan of Wall Street and certainly wasn't trying to do favors for Wall Street. Believed in market principles, believed if you took risks you should--you should--you should take the losses. But he understood markets well enough to know that he--I can't tell you the number of times I recounted conversations in the book where he would say, `This--we may not always look good, but we're not going to let our economy be ruined. We're--we are going to do what it takes to protect the economy and to protect the American people.' And he constantly told me--which helped, because you were seeing markets and politics clash--that, `We're going to do the right thing. Don't you worry about the politics.'

But he also recognized that I had good working relationships with the Democratic leaders as well as Republicans, and so he--you know, and I think one of the things that I'm proudest of is that twice we were able to go to Congress on the brink of disaster, first before Fannie and Freddie were ready to melt down--and they were talking about $5.4 trillion in assets, and that just would have taken everything down if it'd gone down. And I shouldn't say 5.4 trillion in assets. I'd say in liabilities, either direct or guaranteed liabilities. But--and then second with the TARP. And in both times, before we had the meltdown, Congress acted and gave us unprecedented authorities.

LIESMAN: (Unintelligible)...a decisive president but not one who's incredibly inquisitive.

Mr. PAULSON: Oh, he was--he was--he had--he was quite inquisitive. And he--you know, he understood this. You know, I think there's going to be a lot of people that are disappointed if they, you know, dislike George Bush, because what I saw here was not the caricature of George Bush. I saw someone who got it quickly, understood that the financial system is all about jobs for the American people and was focused on the economy. Now, he had confidence in my knowledge of the markets, and he knew I'm decisive by nature. And he encouraged that because he thought that's what you need in a crisis.

LIESMAN: Secretary, I have said the term "$700 billion" so many times and never stopped to think of where that number actually came from. And it appears as if it was almost randomly arrived at in the hallway?

Mr. PAULSON: It--well, it wasn't randomly arrived at in the hallway, but when we had got the authorities for Fannie and Freddie, got unlimited--you know, we couldn't say unlimited, we said unspecified. And we knew we weren't going to get that again. I would've liked unspecified or unlimited, because I felt we needed to have something that'd be big enough to satisfy the market and to do the job. And so we were--when I went up to the Hill, I talked with my advisers, and with Kevin Fromer, my legislative aide, just did a great job through all this. And I talked with him, and he said, `Hank, you know, what I--what are you thinking?' And I said, `Well, I think we need at least $500 billion.' And he said, `Don't put that number out there. It will'--he said, `Talk in terms of hundreds of billions of dollars. And--because we need Congress. We need'--I wanted two things from congressional leaders that night. I wanted them to say they were going to act to get something done quickly, and I wanted them to go to the microphone and say something that was going to calm the markets. So I told them, `We'll work with you on the number, but it's hundreds of billions of dollars.'

Now, when we got ready to set the legislation up, he came to see me and said, `I sense that you don't think $500 billion is enough.' And I said, `No, I don't. I want more.' And he said, `Well, sure can't--better not be thinking about something that starts with a T, because we're going to be dead on arrival if it--if it's that.' So then we talked about it, and he and I talked and said, you know, 500 billion, 700 billion, they're both big numbers. People are going to gag when they hear either one, so we might as well get something that's going to make the market happier and will give us, you know, more to work with. And so we settled on 700 billion. I wish I could tell you there was some--we figured it out on our calculator, but we didn't.

LIESMAN: There's one other political figure I wanted to ask you about, which is--it already made some news, which is Sarah Palin. She kind of rubbed you the wrong way.

Mr. PAULSON: Well, the--I knew John McCain, didn't know Barack Obama and...(unintelligible)...know Joe Biden. So I'd never met her before. And everyone calls me Hank, but the very first time I talked with her on the phone, she called me Hank, and so there's sort of an instantaneous--a bit of a reaction. But as I thought about it, that's what you do when you're in a political campaign, when you're running for office. And I'll tell you one thing that comes through in my book, and it was just a couple conversations with Sarah Palin but, boy, she got the political issues. She was right on, you know, the American public's distaste for the compensation. And if you have a failing institution, are you taking out the CEOs? And so she was--she was really good on that.

LIESMAN: What do we need to do here to get the markets running?

Mr. PAULSON: Well, I think if we don't get two things done, we will fail. So there's two things that I'm going to point out that we absolutely need to do in terms of regulatory reform. And the first one is the systemic risk regulator. Right now, regulators are, you know, focused--I describe it on the trees, but we need one regulator on the entire forest. So we need one regulator that's got the information so that they can monitor the markets and the power to intervene and restrain risk taking or activities, or activities that can threaten the whole system, when it's necessary. That's number one.

And then number two, as you heard me say earlier, we sure better have resolution authority so that in future no financial institution will be too big to fail. And any institution, regardless of its size, you know, or business model or whatever, that can't be liquidated and liquidated in a way in which it doesn't take down the financial system and the American economy, and then we won't get ourselves back in this trouble again.

Now, there's a series of other things we need to do. And I'd say if you wanted me to cite one other, it would be let's get housing policy right. We've got so many incentives for housing that we've overstimulated home ownership. And so between Fannie and Freddie, which need to be reformed, scaled way back, in my judgment--but between that and the--and the--you know, the FHA programs and mortgage interest rate deduction, someone's got to look at it all and say, `Let's scale this back a bit.'

LIESMAN: What are you going to do?

Mr. PAULSON: What I do next is something I've done all my life and really enjoy and think is very important, and that's work with my wife, Wendy, the conservation initiatives. Conservation and the environment. I've loved that and done it all my--all my life, frankly, and in recent years have been very engaged in it. And I'd like to do that full time.

LIESMAN: But happen if the phone rang, it was the president of the United States who said, `I need someone to run the new version of Fannie and Freddie,' or come back...(unintelligible)?

Mr. PAULSON: Well, I would certainly--I'm very good at coming up with ideas. And one of the things I thought I did pretty well was got--brought some good people down at very short notice who will run Fannie and Freddie, like Herb Allison is now--who's now running TARP. But I'm a public-minded citizen. I'm not going to run any financial institution, and particularly not Fannie and Freddie. But the--but I will--I'm always pleased to give advice to people.

LIESMAN: Talked to Tim Geithner a lot?

Mr. PAULSON: Of course. Of course. You know, we worked closely when we were in government, so I talk with him. But one of the things I really appreciated when I was in government was to talk to and get advice from former senior officials and keep that confidential. I think that's what I intend to do with any calls I have from Tim.

LIESMAN: How do you think he's...(unintelligible)?

Mr. PAULSON: I think he's doing an excellent job. I think he's--I think he's doing an excellent job. He's a very talented man, and the--what I'm focusing on is what I know best, which is the programs that the administration has done to stabilize the system, which I think are very--they're for the most part either continuations or logical extensions of things that we did when we were here. And I think he's--I think that he's--he has a real challenge for the reason we've discussed. He was here and played a significant role, which he should be very, very proud of, but played a significant role in doing some very unpopular things. And so there's...(unintelligible)'s pretty hard to lead during a time like that and not draw some criticism.

LIESMAN: All right, there's one more thing...(unintelligible)...the president. We didn't talk about the president yet. You had a lot of dealings with him, especially in the transition period. Talk a little about working with President-elect Obama.

Mr. PAULSON: Well, we--President Obama was very engaged, and I really appreciated him right up to...(unintelligible)...the election, as supportive of TARP, supportive of what we needed to do to prevent the economy from...(unintelligible). Frankly, during the transition period I never talked to Barack Obama after the election. And I found the transition period, that 10 weeks, to be barbaric. I mean, I just found it--it's our system. I mean, so to have a new president and a new team. And it wasn't like we just were marking time, because one thing I think that comes through in the book is right up until the end, I was worrying about the safety of the system.

One of the--the second worst day I had when I was in the job had to do with the couple days before we rescued Citi. And when I thought after everything we'd done that Citi was going to collapse and we needed to take really strong actions--and so I was worried about taking out the last $350 billion of TARP, which I thought we needed to, during the transition period. So that was a--was a tough period. But I--at the end of the day, I--you know, I'm also very grateful that President Obama chose to continue with so many of the programs we put in place.

LIESMAN: Secretary, thank you very much.

Mr. PAULSON: Thank you, Steve

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