CNBC News Releases


Steffanie Marchese
Henry Paulson


WHEN: Today, Wednesday, October 15th at 7PM ET

WHERE: CNBC's "Wall Street Crisis: Is Your Money Safe?"

Following is the unofficial transcript of a CNBC interview with Treasury Secretary Henry Paulson today on CNBC's "Wall Street Crisis: Is your Money Safe?"

All references must be sourced to CNBC.


Interview: Treasury Secretary Henry Paulson LARRY KUDLOW, host:

I'm Larry Kudlow, everybody. We are here in Washington with Mr. Secretary Henry Paulson.

Mr. Secretary, thank you very much for coming back on.

Mr. HENRY PAULSON (Treasury Secretary): Larry, good to be with you.

KUDLOW: All right, look, it's a tough day, as you just heard Michelle. You know all about that, market's down over 700 points. Your announcement was yesterday, but we still have the bumpy markets. Fear seems to rule, volatility seems to rule, lack of confidence everywhere. Let me ask you, sir, are markets missing something with respect to your new plan? How do you comment on this? Because it just doesn't seem like a wave of confidence.

Mr. PAULSON: Well, Larry, there's a lot going on right now and a lot going on in the markets. We knew that the financial markets and all the turmoil in the financial markets were going to have a significant impact on the real economy, and today there was some evidence of that. The retail sales numbers were--they came in at a disappointing level, not a surprising level. So I think what the markets are saying today is, they understand that we're going to have a difficult few months ahead of us. But I would say is that, let's remember, we have a very resilient economy. Last quarter--seems like a long time ago, but last quarter we grew at 2.8 percent. And the steps we've taken are absolutely the right steps. They're bold steps, they're strong steps to stabilize the financial markets and inject confidence into the banking system along with capital. When banks start lending to each other, feel comfortable dealing with each other, they'll start lending to businesses and we'll see this make a real difference in the economy.

KUDLOW: Do we have to take a recession? Are we in a recession right now, sir?

Mr. PAULSON: Well, Larry, what I'm saying is, we're clearly in a difficult period, and it clearly--the financial turmoil and the very, very difficult time we've had where the credit markets have frozen up, and when loans weren't being made, weren't being made to small businesses, people--it was hurting jobs, it was hurting confidence, and this has to have an impact. And it's having an impact. But by far the most important thing we can do here is stabilize the markets, stabilize the banking system, and I'm very confident that the moves we've done, taken, will do just that.

KUDLOW: All right. I want to get into all those things. They're very important points. Let me begin, front page stories in all the major papers today. When you unveiled on Monday your rescue package to the nation's top bankers, apparently it was a somewhat contentious meeting. And I want to ask you, first of all, are the major bankers with you? Are they on the team for the rescue package? And second of all, what was the biggest bone of contention in that meeting? What was it that you had to sell them on?

Mr. PAULSON: Well, Larry, let me begin by saying, I don't believe it was a very contentious meeting. I think it was a--it was a candid meeting, but I think it was pretty extraordinary to get nine bankers with--running key institutions, institutions with 54 percent of the assets, 50 percent of the deposits of the United States of America, and to get them to sign up for this plan. And what I said to them was, this is about the United States of America, it's about our economy, it's about our banking system, and this is a program for healthy banks. We--this is not about failure. We want healthy banks to participate in this because healthy banks need to be well capitalized. They need to be dealing with other healthy banks and with businesses. They need to be deploying their capital. And this'll be good for the country, be good for the system, and good for all of you.

KUDLOW: How did you persuade my friend Richard Kovacevich, who runs Wells Fargo? He seems to be the most prominently mentioned. Now, I wasn't at the meeting, and he didn't talk to me, but from the news account, how did you talk him into coming on board?

Mr. PAULSON: Well, I've got to say this. We talked to everyone, and these were, again, these are institutions that could survive just fine without capital, OK? More capital. They have adequate capital. But they need to be well capitalized, and what we want to do is to come up with a program, and let's remember something else about this program. This was--nothing punitive about this program. This was a program that said to all the investors that want to come into the banking system, `See? This is--when the government is coming in, it's not coming in to squash private investment.' It's...

KUDLOW: Private shareholders.

Mr. PAULSON: Private shareholders, no. It's encouraging the private shareholders to invest in these banks. So this is--this is about increasing confidence in the banks, and about increasing the confidence of the banks and the banking system so that they can be proactive in deploying their capital.

KUDLOW: Did some of these big bankers worry about management control exercised by the Treasury Department? I mean, clearly there are limits with respect to executive compensation. There are limits with respect to dividend payments, and there are generically issues, will you exercise your warrants and will you exercise voting strength? In other words, is this a nationalization? I think that's on the minds of a lot of people.

Mr. PAULSON: Well, anything but. Anything but. And this is about taking the preventative action so we don't need to do more radical things. And so as we talked about this, let me just take the issues you've mentioned one at a time. These are relatively small positions in ownership terms. These are passive investments--management. This is--this is not anything like what you suggested. And it--in terms of the executive compensation, there was broad agreement in that room that this is an important topic. And no one spent time debating executive compensation. I explained what the law required and that we were going even further, and that what we were talking about is, there wouldn't be golden parachutes; if there were profits based upon financial information that turned out to be materially misleading, that compensation would be given back.

KUDLOW: Both of which the country seems vitally opposed to.

Mr. PAULSON: Oh, sure.

KUDLOW: The political nature of the country right now is so much against that kind of thing.

Mr. PAULSON: Yeah, and also, that there--the--we couldn't have incentives that made compensation based upon excessive risk taking. All of those CEOs in that room understood it. And a matter of fact, when I outlined it, one of the CEOs said, `Hank, why are we even spending time talking about this? Why are we spending time talking about this? Of course; we get it.' And so, again, these are investments that are good for the country, good for the banks, and are encourage--these are temporary investments to bolster confidence, to bring capital to the system. It'll be deployed. The economy will pick up, and these investments'll be refunded

KUDLOW: Do you think, Mr. Secretary, do you think that with the preferred stock and all the other aspects you've just described--really, you say, passive investments, not active management control--will that attract private shareholders and private capital, not just the shareholders today but the potential shareholders tomorrow?

Mr. PAULSON: Absolutely. Absolutely. And I think where people have gotten confused, there have been situations where we've had to come in, where there's a failure. And there's that totally different proposition.



KUDLOW: Fannie and Freddie.

Mr. PAULSON: Yeah, right. A totally...

KUDLOW: This is different than that.

Mr. PAULSON: Totally. That's failure. That's where you have to come in.

This is--this is about attracting private capital, and it was clear to the whole world that these preferred share investments are going to come in right alongside other senior preferred and--not senior to them--and again, preferred doesn't vote with common shares. The warrants are for 50 percent of the value of the preferred shares. And again, the warrants for nonvoting common shares.

And so this is--this is about capital and protecting the American people by getting our financial system working the way it needs to work so we're going to be able to create the jobs, going to--this is about people's 401(k) plan.

This is about loans to send their children to college. And keeping our economy going--that's what it's about.

KUDLOW: So many people want to know--I mean, I get this, I hear this, people stop me on the street, callers on my radio show on Saturdays--how can you get the bankers to deploy the government capital that you are injecting? I mean, for example, the yield on the preferred is 5 percent. Their cost on the preferred is 5 percent. Now, they've got--some of them have preferred stock that's 11 percent in yield. They have bonds outstanding that are 7, 8, 9 and 10 percent.

Mr. PAULSON: Yeah.

KUDLOW: What's to stop them from getting the new government money at 5 percent and retiring the outstanding paper that's much more expensive rather than deploying this new capital in the economy for the purposes you've just described?

Mr. PAULSON: Well, that's a--that's a key question, and let me say, even before that, the reason we set the terms where they were set, we didn't think this term should be set at the--what the market would demand in a crisis situation. That's why the government's coming in to begin with. We wanted the terms to be like that you would have in a normal situation. Now, the way you get bankers to deploy the capital--because they know it's their job to deploy the capital, making the loans which are so vital to our economy, the way you get them to do that is they've got to have, first of all, plenty of capital; they've got to be well capitalized. Secondly, they've got to be confident in the system. They've got to be confident that as the money flows between and among banks that they've--they're confident in that and confident in the strength of the system.

KUDLOW: Rather than pay down their own debt.

Mr. PAULSON: And--oh, listen, they're not going to be paying down their own debt. This is--they're--this--the regulators understand that, and they understand.

KUDLOW: Will you jawbone from time to time--that's a bad word, jawbone--will you be talking to them in consultation as you did on Monday, for example?

Mr. PAULSON: I will clearly be doing that, but I will also say to you that they understand this, and regardless of whether--the--we had had government investments there, we would be jawboning and encouraging them to do the right thing. And I would say it's a lot better to jaw--to do--it'll be a lot more effective if people aren't afraid, and if bank...

KUDLOW: Right.

Mr. PAULSON: And so this is about confidence and confidence in the financial system.

KUDLOW: As a profit-maximizing, free market capitalist, Mr. Secretary, I must take a commercial bake for the show--commercial break for the show.

Much more with Secretary Henry Paulson. I'm Larry Kudlow. Please stay with us.


KUDLOW: Welcome back, everybody. I'm Larry Kudlow. I'm here with Treasury man Henry Paulson. Probably the most talked about, maybe the most powerful guy in the country below the president of the United States.

Mr. Paulson, let me just ask you another question that I hear a lot. People were relieved that you are guaranteeing--the FDIC that is, is guaranteeing the interbank lending, the Libor markets are frozen up. Some say the New York markets are frozen up for the short-term loan, and that's a huge drag on the whole system. But let me ask you, when does this guarantee actually go into place? There's a 75 basis point cost that the banks have to pay. I assume there's some registration. Libor rates have slipped a little bit, sir, but not very much. When does this guarantee for the interbank loans really kick in?

Mr. PAULSON: Larry, I think there's, you know, when you do something as quickly as we rolled this out, there may be some confusion in the marketplace, but everyone has a guarantee for 30 days. So there's a 30 day period where...

KUDLOW: Immediately?

Mr. PAULSON: Immediately. Immediately the guarantee. And that's cost.

KUDLOW: Do people know that, sir? I don't mean to interrupt, but do people know that key point?

Mr. PAULSON: I--they should know it, because the guarantee is there immediately. Now there's--you know, at the end of the 30 days, they need to subscribe to this. There's a 75 basis point fee. Then if they subscribe, the guarantee lasts through June of next year. And the guarantee applies to the senior obligations coming due, unsecured obligations, and they can refund those with a maturity up to--out to three years.

KUDLOW: All right. Talking about the freeze up in London and New York...

Mr. PAULSON: Right. Right.

KUDLOW: ...and elsewhere. In the--with the benefit of hindsight, looking back, was it a mistake to let Lehman go under? Because a lot of people are saying it was precisely the drop off in Lehman, which was roughly in the middle of September...

Mr. PAULSON: Right.

KUDLOW: ...early to middle of September, when suddenly Libor rates went up.

The spread against US Treasuries went up something like 300 basis points.

Mr. PAULSON: Right.

KUDLOW: And the whole system seemed to go haywire. The whole system was like a computer that completely froze up and there was nothing anything could do with it. Was the Lehman decision an error?

Mr. PAULSON: Let me talk a little bit about the Lehman system, because something you could argue--whether we're dealing with a symptom or whether we're dealing with a root cause--because one thing I saw clearly this weekend when we met with central bankers and finance ministers from around the world, and there was something that was very good that came out of that weekend, was a way in which we all agreed to work together with a common set of policies and objectives. The thing that wasn't as good was to understand the extent of the problem with financial companies and bank in country after country where they'd said, `We don't have a real problem,' to suddenly that we--they said, `We have a significant problem.'

But let me get back to Lehman because I, first of all, Treasury certainly didn't have any powers to do anything as it related to Lehman Brothers. And we've been very clear--I've been clear when I talked with Congress in July that we didn't have the authorities to deal with a wind down of a--of a non-bank financial institution. So we were very, very clear about.

KUDLOW: But in truth, sir, weren't you deeply involved in the wind down of Bear Stearns last winter?

Mr. PAULSON: Yes. Yes. We were working with the Fed and the Fed could loan, under 13-3, they can loan against securities when there--but there was a hold that needed to be filled in the case of Bear Stearns. There was a buyer, JPMorgan, and they could loan against securities. There was not--we worked very hard on Lehman. You know, Lehman--we all knew about the problem with Lehman for a long time and Lehman worked, you know, tried to worked through their problems. I think regulators knew that if there was a not a solution before they announced their third quarter earnings there was apt to be a problem. It turns out there wasn't a buyer. There was no hole to fill.

There was just was not a buyer for Lehman. And the Federal Reserve didn't think they had any authorities to loan, you know, under 13-3, against Lehman.

And I certainly wasn't urging that because, again, we have a system. And we now have--we got the authorities when we got the TARP to do more. But I'll tell you, we have a system where we have authorities that were put in place a long time ago for a financial system that existed in a different world. And there are broad authorities if a bank fails and systemic risk exemptions.

KUDLOW: Right.

Mr. PAULSON: There's broad things to wind...

KUDLOW: But in truth, I mean, when you go back and look at it.

Mr. PAULSON: Yeah.

KUDLOW: The stock market is down 25 percent since Lehman.

Mr. PAULSON: Right.

KUDLOW: Which was really just a few weeks ago. It was an extraordinary event. And at the time...

Mr. PAULSON: Right.

KUDLOW: ...some people applauded you and said, `OK, enough is enough. We can't take out every bank.'

Mr. PAULSON: Right.

KUDLOW: But looking back on it, that seemed to be the trigger to all of this recent mayhem.

Mr. PAULSON: Well, I would say, Larry, looking back, there's a lot that's happened. An awful lot that's happened. And what was going on with Lehman, there's no doubt that when you look at the over-the-counter derivative markets, when you look at the complexity of today's financial world, a failure of any big financial system, company, creates a--it creates a big issue. But I would say I'm a, you know, I always look back in addition to looking forward, and we've got to look forward and deal with the facts that present themselves to us. But I could not have been clearer in June and July that we didn't have the authorities.


Mr. PAULSON: And we certainly didn't have them at Treasury. And I don't think the Fed believed they had them. There was not--if there was a buyer for Lehman, if--and there was--we had a foreign buyer that was very interested.

And near the end, their regulator wouldn't let them. And so there was no buyer. There was no hole to fill.

KUDLOW: All right. Let me move on. When you made your statements yesterday regarding the unveiling of the new rescue program, here's what you said, and I will quote. "We regret having to take these actions. Today's actions are not what we ever wanted to do." What did you mean by that?

Mr. PAULSON: What I meant was, you know, we're from the United States of America. We believe in free markets. We expect our markets to work well. We don't--government intervention is about failure of a regulator regime.

Mistakes on a lot of people's parts. But to me, this was much, much better than the alternative. And this was about preserving our free market system and preserving our banking system, and stabilizing it for the American people.

Now there's going to be a good deal of work that needs to be done once we get through this period, and a good deal of work to make sure we don't get in something like this again.

KUDLOW: Some people read your statement and they wondered out loud, `Did you mean the changeover in policy from the Treasury purchases of toxic assets to the new capital injections?'


KUDLOW: And let me read what you told the Senate Banking Committee. This was just a couple weeks old, in a very difficult congressional battle.

Mr. PAULSON: Right.

KUDLOW: Which you eventually won. Quote, "There were some that said we should just go and stick capital in the banks, put preferred stocks, stick capital in the banks. And what to do when you have failures? You know, that's what happened in Japan in other spots, but we said the right way to do this is not going around and using guarantees or injecting capital. There have been various proposals to do that, but we want to use market mechanisms."

Now what was it that made you shift your emphasis away from the toxic asset purchase and towards the injection of capital?

Mr. PAULSON: Larry, I'm glad you asked me that question because let me begin by saying what we were talking about was always capital. From going back over a year ago, I did everything I could to jawbone institutions to raise capital, to say this is all about capital. No CEO ever got in trouble by having too much capital. The illiquid asset purchase is about capital and about price--price discovery and freeing up capital. And we're going to do illiquid asset purchases and it's going to be integrated very well with this program.

KUDLOW: Still. That's still on the program?

Mr. PAULSON: Absolutely. Yes. Absolutely.

Now when we worked with Congress, we knew. We collaborated with them and we knew we were going to have the ability to purchase preferred stocks if it was necessary and it was the right thing to do, and it would be very powerful.

But that statement that I made then was discussing putting in capital, you know, if we dealt with a situation like Freddie or Fannie or AIG, or we had to move to prop up a failing institution.

KUDLOW: But some people, if I may--I don't mean to be interrupting. But some people are saying that the movement of the Europeans toward capital injection, the movement of the British towards capital injection, essential forced you to play your hand. Is there any truth to that?

Mr. PAULSON: I looked at it differently here. I--you always need to look at the facts and look at the facts before you then determine what you do. And what we're doing is very different than what the British are doing. And what we did was we--it was clear to me--and it was clear to me after spending time with the Europeans, understanding what was happening there, learning more about this situation--that the problem was bigger than we had hoped, and that the right way to make a big impact quickly was by purchasing prefers on the terms on which we did it. And that would be--make the taxpayers' money go the furthest. This was clearly an investment. Where clearly an investment that we should get these funds back and get them back with a profit. But we move quickly. But remember, let's just talk about what we've done, and 12 days after the legislation was passed, 12 days after the legislation was passed, we had voluntarily the nine institutions with 50 percent of the deposits of the United States, sign on for a program. And if you look at the terms of this effort...

KUDLOW: For 125 billion.

Mr. PAULSON: Yeah, 125...

KUDLOW: And you're going to go for a second 125 billion.

Mr. PAULSON: And we're going to go then broadly to other financial institutions. And we'll be going to regional banks and smaller banks and community banks who are going to be subscribing...

KUDLOW: Now, that leaves--that leaves only 100 billion out of the authorization of 350 billion.

Mr. PAULSON: Well, we're...

KUDLOW: Is that where the toxic asset purchase comes from?

Mr. PAULSON: Well, remember, we have--we have an--we have 700 billion.

KUDLOW: But you have to go back to Congress for the remainder.

Mr. PAULSON: Yeah, what you need to do, for the next 100 billion, all the president has to do is notify, and then to go beyond that, there's a notification process, and Congress has the ability obviously to pass legislation to prevent it. But there's--so in terms of the illiquid assets, we will--this is a $250 billion purchase of preferred equities, and it gets very different from what we were talking about when we were talking to Congress. This is--this is a way which encourages shareholders to come in and--not the way in which I answered the question, where we were talking about injection preferred on a--on a punitive basis.

KUDLOW: And when--I mean, we talked earlier about the recession, or the downturn and the difficult position; retail sales have fallen three straight months.

Mr. PAULSON: Right.

KUDLOW: We really have unprecedented commodity deflation, credit deflation.

Mr. PAULSON: Right. Right.

KUDLOW: Home deflation, all the rest of it.

Mr. PAULSON: Right.

KUDLOW: When do you think, realistically, new credit will flow to consumers, to businesses, to state and local governments? When do you think Americans should realistically expect that to happen?

Mr. PAULSON: Larry, that is the important question, and that, more than anything else, will make a difference in this economy. And I've said we have a resilient country and a resilient economy, and it can bounce back, and this is about confidence.


Mr. PAULSON: And we're going to have a number of difficult months here, but when we get--and we've taken the actions that I believe are the right actions based upon the facts that we looked at this week. I think they're the right actions, and I think they can make a difference, and they can make a difference more quickly than many people recognize. But it's going to be confidence.

KUDLOW: Whoever wins in November.

Mr. PAULSON: Right.

KUDLOW: We're a few weeks away. Would you be willing to stay on for a few months to keep this process intact before you hand it over?

Mr. PAULSON: Larry, I'm going to work day and night until--through January 22nd, and right after the election, I'm available to work with the best transition you've ever seen.

KUDLOW: And that would...

Mr. PAULSON: You know, with whoever the new Treasury secretary is, whoever the team. We're out looking right now for permanent leaders of this TARP, and so we're looking to get someone that will be more than acceptable to the--to the next president, his economic team in Congress, get them--get them appointed. And we're going to work--this is going to be a first-rate transition, I can guarantee you that.

KUDLOW: All right. Mr. Secretary Henry Paulson, we appreciate it ever so much.

Mr. PAULSON: Yeah.

KUDLOW: I'm Larry Kudlow, everybody, CNBC. Please stay with us. We have more coming.

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