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CNBC EXCLUSIVE: CNBC TRANSCRIPT: FORMER TREASURY SECRETARY OF THE U.S. AND FOUNDER OF THE PAULSON INSTITUTE, HANK PAULSON SITS DOWN WITH ANDREW ROSS SORKIN TODAY ON CNBC’S “SQUAWK BOX”

When: Today, Wednesday, February 15th

Where: CNBC’s “Squawk Box

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Hank Paulson, Former Treasury Secretary of the U.S. and Founder of The Paulson Institute, today on CNBC’s “Squawk Box” (M-F, 6-9AM ET).

All references must be sourced to CNBC.

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ANDREW ROSS SORKIN: I AM HERE WITH THE FORMER SECRETARY OF TREASURY, HANK PAULSON. HE JUST HAD A VERY INTERESTING DINNER IN WASHINGTON, D.C., WITH THE VICE PRESIDENT OF CHINA, XI JINGPING. WHO IS GOING TO BE THE NEXT LEADER OF CHINA OR IS THE PRESUMPTIVE LEADER OF CHINA AND HE WAS JUST AT THE WHITE HOUSE YESTERDAY. I WANT TO GET YOUR THOUGHTS ON EUROPE AND WHAT'S GOING ON IN THE U.S. I DO WANT TO TALK ABOUT CHINA SINCE IT IS IN THE NEWS. YOU HAVE STARTED THE PAULSON INSTITUTE AND YOU'RE WRITING A BOOK ABOUT CHINA. AND GIVEN ALL OF THE POLITICAL RHETORIC GOING ON AROUND CHINA RIGHT NOW. YOU THINK ABOUT SOME OF THE THINGS THAT ROMNEY HAS SAID, HE HAS CALLED CHINA A QUOTE-UNQUOTE CHEATER. HE SAID IF HE WAS IN OFFICE ON DAY ONE I THINK HE SAYS THAT HE WOULD CALL THEM A CURRENCY MANIPULATOR. I'M CURIOUS, WHEN YOU TALK TO THE CHINESE AND YOU TALK TO XI JINPING IN PARTICULAR, HOW THEY SEE THIS ISSUE AND HOW THEY SEE THIS DEVELOPING.

HANK PAULSON: WELL, ANDREW, FIRST OF ALL, I THINK THE CHINESE UNDERSTAND THE SAME THING YOU AND I DO AND ALL AMERICANS UNDERSTAND. OR MANY AMERICANS UNDERSTAND. IS THIS IS A POLITICAL SEASON. AND HARSH LANGUAGE ON CHINA PLAYS WELL AT A TIME LIKE THIS WHAT I EMPHASIZE TO THE CHINESE AND TO OTHERS, THAT WHAT YOU SEE OUR LEADERS TALKING ABOUT, IS ENFORCING THE TRADE RULES. AND WE'VE GOT A RULES-BASED SYSTEM. HOW CAN YOU QUESTION THE NEED TO ENFORCE THE TRADE LAWS. AND FORTUNATELY, WE'VE GOT DISPUTE RESOLUTION PROCEDURES IN THE WTO THAT REALLY, THAT KEEP US OUT OF A TRADE WAR.

SORKIN: YOU’VE ALWAYS HAD CLOSE TIES WITH CHINA DO YOU SEE THEM AS CHEATERS?

PAULSON: DO I SEE THEM? LET ME TELL YOU, CHINA HAS GOT, I FOUGHT AS HARD AS ANYONE TO CREATE A LEVEL PLAYING FIELD IN CHINA. AND SO THERE'S A LOT OF WORK THAT NEEDS TO BE DONE. BUT I TEND TO TAKE A MORE POSITIVE APPROACH AND TAKE AN AFFIRMATIVE AGENDA. AND I LOOK AT CHINA AS LARGEST EXPORT MARKET, OR FASTEST-GROWING EXPORT MARKET. AND SO THE THINGS I'M EMPHASIZING ARE THINGS THAT GOING TO GROW THE PIE. FOR INSTANCE, A BIG EFFORT I HAVE RIGHT NOW WITH THE PAULSON INSTITUTE IS TO ADVOCATE FOR MORE CHINESE INVESTMENT IN THE UNITED STATES. BECAUSE THAT WILL HELP THE ECONOMY. IT WILL CREATE JOBS. AND SO FOR INSTANCE, WHEN I WAS IN BEIJING IN DECEMBER, I WAS THERE, THE MAYOR OF LOS ANGELES, MAYOR VILLARAIGOSA, WHO CHAIRS THE U.S. MAYORS ASSOCIATION, WAS THERE WITH ME, WE WERE DOING PROGRAMS ON SUSTAINABLE URBANIZATION, WE PUSHED HARD FOR CHINESE INVESTMENT. I'M GOING TO BE WORKING WITH THE MAYOR OF L.A. AND THE U.S. MAYORS ASSOCIATION AND THE CHINESE MAYORS ASSOCIATION ARE PUTTING TOGETHER AN EVENT IN LOS ANGELES IN MAY, EMPHASIZING INVESTMENT TO CREATE JOBS IN THE U.S.

SORKIN: HOW POLITICALLY PALATABLE IS THAT, GIVEN WHAT'S GOING ON. YOU READ IN THE PAINS ABOUT SOME OF THE LABOR PRACTICES IN CHINA. I'M THINKING ABOUT FOX COM AND APPLE AND THE PERCEPTION OF WHAT AMERICANS THINK WHAT'S HAPPENING IN CHINA AND TO THINK OF THEM AS INVESTORS HERE.

PAULSON: WELL LET ME SAY THAT WHEN YOU GET TO THE SUB NATIONAL LEVELS, WHEN YOU GET TO MAYORS AND GOVERNORS, TRUST ME, THEY UNDERSTAND CAPITALISM. IT DOESN'T MATTER WHAT PARTY THEY'RE FROM AND THEY UNDERSTAND JOBS AND THEY UNDERSTAND GROWTH AND INVESTMENT. AND SO THAT'S WHAT WE NEED TO GET OUR ECONOMIES GOING. AND THEY UNDERSTAND THAT THE INVESTMENT IN THE U.S. ECONOMY IS GREAT VOTE OF CONFIDENCE IN THE U.S. ECONOMY.

SORKIN: WHEN TALKED TO XI JINPING, AND I’M THINKING ABOUT FOXCONN, I’M THINKING ABOUT APPLE, THERE WAS THE NEWS RECENTLY ABOUT NORTEL THAT WAS HACKED, GOOGLE LEFT CHINA. HOW ARE THEY THINKING ABOUT THOSE ISSUES?

PAULSON: WELL FIRST OF ALL, LET ME SAY WITH REGARD TO XI JINPING, YOU HAVE SOMEONE WHO IS A STRONG, CONFIDENT LEADER AND THAT'S GOOD FOR CHINA AND IT'S GOOD FOR THE UNITED STATES. BECAUSE THE CHINESE LEADERSHIP IS GOING TO BE TESTED, REALLY TESTED OVER THE NEXT TEN YEARS. BECAUSE THE DEMANDS, THEY CAN BE TESTED DOMESTICALLY AND GLOBALLY. AND DOMESTICALLY, THE DEMANDS OF THE CHINESE PEOPLE GROWING ALL THE TIME AS IS THE LEADERSHIP CHALLENGE OF MANAGING THE KINDS OF CHANGE THEY NEED TO MANAGE. YOU KNOW ON A MASSIVE SCALE. AND TO REBALANCE THAT ECONOMY AND EMPHASIZE-- PLACE A BIG EMPHASIS ON CONSUMPTION RATHER THAN EXPORTS. THEY NEED TO INCREASE INCOME ACROSS THE ENTIRE POPULATION AND KEEP THAT GROWING, THAT'S A HUGE CHALLENGE. YOU MENTIONED FOXCONN AND LABOR CONDITIONS IN CHINA. CHINA IS A DEVELOPING NATION. THEY HAVE GDP PER CAPITA OF FOUR THOUSAND DOLLARS AND WAGES ARE GOING, THEY ARE PRESSING WAGES UP VERY QUICKLY. WAGES WENT UP 23 PERCENT LAST YEAR SO THEY’VE GOT A LOT OF WORK TO DO. THEY KNOW THAT THEIR COUNTRY IS TOO BIG AND TOO COMPLEX RIGHT NOW IN TERMS OF IT’S ECONOMY TO BE AS DEPENDENT AS THEY ARE ON EXPORTS. SO THEY’VE GOT A LOT OF TO DO TO REBALANCE.

SORKIN: DO YOU WORRY ABOUT SOME OF THE SOCIAL ISSUES? WHEN YOU GO TO CHINA FOR EXAMPLE, AND I THINK ABOUT SOME OF THE HACKING ISSUES, WHEN YOU GO TO CHINA WOULD YOU MAKE A SENSITIVE PHONE CALL? DO YOU WORRY ABOUT BEING BUGGED, FOR EXAMPLE?

PAULSON: IN TERMS OF CYBER SECURITY AND IN TERMS OF BREAKING INTO COMPUTERS, THAT'S A CRIME. WE NEED TO DO EVERYTHING WE CAN TO ENFORCE THE LAW. AND THE POINT I MAKE AND I THINK THE POINT THAT THE CHINESE UNDERSTAND AND ALL OF US UNDERSTAND IS EVERY BIG ECONOMY AND PARTICULARLY CHINA, HAVE A LOT TO GAIN FROM HAVING INTERNATIONAL ECONOMIC SYSTEM WORK SMOOTHLY, BE STABLE. AND SO THEY'VE GOT THE SAME INTEREST IN CYBER SECURITY THAT WE HAVE. AND I MAKE THAT POINT.

SORKIN: CHINA'S ECONOMY, HOW MUCH DO YOU WORRY ABOUT IT. WE OFTEN HAVE JIM CHANOS, THE HEDGE FUND MANAGER, ON OUR BROADCAST AND HE OBVIOUSLY IS A BEAR ABOUT CHINA, WORRIES A LOT ABOUT THE REAL ESTATE MARKET THERE. WORRIES A LOT ABOUT A MAJOR HICCUP COMING. HOW DO YOU SEE IT?

PAULSON: I'M NOT A BEAR ON CHINA. BUT CHINA HAS GOT SOME REAL CHALLENGES. WE HAVE CHINA IS A $6 TRILLION ECONOMY. THE U.S. IS ROUGHLY $14 TRILLION. EUROPE IS 16 TRILLION. WITH THE ISSUES WE HAVE IN $30 TRILLION AWAY FROM CHINA, THAT HAS TO HAVE AN IMPACT ON CHINA. SO CHINA IS GOING TO HAVE MORE PRESSURE TO MAINTAIN THEIR GROWTH RATE. I THINK THEY'RE GOING TO BE ABLE TO MAINTAIN IT AT AN ACCEPTABLE. AT AN ACCEPTABLE LEVEL FOR THEM FOR A WHILE. BUT REMEMBER, THAT THIS, THIS JOB IS TREMENDOUS, IN ORDER TO KEEP, MANAGE THAT CHANGE, MAINTAIN GROWTH, REBALANCE THE ECONOMY, AND THE POINT THAT I MAKE TO THEM ALL THE TIME, IS THEY ARE SO LARGE AND COMPLEX, AND INCREASINGLY INTEGRATED INTO THE GLOBAL SYSTEM, THAT IT'S GOING TO BECOME MORE AND MORE DIFFICULT TO MANAGE THAT ECONOMY WITH A COMBINATION OF MARKET MEANS AND ADMINISTRATIVE MEASURES. AND THAT THEY NEED TO SPEED UP THE PROCESS OF REFORM. AND THAT'S THERE ACTUALLY MORE RISK TO THEM IF THEY GO TOO SLOW THAN IN GOING TOO FAST.

SORKIN: MR. SECRETARY, JOE HAS A QUESTION FOR YOU.

JOE KERNEN: GREAT TO SEE YOU, MR. SECRETARY. AND YOU KNOW, FOR I DON'T KNOW HOW MANY THOUSANDS OF YEARS, WE'VE POINTED OUT THE DIFFERENCES BETWEEN THE CULTURE OF THE WEST AND THE CULTURE IN CHINA. MORE RECENTLY, NEIL FERGUSON HAS POINTED OUT, THE ASCENDENCY OF THE WEST 500 YEARS AGO, HE'S IDENTIFIED SIX OF THE KILLER APPS, HE SAYS CHINA HAS DOWNLOADED FIVE OF THEM. THAT’S WHY THEY ARE SO EFFECTIVELY CATCHING UP WITH US BUT THERE'S ONE THAT STILL HASN'T BEEN DOWNLOADED THAT COULD PRESENT A PROBLEM IN THE FUTURE AND THAT'S JUST THE HUMAN RIGHTS ISSUE, THE PROPERTY RIGHTS ISSUE. IS IT SUFFICIENTLY DIFFERENT ENOUGH CULTURALLY OVER THERE THAT THEY NEVER HAVE A DAY OF RECKONING. OR DOES THE INTERNET AND JUST THE DESIRE FOR ALL PEOPLE TO HAVE JUST BASIC FREEDOMS, DOES THAT EVENTUALLY PRESENT A HUGE CHALLENGE FOR CHINA? AND HOW MANY YEARS DOWN THE ROAD DO YOU SEE THAT, YOU KNOW, COMING TO WHERE THEY HAVE TO RECKON WITH THAT?

PAULSON: JOE, FIRST OF ALL, GOOD TO SEE YOU, IF ONLY THROUGH A CAMERA. AND THE QUESTION THAT YOU ASKED IS ONE I GET A LOT. AND THE WAY I ANSWER IT IS, I BELIEVE THAT YOU'RE GOING TO SEE ULTIMATELY, MORE POLITICAL FREEDOM, MORE PERSONAL FREEDOMS. BECAUSE THEY WILL INEVITABLY FOLLOW THE ECONOMIC FREEDOM AS THE CHINESE GET MORE AND MORE ECONOMIC FREEDOM. SO I SEE THAT AS INEVITABLE. WHEN YOU TALK ABOUT POLITICAL REFORM AND MORE POLITICAl FREEDOM, I DON'T THINK ANY OF US, HAVE GOT THE EXACT TIMING OR THE, THE PRECISE PATH IT WILL TAKE. BUT THE ONE THING THAT I BELIEVE, AND I BELIEVE THIS VERY STRONGLY, THAT MORE POLITICAL FREEDOM IS GOING TO BE A VERY IMPORTANT TOOL TO HELP MAINTAIN STABILITY. IT DOESN'T HAVE TO BE DESTABILIZING. AND TO STEP BACK A BIT, I'VE BEEN GOING TO CHINA FOR A LONG TIME. AND LET ME TELL YOU, THE, THE LIVING CONDITIONS AND THE PERSONAL FREEDOMS AND THE LIVES OF THE CHINESE PEOPLE HAVE IMPROVED DRAMATICALLY OVER A 20-YEAR PERIOD, TEN-YEAR PERIOD. SO I THINK THERE'S, THERE'S, THERE'S ROOM FOR A LOT OF ENCOURAGEMENT THERE.

SORKIN: I’M CURIOUS JUST TO FOLLOW UP, WHEN YOU GO TO A, I DON’T KNOW IF YOU’VE BEEN TO A FOXCONN FACILITY, I'VE BEEN READING ALL OF THESE STORIES IN THE NEW YORK TIMES RECENTLY ABOUT WHAT SEEMED LIKE RATHER HORRIBLE CONDITIONS. ARE THEY AS HORRIBLE AS THEY SOUND? AND IS THE GOVERNMENT TRYING TO COVER IT UP?

PAULSON: I HAVE NEVER BEEN TO A FOXCONN FACILITY. SO I'VE READ THE SAME STORIES YOU'VE READ. BUT TO PUT IT IN PERSPECTIVE, ANDREW. THIS IS A DEVELOPING NATION. YOU KNOW, GDP PER CAPITA OF $4,000, THERE'S A LOT THAT'S BEING DONE IN TERMS OF WAGES INCREASING. AND U.S. COMPANIES OPERATING IN CHINA HAVE DONE A LOT TO RAISE THE BAR AND IMPROVE CONDITIONS. NOW THERE'S A WAYS TO GO, OBVIOUSLY. BUT THE COUNTRY HAS COME A LONG WAYS AND U.S. COMPANIES HAVE ADDED TO THAT.

SORKIN: MR. SECRETARY, MICHELLE HAS A QUICK QUESTION FOR YOU.

MICHELLE CARUSO-CABRERA: THANKS SO MUCH FOR JOINING US. THE CHINESE INVESTMENT CORPORATION AS A MEMBER OF THEIR ADVISORY BOARD WHO HAS BEEN PUT FORTH TO TALK TO MEDIA AROUND THE WORLD. RECENTLY MADE COMMENTS ABOUT EUROPE SAYING THAT THEY FELT THE SYSTEM THERE HAD BRED SLOTHFULNESS, ET CETERA. HOW DO THE CHINESE BEHIND CLOSED DOORS LOOK AT THE SITUATION IN EUROPE AND ABOUT HOW THEY'RE GOING TO INVEST THERE, IF THEY ARE AT ALL?

PAULSON: CHINESE HAVE BEEN INVESTORS ALL AROUND THE WORLD AND THEY VERY MUCH WANT TO INVEST MORE. AS YOU LOOK AT CHINA TODAY, THAT THEY'VE GOT SOME, A GOOD NUMBER OF COMPANIES THAT ARE VERY, VERY SUCCESSFUL, OPERATING IN CHINA. BUT THEY HAVE FEW, IF ANY, OF THE BEST GLOBAL COMPANIES. SO I THINK THE NEXT, THE NEXT ITERATION FOR CHINESE COMPANIES ARE TO LEARN HOW TO BECOME GREAT GLOBAL COMPANIES AND HOW TO HAVE, HAVE OUTSTANDING TECHNOLOGY AND GOVERNANCE AND HOW TO GIVE BACK TO THE COMMUNITIES IN WHICH THEY INVEST AND SO ON. SO THEY'VE GOT A LONG WAYS TO GO. I THINK THEY'RE LOOKING TO INVEST IN EUROPE. THEY'RE LOOKING TO INVEST IN THE UNITED STATES. THEY'RE LOOKING TO INVEST ALL OVER THE WORLD. NOW I THINK WHAT YOUR QUESTION THOUGH IS GETTING AT IS HOW DO THEY LOOK AT WHAT'S GOING ON IN EUROPE. AND THEY'VE GOT TO LOOK AT IT WITH A GOOD DEAL OF CONCERN, AS I SAID. THEY UNDERSTAND THAT THEY, THEY'VE GOT A $6 TRILLION ECONOMY AND THEY LOOK AT WHAT'S GOING ON AROUND THEM. THEIR JOB ISN'T BECOMING ANY EASIER TO CONTINUE TO GROW AND MEET THE DEMANDS OF A CHINESE PEOPLE, BECAUSE THE CHINESE PEOPLE WANT THE INCOME TO GROW THROUGHOUT THE POPULATION AND THROUGHOUT ALL THE REGIONS. AND SO THEY REALIZE THEY'RE GOING TO HAVE TO REBALANCE THEIR ECONOMY.

SORKIN: WE'RE GOING TO SNEAK IN A QUICK BREAK, COME BACK AND TALK MORE ABOUT CHINA, I WANT TO TALK TO YOU ABOUT THE U.S. ECONOMY. I WANT TO TALK ABOUT EUROPE AND A LITTLE BIT ABOUT WALL STREET. SO WE'RE GOING TO CONTINUE WITH THE FORMER TREASURY SECRETARY, BACK TO YOU, MICHELLE.

CARUSO-CABRERA: GREAT STUFF, ANDREW. COMMENTS OR QUESTIONS ABOUT ANYTHING YOU SEE HERE ON "SQUAWK," THIS INTERVIEW, EMAIL US AT SQUAWK@CNBC.COM.

KERNEN: LET’S GET BACK TO OUR SPECIAL GUEST. JOINING US NOW IN A RARE EXCLUSIVE INTERVIEW IS HANK PAULSON. FORMER TREASURY SECRETARY OF THE UNITED STATES. FOUNDER OF THE PAULSON INSTITUTE. QUICKLY WE WANT TO ASK YOU ABOUT WHAT WE'VE BEEN WATCHING AND SLOW MOTION. MR. SECRETARY. IN EUROPE AND I UNDERSTAND WITH CHINA THERE'S CULTURAL DIFFERENCE, EUROPE THERE'S CULTURAL DIFFERENCES. BUT YOU HAD, I WOULD SAY DAYS TO DEAL WITH A SITUATION IN THE UNITED STATES. I GUESS THEY HAVE YEARS IN EUROPE TO DEAL WITH A SIMILAR SITUATION. SHOULD WE HAVE EXPECTED THAT? AND WILL IT ULTIMATELY BE EFFECTIVE, THEIR SORT OF APPROACH TO DEALING WITH WHAT WAS KIND OF SIMILAR IN CERTAIN REGARDS?

PAULSON: JOE, YOU'RE RIGHT. THEY'RE SIMILAR ONLY IN CERTAIN REGARDS. BECAUSE THIS HAS BEEN GOING ON FOR A LONG TIME. AND I THINK IT'S GOING TO TAKE YEARS TO PLAY OUT. SO THIS IS GOING, THIS IS SOMETHING WE'RE GOING TO BE WATCHING FOR A GOOD WHILE. AND YOU KNOW, WHEN YOU AND HAVE TALKED ABOUT THE U.S. FINANCIAL CRISIS, I MENTIONED THAT THAT WAS, THE COLLISION OF, OF POLITICAL FORCES AND MARKET FORCES. AND THAT'S REALLY WHAT YOU'RE SEEING IN EUROPE. BUT THE REASON IT'S SO DIFFICULT IS THAT THE ISSUES AROUND THE STRUCTURAL ISSUES AROUND THE EU ARE VERY DIFFICULT ISSUES. THEY'RE DIFFICULT ANALYTICALLY, YOU CAN PUT A BUNCH OF EXPERTS IN THE ROOM AND IT ISN'T THAT OBVIOUS WHAT THE ULTIMATE SOLUTION IS. AND THEY'RE VERY DIFFICULT POLITICALLY. AND THEN YOU'VE GOT THE ISSUES AROUND THE FISCAL PROBLEMS OF SEVERAL OF THE MEMBER STATES. SO YOU KNOW THAT'S GOING TO TAKE A GOOD WHILE TO GRIND ON. AND SO WHILE THE POLITICAL PROCESS GRINDS ON HERE, I THINK THE IMPORTANT THING IS TO SAY HOW DO WE CONSTRUCT A BIG-ENOUGH FIREWALL SO THAT WE STABILIZE THE BANKS AND SO THAT WE MAKE SURE, SO THAT THEY MAKE SURE YOU DON'T HAVE A BIG SYSTEMIC BANK FAILURE OR MESSY MEMBER FAILURE.

SORKIN: YOU HAVE THE YEAR OF MARIO DRAGHI AND I’M CURIOUS WHEN HE CALLS FOR ADVICE DO YOU, WHAT DO YOU TELL HIM? AND DO YOU WORRY ABOUT A LEHMAN BROTHERS LIKE MOMENT IN ALL OF THIS? IS THAT AN APT COMPARISON OR IS THAT UNFAIR?

PAULSON: ANDREW I'VE GOT A HIGH REGARD FOR MARIO DRAGHI AND MARIO MONTI AND ANGELA MERKEL AND A NUMBER OF THE PEOPLE THAT ARE ON THE FRONT LINES HERE AND ONE THING I NEVER DO IF I HAVE COMMENTS IN PRIVATE I NEVER TALK ABOUT THEM PUBLICALLY. BUT I'LL TELL YOU WHEN, WHEN I SAID WE NEED TO HAVE, COME UP WITH A WAY OF STABILIZING THE BANKS WHILE THIS DRIVES ON, I WOULD SAY THAT MARIO DRAGHI HAS TAKEN A BIG STEP TO ADDRESS THAT WITH A MASSIVE LIQUIDITY FACILITY.

SORKIN: WHEN YOU GO BACK AND THINK ABOUT LEHMAN BROTHERS. IS THAT AN APT COMPARISON? IS THE FAILURE FOR EXAMPLE OF GREECE THAT BIG?

PAULSON: I THINK WHEN YOU LOOK AT LEHMAN BROTHERS, REMEMBER, I BELIEVE LEHMAN WAS A SYMPTOM AS MUCH AS ANYTHING. BECAUSE WE HAD, WE HAD AIG, MERRILL, LEHMAN BROTHERS ALL GOING DOWN THE SAME WEEK. WE HAD THIS PROBLEM THROUGHOUT EUROPE. I DON'T THINK THAT IS THE RIGHT ANALOGY. BUT I THINK THE ONE THING THAT WE SHOULD TAKE AWAY FROM LEHMAN BROTHERS IS YOU DON'T WANT A BIG SYSTEMIC INSTITUTION TO FAIL IN A MESSY WAY AND YOU CLEARLY DON'T WANT THAT TO HAPPEN WITH A MEMBER STATE. BUT SO WHEN YOU LOOK AT GREECE, I THINK IT'S IMPORTANT THAT IF THERE IS A PROBLEM, THAT IT'S WELL ANTICIPATED AND THAT, AND IT DOESN'T HAPPEN IN A SLOPPY SUDDEN WAY.

SORKIN: ARE THERE ANY LESSONS FROM YOUR EXPERIENCE ON THE SOCIAL SIDE? AND WHEN I SAY THE SOCIAL SIDE, I THINK ABOUT THE BAILOUTS. AND THE REASON I ASK IT IS BECAUSE RIGHT NOW YOU'RE SEEING SOCIAL UNREST IN GREECE AROUND AUSTERITY. HERE YOU'RE SEEING A DIFFERENT VERSION OF SOCIAL UNREST AT SOME LEVEL AROUND OCCUPY WALL STREET. I'M CURIOUS WHEN YOU GO BACK AND THINK ABOUT THAT, IF YOU WERE GOING TO TALK TO MARIO DRAGHI, WHAT WOULD YOU TELL HIM?

PAULSON: THERE ARE HUGE LESSONS AND I DON’T HAVE TO SAY THAT BECAUSE I THINK EVERYONE UNDERSTANDS IT IS SO WELL. I TELL THE STORY, AND I GET A LAUGH, ALTHOUGH I DIDN'T LAUGH AT FIRST, WHEN I LEFT, WHEN I LEFT MY JOB, THERE WAS A POLL. AND THE POLL SHOWED THAT 92% OF THE AMERICAN PEOPLE WERE AGAINST THE T.A.R.P. AND THAT THE SAME POLL, 60% WERE AGAINST TORTURE. AND SO THAT'S, THAT TELLS YOU SOMETHING. AND WHEN YOU THINK DEEPER ABOUT IT, I UNDERSTOOD WHY THE AMERICAN PEOPLE DON'T LIKE BAILOUTS. NO ONE LIKES BAILOUTS. BUT THEY'RE SURE BETTER THAN THE ALTERNATIVE, WHICH WOULD HAVE BEEN A CATASTROPHE. SO IF THE AMERICAN PUBLIC FEELS THAT WAY, JUST IMAGINE WHAT THE GREEK CITIZENS FEEL. JUST IMAGINE WHAT THE GERMANS FEEL. AND SO, YOU HAVE TO SAY, YOU CAN ONLY DO WHAT YOU CAN DO. SO THIS IS, THAT'S WHY I STARTED OFF, AND I SAID TO JOE – THE COLLISION OF POLITICS AND MARKETS. THAT'S WHAT WE SAW IN THE U.S. BUT IN THE U.S., WE WERE DEALING WITH ONE NATION, ONLY ONE NATION. AND IN THE U.S., NO ONE DOUBTED THAT IF WE GOT THE AUTHORITIES, THAT THE SOVEREIGN WAS STRONG ENOUGH THAT WE COULD, WE COULD DO WHAT WE NEEDED TO DO.

SORKIN: RIGHT.

PAULSON: AND SO THE DANGER IS, IF THIS DRAGS ON TOO LONG, THAT PEOPLE START TO HAVE THOSE DOUBTS. THAT'S WHY I THINK IT'S SO IMPORTANT THAT THEY ERECT THAT FIREWALL AND THAT THEY MAKE SURE THAT THE BANKS ARE STABLE. SO THAT'S WHY I APPLAUD WHAT MARIO DRAGHI HAS DONE IN TERMS OF THIS MASSIVE LIQUIDITY.

SORKIN: MICHELLE’S GOT A QUESTION FOR YOU.

CARUSO-CABRERA: SPEAKING OF FIREWALLS MR. SECRETARY, WHEN ANDREW WAS IN DAVOS, HE ASKED JAMIE DIMON, VERY SPECIFICALLY ABOUT IF THERE WERE A GREEK DEFAULT WHAT WOULD BE IMPACT ON U.S. BANKS. AND JAMIE DIMON SAID NEAR ZERO. DO YOU THINK HE’S RIGHT ABOUT THAT? HAVE WE GOT A GOOD-ENOUGH FIREWALL HERE?

PAULSON: WELL, I THINK THERE'S SEVERAL WAYS TO LOOK AT THIS AND TO BEGIN WITH, I WOULD SAY THAT THE U.S. BANKS ARE MUCH BETTER CAPITALIZED THAN THEY WERE A NUMBER OF YEARS AGO. THEY'RE BETTER REGULATED. AND I, YOU KNOW, I DON'T DOUBT WHAT I READ AND WHAT I HEAR FROM REGULATORS THAT THEIR DIRECT EXPOSURE TO EUROPEAN SOVEREIGN DEBT IS REALLY QUITE MANAGEABLE. BUT I WOULDN'T WANT TO TEST OUR FIREWALL IF WE HAD, IF THIS THING GOT OUT OF CONTROL AND YOU HAD CATASTROPHE OVER THERE. I'M NOT EXPECTING THAT. I'M NOT EXPECTING THAT AND I'M NOT FORECASTING THAT.

SORKIN: THE VOLCKER RULE IS IN THE NEWS, GIVEN THE COMMENT PERIOD JUST ENDED. I JUST WROTE ABOUT IT. I THOUGHT THE COMMENT PERIOD IS OVER, BUT WE'LL GIVE YOU AN OPPORTUNITY TO COMMENT.

PAULSON: THANK YOU FOR THAT OPPORTUNITY.

SORKIN: DOES THE VOLCKER RULE HELP END TOO BIG TO FAIL?

PAULSON: LISTEN, ANDREW, I THINK YOU KNOW THAT, THAT I ADVOCATED VERY STRONG TOUGH REGULATION ON THE BIG BANKS. AND, BUT I DIDN'T ADVOCATE THE VOLCKER RULE AS THE WAY TO GO. AND THE REASON I DIDN'T WAS, AT LEAST FROM MY EXPERIENCE, THAT WHEN I LOOKED AT THE FAILURES AND THE PROBLEMS WE'RE DEALING WITH, IT DIDN'T COME FROM PROPRIETARY TRADING. AND SO WHAT I'VE SAID, ANDREW, IS THAT I WANT THE REGULATORS TO BE ABLE TO, TO HAVE THE AUTHORITY TO STEP IN AND STOP ANY DANGEROUS PRACTICE BY THE BANKS OR RISKY PRACTICE THAT VIOLATED THE SYSTEM. AND IN MY EXPERIENCE, A PROPRIETARY TRADING IS CLEARLY BRINGS WITH IT, RISK. BUT THERE ARE MANY PRACTICES THAT DO. AND FROM MY EXPERIENCE, BANKS GET IN TROUBLE EVEN MORE, FROM CUSTOMER ACCOMMODATING TRADES. BRIDGE LOANS OR STEPPING INTO TO DO A BIG OIL-HEDGING TRANSACTION OR WHATEVER. SO I THINK IT CAN BE, IT CAN BE COUNTERPRODUCTIVE TO SINGLE OUT ONE AREA AND FOCUS ON THAT. AND THEN YOU THINK BOY, IF WE JUST DEAL WITH PROPRIETARY TRADING, WE'VE SOLVED THE PROBLEM. ALSO, MY OTHER CONCERN HERE AND THIS IS GOING TO BE THE WAY IT'S, THE WAY THE RULES ARE WRITTEN. BECAUSE I THINK IT'S VERY IMPORTANT AND I'M NOT SAYING THE VOLCKER RULE IS GOING TO BE A PROBLEM. IT COULD BE HELPFUL. BUT IT'S GOING TO BE VERY IMPORTANT THAT THE RULES ARE WRITTEN SO THAT BANKS ARE ABLE TO MAINTAIN INVENTORIES. BECAUSE IF THEY CAN'T HAVE INVENTORIES, THEY'RE, HOW DO THEY PROVIDE THE LIQUIDITY AND HOW DO THEY DO THEIR MARKET-MAKING AND RISK MANAGEMENT FUNCTION IN A WAY THAT THERE'S NOT A BIG COST.

SORKIN: DO YOU THINK WALL STREET HAS CHANGED? YOU SPENT YOUR CAREER ON WALL STREET, YOU WERE THE CEO OF GOLDMAN SACHS. CAN YOU EVER IMAGINE THAT WOULD BE IN THIS PLACE NOW IN TERMS OF THE WAY THE PUBLIC THINKS ABOUT WALL STREET AND SOME OF THE ISSUES THAT ARE SURROUNDING IT?

PAULSON: IT'S SO, SO SAD. BECAUSE I BELIEVE BANKING IS AND SHOULD BE A NOBLE PROFESSION. IT'S VITAL CAPITAL MARKETS ARE JUST VERY, VERY IMPORTANT TO ANY ECONOMY. AND SO I, WHEN I GO AND TALK TO BUSINESS SCHOOLS OR TALK TO UNDERGRADUATES, THEN PEOPLE TALK ABOUT THEIR CAREER, I ENCOURAGE THEM TO CONSIDER BANKING ALONG WITH ALL SORTS OF OTHER CAREERS. AND WALL STREET WILL GET THROUGH THIS. WALL STREET MADE A LOT OF MISTAKES. BUT YOU KNOW WHAT HAPPENS? AND IT HAPPENS WITH EVERY FINANCIAL CRISIS. IT HAS FROM THE BEGINNING OF TIME. FINANCIAL CRISES STEM FROM FLAWED GOVERNMENT POLICIES. ALWAYS. OKAY? AND --

SORKIN: SO YOU PUT MORE BLAME ON THE GOVERNMENT POLICIES THAN ON THE BANKS?

PAULSON: NO. I'M SAYING THE PLENTY OF BLAME TO GO AROUND. BUT THE ROOT CAUSE ARE, THIS WAS A HUGE CREDIT CRISIS. WHY DO AMERICANS BORROW TOO MUCH, SAVE TOO LITTLE? WHY DID WE OVERSTIMULATE HOUSING? THERE ARE FLAWED GOVERNMENT POLICIES. THERE ARE EVERYWHERE. WHAT'S GOING ON IN EUROPE. ARE YOU GOING TO BLAME THE BANKS? WHEN YOU LOOK AT SOME OF THE STRUCTURAL ISSUES AND SO ON. SO WHAT HAPPENS, BECAUSE THE BANKS ALWAYS MAKE MISTAKES. SO PEOPLE PILE ON THE BANKS. AND THEY WORK TO CORRECT THOSE MISTAKES. AND THAT WOULDN'T BE ALL BAD IF PEOPLE, UNLESS IT HAS PEOPLE TAKE THEIR EYE OFF THE BALL. BECAUSE SO FAR WE'VE DONE A LOT TO STRENGTHEN THE BANKING SYSTEM. BUT THE GOVERNMENT POLICIES THAT GOT US HERE, NO ONE'S DEALT WITH THOSE BIG ISSUES AND THOSE ARE THE ISSUES THAT WE REALLY NEED TO DEAL WITH.

SORKIN: U.S. ECONOMY, YOU ALSO SPEND TIME STILL TALKING TO BEN BERNANKE, WE HAD SOME VERY GOOD JOBS NUMBERS OUT LAST WEEK. BUT MR. BERNANKE HAS SIGNALED THAT HE DOESN'T THINK THE ECONOMY IS GOING TO GROW NEARLY AS MUCH AS THOSE NUMBERS WOULD SUGGEST. HOW DO YOU SQUARE THAT CIRCLE?

PAULSON: I CAN'T COMMENT ON WHAT BEN BELIEVES OR NOT, THAT'S FOR HIM TO TALK ABOUT. WHEN I LOOK AT THE ECONOMY, AND AGAIN, I'M NOT AN ECONOMIST, I JUST LOOK AT IT AND I AM ENCOURAGED BY THE RECENT ECONOMIC NEWS. BUT I THINK IT'S GOING TO BE A LONG SLOG. AND I THINK IT'S GOING TO BE YEARS BEFORE WE GET OUR UNEMPLOYMENT TO AN ACCEPTABLE RATE.

SORKIN: WHAT DO YOU THINK AN ACCEPTABLE RATE IS?

PAULSON: I WON'T PUT A NUMBER ON IT, BUT IT'S A LOT LOWER THAN IT IS NOW. BUT HERE'S THE ANOMALY AND HERE'S THE ANOMALY THAT A NUMBER OF ECONOMISTS I'VE TALKED TO ARE STRUGGLING WITH. IF YOU LOOK TAKE A LOOK AT THE RECENT JOB CREATION, WHICH HAS BEEN QUITE GRATIFYING, AND YOU LOOK AT THAT, YOU CAN'T SQUARE IT WITH THE GROWTH RATE. BECAUSE ALMOST ANY ECONOMIST WOULD SAY IT'S GOING TO TAKE A HIGHER GROWTH RATE THAN WE'VE HAD TO CREATE THE JOBS WE'VE CREATED. AND I'VE HAD A COUPLE OF ECONOMISTS SAY TO ME, HANK IF YOU'RE GOING TO BACK THE 2010 WHEN UNEMPLOYMENT WAS THE HIGHEST AND THEN YOU SAID WHAT GROWTH RATE WOULD IT TAKE TO CREATE THE JOBS WE'VE GOT TODAY, THEY WOULD SAY 5%. AND OF COURSE, WE HAVEN'T HAD THAT KIND OF GROWTH AND SO TO ME, THAT'S AGAIN RATHER TROUBLING. SO I'M NOT BEING AN ALARMIST. I JUST THINK THAT UNTIL WE DEAL WITH THE HUGE STRUCTURAL ISSUES WE'VE GOT AND WORK ACROSS THE AISLE AND COMPROMISE, WE'RE NOT GOING TO GET THE ECONOMY ON THE KIND OF SUSTAINABLE GROWTH TRACK WE NEED.

SORKIN: MR. SECRETARY, JOE'S GOT A QUICK QUESTION FOR YOU.

KERNEN: HANK, YOU'VE SEEN THAT CORPORATIONS SEEM TO BE A LITTLE BIT HESITANT TO MAKE LONG-TERM INVESTMENTS, A LITTLE BIT HESITANT TO HIRE. THERE'S A LOT OF DIFFERENT REASONS AND I'M SURE THEY ALL HAVE SOME VERACITY. BUT WHAT DO YOU THINK IS THE MOST IMPORTANT? DO YOU THINK THEY'RE LOOKING AT NEVER HAVING COMMERCIAL PAPER FUND ALL THEIR OPERATIONS AGAIN SO THEY'RE MORE CAUTIOUS? DO YOU THINK IT'S UNCERTAINTY ABOUT TAX POLICY AND GOVERNMENT POLICY IN THE FUTURE? OR IS IT JUST WHAT WE SHOULD HAVE EXPECTED GIVEN SUCH A DEEP FINANCIAL CRISIS A COUPLE OF YEARS AGO, IT'S STILL WORKING OUR WAY OUT OF THAT PROBLEM?

PAULSON: JOE, I THINK IT'S ALL OF THE ABOVE. BUT TO STEP BACK, U.S. BUSINESS, THEY'VE BEEN A HUGE BRIGHT SPOT. WHEN YOU TAKE A LOOK AT HOW ABYSMALLY, HOW POORLY THE GOVERNMENT HAS PERFORMED, AND YOU LOOK AT WHAT THIS ECONOMY HAS BEEN THROUGH, AND THEN YOU LOOK AT THE WAY U.S. BUSINESS IS PERFORMING, I WOULD SAY U.S. CEOs AND MANAGEMENT TEAMS AND CORPORATIONS ARE DOING AN OUTSTANDING JOB. AND I THINK IT TAKES A WHILE TO COME BACK FROM WHAT WE'VE GONE THROUGH. I THINK THERE'S A LOT OF UNCERTAINTY. JUST LOOK AT THE ISSUES WE'VE TALKED ABOUT TODAY. WHEN YOU TALK ABOUT WHAT'S GOING ON IN EUROPE. YOU KNOW, WHAT ARE THE ISSUES IN CHINA. WHAT ARE THE CONCERNS IN THE U.S. IT'S NOT THE KIND OF ENVIRONMENT WITH ALL OF THIS UNCERTAINTY. AND THEN WHEN THE POLITICAL UNCERTAINTY AND THE REGULATORY UNCERTAINTY, IT'S NOT THE KIND OF ENVIRONMENT WHERE CEOs ARE FEELING SO CONFIDENT THEY WANT TO GO OUT AND ARE LOOKING TO MAKE THE INCREMENTAL INVESTMENT.

SORKIN: I'M CURIOUS, I WASN'T GOING TO GO HERE, BUT TAX POLICY AND THE CONTEXT OF EVERYTHING THAT'S GOING ON, YOU'RE A FRIEND OF WARREN BUFFETT'S, THERE'S THE INDIVIDUAL, BUT ALSO THE CORPORATE TAX ISSUE. I'M CURIOUS, YOU SAW WHAT OBAMA HAS RECENTLY PROPOSED. WHAT DO YOU THINK OF THAT?

PAULSON: YEAH. I GET THERE'S NOTHING THAT FRUSTRATES ME MORE THAN THE TAX DEBATE. BECAUSE I'VE STUDIED THE TAX SYSTEM. AND THERE'S NO DOUBT WE NEED MORE TAX REVENUES. OF COURSE WE NEED MORE TAX REVENUES, THEY'RE 15% OF GDP NOW, THEY'VE AVERAGED MORE THAN 18% FOR 40 YEARS. BUT THE ISSUE SHOULDN'T BE WHAT DO WE DO WITH THIS RATE OR THAT RATE. THE QUESTION SHOULD BE, WHAT FORM OF TAXES WILL GIVE US THE REVENUES WE NEED AND LET US BE COMPETITIVE AND CREATE JOBS AND GIVE US ECONOMIC GROWTH. THAT'S WHAT WE NEED. AND NO ONE WOULD ARGUE THAT THE CURRENT SYSTEM DOES IT. WE NEED A NEW SYSTEM. AND YOU KNOW, I'VE BEEN FOR A SYSTEM WHERE WE WOULD ELIMINATE THE DEDUCTIONS AND ALL THE DISTORTIONS AND THE SPECIAL SPENDING PROGRAMS THAT ARE PART OF THE TAX CODE. AND LOWER THE RATES. AND HAVE SOMETHING THAT WILL LET US BE COMPETITIVE IN TODAY'S WORLD.

SORKIN: FINAL QUESTION. TIM GEITHNER HAS SIGNALED HE'S GOING TO BE STEPPING DOWN, WHETHER OBAMA WINS OR NOT IN THE NEXT ELECTION CYCLE. WHO WOULD YOU LIKE TO SEE OR WHAT KIND OF PERSON, GIVEN THE ECONOMY AND THE STATE OF THE WORLD THAT WE LIVE IN, WHAT KIND OF PERSON WOULD YOU LIKE TO SEE BE THE NEXT TREASURY SECRETARY?

PAULSON: I WOULD HAVE TO TAKE THIS TIME TO SAY, TIM IS A TERRIFIC TREASURY SECRETARY AND ALL OF US SHOULD BE VERY GRATEFUL THAT HE'S IN THAT JOB TODAY. NOW IN TERMS OF YOUR QUESTION, I WOULD SAY WHAT WE NEED WITH A TREASURY SECRETARY, IS FIRST OF ALL, SOMEONE THAT IS CLOSE TO THE PRESIDENT. OR CAN BUILD A STRONG RELATIONSHIP WITH THE PRESIDENT. BECAUSE THE TREASURY SECRETARY CAN ONLY DO WHAT THE PRESIDENT IS GOING TO LET HIM DO. AND SECONDLY, WE NEED SOMEONE WITH BOTH THE SKILL SET AND THE MINDSET TO WORK ACROSS THE AISLE, TO WORK WITH MEMBERS OF CONGRESS LIKE THEIR CLIENTS, AND TO BE WILLING TO TAKE ON HUGE ISSUES. BECAUSE WE'RE ONLY GOING TO SOLVE THE BIG DEFICIT PROBLEM WE HAVE, AND WITH ENTITLEMENT REFORM, WITH TAX REFORM. AND SO THIS IS GOING TO HAVE TO BE SOMEONE THAT KNOWS HOW TO GET SOMETHING DONE. KNOWS HOW TO WORK WITH PEOPLE AND KNOWS NO MATTER HOW SMART YOU ARE, NO MATTER HOW GREAT YOUR IDEAS ARE, THEY'RE WORTHLESS UNLESS YOU CAN SELL OTHER PEOPLE AND GET THEM TO ACT.

SORKIN: HANK PAULSON, THANK YOU SO MUCH FOR JOINING US THIS MORNING. WE APPRECIATE IT VERY MUCH ON BEHALF OF EVERYONE AT "SQUAWK."

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