Former Treasury Sec. Paulson On The 2008 Crisis

Triss from when you began your role at Treasury when do you think you realized or even have the thought that we could be headed for a crisis like this while Andrew we're really from the day I begin I was concerned that we were going to have a crisis because of the excess as I'd seen in the financial system so for instance right after I was sworn in as Treasury secretary and had the first meeting with President Bush and his economic team which was at Camp David and and I was slated to talk about entitlement reform and I basically said you know I'd like to talk about something else I came here to work on entitlement reform that's very important but I see great excesses in the financial system I think we're due to have a crisis and so we had quite a in extensive conversation about that the advantage of this was that we began to prepare right away our agencies and departments develop smooth communications and which were invaluable later but I had not seen anything or or for seen anything of the nature we had I didn't think we were going to have the epic event the once in every 75 year event that we actually had after Bear Stearns what did you think was going to happen did you think it was over did you think it was just the beginning oh oh no there's no way we thought it was over after Bear Stearns a matter of fact as I look at Bear Stearns I think Mayer Stearns was a key pivotal bullet the real bullet and I'll talk about that in a minute but now after Bear Stearns what hit us big time all of us was if an investment bank gets hit by a run in the middle of a panic we don't have the authorities in the United States government to save them unless what there's a buyer so you call in in the in that's that spring period you have a handful of calls with Dick Fuld would you tell it well what was it just a handful of calls I I had 60 calls so a Dick Fuld from the time Bear Stearns went down and it's all Lehman failed and other members of Treasury had plenty of calls also I was very clear and what I told them I I said you know we learned that a the United States of America doesn't have the authorities to save a failing in investment bank we don't have the authorities the emergency authorities to guarantee liabilities to inject capital so you know what you should be doing is you should be raising capital and you should be looking for a cornerstone strategic investor or working to sell the business and we had plenty of conversations where we nudged him and even pushed him very hard to do just that and what did he tell you well he is an optimist the so he basically said you know I've got plenty of capital we don't have a significant risk you know at Lehman but I do recognize that the market is concerned to remember this this evolved over a period of time he would come up with these wacky ideas from his standpoint I'm sure they weren't wacky I mean he would talk about yeah this idea of spin code where he was going to put his bad assets aren't you know art stone and other bad assets you know in a pool that's and spin them off and he would say well I want what I want you know the government to guarantee it or the government to put in capital and we explained odd nauseam that the government couldn't do that that's been asked forward to now the fall of 2008 Fannie and Freddie have been taken into conservatorship and now we're moving into that that week where we're walking through into the weekend of Lehman Brothers and let me start even before then for that week to just say we were racing I was racing to stabilize Fannie and Freddie before Lehman announced the third quarter earnings so we were we were concerned about Lehman I was very concerned about Fannie and Freddie and Fannie and Freddie's nine times bigger than then the Lehman Brothers and any kind of failure or even a fail the auction could do huge damage but imagine if Bear Stearns had gone down or Lehman had gone down before we'd stabilize Fannie and Freddie so I had that been a bit naive because when we got Fannie and Freddie done and that was so difficult to get it done and I thought so it's so important to the financial system I've read the sign relief and I was hoping wow you know maybe we've put out this fire you know maybe that this is such a strong signal and of course I so all kinds of banks owned Fannie and Freddie paper and I thought that that would appreciate in value that would give a lift to the industry and that may have given a lift to Lehman Brothers so instead you know the market said holy cow you know if Fannie and Freddie has got these problems just think how bad the situation must be a believe it so it it actually had the opposite effect that I'd anticipated but I can only say we were very fortunate to have got Fannie and Freddie done he got them nationalized before Lehman came on good so now let's walk into that weekend you're on the phone with Tim and been making plans to go down to New York yeah come up to New York like Bank America is in and around Lehman Brothers you're you're about to bring all of the CEOs from The Wall Street banks together I was pretty sure of his Lehman had gone all around the world that there was no one that wanted to buy Lehman as is people would want to buy Lehman if they could get help with the bad debt so I made the point on that that that phone call that that there would be no government money what this was was a tactic and it was a tactic designed to increase our probability of having a successful deal because we wanted I wanted the Wall Street to show up and be prepared to take enough of the bad debt that you know that would have to be left behind so that a buyer could be attracted and we could get a deal done with a buyer publicly the perception was that that the government wasn't going to take anything on you that was more of a negotiating you know you want that was a negotiating tactic because that was a negotiating tactic because if we hadn't done that they would have all showed up thinking that the Fed is going to finance it or somehow the government was going to take on these bad assets or guarantee the liabilities and so we that was the that was a tactic I remember talking with Tim afterwards and Tim said you know I wouldn't have done that because he said if there's an opportunity to do a deal you know it will be embarrassed you lose credibility and I said that would be a hyper that would be a high-class problem if we can do that I'm trying to get through the night and I don't want these guys showing up thinking that that what we're going to bail them out Leeman going under it was horrible it hurt a lot of people at Lehman it it accelerated the panic but you know we had three major institutions going down that weekend and you know if B of a had bought Lehman then Merrill would have gone down it would have been worse because Merrill was bigger Lehman the failure actually jolted the political system and made it possible to go to Congress get the tarp it could have been a worse outcome that weekend do you think without Lehman Brothers failing the government wouldn't have acted a week Andrew we couldn't have Minh any earlier that was success and got the authorities we needed from Congress I mean even after Lehman Brothers everything we went through the House voted him down the first time we frustrated that people politicize the failure of Lehman and thought it was a choice of course but I'm not sure that was even politicizing it I mean I think people really did believe that it was a choice I mean we did so many you know amazingly creative and difficult things with the authorities we we had you know I thought we were sort of working with with the baling wire and duct tape but we we we've done so much I think people just expected us to do this and expect that it's somewhere the United States of America had to have the authorities to save a failing investment bank so fast forward now we're on Tuesday yeah and the government's gonna have to bail out AIG right after the Sunday night and Monday we're leaving brothers didn't get bailed out right how did that wave on you oh it listen I was doing I wanted to they allow a rescue any institution we could any institution we could and AIG was a dramatically different situation than Lehman Brothers what we had a situation with AIG where the market perception was that there was this liquidity problem serious one at the holding company but that the insurance companies were well capitalized they had independent ratings and that they were that they resulted and the Fed was able to make a loan looking at them as collateral and so the Fed this judgment I'm not saying it was an easy judgment for the Fed but the Fed made the judgment that they could make a loan that where the collateral would be good and what is more important in my judgment is the market accepted it take us to that Wednesday and Thursday when you go to Congress we went up on a Thursday night and and and painted a a very bleak picture talked about you know that the fact that the the markets were frozen and that no matter what we did the economy was going to turn down a number of weeks out and that we really needed these authorities and at the time I remember us late at night Barney Frank said you know this is gonna be a very unpopular vote because you can't prove a contractual and I remember asking what's the counterfactual it was and he said you'll never get credit from the American people for staving off a crisis that they don't see if you're successful but we're going to get the blame for the downturn when it comes it seemed like an excruciatingly long time to me but to get the authorities about Congress acted we got them in 16 days which is lightning speed for Congress and and I actually think it's the last time we've seen the United States Congress make a consequential decision on a bipartisan basis so I think that was that was that of sort of the best part of the crisis yeah I mean we had 10% unemployment we had 23 million people out of jobs people lost their homes you know their jobs and this if the people that were at least able to bear it you know those on fixed income low income so it was horrendous but you know I was thinking of a Great Depression kind of an event which is 25% that's two and a half times greater I was envisioning food lines in the middle of night speak to this because it was an issue I know you you had to deal with that week which was the perception around your former role at Goldman Sachs and therefore the relationship or conversations you could or could not have with Goldman right so Andrew let me begin by saying that when I left Goldman Sachs I severed my relationship or Goldman Sachs I was Treasury secretary representing the American people and that was going to be what how I performed in that job is going to be my lasting legacy for good or for bad I bent the patriot so I was working a hundred percent for the American people and you know so and you know after I left Treasury I didn't go back to Goldman Sachs I didn't go to work for any financial institution when I went to Treasury I signed a ethics agreement that said I wouldn't work on issues that were particular to Goldman Sachs and so the and and of course any time I did something to to protect the financial system and the American people it's going to relate somehow to Goldman Sachs right but it's not particular to Goldman Sachs now my lawyers monitored this all and there was a time during that weekend when they went and got it you know got the release so I could deal with Goldman Sachs and talk to Goldman Sachs if I needed to because Tim Geithner had come to me and and and said Hank how dumb is this how would you like to explain to the American people you know if Goldman Sachs went down and to say well I I was on the sidelines looking at it I didn't do anything to protect you because I had I didn't ask for a release from my ethics agreement do you remember getting calls from John Mack oh gosh yes I had multiple calls from him I had one or early in the week where he said the short sellers were all over them and you know and Morgan was under huge pressure and that was a time in which what did he want you to do well he wanted a ban on short selling and we've been looking at that anyway and you know I spent a bunch of time talking a bit and pin Tim about it with Chris Cox and and you know and Chris Cox rightly had concerns about you know how effective a ban would be and I leaned on him and said you know I think if we don't do this I'm not sure there's gonna be a market to protect anyway I mean we're not you know some free-market principles are out the window Morgan Stanley goes down it's going to be all she wrote so we we got the ban test it was like in the meeting in early October when all the bankers come up come in to come down to DC and you say we're giving you the money and you're gonna have to take it one of the things that I'm absolutely the proudest of was something we did with the tarp authorities which is totally unprecedented we move with lightning speed and we put capital in seven hundred banks this recapitalize that the the the whole financial system but it was very unpopular and rightfully so the American people were unhappy that the when the banks paid out big bonuses the American people wanted us to to punish the banks and you know we you know when I had to decide between you know doing what the public wanted and doing things that stabilized the markets you know I came down on the side of stabilizing the markets because I thought that's what it was going to take to really protect the American the American economy the financial system the workers the homeowners and so on so that that's what I did I wish I could have done both scissors are very very tumultuous time we went around the table and again it was very important not to distinguish this capital you know I would have liked as much as anyone to put all kinds of restrictions on it but then people wouldn't have taken capital because you know what we've learned is during a crisis no one wants to be stigmatized and look weak so every bank says guess what I don't have any problem I don't need any help until they that they fail or just about to fail so they came in and we went around the table and basically every institution very willingly accepted this with the exception of dick Ivanovich of Wells Fargo what I basically said and I don't remember the exact words was listen your regulator sitting right there with you then in timbre telling you what you need you know you can either take it but if you don't take it and you can't raise the capital they tell you in a race in the public market when you come back to me you won't like the terms of the second helping and so he took it but it is highly highly unpopular and I looked at some polls when I left office that showed that torture you know what was less unpopular than in the tarp and because the tarp was so unpopular I think it makes it much harder on those that come after us to do the kinds of things that they're going to need to do today yeah do you think we're in a better position than we were a decade ago well in some ways were in a better position in some ways were in a worse position so the with regard to our banks they're much better capitalized much better managed much better regulated and a matter of fact as I look throughout our financial system I don't see a lot of vulnerabilities you know Fannie or Freddie still haven't been fixed but the government's on the hook there so I don't see that leave it leading to our crisis anytime soon so less dry kindling around to start the fire but I'm more concerned about the tools we have to put out the fire because one of the very biggest lessons from the crisis if you want to stem it you got to come in with government force early on and you know it takes a while to get Congress to act but I don't think Congress has learned that lesson because they've taken away the authority the Treasury had to use the exchange Stabilization Fund which we used to guarantee the money markets the ability for the FDIC to use their emergency authorities to guarantee the unsecured liabilities of bank holding companies tremendously powerful that has been taken away the ability of the Fed to make 13-3 emergency loans on a one-off basis they can make it a systemic basis but on a one-off basis has been taken away if they hadn't had that I believe that the Bear Stearns would have gone down and it would have precipitated a huge problem now we do have the orderly liquidation authorities that I really wish we had for Lehman and I think it could have made a difference a big difference on Lehman but I have real concerns about how those might work in the middle of a crisis if they're used as Congress intended them to be used the biggest regrets I have have to do with communications but I was never able to convince the American people of what we did wasn't for Wall Street but it was for them you you

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Id: DsZ28xn9ATo

Length: 22min 4sec (1324 seconds)

Published: Tue Sep 11 2018