Hank Paulson, the U.S. Treasury secretary from 2006 to 2009, and more importantly the George W. Bush official who acted forcefully to contain a rapidly spreading financial crisis in 2008 while his White House bosses snoozed, remains convinced his emergency actions prevented another Great Depression.
Speaking yesterday to an overflow crowd at the Economic Club of New York, Paulson said he had done a lot of soul-searching and, while the country continues to debate the causes of the meltdown and the effectiveness of his rescue efforts, "I remain convinced, on balance, that we did the right things."
It was a polite affair at The Pierre hotel; the obvious questions went unasked: So you never kicked yourself for not pressuring bailed-out bankers to refrain from paying themselves large bonuses? And you aren't even a little disappointed that you never demanded that rescued banks maintain lending levels, or assist underwater homeowners?
Paulson nevertheless offered an interesting perspective on what was done -- and not done -- to fix the financial system's potholes five years later. Some highlights:
The U.S., he warned, is in danger of another crisis, if only because historically they arrive about every eight years. All crises have roots in flawed government policies that allow bubbles to build, the former Goldman Sachs chairman and chief executive officer said.
This time, though, danger lurks in the reforms that never got done, including overhauling Fannie Mae and Freddie Mac, the housing-finance companies he seized five years ago. Money-market mutual funds and other so-called shadow banks that provide overnight financing to commercial banks also still need to be regulated, Paulson said, or else they could trigger another crisis.
Also on his "jobs not done" list: the alphabet soup of regulatory agencies. There were five main regulators pre-crisis, Paulson said, and there are still five main regulators, tripping over each other. "This is a big problem," he said, emphasizing the big.
He named a couple programs that Congress ended in 2008 and 2010 but shouldn't have because they might come in handy in the next crisis, including the Federal Reserve's section 13(3) emergency lending authority.
What would he do to avoid another 2008? He espoused higher capital requirements on any bank that is highly dependent on shadow banks for financing, and suggested that the largest banks might need still more capital than called for in the Basel III accords and by the Federal Reserve.
He would also shrink Fannie and Freddie by limiting the size of the mortgages they buy and making their guarantees available only to first-time homebuyers. And he would have the Securities and Exchange Commission regulate all money-market funds, not just those that cater to pension and mutual funds.
Paulson's only regret? He didn't clearly communicate some of his policy decisions, which remain unpopular today. He is bothered, he said, that he couldn't convince Americans that he bailed out the banks not to save Wall Street but to save Main Street. He also wishes he had better explained that he didn't just wake up one day and decide to let Lehman Brothers collapse. He said he tried for weeks to convince other banks to buy Lehman, but failed.
Paulson admitted to a few "mistakes" that, in hindsight, were fortuitous. One such foot fault came when he asked Congress to give him the authority to place Fannie and Freddie into conservatorships in case of a dire emergency. He swore the need was theoretical -- after all, their regulator had just told him the companies were adequately capitalized.
"If you've got a bazooka and people know you've got it, you may not have to take it out," he told Congress on July 15, 2008. On Sept. 8, he seized the housing-finance companies (and the late-night comedians mocking the bazooka-toting Paulson had a field day). Today, Fannie and Freddie remain effectively nationalized.
What economic club would be worth its salt if Paulson weren't asked: Yellen or Summers? He balked at directly answering whether he preferred Janet Yellen, the Fed vice-chairman, or Larry Summers, also a former Treasury secretary, as the next Fed chairman. He did allow that, "more than anything else," it should be someone who "thinks independently" and has the political courage "to do the right thing."
He repeated that guidance a couple different ways, then added unconvincingly: "... and able to build consensus."
Anyone involved in or reporting on the frightening times in 2008, when financial-company rescues were hastily arranged over consecutive weekends in September, knows that the only consensus Paulson sought was with Fed Chairman Ben Bernanke and Tim Geithner, the then-New York Fed President who would replace Paulson as Treasury secretary. Maybe if he were granted a mulligan, Paulson would use it to build more consensus on how to bail out banks without leaving taxpayers with a bitter aftertaste?
(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)