History may look more fondly upon him than he’s given credit for today. The bailout and the response to the crisis was executed better than many imagined, says Andrew Ross Sorkin.
Question: In March of 2008, Hank Paulson refused to think about bailouts. Where did this visceral rejection originate?
Andrew Ross Sorkin: I think with Hank Paulson the concept of a bailout was anathema to him from day one. He was a Republican, he's a free marketeer, he believes in capitalism, and part of capitalism is believing in failure. And so the idea of bailing out an institution, I think, went against every part of him. And I think that was, for him, the biggest struggle to overcome, both in terms of his own ideals and then politically what it meant for the Bush administration.
Question: How did Paulson go from being anti-bailout to champion of it?
Andrew Ross Sorkin: Well, as someone who was so against bailouts, he was somebody who was also a pragmatist, and I think he recognized that as much as he didn't want to bail out many of these institutions, and they didn't necessarily deserve to be bailed out, that he needed to do so for the sake of the system. So when you look at the Bear Stearns bailout, for example, I think he had a realization, a recognition, that if he didn't do that, he was worried, frankly, at that time about a run then on Lehman Brothers and the rest of the system. Obviously, when he finally got to Lehman Brothers in September, he didn't bail them out. But once you got to AIG and once you started thinking about Morgan Stanley and Goldman Sachs, at that point I think he really saw the abyss on the other side and thought if we don't bail these firms out, if we don't find a solution to reinstall confidence in the system, the game is over.
Question: Some say Paulson’s failure to bail out Lehman was the policymaking error of the crisis. What do you think?
Andrew Ross Sorkin: There are two issues here. One is the consistency question, which is that throughout this period there was an inconsistency to Paulson and the administration's views on bailouts. You saw them save Bear Stearns, you saw them put Fannie and Freddie into conservatorship, and that created an expectation in the marketplace about how they would treat and handle Lehman Brothers. So the fact that they were then inconsistent on Lehman Brothers is in part what shook the confidence in the markets. So that is a piece of it. Should have they saved Lehman Brothers? Not necessarily because they deserved to be saved, but because the system needed them to be saved in part because of that consistency question. So the Lehman Brothers failure became a grand mistake because of those issues.
Question: Will the government be able to extricate itself from being a bailout machine?
Andrew Ross Sorkin: I'm afraid to say that over the next decade or longer it is going to be very hard for the government to really extricate itself from this, from Wall Street. And there's always going to be, in the back of investors' minds and in the back of the minds of people in the marketplace and the public, that the government could and may step in. And it's going to raise that whole consistency question all over again the next time a big institution gets into trouble, and what the role of government will be and how it will play going forward.
Question: During the crisis, why were there mixed messages coming from Paulson, Geithner and Bernanke?
Andrew Ross Sorkin: You know, that question raises a very interesting point, which is you had this troika of people -- Hank Paulson, Tim Geithner and Ben Bernanke -- and each of them was coming at this from a different place and perspective. Hank Paulson, obviously, had spent his career on Wall Street, had a deep knowledge of the Street, and also was a very forceful personality, had a very good relationship with the President, and was in a very different place, for example, than Ben Bernanke, who is an academic, quiet guy; spent most of his time thinking about monetary policy. And then you have this other guy in the middle, Tim Geithner, who at the time was the president of the Federal Reserve in New York, who was playing both to Ben Bernanke, as his almost understudy in that role, but also playing to Paulson, and also playing to Wall Street in that he literally sits -- his office sits blocks away from Wall Street -- and spends time with many of the Wall Street leaders trying to understand their issues. And each of them came to this crisis from a very different place, and so it's not surprising that they all had different perspectives and views as the crisis unfolded.
Question: Why was this not resolved earlier?
Andrew Ross Sorkin: I think Paulson would tell you that he made it clear after Bear Stearns that he was not in the business of bailouts. I think he went on television and said that repeatedly. And yet of course then he goes and puts Fannie and Freddie into conservatorship, and so it goes back to this issue of the inconsistencies. I think he did have a worldview that he didn't want to be in the business of bailouts; he had tried to make that clear. I think Ben Bernanke and Tim Geithner shared the view that they shouldn't be in the business of bailouts, but you know, you're not in the business of bailouts until you frankly think you need to be. And unfortunately, the situation became, or got to a point where they felt, for Fannie and Freddie, at least, and then later with AIG and the others, that they needed to be, that there was no choice that they didn't have another card to play.
Question: How did Paulson’s baking career prepare him for Treasury?
Andrew Ross Sorkin: Paulson was a get-it-done kind of guy. Some people would say that he shot first and asked questions later. I'm not sure that's the answer. I would say actually, like a true sort of Wall Street deal guy, he was talking to a lot of people, asking lots of questions. I mean, this guy was fielding phone calls, hundreds sometimes in a day, just sort of feeding the sort of information flow. And that's what Wall Street is often about; it's about this sort of massive information trade. And he would be taking little bits and trying to analyze and synthesize and figure out what to do; and as someone who was on Wall Street was also an executor. It was a get it done, we need to do this. But at the same time that meant that everything was a deal. He saw the world in terms of deals, as a transaction, if you will. And that is probably a different perspective than someone like a Ben Bernanke brings to the table.
Question: How did Paulson’s career experience lead him astray?
Andrew Ross Sorkin: It'll be interesting to see how history ultimately judges Hank Paulson. There will be those that will suggest that he was led astray, that he made mistakes. And there was no question that he did. But I also suspect that history may look more fondly upon him in certain respects than he's given credit for today. We can argue the points about the mistakes that were made up and until and through the crisis --- the failure of Lehman Brothers, how to deal AIG, et cetera, et cetera -- but the bailout and the response to the crisis I think was actually probably done and executed better than many of us imagined, in that I think the economy would have really been in much worse shape than we've ever wanted to acknowledge. And as a result, we didn't fall off the cliff, and we will live with the unintended consequences of that for 10 or 20 or 30 years as we pay off this $700 billion of TARP money and trillions of dollars that have been pumped into the system through the Federal Reserve and otherwise. And as a result, I'm not sure that history is going to say that he made the mistake that the question suggests.
Recorded on December 3, 2009