On the Money at Treasury
Tuesday, November 20, 2007
When Henry M. Paulson Jr. took the helm of the Treasury Department 16 months ago, he spoke in soaring terms about shaping America's competitive destiny. At his confirmation hearing, not a single question focused on the housing market or the mortgage industry.
But just under the surface, a lending crisis was about to burst into full boil.
Now, as crises in the mortgage and financial markets raise fears of a recession, he has moved forcefully to try to prevent the worst outcomes. Using the skills he developed during three decades at Goldman Sachs, he persuaded banking executives to create a private fund that could buy up investment instruments so that their collapse would not infect the broader economy. His staff is developing policies to stem the flood of foreclosures anticipated in the coming months. His legacy as Treasury secretary is likely to be that of crisis manager.
Paulson, 61, has won praise from Congress for being flexible and creative in responding to the problems. He has also drawn criticism: from the left, for not acting on a housing meltdown that affected millions of Americans until it threatened big banks; from the right, for assenting too readily to new regulation of the financial system.
"I think we're working our way through this," Paulson said in an interview in his office last month. "But I also recognize that it's going to take longer for these markets to operate the way they should be, and until they are, there's a certain amount of" -- he paused for a moment, as if searching for words that would not fuel further panic -- "fragility in the system."
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In a domestic financial crisis, there are limits to a Treasury secretary's powers. He cannot force markets to calm down. He cannot cut interest rates, which is the purview of the Federal Reserve.
"There's not a whole lot of magical buttons over there to push," said Robert S. Nichols, president of the Financial Services Forum and a former Treasury official.
So, as markets for a wide range of debt products went haywire in late July and August, Paulson took little visible action. Publicly, he said that damage in the mortgage sector appeared "largely contained." Privately, he was furiously gathering information -- mostly by working the phones incessantly.
"I think everybody who's dealt with Hank has had situations where he's called at 4:30 and been told you're in the men's room," said Joshua B. Bolten, the White House chief of staff, "and [he] calls back at 4:33 and wants to know if you're out of the men's room yet."
Paulson drew on more than 30 years of high-level contacts. He called James Dimon, chief executive of J.P. Morgan Chase, to educate himself about the market for mortgages, a business that has not been of major interest to Goldman Sachs. "He doesn't know the consumer mortgage business like we do," Dimon said. "It's 'What are the spreads, what could be ameliorated, what could be fixed, what policies make sense? Do you think this will help, do you think that will help?' "
He called American Express chief executive Kenneth I. Chenault to learn whether businesses and consumers were reducing their spending. (They weren't, at that point.) He called James W. Owens, chief executive of the construction-equipment company Caterpillar, to ask how the problems were affecting industrial firms.