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A Conversion in 'This Storm'
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Then, on the eve of Lehman's bankruptcy filing in September, Paulson thought it was time to move ahead. He was alarmed not only by the plight of AIG but by the possibility of Washington Mutual, Wachovia and several large banks in Europe failing all at once, he recalled. He ordered his staff to draft legislation that would give the Treasury new authority, including the ability to buy toxic assets from banks and inject capital directly into financial companies in exchange for ownership stakes, a senior government official said. The stakes for the world economy had escalated, and he hoped Congress would recognize the peril.
In the hallways of Capitol Hill and before the television cameras, Paulson emphasized the first proposal, which involved the government buying troubled assets and allowing the market to set their prices. But even though he had already developed contingency plans to make direct capital injections, he disparaged the idea during congressional hearings. In late September, he told the Senate: "There were some that said we should just go and stick capital in the banks. . . . But we said the right way to do this is not going around and using guarantees or injecting capital, and there's been various proposals to do that, but to use market mechanisms."
Yet before the rescue package had been enacted by Congress, this free marketeer had already decided that a bigger bang for the federal buck would be direct capital infusions, in essence a partial nationalization of the country's banks.
Last week, he announced that the program to buy toxic assets would be shelved altogether in favor of a proposal to inject capital into a wider range of financial firms, in an effort to loosen the markets that finance auto, student and other consumer loans.
Some corporate executives said Paulson's on-the-job education was costly. It would have been better, they said, if the Treasury had never volunteered to buy the troubled securities. Once Paulson abandoned this plan, their values plummeted, burning bigger holes in the balance sheets of some financial firms.
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When the Bush administration asked Paulson to be Treasury secretary in 2006, many of Paulson's closest friends questioned whether he could adapt to life inside the Beltway.
Paulson exuded confidence as he moved through Wall Street's inner circles, but not eloquence in front of the podium. And some said they raised doubts about whether he could handle the heat of Capitol Hill hearings -- or whether the White House would simply undercut his authority.
Paulson said he has become far more comfortable in Washington than in New York. An Illinois farm boy, he never adapted to the New York lifestyle, never enjoyed swinging deals along a golf course.
Even from the beginning of his tenure at the Treasury, it was clear that Paulson might break the mold. When he accepted the administration position in the summer of 2006, his allies on Wall Street urged him to revise the Sarbanes-Oxley Act, which was adopted in 2002 in response to a string of accounting scandals at Enron and other firms. The legislation had increased accountability for public companies but at some expense to their bottom line.
Upon reviewing the act closely, Paulson said, "I could not find a single idea in it that was wrong."
Some who worked with him during the early part of his tenure said his thinking on regulation appeared surprisingly amorphous.
