Hank Paulson goes into the gritty details of the 2008 banking crisis, why he bailed the banks out and what he believes would have happened if he hadn't done so in the new documentary Hank: Five Years From the Brink.
The former secretary of the treasury from 2006 to 2009 is best known for his role in leading the bailout, the Troubled Asset Relief Program (TARP) and for letting Lehman Brothers fail. At the time, this was more unpopular than torture with much of the American public.
I sat down with Paulson Wednesday morning at the George W. Bush Center at Southern Methodist University to talk about the film and ask some questions of my own related to the banking crisis.
Hank was released on Netflix on the fifth anniversary of the crisis last year and will have a limited release nationwide, including AMC Valleyview in Dallas. The film was directed by Joe Berlinger, who is known for Paradise Lost and Metallica: Some Kind of Monster.
You were really stuck between a rock and a hard place in the fall of 2008. Walk me through your thought process at that time.
“We had some difficult decisions. We did some things that were unpleasant, even to us. But I felt then and looking back at it now, I think we got the big things right and made a big difference. We staved off disaster.”
When you talk about disaster, did you envision bread lines, bank runs?
“I tried not to spend a lot of time thinking about that, just thinking about how to avoid it. Sometimes when I wake up in the middle of the night when I’d wake up I would think about it. I really didn’t want to envision it. The modern financial system, is so complex and the institutions are so large, you saw what happened just with Lehman going down, Fannie and Freddie combined are nine times bigger than Lehman, just the thought of that and how we would ever put Humpty Dumpty back together again.”
How would the failing of these banks and non-banks wreck the economy?
“Just before we guaranteed the money markets, I think that was the time I saw it the clearest. Because 30 million Americans had deposits in money market funds totaling $3.5 trillion. If there is a panic and a run on the money market funds, not only did those people get hurt, but those funds were used to finance short-term operations of major companies.
I had a call from one AAA company, where the CEO told me the treasurer said we’re not going to be able to make our $800 million quarterly dividend payment. You could just see very quickly if the big companies don’t have the financing to pay their suppliers how that ripples through the economy. Small companies go down.”
The way I explain it often is that, credit was frozen. And if credit was frozen then you don’t have mortgages, you don’t have credit cards, you don’t have loans to start businesses to keep businesses, loans to send kids to school etc.”
This was very unpopular, especially to people who were responsible and didn’t go beyond their means or use adjustable rate mortgages. The film makes it clear that you agonized over the decision yourself but you did it. Why?
“Many, many Americans were unhappy because they wanted to hear that the people who made the mistakes were being held accountable. But if I had to decide between that and stability, I erred on the side of stability. All Americans would have been hurt if the system had collapse. Those that had been responsible and those who had been irresponsible. Those who had made mistakes and those who didn’t make mistakes.”
Our first priority was to prevent catastrophe to protect the American people.
That’s hard to explain and that’s hard for the American people to really understand a catastrophe that never occurred. What they see is a very serious problem that did occur. I can say, we took steps and it would have been much worse if we hadn’t taken them and guess what, the money we put out in the TARP and the capital to banks and insurance companies came back plus $32 billion.”
“What many people rightfully say, is look at all those that lost their houses. Look at all those who lost their jobs and look at all those who are still suffering. And I understand that.”
The film hints at the fact that you saw a crisis coming when you were appointed in 2006.
“My first meeting with George Bush and his economic team was at Camp David in July, I told him I saw excesses in the markets and I thought we were overdue for a crisis. He asked me what would cause it. I said ‘I don’t know, sir. But when it happens it will be obvious in 20/20 hindsight so we’ve got to get ready for it.’ Though I didn’t see something of that magnitude. I had witnessed crisis every eight to 10 years. But this is a once in a 75-year crisis. In this one, the excesses had been building for decades.
Even in the bubble years, ’97 to 2007, Americans had doubled their borrowing but their income was flat. So people were borrowing at a level they couldn’t afford to maintain their standard of living.
We had a flawed regulatory system. We didn’t have adequate powers and by the time I was there, the problem was mostly baked.”
Does Dodd Frank do enough to prevent another crisis on this scale?
“We have the key authorities we need now as a result of Dodd Frank. Right now, there are emergency authorities to wind down a failing non-bank without throwing them into bankruptcy. I really wish we’d had that for Lehman Brothers, right? We have as a result of Dodd Frank, banks are going to be better capitalized and the biggest banks are going to pay an added capital charge. We’ve got, as a result of Dodd Frank, all the biggest most complex banks will have a common regulator.”
What made the 2008 crisis different?
“This is one that was unprecedented. People hadn’t taken a look at our regulatory system in a long time. The financial markets had outgrown the regulatory system and it didn’t fit so we didn’t have the powers we need. I think we did a pretty good job of making do with what we had. One of the things I’m proudest of, is twice we got Congress to give us extraordinary powers before we had catastrophe.
I was very fortunate. I had a commander in chief in George Bush, this is a man who wasn’t afraid to make hard decisions and do unpopular things and really encourage bipartisan cooperation. He would sometimes refer to me as his war-time general.”
Why did you decide to sit down for this film?
“It took a leap of faith for me because I didn’t have any editorial control. But he’s done good work. I think the major lessons that we need to learn going forward, as we say at the end, we don’t want to see this movie again. There’s a record now on cinema.”