It was his first formal public defense and explanation of his actions since the dust settled from the financial panic of late September and early October, and Treasury Secretary Henry Paulson had clearly been thinking about it for a while. Normally a believer in brevity, especially at press conferences, he arrived in the Treasury press room Wednesday morning with a 3,500-word speech prepared. He then proceeded to read the whole thing, taking a few big swigs of water along the way, before hoarsely submitting to questions.
Over the past two months, Paulson's public image has taken quite a beating. The former Goldman Sachs CEO entered September as the can-do dealmaker who seemed to have finally gotten the yearlong mortgage crisis under control. Now, after the expensive rescues of Fannie Mae, Freddie Mac and AIG, the failure of Lehman Brothers, and the painfully dramatic struggle to get a $700 billion financial bailout bill through Congress, he is a much-diminished figure. He has zigzagged and he has waffled and he has backtracked. His decisions and his motives have been harshly questioned on Capitol Hill and by the press. And he's just tired. He gave off the vibe today that he might just be counting the days until he gets to hand off the whole mess to Larry Summers, Tim Geithner or whoever President-elect Barack Obama chooses to succeed him. (Read more about TARP.)
First, though, Paulson felt called upon to defend what he has done. "The actions taken by Treasury, the Federal Reserve and the FDIC in October have clearly helped stabilize our financial system," he began. "Before we acted, we were at a tipping point." He's right about that. We'll never know just what horrors we might have tipped into (Paulson's less-than-evocative phrase for what could have been was "broad systemic event"). But it's clear that financial markets are much calmer if not happier than they were in early October.
It's possible that the panic never would have happened if Paulson and Federal Reserve officials hadn't allowed Lehman to fail. Although, given how much criticism they got for their semi-bailout of Bear Stearns in March, it's easy enough to see where that decision came from. Less easy to understand is why Paulson initially stubbornly insisted that the bailout bill be structured as an asset-purchase plan it's still called the Troubled Asset Relief Program, or TARP rather than as a straightforward recapitalization of troubled banks. Treasury has since switched to the latter approach, so far putting $216 billion of the TARP hoard into capital injections. On Wednesday, Paulson said that Treasury has concluded that, for the moment at least, buying illiquid mortgage securities "is not the most effective way to use TARP funds." Instead, Treasury will look to help nonbank lenders involved with credit cards, auto loans and other forms of consumer finance.
Why the big switch? "The facts changed and the situation worsened," Paulson said during the Q&A. He kept coming back to that phrase, "the facts changed," in what seemed to be a conscious reference to economist John Maynard Keynes' famous line, "When the facts change, I change my mind." As Paulson put it in an answer to another question, "I will never apologize for changing the approach or strategy when the facts change."
When asked what exactly had turned out to be wrong with the idea of buying up mortgage securities, Paulson launched into what seemed likely to become an in-depth explanation. But when he paused early on, a reporter interrupted with another question, and that explanation was over.
There were lots of questions about what to do for General Motors, which appears headed for bankruptcy without government help. Paulson said TARP was never intended to bail out nonfinancial firms, so that money is off-limits. But he did indicate that the Bush Administration would be agreeable if Congress wanted to amend a law passed in September that provides $25 billion in loans to automakers for retooling, so that those funds can be used to keep GM and the two other members of the Detroit Three alive.
Paulson didn't seem to think that that was something he needed to get involved with. Same with fiscal stimulus legislation. Paulson shepherded the last stimulus bill through Congress in January. Not this one. "My focus is on the financial sector, on getting credit going, getting lending flowing," he said. "I can't imagine anything that would have a bigger stimulative impact." In other words, he really doesn't want to take on anything more at this point. Can you blame him?