Henry M. Paulson Jr., the financial firefighter stationed at the epicenter of the biggest financial crisis since the Great Depression, worries that the nation is headed for another crisis because political leaders failed to learn critical lessons from the last one in 2008.
In an exclusive interview with The Washington Times, Mr. Paulson, former President George W. Bush’s last secretary of the Treasury, said the most serious lapse may be Congress‘ failure to reform mortgage giants Fannie Mae and Freddie Mac in a way that would revive the private market for mortgages, which has all but disappeared since the crisis.
He insisted that vigorous, bipartisan action is needed to ensure that housing never again turns from the American dream into an American nightmare for middle-class homeowners.
“We don’t want to have to replay this movie. We need to learn from our mistakes and clean up our messes,” he said, emphasizing that worries about Washington’s failure to reform Fannie and Freddie are what prompted him to make a documentary being released in theaters this week that chronicles his central role in the government response to the monumental financial collapse.
He points out that the mortgage giants owned or guaranteed about half of the nation’s mortgages before the crisis but have dramatically increased their dominance ever since. Along with the Federal Housing Administration, they guarantee nearly every new mortgage in the U.S., which enables the government to essentially dictate the price and terms of home financing and suffocate any hope that the market will return to normal, he said.
“That’s ultimately a recipe for disaster,” he said, adding that reforming the mortgage guarantors — which remain in a government custodianship that he engineered in September 2008 — will be much harder now that they are profitable again and their profits are being transferred to the Treasury each quarter to help pay down bloated U.S. budget deficits.
Mr. Paulson is also concerned that the nation’s biggest Wall Street firms and megabanks remain “too big to fail” and could cause another financial disaster, although he said Congress and regulators have made progress reining them in with measures enacted in the Dodd-Frank banking reform law.
A figure reviled in some circles, Mr. Paulson acknowledges his own role in making those banks bigger by arranging during the height of the financial crisis the merger of such giants as J.P. Morgan and Bear Stearns, Bank of America and Merrill Lynch, all in a desperate effort to prevent the kind of nosedive into financial chaos that ultimately happened anyway with the spectacular failure and bankruptcy of Lehman Brothers in September 2008.
He jokingly suggests that he may be best remembered as “Mr. Bailout” for having engineered taxpayer-funded rescues for a long list of American financial and corporate behemoths in the 10 months before President Bush left office in January 2009, including Fannie and Freddie, General Motors, Bank of America, American International Group and Citibank. But he defends the moves as “absolutely necessary” and credits them with preventing an even bigger economic catastrophe that could have driven U.S. unemployment to 25 percent instead of the 10 percent level where it topped out in 2009.
Like the Americans who were traumatized by the crisis and ensuing deep recession, which threw more than 8 million people out of work and millions out of their homes, Mr. Paulson keeps returning to the subject and mulling over what happened, seeking to find those kernels of truth that reveal the meaning.
His latest effort, the documentary collaboration between Bloomberg BusinessWeek Films and award-winning director Joe Berlinger, recounts the dramatic and fast-paced events as the debacle deepened and Mr. Paulson led the effort to soften and prevent the nation’s head-spinning downward economic spiral.
As “Hank: Five Years From the Brink” vividly recalls, Mr. Paulson repeatedly confronted and coerced the nation’s top bank chieftains as one after another of the megabanks was engulfed by the financial superstorm that ultimately erased more than half the value of the U.S. stock market and completely wiped out large parts of the U.S. bond market.
He fears that many of those banks, which have grown even larger since the crisis, with the top five owning nearly half of all U.S. banking assets, remain “too big to fail,” threatening to drag the nation and taxpayers into future bailouts if their failures threaten to bring down the financial system.
Regulators are moving in the right direction following Dodd-Frank mandates requiring the banks to have big capital cushions, ample liquidity and other safeguards, he said. “The biggest banks are better managed and much better regulated now,” but he still worries that the nation has not gone far enough to defuse a crisis.