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“It’s obviously unacceptable for any bank to be too big to fail,” he said. Regulators still need to reform the shadowy “repo” market where big banks get much of their funding, and ensure in laying out procedures for liquidating large banks in the future that the banks are not allowed to continue operating in the same form that led them to the brink of collapse.

‘Horror show’

Still, while the banking leviathans continue to pose risk to the system, he said, it is the question of Fannie and Freddie that most concerns him. Political leaders and the public have not focused as much on their critical role in the housing debacle, perhaps because he stepped in and took control over the goliaths before a crisis occurred, in what he views as his single biggest move to stem the crisis.

“We took action before they started to unravel, before there was a failed auction. The public never saw that horror show,” he said. “People never focused on what their failure or near-failure would have done,” he said, suggesting the ensuing crisis would have been much bigger than the financial collapse in the wake of the Lehman bankruptcy. “They were collectively nine times bigger than Lehman Brothers” and the massive damage to the housing and mortgage markets could have been many times worse.

“It perplexes me that nothing has been done” and both parties seem content to just allow the housing market to drift through yet another era of government dependence and dominance that potentially is creating even bigger market distortions, he said. “Every financial crisis has its roots in flawed government policies that lead to excesses in the markets that build up and build up, and then you get a bubble and it bursts.”

As with so much of Washington, gridlock and powerful vested interests in the housing industry have frozen housing policy, he said.

Deep disagreements over the role Fannie and Freddie played in the crisis seems to prevent any compromise over their future role.

Conservative Republicans blame Fannie and Freddie for generating the crisis by encouraging lenders to make easy-money loans to increase homeownership among disadvantaged groups and borrowers.

Mr. Paulson called that view “oversimplification,” noting that unethical mortgage brokers and dealers on Wall Street who knowingly sold risky instruments to unwary borrowers and investors were as much at fault, while homeowners contributed to the crisis by getting too deeply into debt as they sought to finance unsustainable lifestyles and spending habits they adopted during the bubble years.

“I don’t like oversimplifications. The crisis we dealt with was a once-in-75-year crisis where excesses had been building for a long time.” Among the problems that contributed to the crisis was the “incredible complexity” of the subprime mortgage securities engineered by Wall Street, which ultimately blew up and triggered the downward spiral in financial markets.

The blame within the government rests not just with the fair-housing mandates given to Fannie and Freddie, but also with government policies in place since World War II that include generous tax deductions for homeowners and low down-payment lending programs for farmers and veterans, all of which have encouraged homeownership at almost any cost and heavily favor borrowing over saving, he said.

“It doesn’t make sense for everybody to own a home,” he said. “These policies encouraged Americans to put everything in their homes” and get over their heads in debt, yet they succeeded only in nudging up the homeownership rate from around 64 percent before the housing bubble to 69 percent when it peaked, he said.

Congress and the administration need to find a compromise that realistically addresses the role Fannie and Freddie played in the crisis and prevents them from making the same mistakes in the future, while paring back their role in the market to allow private lending to re-emerge, he said.

Bipartisan legislation drafted by Sen. Bob Corker, Tennessee Republican, and Sen. Mark R. Warner, Virginia Democrat, which preserves a residual role for the government providing a last-resort backstop in the mortgage market, would be a good starting point, he said.

“I have no doubt that if you do this properly, you’ll have a private market” for mortgages again, he said.