Former Treasury Secretary Henry Paulson told an audience of bankers and economists at a hotel on New York’s Fifth Avenue today that many of the factors that contributed to the financial crisis of 2008 are still in place. Asking rhetorically whether another crisis could occur, Paulson said: “The answer, I’m afraid, is yes.”
Paulson is in demand these days because as President George W. Bush’s Treasury secretary he was a key player in the dramatic efforts to rescue the financial system after Lehman Brothers declared bankruptcy on Sept. 15, 2008. Bloomberg Businessweek will feature Paulson in a special fifth-anniversary issue, and the magazine commissioned a documentary called HANK: Five Years From the Brink. Clips from the movie are available now on the magazine’s website.
Paulson has been accused in some quarters of putting Wall Street ahead of Main Street in the bailout, but that was not the tenor of questions at today’s meeting of the Economic Club of New York, which counts numerous Wall Street chief executives and hedge fund titans among its members. When Andrew Tisch, the co-chairman of Loews, asked Paulson if he would do anything differently, Paulson said, “almost every mistake was a communications issue.” He said he remains frustrated that the public doesn’t understand that what he did “wasn’t for Wall Street; it was for them.”
Paulson ticked off three reasons he thinks another financial crisis remains very much possible:
• Fannie Mae and Freddie Mac, the mortgage-finance giants that the Bush administration was forced to nationalize, remain in government hands. And because they’re making a lot of money now, it’s politically difficult for the government to shrink them to a manageable size. Ninety percent of mortgage loans have government guarantees.
• The shadow banking system hasn’t been fixed. “More needs to be done” to fix the form of securitized lending known as repo. There should be more disclosure about the holdings of money market mutual funds.
• There are still too many financial regulators—five—and they tend to engage in “dysfunctional” competition. “This is a big problem.”
In the question-and-answer session, Paulson threw in another factor:
• Congress has tied the hands of the Treasury Dept. and Federal Reserve to deal with a future financial crisis. In 2008, Paulson’s Treasury used its exchange stabilization fund to guarantee the assets of money market mutual funds, a measure that prevented a run on those funds that would have crippled the financial system. Today, Treasury would not be allowed to do that.
Paulson ducked a question about whom President Obama should nominate as chairman of the Federal Reserve. “If he wants my advice, he’ll ask me,” Paulson said. “So far he hasn’t, strangely enough.”