Former Treasury Secretary Henry M. Paulson sat uncomfortably before a congressional committee not just as a key figure in the Bank of America Corp.-Merrill Lynch & Co. imbroglio, but also as the embodiment of the bailouts of last fall.
Appearing on Capitol Hill for the first time since leaving office in January, Paulson’s tall frame quickly turned into a lightning rod. Democrats and Republicans fired bolts of criticism for more than three hours Thursday, accusing him of such offenses as misleading Congress about the use of the $700-billion bailout fund and going skiing at one point during the crisis.
Paulson’s strong defense of his actions often was met with skepticism.
“I don’t think anybody’s buying what you’re saying right now,” Rep. Dan Burton (R-Ind.) told him at one point.
The rough treatment demonstrated the anger felt by many lawmakers for the Bush administration’s handling of the crisis, the escalating price tag for keeping the economy afloat and the increasing concerns about the government’s growing involvement in the private sector.
That anger also indicates that the recently named members of a congressional commission to investigate the causes of the crisis may engage in an acrimonious process much different from a similar fact-finding review of the 2001 terrorist attacks.
Paulson did not back down. He said many of the moves he and other government officials had made were “abhorrent” because of his belief in free markets. He specifically cited his pain in deciding to rescue American International Group Inc. after the giant insurer’s risky investments put it on the brink of failure in September.
But Paulson said the actions were necessary to prevent an even deeper economic disaster.
“In the midst of a rapidly changing crisis, our responses were not perfect, but I am confident that they were substantially correct and that they saved this nation from great peril,” he told the House Committee on Oversight and Government Reform.
Many lawmakers disagreed, and a hearing that was supposed to focus on the Bush administration’s pressure to force Bank of America to complete its deal with Merrill Lynch turned instead into an outlet to vent displeasure with the bailouts.
Obama administration economic officials have been able to dodge intense grilling because they were not in charge last fall. But Paulson was the point man for the Bush administration during the crisis, and he faced a torrent of pent-up frustration.
Several lawmakers accused him of using the bailouts to help his Wall Street friends -- particularly those at Goldman Sachs, which he once headed -- at taxpayers’ expense.
“Your coming here and saying you feel the pain of AIG is simply outrageous,” said Rep. Cliff Stearns (R-Fla.), who accused Paulson of letting Lehman Bros. fail last September because it was a major Goldman competitor.
“I think your statement is outrageous,” Paulson shot back, the only time he came close to losing his temper.
Paulson lamented some actions but said he was sure the economy would be much worse had he and other government officials not acted as they did.
“I knew it was going to be very bad, and I didn’t want to experience very bad,” Paulson said.
Some lawmakers doubted that. When Paulson said there might be twice as many home foreclosures without the bailouts, Rep. Marcy Kaptur (D-Ohio) said foreclosures in her state were on their way to that level.
“You ought to come visit us in Ohio and see the result of your handiwork,” she said.
Rep. Darrell Issa (R-Vista), one of Paulson’s few defenders, praised him for his candor but said a review of what happened last fall was necessary to avoid a repeat. “Wall Street, perhaps, would say that the end justifies the means: We have, in fact, been saved. Here in Washington, we’re Monday-morning quarterbacks.”
Paulson strongly defended his decision to pressure Bank of America to go through with a deal to acquire troubled Merrill Lynch, saying the failure of the acquisition would have threatened the stability of both institutions and the overall economy.
But several lawmakers accused Paulson of being evasive on his recollection of what they called threats he and Federal Reserve Chairman Ben S. Bernanke made to replace Bank of America Chief Executive Ken Lewis if the bank pulled out of the Merrill deal in December.
Because of huge new losses at Merrill Lynch last fall, Lewis has testified, he was considering invoking a “material adverse conditions” clause to pull out of the deal or renegotiate its terms. Lewis told New York Atty. Gen. Andrew Cuomo that Paulson and Bernanke had threatened to fire him and his board if the bank did so. The Fed serves as the regulator for Bank of America and has the ability to replace its management.
But Lewis last month told the House committee that he was not threatened. Bernanke also denied making such a threat.
Paulson said he wouldn’t characterize his conversations with Lewis as a threat, but said he sent “a very direct, strong clear message.”
With the “markets driven by fear and uncertainty,” Paulson said, he recalled telling Lewis that invoking the clause would show “a colossal lack of judgment.”
“If he had taken an action that showed a lack of judgment, I think then the regulator would have been irresponsible if the regulator hadn’t pushed him out,” Paulson said.
Stearns, along with Reps. Stephen F. Lynch (D-Mass.) and Michael R. Turner (R-Ohio) accused Paulson of misleading Congress during its consideration of the $700-billion Troubled Asset Relief Program. The program was designed to purchase toxic assets from financial institutions, but Paulson quickly used it instead to funnel billions of dollars directly into large banks.
“If you had come up here with Mr. Bernanke and said, ‘I’ve got a plan. I want to take [$700 billion] in taxpayer money. I want to give it to my pals in the nine biggest banks of America,’ how many votes do you think you would have got up here?” Lynch said. “That’s why I believe you have misled Congress.”