Hank Paulson Sits Down with Larry Kudlow

By Chris Ariens 

Treasury Secretary Hank Paulson (whose name has already come up in the debate) sat down with Larry Kudlow tonight on CNBC’s “Wall Street Crisis: Is Your Money Safe?” It’s Paulson’s first cable news interview since Sept. 8, the day after the government took control of Fannie Mae and Freddie Mac.

CNBC has also announced it will simulcast CNBC Europe from 1am-4amET tomorrow morning preempting infomercials.

The Paulson/Kudlow transcript is after the jump…

> Update: Paulson will be on Fox Business Network Thursday morning with Alexis Glick…

DATE October 15, 2008 ACCOUNT NUMBER N/A
TIME Varies
PROGRAM Wall Street Crisis: Is Your Money Safe?

Interview: Treasury Secretary Henry Paulson

I’m Larry Kudlow, everybody. We are here in Washington with Mr. Secretary
Henry Paulson.

Mr. Secretary, thank you very much for coming back on.

Mr. HENRY PAULSON (Treasury Secretary): Larry, good to be with you.

KUDLOW: All right, look, it’s a tough day, as you just heard Michelle. You
know all about that, market’s down over 700 points. Your announcement was
yesterday, but we still have the bumpy markets. Fear seems to rule,
volatility seems to rule, lack of confidence everywhere. Let me ask you, sir,
are markets missing something with respect to your new plan? How do you
comment on this? Because it just doesn’t seem like a wave of confidence.

Mr. PAULSON: Well, Larry, there’s a lot going on right now and a lot going
on in the markets. We knew that the financial markets and all the turmoil in
the financial markets were going to have a significant impact on the real
economy, and today there was some evidence of that. The retail sales numbers
were–they came in at a disappointing level, not a surprising level. So I
think what the markets are saying today is, they understand that we’re going
to have a difficult few months ahead of us. But I would say is that, let’s
remember, we have a very resilient economy. Last quarter–seems like a long
time ago, but last quarter we grew at 2.8 percent. And the steps we’ve taken
are absolutely the right steps. They’re bold steps, they’re strong steps to
stabilize the financial markets and inject confidence into the banking system
along with capital. When banks start lending to each other, feel comfortable
dealing with each other, they’ll start lending to businesses and we’ll see
this make a real difference in the economy.

KUDLOW: Do we have to take a recession? Are we in a recession right now,

Mr. PAULSON: Well, Larry, what I’m saying is, we’re clearly in a difficult
period, and it clearly–the financial turmoil and the very, very difficult
time we’ve had where the credit markets have frozen up, and when loans weren’t
being made, weren’t being made to small businesses, people–it was hurting
jobs, it was hurting confidence, and this has to have an impact. And it’s
having an impact. But by far the most important thing we can do here is
stabilize the markets, stabilize the banking system, and I’m very confident
that the moves we’ve done, taken, will do just that.

KUDLOW: All right. I want to get into all those things. They’re very
important points. Let me begin, front page stories in all the major papers
today. When you unveiled on Monday your rescue package to the nation’s top
bankers, apparently it was a somewhat contentious meeting. And I want to ask
you, first of all, are the major bankers with you? Are they on the team for
the rescue package? And second of all, what was the biggest bone of
contention in that meeting? What was it that you had to sell them on?

Mr. PAULSON: Well, Larry, let me begin by saying, I don’t believe it was a
very contentious meeting. I think it was a–it was a candid meeting, but I
think it was pretty extraordinary to get nine bankers with–running key
institutions, institutions with 54 percent of the assets, 50 percent of the
deposits of the United States of America, and to get them to sign up for this
plan. And what I said to them was, this is about the United States of
America, it’s about our economy, it’s about our banking system, and this is a
program for healthy banks. We–this is not about failure. We want healthy
banks to participate in this because healthy banks need to be well
capitalized. They need to be dealing with other healthy banks and with
businesses. They need to be deploying their capital. And this’ll be good for
the country, be good for the system, and good for all of you.

KUDLOW: How did you persuade my friend Richard Kovacevich, who runs Wells
Fargo? He seems to be the most prominently mentioned. Now, I wasn’t at the
meeting, and he didn’t talk to me, but from the news account, how did you talk
him into coming on board?

Mr. PAULSON: Well, I’ve got to say this. We talked to everyone, and these
were, again, these are institutions that could survive just fine without
capital, OK? More capital. They have adequate capital. But they need to be
well capitalized, and what we want to do is to come up with a program, and
let’s remember something else about this program. This was–nothing punitive
about this program. This was a program that said to all the investors that
want to come into the banking system, `See? This is–when the government is
coming in, it’s not coming in to squash private investment.’ It’s…

KUDLOW: Private shareholders.

Mr. PAULSON: Private shareholders, no. It’s encouraging the private
shareholders to invest in these banks. So this is–this is about increasing
confidence in the banks, and about increasing the confidence of the banks and
the banking system so that they can be proactive in deploying their capital.

KUDLOW: Did some of these big bankers worry about management control
exercised by the Treasury Department? I mean, clearly there are limits with
respect to executive compensation. There are limits with respect to dividend
payments, and there are generically issues, will you exercise your warrants
and will you exercise voting strength? In other words, is this a
nationalization? I think that’s on the minds of a lot of people.

Mr. PAULSON: Well, anything but. Anything but. And this is about taking
the preventative action so we don’t need to do more radical things. And so as
we talked about this, let me just take the issues you’ve mentioned one at a
time. These are relatively small positions in ownership terms. These are
passive investments–management. This is–this is not anything like what you
suggested. And it–in terms of the executive compensation, there was broad
agreement in that room that this is an important topic. And no one spent time
debating executive compensation. I explained what the law required and that
we were going even further, and that what we were talking about is, there
wouldn’t be golden parachutes; if there were profits based upon financial
information that turned out to be materially misleading, that compensation
would be given back.

KUDLOW: Both of which the country seems vitally opposed to.

Mr. PAULSON: Oh, sure.

KUDLOW: The political nature of the country right now is so much against that
kind of thing.

Mr. PAULSON: Yeah, and also, that there–the–we couldn’t have incentives
that made compensation based upon excessive risk taking. All of those CEOs in
that room understood it. And a matter of fact, when I outlined it, one of the
CEOs said, `Hank, why are we even spending time talking about this? Why are
we spending time talking about this? Of course; we get it.’ And so, again,
these are investments that are good for the country, good for the banks, and
are encourage–these are temporary investments to bolster confidence, to bring
capital to the system. It’ll be deployed. The economy will pick up, and
these investments’ll be refunded

KUDLOW: Do you think, Mr. Secretary, do you think that with the preferred
stock and all the other aspects you’ve just described–really, you say,
passive investments, not active management control–will that attract private
shareholders and private capital, not just the shareholders today but the
potential shareholders tomorrow?

Mr. PAULSON: Absolutely. Absolutely. And I think where people have gotten
confused, there have been situations where we’ve had to come in, where there’s
a failure. And there’s that totally different proposition.



KUDLOW: Fannie and Freddie.

Mr. PAULSON: Yeah, right. A totally…

KUDLOW: This is different than that.

Mr. PAULSON: Totally. That’s failure. That’s where you have to come in.
This is–this is about attracting private capital, and it was clear to the
whole world that these preferred share investments are going to come in right
alongside other senior preferred and–not senior to them–and again, preferred
doesn’t vote with common shares. The warrants are for 50 percent of the value
of the preferred shares. And again, the warrants for nonvoting common shares.
And so this is–this is about capital and protecting the American people by
getting our financial system working the way it needs to work so we’re going
to be able to create the jobs, going to–this is about people’s 401(k) plan.
This is about loans to send their children to college. And keeping our
economy going–that’s what it’s about.

KUDLOW: So many people want to know–I mean, I get this, I hear this, people
stop me on the street, callers on my radio show on Saturdays–how can you get
the bankers to deploy the government capital that you are injecting? I mean,
for example, the yield on the preferred is 5 percent. Their cost on the
preferred is 5 percent. Now, they’ve got–some of them have preferred stock
that’s 11 percent in yield. They have bonds outstanding that are 7, 8, 9 and
10 percent.

Mr. PAULSON: Yeah.

KUDLOW: What’s to stop them from getting the new government money at 5
percent and retiring the outstanding paper that’s much more expensive rather
than deploying this new capital in the economy for the purposes you’ve just

Mr. PAULSON: Well, that’s a–that’s a key question, and let me say, even
before that, the reason we set the terms where they were set, we didn’t think
this term should be set at the–what the market would demand in a crisis
situation. That’s why the government’s coming in to begin with. We wanted
the terms to be like that you would have in a normal situation. Now, the way
you get bankers to deploy the capital–because they know it’s their job to
deploy the capital, making the loans which are so vital to our economy, the
way you get them to do that is they’ve got to have, first of all, plenty of
capital; they’ve got to be well capitalized. Secondly, they’ve got to be
confident in the system. They’ve got to be confident that as the money flows
between and among banks that they’ve–they’re confident in that and confident
in the strength of the system.

KUDLOW: Rather than pay down their own debt.

Mr. PAULSON: And–oh, listen, they’re not going to be paying down their own
debt. This is–they’re–this–the regulators understand that, and they

KUDLOW: Will you jawbone from time to time–that’s a bad word, jawbone–will
you be talking to them in consultation as you did on Monday, for example?

Mr. PAULSON: I will clearly be doing that, but I will also say to you that
they understand this, and regardless of whether–the–we had had government
investments there, we would be jawboning and encouraging them to do the right
thing. And I would say it’s a lot better to jaw–to do–it’ll be a lot more
effective if people aren’t afraid, and if bank…

KUDLOW: Right.

Mr. PAULSON: And so this is about confidence and confidence in the financial

KUDLOW: As a profit-maximizing, free market capitalist, Mr. Secretary, I
must take a commercial bake for the show–commercial break for the show.

Much more with Secretary Henry Paulson. I’m Larry Kudlow. Please stay with


KUDLOW: Welcome back, everybody. I’m Larry Kudlow. I’m here with Treasury
man Henry Paulson. Probably the most talked about, maybe the most powerful
guy in the country below the president of the United States.

Mr. Paulson, let me just ask you another question that I hear a lot. People
were relieved that you are guaranteeing–the FDIC that is, is guaranteeing the
interbank lending, the Libor markets are frozen up. Some say the New York
markets are frozen up for the short-term loan, and that’s a huge drag on the
whole system. But let me ask you, when does this guarantee actually go into
place? There’s a 75 basis point cost that the banks have to pay. I assume
there’s some registration. Libor rates have slipped a little bit, sir, but
not very much. When does this guarantee for the interbank loans really kick

Mr. PAULSON: Larry, I think there’s, you know, when you do something as
quickly as we rolled this out, there may be some confusion in the marketplace,
but everyone has a guarantee for 30 days. So there’s a 30 day period where…

KUDLOW: Immediately?

Mr. PAULSON: Immediately. Immediately the guarantee. And that’s cost.

KUDLOW: Do people know that, sir? I don’t mean to interrupt, but do people
know that key point?

Mr. PAULSON: I–they should know it, because the guarantee is there
immediately. Now there’s–you know, at the end of the 30 days, they need to
subscribe to this. There’s a 75 basis point fee. Then if they subscribe, the
guarantee lasts through June of next year. And the guarantee applies to the
senior obligations coming due, unsecured obligations, and they can refund
those with a maturity up to–out to three years.

KUDLOW: All right. Talking about the freeze up in London and New York…

Mr. PAULSON: Right. Right.

KUDLOW: …and elsewhere. In the–with the benefit of hindsight, looking
back, was it a mistake to let Lehman go under? Because a lot of people are
saying it was precisely the drop off in Lehman, which was roughly in the
middle of September…

Mr. PAULSON: Right.

KUDLOW: …early to middle of September, when suddenly Libor rates went up.
The spread against US Treasuries went up something like 300 basis points.

Mr. PAULSON: Right.

KUDLOW: And the whole system seemed to go haywire. The whole system was like
a computer that completely froze up and there was nothing anything could do
with it. Was the Lehman decision an error?

Mr. PAULSON: Let me talk a little bit about the Lehman system, because
something you could argue–whether we’re dealing with a symptom or whether
we’re dealing with a root cause–because one thing I saw clearly this weekend
when we met with central bankers and finance ministers from around the world,
and there was something that was very good that came out of that weekend, was
a way in which we all agreed to work together with a common set of policies
and objectives. The thing that wasn’t as good was to understand the extent of
the problem with financial companies and bank in country after country where
they’d said, `We don’t have a real problem,’ to suddenly that we–they said,
`We have a significant problem.’

But let me get back to Lehman because I, first of all, Treasury certainly
didn’t have any powers to do anything as it related to Lehman Brothers. And
we’ve been very clear–I’ve been clear when I talked with Congress in July
that we didn’t have the authorities to deal with a wind down of a–of a
non-bank financial institution. So we were very, very clear about.

KUDLOW: But in truth, sir, weren’t you deeply involved in the wind down of
Bear Stearns last winter?

Mr. PAULSON: Yes. Yes. We were working with the Fed and the Fed could
loan, under 13-3, they can loan against securities when there–but there was a
hold that needed to be filled in the case of Bear Stearns. There was a buyer,
JPMorgan, and they could loan against securities. There was not–we worked
very hard on Lehman. You know, Lehman–we all knew about the problem with
Lehman for a long time and Lehman worked, you know, tried to worked through
their problems. I think regulators knew that if there was a not a solution
before they announced their third quarter earnings there was apt to be a
problem. It turns out there wasn’t a buyer. There was no hole to fill.
There was just was not a buyer for Lehman. And the Federal Reserve didn’t
think they had any authorities to loan, you know, under 13-3, against Lehman.
And I certainly wasn’t urging that because, again, we have a system. And we
now have–we got the authorities when we got the TARP to do more. But I’ll
tell you, we have a system where we have authorities that were put in place a
long time ago for a financial system that existed in a different world. And
there are broad authorities if a bank fails and systemic risk exemptions.

KUDLOW: Right.

Mr. PAULSON: There’s broad things to wind…

KUDLOW: But in truth, I mean, when you go back and look at it.

Mr. PAULSON: Yeah.

KUDLOW: The stock market is down 25 percent since Lehman.

Mr. PAULSON: Right.

KUDLOW: Which was really just a few weeks ago. It was an extraordinary
event. And at the time…

Mr. PAULSON: Right.

KUDLOW: …some people applauded you and said, `OK, enough is enough. We
can’t take out every bank.’

Mr. PAULSON: Right.

KUDLOW: But looking back on it, that seemed to be the trigger to all of this
recent mayhem.

Mr. PAULSON: Well, I would say, Larry, looking back, there’s a lot that’s
happened. An awful lot that’s happened. And what was going on with Lehman,
there’s no doubt that when you look at the over-the-counter derivative
markets, when you look at the complexity of today’s financial world, a failure
of any big financial system, company, creates a–it creates a big issue. But
I would say I’m a, you know, I always look back in addition to looking
forward, and we’ve got to look forward and deal with the facts that present
themselves to us. But I could not have been clearer in June and July that we
didn’t have the authorities.


Mr. PAULSON: And we certainly didn’t have them at Treasury. And I don’t
think the Fed believed they had them. There was not–if there was a buyer for
Lehman, if–and there was–we had a foreign buyer that was very interested.
And near the end, their regulator wouldn’t let them. And so there was no
buyer. There was no hole to fill.

KUDLOW: All right. Let me move on. When you made your statements yesterday
regarding the unveiling of the new rescue program, here’s what you said, and I
will quote. “We regret having to take these actions. Today’s actions are not
what we ever wanted to do.” What did you mean by that?

Mr. PAULSON: What I meant was, you know, we’re from the United States of
America. We believe in free markets. We expect our markets to work well. We
don’t–government intervention is about failure of a regulator regime.
Mistakes on a lot of people’s parts. But to me, this was much, much better
than the alternative. And this was about preserving our free market system
and preserving our banking system, and stabilizing it for the American people.
Now there’s going to be a good deal of work that needs to be done once we get
through this period, and a good deal of work to make sure we don’t get in
something like this again.

KUDLOW: Some people read your statement and they wondered out loud, `Did you
mean the changeover in policy from the Treasury purchases of toxic assets to
the new capital injections?’


KUDLOW: And let me read what you told the Senate Banking Committee. This was
just a couple weeks old, in a very difficult congressional battle.

Mr. PAULSON: Right.

KUDLOW: Which you eventually won. Quote, “There were some that said we
should just go and stick capital in the banks, put preferred stocks, stick
capital in the banks. And what to do when you have failures? You know,
that’s what happened in Japan in other spots, but we said the right way to do
this is not going around and using guarantees or injecting capital. There
have been various proposals to do that, but we want to use market mechanisms.”
Now what was it that made you shift your emphasis away from the toxic asset
purchase and towards the injection of capital?

Mr. PAULSON: Larry, I’m glad you asked me that question because let me begin
by saying what we were talking about was always capital. From going back over
a year ago, I did everything I could to jawbone institutions to raise capital,
to say this is all about capital. No CEO ever got in trouble by having too
much capital. The illiquid asset purchase is about capital and about
price–price discovery and freeing up capital. And we’re going to do illiquid
asset purchases and it’s going to be integrated very well with this program.

KUDLOW: Still. That’s still on the program?

Mr. PAULSON: Absolutely. Yes. Absolutely.

Now when we worked with Congress, we knew. We collaborated with them and we
knew we were going to have the ability to purchase preferred stocks if it was
necessary and it was the right thing to do, and it would be very powerful.
But that statement that I made then was discussing putting in capital, you
know, if we dealt with a situation like Freddie or Fannie or AIG, or we had to
move to prop up a failing institution.

KUDLOW: But some people, if I may–I don’t mean to be interrupting. But some
people are saying that the movement of the Europeans toward capital injection,
the movement of the British towards capital injection, essential forced you to
play your hand. Is there any truth to that?

Mr. PAULSON: I looked at it differently here. I–you always need to look at
the facts and look at the facts before you then determine what you do. And
what we’re doing is very different than what the British are doing. And what
we did was we–it was clear to me–and it was clear to me after spending time
with the Europeans, understanding what was happening there, learning more
about this situation–that the problem was bigger than we had hoped, and that
the right way to make a big impact quickly was by purchasing prefers on the
terms on which we did it. And that would be–make the taxpayers’ money go the
furthest. This was clearly an investment. Where clearly an investment that
we should get these funds back and get them back with a profit. But we move
quickly. But remember, let’s just talk about what we’ve done, and 12 days
after the legislation was passed, 12 days after the legislation was passed, we
had voluntarily the nine institutions with 50 percent of the deposits of the
United States, sign on for a program. And if you look at the terms of this

KUDLOW: For 125 billion.

Mr. PAULSON: Yeah, 125…

KUDLOW: And you’re going to go for a second 125 billion.

Mr. PAULSON: And we’re going to go then broadly to other financial
institutions. And we’ll be going to regional banks and smaller banks and
community banks who are going to be subscribing…

KUDLOW: Now, that leaves–that leaves only 100 billion out of the
authorization of 350 billion.

Mr. PAULSON: Well, we’re…

KUDLOW: Is that where the toxic asset purchase comes from?

Mr. PAULSON: Well, remember, we have–we have an–we have 700 billion.

KUDLOW: But you have to go back to Congress for the remainder.

Mr. PAULSON: Yeah, what you need to do, for the next 100 billion, all the
president has to do is notify, and then to go beyond that, there’s a
notification process, and Congress has the ability obviously to pass
legislation to prevent it. But there’s–so in terms of the illiquid assets,
we will–this is a $250 billion purchase of preferred equities, and it gets
very different from what we were talking about when we were talking to
Congress. This is–this is a way which encourages shareholders to come in
and–not the way in which I answered the question, where we were talking about
injection preferred on a–on a punitive basis.

KUDLOW: And when–I mean, we talked earlier about the recession, or the
downturn and the difficult position; retail sales have fallen three straight

Mr. PAULSON: Right.

KUDLOW: We really have unprecedented commodity deflation, credit deflation.

Mr. PAULSON: Right. Right.

KUDLOW: Home deflation, all the rest of it.

Mr. PAULSON: Right.

KUDLOW: When do you think, realistically, new credit will flow to consumers,
to businesses, to state and local governments? When do you think Americans
should realistically expect that to happen?

Mr. PAULSON: Larry, that is the important question, and that, more than
anything else, will make a difference in this economy. And I’ve said we have
a resilient country and a resilient economy, and it can bounce back, and this
is about confidence.


Mr. PAULSON: And we’re going to have a number of difficult months here, but
when we get–and we’ve taken the actions that I believe are the right actions
based upon the facts that we looked at this week. I think they’re the right
actions, and I think they can make a difference, and they can make a
difference more quickly than many people recognize. But it’s going to be

KUDLOW: Whoever wins in November.

Mr. PAULSON: Right.

KUDLOW: We’re a few weeks away. Would you be willing to stay on for a few
months to keep this process intact before you hand it over?

Mr. PAULSON: Larry, I’m going to work day and night until–through January
22nd, and right after the election, I’m available to work with the best
transition you’ve ever seen.

KUDLOW: And that would…

Mr. PAULSON: You know, with whoever the new Treasury secretary is, whoever
the team. We’re out looking right now for permanent leaders of this TARP, and
so we’re looking to get someone that will be more than acceptable to the–to
the next president, his economic team in Congress, get them–get them
appointed. And we’re going to work–this is going to be a first-rate
transition, I can guarantee you that.

KUDLOW: All right. Mr. Secretary Henry Paulson, we appreciate it ever so

Mr. PAULSON: Yeah.

KUDLOW: I’m Larry Kudlow, everybody, CNBC. Please stay with us. We have
more coming.