[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 BANK OF AMERICA AND MERRILL LYNCH: HOW DID A PRIVATE DEAL TURN INTO A 
                       FEDERAL BAILOUT? PART III

=======================================================================

                             JOINT HEARING

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                                and the

                    SUBCOMMITTEE ON DOMESTIC POLICY

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 16, 2009

                               __________

                           Serial No. 111-46

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts       MARK E. SOUDER, Indiana
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      LYNN A. WESTMORELAND, Georgia
JIM COOPER, Tennessee                PATRICK T. McHENRY, North Carolina
GERALD E. CONNOLLY, Virginia         BRIAN P. BILBRAY, California
MIKE QUIGLEY, Illinois               JIM JORDAN, Ohio
MARCY KAPTUR, Ohio                   JEFF FLAKE, Arizona
ELEANOR HOLMES NORTON, District of   JEFF FORTENBERRY, Nebraska
    Columbia                         JASON CHAFFETZ, Utah
PATRICK J. KENNEDY, Rhode Island     AARON SCHOCK, Illinois
DANNY K. DAVIS, Illinois             ------ ------
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
------ ------

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director













                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 16, 2009....................................     1
Statement of:
    Paulson, Henry M., former Secretary of the Treasury..........    19
Letters, statements, etc., submitted for the record by:
    Connolly, Hon. Gerald E., a Representative in Congress from 
      the State of Virginia, prepared statement of...............    83
    Issa, Hon. Darrell E., a Representative in Congress from the 
      State of California, prepared statement of.................     8
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................    13
    Mica, Hon. John L., a Representative in Congress from the 
      State of Florida, news article dated June 11, 2009.........    44
    Paulson, Henry M., former Secretary of the Treasury, prepared 
      statement of...............................................    21
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................     3

 
 BANK OF AMERICA AND MERRILL LYNCH: HOW DID A PRIVATE DEAL TURN INTO A 
                       FEDERAL BAILOUT? PART III

                              ----------                              


                        THURSDAY, JULY 16, 2009

        House of Representatives, Committee on Oversight 
            and Government Reform, joint with the 
            Subcommittee on Domestic Policy,
                                                    Washington, DC.
    The committee and subcommittee met, pursuant to notice, at 
10 a.m., in room 2154, Rayburn House Office Building, Hon. 
Edolphus Towns (chairman of the full committee) presiding.
    Present: Representatives Towns, Kanjorski, Cummings, 
Kucinich, Tierney, Clay, Watson, Lynch, Connolly, Quigley, 
Kaptur, Kennedy, Cuellar, Hodes, Welch, Foster, Speier, Issa, 
Burton, McHugh, Mica, Souder, Turner, McHenry, Bilbray, Jordan, 
Flake, Fortenberry, Chaffetz, and Schock.
    Also present: Representatives Stearns and Garrett.
    Staff present: John Arlington, chief counsel--
investigations; Jaron R. Bourke, subcommittee staff director; 
Brian Eiler, investigative counsel; Linda Good, deputy chief 
clerk; Jean Gosa, clerk; Adam Hodge, deputy press secretary; 
Carla Hultberg, chief clerk; Marc Johnson and Ophelia Rivas, 
assistant clerks; Mike McCarthy, deputy staff director; Jesse 
McCollum, senior advisor; Jenny Rosenberg, director of 
communications; Joanne Royce and Christopher Staszak, senior 
investigative counsels; Christopher Sanders, professional staff 
member; Shrita Sterlin, deputy director of communications; Ron 
Stroman, staff director; Charisma Williams, staff assistant; 
Alex Wolf, professional staff; Lawrence Brady, minority staff 
director; John Cuaderes, minority deputy staff director; 
Jennifer Safavian, minority chief counsel for oversight and 
investigations; Frederick Hill, minority director of 
communications; Dan Blankenburg, minority director of outreach 
and senior advisor; Adam Fromm, minority chief clerk and Member 
liaison; Kurt Bardella, minority press secretary; Seamus Kraft 
and Benjamin Cole, minority deputy press secretaries; 
Christopher Hixon, minority senior counsel; Brien Beattie and 
Mark Marin, minority professional staff members; Katy Rother, 
minority staff assistant; and Sharon Casey, minority executive 
assistant.
    Chairman Towns. The committee will come to order. Good 
morning and thank you all for being here.
    Today we are continuing our investigation of Bank of 
America's acquisition of Merrill Lynch. When we held our first 
hearing on this merger, I called it a shotgun wedding. Now it 
looks like a marriage of convenience. Ken Lewis got what he 
wanted, and the Treasury and the Fed got what they wanted. All 
of this happened against the backdrop of unchecked government 
power, with no transparency or accountability.
    Ken Lewis appears to have manipulated the unaccountable 
system to his benefit. He started this all in motion when he 
made the first phone call to Mr. Paulson. He got the government 
involved. He got the Treasury to cough up $20 billion of 
taxpayers' money to help finance his merger. He never had to 
disclose $12 billion in Merrill Lynch losses to investors until 
it was over. He never had to ask the shareholders to reconsider 
the transaction.
    In the end, Mr. Lewis got everything he wanted. Mr. Paulson 
and Mr. Bernanke also got what they wanted out of this 
marriage. They got an uninterrupted merger that they believed 
helped to stabilize the market. The problem was, while all of 
this was going on, the American people, investors, and the 
Congress were kept in the dark. There was no oversight to 
determine whether this arrangement made sense. In my view, this 
is unacceptable and must be prevented from happening in the 
future.
    That being said, significant issues need to be resolved 
today.
    Was Bank of America really forced to go through with the 
deal, or was this just an old-fashioned Brooklyn shakedown? Did 
Lewis threaten to back out of the deal in order to squeeze more 
money out of Federal Government? If Mr. Paulson believed that 
Ken Lewis had demonstrated a colossal lack of judgment, why did 
he and Mr. Bernanke leave Lewis in charge of Bank of America?
    Did government officials tell Ken Lewis to keep quiet about 
the escalating losses at Merrill Lynch and the government's 
commitment to provide billions in Federal funding?
    Did Congress make a mistake in conferring broad authority 
on the Fed and Treasury in October 2008, when the TARP fund 
program was created?
    Should Congress have required more accountability, 
transparency, and checks and balances in the operation of the 
TARP funds?
    Perhaps Mr. Paulson will help us shed some further light on 
this transaction and help us to answer these questions. I look 
forward to his testimony this morning.
    I now yield 5 minutes to our ranking member of the full 
committee, Mr. Darrell Issa, for his opening statement.
    [The prepared statement of Hon. Edolphus Towns follows:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Issa. Thank you, Mr. Chairman, and thank you for being 
a full partner in this process.
    Mr. Chairman, I would ask unanimous consent that the 
gentleman from Florida, Mr. Stearns, and the gentleman from New 
Jersey, Mr. Garrett, be allowed to sit in on the panel pursuant 
to our rules and ask questions at the end of all other 
questioners.
    Mr. Chairman, after reading former Secretary Paulson's 
testimony, it is clear that most of the basic facts related to 
this event in December of last year are no longer in question. 
Secretary Paulson has confirmed that he did tell Bank of 
America CEO Ken Lewis that if the Bank of America exercised the 
MAC clause and later needed assistance, then management would 
or could, depending on how you look at it, be fired. This is 
not in debate. As a matter of fact, the candor and clarity that 
the Secretary is bringing to us today is refreshing and 
helpful.
    The fact that the Secretary does not believe it is 
inappropriate perhaps we should look at in light of the times. 
Just as revisionists have rewritten what we were doing after 
2001 to protect the homeland, we are already beginning to 
question whether in fact means used at the disposal of the Fed 
and the Treasury and the FDIC were inappropriate or appropriate 
now that, of course, a global financial meltdown has been 
averted.
    I think in fairness, just like in the cold war, had the 
Soviets come over the Czech border, we would have had to come 
as we are and bring what we had. What we had at the beginning 
of this crisis was in fact a Secretary of the Treasury 
relatively new on the job, a Fed chairman relatively new on the 
job, all of whom were being told, ``here is what is happening 
on a daily basis, do something about it.''
    They came to us with a plan, a plan that I voted against, a 
plan to buy toxic assets for some $700 billion. But when they 
went back and started looking at how to execute after receiving 
it, it became clear that it was more complex, it was more 
nuanced, that the needs were not necessarily for toxic asset 
purchases and it might not be in the taxpayers' best interests.
    So although there will be some things that I approve of and 
some things I disapprove of, I think today, Mr. Chairman, we 
have to consider with this last witness the situation that 
existed at that time, one in which the President had lobbied 
heavily for moneys but without anyone having a book written on 
how you get through these times.
    Wall Street perhaps would say that the end justifies the 
means; we have in fact been saved. Here in Washington we are 
Monday morning quarterbacks. Monday morning quarterbacks say, 
in fact, if we have to play again next Sunday, how do we do 
better? What can we learn from what happened on the gridiron on 
Sunday?
    Mr. Chairman, that is our job here today. We have to ask 
some serious questions and use an expert witness as part of the 
process. We have to ask what would he do differently if he had 
it to do over again. He may or may not be able to answer it.
    What should we do in order to glean the causes, the events, 
the solutions, and in fact what regulatory changes will be 
necessary or at least considered if we are to be prepared to 
either not have it happen again or, as the chairman said, 
provide the transparency, accountability, predictability, and 
rule of law the next time that may have been lacking in this 
once-in-a-century event?
    So, Mr. Chairman, on a bipartisan basis, I am thrilled that 
we are bringing to a close this three-part hearing process, 
because I believe it is helpful and will continue to be helpful 
not just as oversight but as a partner in the necessary reform.
    Mr. Chairman, I might take note that just yesterday, on the 
House side at least, all of the commissioners for the 9/11-
style financial commission that you and I worked on together 
were named. That is a beginning of what could be up to an 18-
month process in which I believe both of us and all the members 
of our committee will be working together to ensure that our 
reforms fit future possible challenges.
    I thank the chairman and yield back.
    [The prepared statement of Hon. Darrell E. Issa follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman Towns. Thank you very much, Congressman Issa from 
California.
    This hearing is being conducted jointly with the Domestic 
Policy Subcommittee. I now yield 5 minutes for an opening 
statement to the chairman of that subcommittee, Congressman 
Kucinich from Ohio.
    Mr. Kucinich. Thank you very much, Mr. Chairman.
    I don't think the question facing us today, with all due 
respect to my friend from California, is whether or not this is 
a moment for Monday morning quarterbacks. The question is 
whether taxpayers should have purchased the Bank of America 
franchise.
    With Mr. Paulson's testimony today, it is an undisputed 
fact that then Secretary Paulson told Bank of America's Ken 
Lewis that the government might remove him and his board of 
directors if Bank of America abandoned its deal to acquire 
Merrill Lynch. It requires a judgment call to decide if 
Secretary Paulson was being justifiably tough in response to 
Bank of America's consideration of invoking the material 
adverse change clause in its merger contract, an arguably 
unwise but lawful action which he viewed as a potential threat 
to the financial system at a moment of crisis.
    But nothing in Secretary Paulson's testimony today 
justifies the government's decision to ignore evidence that 
Bank of America withheld information from its shareholders 
about mounting losses at Merrill Lynch before the crucial 
shareholder vote on December 5th, a potentially illegal act. I 
have seen no justification for the government to override 
recommendations of professional staff at the Fed and the 
president of a regional Federal Reserve Bank for greater 
accountability of Bank of America's top executives. Yet, sadly, 
that is precisely what Mr. Paulson and Mr. Bernanke did.
    This committee's investigation and two previous hearings 
have revealed that the government had concluded that Mr. 
Lewis's management of Bank of America was seriously deficient 
and possibly in legal jeopardy. Top staff at the Fed and 
Treasury had determined that Mr. Lewis knew about accelerating 
losses at Merrill Lynch before the shareholder vote to ratify 
the merger, but he did not provide that information to 
shareholders.
    The top lawyer at the Fed had determined that Mr. Lewis and 
his management team were possibly in violation of securities 
laws for withholding material information from shareholders.
    Top professional staff at the Fed had determined that Mr. 
Lewis and his management team had failed to do due diligence in 
acquiring Merrill Lynch and were not up to the task of 
identifying and solving the problems in which they found 
themselves in late 2008.
    Top staff at the Fed and even the president of a regional 
Federal Reserve Bank were pressing for a number of new 
requirements on Bank of America as conditions of any Federal 
bailout in order to remedy the deficient management they 
perceived.
    If you will look at the screen, you will see the supporting 
documents our investigation has revealed. In an e-mail from a 
senior adviser at the Federal Reserve to Chairman Bernanke, 
``There are clear signs in the data we have that the 
deterioration at Merrill Lynch has been observably under way 
over the entire quarter, albeit picking up significantly around 
mid-November.''
    The next slide, please.
    From a restricted Federal Reserve analysis of Bank of 
America-Merrill Lynch merger, ``BAC management's contention 
that the severity of MER's losses only came to light is 
problematic and implies substantial deficiency in the diligence 
carried out in advance of and subsequent to the acquisition. 
These were clearly shown in Merrill Lynch's internal risk 
management reports that BAC reviewed during their due 
diligence.''
    Next slide, please.
    ``The potential for losses and other risk exposures cited 
by management, including those coming from leveraged loans and 
the trading and complex structured credit derivatives products, 
that is called correlation trading, should also have been 
reasonably well understood, particularly as BAC itself is also 
active in both these products.''
    Next slide, please.
    From an e-mail from the Fed's general counsel to Chairman 
Bernanke: ``Lewis should have been aware of the problems at 
ML''--Merrill Lynch--``earlier, as early as mid-November and 
not caught by surprise. That could cause other problems for him 
around the disclosures Bank of America made for the shareholder 
vote.''
    Next slide, please.
    From another e-mail from the Fed's general counsel to 
Chairman Bernanke: ``A different question that doesn't seem to 
be the one Lewis is focused on is related to disclosure. 
Management may be exposed if it doesn't properly disclose 
information that is material to investors. His potential 
liability here will be whether he knew or reasonably should 
have known the magnitude of the Merrill Lynch losses when Bank 
of America made its disclosures to get the shareholder vote on 
a Merrill Lynch deal in early December.''
    Next slide, please.
    From talking points prepared by top staff at the Fed 
Reserve: ``Bank of America should expect to be required to more 
intrusive review and involvement by the U.S. Government in the 
selection of management of Bank of America, including the board 
of directors.''
    And the final slide.
    From an e-mail from Eric Rosengren, president of the Boston 
Federal Reserve Bank, to Chairman Bernanke: ``Going forward, I 
am concerned if we too quickly move to a ring-fenced strategy, 
particularly if we believe that existing management is a 
significant source of the problem and they do not have a good 
grasp of the extent of their problems and appropriate 
strategies to resolve them. I think it is instructive to look 
at the example of the Royal Bank of Scotland. The U.K. replaced 
senior management. I would not want to discard this option 
prematurely.''
    In spite of the evidence and recommendations from top 
staff, Secretary Paulson and Chairman Bernanke bailed out the 
merger of Bank of America and Merrill Lynch without requiring 
replacement of Bank of America's top management or board of 
directors or imposing any meaningful new requirements on Bank 
of America's management.
    Not every national government, faced with troubled, 
systemically significant banks, behaved the same way. The U.K. 
dismissed top corporate management at Royal Bank of Scotland 
upon rescuing the company, without impairing the bank's ability 
to operate. Even in the United States, General Motors' top 
executive was pushed aside as a condition of Federal support. 
But in the United States, the management of systemically 
significant banks, such as Bank of America, not only kept their 
jobs, they received billions in taxpayer dollars to help plug 
the holes in their balance sheets.
    Secretary Paulson regards the government's intervention in 
financial markets as successful. Certainly TARP and the Fed's 
many new lending facilities aid systemically significant banks 
and have bought time for those banks. But the lasting 
contribution----
    Chairman Towns. Will the gentleman summarize?
    Mr. Kucinich. I will summarize right now.
    The lasting contribution of this committee's investigation 
will be exposing Treasury and the Fed's failure to require 
meaningful accountability from systemically significant banks 
in exchange for Federal bailout. Not a single CEO of a 
systemically significant bank was removed from his job by 
government action for a misdeed or mistake. Nor has a single 
CEO of a systemically significant bank fully explained his role 
in creating the circumstances of the financial crisis. The 
biggest, most powerful bankers have essentially received a free 
ride at taxpayers' expense.
    In conclusion, in choosing to bail out Bank of America 
without also removing its top management for their failure to 
do due diligence and for withholding potentially material 
information from shareholders prior to the merger ratification 
vote, the government sent a signal to the management of all 
systemically significant banks that their mistakes and misdeeds 
will be treated differently and more gently by regulators than 
those committed by managers of mid-sized and small-sized banks. 
Over the coming months and years, it will prove to be a 
dangerously destabilizing signal that we will deeply regret.
    I yield back.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Mr. Issa. Mr. Chairman, as a point of order, on this side 
at least we have not received any of the documents that were 
displayed. Could we get copies of each of those put on the 
board, please?
    Chairman Towns. I will be delighted to do so, without 
objection.
    I now yield to the gentleman from Ohio, who is the ranking 
member of the Domestic Policy Subcommittee, Mr. Jordan.
    Mr. Jordan. Thank you, Mr. Chairman.
    Let me thank you, Chairman Kucinich, Ranking Member Issa, 
for working with me and others to get this series of hearings 
here in front of the committee.
    I would also like to thank Secretary Paulson for coming 
before the committee today, and I think we all look forward to 
his testimony in the few hours we are going to get to spend 
here with him.
    The fall of 2008 was a watershed time for our economy. Our 
economic challenges were felt the most by the millions of 
Americans who lost jobs, saw savings shrink and their credit 
tightened. Unfortunately, the approach taken by the Federal 
Government I believe is dangerous and I think many Americans 
would argue has not helped.
    Federal bailouts and Federal stimulus packages are 
transforming our free market economy into a political economy. 
The Federal Government now selects the winners and the losers. 
The current issue before this committee is merely a symptom of 
the ever-increasing reach of the Federal Government into the 
everyday affairs of American businesses and American families.
    Should anyone be surprised by the way the Federal 
Government has administered the bailout program? With a 
trillion dollars at their disposal, little guidance and 
oversight, we have seen Treasury and the Federal Reserve behave 
in a way that can only be described as unprecedented.
    The evidence is clear. The Federal Government has used 
threats, intimidation, and I believe deception to impose 
growing command and control over our economy, with the 
increasing nationalization of everything from banks to car 
companies, runaway Federal spending and deficits, higher taxes, 
government takeovers of energy and, potentially, health care, 
all while the economy is deteriorating even further and more 
American jobs are being lost.
    The American people are saying, enough is enough; and the 
American people want answers.
    I look forward to hearing from Mr. Paulson about his role 
in these dealings and would yield back the balance of my time, 
Mr. Chairman.
    Chairman Towns. Thank you very much for your statement.
    We turn now to our witness, Henry M. Paulson. Mr. Paulson 
served as the Secretary of the Treasury from 2006 to 2009, 
January 2009. He previously served as the chairman and CEO of 
Goldman Sachs.
    It is committee policy, Mr. Paulson, that we swear our 
witnesses in. Will you please stand and raise your right hand.
    [Witness sworn.]
    Chairman Towns. Let the record reflect he answered in the 
affirmative. You may be seated.
    So, Mr. Paulson, you may begin.

STATEMENT OF HENRY M. PAULSON, FORMER SECRETARY OF THE TREASURY

    Mr. Paulson. OK. Chairman Towns, Ranking Member Issa and 
distinguished members of the committee, I served as Secretary 
of the Treasury from July 2006, to January 2009. During my 
tenure, the world experienced a financial crisis unprecedented 
in our lifetimes. The crisis presented a relentless series of 
novel challenges that required swift, innovative, and dramatic 
responses.
    Had the crisis of 2008 been left to unfold without strong 
Federal reaction and intervention, the world of 2009 would look 
very different from the world we live in today. Many more 
Americans would be without their homes, their jobs, their 
businesses, their savings, their way of life.
    The crisis of confidence last fall threatened to disrupt 
our entire financial system, not just the institutions that had 
high credit losses on their mortgage investments but all 
financial firms, whether weak or solvent. As liquidity dried 
up, the continued collapse of financial institutions that 
provide credit and handle payments would have meant in short 
order that firms across industries, not just Wall Street but 
every street, would have seen a massive curtailment of access 
to financing needed to purchase supplies and pay employees.
    Missed payrolls would have quickly turned into even more 
millions of layoffs, and this in turn would have meant an even 
greater retreat of consumer spending. It would have been 
extremely difficult to break the momentum of this downward 
spiral.
    Now that the financial system is stabilized, we can and 
should take the time to learn the lessons of the past. 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.
    This hearing is about Bank of America, and in my prepared 
testimony I lay out the series of events surrounding its 
acquisition of Merrill Lynch. There are three issues that are 
appropriate to address at the outset of this hearing.
    First, some have opined that I and other government 
officials allowed concerns about systemic risk to outweigh 
concerns about potential harm to Bank of America and its 
shareholders. That simply did not happen. In my view and the 
view of numerous government officials working on the matter, 
the interests of the Nation and Bank of America were aligned 
with respect to a closing of the Merrill Lynch transaction.
    Second, some have suggested that there was something 
inappropriate about my conversation of December 21st with Mr. 
Lewis in which I mentioned the possibility that the Federal 
Reserve could remove management and the board of Bank of 
America if the bank invoked the MAC clause. I believe it was 
appropriate for me to explain to Mr. Lewis that the government 
was supportive of Bank of America and that it felt very 
strongly that if Bank of America exercised the MAC clause that 
would show a colossal loss of judgment and would jeopardize 
Bank of America, Merrill Lynch, and the financial system.
    It was also appropriate for me to remind him that, under 
such circumstances, the Federal Reserve could invoke its 
authority to remove management and the board of Bank of 
America. I intended my message to reinforce the strong view 
that had been expressed by the Fed and which was shared by the 
Treasury that it would be unthinkable that Bank of America take 
this destructive action.
    Third, the suggestion has been made that I discouraged Mr. 
Lewis from making required disclosures to the public markets 
about losses at Merrill Lynch. That simply did not happen, and 
Mr. Lewis has denied it unambiguously in testimony before this 
committee.
    I would like to conclude with what is most prominent in my 
recollection of the events of last fall. What I recall most 
vividly is a Nation faced with a threat of an unparalleled 
economic crisis and the efforts of the men and women from both 
the public and private sectors who worked hard to steer our 
Nation away from that precipice. It was my privilege to work 
with them, and I am proud of what we have accomplished.
    Thank you, Mr. Chairman. I would be very happy to answer 
your questions.
    [The prepared statement of Mr. Paulson follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman Towns. Thank you very much, Mr. Paulson.
    We will begin with the question period. Each Member in turn 
will have 5 minutes, of course; and I will begin.
    As you can see with the document up on the screen, Mr. 
Lewis of Bank of America claimed under oath to Attorney General 
Cuomo's office that he would have renegotiated the deal if you 
didn't tell him he could not do so. A lawyer says to Mr. Lewis, 
``you can always renegotiate.'' Mr. Lewis says, ``not when you 
are told you cannot do it.'' Mr. Lewis is asked, ``would you 
have tried to renegotiate the price if you weren't told not to 
do it by Mr. Paulson?'' Mr. Lewis's answer to that is ``yes.''
    Is it true then, Mr. Paulson, that you told Mr. Lewis he 
could not renegotiate the Merrill deal?
    Mr. Paulson. It wasn't quite that direct or specific, but I 
can be very clear that we viewed the invocation of a MAC 
clause, whether it was to renegotiate or just get out of the 
merger, as being very risky. The markets were driven by fear 
and uncertainty, and invocation of a MAC clause, whether it was 
ultimately going to be resolved by the courts or be resolved by 
renegotiation in a shareholder vote, would lead to an extended 
and difficult process, and the fact still remained that we 
viewed the MAC clause as being an illegally binding contract.
    Chairman Towns. Was that a yes?
    Mr. Paulson. That is what I said. I said that we viewed--I 
viewed and I know the Fed viewed--that the invocation of a MAC 
clause would be a serious mistake. It would be a colossal lack 
of judgment if he invoked the MAC clause, whether it was to 
renegotiate or whether to go through the courts.
    Chairman Towns. I am still trying to find out whether that 
was a yes or a no?
    Mr. Paulson. Well----
    Chairman Towns. ``Maybe'' is not allowed.
    Mr. Paulson. Did I order him directly? It wasn't that 
direct. But I did say I thought invoking the MAC clause would 
be a colossal lack of judgment. There was no sound legal basis 
for it, and the distinction between invoking the MAC clause to 
renegotiate or go to the courts was one that for all practical 
purposes was not a significant one.
    Chairman Towns. Let me say, if he had invoked the MAC 
clause, wouldn't that be a colossal lack of judgment on his 
part, and wouldn't this have jeopardized his own bank and the 
American economy if he had exercised the MAC?
    Mr. Paulson. Yes. Yes, Mr. Chairman. It was the view of 
very experienced Federal Reserve lawyers that there wasn't a 
sound legal basis, and it is my understanding that there is no 
instance where a Delaware court has let a company use a MAC 
clause to get out of a merger.
    This particular MAC clause even had a carve-out which 
carved out changes due to market conditions.
    Chairman Towns. My concern is, if you had those concerns, 
why didn't you just fire him?
    Mr. Paulson. Well, I would say this. Remember, Mr. Lewis 
did not invoke the MAC clause. He did not do something that 
showed a colossal lack of judgment. Mr. Lewis was considering 
this and his board was considering this and they decided to 
fulfill their contract and acquire Merrill Lynch.
    Chairman Towns. You know, it seems to me that if he had 
this lack of judgment, how could you give him $20 billion? It 
seemed to me you would have just forced his hand at that point 
in time and pushed him out.
    Mr. Paulson. Mr. Chairman, I am making a distinction 
between an action that he might have taken which he didn't 
take. If he had taken an action that showed a lack of judgment, 
I think then the regulator would have been irresponsible if the 
regulator didn't push him out. But he did not take that action, 
and they fulfilled their contract, and they acquired Merrill 
Lynch.
    Chairman Towns. I am running out of time here. Did you call 
Mr. Lewis or did he call you in reference to this deal?
    Mr. Paulson. In which of these calls?
    Chairman Towns. Is it true that Mr. Lewis called you in 
December 2008, and asked the government to get involved in the 
Merrill Lynch deal, or did you call him?
    Mr. Paulson. No, the first time we heard of this was a call 
from Lewis. So on December 17th, I heard from a member of my 
staff that he would be calling, and then I got a call from him, 
and he said that he and his board were concerned to learn of 
the extent of Merrill losses which he had become aware of very 
recently.
    Chairman Towns. My time has expired, but let me just ask 
you this before we go on. Is it true that Bank of America first 
brought up the bailout? Did they bring up the bailout to you, 
or did you bring up the bailout to them?
    Mr. Paulson. Bank of America came to us with their concerns 
about their losses and their concerns about going ahead with 
the acquisition. And in terms of the bailout, I am not--I 
prefer to use the word ``rescue.'' But whatever word we use, 
that this came out of discussions, because we had very much--at 
least I think we had--an alignment of interests. Because my 
concern was the American people, and I took a look at the 
losses that I heard coming----
    Chairman Towns. Pull the mic a little closer to you.
    Mr. Paulson. I am sorry.
    So, as I said, the rescue came out of discussions; and I 
believe it was the view of the government that the Fed and 
Treasury--that when these announcements were announced, that 
they would truly shake the market were it not for some form of 
government support being in place. So we felt that we needed 
that in place in order to keep the system intact.
    Chairman Towns. Let me just say we will continue to go on a 
second round.
    I yield to the Congressman from California, the ranking 
member, Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman.
    Mr. Paulson, with our previous two testimony witnesses, 
obviously, Chairman Bernanke found himself in an odd situation 
of saying, although Mr. Cuomo had said that the threat that you 
had said--and I will quote it as best I can from his letter--
Secretary Paulson has informed us that he made the threat at 
the request of Chairman Bernanke.
    That came from Cuomo's office. I apologize that his work 
was a little sloppy. We get a letter, but there is no 
transcript, there is no written records, so we have to take his 
interpretation of your statements, and that is one of the 
reasons you are here today.
    We also dealt with Ken Lewis, who came here with a 
situation in which he had received a threat by your own 
statements and yet he had to say that the threat was not the 
reason that he went through with the bad deal. For if he had 
said that, then the Ohio pension funds and others that have 
sued saying that the merger diminished their asset value in 
Bank of America would have in fact had their lawsuit go forward 
much more readily.
    So each of you before you have been in an odd situation. 
You are uniquely positioned to help us. One, you have told us, 
yes, you did issue the threat. Two, you believed that it was 
reasonable.
    I want to put it in perspective just for a moment, perhaps 
for historical purposes, and go back to the first Gulf war in 
1990 in which Margaret Thatcher said to President George 
Herbert Walker Bush, ``don't go wobbly on me, George,'' when 
she felt that he was not prepared to pursue a war against 
Saddam after he invaded and brutally treated the people of 
Kuwait.
    This was not a war, but this was an emergency situation. 
Your threat is admitted. Your threat was because you felt that 
there was clearly disaster if they didn't go forward with it. 
After one more thing I would like to ask you to elaborate on 
that and how Mr. Cuomo came to give us the line he did.
    My understanding is, had the MAC clause been completely 
valid, had Ken Lewis renegotiated, had they agreed to a new 
term or to a breakup, isn't it true that in fact we would have 
had a long period of time while statutory notice for 
stockholders and a stockholder vote occurred?
    Mr. Paulson. Yes. If there had been a renegotiation period, 
there would have been an extended period and there would have 
been a revote, is my understanding.
    Mr. Issa. Isn't it that which is at the center of why you 
issued the threat and why Ken Lewis ultimately decided that the 
damage from that period, even if he got a better price or broke 
it, either way could be disastrous to both firms?
    Mr. Paulson. Well, the reasoning again, I don't--Ken Lewis 
didn't characterize it as a threat, and I----
    Mr. Issa. Actually, he did characterize it as a threat. He 
managed to say that he didn't feel threatened while receiving a 
threat.
    Mr. Paulson. I prefer to characterize it as me explaining 
the Fed's supervisory authorities to him. In any event----
    Mr. Issa. I like Margaret Thatcher's way of doing it.
    Mr. Paulson. However we characterize it, the concern that I 
had was that the MAC clause wasn't a legally viable option. 
There is no precedent for it. There is no basis for it. So 
doing that would have just--would have then--it would have 
shown a lack of judgment, and I think it would have really 
undermined the viability of B of A and Merrill Lynch and the 
financial system.
    Mr. Issa. Going back to Mr. Cuomo's characterization of 
what you had to say, if you can help us, if you will, thread 
the needle between these two; and before my time is up I want 
to ask one other question, sort of an easy one. Would you say 
that effectively, no matter what the reason, the viability of 
the MAC, you were saying the equivalent of what Margaret 
Thatcher said to George W. Bush, which is, ``stay the course; 
get this done; it is better to do it right now than not.''
    Mr. Paulson. Let me go to explaining the confusion with 
Secretary Cuomo's office. It is really quite simple, because 
the Fed had invoked a privilege that kept me from recounting my 
conversation with Ben Bernanke to Cuomo's office. So if it 
hadn't been for that Fed privilege, I would have told and would 
have said to Attorney General Cuomo's office exactly what I am 
saying here today. So I think it is really quite 
understandable, you know, this discrepancy in light of the Fed 
privilege.
    And right after Attorney General Cuomo's letter came out, I 
made a public statement where I said that my prediction of what 
could happen to Lewis and the board, that was for me, those 
were my words, but it was based upon what I understood to be 
the Fed's very strong opposition to B of A renouncing the deal.
    Now, to your last question, I was attempting to send a very 
strong message to Ken Lewis in terms of how strongly the Fed 
and Treasury viewed this matter. And it wasn't just the words 
about the Fed's supervisory power and the other language which 
I presented at that time, again, a very strong message on the 
lack of the MAC being a legally viable option, a very strong 
message on it being a lack of judgment, and a very strong 
message on what I believed and what the Fed believed this would 
do to Bank of America and Merrill Lynch and the financial 
markets.
    Mr. Issa. Thank you.
    Thank you, Mr. Chairman.
    Chairman Towns. Thank you very much.
    I now yield 5 minutes to the gentleman from Ohio, Mr. 
Kucinich.
    Mr. Kucinich. Secretary Paulson, in your testimony you 
justified telling Mr. Lewis that the government might remove 
Bank of America management if they terminated the deal to 
acquire Merrill Lynch. You state, ``Such an action would show a 
colossal lack of judgment and would jeopardize Bank of America, 
Merrill Lynch and the financial system.''
    Mr. Secretary, if a lack of management judgment merits 
decisive governmental action, what about potential violations 
of the law?
    Mr. Paulson, were you aware of concerns felt at the Fed and 
Treasury that Ken Lewis's management team failed to do due 
diligence in acquiring Merrill Lynch and possibly violated 
securities laws by withholding material information from his 
shareholders to get the vote for the merger with Merrill?
    Mr. Paulson. I have become aware from some of the e-mails 
that this committee has released and other documents.
    Mr. Kucinich. Did you know at that time?
    Mr. Paulson. That there were concerns. And I know there 
were some concerns----
    Mr. Kucinich. At that time, did you know, Mr. Secretary?
    Mr. Paulson. By staff members, some concerns at that time 
along the lines of what you expressed on due diligence. I had 
not heard concerns at that time about securities laws.
    Mr. Kucinich. Now, Chairman Bernanke testified here that he 
shared those concerns about Bank of America's management. Did 
you share the concerns with anyone?
    Mr. Paulson. In terms of concerns about Bank of America's 
management? Here is what I would say about management. 
Congressman, I have been involved and was involved in at least 
three situations when I was at Treasury where CEOs were 
replaced: Fannie, Freddie, AIG.
    Mr. Kucinich. Let me ask you this on that point. In 2008, 
did you ever inform the management of any systemically 
significant bank that they would be forced out for any reason?
    Mr. Paulson. Well, I would say this. Here is the calculus. 
You have to ask yourself, is this management capable of running 
the firm and is there someone else there or someone else you 
know of that can do a better job? And I would say that these 
large, complex financial institutions are not easy to run, and 
it is not easy to find strong people to run them during a 
financial crisis.
    Mr. Kucinich. I just want to say this, Mr. Paulson--and we 
have limited time here, so I appreciate you answering these 
questions. The investigators of this committee have reviewed 
tens of thousands of pages, including notes of conversations 
you participated in, where the Federal Reserve response to Bank 
of America's problems was crafted. These documents clearly show 
that you were an advocate of aggressive fiscal responsibility. 
You advocated for a large cash injection, a very large asset 
protection plan. But nowhere in these documents did we find 
evidence that you advocated for holding Bank of America's 
management accountable for failing to do due diligence and for 
withholding potentially material information from shareholders.
    So, Mr. Secretary, did you in fact advocate for requiring 
such accountability as a condition of the bailout you were 
developing?
    Mr. Paulson. I advocated the accountability we put in place 
which was we treated Bank of America like Citigroup. We treated 
them differently than those that went to the TARP the first 
time. So we had tougher restrictions on executive comp, and we 
had provisions on foreclosure mitigation.
    But in terms of replacing the CEO, in this situation it was 
my judgment and it was the judgment of the regulator that it 
was appropriate to keep Mr. Lewis--that this is a decision that 
is made by the board of directors and for regulators to come in 
and decide to replace him, we didn't think that was 
appropriate.
    Mr. Kucinich. Mr. Paulson, as you know, invoking the MAC, 
however ill-considered it would have been, was not against the 
law. Meanwhile, Bank of America's decision to withhold material 
information about a merger from shareholders and their failure 
to do due diligence are potential violations of law. Perhaps 
you can explain to this committee how a Secretary of the 
Treasury can justify punishing an unwise but lawful act, while 
ignoring potentially illegal ones?
    Mr. Paulson. Well, in terms of legality----
    Mr. Kucinich. Could you speak closer to the mic?
    Mr. Paulson. I would say, in terms of legality, I certainly 
don't feel qualified to sit here and opine on whether there was 
an illegal action, and I certainly have not seen evidence of an 
illegal action, and that is in terms of the relationship 
between B of A and the capital markets and the relationship 
between B of A and the SEC. I think that is a matter for others 
to opine on.
    Chairman Towns. The gentleman's time has expired.
    I now yield to the ranking member, Mr. Jordan.
    Mr. Jordan. Thank you, Mr. Chairman.
    I think as I look at this and as most people look at this, 
they see a clear pattern of deception and intimidation. I don't 
think there is anyone in this room who doesn't believe that you 
guys intimidated Mr. Lewis.
    I think it starts at the October 13th meeting when you 
called the nine biggest banks to Washington. They didn't know 
what the meeting was about. The whole meeting took 45 minutes. 
You slide a piece of paper across. They have to sign it and 
write in the amount of TARP money they are going to take. And I 
think it continues.
    But my biggest concern is this--again, what I have said is 
a pattern of deception. Because, I mean--and this is the 
concern. I think the American people need to see this 
situation, because it sheds light on where we are headed.
    We have a car czar, pay czar, 21 other czars. We have an 
auto task force. We have unprecedented involvement by the 
government in the private sector. And coming soon to families 
across America we have this comparative effectiveness board 
that is going to decide what kind of health care you are going 
to get. So it is important we see what happens when you give 
this kind of involvement to the Federal Government.
    So I want to walk you through a series of things that took 
place in this acquisition and then ask you a question at the 
end.
    First of all, I want to start with what some people would 
describe as an exaggeration. You said the world was going to 
end, everything was going to be terrible if in fact this deal 
didn't get completed. Yet there are people at the Fed like Mr. 
Ashcraft, who said the doomsday predictions were ``a little 
over the top.''
    You timed the release of information so you kept the 
American public in the dark. You only gave verbal assurances to 
Mr. Lewis. You wouldn't put anything in writing. You didn't 
want that out. You made sure that Ken Lewis' testimony to 
Attorney General Cuomo, he said Mr. Paulson said we don't want 
a disclosable event. We have the Angulo e-mail that says, if 
Merrill decides to file early, we want to steer Merrill to a 
later filing.
    So you controlled when the American people could get this 
information, even though you are using $700 billion of their 
money. You deceived the regulators.
    We have the Attorney General's letter to Congress, 
``Secretary Paulson did not keep the SEC chairman in the loop 
during discussions and negotiations with the Bank of America.''
    The Office of the Comptroller of the Currency was also kept 
in the dark. We have e-mail from Brian Peters from the New York 
Fed where he is talking about an upcoming conference call: 
``Given the presence of the OCC on the call, I think we should 
not discuss or reference the call with Ken Lewis and Secretary 
Paulson.''
    Maybe most importantly, and I just want to read from--our 
staff did good work--I want to read from the memo they put 
together. You kept the Financial Stability Oversight Board in 
the dark as well. Let me just read this: ``Not only did Mr. 
Paulson and Mr. Bernanke deliberately keep the SEC and OCC in 
the dark about events at Bank of America and Merrill Lynch,'' 
you also failed to raise the issue at two consecutive meetings 
of the Financial Stability Oversight Board which Congress 
established to bring oversight to TARP. According to the 
minutes of these FSOB meetings, it was not until the January 
15th meeting that you and Mr. Bernanke informed the board of 
the government's plans for additional bailouts of Bank of 
America in connection with the Merrill Lynch merger.
    So, again, you claim that failing to force the merger would 
have had catastrophic effect on financial stability, yet it 
wasn't worth revealing to the Financial Stability Oversight 
Board. So financial instability is going to happen, but you are 
not going to reveal what is going on to the Financial Stability 
Oversight Board.
    Then the last example I would point to is one I started 
with. Go back to the October 13th meeting. You deceived the 
banks involved with this. I mean, this is based on Ken Lewis' 
testimony, and I have asked this question, talked about this 
with Ken and Fed Chairman Bernanke.
    You called the nine biggest banks to Washington. They don't 
know what the meeting is about. The whole meeting takes 45 
minutes. He described the meeting. They sat on one side. You 
and Mr. Geithner and Mr. Bernanke and Ms. Bair sat on the other 
side, and you basically tell them they are going to take TARP 
money, like it or not.
    So I have one question, and I think this is critical. That 
was on October 13th, that meeting. I want to go back to October 
3rd, because that is when this whole thing started.
    When we started down this bailout road, this bailout fever 
that has grabbed Washington, it, frankly, started on October 
3rd when the Congress of the United States decided to give you 
$700 billion of taxpayer money; and the whole premise of that 
action was that you were going to take that money and you were 
going to go buy the troubled and toxic assets. You were going 
to clean things up, and things were going to get back on the 
right track. And yet, to date, the Treasury has not purchased 
those assets.
    So I want to know, when did you know that you could not be 
able to do what you told Congress? I remember sitting in on the 
conference calls with you and Mr. Bernanke. I remember when you 
came in front of lawmakers and you talked about we are going to 
buy these troubled assets. And yet less than--actually, 10 days 
later, you had changed direction completely and instead just 
injected capital into the institutions.
    So did you deceive the Congress before the October 3rd 
vote, Mr. Paulson?
    And, again, it is a pretty clear pattern of what has taken 
place.
    Mr. Paulson. Well, unfortunately, I don't think I have time 
to respond to every question you asked or every statement you 
made, many of which I disagree with. But let me get to the 
TARP, because I think that is critical.
    We went to Congress and asked for authority to buy liquid 
assets. We also recognized we needed flexibility, and we worked 
with Congress to make sure that we had the flexibility to deal 
with whatever we had coming at us. Congress, I believe, knew 
they were giving us this flexibility, and thank goodness they 
did give us that flexibility.
    Now, what happened in the last few days before we got the 
TARP legislation which passed on October 3rd and in the week 
after we got the TARP legislation, the markets continued to 
freeze up. We had a whole series of bank failures overseas. 
Five or six different countries had to intervene to rescue 
their banks.
    Market participants were clamoring for us to do something 
quickly. We needed to do something quickly. And the way we were 
able to do something quickly and make a difference and make a 
dramatic difference and prevent something very dire from 
happening was to make the change and inject capital.
    I would say one other thing. I think subsequent events have 
proven unequivocally that there is not an easy, quick way to 
purchase illiquid assets. So when did I come to the conclusion 
that we would--we needed to move and do something? It was 
sometime----
    Mr. Jordan. Sometime between October 3rd and October 13th, 
obviously. My question is, was it before October 3rd?
    Mr. Paulson. It wasn't--I would say----
    Mr. Jordan. Would you disagree--wouldn't you say that the 
main point that you and Mr. Bernanke sold--and I didn't go 
along with this. I thought it was a crazy thing. The main thing 
you sold to the Congress of the United States was we were going 
to go in and buy these toxic, troubled assets? Would you agree? 
That was the main point, and it changed in 10 days.
    Mr. Paulson. Well, let me say this. That was the main 
thrust, and that is what we talked about. But we, from the 
beginning, wanted flexibility. Congress wanted to give us 
flexibility. It was very good that Congress gave us 
flexibility.
    Chairman Towns. The gentleman's time has expired.
    I now yield to the gentleman from Pennsylvania, Mr. 
Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Secretary, I am not sure that the committee here isn't 
having this examination to find out whether we could promote 
the shareholders' interests at Bank of America. That seems to 
be what you potentially violated. But I am going to give you an 
opportunity, since this is your first testimony before the 
Congress, to be a little more explicit and descriptive of the 
situation that happened from September 15th to the 18th and 
then on October 3rd by act of Congress and processes that were 
taken.
    You heard my colleagues on the other side seem to suggest 
that you overreacted, that there was an exaggeration of 
difficulty, and that in some way abuse of power occurred on 
behalf of yourself and the President and this Congress in 
acting precipitously in the fall of 2008 in this disaster.
    Now we have had the occasion to have Chairman Bernanke 
before this committee and before the Financial Services 
Committee three or four times, and I always ask the question of 
him to make sure we restate that picture and that the American 
people have a chance to understand what happened. I daresay for 
criticism, I think both yourself and Chairman Bernanke and the 
new Secretary of Treasury have failed to inform adequately the 
American people as to what meltdown meant. I remember those 
vital days and some of those meetings and telephone conference 
calls that we all participated in and some of the descriptions.
    I don't want to provide that testimony, but I am hoping 
that maybe you may remember whether questions of law and order 
were asked, whether questions of the capacity to feed the 
American people for what period of time were asked. I am not 
going to say what I remember the answer to be, but I think when 
you give the description now, something dire had to be stopped 
from happening. That is great for you to understand that and 
those of us that were there, but that doesn't mean a damn thing 
to the American people. And as we move through this, you can 
see that committee members here don't quite understand what the 
situation of September, October, November, and December 2008 
was like.
    Please take moments now to describe as fully in detail as 
you can what were the projections that could happen to not only 
the United States but the world in a period of 24 hours, 48 
hours, 72 hours, and how that would comport to what life would 
be like if no action were taken.
    Mr. Paulson. Congressman, thank you for the question.
    One of the issues we dealt with at the time was the more 
explicit we were and more graphic we were the more this would 
terrify the American people and lead to an even greater 
economic problem. So as we were attempting to explain this, 
there was this conflict. We didn't want to overly scare people 
and make it worse.
    Mr. Kanjorski. Now--scare people. Tell them the truth. We 
have to deal with the American people now and some of our 
fellow members who think that this was a facade of some sort, 
that it didn't really happen, that we weren't in jeopardy.
    Mr. Paulson. Well, if you have a situation where the 
banking system is frozen and money can't move between financial 
institutions, what ultimately happens is that every business, 
even businesses that seem to be solid and small businesses 
across America, will not be able to fund their inventory. They 
won't be able to meet their payroll. You will have--when a 
financial system breaks down, the kinds of numbers that we were 
looking at in terms of unemployment was much greater than the 
numbers we are looking at now, people in the streets.
    And, of course, around the world it is very significant. 
Because I remember talking with, for instance, German leaders 
who were explaining to me that people in the old east were 
unhappy with the big discrepancies in wealth but they at least 
believed in the system and believed in some form of market-
driven capitalism, but that if we had a meltdown of the system 
it just could lead to chaos or people even questioning the 
basic system.
    So there was----
    Mr. Kanjorski. Let me put it a little more succinctly, 
because we are running out of time.
    Mr. Paulson, I was in New York the other day and had this 
very discussion with a lot of your former colleagues on Wall 
Street; and we talked about what would happen if the President, 
yourself, and the Congress did not take action. The one member 
I remember sitting at the panel described it--he said that the 
people that talked about we would have gone back to the 16th 
century were being optimistic.
    Mr. Paulson. Well, I try not to use hyperbole and explain 
something that is impossible to ever prove now that it didn't 
happen. But at least I believe, when we had this debate, I had 
some people say, listen, look at everything that has been in 
place since the Great Depression. We certainly couldn't go 
through that again.
    I looked at it the opposite. When I looked at a world where 
information can flow, money can move with the speed of light 
electronically, looked how fast this liquidity went, looked at 
the ripple effect and looked at how when a financial system 
fails a whole country's economic system can fail, I believe we 
could have been gone back to the sorts of situations we saw in 
the depression.
    I remember asking Ben Bernanke what he thought the world 
would look like.
    And he said, well, just take a look at what happened in the 
Depression.
    But I didn't spend a whole lot of time thinking about that, 
because I knew it was going to be very bad, and I never wanted 
to experience very bad. I didn't want to ever get to the point 
where we could, where we could really understand it.
    Chairman Towns. Your time has long expired.
    Mr. Kanjorski. Thank you, sir.
    Chairman Towns. Let me move to Mr. Burton of Indiana.
    Mr. Burton. Mr. Paulson, there are those of us that don't 
agree with your analysis that going about solving this problem 
was the correct way. You know, you talk about a meltdown, we 
have 9.5 percent unemployment right now. If you take into 
consideration those who are working part-time or who are 
getting unemployment compensation, it's closer to 16.5 percent. 
There was an article in the Wall Street Journal.
    So you are talking about you guys saved the economy and 
saving the world. We do have a meltdown going right now. And if 
you don't believe it go out to Indiana and look at some of the 
parts of my district.
    Let me ask you a couple of questions. First of all, I asked 
Mr. Bernanke if he talked to you about telling Lewis if they 
used the MAC clause, that they were going to be fired, and he 
said he didn't give you any instruction or say anything to you 
about that. And yet when you spoke, you said that, in your 
testimony, you said you were confident that was a strong 
opinion of the Federal Reserve.
    How did you know that? I mean, there must have been some 
communication. How did you know that you were confident that 
was their position?
    Mr. Paulson. I would say two things here. First of all, you 
are right that I do not remember Ben Bernanke ever suggesting 
to me that the Fed----
    Mr. Burton. You don't remember? You know, Mr. Bernanke said 
the same thing. He said he didn't remember.
    Mr. Paulson. But what I do, so you asked where I came away 
with that view.
    Mr. Burton. Yes.
    Mr. Paulson. And I participated in a number of meetings and 
calls where Chairman Bernanke participated, there were lawyers 
from the Fed, staff members from the Fed, people from Treasury. 
And I came away from that, those calls with that understanding.
    Mr. Burton. Well, who--wait a minute. Wait. Well, if you 
came away from that from those phone calls----
    Mr. Paulson. Let me just, let me just----
    Mr. Burton. No, listen. Just a second. If you came away 
from that from those phone calls, somebody must have said, 
``hey, we can't let them do this.'' And I would suggest that it 
might have been Mr. Bernanke.
    Mr. Paulson. Well, what I would say to you, I do not know 
whether someone in those conversations or calls expressly said 
it or if my understanding came from just the tone and the 
forcefulness of----
    Mr. Burton. You know, you are a very smart man. I don't 
think anybody is buying what you are saying right now. I mean 
you guys were on a phone call, there was a number of 
conversations and e-mails, and you are saying that you didn't 
get any suggestion from Mr. Bernanke that he wanted you to let 
them know they were going to be fired if they didn't do what 
you said?
    Mr. Paulson. I said I clearly came away with the 
understanding that this committee has, which was substantiated 
by the e-mails that have been released and some of the other 
things, that was the view of the Fed.
    But I also don't remember Ben Bernanke ever talking about 
that possibility with me.
    Mr. Burton. It's interesting that both and you Mr. Bernanke 
can't remember.
    Let me just read something here that really concerns me. 
First of all, they expected a $9 billion liability, and a few 
days later they found it wasn't $9 billion but $12 billion. And 
so they were very concerned that they weren't going to be able 
to swallow all of that, and that's why they said they wanted to 
change and wanted to use the MAC provision. And you didn't want 
to make that public.
    You didn't want to make any of this public. Why not?
    Mr. Paulson. Well, let me say to you that is not a fact. 
The only--this came up in connection with Ken Lewis asking me 
for a letter from Treasury. And what I said to him about a 
letter from Treasury, I said, ``Ken, we do not have any kind of 
a specific agreement here. We haven't decided on the size of 
the program, the dollar amount. We haven't decided on how many 
assets.'' And so if I gave a letter, all I would be saying is 
what I have already said publicly, which is that BofA is 
systemically important and that we are committed to not having 
a failure.
    So--let me just finish here.
    Mr. Burton. Don't use up all my time.
    Mr. Paulson. So what I said was just the opposite. I said 
if I give you a letter of disclosure----
    Chairman Towns. Mr. Paulson, please pull the mic closer to 
you.
    Mr. Paulson. Oh, sorry. If we give you a letter we disclose 
it is what I said to him.
    Mr. Burton. Here is what was said in testimony. Bernanke 
and Paulson insisted that Lewis relied solely on their verbal 
assurance of more support because, as Paulson told Lewis in a 
written pledge, ``would be a disclosable event, and we did not 
want a disclosable event.''
    And he goes into more detail than that.
    Mr. Paulson. Well, let me say Lewis has testified clearly 
before this committee that I never, ever suggested to him that 
he delay any disclosure. What I said to him was something I 
would expect you all would agree with, which is if we are going 
to issue a letter from the Treasury, I am not going to issue a 
letter without disclosing that letter, and I don't see the 
point of a letter because we have no specific agreement. 
There's nothing to write down. We don't have the size of the 
program, we don't have the dollar amount, and we have already 
publicly said----
    Mr. Burton. You gave him verbal assurance, but you wouldn't 
put it in writing?
    Mr. Paulson. I gave him verbal assurance that we were 
committed to working to get something done.
    Mr. Burton. Why didn't you want to put it in writing? I 
mean, there are several places where he says that you would not 
allow it to be put in writing. You didn't want people to know, 
you didn't want public disclosure. Why not?
    Mr. Paulson. I attempted to answer. I will answer it one 
more time for you, sir----
    Mr. Souder. Mr. Chairman, may we ask the witness again to 
speak in the mic again? I can't hear Mr. Paulson.
    Mr. Paulson. I am sorry. I had already said publicly, as 
had the Fed, that we were committed to working to prevent the 
failure of any systemically important institution, and Bank of 
America was one.
    Now going beyond that, we had made it clear that we were 
going to be working with him to develop a support program. But 
we didn't have a size, we didn't have the amount of assets that 
would be covered, we didn't know what form of equity and how 
much. We had nothing definitive to say.
    And so I said I don't see how a letter is going to be 
meaningful or helpful. But if I give you a letter, we are going 
to disclose it. And then that got twisted around to say I 
didn't want a disclosure.
    Mr. Burton. I know my time is up. Let me just read one 
thing real quick, Mr. Chairman. Here is what he said.
    I was instructed that, ``We do not want a public 
disclosure.'' That is what he said flat out.
    Mr. Paulson. Well, he has testified something different 
before this committee.
    Mr. Souder. Mr. Chairman.
    Chairman Towns. I am sorry, his time is expired.
    Mr. Souder. Well, I have a procedural question, that Mr. 
Paulson clearly is moving back and forth. Is there enough slack 
in the mic so that the mic could be pulled more to the edge of 
the table? If you could pull it back in that direction. Thanks.
    Chairman Towns. Thank you very, very much.
    Mr. Paulson, we are having problems hearing you.
    Mr. Paulson. Yes. OK.
    Chairman Towns. The gentleman from Massachusetts, Mr. 
Lynch.
    Mr. Lynch. Thank you, Mr. Chairman.
    Mr. Secretary, I want to go back to the line of questioning 
suggested by Mr. Jordan of Ohio. I also sit on the Financial 
Services Committee. You testified at least a half a dozen times 
before that committee prior to the TARP vote.
    You did indeed, in all of your testimony, along with Mr. 
Bernanke, express the intent, the central intent of this TARP 
Program was to buy toxic assets to get the economy moving again 
and to get folks lending again, and you pounded away at that 
central theme.
    And what Mr. Jordan was saying that a matter of days went 
by and you changed completely the focus of that program. Now, 
in my opinion, you misled Congress. When you were asked by Mr. 
Bachus in the Financial Services Committee, he said, wouldn't 
it be more impactful, I am paraphrasing, to just inject the 
money directly in the banks?
    And what was your response?
    Mr. Paulson. I believe I said right there----
    Mr. Lynch. You said that wouldn't work. You dismissed that. 
You dismissed that in open committee.
    Mr. Paulson. Right.
    Mr. Lynch. Which led Members of Congress to believe that 
you weren't going to do that. Now hear me out. If you had come 
up with here with Mr. Bernanke and said, ``I have a plan, I 
want to take $800 billion in taxpayer money and I want to give 
it to my pals in the nine biggest banks in America,'' how many 
votes do you think you would have up here?
    And that's why. That's why I believe you have misled 
Congress.
    Let me ask you something else. This conversation that you 
had, you had a conversation December 26th--22nd, I believe it 
was, with Mr. Lewis. According to his testimony, you were on a 
bike ride, and he says that you spoke to him, you were on a 
bicycle, he was able to catch up to you.
    Mr. Paulson. Which date was this?
    Mr. Lynch. I am sorry?
    Mr. Paulson. What date was this?
    Mr. Lynch. December 21st or 22nd. I actually have it in my 
notes here.
    Mr. Paulson. I happened to be out skiing. It would have 
been an interesting bike ride.
    Mr. Lynch. Well, he is saying you are on a bike. Well, 
whether you were on skis or on a bicycle, that's not important. 
I want to know what you said. What did you say to him directly? 
Give me the gist of this conversation, paraphrase it if you 
must, but tell me what you said to him.
    Mr. Paulson. Which conversation on the 21st because I had 
two conversations with him on the 21st?
    Mr. Lynch. Well, the one in which he says that you stated 
that there was a real threat, the real possibility, I won't use 
the word ``threat,'' that he could be removed and the board 
could be removed under the emergency Fed power, not by 
Treasury. That conversation.
    Mr. Paulson. OK. This conversation was one where I said to 
him, No. 1, that the Treasury and the Fed have communicated 
publicly that we are committed to prevent the failure of 
systemically important institutions and Bank of America 
definitely is one, No. 1.
    Second, that we believed that the exercise of a MAC clause 
would show a lack of judgment and, if he did so----
    Mr. Lynch. This is what you said to him.
    Mr. Paulson. Yes. And if he did so, it could destabilize 
both--destabilize Bank of America, Merrill Lynch, and the 
financial system. And under those circumstances, the Federal 
Reserve could replace management and board.
    Mr. Lynch. Did you have a conversation with Mr. Bernanke 
prior to this that you were going to have this conversation and 
put it on the line like this?
    Mr. Paulson. I had--the conversation I had with Ben 
Bernanke, I did have a conversation before this with Ben 
Bernanke.
    I had received a call from Ken Lewis, telling me that he 
had been giving more thought to the situation, and he and his 
board were increasingly concerned and were considering 
exercising the MAC clause.
    And I had a conversation with Ben Bernanke beforehand. But 
I will say to you, I had had so many conversations with Ben 
Bernanke, I have trouble distinguishing one call from another. 
And the call I had with him was not one where we were saying, 
``now let's get our script down.'' I had a conversation with 
Ben Bernanke, told him that I had heard from Lewis. And then 
afterwards I got back to Lewis with the conversation I just 
gave to you.
    Mr. Lynch. Let me ask you, either on skis or on bicycle, 
was anybody with you when you made this call?
    Mr. Paulson. I made the call from--no. I made the call from 
my living room in a ski cabin in Colorado.
    Mr. Lynch. And there was nobody else in the room at the 
time?
    Mr. Paulson. I--unless one of the kids were running 
through--or one of the grandchildren. But other than that, I 
think I was by myself.
    Mr. Lynch. All right. My time has expired. I yield back.
    Chairman Towns. Thank you very much. I now yield to the 
gentleman from Florida, Mr. Mica.
    Mr. Mica. Thank you, Mr. Chairman.
    Mr. Paulson, you just spoke about some conversations with 
Mr. Lewis, and if I could just clarify, I guess Mr. Lewis 
claims that he first learned of the $12 billion financial loss 
at Merrill Lynch on December 14th, which was 9 days after the 
shareholder vote.
    Now, you just testified that he called you at that point 
and told you he was strongly considering backing out. Is that 
what you were referring to just a moment ago, or was it a 
conversation later on December 21st when Lewis informed you 
that he was considering backing out because of financial losses 
at Merrill Lynch?
    Mr. Paulson. Well, we had----
    Mr. Mica. There's two conversations, one earlier, which is 
shortly after their board meeting, when he first indicated, and 
a second time. Do you recall?
    Mr. Paulson. Yes, there were multiple conversations. The 
first call was the first time I had any inkling of the problem, 
was on December 17th. And that's when he called and----
    Mr. Mica. Well, he said on the 14th that he called you, and 
that's what we have information. Then there's another 
conversation on the 21st that he was, again, very seriously 
moving toward getting out of the deal because of what he had 
learned. And he said that is when you threatened to remove him 
and the Board of Directors at Bank of America.
    Do you recall threatening him in one of those 
conversations?
    Mr. Paulson. Well, I don't characterize it as a threat. I 
clearly recall on the December 21st, explaining to him that----
    Mr. Mica. So you did not threaten him, either to remove him 
or the Board of Directors?
    Mr. Paulson. No. What I have testified here today is that I 
sure explained to him that the Fed could remove management and 
the Board of Directors.
    Mr. Mica. You told folks that all hell would break loose if 
they backed out of the deal; is that correct?
    Mr. Paulson. I didn't use those words, but I sure told him 
it would be a very serious problem and it would be creating 
financial havoc.
    Mr. Mica. But there were backup plans. Were you aware of 
those backup plans? Did you disclose those backup plans or ever 
mention that you had any alternative to Lewis?
    Mr. Paulson. I don't know what you are speaking of in terms 
of backup plans.
    Mr. Mica. Well, it's my understanding that you had 
information relating to a possible backup plan by a British 
regulatory authority, and that there were backup plans if, in 
fact, they didn't go through with the deal.
    You are not aware of any backup plans? That was the only 
option?
    Mr. Paulson. I don't know what the--you know, we certainly 
had--we had our TARP, and we were low on the capacity in the 
TARP. But I don't know anything about British----
    Mr. Mica. Well, I have the information here we will put in 
the record, that we have had recent discussions with BAC and ML 
Management who contend that they have the required shareholder 
support and are confident that a transaction will be approved 
with tomorrow's vote. If approval is withheld, ML will continue 
to have access to the various facilities and programs currently 
in place in the United States. Additionally, it is reasonable 
to expect that ML would be provided necessary support to 
preclude sufficient systemic disruption.
    Are you aware of that?
    Mr. Paulson. I assume people are just--that you are just 
talking about a board report where they are talking about 
access to Fed lines or the fact----
    Mr. Mica. From the Richmond Fed to the U.K.?
    Mr. Paulson. Yes, I am not aware of that.
    Mr. Mica. You are not aware. And you were never aware of 
any backup plan. The only thing--and you never threatened Lewis 
to remove him or his board?
    Mr. Paulson. You keep putting words in my mouth. I have now 
told you three times and told the committee repeatedly that, of 
course, I told Lewis that we would--the Fed had the authority 
and could replace Lewis and the board.
    Mr. Mica. So you did tell him that you had the authority to 
remove him and the board?
    Mr. Paulson. I told him that the Federal Reserve could 
replace him and the board if he pursued the course of invoking 
the MAC.
    Mr. Mica. And, again, for the record, you were not aware, 
you are telling this committee that you are not aware of any 
contingency or backup plans other than your holding Mr. Lewis 
and the board to the deal that you wanted to impose?
    Mr. Paulson. I am saying that our--my plan and my 
preparedness was to get ready with the support package when the 
company announced the earnings. In terms of----
    Mr. Mica. Mr. Chairman, I have information contrary to what 
the witness is testifying, and I would like to ask unanimous 
consent that be made part of the record.
    Chairman Towns. Without objection, so ordered.
    [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Mica. Thank you. I yield back.
    Chairman Towns. I yield to the gentleman from Illinois, Mr. 
Quigley. Congressman Quigley.
    Mr. Quigley. Thank you, Mr. Chairman.
    Mr. Paulson, I guess I want to put this in context with 
what didn't happen with Lehman, and I believe the expression 
you used was ``moral hazard,'' which is the notion of bailing 
out institutions, inviting more risk taking. Is that a concept, 
is that a term you do not use any more?
    Mr. Paulson. No, I think moral hazard is a very important 
concept. And I do think where we have a regulatory system 
that's in balance, and you have the wind down powers that the 
administration is requesting, and hopefully Congress will pass, 
that lets a nonbank institution fail without disrupting the 
system, that it will be--that moral hazard will have more teeth 
in it.
    Mr. Quigley. So why was Lehman a moral hazard and not Bear 
Stearns, Fannie Mae, Freddie Mac, AIG?
    Mr. Paulson. OK, I would actually thank you for the 
question.
    That we, I believe quite strongly, that if we--if Tim 
Geithner, Ben Bernanke and Hank Paulson had found something 
legal we could have done to save Lehman, we would have.
    And let me explain the difference. In Lehman Brothers, 
there was a liquidity problem and a capital problem. And we 
were unable to find any buyer to come in and make the 
acquisition on an assisted basis or an unassisted basis.
    And so although the Fed was able to loan against Lehman 
collateral and did loan to help facilitate liquidation and 
bankruptcy, a Fed loan would not have saved Lehman Brothers.
    In the case of Bear Stearns, we had a buyer, JPMorgan, and 
JPMorgan then--the Fed was able to make a loan to assist that 
acquisition. Bear Stearns, there was a liquidity problem and a 
capital problem, and JPMorgan took care of the capital problem. 
They were able to guarantee the trading book while the merger 
was being voted on.
    AIG was a different situation because in AIG the perception 
at the time was this is a liquidity problem only, because we 
had--they had a number of stable, regulated insurance companies 
that were perceived to be well capitalized and were collateral 
for the loan.
    So we faced a situation in Lehman Brothers where we did not 
have--the government didn't have wind down powers, the 
government didn't have powers to inject capital. That came 
after we got the TARP, and we didn't have a buyer. And so there 
was no power that we could find to solve both the liquidity and 
the capital problem.
    Mr. Quigley. Did Bank of America request your assistance to 
purchase Lehman?
    Mr. Paulson. Did Bank of America?
    Mr. Quigley. Yes.
    Mr. Paulson. We went to Bank of America repeatedly and Bank 
of America asked each time for more assistance, and we had 
the--we had the private sector ready to fill the gap, but Bank 
of America, in my judgment, was never serious about it because 
each time they showed less interest, and it turns out they 
were--that they were interested in Merrill Lynch.
    We had another buyer, Barclays, that we thought was going 
to do the deal right up until Sunday morning.
    Mr. Quigley. Well, let me ask just one more question, given 
the short timeframe.
    Most of these other groups that were saved, AIG, Fannie 
Mae, Freddie Mac, their management was replaced. Lewis wasn't 
replaced.
    Was his situation different? In short, did you promise him 
he could keep his job if he did it this way?
    Mr. Paulson. Absolutely not. These are--these decisions, 
for the government to come in and take the responsibility away 
from the board and replace the board, there's got to be a very 
good reason.
    And Fannie, Freddie, AIG, there was good reasons, but I 
also looked at this very pragmatically and said these are big, 
difficult institutions to run.
    Is the current CEO, is he capable of running this 
institution, and then you have to say who else is suitable to 
come in and run these institutions?
    Mr. Quigley. I appreciate it, and my time is up. I guess 
you could see how that appears to be splitting hairs of who you 
fire and who you don't fire, and it could very easily be 
construed to those who are making these decisions in these 
financial institutions that their first course, their first 
thought must be that they have to listen to whatever you say. 
They have to play ball, or because you have such discretion, 
you know, those who play ball keep their jobs and those who 
don't get fired.
    Chairman Towns. The gentleman's time has expired.
    Mr. Chaffetz from Utah.
    Mr. Chaffetz. Thank you, and thank you, Secretary Paulson 
for being here. I appreciate it.
    When this country experienced Enron, there was outrage from 
coast-to-coast, people who were not informed about the material 
things that were happening and not happening within that 
company, because the shareholders were left in the dark.
    My concern is the lack of transparency to the shareholders 
and to the public at large, not only as investors, but as 
investors, as shareholders, if you will, as being taxpayers in 
this country.
    So the question that I have, I want to followup on Mr. 
Jordan's question, a little deeper into why you did not share 
this information with other regulatory agencies, for instance, 
the SEC. Why didn't you feel compelled to share information 
with them?
    Mr. Paulson. First of all, we were working with the 
regulators that were involved with putting the financial 
assistance together. That was the effort.
    Mr. Chaffetz. But----
    Mr. Paulson. But the responsibility, it is not a Treasury 
Secretary's job to get between a company and the SEC, for 
instance, once you get disclosure.
    Mr. Chaffetz. My understanding----
    Mr. Paulson. I have been around long enough to know these 
are critically important decisions and that's the 
responsibilities of a CEO working with his general counsel and 
with the regulator.
    Mr. Chaffetz. But you were a participant on the Financial 
Stability Oversight Board. I mean, one of the requirements with 
TARP was that the Financial Stability Oversight Board, which 
you had two meetings and you did not inform the SEC nor did you 
inform the Office of the Comptroller of the Currency. Why is 
that?
    Mr. Paulson. Well, let me be--because I take exception with 
that.
    After a January 8th meeting of the Financial Stability 
Board, I sat down with Chairman Chris Cox, and I explained to 
him, it was still early, we didn't have the package together, 
but we were working on it. And I gave him the details to the 
extent that we knew them at that time.
    Mr. Chaffetz. I mean, this thing was fully baked at this 
point. That was pretty late in the game. Let me go back to 
what--pardon me. Let me go back to what Attorney General Andrew 
Cuomo said. He told Congress in his April 23rd letter that Hank 
Paulson informed this office that he did not keep the SEC 
chairman in the loop during the discussions and negotiations 
with the Bank of America in December 2008.
    Is that true or not true?
    Mr. Paulson. Well, what Attorney General Cuomo's office was 
talking about was that--the question was in December. I also 
explained to the Attorney General in January----
    Mr. Chaffetz. Again, is the Attorney General's statement 
true or not true? I will read it to you again, Informed this 
office that he did not keep the SEC chairman in the loop during 
the discussions, the negotiations with the Bank of America in 
December 2008.
    Mr. Paulson. In December I did not. That's absolutely 
correct.
    Mr. Chaffetz. And you feel no obligation, the one agency 
that is out there as an advocate for the shareholders, you 
didn't think that was an important effort on your part, or you 
didn't feel any obligation to share with the SEC or other 
regulatory agencies, even the one within your own agency, the 
Office of Comptroller of the Currency?
    Mr. Paulson. I would again, let me say two things, separate 
it, because you have blurred two things.
    First of all, with regard to the relationship of Bank of 
America to the SEC, that is something that is not my 
responsibility. It's not the responsibility of the Fed. That's 
the role of Bank of America to work with the SEC.
    Mr. Chaffetz. But the Congress------
    Mr. Paulson. But the Financial Stability Oversight Board, 
because this has come up now several times----
    Mr. Chaffetz. Right.
    Mr. Paulson. We did not begin to have this together until 
we brought it to the Financial Stability Board and there was a 
full and thorough airing there.
    Mr. Chaffetz. But that was so far after these deals were 
already cut.
    Mr. Paulson. These deals were not cut. These deals were not 
cut. That's where there is a misunderstanding. There's an 
understanding that we are going to work to get something done, 
but we had nothing specific to bring forward.
    And the other point I made was on January 8th, in his role 
as a member of the Financial Stability Oversight Board, I gave 
Chris Cox a briefing.
    Mr. Chaffetz. I think, Mr. Chairman, what needs to be 
explored further is that--I wasn't here. I am a freshman. You 
wouldn't have wanted me here because I would have voted against 
this TARP. I think it's an absolute disaster.
    But I have to tell you that I think this Congress or the 
Congress before this did set up this Financial Stability 
Oversight Board to precisely make sure there wasn't this 
audacity of arrogance that would be held in just one or two 
persons' hands and that there would be more involvement from 
other agencies that are very relevant.
    And to exclude the one agency that is shared, that is 
tasked with taking care of shareholders I think is inexcusable 
and I think we need to delve into further.
    I see my time has expired. Thank you, Mr. Paulson, and 
thank you, Mr. Chairman.
    Chairman Towns. Thank you very much. I now yield 5 minutes 
to the gentleman from Vermont, Mr. Welch, Congressman Welch.
    Mr. Welch. Thank you very much, Mr. Chairman. Thank you, 
Mr. Paulson.
    Mr. Paulson, I was on that call, I think, in September or 
October when you informed Congress, you and Mr. Bernanke, of 
the dire condition in the financial markets.
    My understanding of what your goals were at that time were 
to do basically three things: One, stabilize the financial 
system; No. 2, eventually reform the system; and No. 3, repay 
the taxpayer. Is that more or less a fair summary?
    Mr. Paulson. Yes.
    Mr. Welch. I want to go into this--and I share that concern 
about repaying the taxpayer.
    When the deal with Bank of America went through, the 
Federal Government--and you were very much a part of this--did 
two things to help in the stability effort. One was the TARP 
payment of $20 billion and, No. 2, was the asset backing of 
these mortgage-backed securities of $118 billion.
    Mr. Paulson. Yes.
    Mr. Welch. And the intention was that the taxpayer would 
get repaid on that $20 billion TARP payment. Some firms have 
repaid, Goldman Sachs, JPMorgan. And there was going to be an 8 
percent interest rate paid to the taxpayer on preferred stock; 
correct?
    Mr. Paulson. Well, yes. On the second round is 8 percent.
    Mr. Welch. And then there was a $118 billion backing by the 
U.S. Government and a nonrecourse loan that provided assurance 
to the Bank of America shareholders and the owners of these 
securities that the Federal Government would make good on them 
in the event that there was a collapse; correct?
    Mr. Paulson. Yes.
    Mr. Welch. And my understanding is that it was the 
intention of the Treasury Department that the taxpayers be 
compensated for providing this guarantee; correct?
    Mr. Paulson. Yes.
    Mr. Welch. And that guarantee was going to be, as I 
understand it, in the form of a fee of about $4 billion; 
correct?
    Mr. Paulson. I have forgotten the precise number, but that 
sounds about right.
    Mr. Welch. That sounds about right. And that fee would be 
arrived at in the ordinary course of what was the customary fee 
for such a guaranteed program, correct?
    Mr. Paulson. Yes.
    Mr. Welch. Mr. Lewis is now--and you understood, in your 
capacity as Treasury Secretary, that, in fact, the American 
taxpayer was on the hook to backstop those loans if they went 
sour; correct?
    Mr. Paulson. Well, I clearly understood that we had a term 
sheet, and that the deal wasn't finalized yet, but we were--and 
then I left office before it was finalized.
    Mr. Welch. I understand that, but a deal is a deal and you 
shake hands and that's all you need. Frankly, I think that's 
the way most Americans would be, right?
    Mr. Paulson. I would say on this one, and I know where you 
are leading, I just was not--I don't have the details because--
--
    Mr. Welch. I am not asking the details. You, as the 
Treasury Secretary of the U.S. Government, a person filling the 
shoes of Alexander Hamilton, would agree that when you give 
your word, you are going to keep your word?
    Mr. Paulson. I would expect we would keep the word.
    Mr. Welch. And I think you would, and I give you credit for 
that. My question is this; Mr. Lewis is apparently now saying 
that there is no deal, he didn't sign it. Even though he 
benefited by it, he doesn't want to pay back the American 
taxpayer for the benefit that the Treasury and the U.S. 
taxpayer provided.
    Is that the right thing for Mr. Lewis to do?
    Mr. Paulson. Well, I don't know what the circumstances are. 
So I don't know why----
    Mr. Welch. I think there are a lot of things you did well, 
and I understand you were trying to stabilize the situation.
    But this, frankly, I think, is a simple yes or no. We put, 
``we'' being the Treasury Department and the U.S. taxpayers, 
$118 billion of our money at risk. Bank of America took great 
advantage of that because it provided stability and confidence.
    And now Mr. Lewis says he doesn't have to pay for it 
because somebody forgot to have the term sheet signed. Is that 
acceptable to you?
    Mr. Paulson. Well, can I just explain why I am hedging on 
this, because I was part of doing a similar deal for Citigroup.
    And we had a term sheet, and then it was very difficult to 
get it done. And Citigroup wanted to get it done at least as 
much as the U.S. Government, and it was hard to get it done.
    So what I don't know, if the circumstance was, as you 
presented it, OK, then there would be one answer. But I do not 
know why, because I wasn't there. All I know is we had a term 
sheet. I left government, and the deal didn't close.
    Mr. Welch. Well, here is the bottom line on that, and this 
is one of the frustrations. A lot of us voted for that program.
    Mr. Paulson. Right.
    Mr. Welch. Because we felt it was the lesser of evils. We 
didn't want to. And I remember you on the phone call.
    Mr. Paulson. Right.
    Mr. Welch. You actually were quite candid in saying the 
last thing in the world you wanted to do was come to the 
American taxpayer and ask for this bailout, but it was your 
honest judgment that if we didn't do it there would be a 
calamity that would ripple across all America.
    Mr. Paulson. Right.
    Mr. Welch. So you went ahead.
    We did the same thing, in effect, with Bank of America. Now 
Mr. Lewis wants the benefit from the taxpayer commitment, the 
Treasury commitment, and he doesn't want to pay. Most Americans 
think a deal is a deal and they should pay.
    Mr. Paulson. I would say that if it was a deal, I would 
think he should pay. And no one was tougher than I was in 
trying to protect the American taxpayer. And no one is looking 
at these programs more with hindsight more than I am in wanting 
to get the money back.
    Mr. Welch. Well, see, this isn't hindsight. I mean, this is 
like a deal with a wink. You know, the taxpayer made a 
handshake, we are going to cover it. Mr. Lewis kind of had a 
wink or had his fingers crossed.
    Mr. Paulson. I don't want to take the other side of your 
argument. I am just simply being honest and saying I don't know 
why the deal didn't get done. A deal could not get done for two 
reasons--three reasons. It could not get done because it was so 
complex, people couldn't figure out how to get it done because 
it was so complex or he wanted out or the government wanted 
out, and I don't know the answer.
    Chairman Towns. The gentleman's time has expired.
    Mr. Welch. All right, thank you very much. Thank you, Mr. 
Paulson.
    Chairman Towns. I now yield time to the gentleman from 
Ohio, Congressman Turner.
    Mr. Turner. Thank you, Mr. Chairman. Thank you, Mr. 
Paulson, for being here and your description of the environment 
in which you were in and your actions.
    You know, it's interesting. When we have hearings, we 
basically try to do two things in hearings, find out what 
happened and find out should it have happened, why did it 
happen. Is this the appropriation action? That's the oversight. 
Why it happened is a factual issue.
    Now on the factual side, what we hear from you is that you 
don't deny that you told Mr. Lewis don't renegotiate and don't 
back out.
    You disagree as to whether or not it was an actual threat 
for his removal being the consequences, but you told him, don't 
renegotiate, don't back out.
    And the why you say is because for the American people you 
believe it was irresponsible, that the interest of the 
shareholders of the Bank of America were the interests of the 
Nation, which the financial markets were at risk, and 
apparently $12 billion is not material for you to believe that 
a material change had occurred, and you cite your vast 
experience.
    Now, you also say that you have taken actions that there 
has been removal before. You cite the actions of Fannie, 
Freddie, and AIG on removal.
    Those were so different, you had failures of organizations. 
You didn't have just merely a business deal that was going 
forward. So they are really not comparable.
    I mean, I don't think you have an instance where you can 
provide us that's comparable where there's a threat from the 
Treasury Secretary for the purposes of removal of a CEO for a 
business transaction to go forward, unless there are other 
threats that you put forward that we are not yet aware of.
    Now, the thing about your vast experience that just really 
strikes me is that you really have no exact science with your 
vast experience. You cite the impact on the markets, your view 
of these deals, your impressions of how the markets might have 
an impression, which is not a science. There is no accounting 
problem from which you made your decision. There is no data 
point from which you made your decision.
    And with all the responsibilities that you had, which 
apparently somewhere around that time include skiing, there was 
no way that you could have been up to speed on the economics, 
the due diligence, the specifics of the details of this deal to 
the extent of someone to intervene enough to say do not 
renegotiate this deal and do not back out.
    Now, I agree with Representative Lynch. I absolutely 
believe that you misled Congress.
    And I want to take you back to a meeting that you had with 
Cheney, yourself, Mr. Paulson, and Bernanke where you came 
before the Republican Conference to explain your $700 billion 
bailout deal, which I voted against.
    You came forward and told us that you were going to buy 
toxic assets, illiquid assets, and that if these were not 
removed from the market that we were going to have calamity and 
that the crisis was those toxic assets were causing, again, the 
markets to have instability because the markets had the 
impression that these toxic assets, having no value, raised 
questions as to the value of the institutions.
    I thought it was a crock then, and I voted against it. And 
then you turned completely away from the toxic assets, and I 
believe that you were misrepresenting Congress. I don't think 
it was an issue of just asking for flexibility.
    I also voted against it because the deal was, you didn't 
tell us who was going to get the money, you didn't tell us what 
the money was going to be used for, you didn't tell us how 
much. And the part that was crucial to me is that you didn't 
step forward and say these are the changes that need to be made 
in our regulatory systems and the laws to make certain that 
this never happened again.
    Now the other thing that was important to me is that I 
believe we were about to participate in the largest theft in 
history.
    I come from Ohio, ground zero for the mortgage foreclosure 
crisis. So when you were standing in front of us asking for 
$700 billion of taxpayers' money to bail out what you called 
toxic assets for these mortgage-backed securities as a result 
of the mortgage foreclosure crisis and the credit default 
swaps, I realized that you were asking me to give taxpayers' 
money to bail out these people who I believe were 
systematically defrauding my community and the people who were 
buying houses and refinancing their houses with overvaluations.
    And I had a great concern, as did my community, that the 
underlying collateral for these mortgage-backed securities was 
not there. And that's ultimately what took down the valuation 
of those mortgage-backed securities.
    So my question to you is, Mr. Paulson, in your vast amount 
of experience, since you were in this position in July 2006 
while the mortgage foreclosure crisis was raging throughout the 
country, and your description of people losing their homes was 
happening then, not just in 2008, when you stepped in with your 
TARP Program, there were record foreclosures, mortgage-backed 
securities were being traded with significant questions, I 
believe, in the market of the underlying value of the 
collateral. Subprime mortgage lending was spiraling. Refinances 
were increasing based on inflated and escalating property 
values.
    Where was your vast experience then and what do you believe 
we should have done in 2006 to have stopped this?
    Mr. Paulson. Well, first of all, if you are making the 
comment that I did not see this crisis coming to the extent it 
came, you are absolutely right, OK. I, like many others, 
underestimated this then, No. 1.
    But what I did do, very shortly on arriving, was begin 
preparing for a financial crisis. I began meetings with the 
President's working group on preparations, No. 1.
    And No. 2, although I would take exception with a lot of 
the things you said, I began working on a plan, which we had 
announced in March, well before I went to Congress, to overhaul 
this outdated, inadequate regulatory system. And so we came out 
with that in March, came out with recommendations that we 
needed the authorities to wind down these nonbanking 
institutions if they get in trouble, so they don't have to be 
bailed out.
    The only other thing I would say to you was I am not 
disputing the fact that when Ben Bernanke and I came to 
Congress we understood the illiquid assets, because illiquid 
assets were at the heart of the problem in the financial 
institutions. That was at the heart of the problem. That was a 
major cause for the losses, for the illiquidity, and so our 
approach was to buy those illiquid assets. That was our primary 
approach.
    And we learned, and as the situation began to crumble all 
around the world and it was so clear we had to move quickly, we 
needed to change gears. And I made the decision that when the 
facts change, you need to move quickly and change. And I am 
just saying the only point I was trying to make wasn't to say 
we didn't come to Congress and ask for illiquid assets, but, 
thank goodness, when we came to Congress we also asked to have 
flexibility and Congress gave us the flexibility.
    And so the last point I would make is the people I care 
about are the same ones you care about, the American people, 
the people that are going to lose their jobs. And the tragedy 
is they didn't create the problem. It was the big banks that 
created the problem. It's a whole lot of--the problem was not 
created by them. But they would be the ones that would pay the 
greatest penalty if there was a collapse. And so that is what I 
was working for.
    Chairman Towns. The gentleman's time has expired.
    I now yield 5 minutes to the gentlewoman from California, 
Congresswoman Speier.
    Ms. Speier. Thank you, Mr. Chairman.
    If the people of America didn't create the problem, who 
created the problem?
    Mr. Paulson. If the people of America didn't create the 
problem?
    Ms. Speier. You said the people of America didn't create 
the problem. So tell us who created it. Were the banks 
involved?
    Mr. Paulson. Well, I would say this, this problem, there is 
so much blame to go around, it is hardly----
    Ms. Speier. Well, give us a few people, few institutions.
    Mr. Paulson. OK, well you look at--excesses had been 
building up for a very long time.
    Ms. Speier. I just want you to give me some names. I have a 
limited amount of time. Would we include the banks, would we 
include Goldman, would we include AIG? Would we include anyone 
who got TARP funds?
    Mr. Paulson. You could say financial institutions, 
regulators, investors, so that there is plenty of mistakes by a 
vast multitude of----
    Ms. Speier. You would be interested in knowing that in the 
Financial Services Committee yesterday all the banks were 
represented and they, almost to a person, indicated that had 
they weren't responsible for this. But let me move on.
    Do you use e-mail?
    Mr. Paulson. Do I use e-mail? No, I don't use it 
personally.
    Ms. Speier. You don't use it personally or professionally?
    Mr. Paulson. Yes, I just don't. I have never used it for 
any business communications, just never use it.
    Ms. Speier. So while you were Secretary of the Treasury you 
never used e-mail?
    Mr. Paulson. No.
    Ms. Speier. How did you communicate with people?
    Mr. Paulson. Telephone.
    Ms. Speier. All right. Did you know Mr. Lewis before you 
were Secretary of the Treasury?
    Mr. Paulson. Yes.
    Ms. Speier. For how long?
    Mr. Paulson. I, you know, 4 or 5 years.
    Ms. Speier. Did you know him socially?
    Mr. Paulson. No.
    Ms. Speier. But professionally you knew him?
    Mr. Paulson. Professionally I knew him, yes.
    Ms. Speier. OK. When you gave BofA and Mr. Lewis $15 
billion in October, he didn't want it, we were told. So why did 
you give it to him?
    Mr. Paulson. Well, that is certainly not my recollection. 
But let me tell you why we gave it to them.
    Ms. Speier. Very briefly, because I have a second question 
I want to ask you.
    Mr. Paulson. OK. Then very briefly, after we got the TARP 
authorities, and when the system was on the edge and we needed 
to move quickly, we decided that the only way to do something 
that was going to be dramatic and make a difference was going 
to be put capital, get capital out quickly and get it out into 
nine systemically important major institutions.
    So we called them together, the regulators, let them know 
what the recommendation was for each institution. And Mr. 
Lewis, like the other CEOs there, very willingly agreed to take 
that capital because they recognized that they had as much to 
gain as anyone from stability of the system.
    Ms. Speier. All right, so you gave him $15 billion in 
October and then another $10 billion on January 9th and then 
$20 billion on January 20th.
    It's interesting that amount of money equals about $45 
billion. They paid $50 billion for Merrill Lynch.
    In many respects, I feel like the taxpayers bought Merrill 
Lynch for the Bank of America.
    Mr. Paulson. Well, I would say this to you. The taxpayer 
has benefited in two ways. First of all, I would be very 
optimistic that the taxpayer will get all of that money back 
with a profit, No. 1. And, second, what the taxpayer got was an 
averted calamity. Because if we had had the financial system 
collapse, the taxpayers would be the people who would be hurt.
    Ms. Speier. All right. Let me ask you this. This press 
release went out from your office, as Secretary of the 
Treasury, on January 16th. And this press release talks about 
the package to the BofA and specifically says that the Treasury 
and the FDIC will provide protection against the possibility of 
unusually large losses on an asset pool of approximately $118 
billion of loans.
    So this ring fence was a done deal on January 16th?
    Mr. Paulson. What----
    Ms. Speier. When you were Secretary of the Treasury.
    Mr. Paulson. We worked out the details and put out a term 
sheet, but this deal was not closed then. And I left Treasury--
--
    Ms. Speier. How could you possibly say this publicly if it 
wasn't closed then? It wasn't a deal. So were you giving him 
something or giving BofA something that they didn't actually 
have to agree to but give the appearance that they had 
something and then they could renege on it?
    Mr. Paulson. Congresswoman, I have no idea what happened 
after I left. So----
    Ms. Speier. But how professional is it to put out a 
statement in a press release that something has been 
consummated when it hadn't been consummated. I mean, that's 
kind of like Contracts 101.
    Mr. Paulson. No--I am getting it from both angles here, 
people wanting me to put out letters when there's nothing to 
disclose. Here we had, what we did is we communicated to the 
market that we had a term sheet. The market knew that this deal 
wasn't closed yet. We were announcing a deal with the intent of 
closing it.
    And why it didn't close, you will have to ask people that 
are at Treasury today.
    Ms. Speier. Mr. Chairman, I certainly would hope that we 
would question further who was responsible at that point in 
time for these negotiations so we could have them come before 
this committee.
    I yield back.
    Chairman Towns. Good point. Thank you very much.
    I now yield 5 minutes to the gentleman from Indiana, Mr. 
Souder.
    Mr. Souder. Mr. Paulson, had Mr. Geithner signed off on 
that memo, the terms of the deal?
    Mr. Paulson. What did you say?
    Mr. Souder. In other words, you were just about to 
transition between Treasury Secretaries. Had Mr. Geithner or 
the incoming administration signed off on the tentative terms?
    Mr. Paulson. The--Mr. Geithner, as you know, was the 
Treasury Secretary designate, and we wanted there to be a very 
smooth transition. And so I posted him generally on a number of 
matters, including that matter. But I never viewed him as a 
decisionmaker, and I certainly didn't go to him to sign off on 
the details of that term sheet.
    Mr. Souder. I have a larger question I want to pursue off 
of Mr. Lewis.
    But I want to correct the record that on some things that I 
think have been misstated. As somebody who voted for all three 
versions of TARP, took incredible political heat in the middle 
of a tough targeted race, I believe it was the right thing to 
do, and I would do it again with some additional caveats.
    But there has been a lot said today about the restrictions 
that were put on you. In fact, you came, in my opinion, not 
very tactfully, and told us that you wanted, basically, a blank 
sheet of paper with whatever you wanted to do. Initially, they 
didn't need any Republican votes. Paul Ryan and others in our 
caucus negotiated some 20 pages of additional things. But the 
bottom line is that we left there, or the Secretary of Treasury 
and those responsible can do whatever they think they need to 
do.
    Now, we can try to pass blame. We can try to say whatever 
we want. And in the future we probably need to tie it down 
more. But at the end of the day, our conference, after hours of 
internal debate, knew that given the nature of the crisis, we 
had signed a blank check, for good or bad, that we were going 
into an election season. We were about to leave town. It was 
getting highly politicalized. Things were changing. I am not 
defending the decisions that you made. I am just saying it's a 
little bit much for Members of Congress to claim that there 
were all these guidelines in place because we knew full well 
you had an opt-out clause.
    Now, that said, clearly you misled us, and we probably 
wouldn't have had the votes, even though we underneath knew 
that was there, because we understood it was toxic assets. We 
didn't believe you were going to take over in the way this was 
going to evolve.
    Had we known that, the bill would have never have passed or 
we would have put tighter restrictions in. Because what I would 
say is it was a verbal misleading. Even though if anybody read 
the document, it actually gave you a total blank check.
    Now I would also say I don't understand where people were 
saying that we weren't in a crisis. Every 40 hours for 3 months 
someone was calling me telling me a bank was either calling 
their revolving loan, the mark-to-market was tightening up 
their assets, so the banks were having their assets dropped. 
People who were never late in their history, people who didn't 
know how to get their payroll dollars, major corporations in 
this country were having to borrow overseas from Third World 
countries in order to meet their payroll, and I don't know 
where it would have gone.
    I represent a district that has the highest unemployment in 
the United States. Elkhart County has been first in 
unemployment all the way through. But they are 57 percent 
manufacturing. They are 17.6 percent right now unemployment.
    We were headed to a lot more than we are right now. I am 
not necessarily happy with everything that's happening, but it 
could have been a lot worse. I don't know how catastrophic, but 
in fact it's relatively stabilized, in that I think we can have 
differences of opinion of how to do it.
    Now, here is my concern about what I saw in the Lewis thing 
and where it has evolved.
    When you intimidated, at the very least, Mr. Lewis into 
saying the government is going to do it, somewhere in here we 
went from toxic assets and loans, and your stated goal to us 
was we didn't want the government micro managing and directing. 
That was the next step, the Lewis process.
    Then when you say when you handed it over, you thought you 
had a process, but you don't really know what happened after 
that. Since then, we now have common stock in banks. We are 
telling them we want bonuses, we are micromanaging. Tomorrow, 
we have a proposal, now that we have taken over stock in GM, to 
tell GM that they can't close dealerships.
    Now, this is the problem when government starts to taking 
over.
    If you were Treasury Secretary now, where would you have 
started to draw the line here? You started to walk into it with 
Mr. Lewis when you realized that it kind of unscrambled. Would 
you have moved to common stock? Do you believe this has gone 
too far? What lessons can we learn from what we have seen here, 
because right now the government is in so deep that getting out 
is going to be very difficult and we are micromanaging, and 
Congress is going to tell people what kind of tie they can buy 
if we are not careful.
    Mr. Paulson. To me, that's the right question. And one of 
the things that was most difficult for me is I came to the job, 
believing, totally, and I still do, in markets and free 
enterprise, and not wanting to see government overly involved.
    And so I was forced to make some decisions, which were very 
objectionable, but they were better than the alternative. And I 
thought the decisions we made were going to ultimately help to 
preserve the markets.
    So I think the key question is not only how do you get into 
these programs, but what's the right exit strategy? What is the 
right exit strategy? When is the system stable and when do we 
get out?
    And I don't think that it is appropriate for me, as a 
former Secretary of Treasury, 5 months out of the job, to be 
not any closer to it than I am now to be saying more than that, 
other than because I think everyone here understands that 
government has been forced to do things, I think forced to do 
things by not only an unprecedented crisis, but forced to do 
things because we didn't have the tools we needed.
    There were not wind down authorities. There was nothing to 
deal with a failure of a large, nonbanking institution other 
than the bankruptcy process. And so we had a really outmoded, 
outdated regulatory system.
    Mr. Souder. But it's fair to say that even under great 
pressure, you didn't take common stock?
    Mr. Paulson. Yes. I did not under----
    Chairman Towns. The gentleman's time has expired. Let me 
just do a little housekeeping here. We have seven votes on the 
floor. So the committee will recess until 1:30. We will return 
back at 1:30.
    [Whereupon, at 11:58 a.m., the committee was recessed, to 
reconvene at 1:30 p.m., this same day.]
    Chairman Towns. The committee will reconvene. Let me remind 
the witness that he is still under oath.
    I yield 5 minutes at this time to Congressman Foster of 
Illinois.
    Mr. Foster. Thank you, Chairman, and Mr. Paulson for your 
time here.
    Before I get into my main line of questioning, I was 
wondering if you could be of help in clearing up something that 
is actually a public statement on the minority side Web site 
from this committee having to do with the CPP program and its 
origins.
    It contains, among other things, the statement that ``under 
pressure from the House Democrats, such as Nancy Pelosi and 
Barney Frank, Bush Treasury Secretary Paulson partially 
nationalized the U.S. banking sector despite his own misgivings 
about the inevitable perverse consequences to follow.''
    I was wondering if that is a reasonable characterization of 
the origins, as you saw it?
    Mr. Paulson. No, it is categorically untrue.
    The facts are, we went to Congress to get the TARP 
legislation. Our primary thrust was the purchase of illiquid 
assets. That was really the source of the problem, and that was 
our strong intent. We got additional flexibility.
    After the legislation, it was clear that the problem was 
continuing to get worse. The facts were changing, banks were 
failing around the world, and there was quite a problem. We 
needed to move quickly to really put out the fire, and by far, 
the best idea and the only way we could think of doing it was 
with this program.
    It was not a nationalization of the banks. As a matter of 
fact, the program that we implemented when I was here had 
preferred stocks, preferred stocks which--they were minority 
positions. And I have always said that this is something that 
is abhorrent to me, nationalization. But we did some things. 
And any kind of government intervention was not something I 
came to Washington to do, but it was better than the 
alternative.
    But we switched gears, and, fortunately, Congress gave us 
the flexibility to do what we needed to do, which was prevent 
the American people from really having a very serious problem.
    Mr. Foster. Well, thank you for clearing that up. I also 
voted for the TARP authority and recognized at the time this 
was a very important feature of it, that if things continued to 
get worse, that the only thing you could do fast was a rapid 
capital injection, and this was an important element of it. So 
thank you for clearing that up.
    Now, I am interested in exploring the principle that you 
seem to be bringing forth in terms of that, in times of 
systemic risk, there are conditions under which shareholders of 
a systemically important firm might be expected to take a 
bullet, so-to-speak, for the good of the overall financial 
system, on the grounds that the firm, like everyone else, has 
much to lose if the financial system collapses, and that, 
moreover, threats from Federal regulators are an appropriate 
means of encouraging them to take that bullet.
    Is this a reasonable, though a little bit perhaps stilted, 
characterization of your position on this?
    Mr. Paulson. Yes, that is not my characterization at all, 
because we were very fortunate in this situation to have an 
alignment of interests here, because I have no doubt what was 
in the best interests of the public, which was to not have Bank 
of America collapse, not have Merrill Lynch collapse, not have 
the financial system collapse.
    I happen to believe, and I believe Ken Lewis testified he 
believes, that was--and also an alignment of interest with Bank 
of America and Merrill Lynch. I believe if Bank of America had 
invoked a MAC, tried to evoke a MAC, which was a legally 
binding contract, that was not legally valid, I think the 
merger contract was----
    Mr. Foster. You asked them to not pursue--they certainly 
had the legal right to try to invoke it, and you had used what 
could basically be characterized as an indirect threat to 
encourage them not to attempt to exercise that legal right. I 
was wondering if you see that there is need for additional 
legal clarity in this area?
    Mr. Paulson. Well, I can say I think the more legal clarity 
we have, the better, on everything. But on this, I just want to 
come back to the MAC, because I heard people discuss this a 
lot. No one has ever dealt with, as far as I have heard on the 
other side, the basic issue. Show me a Delaware court that, 
after shareholders have voted, has let a company get out of a 
merger by invoking a MAC. And this MAC actually had a carve-out 
for changing market conditions.
    Mr. Foster. The argument was it was unlikely, not 
impossible, and certainly these were circumstances like 
Delaware courts have not seen in the recent past.
    Mr. Paulson. Yes.
    Mr. Foster. So are there specific issues of legal clarity? 
For example, some sort of safe harbor for CEO's that act in 
ways that might be construed in normal times as against their 
shareholders' interests, but because this is a time of systemic 
risk and they have been given direct orders from their 
regulators trying to avert systemic risk? Do you see any merit 
in that kind of carve-out?
    Mr. Paulson. It is something that I have--it is a very 
complicated issue, and it is one that I really don't feel 
qualified to have thought through all the arguments on this. 
But it is certainly one I think that bears consideration.
    Mr. Foster. OK. Thank you. I yield back.
    Ms. Kaptur [presiding]. Mr. McHenry.
    Mr. McHenry. Thank you, Madam Chair.
    Secretary Paulson, thank you for your service to your 
country. This hearing is about the actions that took place in 
regard to one deal that we actually have a good bit of 
disclosure on because of the New York Attorney General's, in 
essence, public, now public testimony, about what occurred with 
that.
    The reason why we are having these hearings is about the 
ramifications for the financial industry going forward. We want 
to make sure that government officials are really in keeping 
with what is appropriate. So that is why this hearing is 
occurring today.
    Now, you have had a long history in the financial 
marketplace as chairman of Goldman Sachs. A couple of these 
great quotes about your service and your actions on Wall Street 
are here. One quote that I think says a lot is Jim Citrin, a 
column from September of last year, he says, describing you, 
``as direct, intense, powerful, serious, competitive, can-do, 
and, frankly, ballsy.'' One of his former Goldman executive 
committee members said, ``Hank hasn't changed at all since he 
was at Goldman, literally.''
    There is no question by financial analysts or reporters or 
these committee members about your capacity to finish a deal, 
and I don't think the President had any concerns about that 
when he offered you the job.
    Another Fortune Magazine described you back in 2003 as the 
investment community's steeliest, stealthiest power broker.
    We get the idea. You have the capacity to get a deal done.
    Now, as chairman of the Federal Reserve, Ben Bernanke had a 
different set of powers than you had as Treasury Secretary, is 
that true?
    Mr. Paulson. Oh, absolutely.
    Mr. McHenry. So as Secretary of the Treasury, did you have 
the statutory authority to fire the Board of directors of Bank 
of America?
    Mr. Paulson. No.
    Mr. McHenry. OK. No. So, in your testimony, you say that, 
``I mentioned the possibility that Federal Reserve could remove 
management and the board of Bank of America if the bank invoked 
the MAC clause.'' So, in essence, you were carrying a message 
from the Federal Reserve. Is that a good way to characterize 
this?
    Mr. Paulson. Well, I would prefer to characterize it the 
way I had to characterize it earlier. I had had a comprehensive 
conversation with Ken Lewis in which I reaffirmed the support 
that he was going to receive from the government because we 
were committed to every systemically important institution.
    Mr. McHenry. And that support is also Fed, the Treasury, 
the whole regulatory gambit?
    Mr. Paulson. It is combined. And I expressed the view, and 
I expressed it in a strong language, that the MAC was not a 
legally valid option in the judgment of the Federal Reserve 
lawyers and expressed the judgment that, if he were to go ahead 
and do something like this and endanger his company, Merrill 
Lynch, and the system, it would be a lack of judgment. And then 
I explained to him, you know, I explained to him that the 
Federal Reserve had the authority to replace management and the 
board. That is a supervisory authority.
    Mr. McHenry. And that last phrase that you said there, you 
relayed the Fed's authority to replace the board, had you had 
discussions with the Fed and your staff had discussions with 
the Fed that was within their capacity?
    Mr. Paulson. Well, what I have said earlier, and I will 
repeat it, that I have no recollection of Ben Bernanke having 
ever talked with me directly about that authority. I do have--I 
participated on a number of calls and meetings where there was 
staff together, and I don't remember whether I heard someone 
expressly say that or whether it was just the tone and the 
forcefulness of that discussion. But I clearly had that 
understanding, and I think that understanding has been borne 
out by the e-mails the committee has released and some other 
things.
    Mr. McHenry. When Mr. Issa asked you in the second set of 
questions here about this, you said we explained the Fed's 
statutory authority.
    Mr. Paulson. Right.
    Mr. McHenry. Now, did your lawyers say this, or was it the 
Fed's lawyers that said that? Is that hard to recall?
    Mr. Paulson. As I said to you, I had that understanding. As 
you can imagine, when I am participating in as many discussions 
and calls, it is different. And what I have told you is I don't 
remember whether someone expressly mentioned that to me in so 
many words or whether it just was a logical conclusion. Because 
if you had heard the discussions that I had heard, where if you 
are running a regulated bank and your regulator says, ``we 
don't think this is legally valid, we think if you do this, you 
are going to cause great harm to your company and to the 
financial system, it will be a lack of judgment.'' And if 
someone goes ahead and does that, it is a pretty logical 
conclusion that maybe even the regulator would be irresponsible 
if they didn't hold them accountable.
    Mr. McHenry. Sure. My time is short--oh, my time is 
expired. I have additional questions. I hope you will have an 
additional round.
    Ms. Kaptur. I was letting the gentleman finish his line of 
questioning. Thank you.
    Mr. Cummings.
    Mr. Cummings. Thank you very much, Madam Chair. Mr. 
Paulson, thank you very much for your testimony.
    Mr. Paulson, I think that you would agree with me--I am 
going back to some questions Mr. Kanjorski asked you. You would 
agree with me, even with those emergency circumstances you 
found yourself in, there is no reason to suspend ethical 
behavior, is there?
    Mr. Paulson. Absolutely not.
    Mr. Cummings. I didn't hear you.
    Mr. Paulson. Absolutely not.
    Mr. Cummings. And it is interesting that, as I read your 
testimony, and I read it several times, that you have expressed 
tremendous concern about our constituents and the people of 
America who are suffering greatly. And I was just wondering, 
were you aware of the Merrill Lynch $3-plus billion worth of 
bonuses they were about to give out when this deal came down?
    Mr. Paulson. No, I wasn't.
    Mr. Cummings. And when did you find out about the $3-plus 
billion in bonuses that the American people basically ended up 
paying?
    Mr. Paulson. My best memory of this was sometime around the 
middle of January, the day or so before we were putting this 
deal together, and when we were talking about the compensation 
restrictions for BofA, and I am not entirely certain, but I 
have a memory that someone on my staff said, in terms of 
Merrill Lynch, their bonuses have already been paid.
    Mr. Cummings. Do you think that was fair to the American 
people, to stockholders? Basically, what ended up is that the 
American people pretty much ended up paying Merrill Lynch's $3 
billion-plus bonuses that were apparently given out just before 
this deal went through. You understand that, right?
    Mr. Paulson. Well, I do understand the bonuses were paid 
before the deal went through.
    Mr. Cummings. Do you think that is fair, and do you think 
that is ethical?
    Mr. Paulson. In terms of--those are two different words.
    Mr. Cummings. Why don't we start with ``ethical'' first.
    Mr. Paulson. OK. In terms of ethical, I am not sure I would 
call that unethical, that Merrill Lynch paid out bonuses before 
the deal went through. Now, whether that is something that 
should have been done is another question.
    Mr. Cummings. Do you think that should have been done?
    Mr. Paulson. I wasn't there. I didn't make the decision. I 
don't think I should be judging that today.
    Mr. Cummings. Well, you judged everything else. You made a 
judgment with regard to Mr. Lewis. You made a judgment when you 
said that you felt that it would be a colossal lack of judgment 
for him to push the MAC. You made judgments all along where you 
made decisions affecting the American economy.
    So why suddenly are you washing your hands of this? You 
have been bragging up there this morning all this time about 
the judgments you have made.
    Mr. Paulson. Yes, but I do not have all the facts on this 
situation.
    Mr. Cummings. Let me ask you this. I would like to clarify 
something that you testified to this morning. A letter we 
received from Mr. Bernanke and handwritten notes we received 
under subpoena indicate that it was Mr. Lewis who first brought 
up the issue of receiving a bailout.
    Isn't it true that it was Bank of America who first brought 
up the bailout?
    Mr. Paulson. I am not sure exactly how it came up, but it 
very well could have been. I sure know that it was--with 100 
percent certainty--it was Bank of America that came to us and 
said they have the losses and said they have a major problem 
and were considering triggering the MAC clause.
    Mr. Cummings. All right.
    So, in December 2008, did you promise Mr. Lewis that you 
would provide Bank of America with enough capital to fill the 
$12 billion ``hole'' created--let me finish, I want you to 
answer the whole question--created by the losses at Merrill 
Lynch, or would it be fair to say that you at least intimated 
to Mr. Lewis that he could count on an amount equal to 
Merrill's losses in December?
    Mr. Paulson. We weren't as specific in terms of the amount 
and the losses, but we more than intimated. Both Ben Bernanke 
and I were very clear that we were committed to working with 
him to come up with a support program that we thought would 
work.
    Mr. Cummings. Let's talk about Goldman Sachs for a moment. 
Immediately before becoming Secretary of the Treasury, you were 
the chairman and CEO of Goldman Sachs, were you not?
    Mr. Paulson. Absolutely.
    Mr. Cummings. And as Treasury Secretary, you asked then 
Goldman board member Ed Liddy to take over as head of AIG, is 
that correct?
    Mr. Paulson. Yes.
    Mr. Cummings. Goldman has subsequently been revealed to be 
the largest recipient of AIG's counterparty payments, 
benefiting to the tune of more than $13 billion after AIG was 
bailed out. I note that the firm repeatedly claimed that its 
exposure to AIG was fully hedged, and it was not material to 
the firm.
    Just this week, Goldman posted a record $3.34 billion in 
quarterly profits and plans to give out billions of dollars 
worth of bonuses, to the tune of $600,000 on the average to 
28,000 employees.
    I just ask you one question, and this is my last question. 
The people in my district who are losing their homes and their 
insurance, the ones you talked about in your statement, their 
homes, their insurance, everything they have, some of them 
elderly going back to work, you know what they asked me? They 
said, ``Cummings, that money that those folks are getting on 
Wall Street, those millions and billions, is that our money? 
Because our money went somewhere. We don't know where it went. 
But we know people are getting millions and billions of 
dollars.''
    ``What about us? What about us who are out of work? What 
about us who have to send our kids to college in September 
after they have done everything they are supposed to do to 
prepare for college? What about us who don't have a house? What 
about us? You keep telling us the storm is going to be over, 
but when the storm is over, who is going to be living in my 
house?'' What about them? And they are asking the question, is 
some of this money their money?
    Mr. Paulson. Mr. Cummings----
    Mr. Cummings. I just want to be able to answer them when I 
go home tonight.
    Mr. Paulson. I want to just say two things. First of all, I 
want you to know that I had no role whatsoever in any of the 
Fed's decisions regarding payments to any of AIG's creditors or 
counterparties, No. 1.
    Second, what I would say to you is the thing that bothers 
you, bothers me, because the people that are paying the price 
had nothing to do with the problem. But the sad truth is that 
if these companies had gone down, they would be paying a bigger 
price. There would be more foreclosures. There would be more 
people that are unemployed.
    So you are absolutely right in asking the question. You 
should keep asking the question. This is a terrible thing, and 
that is why I believe you and the other Members of Congress 
need to work so hard to put in the kinds of regulatory reforms 
and the kinds of powers that we need to have in place to make 
sure we don't have to go through something like this again.
    Mr. Cummings. I see my time is up.
    Thank you, Madam Chairman.
    Ms. Kaptur. I thank the gentleman.
    Congressman Bilbray.
    Mr. Bilbray. Thank you, Madam Chair.
    Mr. Secretary, I am sort of sitting here listening to this 
testimony and all at once realizing as we are in the micro, 
there is a macro message here. You did say the Fed has the 
authority to hire and fire the board of directors?
    Mr. Paulson. Well, what I said is I have an understanding 
that, under unusual circumstances, if the Federal Reserve is 
dealing with a regulated entity and that there are decisions 
made at that regulated entity that endangers the safety and 
soundness of that institution, then the Fed has the authority 
to hold them accountable.
    Now, clearly in terms of corporate governance 101, we know 
how boards are selected and we know that boards select 
management. But there needs to be something for regulated 
entities where the regulator can protect the safety and 
soundness.
    Mr. Bilbray. I am sensing we have moved beyond where we 
have been historically been. We have gone into a brave new 
world where now, with a de facto nationalization of the 
industry, we are sitting here as a committee considering items 
that, in 1927, when this committee was founded, never dreamed 
that Washington would be determining what kind of decisions are 
made in either Wall Street or Main Street. Now Washington is 
making those determinations, and this brave new world we 
ventured into of nationalizing major industries really does 
place a strain on a system that was never designed to make the 
decision or to do the oversight as we are trying to do today. 
It never was perceived by the founders of this committee that 
we would be having this discussion.
    My question to you as the Secretary, as we talk about other 
situations and talk about exit strategies, where is the exit 
strategy? What date can I tell my constituents that we will not 
have this discussion anymore, that this committee and Congress 
will not be discussing how we have influenced or directed the 
decisions in at least this major industry? When will we be out 
of the business of doing banking?
    Mr. Paulson. Well, I would say, first of all, that is the 
major question. It is a question I ask myself and it is a 
question that is easier to ask than it is to answer. But it is 
a question you should be asking, because we as a Nation needed 
to do some things that many of us found abhorrent. They just 
were better than the alternative.
    So once the system is stabilized and the economy is turned, 
then there needs to be great consideration given to how we exit 
this and then how we put in place those reforms to really 
reduce the risk that we are ever going to be back here again 
doing these sort of things.
    But I can't stand here and tell you today that I have the 
answer to your question, but I hope it is soon.
    Mr. Bilbray. Well, let me say, I think the last 
administration had the public turn on them because they did not 
have an exit strategy for another situation. Regardless of who 
is in the making of this, if this administration doesn't 
develop an exit strategy, give some timelines that do not exist 
today, I think all of us are going to be held responsible for 
the fact that Washington has stepped into something, has 
started punching at this tar-baby and now has no way of 
extricating ourselves out of it, and we have now created a 
whole new environment of what is appropriate for the Federal 
Government to be doing, and we are down now having this hearing 
about who gets hired or fired, who is notified that if they 
don't do certain actions, there is going to be termination.
    All of these things have never been perceived as being the 
appropriate position for the Federal Government, which now the 
Federal Government is engaged into. So extracting ourselves out 
of the situation is going to be something I think the American 
people are going to demand very soon.
    Madam Chair, at this time, I would like to yield to the 
gentleman from the Carolinas, if I remember right.
    Mr. McHenry. I thank my colleague from whatever that State 
is in the West, that is financially sound.
    Secretary Paulson, just in continuation with my line of 
questioning before, from the notes we have on your schedule 
from December 19th, mid-December, December 19th is what we 
have, it shows you had roughly five phone calls with Dr. 
Bernanke, with Chairman Bernanke, that day. Was that fairly 
typical in those very busy days of multiple communications, one 
on one and at the staff level?
    Mr. Paulson. Yes. We had I am not sure five every day, but 
we had multiple conversations for 7 or 8 months there.
    Mr. McHenry. And when you communicated with Chairman 
Bernanke, did you express--on this day, we have multiple calls 
with Chairman Bernanke, a couple calls to Ken Lewis, Geithner, 
a number of different folks throughout the day. Did you 
describe to Chairman Bernanke your conversation you had with 
Ken Lewis?
    Mr. Paulson. My conversation with who?
    Mr. McHenry. Ken Lewis.
    Mr. Paulson. Oh, with Lewis. My conversation on which day, 
the 19th?
    Mr. McHenry. Whatever day it was. Did you describe the 
conversations you had with Ken Lewis?
    Mr. Paulson. Oh, the conversation I had with Ken Lewis on 
the 21st.
    Mr. McHenry. You talked to Ken Lewis multiple times in 
December. There are multiple conversations where he said they 
were considering MAC. You said it was bad. You then came back 
and said----
    Mr. Paulson. Absolutely. We communicated frequently and I 
would summarize that conversation----
    Mr. McHenry. Your mic I think is off.
    Mr. Paulson. Can you hear me now? We communicated 
frequently, and I would summarize conversations.
    Mr. McHenry. At the same time, did you keep your successor, 
Mr. Geithner, informed?
    Mr. Paulson. Yes, in a different way; Chairman Bernanke was 
a major decisionmaker. During this period, once Tim Geithner 
was the Secretary of Treasury-designate, then we wanted a very 
smooth transition, so I kept him posted on a variety of things. 
But I wasn't looking to him as a decisionmaker when I posted 
him.
    Mr. McHenry. Thank you.
    Ms. Kaptur. I thank the gentleman.
    Congressman Connolly.
    Mr. Connolly. Thank you.
    And welcome, Mr. Secretary Paulson. Thank you for your 
patience today, given our schedule.
    I would like to go back just a little bit and maybe I can 
start following up on my colleagues' questions about the MAC. 
It is our understanding that not once but twice Mr. Lewis 
threatened to invoke the MAC because they had discovered a $12 
billion problem in the Merrill Lynch deal, is that correct?
    Mr. Paulson. Well, what I remembered was $18 billion pre-
tax at one time and then $22 billion pre-tax at the end, and 
$15 billion after tax. But my numbers might be wrong.
    Mr. Connolly. OK. But in both cases, they threatened or 
discussed with you the possibility of invoking the MAC, is that 
correct?
    Mr. Paulson. Yes.
    Mr. Connolly. Your reaction was obviously negative in both 
instances. Why?
    Mr. Paulson. It was based upon the view of very experienced 
lawyers, and again I haven't heard this refuted elsewhere with 
any degree of vehemence, that there was a legally binding 
contract and that the MAC clause would not have been legally 
valid in this situation. The shareholders had voted in both 
companies. This was a Delaware company.
    Mr. Connolly. But that is really a legal matter, obviously 
not normally involving the Secretary of Treasury. Why would you 
care one way or another whether he was acting on 
misinformation, legal misinformation, and threatening to invoke 
the MAC?
    Mr. Paulson. I normally wouldn't care, but if you have a 
situation where a company, in doing something like this in a 
period of uncertainty and fear, could do grave damage, in the 
opinion of the regulator, to that company and to the whole 
system, I sure better care.
    Mr. Connolly. You were worried about the impact on a very 
fragile system at that time?
    Mr. Paulson. I was worried about the impact on a very 
fragile system, and also the impact on BofA, which was the 
biggest bank.
    Mr. Connolly. Given that concern, Mr. Secretary, at any 
time in that period, around December 2008, did you have any 
conversation that could be construed explicitly or implicitly 
as promising in exchange for their backing off the MAC threat 
or even going public with the $12 billion or whatever the 
ultimate number was, in exchange for that silence or that 
proceeding forward, that there would be TARP funding available 
to Mr. Lewis and BofA?
    Mr. Paulson. We definitely had conversations, but it wasn't 
in exchange for. No matter what they did, you know, I felt a 
responsibility, and I know Ben Bernanke felt the 
responsibility, to keep the financial system from collapsing. 
So this was not a situation where, ``gee, we will do this big 
favor for you.'' This was a situation where we were doing this 
for the American people. And it just so happened that there was 
an alignment of interests, because a BofA failure wouldn't have 
been good for the BofA shareholders either.
    Mr. Connolly. And this alignment, as you know, I know you 
have heard ad nauseam here today, Mr. Lewis construed as almost 
a threat by you and perhaps by Mr. Bernanke that if you didn't 
take the Federal money, we were going to fire you and your 
board. That is a far cry from how you characterized it as sort 
of a confluence of interests.
    Mr. Paulson. Well, no, I didn't--there are two different 
things, OK? The confluence of interest was just what I said, 
which was we certainly didn't want BofA to be unstable. In 
terms of my communication with him, I have been pretty direct. 
I wouldn't use the word ``threat,'' but I have said what I said 
and I was very direct, and I intended to give a very direct, 
strong, clear message. And that was, I am not characterizing it 
as a threat, and Lewis didn't characterize it as a threat, but 
I did explain the Fed's powers.
    But that was--in terms of the confluence of interest, to me 
that is just an obvious thing. If you follow the train of logic 
we have laid out here, you either accept the logic or you 
don't. Some people will say, well, there was no crisis, nothing 
would have happened to BofA, nothing would have happened to 
Merrill Lynch, nothing would have happened to the financial 
system. I can't satisfy those people.
    Mr. Connolly. Yes, and I am with you, Mr. Secretary. There 
was a crisis and I understand where you and the Federal Reserve 
chairman were coming from.
    But I guess we are trying to understand, and I see my time 
is up, Madam Chairman. I hope I have the opportunity to return 
to some specific questions regarding the term conditions of the 
agreement to go forward with TARP funding.
    Thank you.
    Ms. Kaptur. I thank the gentleman.
    Mr. Schock.
    Mr. Schock. Thank you, Madam Chairman.
    Following up on Mr. McHenry's questions about Tim 
Geithner's involvement about this, you stated, once he was 
nominated, you kept him informed. However, we have notes from 
Joe Price, who is the chief financial officer for Bank of 
America, basically chronicling the conversation that you had 
with Chairman Lewis and yourself, and in those documents, he 
says, ``Fire BOD if you do it; irresponsible for country; Board 
of Directors; Tim G agrees.''
    In those conversations, did you ever invoke Tim Geithner's 
name or suggest in any way that he was on board in your view on 
this to apply additional pressure to Mr. Lewis or Bank of 
America?
    Mr. Paulson. I tell you, I have sure got no memory of that. 
Just none whatsoever.
    Mr. Schock. You don't remember mentioning Tim Geithner in 
the conversation with Mr. Lewis?
    Mr. Paulson. I don't. I don't remember it. Those are Joe 
price's notes, and someone would have to ask him. I don't even 
remember talking to Joe Price. I remember talking with Ken 
Lewis. And as I said, I posted Geithner. I didn't look at him 
as a decisionmaker, and I just don't have a memory in that kind 
of detail.
    Mr. Schock. So you never used him, to your recollection, as 
additional pressure, that he was on board?
    Mr. Paulson. Yes, I sure don't recall that.
    Mr. Schock. OK. There seems to be a lot of confusion or it 
seems we are arguing over semantics over whether or not you 
threatened Mr. Lewis or Bank of America, and I don't think it 
is necessary that we argue over the semantics of a threat. I 
think you have been very clear, at least in your earlier 
testimony, that if they went forward with invoking the MAC, 
that you would have moved forward with attempting to remove him 
from his position:
    Mr. Paulson. Well, I would not have moved forward. I didn't 
have the authority to do that. What I said to him was, I said 
to him, if he did something so irresponsible, I believe the Fed 
could do that as his regulator.
    Mr. Schock. And you further clarified that you felt that 
would be irresponsible, invoking the MAC?
    Mr. Paulson. Yes. Absolutely. Very clear.
    Mr. Schock. That is clear. OK. So maybe threat isn't the 
correct word. Maybe he felt pressure. Is that a fair term?
    Mr. Paulson. I would rather just tell you what you what I 
said and let you characterize it.
    Mr. Schock. Fair enough. I would like you to respond then 
to Mr. Bernanke's testimony. Ranking Member Issa asked him, if 
there were threats, which I know you don't like that term, or 
if people felt threatened to go through with the deals, it is 
OK, because it worked out. Do you agree with that?
    Bernanke responded, ``no, sir.'' In other words, it would 
not be appropriate for Ken Lewis and Bank of America to feel 
pressure.
    Given Bernanke's acknowledgment at our last hearing that 
threatening to fire Bank of America's management to get them to 
go through with the merger would have been inappropriate, are 
you prepared to take responsibility for issuing such an 
inappropriate statement?
    Mr. Paulson. I will tell you, I certainly take 
responsibility for what I said, and what I said, I think it 
logically followed from--I laid out a train of events and I 
think it logically followed that is what a regulator should do.
    I would say, I think, Chairman Bernanke, when he testified 
here last month, I think he acknowledged that if someone put 
their--made a decision that harmed their company, they deserve 
to be held accountable. And that certainly is what I was trying 
to communicate to Ken Lewis.
    Mr. Schock. You stated earlier that you took issue with 
Bank of America's reason for invoking the MAC. Did you ever 
personally read their legal justification?
    Mr. Paulson. Nope.
    Mr. Schock. You stated you relied on the legal basis or 
rather the Fed's legal staff for their view on the MAC as your 
justification. Are you aware--do you know the names of the 
legal staff that you relied on?
    Mr. Paulson. I listened in and participated in a number of 
calls where I heard the legal staff, and I do know some of the 
people, yes.
    Mr. Schock. Do you know if any of that legal staff had 
backgrounds or experience in mergers and acquisitions?
    Mr. Paulson. I know they were experienced lawyers. I do not 
know their specific experience in mergers.
    Mr. Schock. Come on now. There is a difference between 
being an experienced lawyer and an experienced lawyer in 
mergers and acquisitions that would know whether a company has 
the legal basis to invoke the MAC clause.
    Mr. Paulson. Let me tell you one other thing, OK? One other 
test. I have participated in deals and in markets for 32 years, 
and when I hear a lawyer say to a company, what is your legal 
justification, after two shareholder votes and with a MAC that 
is structured this way, and I am not getting very much back on 
the other side; I will tell you something, as someone who has 
been around in the markets, everything that I heard squared 
with my instincts and judgments.
    Mr. Schock. Were you aware that Bank of America had 
successfully invoked the MAC less than a year earlier on the 
Sallie Mae deal?
    Mr. Paulson. Was it after shareholder votes in a Delaware 
company?
    Chairman Towns. The gentleman's time has long expired.
    Mr. Schock. I guess what I am trying to understand is if 
they legally had justification and the legal expertise to 
invoke the MAC clause once, I would question why they would 
come forward and justify that they could do it in this instance 
and be wrong.
    Mr. Paulson. I have told you how I made my judgment, and 
that is how I made the judgment, and I think it was the right 
judgment.
    Mr. Schock. Thank you.
    Chairman Towns. The gentlewoman from Ohio, Congresswoman 
Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman.
    Mr. Secretary, some contend the timing of what you call in 
your testimony a financial crisis unprecedented in our lifetime 
was actually a calculated Wall Street scenario underpinned with 
masterful deceit and extraordinary moral hazard. Your clarion 
call for the taxpayer bailout of Wall Street's excess came 6 
weeks before a major national election when our government is 
the most vulnerable and tender, and Congress skittish.
    What your orchestration yielded was an unprecedented 
dumping of private sector losses on the U.S. taxpayer. History 
will show that the U.S. Government and you knew about Wall 
Street's growing losses long before the Bank of America merger. 
In fact, Bank of America's purchase of Countrywide in January 
2008 was but another positioning of private sector interests in 
preparation for what I call the greatest Hail Mary pass of all 
time in taking those Wall Street losses and placing them on the 
next three generations. What interests me is who you helped and 
who you didn't.
    Yesterday's New York Times reports that Goldman Sachs, the 
firm at which you spent your life, posted the largest quarterly 
profit in its 140-year history, $3.4 billion. Each Goldman 
employee reportedly could earn $770,000 this year. And the same 
paper's lead editorial yesterday states, ``Across our Nation, 
unemployment is rising, foreclosures are surging, lending is 
still constrained.'' I wish I had an hour to talk to you about 
that.
    It looks like some very rich people are profiting 
handsomely, and I can tell you that those profits at Goldman, 
they would resolve about one-quarter of the housing situation 
in Ohio that we face today.
    Since appointment by President Bush as Secretary of 
Treasury in 2006 until today, have you or any of your family 
had any financial ties or investments related to Goldman Sachs 
in any way whatsoever?
    Mr. Paulson. No.
    Ms. Kaptur. Thank you. What about Bank of America?
    Mr. Paulson. Not that I know of.
    Ms. Kaptur. President Bush was not the first President you 
served. Who was the first President you served?
    Mr. Paulson. Richard Nixon.
    Ms. Kaptur. Richard Nixon. Who did you report to in the 
White House in those days?
    Mr. Paulson. I reported first to Lou Engman and then to 
John Ehrlichman.
    Ms. Kaptur. Thank you. Let me ask you about the deals you 
structured while at Treasury. In terms of the warrants that you 
structured in the $10 billion Goldman Sachs deal, the term 
sheet provides that, once Goldman redeemed the preferred 
shares, it has the option to purchase back the warrants at a 
fair market value at a timing of its discretion.
    Why did you draft a provision that allowed Goldman Sachs, 
the borrower, to determine when the taxpayers must sell their 
warrants?
    Mr. Paulson. You know, in terms of how a specific warrant 
deal was structured, I am sure that the deal that was 
structured for Goldman was the same as for all the other 
warrants.
    Ms. Kaptur. But why would you leave the taxpayer, who in 
this instance is the creditor, why would you let the borrower 
set the terms?
    Mr. Paulson. I would say this, Madam Congresswoman, those 
warrants are going to be very profitable for the taxpayer.
    Ms. Kaptur. Yes, they are going to be very profitable, sir. 
But if Goldman can set the terms of how the money can be 
redeemed, we are not going to get back what we deserve to get 
back for the American people.
    Mr. Paulson. Oh, there is a process, and it is not a 
process where Goldman Sachs sets the terms.
    Ms. Kaptur. Well, that is not what the term sheet provides, 
at a timing of its discretion. That is what the terms are. 
Could you check into that for me with your friends?
    Mr. Paulson. OK, I will check into it. But the timing is 
one thing. The process for how that is set is another.
    Ms. Kaptur. Well, I don't know how you are defining your 
terms there, but it is pretty clear that Goldman Sachs will 
determine when our taxpayers, when we will get our money back. 
That is a pretty serious question.
    Let me go to another point here, and this is who you help 
and who you don't help. Last year, Warren Buffett bought into 
Goldman Sachs at a level of $5 billion. Under your watch as 
Secretary of the Treasury, our taxpayers were forced to invest 
$10 billion in Goldman, not counting the counterparty deal with 
AIG. Warren Buffett received 43.5 million options worth $1.8 
billion for his $5 billion gamble. OK, our taxpayers, by 
contrast, got 9.5 million options worth $500 million, one-fifth 
as much, for their investment, which was double his.
    Buffet is being paid 10 percent interest on his preferred 
stock, yet taxpayers only get 5 percent for the first 5 years 
and 9 percent for the second 5 years. Buffet has a 10 percent 
call premium; taxpayers have no premium rights. Buffet got $5 
billion of present value for his $5 billion investment. 
Taxpayers have $4.9 billion of present value for their $10 
billion investment.
    How is this fair and why did Warren Buffett get a better 
deal for his stockholders than you as Secretary of Treasury got 
for the American taxpayer at Goldman?
    Mr. Paulson. There is a very clear reason why. When we 
structured the capital to go into all of the banks, it was the 
middle of a crisis. Attractive capital was not available. The 
reason we had to do this is capital was not available. We 
wanted to do something that was available, not where we were 
providing it under duress, but providing capital which was 
structured so that the taxpayer would get paid back----
    Ms. Kaptur. At the call of Goldman whenever it sets the 
terms.
    Mr. Paulson. Well, first of all, the banks, we put out the 
capital. It is preferred stock. It wasn't voting. It was 5 
percent initially, so the taxpayer is going to get paid back 
all of that money, 5 percent interest, and warrants as various 
firms, and a number of firms have done well and paid back.
    But you do not stop, Madam Congresswoman, you do not stop a 
financial panic by putting capital and offering capital to 
banks on the terms--the only terms it is available in the 
middle of a crisis. So what we were doing was moving quickly to 
put capital to a range of major financial institutions that 
were picked because they were systemically important.
    I would also argue to you that the fact that a number of 
those institutions have done well----
    Ms. Kaptur. Oh, they have done very well. Oh, yes, Mr. 
Paulson.
    Mr. Paulson. And have paid back the taxpayer is something 
we should all be pleased about rather than the reverse.
    Ms. Kaptur. Well, you know, I wish you had gotten a better 
deal for the taxpayers. You certainly got a good deal for a lot 
of your former clients.
    I have additional questions, Mr. Chairman.
    Mr. Paulson. I think if you look at what the taxpayer is 
going to make on a number of these companies, it will have been 
good. But the biggest advantage to the taxpayer, by far the 
biggest advantage to the taxpayer, is what didn't happen, and 
that we did not have a collapse and we did not have double the 
number of foreclosures in Ohio and double the level of----
    Ms. Kaptur. Oh, they are happening, Mr. Paulson. You ought 
to come and visit us in Ohio and see the results of your 
handiwork.
    Mr. Paulson. Well, I know how terrible it is. I am just 
telling you it would have been worse.
    Ms. Kaptur. If that is your best argument, that is not good 
enough.
    Mr. Paulson. I want to explain it to you, because you 
probably don't agree there was a crisis.
    Chairman Towns. Mr. Fortenberry.
    Ms. Kaptur. I agree it was a crisis of your making----
    Chairman Towns. The gentlewoman's time has expired.
    Congressman Fortenberry from Nebraska.
    Mr. Fortenberry. Thank you, Mr. Chairman.
    Hello, Mr. Secretary, thank you for joining us today.
    In your testimony, you stated that you would like Congress 
to create a new regulatory framework to be able to intervene 
and facilitate the orderly wind-down of a systemically 
important institution. What do you envision?
    Mr. Paulson. Well, I think something very similar to what 
has been suggested by the Obama administration makes sense, 
because there needs to be, when there is a real systemic risk, 
so this should not be done frivolously, when the system is at 
risk, there needs to be a way to avoid the normal bankruptcy 
process and let a regulatory body come in and handle the wind-
down of the liabilities in such a way as it does not present a 
real danger to the public and the financial system.
    If we have a different regulatory regime and if this 
authority is structured properly, then we won't be in a 
situation where institutions are too big to fail.
    Mr. Fortenberry. Well, in that regard, what role do you 
foresee for the Treasury and for the Fed, for the FDIC?
    Mr. Paulson. Well, there have been a number of things that 
have been suggested. What we have suggested as part of the 
regulatory blueprint was the Fed playing the role of a macro 
stability regulator, being able to look across the whole 
economy and look across the capital markets for risk, being 
able to access and get information and having the authority to 
act.
    In terms of the wind-down, if there is a potential failure, 
I think there needs to be a high bar. So there would need to be 
a determination by the Secretary of the Treasury, by the 
chairman of the Fed, by other regulators, that there is a true 
systemic issue. So this should not be an easy bar to get over. 
But when there is, then the regulator needs all of the powers 
to handle that wind-down.
    Mr. Fortenberry. Given all of the turmoil in the economy in 
the last year, given the government's intervention, we are now 
left with the reality that 10 banks in this country control 
about 50 percent of the deposited assets. Is that a systemic 
risk, in your view?
    Mr. Paulson. It is something that makes me uncomfortable.
    Mr. Fortenberry. So how would this new regulatory framework 
look at that potential situation?
    Mr. Paulson. Well, as I said, and I am just only going to 
deal with things that I said, I am saying nothing now that I 
didn't say when I was Treasury Secretary. We put forward a 
regulatory blueprint which called for greater consolidation of 
the banking regulation as opposed to the multiple regulators, 
and so I think having greater consolidation and stronger 
regulation, coupled with the wind-down powers so that you don't 
have banks or bank holding companies being too big to fail, I 
think is a meaningful way of dealing with the risk. Because, in 
my judgment, a regulation, no matter how good, is always going 
to be imperfect. So you need to have it in balance with the 
market discipline or moral hazard. That we got to a point where 
we couldn't rely on market discipline or moral hazard because 
it would have taken the system down.
    But to the extent the infrastructure in the financial 
markets are fixed, and I am talking about the tri-party repo 
market, credit default swaps, and there is a lot of work being 
done there, and you have the wind-down powers so then we are 
not then held hostage by institutions that are too big to fail, 
I think there is an opportunity to get the balance right.
    Mr. Fortenberry. Just to let you know, we have changed the 
expression ``too big to fail'' to ``too big to succeed.'' That 
is part of the intention that I have in simply asking you the 
question, are we now in a place where we, because of debatable 
actions, and I have heard you clearly in your justifications 
and I am not trying to play ``gotcha'' here or anything, just 
looking ahead to say, are we now in a situation where the 
actions that were taken to try to stabilize the economy has 
left us with further vulnerability and the potential for 
systemic failure because of this highly concentrated control of 
the financial system in the hands of a few?
    Mr. Paulson. I understand your question, and there is going 
to be, because when you look at the number of banks, there is 
going to be a lot more consolidation before we are done, but I 
do understand your question and I think it is important we get 
this in balance.
    Mr. Fortenberry. Thank you.
    Chairman Towns. The gentleman's time has expired.
    Congressman Clay from Missouri for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman.
    And thank you, Mr. Paulson, for your candor today. 
Hopefully, we can continue in that vein.
    Secretary Paulson, I have noted with great interest of your 
evolution from a proponent of no government interference in the 
free markets to a person who believes that government does and 
should have a role in the markets. I find that enlightening, 
somewhat welcoming, and also contradictory, often at the same 
time.
    However, today I have questions on why we have companies 
that are too big to fail. I don't believe that. Many don't 
believe that. Of those that you obviously think are or were too 
big to fail, what distinguishes them from others? Why was 
Lehman Brothers allowed to fail and Merrill Lynch and Bank of 
America were not? What were the differences in systemic risk to 
the country in making the decision to rescue the latter and not 
the former? And why rescue and assist Goldman Sachs and not 
Lehman Brothers?
    Mr. Paulson. Well, let me--you know, I went through this 
earlier, and I will go through it again.
    At the time when Lehman was failing, we didn't have the 
TARP, so we had no authority to put capital into Lehman 
Brothers, and we were unsuccessful in finding a buyer.
    In the case of Bear Stearns, we had a buyer in J.P. Morgan, 
and the government could assist that buyer, but J.P. Morgan was 
providing the capital and able to guarantee the trading book.
    Mr. Clay. AIG. Talk about AIG.
    Mr. Paulson. Let me talk about AIG, because AIG is another 
one that was different. In AIG, it was perceived as being a 
liquidity problem, but at the insurance company level, we had 
regulated insurance companies that were well-capitalized and 
perceived as being stable. So the Fed could solve the liquidity 
problem by loaning against those insurance company assets, and 
the market accepted that.
    Lehman Brothers had a capital hole and a liquidity problem, 
and we had been working with a group of industry participants 
to help finance a deal if we could get a buyer, and we were 
unsuccessful at getting that buyer. So once we had the TARP in 
place, we had other tools in the tool kit.
    There has been a lot of confusion. For instance, people 
will say the Fed made a loan to Lehman Brothers after they 
failed against that collateral. That is true. The Fed made a 
loan, and that was to facilitate a liquidation and a 
bankruptcy. A Fed loan to Lehman Brothers by itself would not 
have filled the capital hole, would not have taken care of the 
trading book guarantee, and would not have prevented a 
bankruptcy.
    So after Bear Stearns went, if you look at the record, you 
will look at the fact that Ben Bernanke and Hank Paulson each 
gave a number of speeches where we said we don't have the 
authorities that are necessary to deal with nonbanking 
institutions, financial institutions.
    But your question gets asked by a lot of people, because 
these were complicated issues.
    Mr. Clay. But, look, let me tell you what my constituents 
are feeling. You know, we gave AIG $180 billion because they 
were irresponsible, because they took risks, because they 
created these exotic products and enriched themselves. They 
were irresponsible, and yet they get rewarded through our tax 
dollars. Now we own them.
    So, when does it stop? And what is the punishment for their 
irresponsibility?
    Mr. Paulson. Congressman, I can't tell you how much it 
pains me to be on the other side of this conversation, because 
I can't tell you how angry I was when I sat there that weekend 
in September when the management team came in and laid out the 
issues. And you are absolutely right.
    But there was a situation where we had essentially an 
unregulated hedge fund on top of insurance companies. There is 
a huge gap in our regulatory system. This should never have 
been allowed to happen. It did happen. All I can say to you is 
you will never be able to explain that so your constituents can 
understand it, and that is a good thing, because we don't want 
to have to understand this in this country. We don't want to be 
in a situation where this can happen again.
    But all I can say to you is I believe that if the Fed had 
not taken that action, given the size of AIG, we would have had 
a global banking run. We would have had a financial system 
meltdown. The wealth that would have been lost in 401(k) 
programs, saving plans, the wealth that would have been 
destroyed this in this country, would have been--was tragic.
    But now you have a situation where the government is an 
owner, the government is there, and we have to be careful we 
don't draw the line between trying to punish them and shooting 
ourselves and the taxpayer in the foot, because right now we 
should all want AIG to do well.
    Chairman Towns. The gentleman's time has expired.
    Mr. Clay. You sure? I had 5 minutes.
    Chairman Towns. In fact, you had 7.
    Mr. Clay. Thank you, Mr. Chairman. I yield back.
    Chairman Towns. Thank you very much.
    I ask unanimous consent that Mr. Stearns and Mr. Garrett be 
allowed to participate and, of course, without objection, so 
ordered. And I now call on Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Paulson, I hear your pain when you said you are just 
pained to be on that side of the table answering the 
gentleman's question, but isn't it true that Goldman Sachs 
benefited from the AIG bailout? They got $13 billion and was 
the largest recipient of the public funds from AIG. And, in 
fact, creating the collateralized debt obligation [CDO], formed 
the basis of the current crisis we have today. But while you 
were CEO of Goldman Sachs, you were an active part of that 
business.
    So my problem is, when you say you are pained by AIG, I go 
back to your bait and switch when you came here to Congress and 
you suddenly decided, instead of buying the toxic loans, you 
were going to go out and start to give money to these people.
    So if you didn't have any credibility on the bait and 
switch, how do you have any credibility today to come before 
you us and tell us that you are pained by AIG?
    Mr. Paulson. Well, let me respond----
    Mr. Stearns. Do you understand the credibility you have, 
you came here and said in this two-and-a-half page bill that 
you wanted $750 billion. Then immediately after you got 
approval from Congress, you changed it. You baited us on, then 
you switched it.
    And then you started giving money to these institutions, 
these top 15 institutions, when all these people who had the 
loans you could have worked out a homeowners' equity plan 
around this country to help the people who are actually having 
their homes foreclosed. You are helping AIG, and you are 
helping Bank of America, and you are bankrupting Lehman 
Brothers, who was your biggest competition.
    Isn't there some point you should have recused yourself and 
said, ``you know something, all my buddies in Goldman Sachs are 
over there? You know, I really feel that I shouldn't be making 
these decisions to let Lehman Brothers go bankrupt, that I 
really should recuse myself.''
    And the fact is you are coming here and say you feel the 
pain of AIG, it's just outrageous.
    Mr. Paulson. Well, I would like to respond to you, 
Congressman, because I find your statement outrageous.
    Mr. Stearns. Let me tell you, I have the time, Mr. Paulson. 
Let me just say one other thing.
    Chairman Towns. No, I just want you to speak into the mic. 
Pull the mic to you.
    Mr. Stearns. Let me say one other thing here. You know, 
when you look at--you are saying to us you support the Obama 
administration giving more power to the Federal regulator, the 
Fed. But when you look, the Fed was on--Geithner was on board 
at the Fed, the New York Fed, dealing with all these 
institutions. He didn't get it.
    And then we had this fellow who came up afterwards, Mr. 
Friedman, he was on the Goldman Sachs board. And he didn't last 
too long as the Fed chairman. Why? Because he had conflict of 
interest.
    Is it possible that there's so much conflict of interest 
here that all you folks don't even realize that you are helping 
people that you are associated with and you should be recusing 
yourself for America's ethics?
    Mr. Paulson. Let me make several comments.
    The first comment I will say is I came to Congress, I asked 
for the TARP, and I asked for authority to purchase illiquid 
assets.
    Mr. Stearns. But in 10 days you changed your opinion----
    Mr. Paulson. We changed because the situation changed 
dramatically.
    Mr. Stearns. In 10 days?
    Mr. Paulson. You betcha. If you look at what happened in 
that 10-day period, you look at what happened around the world, 
it changed dramatically. No. 1.
    Mr. Stearns. I don't want you to use all my time.
    Mr. Paulson. OK. Second--but I just want to respond to, 
second. I left Goldman Sachs, I sold my shares in Goldman 
Sachs.
    Mr. Stearns. Tax deferred too. You didn't have to pay any 
tax on your $200 million, is that true?
    Mr. Paulson. I sold my shares in Goldman----
    Mr. Stearns. There is a clause that if you come into the 
administration, you sell your assets, it is tax deferred. You 
don't have to pay $200--you had a $200 million profit, and you 
didn't have to pay any tax. Isn't that true? Is that true or 
not? Yes or no.
    Mr. Paulson. Listen, you do not pay a profit when someone--
a tax when someone makes you sell assets.
    Mr. Stearns. Maybe that was the incentive for you to become 
Secretary of Treasury so you didn't have to pay the tax there?
    Mr. Paulson. Oh.
    The next thing I would say to you, and say it very, very 
clearly, is I, you know, I behaved with the----
    Mr. Stearns. You don't think you should have recused 
yourself when you asked Lehman to go into bankruptcy, you 
didn't put Bear Stearns in bankruptcy, and then you folded 
Merrill Lynch into--I mean, isn't there some point where you 
have to say, ``hey, I have a conflict of interest here?'' You 
don't feel any kind of scintilla of ethics on this thing at 
all?
    Mr. Paulson. Totally. I operated very consistently within 
the ethics guidelines I had as Secretary of the Treasury. And 
when it became--when it became clear that we had some very 
significant issues with Goldman Sachs and with----
    Mr. Stearns. Why didn't you recuse yourself then?
    Mr. Paulson [continuing]. And with Morgan Stanley, what I 
did then, it would have been very wrong for me to recuse 
myself. What I did was I went and got a waiver from the ethics 
agreement. Because when we had concerns----
    Mr. Stearns. Who is in charge of the ethics agreement?
    Mr. Paulson. What?
    Mr. Stearns. Who is in charge of the ethics agreement that 
you got a waiver?
    Mr. Paulson. We have an Office of Ethics at Treasury and we 
have a White House Ethics Office.
    Mr. Stearns. So you got it from legal counsel at the White 
House?
    Mr. Paulson. We got it from the Government Ethics Office.
    Chairman Towns. The gentleman's time is expired.
    Mr. Stearns. Thank you, Mr. Chairman, for the courtesy. And 
I ask unanimous consent that my opening statement be made part 
of the Record.
    Chairman Towns. Without objection, so ordered.
    The Congresswoman from California, Ms. Diane Watson.
    Ms. Watson. Thank you, Mr. Chairman. I appreciate your 
being here and for your patience.
    A few minutes ago we talked about an institution that you 
thought would be able to deal with regulatory activities. How 
do you feel about the regulatory proposals that have been put 
forth by President Obama and Congress?
    Mr. Paulson. That's a pretty broad, general question.
    Ms. Watson. Have you been following them?
    Mr. Paulson. Yes. I would say I made, when I was Secretary 
at the Treasury, I put forward a number of regulatory 
proposals, put forward a regulatory blueprint.
    And there are a number of things that the administration 
has put forward that I am very, very pleased about, the wind 
down authorities for nonbanking institutions, the idea that 
there be a macro stability regulator, the idea that there be a 
consolidation of banking regulators.
    So I think there are some very positive ideas that have 
been put forward.
    Ms. Watson. Would you please, if we send you the exact 
questions, would you put your responses in writing so I can say 
that when we form this new regulatory system, these are some of 
the points that we ought to consider?
    We are trying to unscramble eggs that are really rotten at 
this point, and we must move forward and correct this system. 
It's impacting on not only the United States but the rest of 
the world, too. We have to get it right, and I don't--I cannot 
be convinced that this wasn't seen back a year ago, the 
collapse.
    But in trying to move on, I want to reiterate what has 
happened on Tuesday. It was reported that just 1 month after 
repaying their $10 billion in aid, Goldman Sachs would be 
posting a second quarter net profit of $3.44 billion.
    I am curious to hear your perspective on their success 
despite the recession, given your 26 years of experience at 
Goldman Sachs and the unique role former Goldman employees have 
played in economic policy, considering that the last two 
chairmen of the Federal Reserve Bank of New York, the head of 
the World Bank, and the head of the New York Stock Exchange, 
and the former Assistant Secretary at Treasury responsible for 
TARP, Neel Kashkari, were all former Goldman Sachs employees.
    And why do you believe Goldman Sachs has been able to bring 
in such profits despite the current economic conditions?
    Mr. Paulson. Yes--I don't have an answer for you. I have 
not worked at Goldman Sachs in 3 years, so I can't explain what 
they are doing that's working. But I can say I take some 
comfort, and I think all of you should, that there are a number 
of financial institutions that are more profitable today. And 
it looks increasingly like the government will be paid back 
with profits on a number of these plans.
    And in terms of your request to me to give you something in 
writing, I will work with you on that. I don't have a staff 
like I used to, and I have a lot of requests.
    Ms. Watson. No. You can handwrite them. I do have a staff, 
and we will send you in writing what we would like to ask and 
what you think should be proposed. You can write it in hand. 
You can do pencil and paper.
    Mr. Paulson. I will do my best to work with you on it. 
Thank you.
    Ms. Watson. All right. I appreciate that. And do you think 
that Goldman Sachs has benefited from the economic crisis and 
the dissolution of some of their strongest competitors, such as 
Lehman Brothers?
    Mr. Paulson. I don't. I don't know what is the source of 
the profits, and I have no basis to speculate on it.
    Ms. Watson. OK. How was the determination made that 
institutions such as Bear Stearns, AIG, and Merrill Lynch 
should be saved either through direct assistance or 
acquisition, while Lehman Brothers would be allowed to fail? I 
am not quite clear, and I know you have addressed it.
    Mr. Paulson. Yes, I did, and I would just say to you, we 
did not have the legal powers we believed to do something in 
the Lehman Brothers case. We did not have the TARP to put 
capital in, and we did not have a buyer as we did in the case 
of Bear Stearns.
    And so we were faced with sort of an unfortunate set of 
circumstances.
    Ms. Watson. And I will conclude, I see the red light, Mr. 
Chairman, but I just want to say if we have missed our 
oversight responsibilities, I need to know what you consider, 
in writing, and we will put that in our letter to you, what you 
consider government could do more of.
    I do know that we did not, this committee, under the former 
administration, did not do the kind of oversight, maybe we were 
asleep at the wheel, or maybe we looked the other way.
    But I would like to hear from you what government could do 
so we don't get in this situation again. And I think, really, 
it's worse than the depression of the 1930's.
    Thank you, Mr. Chairman, for the extra minutes.
    Chairman Towns. I thank the gentlewoman from California.
    I now yield to Mr. Garrett of New Jersey.
    Mr. Garrett. I thank the chairman and thank the Secretary.
    Before I begin, I would just make a comment. One of your 
comments when I was walking in the room with regard to AIG, 
saying that there was a gap with regard to coverage--not 
coverage, but gap with regard to authority and regulation 
there.
    We have had a number of panels, Financial Services, look at 
this. And the bottom line is, the take-away that I have always 
heard is there is not a gap in authority, not a gap in 
regulation, that there were regulators there in place.
    But what they actually admitted to was they had the 
authority, they had the personnel. But, you know what? They 
just missed it. They weren't looking in the right places, and 
it was just an error on the part of personnel.
    Mr. Paulson. And it may have been a gap in terms of 
capability when you look at the multiple regulators.
    Mr. Garrett. That's probably a good way to phrase it.
    One of the things that you have said and others, Chairman 
Bernanke as well, that what we needed here is resolution 
authority, and that's what we need to answer her question going 
forward is resolution authority as well.
    But here is a question I will pose for you hypothetically. 
Had we had resolution authority prior to the AIG situation, can 
you think and explain to me how it would be different?
    I will just posit two thoughts to you. If you had the 
resolution authority and they tried to move in to try to wind 
down the firm in a more, quicker manner--but we know right now, 
there is no real market out right there. And the same reason we 
are not doing it right now is it would put a more, larger 
burden on the taxpayer, right?
    And if you did it--what they are doing now, essentially, is 
saying we are going to do it out over a period of time. There's 
still the threat of a problem over it.
    So help me understand why anything would be different 
significantly to the taxpayer and the structure had we had a 
wind down authority in place prior to the AIG situation?
    Mr. Paulson. With AIG it was necessary to keep the 
current--the company didn't go through bankruptcy.
    Mr. Garrett. Right.
    Mr. Paulson. Kept the current, kept the current corporate 
structure.
    Mr. Garrett. Right.
    Mr. Paulson. Worked within the legal framework.
    Mr. Garrett. Right.
    Mr. Paulson. The one thing that is similar is that the Fed 
made a loan, which is going to be repaid----
    Mr. Garrett. Yes.
    Mr. Paulson [continuing]. As pieces of the company are 
sold.
    But since I don't know, you know, in terms of AIG----
    Mr. Garrett. Yes.
    Mr. Paulson. My role was giving the Fed support as they 
made this decision. But once the action was taken, I had no 
dealings. So I just don't know the details, and I think 
probably the Fed would be better to answer that question for 
you in terms of what they are doing now, what they might do 
differently with the resolution authority.
    Mr. Garrett. OK. I only posit the question because I do 
know you were not on the scene after the fact. But I just posit 
the question because I know you have said in the past, and 
here, too, I think, that we need the wind down authority.
    But I am not really seeing, and I haven't got my hands 
around--from other witnesses as well, what would have been 
different in that situation.
    And now we have the situation, as you well know, with the 
CIT, looking like that they are not going to be able to get a 
bailout, if you will. And so haven't we already set up the 
precedent, set up the situation, maybe going all the way back 
with Bear Stearns, that you create the conundrum of them saying 
that we look to the government to bailout, and under the 
administration proposals they say we are only going to bail out 
the Tier 1 entities. And CIT apparently just doesn't fall into 
that category, so they are not going to get the bailout.
    So you have a disincentive now. You have a disservice to 
the taxpayer and disincentive to the taxpayer saying you are 
going to encourage companies like that in the future and say, 
boy, I better get into the Tier 1 situation again or else I am 
going to fall into the CIT situation. Isn't that the problem 
with the administration's proposal?
    Mr. Paulson. Well, I don't have all of the facts in terms 
of what has happened. When I was here, the regulators made CIT 
a bank holding company. They came in with a regulatory 
recommendation to Treasury. We funded, we funded them out of 
TARP. I have lost touch. I don't know what's happened.
    But I understand the issue, the conundrum you have laid 
out. And that is why, really, the only answer is we need to 
exit from all of these programs as soon as we can.
    Mr. Garrett. Yes. But my fear is that we--and my question 
to you would be, are we not, would we not under the 
administration's proposal--and I know you spend some time 
looking at these things--basically perpetuating that situation 
going forward? In other words, we set the administration's plan 
into place, and we begin to identify certain entities as being 
too big to fail, the Tier 1 institutions, then the CITs of the 
world.
    And I know you may not be up to speed, and neither am I, on 
the particulars right there, but the CITs of the world will say 
we want to get into that situation in the future, and that's 
the basic underlying flaw in the administration's proposal, 
that you perpetuate the problem.
    Would you agree with that?
    Mr. Paulson. I do agree on one thing, that we don't want to 
move toward a situation in this country where we have certain 
organizations that are too big to fail and every one else can 
fail, and we want to get to a situation where no one is too big 
to fail.
    Now, I don't know enough about the CIT to jump to the same 
conclusion you are about that. But I understand the dilemma you 
are pointing to.
    Chairman Towns. The gentleman's time has expired.
    I indicated to Mr. Paulson that we would get him out. He 
has a plane to catch.
    So I would now like to yield closing statement to ranking 
member, Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman, and thank you for this 
hearing, and I look forward to the reform part of our oversight 
and reform.
    At this time I will like to ask unanimous consent that the 
committee consolidate questions of the minority and the 
majority so that we can keep from overburdening Mr. Paulson and 
still work with him to get followup answers.
    Chairman Towns. Without objection, so ordered.
    Mr. Issa. Thank you.
    Mr. Paulson, I personally want to thank you as a private 
citizen for coming here and giving us so much of your time and 
your insight into what happened at this very difficult time.
    There are unanswered questions. There are questions that we 
will never know. We will never know, had Merrill Lynch stayed 
on its own, stood on its own and received, let's say, half of 
the TARP money that the combined company received, would it, in 
fact, today be a viable, going concern?
    Would the backup plans envisioned by the Treasury and the 
Fed, in case BofA were to back out, would they, in fact, have 
worked? We will never know that.
    Mr. Secretary, I want to thank you for your attempts to 
make sure we never had to know it.
    I, in fact, have been an outspoken critic of some of the 
activities, including the threats. I am and will continue to be 
an outspoken critic of expanding the Fed's role beyond the 
monetary supply and giving them a direct role in the systemic 
risk question. I do so because I believe that the Fed has a 
primary and premier obligation as an economic modeling 
organization.
    Well, you have a long history in mergers and acquisitions, 
understanding of what a, ``good merger'' is and a ``bad 
merger'' is. That is not inherently a core talent that we 
expect to see in the Fed. So as we work to go forward to find 
the right models in case something like this happens again, and 
hopefully the right models to see it before it happens and 
prevent it, I hope you will continue to be a resource for us, 
because I do believe that the commission, which has just been 
formed, and this committee have an obligation to get it right 
so we don't have to do it again.
    Mr. Chairman, I want to thank you for this series and for 
your continued partnership on a bipartisanship basis and 
particularly for your help today in making sure that everyone 
got their questions in, including those who have not yet asked 
them.
    With that, I close and yield back and thank the chairman.
    Chairman Towns. I thank you very much for your statement.
    Let me just say, Mr. Paulson, thank you for coming.
    But, still, there are some unanswered questions that I 
would hope that maybe you could give it to us in writing, that 
when they looked at the books at Merrill Lynch, they realized 
there was a $9 billion shortfall. This is according to Mr. 
Lewis. And then, of course, it was discovered further that 
maybe it was a $12 billion shortfall.
    But my question to you, and hope that you give it back to 
us in writing, because when I asked you earlier today you 
didn't respond to it: How did it get from $12 billion to $20 
billion? There's no real answer.
    Mr. Paulson. I can tell you. That one I can tell you I 
can't give it to you in writing, because I don't know. What I 
heard was a call on the 17th where the losses were $18 billion 
pretax. By the 19th they were $22 billion pretax. And what I 
said to people, that's a loss that takes my breath away.
    When the market hears that, now, all I could say to you is 
December, the end of November and December were the worst 
months in the marketplace. And banks, it was the worst month 
for the economy. If you look at what was going on economically, 
it was the worst month in terms of credit products and banks 
losses.
    And so I didn't--when I look at it, I wasn't shocked that 
this could have happened so quickly. But I don't have that 
explanation. You would have to get that from Merrill Lynch or 
BofA.
    Chairman Towns. Yes. I could see this if we were talking 
about millions, but we are talking about billions, ``B.'' It is 
like ``B'' in boy.
    Mr. Paulson. Yes, that was my reaction. I saw and witnessed 
things that I never had seen before.
    And so what was going on in the marketplace at that point 
in time, what BofA and Merrill subsequently explained to me, 
was the products they had in inventory, the credit products, 
there was a big erosion in value based upon what was going on 
in the markets.
    But I don't--I don't know. I heard about it for the first 
time on the 17th.
    Chairman Towns. Let me just finish by saying last year, at 
the height of the financial crisis, major decisions were made 
about who was going to live and who was going to die. Lehman 
went down but AIG was saved. Bear Stearns was sold off, Bank of 
America received billions. Nine big banks were forced to take 
billions, when in many instances they didn't even ask for.
    Most significantly, all of this was decided behind closed 
doors, with no oversight. In a way, the Bank of America-Merrill 
Lynch deal illustrates the dangers of concentrating enormous 
power in only one or two individuals.
    When you turn over complete authority to the Treasury 
Department or the Fed, with no accountability and no checks and 
balances, this is what you get: oral commitments involving 
billions of dollars; seemingly arbitrary decisionmaking, and 
residual suspicion.
    Mr. Paulson has stated that the principal regulatory 
agencies--the SEC and the FDIC--were consulted in this merger. 
I think it is clear that we need to hear next from former SEC 
Chairman Cox, and from FDIC Chairperson Bair to better 
understand the nature and extent of their participation. I 
intend to schedule a hearing for that purpose following the 
August recess.
    There are some unanswered questions here, and if we are 
going to reform our financial system, I think we need to have 
the answers to these questions.
    So, Mr. Paulson, I want to thank you for taking the time to 
come, and I hope that you will become a resource in many, many 
ways to be able to help us to sort of unfold and get through 
this mess and to be able to come back stronger than ever 
before.
    Thank you so much for testifying.
    Mr. Paulson. Thank you very much, Mr. Chairman. Thank you.
    Chairman Towns. This hearing is adjourned.
    [Whereupon, at 2:55 p.m., the committee was adjourned.]
    [The prepared statement of Hon. Gerald E. Connolly and 
additional information submitted for the hearing record 
follow:]

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