[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
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/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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