Henry Paulson’s Longest Night

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In 2006, Goldman Sachs C.E.O. Henry Paulson reluctantly became Treasury secretary for an unpopular, lame-duck president. History will score his decisions, but the former Dartmouth offensive lineman definitely left everything on the field. In private conversations throughout his term, as crisis followed crisis—Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G., and so forth—Paulson gave the author the inside track, from the political lunacy and bailout plans to the sleepless nights and flat-out fear, as he battled the greatest economic disruption in 80 years.

It was February 2008, and Henry M. Paulson Jr., a prince of Wall Street turned secretary of the Treasury, was reflecting on his biggest achievement to date: a $168 billion economic-stimulus package that had passed Congress four days earlier after swift, bipartisan prog ress through both houses. In light of all the later twists and turns that the global financial system and the national economy took, this measure would come to seem quaint and fainthearted. But at the time, it was a very big deal indeed, and Paulson felt justifiably proud. The stimulus had been his baby. Paulson had persuaded George W. Bush, whose relations with both parties in Congress were by then close to toxic, to articulate only the broadest principles, and not to present a detailed plan. Paulson himself, in endless night and weekend negotiations with congressional leaders, had delivered the final package.

“Nancy Pelosi to me was a wonder in this deal, and she was available 24-7, anytime I called her on the cell phone,” Paulson told me, his hulking frame unfolding in a comfortable chair in his office at the Treasury, dominated by an oil portrait of his first pred e ces sor, Alexander Hamilton. “She was engaged, she was decisive, and she was really willing to just get involved with all of her people on a hands-on basis.” Paulson paused. “Now let me … I’ll be there in one minute … Let me just make a … I have been, you know … I finished this thing on Thursday night, flew over to Tokyo, flew back, and I’m battling a bit of a stomach problem.”

And with that Paulson ducked into the private bathroom adjoining his office, closed the big paneled door, and audibly, violently, and repeatedly threw up. He emerged a moment later as if nothing had happened, but in a few minutes he did the same thing all over again. I asked if he wouldn’t rather stop, and resume our conversation another time. “That’s O.K.,” he said. “I’m just going to go through this all. I won’t remember it. You know, I barely remember the details now.”

In the months to come, I would think of Paulson’s perseverance in the face of gastric distress as a metaphor for the way he persevered through the worst global financial crisis since the Great Depression. He never missed a day of work due to illness or indisposition in two and a half years, though he often awoke at one or two a.m., unable to go back to sleep. “I don’t mean to make light of this, because I felt awesome responsibility,” he told me on one occasion. “But as I said to someone—it may not be a great analogy, but once you’re boiling in oil, it doesn’t make much difference” what the temperature is.

Like the Dartmouth offensive lineman he once was (his nickname had been “The Hammer”), Paulson spent most of his time at Treasury slogging down the field, facing one crisis after another. History will decide whether Paulson’s policy choices were wise or ill-advised. Economists and politicians are already deeply divided. But watching him over many months, it was hard not to be impressed by the resolve with which this moderate old-line Republican—a man with a threshold faith in the wisdom of markets—became the greatest economic interventionist of his generation.
The Reluctant Nominee

Henry Paulson’s memoir, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, will be published next month, and its appearance will reopen all the old debates over his tenure. I began sitting down with Paulson on a regular basis just as the economic crisis started to unfold. In the summer of 2006 he had left Goldman Sachs to become George W. Bush’s third Treasury secretary. In an administration that had concentrated economic policymaking in the political shop of the White House and had slighted its first two Treasury chiefs, Paul O’Neill and John Snow, to the point of near irrelevance, here at last was a player of undisputed accomplishment who wouldn’t be relegated to the Cabinet’s second tier—the C.E.O. of one of Wall Street’s most powerful and respected investment banks, a Tom Wolfe “Master of the Universe” come vividly to life. Paulson had joined the Bush administration with the greatest reluctance; his previous job in government, as an office assistant to John Ehrlichman in the Nixon White House, had ended 33 years earlier in what could mildly be called disappointment. (Watergate brought Ehrlichman down before finally snaring Nixon himself.)

It was not clear what even a figure of Paulson’s achievements could do for a lame-duck president with sagging approval ratings, miserable relations with much of his own party, and Democrats poised to regain control of both houses of Congress for the first time since 1994. I approached his staff with a proposal: Could I come and talk to him every couple of months or so, on the rec ord, about whatever was on his mind or mine, with the proviso that nothing would appear in print until after he left office? His staff at first resisted, for whatever reason—Paulson would later tell me, “I hate good press and I abhor bad press”—and I suspect aides were fearful that the boss might wind up looking good at the president’s expense. But eventually he agreed to the idea, which ultimately produced more than eight hours of taped interviews over 15 months. The account that follows is based on those sessions—sometimes episodic, often impressionistic, ranging from the forced sale of Bear Stearns to the collapse of Lehman Brothers and beyond. Typically, we talked about fast-moving events in the news, and if I had ever broken the ground rules, there were times when I could have moved the markets, as when Paulson told me last fall, days before he announced the decision publicly, that he had concluded it would not be enough to use the $700 billion in federal bailout funds to buy up toxic bank assets, and that the government would have to inject capital directly into the biggest banks (as it would turn out, whether they wanted the money or not). Sometimes Paulson was in a reflective mood: on the very day that Congress passed a multi-billion-dollar plan to prop up Fannie Mae and Freddie Mac, the government-blessed mortgage-finance agencies, Paulson wanted to talk about nothing so much as his years and years of dealing with China.

In many ways, Paulson was a most unlikely tribune for the cause that became his to carry. He rose to the heights on Wall Street but once told his Dartmouth alumni magazine that he was not an inspirational leader, and that is true. He is tall and striking, with piercing blue eyes and a head that is nearly bald. When he crosses his arms, he looks like Mr. Clean. But he is not articulate, especially in public, and as he gropes to find the words he wants, his features often contort into expressions that project a kind of caged and edgy consternation, when quiet confidence may be what’s called for. He is fully aware of the effect, noting how news photographers always seemed to catch him when he was wiping his eyes, or “where I look like I was in anguish.” He is a nonsmoker, non-drinker, and devout Christian Scientist in a business whose captains typically have subscriptions to Cigar Aficionado and Wine Spectator. “Home” to him is still the relatively modest house he built for himself in Barrington, Illinois. “I would have friends visit from Goldman Sachs,” he recalled, “and they were used to looking at these palatial Goldman Sachs homes, and they could hardly believe this.” He came of age in a trade in which secrecy is honored and billion-dollar deals are sealed with handshakes—he has never kept a journal, doesn’t believe in “kiss-and-tell kinds of things”—yet found himself working in a frantic environment in which senators and congressmen can be blabbermouths who say one thing in private and do just the opposite in public. During the heated presidential primary contests of 2008—to a political addict, the most consequential and riveting campaign in a generation—he admitted that electoral politics left him cold: “I find public policy interesting, and I find the result very interesting—who gets elected. But how that happens is not.”

After his swift, unanimous confirmation, in June 2006, Paulson’s next congressional testimony did not come until February 2007—when the pace picked up markedly, driven by the press of events. He never became fully comfortable in a committee setting, in part because hearings seemed to try his patience. As he noted, “There’s a great lack of financial literacy and understanding in this nation, even among college-educated people.” But Paulson did figure out how to behave on the Hill. “There’s a way, keeping full integrity, of answering the questions you want to answer,” Paulson told me in one of our conversations, reflecting on what he had learned about committee hearings. “The thing that scared me was not a question I didn’t know the answer to. Just say, ‘I don’t know.’ The thing that scared me was some question that I knew, and answered correctly, and I’d be in deep doo-doo!” As his tenure wore on, Paulson confessed, “I amuse myself a lot by sitting there sometimes and thinking what would happen if I said, ‘Do you realize what an idiotic question that is?’ “

“If I Could Have Had a Do-Over … “

My first on-the-record session with Paulson came in November 2007, when he was roughly a year and a half into the job, and just months after the subprime-mortgage meltdown had begun to hint at the scale of the worldwide trouble to come. The headlines in The New York Times that morning had to do with tightening global credit markets. Much of our conversation revolved around his unwillingness to take the Treasury post in the first place, and around his palpable surprise at the ways of the capital. For a person whose baptism in Washington included an up-close look at the unfolding Watergate scandal, Paulson often seemed astonishingly naïve about the realities of big-time national politics.

When Paulson’s old Goldman colleague Josh Bolten, the White House chief of staff, first approached him, “the idea of being Treasury secretary in the abstract appealed to me, but my initial inclination was that it wasn’t right for me to take that step.” Paulson had sized up the issues he cared about—reforming Social Security and Medicare, overhauling the tax code, rethinking trade and investment policy—and concluded that all were essentially non-doable. He would be right about that. Paulson resisted the offer, strongly recommending someone else. (He wouldn’t say whom.) By the spring of 2006, Bolten was so eager for Paulson to sign on that he offered something almost unheard of for the Bush team: a private meeting with the president even before Paulson decided whether he wanted the job. Paulson agreed, then changed his mind, thinking, “Wait a minute—what am I smoking? You know, how could I possibly presume to take the president’s time,” only to turn him down. A month or so later he relented, after concluding that he should not shrink from a challenge and that, as a friend told him, “there are no dress rehearsals in life.” He put prescient misgivings aside: “Part of the reason I hadn’t then taken this on was I said, How many Cabinet secretaries had I seen come to Washington and leave in recent times with a better reputation than they came with?” The answer was: Not many. Paulson laughed when he remembered calling Lloyd Blankfein to tell him that he’d be taking the Treasury job after all, and that Blankfein in turn would take over as head of Goldman Sachs. “I think I surprised and delighted him,” Paulson said. He “thought it was great for the country—and for him.”

Paulson is the kind of Republican who barely exists anymore—an economic conservative, yes, but also a strong environmental advocate who has given more than $100 million to conservation causes. He laid down a few conditions for coming on as secretary in a midterm-election year, the first of which was that he would not do any campaigning—a brave stance in the hyper-politicized Bush White House: “Treasury secretary to me, just the Treasury secretary, is not a political position.”

Paulson’s confirmation took barely a month from the announcement of his nomination to his swearing-in—a snap of the fingers by Washington’s clock—but to him it felt like an eternity, “like I’d jumped into the abyss.” He knew he’d had it easy, but it was intolerable all the same: “Oh, it’s terrible. You’re staying in a hotel. You can’t meet with anybody, you know, that’s got anything to do with running the government.” He added, “I just realized what a baby I would have been if I had been subjected to what some others are subject to.… There were a couple of times during the process—where there were no serious hiccups, just people asking questions about this matter or that, you know—if I could have had a do-over, I would have gone right back to C.E.O. of Goldman Sachs.”

For Paulson, in his first months on the job, the biggest adjustment was having a boss for the first time in a dec ade, and not just any boss, but the president of the United States. “Everything depends on a good relationship with the president,” he told me. “The onus is on me to build that relationship, not him. I told him, ‘There’s just never going to be any daylight between you and me on any issue in public, just isn’t.’ ” During our conversation Paulson spoke in the next breath of his having needed to build a relationship with the White House staff and Cabinet as well, and I asked how that had gone. He smiled a bit. “I have a different management style” from what you usually find in the White House, he said. “Many of them like the fact that I’m straightforward and predictable.” But the ponderous pace of the executive branch, the need for multiple sign-offs, the “interagency process,” the ideological litmus tests applied to every last policy—this he never got used to, calling it a “ball and chain.” The saving grace for Paulson ended up being the skills he had honed as an investment banker, calling on clients in industries all across the country and the world, building relationships that would pay off later. “I’ve done that for a living for a very long time. We’re down on our knees with clients all the time.”

At Goldman, Paulson had played his share of high-stakes office politics (he got the top job in a coup against his colleague Jon Corzine, who went on to become a Democratic senator from New Jersey and is now the state’s governor), and he had dealt with high-powered C.E.O.’s and government leaders all over the planet. Members of Congress are a more slippery lot. When it came to Washington, Paulson found he had much to learn. “It’s directionally the same, but the extent of it is very different,” he would tell me. “Here’s what I mean: I found that at Goldman Sachs, to be effective as a leader, you had to build consensus when you’re managing smart people who’ve got other alternatives.… I’m in that situation today to a much greater extent than I ever was at Goldman Sachs, because the people I’m trying to bring together are truly independent. Oftentimes, they may even agree [with me] in private, but because of their constituencies or because of their parties or because of their committee chairmen or because of what the American people think, you know, won’t agree in public. So I have to get used to people saying, ‘Boy, that’s reasonable—I really think a trade agreement with Colombia is great, but I can’t be for it.’ ” Repeatedly, phone conversations with members of Congress would go as follows. Paulson would ask, What do you think we should do?, and the reply would come: “Exactly what you’re doing. If you need my vote to get it done, I’ll vote with you, but, fortunately, you don’t, and I can take a pass.”

Paulson was appalled by the two-facedness of some members of Congress. “And they say—they’re calling—‘Oh, sorry to do that,’ ‘I hate to do it,’ ‘We’re so glad you’re here,’ ‘There’s such a burden on you,’ ‘Thank you for being here. Don’t worry. We’ll get this done. We’ll work this through.’ And then, up there … my God!” It took a year to get acclimated, “because I didn’t understand the system.”

As I look back over our conversations, one man whose name comes up frequently and stands out as an exception to everything that left Paulson cold about Washington’s way of doing business is Barney Frank, the Democratic congressman from Massachusetts and chairman of the House Financial Services Committee, who was a key player in almost all the actions Paulson took as the crisis unfolded. “This is a guy that’s got the intellect, he’s got the energy, he cares, and he wants to legislate, knows how to legislate,” Paulson said. “He’s interested in getting across the finish line. Now, I just wish he were a Republican and we all shared the same policy principles, and you’d cut a wide swath!”

For a person long used to dealing with the hard, rational facts of a business deal—accustomed to assessing value, the upside and downside potential of any transaction, and then striking at precisely the right moment—Paulson had to struggle to grasp the intricacies of Washington, where appearance often is reality and even the easy things can be difficult. Should this have come as a surprise to a man of the world—someone who, at a young age, had seen the Nixon White House from the inside? The nature of the capital is no secret, and many pairs of young eyes have quickly scoped it out and conquered it. Think of the accounts left by John Hay, Lincoln’s personal secretary, or the mastery of the young Clark Clifford advising Harry Truman, or, for that matter, the precocity of George Stephanopoulos.

That said, Paulson the outsider sometimes described Washington’s essential character with memorable clarity. “I see nothing easy in Washington,” he said at one point. “I see either analytically simple things that are politically complex, or those that are politically complex and analytically complex. I mean, look at immigration reform, you know? It is, I think, analytically easy, but politically very, very complex and very difficult.”
“Foam on the Runway”

If Paulson was taken aback by the ways of Washington, he was just as surprised at how the crisis in the subprime-mortgage market became, by the fall of 2008, a global economic meltdown. He told me repeatedly that he had always known that, because the country had gone eight years without a major financial shock, “the next shock we had was going to really stress the modern financial system.” He was certainly aware, and frequently mentioned, that the subprime-mortgage problem had the potential to spread. He recalled telling President Bush that “there’s a dry forest, and we don’t know what’s going to ignite the fire or set the spark,” but suspected that housing might be it. During a conversation late in his tenure, Paulson said he believed that he and Ben Bernanke, the chairman of the Federal Reserve Board, “were ahead of a lot of people in understanding how serious” the gathering economic crisis was. But, he added, “it was always bigger and more systemic even than I had for a good while anticipated it to be, or expected it to be.” At another point, he said simply, “We’ve been late on everything.”

When I went to see Paulson in January 2008—just as he was putting together the Bush administration’s stimulus package—he was eager to talk about how he hoped to respond to a slowdown that he himself acknowledged was “pretty significant.” So eager to respond, in fact, that it was often difficult to get a question in edgewise. This turned out to be a pattern in all our conversations, and I couldn’t help thinking of those old photographs of Lyndon Johnson, leaning in and bearing down on some wavering Senate colleague, as if to persuade his listener by sheer physical force. Paulson, like Johnson, comes across far more persuasively, and more effectively, in private than in public, where his remarks tend to be bland and a bit impenetrable. Television is definitely not Paulson’s medium. He mentioned once the reaction of friends he’d run into at the peak of the crisis: “I have people say, ‘Oh, you look so good. You look relaxed, much better than you look on TV.’ And I think What do I look like on TV?” Associates have described him as an occasional table pounder in meetings (on at least one occasion, apparently, he even turned into a table thrower), and though I never glimpsed that side of him, I did sense a bluntness and a frankness that might have served him well, had the public ever been able to see it.

“It was in August, O.K., where there was real stress, where credit spreads blew out, and there was fear,” he told me, referring to the late summer of 2007, when the mortgage crisis began. “I always talk public ly about ‘extreme risk aversity,’ or something. Treasury secretaries don’t use ‘fear.’ But there was this—you know—there was fear, O.K.?”

By the winter of 2008, this extreme risk aversity—this fear—had prompted Paulson to persuade reluctant free marketeers in the Bush administration that it was time to devise some kind of government package of tax rebates and other actions aimed at stimulating the economy. On January 16, he gave me a preview of his thinking and a summary of his forecast for the future. He was clearly trying to get ahead of economic trouble, though it turned out that his forecasts were well wide of the mark.

“We’ve said, let’s proceed with—that I can tell you because this is confidential and longer-term, because right now we haven’t announced that it’s official—but, let’s proceed with a stimulus package,” Paulson explained. “This would not be one where we’re doing it because we’re in recession or because we know we’re going to go into recession. As a matter of fact, if I had to guess, I would say the odds are that we will continue to grow.” He saw the stimulus package more as an “insurance policy” against recession rather than a lifeline out of one. A month later, in February, he referred to the “likelihood” that the economy was “going to be growing.” A month after that, in March, he told me that recession was “not the most likely case,” and repeated that he believed the economy would continue to grow. He didn’t minimize the impact of home foreclosures, but insisted that they be seen in perspective: “You know, last year, there were a million and a half, maybe. This year people are estimating up to two million. So this increment of unusual foreclosures is not huge relative to the 55 million mortgage holders. There’s 2 percent in default. You wouldn’t get that from reading the newspapers, would you?” The National Bureau of Economic Research, a private group of leading economists charged with charting the country’s official economic condition, would eventually determine that the United States had entered a period of recession the previous December, before Paulson spoke any of these words.

When I asked Paulson how conditions had deteriorated to this point, his answer was succinct. “Going back for some good period of years, housing prices have appreciated at a rate that’s clearly not sustainable. And as in any situation like this that’s got global-like aspects, the investors all assume that prices will keep going up, and so they do things that don’t seem foolish at the time, but in retrospect seem utterly ridiculous. And it’s not so ridiculous to buy a home with little money down or negative amortization or whatever, if the price is going to keep going up. And then we have in our capital markets—in general, innovation precedes regulation, and that’s generally been good because we grow quicker because of it. But then regulation policy needs to catch up with innovation.” In short, Paulson said, the go-go vehicles—the credit-default swaps, the hedge funds, the mortgage-backed securities, and other devices—had made the world financial system more interconnected than ever. “This is the first time we’ve gone through a crisis where we’ve had this level of complexity and this degree of global integration of the capital markets.”

Paulson was determined to approach the problem in a bipartisan way, in contrast to the often heavy-handed and divisively partisan pattern of the Bush administration. To some degree, this was an acknowledgment of reality; both houses of Congress had been in Democratic hands for a year by this point, and Democratic cooperation was essential. Paulson had a larger goal, too—he believed a display of bipartisanship would in itself be good for the markets and for the economy. “It’s not enough to just sit there and say, ‘I’m right, the other guys are wrong,’ ” he told me at one point, explaining why it was often so difficult working with some of the more doctrinaire members of the White House staff. “It’s not that there’s anything wrong with ideology. I’ve got my ideology and my philosophy. But those that say, ‘I won’t compromise,’ to prove a point, and then ‘I’m going to point a finger afterwards and say, See, I was right … ’ ” Paulson was impatient with such people.

The stimulus proposal passed, though it would have no discernible impact. By March, Paulson had a fresh crisis on his hands: Bear Stearns, the weakest of the nation’s major investment banks, was teetering near collapse because of its deepening losses in the mortgage market. By Thursday, March 13, it became apparent that Bear would have to file for bankruptcy—with potentially devastating consequences for investor confidence—unless a willing buyer could be found. Over the weekend, together with the Federal Reserve, which approved a $30 billion credit line to ease the purchase, Paulson helped engineer the sale of Bear to J. P. Morgan Chase at a fire-sale price that wiped out 90 percent of the firm’s value in a matter of days. Paulson’s strong ally in the deal was Timothy Geithner, then the president of the Federal Reserve Bank of New York. (Paulson told me just after the sale, “My own view—he’s going to be a terrific Treasury secretary someday.”) Shortly after the Bear Stearns deal, Paulson still seemed to be in a bit of shock from the speed with which the intervention had unfolded, though he wasn’t surprised at the speed of Bear’s collapse. “When financial institutions die, it’s liquidity, O.K.? If you’re an investment- banking firm, it’s liquidity. And when the run starts, it happens, it’s over quickly.”

Paulson expressed frustration at the Treasury’s limited powers—his lack of what he always referred to as “the authorities”—to deal with such a crisis at a non-bank financial institution: “Our infrastructure—legal and regulatory—hasn’t changed in a long time.” Since the 1930s, federal deposit insurance has made bank failures no big deal for most depositors: the government insures the accounts and is empowered to take over, or sell, the bad bank to a stronger one. No such safety net exists for investment banks, or for the high-flying financial products they market and sell.

There had been a moment, Paulson said, when he worried that the government might simply have to let Bear Stearns file for bankruptcy, “put foam on the runway,” and hope for the best. “And then things came together,” he said. “Would it have been nice if J. P. Morgan had bought it without any government help? You bet. Were we fortunate that they were there with government help? You bet.”
A “Bazooka in My Pocket”

Hank Paulson does not have an in-box mind. No one could have gotten as far on Wall Street as he did by simply dealing with whatever happened to cross his desk. On major questions—such as U.S. relations with China—he has passionate views and ambitious agendas. “I can’t think of a single big issue, national-security issue, whether it be with Iran or when we’re dealing with, what do you call it, Myanmar or Burma, or North Korea, that we’re not going to be able to solve it better with China,” he said. Paulson can go on (and on) about China, and does. He made nearly 70 trips there between the time he became co-head of investment banking at Goldman and the time he assumed his job at Treasury. He won President Bush’s backing to consolidate some 40 extant bilateral economic dialogues between China and Washington into one strategic effort that he himself led, and that met with some limited success.

As noted, when he went to Washington, Paulson had hoped, forlornly, that he might have a hand in overhauling Social Security and Medicare, reforming the tax code, and addressing other issues of fundamental long-term importance. He was far from an authority on housing: “I’m not a housing expert. We don’t have housing experts at Treasury.” He was also far from an expert on financial regulation: “I knew a lot about regulation, but not nearly as much as I needed to know, and I knew very little about regulatory powers and authorities.” But these and other matters became his to deal with. “Would it be more satisfying if we were solving fundamental, long-term structural economic issues?” he asked at one point. “Of course. But it’s my job to play the hand that I’ve been dealt, and to play it as well as I can.”

The hand that Paulson was dealt, as everyone knows, was the greatest disruption in the world economy in nearly 80 years—a disruption that manifested itself above all as turmoil in the global financial markets. Paulson’s entire career had been spent in the marketplace, and, indeed, his understanding of broader economic themes was almost wholly a reflection of his understanding of markets. In coping with the cascade of crises that confronted him in 2008, Paulson took a deal-maker’s approach, moving from day to day and bailout to bailout, with the consistently stated goal of shielding the global economy from greater shock, but often—as critics and supporters alike contended—without a clear or coherent overarching philosophy or worldview. Paulson is certainly no Henry Kissinger—a man who combined an interest in grand strategy on the heights of Olympus with an equal taste for manipulative scheming down here on earth. Paulson is, above all, a pragmatist. “I tend to be a person that is very focused on the matter at hand,” he explained at one point. And again: “Focus on the immediate, you know: what you’re doing right now. And if you do a good job, things take care of themselves.” And yet again: “It’s my weakness and my strength: I have a focus. I have a one-track mind when I’m working on something. I’ve never tried to look ahead.” One step at a time. Address this problem, then the next one. If Paulson had an overarching strategy, it amounted simply to this: “First and foremost, let’s get through the night. Let’s get through this period with as little spillover into the global economy as possible.”

The rescue of Fannie Mae and Freddie Mac—which together touched more than half of the nation’s $12 trillion in mortgages, by either backing them or owning them outright—proved to be all-consuming. “Mind-numbing” was the term Paulson used more than once. Beginning in the fall of 2006, Paulson had pressed for systemic reform of Fannie and Freddie, and had run into fierce opposition from the White House, which drew the line at any compromise with Congress. But by midsummer 2008, the mortgage meltdown had left Fannie and Freddie on the verge of collapse. In July, Paulson proposed a rescue package that gave the government sweeping powers to inject capital into the two institutions through investments and loans, and extended a total credit line of some $300 billion. Paulson told lawmakers that the measure would give him a “bazooka in my pocket” whose mere existence would mean the government might never have to act. By September, that assessment turned out to be completely wrong, and Paulson fired the bazooka, staging a government takeover of both Fannie and Freddie and ousting their leadership.

September 2008 was Paulson’s mensis horribilis, the cruelest month of his tenure. It was the month in which Ben Bernanke declared, “There are no atheists in foxholes and no ideologues in financial crises.” Paulson—the staunch foe of government intervention—would intervene more massively than any Treasury secretary in modern times. Ten days after the takeover of Fannie Mae and Freddie Mac, Paulson let Lehman Brothers file for bankruptcy—the largest bankruptcy in American history—because, unlike Bear Stearns, the firm could not find a willing buyer and, Paulson said, the Treasury lacked any adequate mechanism for providing funds. Then, the very next day, with Paulson’s support, the Federal Reserve approved an $85 billion buyout of the troubled insurance giant A.I.G., the most radical intervention into private business in the Fed’s history. The distinction between the two cases has never been especially clear to the average American, much less to many experts. For Paulson, part of the difference seemed to be that A.I.G. had some assets that could be disposed of, but, more important, had sold rafts of esoteric insurance contracts to holders of complicated debt securities all over the world. If A.I.G. had failed, and been unable to pay its insurance claims, investors would have been forced to lower the valuations of the securities they held—and thus to dramatically reduce their own capital. “A meltdown there would have been just catastrophic,” Paulson said.

The meltdown at Lehman was catastrophic enough, and Paulson took enormous heat for its failure. Barclays, the British bank, had hoped to buy it, but British regulators blocked the deal, and Paulson saw no alternative. “Lehman Brothers was something that we had been focused on and worked on and worried about for a year. And we knew, and Dick Fuld [the Lehman C.E.O.] knew, and we kept telling him every way we knew how that if he announced earnings like he thought he was going to announce—right after he announced the second-quarter earnings—the company would fail. And when you’ve got an investment bank, no one had any powers to deal with that. I certainly didn’t have any powers to deal with that.”

In the months since the A.I.G. bailout, some of Paulson’s critics have suggested that he had a particular interest in protecting A.I.G., because its failure would have threatened Goldman Sachs, where he spent his entire career. In August, The New York Times reported that Paulson had sought, and received from Treasury lawyers, permission to talk with Lloyd Blankfein, his successor as Goldman’s C.E.O., and ultimately spoke with him 24 times in the six days following the A.I.G. crisis. In Paulson’s conversations with me, many casual references gave the impression of a man continually on the phone with players on Wall Street, and at one point he singled out Blankfein (along with Ben Bernanke) as someone “at a different intellect level than some of the rest of us.” It would be natural enough for Paulson to talk with a trusted former colleague about such momentous events, and Paulson’s aides have insisted that he showed Goldman no special favors. No evidence to the contrary has ever emerged, but Paulson’s harshest critics have focused their attention on Goldman’s ties to A.I.G. Paulson has taken pains to note—most recently in congressional testimony this summer—that he himself didn’t fashion the A.I.G. deal. As he told me right after the A.I.G. bailout, “Much of what has been done hasn’t been done with any power we had at Treasury. It’s been done with the Fed. I’ve been a good team player. I’ve given them advice. I’ve been willing to take the hits for things that weren’t done with my authorities.” The truth is, coordination among all the relevant parties—Ben Bernanke, Tim Geithner, financiers outside government—was intense throughout the crisis. In addition to countless phone calls, Paulson said he and Bernanke had lunch once a week. Sometimes, Paulson said, he spoke to Geith ner “every hour.” In this environment of mutual consultation, even the principals sometimes seem to have trouble delineating their roles. Once, in explaining the purchase of Bear Stearns by J. P. Morgan, Paulson began, “So anyway, the deal was, we cut the deal—,” then corrected himself. “We didn’t cut the deal. Tim cut the deal.”

By the end of that third week in September, Paulson and Bernanke were at last proposing a structural response, albeit an ad hoc one, to the ongoing crisis of liquidity and the resulting crisis of confidence. The response came in the form of a $700 billion emergency program that would give the government broad—indeed, almost unfettered—authority to intervene in the financial sector. The initial idea was to buy toxic assets of financial institutions—the bad mortgages and other investments—in order to restore confidence and get credit flowing again. The program was called the Troubled Assets Relief Program, which quickly became known as tarp.

A surreal atmosphere had descended on Washington. The Republican presidential nominee, John McCain, “suspended” his campaign and joined a contentious emergency meeting at the White House, along with Barack Obama. The process degenerated into partisan bickering and stalemate. There was such outrage among the public at the idea of a bailout for Wall Street—with calls running 60 to 1 against—that on September 29 the House Republicans succeeded in initially defeating the bill. Paulson and administration officials were shocked, though Barney Frank read the situation correctly, as Paulson recalled: “He said, ‘Well, sometimes, you know, kids have got to run away from home and be hungry before they come back.’ ” Four days later, the runaways came home, and a barely revised version of the program passed. “It was one of the most difficult things I’ve ever done, to go up there, to go through these hearings, which are all about … it’s entertainment, and it’s speaking to the people back home, and it’s sound bites. And to be doing that at the same time you’re trying to negotiate something this important was exhausting.”

By early October, when we talked about the episode, Paulson had just returned from a short weekend on the Georgia shore, catching redfish and banding a peregrine falcon. It was a rare reminder of Paulson as an outdoorsman, and of the fact that what had given some Republicans pause about Paulson when he was nominated was that he was a potential conservationist, not a potential interventionist. Paulson reflected on what he had just been through: “Republicans, in particular in the House, were very vulnerable, and so it was against their philosophy, against everything they’ve been saying about markets.” But there was another reason the Republicans were unhappy: “Because the Democrats would rub their noses in it and say, You know, we’re working closely with Paulson. And so every time Barney Frank would say, ‘I’m working closely with Paulson,’ that was like waving a red flag in front of a bull.” Around this time, Newsweek ran a cover story on Paulson with the headline king henry. It was not helpful. “After that article, I had a number of people I was dealing with, and they all say, ‘You’re not king, O.K.?’ In private, on the phone, ‘You’re not king.’ And I’m saying to myself, Thank you, Newsweek, you know? You really made my job easier.”

Paulson was castigated by many economists for the bluntness of the tools he was wielding, and by people within his own party for the sheer scale of his intervention. Looking back, he would tell me, without apology, “The lessons of history are such that the biggest mistake you can make is not doing enough.” Bush was a non-presence—the conservative columnist Peggy Noonan likened him to the cuckoo in a Swiss clock that makes regular but ritualistic appearances and is ignored. Paulson told me that this strategy had been deliberate—that having the president involved simply would have been counterproductive, and the president himself knew it. “Given the political dynamics, given where we were in the election year, given his relationship, you know, with the people up there, he said to me, ‘You will be more successful if we do it this way.’ ” The damage to Bush’s prestige—from Iraq, from Katrina, from the general perception of incompetence—diminished his influence on economic matters. Paulson put it bluntly: “The president didn’t have the stick to get some of the things we would have liked to have gotten.”

By this point in the crisis, Paulson was deeply fatigued—“It wasn’t the hours in bed. It was the hours I spent sleeping in bed!” he told me at one point when I asked him how much rest he was getting. He felt, he said, resorting again to a stock image from his repertoire, as if he’d been boiling in oil for a year. He was also increasingly frustrated. “As I look back—and I’m a great second-guesser—I would not second-guess any of these, because we did everything we’ve been able to do. But none of them have been sufficient.… We’ve been late on everything, because it just is the kind of thing—it’s just impossible to get ahead of with the authorities we have in particular. And I think I’ve been pretty consistent since I’ve been down here to say now we have a broken regulatory system, but we don’t have the authorities and powers we need.” Paulson acknowledged that the country was indeed facing the prospect of a full-blown recession.

Just five days after passage of the tarp plan, and a week before he would announce it publicly, Paulson told me he had made what would turn out to be perhaps the most controversial decision of his tenure: he decided he would have to invest government rescue money directly into equity stakes in banks.

“One thing I can say to you—because this is embargoed—is we very much are going to need to inject capital and come up with programs to do that. This has now moved to the point where $700 billion acquiring assets isn’t going to be as effective as we need it to be. So we’re going to do that”—inject capital—“and we just haven’t figured out how to get the Congress and the American people ready for it. But that will be something we’re going to need to figure out how to do.”

A year later, in many ways, the Obama administration is still figuring out how to do that very same thing.
“I Think There Will Be Big Changes”

Twice in the course of our conversations Paulson came back to the subject of how reluctant he had been to take the job, and why: “I thought it could be pretty unpleasant to be down here the last two and a half years,” he told me right before the 2008 elections. But having formed that thought, he went on, he realized that it wasn’t a rationale he could ever be proud of. “I’m going to be embarrassed if I look back and think I turned down my country.”

I went to see Paulson a few days before the inauguration of Barack Obama. Paulson was reflective, but also preoccupied with the prospect of one last bailout, for a bank he did not name. “I’m sitting here with a major bank, with an unpleasant earnings surprise coming,” he told me. It turned out to be Bank of America, which would take another $20 billion, to help cope with the effects of its merger with Merrill Lynch.

Because Paulson had worked so closely with Tim Geithner, he would be leaving the Treasury in what he considered friendly hands, despite the partisan transfer. Is “partisan transfer” even the right term for this transition? Geithner’s name came up so frequently in Paulson’s conversation that one began to think of the pair of them—and others formed by the same Wall Street culture—as representatives of some extra-partisan third force. Early in his own tenure, Paulson had approached Geithner about serving as his deputy, but Geithner felt it was better to stay at the New York Fed. “He was very helpful to me from day one. He understands Treasury. He’s an internationalist. You know, he’s a guy that comes in a package where he doesn’t have a big or imposing figure. He’s smooth, but there’s … inside, he’s tough as steel.”

Paulson’s experience during the economic crisis had left him sounding decidedly post-partisan. He told me he was “normally not a big proponent” of having partisan majorities in both houses of Congress and the White House and “the same party in control.” But, he added, “I think if there’s ever a time when we need action … I’m just hopeful that, with President-Elect Obama’s popularity and with a strong economic team, they’ll be able to get some things done.” Paulson seemed more or less optimistic as he looked into the middle distance—“We are a rich country. So we will get through this just fine, because we have the resources to devote to it”—and he hoped that the administration would do more rather than less, “because the cost in terms of the economic growth that is lost is something you will never get back.”

Paulson knew that the Obama administration was bound to face continuing criticism as it dispensed the second $350 billion in funds from the tarp program. He said he thought it was all too possible that the system would need more than that. This was in January, and Paulson knew his words would not become public for many months. “I’d never say it publicly right now,” he told me. “In my judgment, $350 billion is not enough.”

I asked Paulson what sort of new paradigm might emerge in the financial system. “There’s always a tendency to over-react—or to take what’s happening at any one point in time and then look at a trend and get an extreme result that doesn’t happen. I can think of times over the last 10 years when it was all the mega-banks that were going to inherit the world. Then it was, you know, private equity and hedge funds. So I think there will be big changes, but I think the changes we’re going to see are going to have to do much more with the shape of the regulatory system, the regulatory powers that are acquired, the financial architecture globally and domestically.”

Henry Paulson arrived in Washington hoping to find the sliver of daylight that might help his party redeem itself, and to help a president who he hoped might yet do good things. He came to believe that in the face of turmoil the biggest mistake that economic policymakers could make was to do too little. Some of his furious fellow Republicans came to believe he did too much—as do some furious critics on the left, though for different reasons. Paulson himself is relieved just to have gotten us through the night.