Former U.S. Treasury Secretary Henry Paulson was in the hot seat most of Thursday as lawmakers peppered him with pointed questions about his role in convincing Bank of America Corp.'s (NYSE:BAC) CEO Ken Lewis to buy embattled Merrill Lynch & Co.
Paulson calmly defended his actions before the House Oversight and Government Reform Committee in what was a charged and hostile atmosphere. He said he had done nothing inappropriate in warning Lewis that reneging on his promise to buy the embattled firm would be a "colossal lack of judgment" that authorities might have to react to it.
Paulson said he told Lewis last year that if he went back on his commitment to purchase Merrill, the Federal Reserve as its regulator would be justified in removing management at the bank.
Paulson said:
"By referring to the Federal Reserve's supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America's regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment."
Paulson also defended his handling of the Troubled Asset Relief Program.
Some lawmakers accused Paulson of misleading Congress during its consideration of the $700 billion TARP. The program was designed to purchase toxic assets from financial institutions, but Paulson decided shortly after it was passed in October to change direction and use a large portion of the money to inject money directly into struggling banks.
He told the panel that had the government not intervened and promised the cash cushion to banks, the economy would be much worse.
Paulson also said he didn't want to frighten the public further and exacerbate the crisis.
"Well, now take the opportunity to scare people," Rep. Paul Kanjorski told Paulson. "Tell them the truth. I mean, we've got 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."
Paulson said there would have been businesses unable to make payroll, the unemployment numbers would have skyrocketed and more people would have lost their homes.
"I think everyone here understands that government has been forced to do things," Paulson said. "I think forced to do things not only because of an unprecedented crisis but forced to do things because we didn't have the tools we needed."
The questioning became even more contentious in an exchange with Rep. Marcy Kaptur, D-Ohio, when she claimed Paulson knew all along that there were problems in the financial system and orchestrated the TARP to be the biggest public bailout of the private sector in history.
"It looks like some very rich people are now profiting," Rep. Kaptur said, referring to the record-setting quarterly profits at Goldman Sachs Group Inc. (NYSE:GS). She then went on to compare the terms of the government's TARP investment in Goldman with the terms that billionaire investor Warren Buffett received on his preferred stock investment in Goldman. Kaptur wanted to know why Buffett got a better deal than taxpayers who invested twice as much in the bank.
Paulson's answer: At the time, Buffett's type of investment capital wasn't available to the banks. "You do not stop a financial panic by offering capital to banks at the only terms available in the middle of a crisis," he said. - Donna Block
Henry M. Paulson Jr.'s Prepared Testimony
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