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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

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

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

——— ———

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

——— ———

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

(III)

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

(1)

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 marVerDate 11-MAY-2000 12:49 May 12, 2010 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 U:\DOCS\55765.TXT KATIE PsN: KATIE
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riage 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:]

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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,

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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:]

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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.

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From a restricted Federal Reserve analysis of Bank of AmericaMerrill 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

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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:]

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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.

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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 reVerDate 11-MAY-2000 12:49 May 12, 2010 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 U:\DOCS\55765.TXT KATIE PsN: KATIE
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move 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:]

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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

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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.

30

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,

31

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.

32

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,

33

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.

34

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

35

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

36

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.

37

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.

38

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 emails, 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.

39

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

40

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.

41

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 getVerDate 11-MAY-2000 12:49 May 12, 2010 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 U:\DOCS\55765.TXT KATIE PsN: KATIE
42

ting 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?

43

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:]

44

45

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.

46

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

47

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.

48

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 mortgagebacked 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.

49

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.

50

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.

51

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

52

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

53

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.

54

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.

55

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.

56

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

57

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.

58

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.

59

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

60

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?

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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 quesVerDate 11-MAY-2000 12:49 May 12, 2010 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 U:\DOCS\55765.TXT KATIE PsN: KATIE
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tion—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.

63

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

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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.

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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 exVerDate 11-MAY-2000 12:49 May 12, 2010 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 U:\DOCS\55765.TXT KATIE PsN: KATIE
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change 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.

67

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.

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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

69

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?

70

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.

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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?

72

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?

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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

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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.’’

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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

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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.

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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.

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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——

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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?

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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.

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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

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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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Æ