Paulson: Acts averted disaster

Henry Paulson was telling a congressional committee on Sept. 24, 2008, a Wednesday, that the government needed to pump hundreds of billions of dollars into troubled financial institutions to prevent the economy from collapsing.

Then an aide passed Paulson a note: Sen. John McCain was suspending his presidential campaign to return to Washington, D.C., and take part in debate in Congress about the financial rescue plan.

“My blood sort of ran cold right there,” Paulson said Tuesday in Omaha.

If McCain , R-Ariz., threw the weight of the Republican Party against the plan, Paulson believed, there was no chance it would survive.

The consequences, he said, would have been a collapse of the U.S. and world financial markets, with unemployment hitting a Depression-like 25 percent and years of struggle — financial “Armageddon.”

He recounted that dramatic moment during the annual meeting of the Greater Omaha Chamber of Commerce, at which he and Warren Buffett, CEO of Berkshire Hathaway Inc., served as keynote speakers with a discussion of Paulson's new book, “On the Brink.”

About 2,400 people attended the luncheon event, held at the Qwest Center Omaha.

The two men sat in easy chairs angled toward each other, the words “Greater Omaha Chamber” on a banner between them. Buffett held a copy of Paulson's book, which chronicles the financial crisis and the actions that Paulson, then-secretary of the Treasury, and others took.

In response to questions from Buffett, Paulson said Sen. Barack Obama readily understood the potential crisis and supported the Troubled Asset Relief Plan, as it came to be called. The support came even though Obama and his fellow Democrats also opposed, in principle, what they perceived as a bailout of big banks that took risks and should suffer the consequences.

Nobody likes a bailout, Paulson said.

McCain had shown less interest in economic issues, Paulson said, and his return to Washington might have signaled that he intended to oppose the unpopular rescue proposal to boost his flagging presidential campaign.

In the book, Paulson wrote that he talked to McCain by telephone the next day.

“I was so concerned that McCain would do or say something rash that I resorted to a veiled threat: ‘I'm not a politician, but if you or anyone else does something that causes this system to collapse, it is not going to just be on me. I am going to go and say what I think to the American people,'” Paulson wrote.

McCain resisted the temptation to “play the populist card” and denounce the rescue plan, Paulson said Tuesday.

“He did his part,” Paulson said, adding that he still is grateful for McCain's support of the plan.

As a result, Congress and President George W. Bush approved the $700 billion rescue, which Paulson credited with calming the financial situation by demonstrating the government's willingness to take substantial, prompt action to prevent economic disaster.

Those attending the chamber's meeting gave Paulson and Buffett a standing ovation after the 50-minute discussion.

Among those attending were executives of KVC Behavioral HealthCare, a children's social services company.

“The human interaction was interesting,” especially Paulson's mention that his mother initially didn't approve of his joining the Bush administration but later changed her mind, said Sandra Gasca-Gonzalez, president of KVC Behavioral HealthCare.

“I just like Warren Buffett's down-to-earth demeanor,” Gasca-Gonzalez said. “It's refreshing.”

Paulson, now a fellow at Johns Hopkins University's School of Advanced International Studies, also said Congress should change the rules for financial institutions so that big companies can be put into receivership, rather than bankruptcy, in a way that preserves the system's integrity.

Congress acted in 2008 with a crisis at hand, and it needs to act now on financial regulation to prevent future problems that could develop, Paulson said. That includes stabilizing Fannie Mae and Freddie Mac, two federally backed financial institutions that guarantee billions of dollars of home mortgages, he said.

Paulson said the U.S., while it must work with China and other major powers in the emerging global economy, is still the strongest economic nation and faces fewer challenges than any other.

One of those major challenges, he said, is the federal deficit. The sooner it is addressed, the less costly it will be, Paulson said.

Watch the video of Buffett and Paulson:

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