Paulson Defends His Response To Financial Crisis
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WASHINGTON — Defending the government's handling of the economic crisis last year, former Treasury Secretary Henry Paulson said Wednesday that the Bush administration's responses were not perfect but "saved this nation from great peril."
"Many more Americans would be without their homes, their jobs, their businesses, their savings and their way of life," he said in written testimony prepared for a hearing Thursday.
While losses have been staggering, "that suffering would have been far more profound and disturbing" had the government not intervened, he will tell the House Oversight and Government Reform Committee.
Paulson's defense came as Congress began an independent bipartisan probe into the government's handling of the crisis. Democrat Phil Angelides and Republican Bill Thomas, both politicians from California, were appointed to lead the effort.
The commission will be given $5 million to complete its work by Dec. 15, 2010.
Angelides, who in 2006 unsuccessfully challenged Arnold Schwarzenegger to become California governor, said his goal was to lead a thorough and non-partisan inquiry.
"Our job is to do the best possible job of shining the light of day on what really happened so it's less likely to happen in the future," he said in an interview.
The White House and Congress are debating the government's next step in handing the worst economic crisis in decades, as foreclosures rise and unemployment figures are projected to top 10 percent this year.
One idea floated this week by administration officials would allow homeowners facing foreclosure to stay in their homes as renters but relinquish ownership to the banks. Democrats, who had not been briefed on the plan, said they were skeptical but would keep an open mind.
"I don't know if this is the right idea or not, but given the scope of the crisis – more than 10,000 Americans found themselves in foreclosure last month – we should consider any option that might help keep people in their homes," said Sen. Christopher Dodd, D-Conn., chairman of the Banking Committee.
Congress already approved a $700 billion bailout for financial institutions last fall under Paulson's direction, as well as a separate $787 billion stimulus package requested by President Barack Obama in February.
Some Democrats have suggested more government spending may be necessary, while Republicans are warning that the nation's $1 trillion deficit will be the single biggest hurdle to recovery.
Paulson, who orchestrated the bank bailout fund, said the unprecedented steps taken by the government in 2008 was necessary to restore confidence to the market.
"Our responses were not perfect ... But, having had the benefit of some time to reflect, and to consider views expressed by others, I am confident that our responses were substantially correct and they saved this nation from great peril," Paulson wrote.
Paulson also defended himself against allegations that he and Federal Reserve Chairman Ben Bernanke pressured Bank of America Corp. into acquiring Merrill Lynch, despite mounting financial losses at Merrill that were ultimately absorbed by Bank of America stockholders.
Bernanke has denied threatening to oust Bank of America CEO Kenneth Lewis if he abandoned the takeover.
Paulson said he told Lewis that reneging on the promise to purchase Merrill would show "a colossal lack of judgment." He then pointed out to Lewis that the Fed could remove management at the bank if it saw fit, he said.
"By referring to the Federal Reserve's supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America's regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment," Paulson said.
Paulson said he believed his remarks to Lewis were "appropriate."
Bank of America ultimately received $45 billion from the government's financial bailout program, $20 billion of which was linked to its acquisition Merrill Lynch.
Appointed by Republicans to co-chair the financial crisis commission was Thomas, the former California GOP chairman of the House Ways and Means Committee.
In addition to Thomas, Republicans picked Douglas Holtz-Eakin, an economic policy adviser to Sen. John McCain during the 2008 presidential campaign; Peter Wallison, general counsel at the Treasury Department during the Reagan administration; and Keith Hennessey, an economic policy adviser to President Bush.
Democrats chose Brooksley Born, a former financial regulator who warned against lax rules for derivatives; Bob Graham, the former Democratic senator from Florida; John Thompson, board chairman of the Symantec Corporation; Heather Murren, a retired Merrill Lynch director; and Byron Georgiou, a Las Vegas businessman.
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ANNE FLAHERTY 07/15/09 07:24 PM ET Associated Press