♪ >> if there is one defining business story of year, it is the housing crisis that would be noted as the biggest financial story of 2007. >> secretary paulson, if you don't mind, he will sit in this chair and see my face in the camera lens here. >> good. >> i am pleased to announce i will nominate henry paulson to be secretary of the treasury. >> people said your greatest strength would be your potential to handle a major global financial crisis. hank: i hope i do not get an opportunity. i have never seen so many people for interviews. >> it is a film.

hank: i know it is a film. >> the biggest casualty yet of the mortgage debt. >> fire. >> the federal reserve is not told of this since the 1930's. -- pulled this since the 1930's. hank: i am a sloucher. i have to remember to set up. >> no slouching. >> this week, lehman stock plummeted 80%. >> third quarter launches of $4 billion this morning. >> many economists only we are in a recession. most americans agree. hank: i do a lot of things well but relax is not one of them. >> the stocks of freddie mac in freefall this morning. >> looking down the barrel of a gun. >> could this cost several hundred billion dollars? >> is it possible that treasury secretary plans to reassure investors? >> if we repudiate george bush's secretary of the treasury, i

believe the consequences will be severe. >> congress must act. >> the biggest bailout in american history. >> a giant blank check to the treasury department. wall street, stocks plummeting 700 points. >> is it ok if i call you hang? k? hank: it is weird if you do not. >> isn't this one did ponzi scheme? >> this would allow hank paulson to act as a king. >> my levels are ok? hank: i can hear you, i can see you. >> mr. paulson has asked that he be above the law. >> he has no idea how bad it is out there. no idea! >> if we have to have somebody at the helm, i think hank paulson is it. >> the world economy would have collapsed. >> right place, right time. no one else could have done it. >> bailout wall street, bailout main street. >> we are the last days of this country surviving.

hank: i had a happy childhood. ♪ brother two years younger, sister, five years younger, early years spent on a farm. my father was a tough taskmaster. a lot of chores. high standards. if i was shoveling maneuver in the barn, the stall had to be clean. i would do a good job on my chores, we would settle the horses and ride. he would drive us crazy with to do lists. i picked that up. i make lists. he would leave it on the bureau for us to read when we woke up. he always worried about the septic tank. we took short showers.

three minute showers, if i stated too long, i would get a glass of cold water coming in. to this day, i cannot take long showers. in high school, i lived for wilderness vacations. canoes,s in canada, camping, swimming, fishing, eating blueberry pancakes in the morning, blueberry cobbler in the evening. i was a competitive kid. asad, what my wife ridicules a mentality, i wanted to learn, and get an a. >> he was someone who strived for excellence. he had great integrity, great honesty, wasn't impressed by impairs its -- appearances. he was always a person of substance and those qualities, that is why i was attracted to him. was: i met wendy just as i

preparing to graduate from dartmouth. she was finishing up her jury or year at wellesley -- junior year at wellesley and boston. >> i had come off a time, i dated a lot in college and frankly have decided that i didn't want to take anymore, to the point that i had written a note to my parents that i was never getting married. i didn't think there were any guys that were worth it. i met hank. was a blind date. ,e went to the boston pops arthur was the conductor. >> it was not a good day. -- date. hank: i do not know what possessed me but i made a paper airplane and sailed it toward arthur. i was not venture. e> i wanted to go hom

early. hank: low and behold, she called and asked if i could bring a friend and come up or treat a. -- tree day. >> we were all calculating. i would never buy a dinner for myself. i thought it was a good way to get a free dinner in boston. we had a great time. after that, i never had a date with anyone else. hank: my first year at harvard business school, i stopped studying. i was good enough that i could -- by and most of my side time was at wellesley college with wendy and persuaded her to marry me before the second year. >> i think the fact that we both found each other and were completely smitten, made the decision easy. i got a job teaching swimming in

quantico, virginia. he got a job at the pentagon. hank: my goal was not to go to washington. i had no previous business experience. the only time i had ever won a suit was special occasions or to go to church. the only management experience i had was at summer camp in colorado. remarkably, i worked on my first bailout in those days. ♪ contractor had run into trouble, on the verge of bankruptcy and the next and administration had gone to congress to get a loan guaranty. i do not think the government should intervene. there were eight or nine prime contractors, plenty of capacity in the industry. ,aluable parts of lockheed critical to national defense could have been bought up by other contractors but this was hotly debated, even then, bailouts were unpopular.

>> in the end, the argument that 60,000 workers faced joblessness overshadow the fears of setting a precedent for bailing out big business. hank: as a result on the lockheed crisis, i was approached by white house staff and asked if i wanted to work on domestic council. i was green. i had questions. i needed mentoring. i decided to work for a man named lou. the first thing he said was -- anything you do that you do not understand, if someone asks you to do something it doesn't seem right to you, ask questions. any memo you write, asterisk oh, is it the right thing? how would it look if it was printed on the front page of the washington post? that was terrific advice. i started work in the next and white house -- in the nixon white house and then watergate

hit. it was quite a life lesson for me. i learned a matter how powerful someone was or how much you respected them, you could get into trouble if you did not think carefully about your actions. so, it was not hard for me to make a decision to leave government. ♪ sachsy of 1974, goldman had it money-losing years. they did not rank near the top in rankings of investment bankers. i picked goldman sachs because i wanted to work with a big firm, and i never wanted to live in new york. if you had asked me if i was interested in investment banking ofi was always suspicious people that came out of their

mother's womb knowing they wanted to be an investment banker. they were not making huge sums in those days. i went because i was interested with substance, the idea of multitasking, working and advising clients in industries. i poured myself into my new job. ♪ thinking back on those years at goldman, i know they were intense. hank is intense. no surprise. i knew they would be demanding. i heard tales of people leaving homes before the sun came up and coming back after the kids were in bed. that was no way we were going to raise a family as far as i was concerned. hank: she said -- if you do not start coming home and helping me with the children at night, you are going to come home some night and i am going to be gone

and the children are still going to be here. >> he took the 442 home, read them a story. i made a decision to be with the children in the earliest years. i felt it was important they have their dad involved. it was important for my sanity and for hank, to know his children. hank: we joke about the fact that i cannot read anything with expression. if you heard me read a speech, it is not a pleasant experience. milestone. i would race through the books -- mono tone. i would race through the books with monotone. wendy came in and said -- slow down and read with expression. as soon as i did, both kids cried. they said, no, read like a daddy, not like a mommy. i tell that because i do not know anyone who has been successful in a career and say, i screwed up my personal life

and i had a great career so i am happy. ♪ things i always loved his living fairly efficiently and not wastefully and not excessively. i felt that was important matter what sort of success hank had. i will tell a story. cody came back with this coat. i said, hank, what are you doing? you have a perfectly good winter coat. he said -- i like this one and they said it looks good. i said, come on, they told you it looks good? why do you need two coats? that was something that had been drummed into me and him as well for a long time. he did take it back. when he began to realize

financial success, i don't know that i consciously thought about it but certainly there was no reason to me that our way of living should change it all. -- at all. hank: i have never been a planner. i am ambitious and competitive. whatever i am doing at the time seems enormously important to me. maybe too important. [applause] my ambitions were not to run the firm. if you are interested in management of running a big organization he went to work for some industrial company. not an investment bank. i worked with many ceos over the course of my career, some good, some not so good. i worked and advised heads of state, government leaders and what i learned was, there is no perfect leader. everyone is flawed.

strengths are usually the opposite of the weakness. hank's candid, indiscreet, indecisive, he asked to quickly. he atftsngredient -- -- he acts too quickly. you need the right people in the right seats. you need to put people around you who you listen to, who can compensate for your weaknesses. if you did not, these big jobs always uncover your weaknesses. when i got to treasury, it was important to me to be able to have the right team. i had turned the job down twice. then we had, visiting the white

house, right after we had turned down the job, the second time. >> i could see he was glum. i know him pretty well. he was not talking. justody language was almost despond and. -- despond it. ent. sweetie, i hope you did not turned on the job because of me, because if it was important to you, i would have agreed to do it. i said, i now. >> i thought it was a throwaway line. i was sure he would never get asked again. that was the end of that conversation. hank: i took that as permission, then it occurred to me that maybe the reason i wasn't doing fear.taking the job, was

i had talked with wendy, with my kids. they were not fans of the bush administration. the biggest issue for wendy was getting back into that environment, which was a fishbowl environment. she knew how consumed i would be. >> i thought he would be leaving goldman sachs and we would be spending more time together. i was not in favor, to say the least, of that move. hank: i began to wonder -- would i be successful in the bush administration? i didn't know many people that have gone to washington and left with a higher reputation. as soon as it occurred to me that i was giving in to fear, i immediately reversed myself and accepted the job and told wendy. >> when he called, he had been asked again and he had accepted, i burst into tears. he was taken aback. you said, it was ok.

use of wood -- you would support me. i said, you never asked again. >> i will nominate henry paulson to be secretary of the treasury. lifetime of business experience, intimate knowledge of markets and ability to explain economic issues in clear terms. >> my own thought process, we have done everything together, i am not going to abandon him. i have no idea what my role would be but i knew i needed to be there. hank: let me say, i am grateful to my family for their understanding and for their support. thank you. neither of us had intuition about what was coming. [applause] when i came to treasury, i didn't know president bush. i had negotiated a number of conditions to my coming. it was important for me to have access to the president and to

be able to choose a staff. i had enough experience to know those conditions would mean nothing if i couldn't build a relationship of trust with the president because i couldn't, i would not succeed and it would be mindful, not his -- my fault, not his. he was the president. i had a terrific boss in george bush who during the financial crisis said, you are my wartime general and you can get to me whenever you need to, we will talk about any issue, which we did. basically, i will rely heavily on you. in july, 2006, the president was meeting with his economic team at camp david. he asked me to make a presentation on reform. i asked for permission to talk there areoncerns that

real excesses in the economy. they had been building up for decades and decades. i thought there was a high likelihood there would be a financial crisis sometime when i was in washington and when he was president. i talked about some of the problems i saw. >> april home sales at the fastest pace in history. prices all-time high. hank: over-the-counter derivative market, the lack of transparency. >> as long as mortgage rates stay in your record lows, the boom is likely to continue. hank: i talked about the size of hedge funds, my concerns in that area. i didn't talk about housing. housing prices have gone up ever since world war ii. we had not seen a nationwide decline in housing prices. >> it may be turning into a hot

summer but the real estate market is showing signs of cooling off. hank: when we finish the conversation he said, hank, what would cause the financial crisis? i said i do not know, sir. but after it happens, the 2020 hindsight will be obvious. hit withe the crisis force was in early august 2007. frozevyweights withdrawals from three investment firms exposed to subprime mortgages in the u.s. the decision woke the world to the dangers of the market. ♪ subprime business exploded from $140 billion in 2000 to $650 billion last year. >> collapse of the subprime market started with a five-year

run up of the housing market ending last year, a boom fueled by adjusted rate mortgages. >> they grew from a niche to more than one in five of all mortgage loans. hank: i had been in washington for a year. ban hadgest french calls for l redemption, liquidity crisis. this led to massive concern across europe. >> we had three funds frozen, they hold some of these subprime related bonds. we're seeing a broad global selloff. >> the nervousness at the moment revolves around the fact that we do not know how deep the problems are. there are unknown questions. uncertainty in stock market, they go one way, downward. hank: we were on high alert. >> economists say millions of homeowners are now at risk of losing their homes.

they simply will not be able to make their monthly mortgage payments by the adjustable-rate mortgages resetting. hank: an environment where the expectation is home prices will go up, discipline goes. if you are a homebuyer, you will reach. you think you have a good investment. if you are a lender, discipline starts to go. no documentation, mortgages, no down payment mortgages. >> estimated more than 2 million homeowners with subprime mortgages at risk of foreclosure. with the language he rate of 8% and rising, some predict eight out of every 10 subprime homeowners will default. hank: some of the people that got put into mortgages by unscrupulous brokers, i have a number of high school friends, grade school friends, who lost their houses, needed help. as i spent time with them and beened at what they had

conned into accepting, they did not understand what they were signing on for and that was despicable. >> fueling the frenzy of subprime mortgages, lenders castanet trying to lure in potential homeowners. they are left holding the bag on billions of dollars of loans gone bad. hank: we took this seriously. the working group convened. we focused immediately on complexity of mortgage securities. it used to be that if i wanted a mortgage on my home, which is what i did in 1974, i went to first national bank in chicago. if i had problems, i could have gone to them and if there was a solution, we could have done some modification. the model had changed. we had gone to a securitization model. a fellow named dan, is a

specialist. he does audits to track the road that a simple mortgage can take. it gets passed around over and over, more confusing than anything i have ever seen. like a hot potato. hank: mortgages were sliced and diced, packaged in securities and sold in the public market around the world. >> this tells you how we got into the mess. a simple mortgage sliced and diced, no one understands who has it and no one knows who owns their home. hank: along with innovation can complexity. complexity -- came complexity. complexity is the enemy. it is not a good thing in finance. >> the economy is going through a rough patch. stocks plummeting, the fed is slashing interest rates and the president is looking for ways to fight off recession. >> the futures market,

likelihood of recession in 2008 at 75%. >> many economists believe we are in a recession and most americans agree. hank: as we moved into 2008, the economists at the time were looking at a v shape downturn. >> is there any prospect of a recession? >> i am praying for v. hank: we had a number of institutions fail over the summer. countrywide, the biggest originator, bailed out from bank of america. citibank, merrill lynch, lehman brothers, morgan stanley had trouble with mortgage portfolios. none of us understood the extent of what we were dealing with. >> fasten your seatbelts. it is going to be a bumpy ride. mek: george bush asked whether a stimulus program made sense. the president deputized me to talk with democrats and

republicans on the hill, to find common ground. we started off with principles. timely, temporary and big enough to make a difference. >> passing effective growth package quickly, we can provide a shot in the arm to keep a fundamentally strong economy healthy. >> the payout will not solve your problems but it will not hurt. >> the economy has headed south, many of us could use the extra $1200 to pay bills or by something special. >> $600 to offset the value of your home? i think that will work out great if your home is made out of plastic and located on salt avenue. hank: we were wrong. this was a major problem. we were putting a band-aid on a major problem. we didn't see the impact from what we did even though we got the money out quickly because oil prices went up. >> record high gas prices this memorial day weekend impounding

consumers at the pump. >> it used to be a dollar. >> breaking me, real. hank: oil prices would have taken a bigger dent. 2008, the investment banking business model was under pressure. >> wall street woke up this morning only to face bad green. bear stearns, one of the most admired firms in america, now one of the most endangered. hank: they were under pressure because they were the smallest investment bank. they were very big in the mortgage markets. >> bear stearns invested heavily in mortgages many of which went sour. >> poster boy for the real estate bubble. in the last year it lost $2.4 billion in bad mortgage investment. hank: they began to fail

quickly. >> liquidity situation deteriorated. >> translation? they didn't have the money to pay off lenders, customers and partners. hank: we knew this investment bank was going to be gone, disintegrate, if there was not a solution by the end of the weekend. i figured somewhere in the united states of america, there had to be some emergency authorities to prevent a failing investment bank from going into normal bankruptcy process. the fed had no authority to guarantee liabilities. they did not have authority to inject capital. neither did treasury. we needed a buyer. >> j.p. morgan chase to the rescue as bear stearns seemed headed for bankruptcy. hank: they were willing to step in and supply the capital, guarantee the trading book, but to get the deal done, the fed against ap facilitate

mortgage pool which was liquid. >> bear stearns, wall street legend, in business for 85 years is being sold to j.p. morgan chase for two dollars a share. to put that in perspective, last year they were selling for $170. >> that to dollar share deal, it didn't make any sense to anyone. if you get under the covers, you find out the fed at some level was throwing them under the bus. hank: the original agreement was for the shareholders to get two dollars a share. in order to get the deal done, they needed to get $10 a share. >> a cloud over the company and people didn't know if the deal is going to happen or if it would collapse. they needed certainty, wrap it up and i think $10 is what it

took to get there. >> something that was quoted in the new york times -- why not set an example of bear stearns? doggy dog, we are tough -- this is the perfect time to set an example. we are a bailout nation. you are aware of the hazard but it seems like you are creating one. hank: the question i often get with bear stearns is, hank, how did you and ben bernanke and tim geithner know that they were too big to fail? didn't that create a moral hazard? during healthy markets, in my judgment, there would not be a big problem with bear stearns had failed. that would have been manageable. the markets were fragile. >> bear stearns is not a bank in the way corner bank is a bank, it is investment that lens and borrows from other wall street

giants. the fear was that it bears fell that would set off a panic, and all other banks would put the brakes on lending, which would and loans toans, businesses that hire people and that would be apocalyptic for the economy. hank: the moral hazard argument goes something like this -- if market participants presume that the government is almost went to step in to save a failing institution, then those participants will not subject that institution to the rigorous analysis and scrutiny that is needed. the fact that i had argued with shareholders of bear stearns should not get more than two dollars a share and make that argument was less about moral hazard at the time and more about what was right. if the united states of america, through the fed, was making a

loan to prevent a bank from failing, why should shareholders get much money? ben and tim argued that the greater good was preventing the failure. initiallyo terms but abhorrent. o i remember early on at goldman sachs, someone said, hank is not assimilatesbut he information from others. i took that as a compliment. with strong views and a proclivity to want to make decisions prematurely, i never would have got far in life or at goldman sachs, if i were not willing to change my views and if i didn't listen to people and surround myself with strong professionals.

with terrific partners, ben bernanke, tim geithner and me. we had extraordinary levels of mutual trust. we had different backgrounds, experience sets, different skill sets. ben is a brilliant economist and he had studied the great depression. tim had spent a lot of time in government. really knew how to get things done and help the, advise me about how to be effective early on. >> today's announcement from bear stearns and the new york fed coming as a shock. >> do know what happened? the rule became the reality. who knows where else can go? that is the worry. lehman, merrill, citigroup, all down. hank: the market turned to

lehman brothers. i was doing everything i could to encourage dick fold, the ceo of lehman brothers, to raise capital, to attract investors and or to sell the company. one of the first things that ben bernanke and i did was went to see marty frank. we said, we got lucky because j.p. morgan stepped up and bought bear. we needed emergency resolution authorities to keep failing investment banks out of bankruptcy just like the government had with commercial banks. he said, we will not get congress to act unless you are prepared to shout, if we do not get these authorities, you will have an investment bank like lehman brothers fail and the consequences will be terrible! that was something we were not prepared to do. as soon as we started saying that, they would have gone down immediately. withme out of that weekend

big concerns. we do not think bear stearns would be the end of the problem. >> fannie mae and freddie mac in freefall as both were down more than 40%. wall street worry. >> losing so much money on the mortgages they have written, that stocks will become worthless. hank: fannie mae was set up in 1938 right after the great depression. freddie mac in 1970. these were covered government-sponsored entities. they had a noble objective. promoting homeownership in america. >> when you buy a house, you take out a loan from a bank, the bank will then sell that loan to fannie or freddie who repackage the mortgages and sell them to investors. they guarantee mortgages will be repaid. it is the grease that keeps the

market moving. forum, not owned by the government, no explicit government guarantee, the market assumed that the united states government was behind them. there was implicit guarantee, and then the government said, it was not. the second flaw, they had weak regulation. congress, and the lack thereof of wisdom had limited the power of the regulator. the regulator did not have broad powers that a banking regulator had to make judgments. atop that all, these were mega-institutions, nine times larger than lehman brothers. the elephant was too big for the tent. >> making mortgage money available to people who want to buy homes.

they hold or guarantee or nearly half of the $12 billion of mortgages in america. hank: market participants are saying, maybe there is a problem. there has to be losses. housing prices are falling so quickly and the only business is guaranteeing mortgages and holding mortgages. >> together the companies have lost $11 billion in nine months. they still have more than $80 billion in the bank. investors are not sure that will be enough to cover losses. >> they have become the backbone of the mortgage industry. hank: their independent regulator had argued they had plenty of capital that we watched them in the market every week selling up to $20 billion of debt securities. they had not been able to sell securities. it would spook investors. you would get massive selloff and a price declines and losses

by all those holding securities. , ithey totally collapsed would be armageddon. >> without fannie mae or freddie mac the modern american economy cannot function. they are as fundamental as the federal reserve. i stood on the steps of treasury on a sunday afternoon and announced i was going to congress to seek emergency fanniety to deal with and freddie. >> i hear you when you say it is your intention or desire and hope not to use the very power you are asking for, it is counterintuitive to say -- give us a blank check or blank

authority as the best way to ensure taxpayers aren't -- hank: if you're not used to thinking about these issues it seems counterintuitive. if you are, it is very intuitive. if you have a squirt gun in your pocket, you may have to take it out. if you have a bazooka and people know you have it, you are not likely to take it out. by having something unspecified, it will increase confidence and by increasing confidence it will greatly reduce likelihood it will ever be used. two things happened that caused me to use the bazooka. the first was, the team we put in place on the ground at any and freddie -- at fannie and

freddie discovered there was capital shortfall. that was concerning. secondly. the market was raising more concerns. number of research analysts were questioning whether these institutions were viable. >> can they survive if the housing market gets no worse than it is today? >> i don't believe so. >> if they were to fail, analysts say mortgage rates would soar, lending would halt and borrowers would pay higher rates, sinking the economy into a deeper downturn. hank: we needed a plan where we took over the company's on sunday so we could open up monday under new management. one of the ceos called me and said what is going on? i said i cannot tell you. i couldn't even give them a clue. i knew what they would be compelled to do if i talked.

there is no way the ceos or boards could agree with anything that would undermine shareholders. they had a fiduciary duty to protect shareholders'interests. there was no choice but to move quickly to put them into conservatorship, where the government backstop debt securities. when i briefed the president on this, he was fascinated by he had a hard time believing we would keep this a secret. i said -- the first thing these guys need to hear is their heads hitting the floor. >> bombshell in the home mortgage crisis. there are reports the federal government is stepping in to take over. >> this man loves the bailout. >> i'm happy. the only move you can make. >> the government puts the companies into conservatorship, replacing ceos and standing behind all loans and debts. >> could this cost several

hundred billion dollars? >> these companies are so big and so interwoven into the financial markets and our system, we had no choice. hank: the president's first question was -- hank, what ideas are you going to put forward to restructure? i explained congress was going to be so unhappy and disappointed with me, that i've been forced to take the bazooka out of my pocket and put the gun on the credit behind this, that i didn't think at the same time i should be talking about how we restructure. what i should do is say, this is a timeout. he agreed. even though i didn't know the particulars, i knew he was having to muster every ounce of scale and ability, every day he came to the door, i could read

whether i could speak to him or not. often, i could see the wheels were going. things were not going well, i knew that. one of the diversions that i frequently offered to hank during the crisis was, a bike ride in rock creek park. we were coming back and he was behind me, i knew he was thinking but then i heard a crash. i saw him sprawled on the pavement. he literally had biked right into the bar that closes off the road. i yelled at him, are you ok? he yells when he is hurt. i know he is fine as long as he is yelling. he is tough. he picked himself up and we went on. then it hit me how preoccupied he was. he was not thinking about ing, the birds i was

pointing out or the families i was motioning to, he was thinking about other things. hank: a few days after stabilizing fannie and freddie, it became clear lehman was going to be under pressure from investors. >> wall street bracing for another possible victim of the housing and credit crisis. >> third-quarter losses of nearly $4 billion this morning. >> wall street punished the stock with a 75% decline this week alone. >> a whole lot of fear in the market now. fear that the next shoe to drop will be the collapse of another financial giant. hank: most market participants were watching nervously, expecting uncle ben and hank would figure out how to pull a rabbit out of the hat. >> this could mean 20,000 job loss. >> the ceo is said to be frantically searching for a white knight to come to the

rescue. hank: something dramatic was needed in order to focus attention on the seriousness of the problem. ben bernanke, tim geithner and i, we decided to bring the heads of the major wall street firms into the new york fed on a friday to let them know that the fed had no authority to capital and put in that the government was not going to be there because a loan to a disintegrating investment bank would not be successful. we needed to rely on the private sector. we wanted them to come up with some solutions, working with us. is arrangingment the sale of lehman but no taxpayer money will be used. hank: we will need a buyer. i thought we would need two. i had a strong view that whether

they failed or whether they were bought, the market was going to turn immediately to merrill lynch. >> lehman is desperate to sell. bank of america, top contender. other banks interested, reportedly include barclays w k it is not 100% certain they will be able to close. hank: that entire weekend was spent going from one meeting to the other, while he talked with a, hoping to get a deal. in the middle of the weekend, aig showed up. we told them, no, you find a private solution. we have our work cut out for us. we were working hard on barclays, lehman brothers

transaction. thought, we are going to be successful. morning, whennday we came in expecting a deal, we got negative signs from barclays that they were having problems. that was just a terrible moment for me. everyone is waiting downstairs for tim and me to come down and report to them and i wasn't quite sure what to say. moment wheret one i was gripped with fear. my stomach tightened. it turned into a knot. i was in a small office that they had given me with a number of people. i didn't have privacy so i took myself out, stepped out and

called wendy. wendy: i could hear the defeat in his voice. that he had really come, he just didn't see a way out. hank: i said, wendy, i feel the burden of the world is on me. that i failed. that it is going to be bad. that i do not know what to do and i do not know what to say. please pray for me. she went immediately to one of our favorite bible verses, second timothy. wendy: god has not given the spirit of fear, but of love into the sound mind. that is what came to me. apparently it triggered something in him. he said, thanks, hung up the phone and went back to work. hank: immediately i felt a sense of peace and renewed confidence. i thanked her and i went back

into the small office and went down and talked to the bankers. >> stunning reshaping of wall street as the financial landscape has changed drastically in the past 24 hours. the big news at lehman brothers, unable to be rescued, has filed to bankruptcy. merrill bought for $50 billion. >> the big news is what one paper is dubbing the wall of fear. wall street is where the eyes of the world are focused. fortunately, the ceo of merrill lynch saw the writing on the wall. bofant and did a deal with . " brokered over the weekend, the funding of independent brokers was going to come under pressure." hank: i think we caught a small aeak in the fact that b fof

bought merrill, as opposed to lehman brothers. merrill would have failed and it would have been a much bigger bankruptcy and even done more damage to the economy. >> can you imagine what it would be like for hank paulson to see lehman brothers drowning and throw back his arm and say, cannot help you? unusual and so many frankly amazing things during the crisis, i think there is a , that thereelief was nothing the united states of america could have done to prevent it, a lehman bankruptcy. people generally believe ben bernanke, tim geithner and i told the truth and those that suggest there is something we could do, have difficulty suggesting what we could of done

that would have worked. remember looking out the window and looking at the people on the street walking and going to work, all of those, some of which worked at lehman, some at other banks. then there is the secondary relationships, those people's families, their life was about to change, in profound ways. that i haven'tme talked with my brother. my brother, my best friend, a senior vice president, income salesman in the chicago office at lehman. i felt i needed to call him. he immediately started asking about me. he was worried. because he knows that i take

things like this hard. i didn't havem, time to go into explanations, we had done everything we could to save lehman, he said i know. he was not asking about what was happening to his stock,'s retirement. he was focused on the. -- on me. that was quite emotional for me but i didn't have a long time to be emotional because there was one call after another and i was quickly back in the fray. >> a day after the failure of lehman brothers and the fire sale of merrill lynch, attention turned to aig, the latest giant in distress. they do business with every major institution, in 130 companies. >> aig selling instruments called credit default swaps. in the simplest terms, they sold

big banks and brokerage firms insurance against their investments dropping in value. now those deals are being blamed for aig's collapse. >> the fed is considering offering some form of financial help to aig, which otherwise would be forced to declare bankruptcy as early as tomorrow. >> why would the loans at lehman not worth? lehman as anid, investment bank had a big liquidity problem and a capital problem. that was the market perception. run doesn't a bank work. we learned that in bear stearns. it took a buyer. in the case of aig, a fed loan, we knew it would work. the perception by the market was

-- this is a company that is adequately capitalized, it had strong insurance companies that have independent credit ratings, different from holding company, the fed good loan against insurance companies as collateral and solve the liquidity problem at the holding company. >> by any measure we are living in extraordinary times. in the most far-reaching intervention into the private sector, the government takeover of aig, the first time ever the government will be in control of a private insurer. >> agreeing to lend them $85 billion at a steep interest-rate. more than 11%. the government gets a nearly 80% stake in aig. company management is replaced. the government will have the tell our over major decisions -- veto power over major decisions and the right to inspect the books at any time. >> they give them time to buy

assets, now this will not have to be sold off at bargain basement prices. >> the common perception is the collapse of lehman brothers accelerated the financial crisis and there was a domino effect. hank: the domino theory is not accurate. it isst way to describe the popcorn theory. popper and itant had been heeding the kernels for years as the crisis went on. lehman might have been the first of pop but even with them, we knew the same weekend they were going down we had merrill lynch and aig. we had three going down. they were not going down because of lehman, they had their own bad loans. >> another anxiety attack on wall street, even after aig bailout, the dow tumbling 450 points. hank: that week was like no

other i have ever had. dozens and dozens of calls, teams of people coming in to talk to me about one problem, as they streamed out, the next one. we were juggling difficult decisions, each of which would time,emanded 100% of my than at any other time. also, that week, we had a huge problem we needed to deal with to prevent a run on the money market funds. >> between 11:00 and 11:30 a.m., the money markets were hit by a run. >> of fund announced for the first time, they had broken the buck. they could not guarantee that every dollar you put into that money market account would be retrievable on your request. hank: the average american

thought it was good, equivalent of a savings deposit. the fact was -- those funds were short-term commercial paper funding, a big part of corporate america to fund basic operations. plain as day, i saw this moving so quickly from wall street to main street. if big companies cannot fund short-term operations, smaller companies who are suppliers have to cut back and you get this vicious cycle as this thing ripples through middle america, both policy teams and legal teams in 24 hours came up with a plan to guarantee the money market funds. that stopped the run. >> if they had not done that,

their estimation was that by $5.5that afternoon, trillion would have been drawn out of the money market system of the united states, would have andapsed the entire economy within 24 hours, the world economy would have collapsed. ♪ hank: we had been working all week on how to go to congress and request the emergency authorities we needed. at the heart of our request was the ability to buy liquid assets, in size, from financial institutions. we wanted fraud authorities. i talked in terms of hundreds of

billions of dollars because we were looking and saying -- what is the most we can get? it was thursday evening, ben bernanke and i went up to talk with congressional leaders. the challenge we had was that so far, many of them had not seen the financial crisis. it hadn't rippled through to their constituents, that the small businesses and their communities were doing ok. we painted a picture of a financial system which was frozen, banks were not lending to each other, credit was not flowing normally, 25% employment, which is what we had after the great depression. there would be a disaster if we did not act immediately. >> treasury secretary henry paulson went on national television to sell the administration's plan, a staggering cost, $700 billion.

>>$700 billion. hank: it is far better than the alternative. >> the plan included the government buying back market check related debt, allowing banks to want against the money money. >> senators told the administration's top moneymen their $700 billion bailout will not fly without significant changes. >> we cannot simply assist wall street. we have to assist hundreds of thousands of phone numbers -- homeowners facing foreclosure. withpe of a quick deal stopped by gop conservatives. >> there is those who said he must act now. the last time i said that i was on a used car lot. up andcrats showed scheduled bipartisan talks but said they forgot to invite the republicans. >> it is just a miscommunication. hank: