>> rose: welcome to the broadcast, tonight hank paulson, the former secretary of the treasury during the height of the global economic crisis takes us inside as we look at his book on the brink and see the issues that he confronted. >> i just felt my stomach knot up and what i did was i just went out of the room, took my little cell phone out of the pocket and stepped in the hallway, called wendy, got her at home and said "wendy, i believe lehman brothers is going to fail and it's going to be very bad and a lot of people are looking to me and i'm not quite sure... i don't have all the answers and i'm afraid, would you pray for me? >> rose: hank paulson for the hour, next.

if you've had a coke in the last 20 years, ( screams ) you've had a hand in giving college scholarships... and support to thousands of our nation's... most promising students. ♪ ( coca-cola 5-note mnemonic ) captioning sponsored by rose communications from our studios in new york city, this is charlie rose.

>> rose: henry paulson is here, he was u.s. treasury secretary from 2006 to 2009. it was an extraordinary period in american history. the outbreak of the global financial crisis consumed his tenure, resulting in the worst recession since the great depression. as a series of major financial institutions collapsed around him, he oversaw the recovery, including the tarp program. while some credit the program for preventing a depression, others say it looked like it was subverting american capitalism. last week, he testified before congress that the program was esseial to preventing disaster. >> today after all the actions that have been taken by the u.s. government, we still have this terrible 10% unemployment level. i believe that if the system had come down and failed, we could easily have had unemployment reaching or exceeding the 25% level we had in the great

depression. we would have lost many additional billions of dollars in american savings. home prices would be much lower than they are today. >> rose: hank paulson recently published a book about his time in office. it's called "on the brink: inside the race to stop the collapse of the global financial system." i am pleased to have him back on this program. welcome. >> charlie, good to be here. >> rose: i should say from the outside, hank paulson and i have known each other for a while and i consider him a friend and i look forward to this conversation because it is his story when he was at the center of the action as a group of people tried to do something about what they considered to be one of the great threats to the american financial system. so having said that, tell me what you take credit for. what do you thinkas the risk and what you think you accomplished.

>> well, charlie, the risk was a huge one because if the system had collapsed, it would have been catastrophic for the economy. at a time right after the lehman failure in that week, in the week before we went up to congress, in the week we went up to congress to ask for the tarp authorities, the markets had frozen up. and i think the average american doesn't know what that really means. but a metaphor i would use is it would be very similar to the highway system in the united states shutting down and so we couldn't get goods to any of the retailers, the supermarkets to stock them. the system had what was close to shutting down and i knew we were

on the brink when blue chip industrial companies were having trouble financing themselves and if the system had collapsed, mainstream... main street companieshroughout america, middle-sized companies, large companies, wouldn't have been able to raise their money to fund their basic business operations. they wouldn't have been able to finance inventories, pay suppliers, pay their employees. and as this rippled through the economy, you would have seen not just the high unemployment rates i talked about, which would just be terrible, i think easily 25%, but, again, you would have seen millions more people lose their homes as home prices dropped and i think trillions of additional losses in terms of lost savings. so this was a serious problem. >> rose: so if people say to you while you were secretary of the treasury with the president's

consent were responsible for a giant rescue of the american financial system that resulted in perhaps the largest government intervention in a long time, you would say it was necessary and justified to save the system? >> i would say absolutely. but i would start and say something first. it was objectionable to me also. it was not something i went to washington to do, not something i wanted to do. you know, the president in his state of the union the other day said republicans and democrats hate the bailout. i hated the bailout but i do not spend a lot of time agonizing over it because i understood the markets well enough to know how bad it would be if we didn't do it. >> rose: adds you know, the criticism that comes from that, not directed to you but including you is that they seemed in washington to care more about bailing out wall street than taking care of us. we had to pay to bail out wall

street. >> charlie, you're absolutely right. and i think it's quite understandable thatpeople look at it that way because, for instance, the week... when i described the situation the week where i went up on a thursday night, september 18, to ask for the tarp authorities, part of the problem i had in working with congress, i knew that the roads had... in the analogy i used, had shut down, and this the goods weren't going to be in the marketplace in a couple weeks. but many congressional leaders and members of congress didn't know because they hadn't seen the impact in their districts yet. so as sure as i was sitting there talking with them as we were looking to get the tarp authorities, i could foresee the economy dramatically turning

down a number of weeks in the future. and this couldn't have come at a worse time, because it was six weeks before an election and so in many ways the book is a story of the collision of capital markets and politics. because every politician had to have one eye on the election, which is their job, and fortunately we got it all done. but nay had to often really vote on faith, because they hadn't seen the impact yet. and that's part of the issue we have today because i can say to the american people if we hadn't done what we had done, then it would have been armageddon. but i... right now what the american people see is this: huge intervention and unemployment still at 10%, which is a terrible level.

the other thing i explain to people, which people don't understand also, is that in my judgment, most if not all th money will come back, will be an investment and clearly the money we put into the banks is going to come back with a profit. so i think... i don't think that message has gotten through. and i think it's very difficult to get my first message through that we didn't... none of us did this... i sure didn't go to washington to bail out the banks i was concerned... i didn't want to go down in history as the secretary of the treasury that had the u.s. and the global economy collapse on his watch. >> rose: looking back, now that you've had a chance to write this book and you've had a chance to think about this and you're being called again to testify because it's an ongoing effort to understand not only what happened but how to prevent it from happening again.

we'll talk about financial reforms. what do you regret? where did you look back and say "that was the wrong call, by me, geithner, bernanke"? >> charlie i've thought about this a lot and i'm going to give you a number of mistakes i think i was involved in making. but the in 20/20 hindsight, the major decisions we made, i'm totally convinced, were the right calls and they were made in the face of unprecedented challenges with really imperfect tools without the authorities we needed in the middle of a very challenging political period with an election coming. and the reason i they is they worked and they prevented the collapse. so most of what is cited as mistakes were really things we

had no control over. for instance, i would like to have seen the a.i.g. problem coming earlier. but there was no regulator that had responsibility for the whole institution and we just didn't have a clear line of sight and we didn't... we didn't have the information. i do not want to have lehman fail. i knew that would be a bad thing and we worked very hard to prevent it. but we didn't he the authorities to prevent the failure of he plan. ... lehman. so the things that bother me as mistake are all the thingssy talk about in the book. for instance many communication inadequacies. going up to congress to get the tarp. we sent up a three-page outline, okay? now... >> rose: for a huge takeover. you were on the cover of a magazine saying "king henry." >> right.

and yet our motive was this is not the complete request, this is not take it or leave it, this was to be collaborative with congress and work together to develop legislation. now i didn't want it to be as many hundreds of pages as it turned out to be but we certainly... i think we would have got off to a much better start if we'd had a press conference, even if it was late at night, we did plenty of things late at night, and explain that. there were... when we put money... we had to move very, very quickly later on to stabilize the system. we... it was two weeks t get the tarp authority from congress. i think it was really quite remarkable they moved that quick. but during the time at which we were attempting to get that authority the system continued to deteriorate, banks were

dropping like flies, we had washington mutual and wachovia in the u.s., we had six european countries jump in and have to rescue their financial institutions so we came together and in a... over a weekend developed a program to put capital into the banks, and we had nine banks agree to take capital and those banks represented over 50% of the deposits in the u.s. well, when we did that, it was clear to me that our objective was one thing only which was to stabilize the system, to prevent a collapse and do this in a way in which many banks were going to want to participate. some how or other we let the americaneople and congress develop an expectation that their lending was going to begin right away.

and that there was going to be more lending as a result of this. and we and the banks were being pummeled before they even got the money as to why they didn't see more lending. so i think, again, another communications challenge. i would like to have been able to explain to the american people... do a better job that wall street, the reason we cared so much about it was this is all about the u.s. economy and jobs and we didn't do that adequately. >> rose: so communication was a problem there. but here is what some people worry about when they look back and you can't to be asked about this. hank paulson, a good man, saw this through the prism of his own experiences. his experiences was as a c.e.o. of perhaps the most successful investment bank in history. >> charlie, i'll make a couple observations. i believe the nation was

fortunate that there were a group of people-- and particularly three of us, ben bernanke, tim geithner and i-- who had skills and backgrounds that complemented each other because i understood enough about markets to understand what was interconnectivitys that what was going to happen when the entire system collapsed. and i... i didn't think i needed to reach out to a lot of people to say if we have, you know, the banks holding a huge percentage of the financial assets in this company collapse, are we going to be in deep do do? i mean, that was intuitively obvious. and i think one of the things that i brought to the party was a decisiveness and ability to move quickly because i was

always reaching out, not just to the major banks and investment banks but industrial companies and so i was... and i was... so i knew for instance when we stepped in when we had... a good example... i'll give you an example. when... there was $3.8 trillion in money market funds in this country. 30 million americans had money in the money market funds. i had reached out to enough people to know the commercial paper market was frozen. we had such good lines of communications, as i explain in the book, that when we were hearing from not just the reserve fund who'd broken the buck but... when we were hearing from a good number of major banks that had money market

funds that they're on the edge of implodeing, i don't have to... if i'd sat there and said "well, i want to study this and look at the unintended consequences" like a number of people suggested, i knew what the consequences would be if we didn't act. so we were moving much quicker than you would like to move but as quick as we had to move because we were staying just one step ahead of this thing. >> at the worst of this crisis you were scared. >> yup. >> rose: because you... and you reach out to your wife wendy. this is in the book. >> right. >> rose: and you reach out to, in a sense, your own christian science faith. >> right. >> rose: tell me about it. >> charlie, it was a very dark day on sunday, september 14.

we had been working very hard to find a way to rescue lehman brothers, but to do so we needed a buyer to play the same role for lehman brothers that j.p. morgan had played for bear stearns, someone to... a buyer to fill the capital hole and to be able to guarantee a trading book for a shareholder vote. and we had lost, you know, the last possible buyer and i knew that lehman was going to fail. as someone who's run a financial institution, i just couldn't think of anything worse for lehman, but, more importantly, i knew what this was going to do to the financial system because it was as fragile as it was. so when i say i knew what it was going to do, i didn't know it was going to be as terrible as

it was, but i knew it was going to be bad. and... >> rose: and you also knew that alice o'darling, chancellor of the exchequer said "we're not going to..." you had signals from people saying... >> the u.k. regulator, i think for some... for their own reasons, which i'm sure were good reasons, had been unwilling to go ahead and approve the acquisition. so in any event when this happened my... and usually i would find... i would have occasional bouts of fear in the middle of the night when i'd wake up. but when i was doing things and active i didn't have time to be afraid but this i just suddenly this shall this stood out because i just felt my stomach knot up and what i did was i just went out of the room, took my little cell phone out of the pocket and stepped in the hall way and called wendy, got her at

home and said "wendy, i believe lehman brothers is going to fail and it's going to be very bad and a lot of people are looking to me and i'm not quite sure... i don't have all the answers and i'm afraid, would you pray for me?" and in terms of faith and chris chance science faith, my religion, i... you know, all through this i parade for the stamina and courage and wisdom and humility and all those things. but this was dealing with fear and she cited a passage from second timothy which had been a favorite of ours "god if not given us the spirit of fear but power and love and a sound mind." but any event, when she... >> rose: she read that to you? >> it gave me what i needed. i strapped on my armor and dealt

with what we had to deal with. now that was... i knew it was going to be bad but that began a boston which was just one thing after another for... as we tell the story in the book, for many days. >> rose: you have said on this program before and in the book you did not have the authority to rescue lehman brothers. you're saying now that you understood the consequences of lehman brothers going down, or did not? >> what i'm saying is we... none of us wanted it to go down. we all knew it was going to be bad. i didn't have to spend a lot of time saying how bad. i do not... i would say i didn't... i sure hoped it wasn't going to be as consequential as it was or as bad as it was. but i knew it was going to be bad. i think it was worse than even i expected. >> rose: if lehman brothers had not gone down, would we have looked a another situation or would there have been another lehman brothers down the road?

>> there would have been another lehman brothers. this crisis had been going on for some time. i think many banks in europe and elsewhere had been sort of covering up loss which is had been building up and we had the same weekend that lehman brothers was teetering on the edge we had a.i.g. come in, you know separate and apart from that. come in on saturday of lehman brother's weekend, we were having other meetings with the fed where they were having a liquidity crisis and we're getting ready to go. merrill lynch was on the... clearly going to be on the edge. and so this... if it hadn't been lehman, it would have... lehman was a symptom, but the fact that lehman failed widened the credit spreads for everyone. and just made the crisis that much more severe. >> rose: just look back at this for a moment, though, with me,

and get beyond the authority question, if i can. could you have done more now, with 20/20 hindsight saying "if we had pinpointed the lehman problem more, if i had made more of a public effort to failure out a way to say we've got to do something about lehman" that you could have somehow stitched together something to save lehman? >> well, i don't believe so, charlie, and here why i don't believe so. once lehman came, we had one thing after another after another move quickly. but the way this situation... and we tell the story in the book, i tell the story... >> rose: and a very interesting story. >> and so we were urging lehman to find sources of capital and they were raising capital in the public markets, urging them to find an investor, urging them to find a buyer. so we were working that. and then we knew... and here's

the important point. we knew we needed these resolution authorities. we need authorities so that any institution in non-banks and banks, any financial institution if they fail they can be wound down, they can be liquidate sod they're not too big too fail. they don't take the u.s. economy down with them. and so we knew that. i gave a couple speeches, i went up and talked to the congress. but even today with a very popular u.s. president after the crisis, more than a year has gone by and we don't have those authorities. >> rose: so you look back and say there's nothing else we could have done, we did our best and it turned out there were things that were unforeseen to us and ken lewis and bank of america went to go with merle, the british regulator dropped barclay so all of a sudden the south korea dealidn' work out so there you are. >> rose: i wouldn't say... that's true but i wouldn't say they're unforeseen to us. i was worried that maybe none of

them would work out. i was hoping they would but we were trying hard but we didn't... if we could have had the authority and got the authority, thought to get from dong buy liquid assets or get tarp earlier or get the winddown authorities, we would have. but my belief is that it is virtually impossible to get anything that's big and difficult from congress unless there's an immediate crisis. and if we'd gone up with lehman and said "there's an immediate cry" we would have precipitated it. >> rose: could it have been and should it have been a better deal, the rescue of a.i.g.? and did investment banks here-- including goldman sachs and others, or banks, and in europe-- get benefits that they should not have in retro senator-elect

>> well, charlie, i'm going to start with how strongly i fed le action that was taken to prevent the failure of a.i.g. so there's just no doubt in my mind that if a.i.g. had gone down vld have taken down the whole system and we have had armageddon. >> rose: because they're all entwined? >> they're entwined, they're huge. we're talking about tens of billions of guarantees for i.r.a.s and other retirement savings programs. now, your... the second part of your question was once the loan was made, it was a fed loan, they had the authorities, they had the technical expertise to do the restructuring and so not only did i have nothing to do with it, i knew nothing about it

until there were announcements that were made publicly. i was scurrying and working on other things. but what i've said is what i just believe from the bottom of my heart, that having worked with all of the people at the fed as closely as i have, the new york fed, i just know that what they were driven by... and they were driven by protecting the system and protecting the american people. >> rose: i'm not questioning motives. this is not about motive. this is not about integrity. this is about looking back with the benefit of 20/20 hindsight. should there have been a different deal having to do.... >> one of the things i am not going to do is second guess others when i don't have the facts and i didn't have the facts then and i don't have them all now. >> rose: but wasn't dan jester

your guy and wasn't he the surrogate in the room? >> charlie, the counterparty decisions were made in november, okay? and in november what we were working on at the treasury-- in addition to a lot of other things-- was we got a call from the fed and said "there's a need to put capital in." because initially the... it was perceived to be a liquidity problem and the fed loaned against the underlying insurance businesses. but the markets continued to deteriorate and losses mounted and so now there was a need to put capital or there would have been a downgrade. and so the fed called us and

said "there's a need for a capital investment," and i had a very outstanding gentleman, jim lambbright, he'd been chairman of the x.m. bank and he was the investment officer at tarp and he worked and his work at mortar fwan stanley, he worked with the fed and the rating agencies to get the right outcome and jim worked to structure this investment and that investment went right into the preferred stock. and the whole lane three operation was different money and that was a fed operation. >> rose: there are lots of people who've looked at the circumstances. we're now trying to look at it just with 20/20 hind sight and not from the moment of the decision making, which is a much more difficult moment, when you're there looking and not knowing and the unexpected is there and the fear is there. >> yup.

>> rose: having said all that, when the thing began to become what it was... i mean, what did you wish you knew? >> well, the... there's a lot of things i wish i knew. but the interesting thing is whether if i had been omniscient how much we would have done differently. >> rose: that's a good point, too. >> i think i would have sounded a lot smarter, but i'm not sure there was much we could have done differently. let me give you an example. again, from the book. the first major meeting i had with the president in 2006, well before the crisis, i asked for the topic to be the state of the capital markets and the credit markets in my best judgment that we were likely to have with the credit crisis. and the president said right away "what's going to cause it?" and i said "sir, i can't tell

you, it will be obvious after the fact. but before the fact, no one knows." we didn't predict the russian default. >> rose: exactly. >> so i didn't see housing coming. as the... as something... >> rose: you didn't see the housing bubble? >> i do not see the housing bubble. i... and, charlie, i mean this. that when we talked about subprime, we looked at subprime as being part of the overall housing but subprime in itself was not big relative to the u.s. economy. and in the u.s., mortgages had always been a safe investment because housing prices had gone up pretty much ever since world war ii. so it wasn't baked into any of the models so i would loved to have sounded smarter and talked about that. but i started working on fannie

and freddie right away on reform. >> rose: did you tellhe president you didn't know much about housing when he asked you become-to-become secretary of the freshly. >> no. i didn't. and i'm sure if i'd been a housing expert i still wouldn't have forecast that. but see we started working... here's an example. we started working right away on fanny and freddie reform and that was one of the first... the only major differences i'd had with the white house staff was not wanting me to start negotiating with barney frank and fashion some compromise in 2006. because i just... i looked... i was really per flexed at these big agencies, fanny and freddie and all the risks and thought it would be better to get half a loaf rather than the whole loaf. but, again, we couldn't get those authorities until they

were ready to melt down. and in twalgt. and so what i learned in washington... and then again we when all through the credit crisis we were working with the fed to develop plans to buy illiquid assets and i had mortgage securities and i have a little section in the book on that. but, again, we knew we couldn't have got the authority from congress. and so my basic message is that... and it's not to make an excuse, it's just... i think it's worth people understanding that the way washington works that if it' big and difficult and politically unattractive and particularly if it's an election year, is going to take a crisis to get the authorities. >> rose: if morgan and goldman had gone down, it would have been... >> but in the end, as you know,

they became bank holding companies and they raised private capital and that stable oozed them. >> rose: now, was it ever a risk that goldman sachs would go down? you're saying if, in fact, morgan stanley went down it would have been huge pressure on goldman sachs and they probably would have gone down. >> yeah. i'm saying that sure it was a risk. i thought during that week where investors were questioning the vishlt of the investment banking model both investment banks were in jpardy the way things had been going had been serial failures, right? and so there was more immediate pressure on morgan stanley, but we were... i needed to be in regular touch with both and all market participants, but i needed to be in touch with both of those investment banks abo what was happening there and in

the markets around them. >> rose: one of the dramatic moments in this book and in andrew ross sorkin's book, it is this moment in which we are now talking about. and part of the untold story-- and everybody saw it from their own perspective where they had shared moments-- is the effort that the secretary of the treasury made to try to help morgan stanley find more capital. yes? >> we did everything we could to be helpful. to stabilize. >> rose: what did you do? >> well, remember, morgan stanley was under extreme pressure. liquidity was disappearing very quickly. one of the... i tell about a number of really very, very difficult telephone conversations. >> rose: well, just tell us about it. >> i would say that the... but what you're specifically

alluding to was morgan stanley and to john mack's great credit he had gone out and interested a japanese bank in making an investment. mitsubishi. and that... and but he needed that deal to close, we wanted it to close. we were naturally... all through this crisis we talked with foreign governments. they had a real interest in the stability of our system and what was going on, so we talked to the chinese, we talked to the japanese. now, in the case of the morgan stanley investment with mitsubishi, the japanese government obviously wanted to know, as did the bank, that investment would be welcomed and that the u.s. government wouldn't go right after investment was made and do something that would... >> rose: so what did you say to

the japanese? >> so what we did was i talked with the japanese fiennes minister and told him it would be very much welcomed and we ended up providing a... as i tell the story in the book, a letter to the japanese government which never mentioned morgan stanley or mitsubishi by name but made it very clear that this was going to be welcome and that we weren't going to do something that was going to immediately hurt the investment. >> rose: as i said, this is high drama. >> right. >> rose: because the stakes are huge. >> there was three or four things that came through to me when i wrote the book and one of them i've already talked about, is the collision of politics and markets. the other was to see, again, how fast things were coming at us

and how many decisions we were needing to make in the same day, sometimes the same hour, decisions over the course of a weekend that you would like to take months to make. but the consequences were going to be so... so terrible if we didn't act that i had felt that everyone's got some strengths and weaknesses and one of my strengths has always been decisiveness. >> rose: right. and we... i'll tell you, we were called upon to do a lot of things very quickly and i did some things which were very objectionable to me personally. i don't like the idea of government being too powerful or telling people what to do or intervention but they weren't things i needed to agonize over.

>> rose: so now what do you say to people who think this is an example where government... the judgments made it necessary but people who worry that we established a precedent here and the government is too powerful and too interventionist and had too much... >> they're absolutely right going forward. and so what we need do is fix the system, charlie, so we never find another treasury secretary again that is sitting in the seat with a flawed, outdated, outmoded regulatory system and without the tools you need. so we need to have a system again going forward where no bank or financial institution is too big to fail so we don't to put taxpayer money in. >> rose: okay, tell me how we do that. that brings know the last lap of this. financial reform is on the docket now. it is under consideration. but what is paulson's recommendation from having been

at the center of this. what we need to do so that a future treasury secretary doesn't face the challenge you did? >> one is that we need a systemic risk regulator that looks... that has responsibility to look at the whole system. >> rose: this is one person, not the federal reserve, but some new systemic... >> well, you could have... the fed could do it. i'm not going to get hung up on who does it. >> rose: okay. but chris dodd gets hung up on. that. >> you need a regulator that has got access to all the information has after having regular access to the information has the power to intervene with any institution, regardless of type, when they see... when the regulator sees practices that need to be restrained because they can threaten to take down the whole system and the u.s. economy.

so as it now works, regulators focus on individual trees, but someone needs to be accountable for looking at the whole forest. >> rose: right. >> and this needs to be broad authority. >> rose: fair enough, so you need somebody with a systemic... who will look at the systemic challenge? >> that's right, number one. and number two, we need resolution authority so any institution, regardless of the type of financial institution, if it fails it can be liquidated and liquidated outside of bankruptcy in a way in which it does not take down the system and the american economy. >> rose: and what should be the criteria for making that decision? >> and so taxpayers never again have to put money in. now, the criteria for making it should be a high bar to make that decision. this should be an emergency authority. so the... right now this type of

authority as it relates to banks it tes a two-thirds vote by a federal reserve board, by the f.d.i.c. board, declaration by the executive branch, secretary of treasury. so i think there should be a very high bar to exercise that authority. >> rose: you now what's called vocal rules. >> right. >> rose: paul volcker wants to see certain activities of banks that were there when you were at goldman sachs and which unless they change the rules continue this that have... deposit banks can be prevented from engaging in proprietary trading and having interest in hedge funds and private equity. are you at one with mr. volcker on that? >> i'm not at one on that. >> rose: why not? >> why, as i said, my first priority by far is the kind of broad authority i just descbed to you and i don't want to slow

down the process. and when i look at what i went through-- bear stearns, lehman, a.i.g., washington mutual, wachovia, fannie mae, freddie mac-- that authority wouldn't have made any difference. it wouldn't have helped us in any of those situations. rose: but would we have had the problem if those institutions... if they there hasn't been any... >> as i said, i don't think they are dhash is to the point with those. now, what i do believe, and i do think that there's some real truth he's on, and when i... in the book i talk about the risk posed by very large, complicated institutions, the concentration, and they... it is a very large terrific the system. >> rose: too big to fail is an idea that bothers you? >> it bothers me.

so i want the resolution authority, but the other thing i do... and i say, i want regulators to focus on size, lines of business. but all business activities be risky, but i don't see that as something for politicians, okay? i see this for the regulator. >> rose: so you'll leave it to the regulator to decide whether an institution should be taking depository money and at the same time then going out and engaging in proprietary transactions? it's okay with you that a commercial bank engages in proprietary transactions? >> well, i... what i said, i've said it differently than that, charlie. what i've said is that i think the practices that i saw that led to the crisis for some very bad practices in terms of excessive risk taking, it wasn't just one line of business. it wasn't just proprietary trading. >> rose: okay, yes. >> and i see size as being something that we should be concerned about.

but i... the idea of having soundbites and going up to congress and legislating it, i would let the systemic regulator and the prudential regulator worry about that. and i would let them deal with it. if proprietary trading is a problem as it relates to certain institutions... >> rose: then they should do something. >> they should deal with it. and what i'm concerned about right now is that with all of the dialogue going back and forth that it will slow down the process and it will create uncertainty, which will hamper the recovery. we need lending. this uncertainty doesn't... >> rose: why is it they're lending? what is it that's preventing banks from making loans so that people can build up their envintorys, so they can employ people and... >> i think part of this is the demand side. >> rose: sure it is. consumer demand. >>ened i think business needs certainty in confidence and

consistency and clarity is important and uncertainty is hurting it. >> rose: this brings me to this question. i ask you this because of your familiarity with the landscape. the argument has been made by some in the obama administration that banks... and some of these institutions we've been talk talking about, they're moving back to all the kinds of things that got them in trouble that they haven't learned any lessons and that their compensation scheme, their compensation practices suggest that they don't appreciate what henry ulson did for them. in the interest of the country. so they're back to huge bonuses. they're back to all kinds of activities that are too risky and they may very well become too leveraged. >> well, charlie... >> rose: is that true or not true? >> charlie, you've dealt with a couple things here. i... from my advantage point right now... but, remember, i've

been spending time writing the book, i haven't been... but if my advantage point we've seen real progress made in a number of fronts. i think the capital liquidity... i do believe the situation... the banks are moving in the right direction there. >> rose: you won't see the kind of leveraging you saw before? you believe that? we will not see the kind of leveraging... >> i don't believe we're going to allow that. that's number one. number two, with compensation, there's two issues, okay, right? from the government perspective, from safety and soundness of an institution, we need compensation plans to be structure sod they don't promote excessive risk taking. i tell the story in the book that in november i was pressing the regulator to come out with regulatory guidance and all the regulators did come together and

did put it right in their guidelines how important it was the compensation plans not promote excessive risk taking and i think the structure of compensation is... which is from a safety and soundness standpoint is... at least from what i read it looks like it's much better. so then you get to the issue you raised, which is the amount. and here you can tell from some of the things i know where the book, i always thought the amount was out of whack even during benign times. and today, charlie, after what the government has done... and here i think the whole system, i think the government... what the government did helped not just all financial institutions but hedge funds, private equity. i think it helped the markets. and i think that the... it's

very important that we have restraint today because the american people are still suffering. now the american people are angry and they're angry because none of us... you don't like, i don't like and no one likes to ceci taxpayer assistance for private profit. whether it's any type of business, but people particularly don't like to see it with banks. >> rose: right. >> and then in our system, risk takers are supposed to stomach their own losses. so of course the american people are angry. but i want to see that anger channeled to get regulatory reform so that we'll never again have to bail out banks. >> rose: do you believe we are on course to a full recovery?

or have we suffered consequences in this experience that will make some people call a new normal? >> charlie, i'm not an economist. but i will say to you we're on course to a recovery. i am not so naive that i can believe after we've gone through what we've gone through it's going to be a quick recovery, it's going to be an easy recovery. it's going to take a while for employment to come back, again to come back for real wages to grow. and my big concern about the future and what normal is going to be comes right down to the deficit. and that to me that is by far,

by far the biggest long term issue we as a country have to confront. we don't have to be depressed about it, it is confrontable that there's no other major economy in the world that doesn't have more problems than we have and less money to deal with it. we're the richest, strongest economy in the world still. but we need to deal with the deficit before it is an immediate crisis. >> rose: it's the debt bomb that we face. >> that's right. >> rose: all right. i had a conversation with you, and i hope this is not violating your confidence. before you took this job you and i had dinner and you said to me "i don't know whether i'm going to do this." at that time you were on the fence. >> right. >> rose: you had no idea it would ever turn out the way it did. so how do you look in retrospect to the decision you made to leave business and go to be

secretary of the treasury? >> i'm grateful that i took the job. >> rose: because... >> because it was a chance do make a difference and i've told you, i believe that working with very limited tools under very difficult circumstances we were able to-- a number of us working together were able to... and congressional leaders. i mean, they did act before there was immediate crisis. we got hugeauthorities which we needed for fanny and freddie and for the tarp. we were able to get the authorities and what we did worked because the system didn't collapse. now, did i enjoy it? no. >> rose: did it take a toll? >> did it take a fol? well, i tell you, it may have. i feel fine now, i'm glad i did

it,'m glad i'm no longer doing it. i'm looking forward to spending the rest of my career on conservation and environmental issues. >> rose: henry m. paulson, jr., inside the race to stop the collapse of the gobel financial system. the title of the book is "on the brink." it is fascinating stuff because the consequences were so great and you see the push and pull of all the factors that were at force and hank paulson has done his best to tell you how he saw it. and what actions that were undertaken and why. and we're deeply grateful to have you on this program. thank you. >> charlie, thank you. >> rose: thank you for joining us. before we leave you this evening here is another oscar moment. >> wl, i my instininct w

>> well, my instinct was the more you felt movie was caught instead of staged, that that would be a good thing. and to that end, we adopted a very documentary-like approach and pitched all the performances in a very naturalistic way and we moved very quickly because i felt that momentum needed to come across on film. so i wanted the feeling that we were chasing the story as it was occurring.

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