Hank Paulson doesn't do 'second-guessing'

WASHINGTON, D.C. (CNN) -- For a man who long championed free markets, the irony of being known as the architect of the greatest government intervention into markets in history sits just fine with former Treasury Secretary Henry Paulson.

Paulson says he'd rather be the architect of the bailouts than the Treasury secretary who presided over the second Great Depression.

"The president in his state of the union address captured the mood of the country when he said Republicans hate these, Democrats hate these, I hate them, and just let me tell you I hated them," Paulson says. "But they were much better than the alternative and you know what they worked. Because we needed working with imperfect tools and authorities ... we were able to cobble together enough to prevent the system from collapsing and avoid disaster."

Paulson recounts the moments when Citigroup was failing and he was in Santa Barbara, walking through the Reagan Library -- "that temple of free-market thinking" and was struck by the irony of the moment.

"What really hit me was that I was forever going to be associated with these bailouts and it'll be the Treasury secretary that did all these interventions. And then I said that will be the good news. The bad news will be if we can't cobble together something that works for Citigroup and it goes down. I'll be the Treasury secretary who presides over another Great Depression."

In a wide-ranging interview this week promoting his book "On the Brink," Paulson responded to criticism that he and his successor, Tim Geithner, were too close to Wall Street and more concerned about bankers than Main Street. Paulson spent 32 years at Goldman, and became CEO before President Bush asked him to become Treasury secretary in 2006. Geithner worked closely with Wall Street as the president of the New York Fed.

On the contrary, his Wall Street pedigree was a "huge help."

"I remember saying to the president 'I feel like Job. I feel like everything bad that can happen is going to happen.' And you know he did a great job of bucking me up and at that time he said to me, 'Hank, you should welcome this.' And I said 'why should I welcome this?' And he said, 'Well you've been preparing for this for your whole career. And you know you have a president that understands what's going on. And it might not always look good. But we're going to do what it takes to prevent this economy from collapsing.' " Still, he says the Americans are justifiably angry at the banks he urged more "restraint" on pay from his former Wall Street colleagues. "In our system risk takers are supposed to bear responsibility for their losses and compensation on Wall Street has always been out of whack," Paulson says, even when he was running a Wall Street firm.

Like his successor, Tim Geithner, Paulson urged Congress and Americans channel their anger at the bailouts.

"The American people are frustrated and angry but I would like to see that anger channeled so that we get the regulatory reforms we need in our Congress so that we don't have to go through something like this again."

Almost from the beginning, questions arose about the Paulson-directed bailouts. First about the intent of the Troubled Asset Relief Program, which shifted from buying troubled assets, to instead recapitalizing the banks with taxpayer injections. Then later, second-guessing on why the government helped JPMorgan Chase acquire Bear Stearns, but Lehman Brothers was left to file for bankruptcy. And then, why AIG's big-bank customers -- like Goldman Sachs -- were paid out in full for their exposure to the insurance giant, and not required to take a "haircut."

"I do not get concerned about the second guessing," Paulson says, "because this was very complicated. It's very hard for people to understand the technicalities. The American people don't like bailouts, OK they just plain don't like bailouts and I'm glad they don't like bailouts. And in terms of Lehman I think I make it pretty clear in the book we just didn't have the authorities. In Bear Stearns we had a buyer. We had JP Morgan to take care of the capital hold and to guarantee the trading book during the pendency of the shareholder vote. And at Lehman Brothers we tried very hard to prevent that failure but we, we were left defenseless because we didn't have the authorities we need." He urged policymakers to work toward regulatory reform, but said said it was "too early" to tax bailed out banks that have paid back their bailout money.

Paulson repeated his assertion that if AIG collapsed we'd have seen 25% unemployment to rival the Great Depression. He expresses frustration with politics and the way Washington works.

Looking forward, the biggest challenge now to the country is its unsustainable deficits. He says "long term it is possible" that America's triple-A credit rating could be pressured by America's structural deficits. "But I think we are a long ways from losing our AAA rating."

He says Americans should save more and spend less, and our trading partners should spend more and save less. But he says addressing these "global imbalances" starts at home.

"We have a tax system that really discourages savings and investments and punishes them and we have a tax system that really encourages consumption. We have housing policies (that) penalize renters relative to home owners and then when you look at it globally we have nations in Asia, China, Japan ... and others that don't have enough domestic consumption. They need to consume more and they need to save less. And I think the only way to deal (is) with direct, very forceful dialogue between nations."

Today, Paulson is making plans to move back to the Midwest to be closer to his young grandchildren and pursue his passion -- conservation. After the chaos and pressure of the crisis, he says he is finally sleeping again at night.

Current Treasury Secretary Tim Geithner mentioned the battlefield movie "The Hurt Locker" when talking with CNN two weeks ago about the work of diffusing economic bombs during the crisis. "This is not, I think the best metaphor for what we do, but part of it is like battlefield medicine and triage and part of it is sort of like, you know we're not risking our lives like this, but have you seen the movie 'Hurt Locker'?"

Does Paulson share his successor's movie review?

Paulson smiles. "I only watch happy movies."