Henry M. Paulson

How Hank Paulson Saved You from the Financial Crisis

Henry Paulson
••• Photo: Getty Images

Henry Merritt "Hank" Paulson, Jr. was U.S. Treasury Secretary from July 10, 2006, to January 20, 2009. His response to the 2008 financial crisis prevented a global depression. Paulson's background, direct personal style, and opinions regarding the economy propelled the U.S. Department of the Treasury into a pivotal role during his tenure. 

Role as Treasury Secretary

The U.S. Treasury's $16 billion budget makes it one of the largest. It controls another $675 billion in tax credits and debt financing, including Treasury bonds, as of fiscal year 2021. It manages the Internal Revenue Service, the U.S. Mint, and the Bureau of the Public Debt.

President George W. Bush hired Paulson for his strong connections to Wall Street and China. Paulson had been the Chairman and CEO of Goldman Sachs since 1998. During that tenure, he made over 70 business-related trips to China. He was a strong advocate of corporate accountability and disciplined spending. For those reasons, he became the point man for efforts to both reduce the budget deficit and increase U.S. economic competitiveness.

Paulson became Treasury Secretary to champion several of Bush's economic goals:

  • Cut the budget deficit in half by 2009.
  • Address the long-term unfunded obligations of Social Security and Medicare.
  • Reduce regulation on foreign capital investment.
  • Keep taxes low and collect them in a more simple and fair manner

U.S.-China Strategic Economic Dialogue

Bush also hired Paulson to work with China to raise the value of its currency. At the same time, he wanted China to open its financial markets to U.S. investors.

Paulson immediately launched the U.S.- China Strategic Economic Dialogue, in which high-ranking U.S. and Chinese officials agreed to meet twice a year to further economic cooperation between the two. As a result, China began to open its financial and services sectors to U.S. investors, lower its subsidies to its exporters, and allow its currency to rise. The dialogue was continued by during the Obama administration by Paulson's successor Tim Geithner.

2008 Financial Crisis

The 2008 financial crisis diverted Paulson's attention back to the United States. In February, he helped launch the Bush economic stimulus plan. The Treasury Department sent $120 billion in tax rebate checks to spur spending and growth.

On July 13, he announced a rescue plan for Fannie Mae and Freddie Mac, which included temporary lending authority and a proposal for regulatory reform. The two agencies held or guaranteed about half of the $12 trillion of the nation's mortgages. Wall Street's fears that these loans would default caused Fannie's and Freddie's shares to tumble. This made it more difficult for the semi-private companies to raise capital themselves. 

Paulson reassured talk show listeners that the banking system was solid, even though other banks might fail like IndyMac. In the last week of July, Congress passed and President Bush signed a bill that granted the Treasury Department authority to guarantee as much as $25 billion in loans held by Fannie Mae and Freddie Mac. It also allowed $300 billion in FHA loan guarantees, $15 billion in housing tax breaks, and $3.9 billion in housing grants.

On September 15, Paulson announced that there was no deal to save beleaguered Lehman Brothers investment bank. Paulson had held a weekend negotiation with potential buyers Barclay’s and Bank of America. But the deal fell through when they saw how bad Lehman's books were.

Some critics now say that Paulson should have guaranteed Lehman's $60 billion in uncertain mortgage assets. But, at the time, there was no legal mechanism for Treasury to do so. The Fed also couldn't lend to a bank that was in such bad shape, according to Paulson in his book, "On the Brink." It was able to do so with AIG and Bear Stearns because their balance sheets were basically sound.

On September 17, investors fled money market mutual funds. The Reserve Primary Fund broke the buck and caused a money market run. Investors were concerned about spreading losses from Lehman’s bankruptcy, As a result, businesses couldn't get money to fund their day-to-day operations. If it had lasted another few weeks, shippers wouldn’t have had the cash to deliver food to grocery stores. Money market accounts had been considered one of the safest investments.

On September 23, 2008, Paulson and Federal Reserve Chair Ben Bernanke went to Congress. They requested approval of a $700 billion bank bailout to buy up mortgage-backed securities that were in danger of defaulting. By doing so, Paulson wanted to take these debts off the books of the banks, hedge funds, and pension funds that held them. 

But Congress didn't want to reward bad banking decisions. The House of Representatives voted against it on September 29, 2008. The Dow fell over 770 points and global markets plummeted.

To stem the panic, the U.S. Treasury Department agreed to insure money market funds for a year. The SEC banned short-selling financial stocks until October 2 to reduce volatility in the stock market. 

On October 3, 2008, Congress approved a similar bill. President Bush signed the Emergency Economic Stabilization Act of 2008 into law within hours. The U.S. government promised to support the banks who bought bad mortgages. Without the bill, banks were afraid to lend to each other. Financial firms were unable to sell their debt. Without the ability to raise capital, these firms were in danger of going bankrupt. That's what happened to Lehman Brothers.

Early Career

Paulson got his B.A. from Dartmouth in 1968. He was a member of Phi Beta Kappa, and an All-Ivy, All-East football player. He received an MBA from Harvard Business School in 1970. Paulson was a Staff Assistant to the Assistant Secretary of Defense from 1970 to 1972. He became Staff Assistant to President Nixon from 1972 to 1973. He joined Goldman Sachs in 1974. 

Paulson wrote about the 2008 financial crisis in "On the Brink." In 2015, he wrote "Dealing With China."

Article Sources

  1. U.S. Department of the Treasury. “Prior Secretaries.” Accessed April 11, 2021.

  2. U.S. Department of the Treasury. “Henry M. Paulson, Jr. (2006 - 2009).” Accessed April 11, 2021.

  3. U.S. Department of the Treasury. “FY 2021 Budget in Brief,” Pages 6, 150. Accessed June 13, 2021.

  4. Paulson Institute. “About the Founder.” Accessed April 11, 2021.

  5. Henry M. Paulson Jr. “Dealing With China,” Search for “70 times.” Grand Central Publishing, 2015.

  6. U.S. Department of State. “An Open Economy Is Vital to United States.” Accessed April 10, 2021.

  7. The White House, President George W. Bush. “President Bush Delivers State of the Union Address.” Accessed April 11, 2021.

  8. U.S. Department of the Treasury. “Fact Sheet Creation of the U.S.-China Strategic Economic Dialogue.” Accessed June 13, 2021.

  9. Tax Foundation. “Overview of Previous Tax Rebates During Economic Downturns.” Accessed June 13, 2021.

  10. U.S. Government Publishing Office. “The Causes and Effects of the Lehman Brothers Bankruptcy,” Page 199. Accessed April 11, 2021.

  11. Federal Housing Finance Agency. “The Appointment of FHFA as Conservator for Fannie Mae and Freddie Mac.” Accessed April 11, 2021.

  12. CBS News. “CBS News’ Face the Nation Sunday, July 20, 2008,” Page 6. Accessed April 11, 2021.

  13. ABA Journal. “Tax Law to the Rescue.” Accessed April 11, 2021.

  14. Congressional Research Service. “Housing and Economic Recovery Act of 2008,” Pages 2, 16, 19-20. Accessed April 11, 2021.

  15. The White House. “Press Briefing by Dana Perino and Secretary of the Treasury Henry Paulson.” Accessed April 11, 2021.

  16. United States Senate. “Financial Meltdown and Policy Response,” Pages 4-5. Accessed April 11, 2021.

  17. U.S. Securities and Exchange Commission. “Testimony Concerning the Lehman Brothers Examiner's Report.” Accessed April 11, 2021.

  18. Henry M. Paulson, “On the Brink,” Search for “no legal basis” and “resolving Lehman Brothers.” Grand Central Publishing, 2011.

  19. Federal Reserve Bank of New York. “Twenty-Eight Money Market Funds That Could Have Broken the Buck: New Data on Losses During the 2008 Crisis.” Accessed April 11, 2021.

  20. U.S. Government Publishing Office. “Turmoil in U.S. Credit Markets: Recent Actions Regarding Government-Sponsored Entities, Investment Banks, and Other Financial Institutions.” Accessed April 11, 2021.

  21. U.S. Congress. “H.R.3997 - Defenders of Freedom Tax Relief Act of 2007.” Accessed April 11, 2021.

  22. Congressional Research Service. “The Global Financial Crisis: Analysis and Policy Implications,” Page 2. Accessed April 11, 2021.

  23. Yahoo Finance. “Dow Jones Industrial Average (^DJI).” Accessed April 11, 2021.

  24. U.S. Department of the Treasury. “Treasury Announces Temporary Guarantee Program for Money Market Funds.” Accessed April 11, 2021.

  25. U.S. Securities and Exchange Commission. “Emergency Order Pursuant to Section 12(K)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments.” Accessed April 11, 2021.

  26. U.S. Congress. “H.R.1424 - A Bill to Provide Authority for the Federal Government to Purchase and Insure Certain Types of Troubled Assets for the Purposes of Providing Stability to and Preventing Disruption in the Economy and Financial System and Protecting Taxpayers, to Amend the Internal Revenue Code of 1986 to Provide Incentives for Energy Production and Conservation, to Extend Certain Expiring Provisions, to Provide Individual Income Tax Relief, and for Other Purposes.” Accessed April 11, 2021.

  27. National Archives. “Henry M. Paulson, Jr., Secretary of the Treasury.” Accessed April 11, 2021.

  28. Henry M. Paulson, “On the Brink.” Grand Central Publishing, 2011.

  29. Henry M. Paulson Jr. “Dealing With China.” Grand Central Publishing, 2015.