Free On the Brink by Henry M. Paulson

authority, and the law prohibits the secretary from interfering with the specific actions of regulators like the Office of the Comptroller of the Currency and the Office of Thrift Supervision, even though they are nominally part of the department. Tax-enforcement matters at the IRS are also off-limits. Depression-era legislation allows the president and the Treasury secretary to invoke emergency regulatory powers, but these are limited to banks in the Federal Reserve System and do not extend to institutions like the investment banks or hedge funds that play a major role in today’s financial system.
    The power of the Treasury secretary stems from the responsibilities the president delegates to him, his convening power, and his ability to persuade and influence other Cabinet members, independent regulators, foreign finance ministers, and heads of the Bretton Woods institutions like the World Bank or the International Monetary Fund.
    I came to Washington determined to make the most of my position. The first order of business was to restore credibility to Treasury by building a strong relationship with President Bush and making clear that I was his top economic adviser. It also helped to make clear to the president that although I would always speak my mind behind closed doors, there would never be any daylight between us publicly.
    I chose to define my role broadly. I held regular meetings with Tim Geithner and Federal Reserve Board chairman Ben Bernanke, knowing that in a crisis we would have to work together smoothly. I also tried to develop my relationship with Congress. I had come to Washington with no close contacts on the Hill, but the way I saw it, I now had 535 clients with whom I needed to build relationships, regardless of their party affiliations. I was fortunate to inherit an outstanding assistant secretary for legislative affairs in Kevin Fromer, who had great judgment and a knack for getting things done. I don’t like briefing memos, and Kevin could tell me what I needed to know in two minutes as we rushed from one meeting to the next on the Hill. Afterward, he didn’t shy from telling me what I could have done better. We made a good team.
    On August 2, I’d met for the first time with the President’s Working Group on Financial Markets (PWG), in the large conference room across the hall from my office. Led by the secretary of the Treasury, the PWG included the chairs of the Federal Reserve Board, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission. It had been formed after the 1987 market crash to make policy recommendations but had functioned more or less ceremonially. What little preparatory work was done was handled at a very junior staff level. The agencies were competitive and didn’t share information with one another. Meetings were brief, with no staff presentation, and held on an ad hoc basis.
    I decided to change that. I added Tim Geithner to our group of principals, reasoning that the New York Fed would be at the forefront of fighting any crisis. I also asked John Dugan to attend the meetings, because the OCC played a major role as a regulator of the largest banks. I was determined to form a cohesive group with close working relationships—it would be critical to how we performed in a crisis.
    We scheduled meetings every four to six weeks and put these on the calendar a year in advance. Before long we were clicking, sharing information and developing substantive agendas. Meetings ran three hours and were well organized, with detailed presentations, including a memorable one by the New York Fed on how various financial institutions were managing risk.
    Early on we focused on the issues of over-the-counter derivatives and leverage in the system. We homed in on hedge funds. As of February 2006, the SEC had begun requiring them to register as investment advisers, subjecting some to regulatory scrutiny for the first time (others had already volunteered to be