Free On the Brink by Henry M. Paulson Page A

regulated). Then in June a federal appeals court had overturned that rule.
    The PWG focused on auditing the relationship between the hedge funds and the regulated institutions that, among other services, financed them. In February 2007 we would release a report calling for greater transparency from hedge funds and recommending they follow a set of best-practice management and investing principles. A year later we proposed that the biggest funds, which posed a risk to the system, be required to have a federal charter or license.
    In preparation for the PWG meetings, Treasury staff, under the direction of Tony Ryan, assistant secretary for financial markets, studied scenarios that included the failure of a major bank, the blowup of an investment bank, and a spike in oil prices. They had originally planned to conduct tabletop exercises on the failure of a government-sponsored enterprise like Fannie Mae and the collapse of the dollar, but decided against doing so for fear that word might leak to the press, leading the public to believe we thought these scenarios imminent.
    When I accepted the job at Treasury, I told President Bush that I wanted to help manage our economic relationship with China. To be successful, we needed to involve the key policy makers of both countries, and I knew I could assist the administration, given my years of experience in China. Launched in September 2006, the Strategic Economic Dialogue (SED) brought together the most senior leaders of both countries to focus on long-term economic matters such as economic imbalances, trade, investment, finance, energy, and the environment. I led the U.S. side, while the feisty vice premier Wu Yi (followed in 2008 by the very able Wang Qishan) represented China.
    The SED’s success is one of the achievements I am most proud of, and I am delighted to see it continued by the Obama administration. By focusing on our bilateral strategic relationship, the SED kept our dealings with the Chinese on an even keel through a wave of food- and product-safety scares. And when the financial crisis erupted, the relationships we had built and strengthened with Chinese officials helped us to maintain confidence in our system. That was crucial, given China’s vast holdings of U.S. debt.
    Though I took an expansive view of my position, I took care not to run roughshod over other Cabinet secretaries’ turf. I well remember Steve Hadley, the president’s national security adviser, cautioning me that I needed to be properly deferential to Condoleezza Rice. “Her first concern,” he said, “will be that you can’t have two secretaries of State, one for economics and one for everything else.”
    When I told Condi about my ideas for the SED, I made the case that a strong economic relationship would help her in her foreign policy leadership role. I made clear to her, “There’s one secretary of State. That’s you. I just want to coordinate and work with you, and help you achieve what you want to achieve.”
    Condi and I hit it off from the start. I’d met her when she was the provost at Stanford University and I was CEO at Goldman Sachs. Former secretary of State and Treasury George Shultz, who was at Stanford’s Hoover Institution, had called me and asked if I would meet with her. She was an expert on Russia and was interested in working for Goldman. Now, I hadn’t seen the Russian financial crisis coming—none of us had—so I thought she might be a great asset. But she decided instead to join George W. Bush’s campaign.
    Condi and I had lunch my second day at Treasury. She knew the president very well, and she gave me great advice on how to relate to him, suggesting that I make sure to spend time alone with him. Condi is smarter and more articulate than I am. I’m no diplomat and I’m terrible on protocol—where to stand and that sort of thing—but I do know how to get things done. More than once she had to tell me, “Remember, you’re number two in protocol, right