Paulson Warns Of "Fragile" Economy

Congress is working on the controversial $700 billion bailout of the national economy. A lot of Americans are angry about it, but Henry Paulson, the secretary of the Treasury, says an extraordinary emergency demands action that was once unthinkable. Paulson has helped to nationalize two mortgage giants, seize the nation's largest insurance company, manage the biggest bank failure in U.S. history, and oversee the end of Wall Street as we know it.

Who is Henry Paulson? 60 Minutes shadowed him these past two weeks as he worked to convince the Congress that it should give him perhaps more power than any Treasury secretary has ever had.

"Scott, it's gotta do it and we're going to make this work, and we're going to do what it takes to work," Paulson replied.

"Shouldn't the price of failure be failure on Wall Street?" Pelley asked.

"And failure and the market discipline that goes with it is the right thing, but unfortunately we have a system that is way out of whack, where our institutions are too big to fail. We don't have the regulatory authorities and structure in place to protect the American people," the secretary said.

"You can't be proud of Wall Street," Pelley remarked.

"I'm not proud of a lot of things. You know, as I go around the world right now, representing the United States of America, it's a humbling experience," Paulson replied.

Paulson's office in the Treasury building overlooks the White House next door, but the view that has seized his attention is behind his desk: four market monitors that have signaled one emergency after another.

"What was the most difficult moment, what was the moment that put a knot in your stomach?" Pelley asked.

"Scott, I've had a lot of knots in my stomach, but I would say last Wednesday night, when the capital markets froze, when there started to be a run on money markets, banks stopped lending to each other. And, I know people in America won't understand what that means, but if money doesn't flow freely between financial institutions, then it impacts everyone in the country," Paulson explained.

"The economy had a heart attack in that moment," Pelley remarked.

"I would say this: whether it had a heart attack or not, the arteries were clogged," Paulson said.

That was Wednesday, Sept. 17, and Paulson told 60 Minutes that was the night he realized the collapse of Wall Street needed a sweeping intervention.

How much jeopardy is the economy in?

"It's a fragile situation, a very fragile situation. There were times, a couple days, last week, and a day this week, when U.S. Treasury bills were trading for well under one percent," Paulson told Pelley.

"People were buying Treasury bills knowing that they would get almost no return. But it was a safe place to stuff their money," Pelley said.

"It is, in some ways, the equivalent of sticking money in your mattress," Paulson said.

It was a classic "run on the bank" panic. At the Capitol that Wednesday night, Speaker of the House Nancy Pelosi grabbed a phone.

"I called Secretary Paulson. And I said, 'Mr. Secretary, we would like to meet with you tomorrow morning because of some of the chaos we see in the markets.' And he said back to me, 'Madam Speaker, it cannot wait until tomorrow morning. We have to come today.' And so they came in and painted a very, very, very grim picture. A couple of days later we got in writing their request, which was even more shocking," Rep. Pelosi recalled.

60 Minutes was with Paulson and his team later in the week as they wrote that first draft to send up to Congress. It ran three pages, and would put him in charge of the largest bailout in American history.

"We've got to get this up to the Hill quickly," Paulson instructed his top advisers in his office that afternoon. "We've got to keep it simple, very simple… this is about recapitalizing our banks and financial institutions."

"It was shocking in that the Treasury Department wrote the bill in a way that gave the secretary czar-like powers. And also it had a $700 billion figure, a number that had never been used. And that was pretty shocking," Pelosi told Pelley.

"I want strong oversight and transparency," Paulson explained. "Scott, the last thing in the world I wanted to do was be sitting in this seat and be going up to Congress asking for these kinds of things. It is a terrible position to be in. The only thing worse is the alternative."

The President called Congressional leaders and the two presidential candidates to the White House this past Thursday. Behind closed doors, there was a tense, angry debate over how the bailout would be structured. Republican House members revolted. Speaker Pelosi led Democrats out for a break and Paulson followed.

Asked what happened, Pelosi told Pelley, "We had our conversation."

"I'm given to understand that Secretary Paulson kneeled down on his knees and begged you to move this bill forward," Pelley said.

"No, no, no," Pelosi said.

Asked if that did not happened, Pelosi said, "Well, Secretary Paulson injected a moment of levity into the conversation but…"

"Levity on one knee?" Pelley asked.

"Well, for a thousandth of a second," Pelosi replied.

"There was a lot of tension. And frustration. And I thought we needed a moment of levity. And I wanted to break that tension. There was some shouting going on," Paulson remembered.

"He said, 'Please, please, I beg you. Don't blow this up.' And we said, 'We're not blowing up. It's the Republicans.' To which he said, 'I know. I know,'" Pelosi told Pelley.

Henry Paulson, who tells his staff to call him "Hank," is a negotiator. He was chairman of perhaps the most successful Wall Street investment bank, Goldman Sachs. He's 62 years old and spends much of his free time on environmental issues. When he left Wall Street for the Treasury, he was worth about $500 million.

"You were asked to take this job as secretary of the Treasury by the White House more than two years ago. First time they asked you what did you tell them?" Pelley asked.

"I told them I would prefer not to do this," Paulson replied.

But the White House asked again, and he said yes.

Asked if he regrets that now, Paulson said, "No, I don't. It was, you know, sometimes I look up and say, you know, 'What's happening?' But in all my life I've been trained that when there's a big problem, you run toward it."

"Has he saved the country?" Pelley asked Roger Altman, who was number two at the Treasury in the Clinton administration and now runs an investment firm.

"We don't know yet," Altman replied.

"There's a very long list of financial institutions that are not sure whether they can get through this. Very long list," Altman said.

Asked if he's talking about more than a dozen such institutions, Altman said, "Oh, I would say so around the world sure, sure."

Altman says one of the biggest problems is uncertainty about how much bad debt Wall Street has hidden away.

"You know I have heard that some of these financial institutions were hiring mathematicians and physicists to write the mathematical formulas that underlied some of these investments, and pretty soon nobody understood what was going on any more," Pelley said.

"Well yes, a level of financial exotica ensued, which boggled the mind and which almost everyone involved didn't understand," Altman replied.

Federal agencies that regulate Wall Street didn't understand, and neither did the companies that rate the quality of investments.

"You're telling me that the credit rating agencies didn't understand these investments?" Pelley asked Altman.

"We had the first instance, at least in my memory, where AAA rated instruments, the highest rating, actually defaulted while rated AAA. Now there's something wrong with that," he replied.

While people wonder what's coming next, many are asking why experts like Paulson didn't see this coming.

"A year ago, last April, you said this, and I'll quote, 'I don't see subprime mortgage market troubles imposing a serious problem. I think it's going to be largely contained.' Why did this seem to take you by surprise?" Pelley asked Secretary Paulson.

"Well, again, hindsight's 20/20. When I came to government, I said, 'You know, we are about due for some kind of market turbulence.' I didn't expect quite this. But I said to the team, as we worked, 'You never know, when there's a lot of dry tinder out there, you never know what spark is gonna light the tinder,'" he replied.

"The regulators should have been suspicious that something very strange was going on," remarked Joseph Stiglitz, a Nobel Prize winning economist who warned of danger two years ago.

Asked if this was not unforeseeable, Stiglitz told Pelley, "Oh, not only was it foreseeable, it was foreseen. Now, economists aren't very good at predicting the precise date in which the whole thing is gonna unravel. But that it was unsustainable was perfectly clear."

Stiglitz agrees a bailout is necessary, but he doesn't like Paulson's plan, which would have the American taxpayer buying bad debt now held by banks. "His proposal is to take on to American taxpayers the millions of bad mortgages, toxic mortgages that no one in Wall Street wants to take. When they announced that plan, the champagne bottle corks were popping on Wall Street. They finally found the sucker to take off these bad assets. No one in the private sector would touch these toxic mortgages," he explained.

Stiglitz says the "sucker" is the American taxpayer.

The bailout plan calls for the government to borrow up to $700 billion to buy troubled assets, and then sell them as the economy improves.

"Now some people, [including investor] Warren Buffett and others have argued to me, and said 'Hank, if you do this right the taxpayer could actually make money on that.' We're not saying that because I see this as a risk, depending on how the economy does. I believe the cost to the taxpayer will be far less than what is actually spent to buy these assets," Paulson said.

Still, Paulson understands many Americans are angry that they're being forced to bailout Wall Street recklessness.

"I would be angry too. People are frustrated. They're angry. They're angry at the excesses. They're angry at executive compensation. They're angry at a whole series of things," Paulson said.

"Let me suggest one of the reasons that people are angry," Pelley said. He read from e-mails uncovered by federal investigators. The e-mails were written by analysts for the credit rating agencies on Wall Street.

One of the e-mails said, "quote, 'It could be structured by cows and we would still rate it.' And this one, this is my personal favorite, one Wall Street analyst to another wrote, quote, 'Let's hope we are all wealthy and retired by the time this house of cards falters.' They were writing these e-mails nearly two years ago. Why are we bailing these people out?" Pelley asked.

"Scott, first of all, that is outrageous behavior. Absolutely outrageous behavior. But what we're doing, right now, Scott, is working to protect the American people. Because a breakdown of our financial system is going to hurt the American taxpayer," Paulson said.

"Once this bailout proposal, as it's called, takes effect, are we out of the woods?" Pelley asked.

"We will have turbulence and turmoil in our financial system for some time, but I believe that this is going to work and it will instill the confidence in our system and the stability we need to allow us to work through this very difficult period and to let the economy continue to function the way it needs to function," Paulson replied.

Produced by Henry Schuster and David Gelber