Hank to the Rescue

Hank to the Rescue

What an incredible time on Wall Street. I’m no expert on the markets, so please don’t ask me how and when the tumult will end. But I’ve spent some time lately with treasury secretary Hank Paulson, and some of his key people, so I can offer some insight into how the former Goldman Sachs CEO is approaching the toughest challenge of his career. The cover story in the current issue of FORTUNE is my profile of Paulson, called The Power of Paulson.

You will hear debate about whether Paulson has made the right moves this year—brokering the sale of Bear Stearns, taking over Fannie Mae and Freddie Mac, refusing to bailout Lehman Brothers. It all seems ad hoc and in a sense it is—there is no formula for dealing with a crisis like this one. But I came away from my time with Paulson convinced of two things. First, he’s about as apolitical a figure as you will find in Washington, and he is committed above all to doing what he thinks is right for the country. Second, he has the right personal qualities for the task that confronts him—brainpower, energy, integrity and a deep knowledge of the capital markets. You can’t ask for more than that.

I did two long interviews with Paulson, watched him testify before Congress, saw him speak a couple of times and read a bunch of his other speeches. No question he has a big ego—most CEOS (or former CEOs) with a net worth of $500 million or more do. Yet he also questions himself (in a good way), listens very well and worries (again, in a good way) about whether he is doing the right thing. This mix of ego and self-doubt seems to work very well for him.

Paulson has great relationships on Capitol Hill, although he isn’t warm or endearing in that Bill Clinton buddy-buddy way. “He got over his need to be liked a long time ago,” one of his top aides told me. Yet he is well-liked because he’s a straight-shooter and his basic decency come across. Democrats say he’s the star of the Bush cabinet—his fans include Barney Frank, who’s in the thick of this crisis as the chair of the House Financial Services Committee, Charlie Rangel, and Chuck Schumer. One Washington insider told me that Paulson is usually the smartest person in the room anytime he’s leading a meeting—except if Barney Frank is there, in which case it’s a tossup.

Several other things I learned that didn’t make it into the story: (1) How Paulson and his crew including the FHFA regulator Jim Lockhart run Fannie Mae and Freddie Mac will be key to ending the housing market collapse, which is at the heart of the credit crunch, which is at the heart of the capital markets turmoil. (By the way, my friend and former colleague Joe Nocera had a great analysis of the crisis in The Times today.) The failure of Fannie and Freddie would have been catastrophic, which is why Paulson stepped in. But operating them won’t be easy. If Fannie and Freddie are too loose with credit, making the equivalent of subprime or no-doc loans, U.S. taxpayers could end up footing a big bill. On the other hand, if they are too conservative, not enough money will flow into the housing market, mortgage rates will rise and housing prices will keep falling—exactly what we don’t need. Somehow Paulson will have to find a way to achieve the competing goals of protecting the taxpayer and fueling a rebound in housing.

(2) Paulson, to his credit, has been pushing for a thorough revamp of how financial markets are regulated. His blueprint for the regulation of capital markets hasn’t gotten a lot of press (it’s complicated and kind of boring) but you can’t accuse him of careening from crisis to crisis without paying attention to long-term solutions. In fact, he told me: “I actually think the blueprint is the most important piece of work that’s been done here.

(3) Don’t expect him to stay until 2009. He will not say publicly that he is definitely leaving in January, so long as the markets are tumultuous, and he apparently has good personal relationships with both Obama and McCain, But I’m told that he isn’t comfortable with their economic policies. McCain’s faux, anti-Wall Street populism rankles Paulson, I was told. And, unlike Obama, Paulson is a strong believer in free trade. So someone else will be on the Treasury hot seat come next January. We’ll be lucky if whoever takes over is as good as Paulson.

By the way, there are some terrific pictures of Paulson in the print edition, including a classic from his days as an All Ivy-league guard at Dartmouth. Here’s how the story begins:

On the first Saturday in September, tropical storm Hanna dumped torrential rains on Washington, D.C., keeping most of the city’s residents indoors. One of them was a weary Henry “Hank” Paulson, Secretary of the Treasury, who arrived at his office at 7 a.m. Paulson had been working long hours without a day off for weeks, and the night before he’d been awakened by a phone call just after settling into bed. “I don’t know how he got my number,” Paulson says cheerfully, “but Barack Obama woke me up at 10:30, and I was on with him for about an hour.” There had been plenty to talk about.

By then Paulson had put the finishing touches on his plan for a takeover of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) - the most sweeping government intervention in the financial markets in years. Paulson and his team had fired the CEOs of the once-formidable mortgage giants and recruited replacements. All that was left was to summon their boards to ratify the deal. As rain pounded on the skylights of the 139-year-old Treasury building, Paulson worked the phones, as he often does, lining up support. He had a long talk with John McCain and Sarah Palin, another with Nancy Pelosi, explaining the takeover. Twice he spoke with President Bush, giving him progress reports.

That evening Paulson had planned to celebrate his 39th wedding anniversary with his wife, Wendy. “We were going to go out to dinner, but we were too tired,” he says. “She cooked me an omelet.”

Such is the grueling, not-so-glamorous life of the former CEO of Goldman Sachs (GS, Fortune 500), whose biggest worry, before accepting the job of Treasury Secretary in 2006, was that he would not be able to make much of a difference. Boy, was he wrong about that.

You can read the online version here.