Paulson: 'Orderly' Auto Bankruptcy May Be Necessary


"This is a time when it makes sense to be prudent" and rescue the automakers, the Treasury Secretary tells BusinessWeek Editor-in-Chief Stephen Adler

Treasury Secretary Henry Paulson said Dec. 18 that the government should exhaust all other options before allowing troubled U.S. automakers to fall into bankruptcy. But Paulson said bankruptcy might end up being the right solution if other measures fail.

Speaking at a BusinessWeek-sponsored Captains of Industry forum at the 92nd Street Y on Manhattan's Upper East Side, Paulson showed mixed feelings about how to deal with General Motors (GM) and Chrysler, which are seeking emergency government assistance to stay in business.

Paulson said he generally prefers free-market solutions, but said he agrees with President Bush that it would be imprudent to allow a disorderly failure of the automakers. Said Paulson: "This is a time when it makes sense to be prudent." The Treasury Secretary added, "If the right outcome is bankruptcy, then it's better to get there through an orderly process."

Favors Oversight of Hedge Funds

In other news, Paulson said he favors regulation of any institution whose failure could jeopardize the financial system, and that includes hedge funds, which traditionally have been lightly regulated. "The [Federal Reserve] should have oversight over hedge funds," he said.

Paulson was interviewed by BusinessWeek Editor-in-Chief Stephen Adler as part of the 10-year-old Captains of Industry series, which features leading newsmakers.

Among other points, Paulson said:

An economic downturn remains much more of a risk than inflation from the money that's now flooding the system. "That'll be a high-class problem when we can start worrying about growth and inflation again," Paulson said, adding: "The real cost would be to not do enough and then have the economy go into a free fall."

Banks that took U.S. funding should lend more, but he defended the Treasury's emphasis on getting them money right away without strings. "Our first priority was always, and we were clear from the day we went to Congress, to prevent the collapse of the financial system." He said, "There was literally a wave, just a string of financial institution failures or near-failures." Paulson added: "They need to lend more. We don't want them hoarding, we want them lending." However, he also said, "It is not in my judgment practical or prudent to have government…saying 'Make this loan, don't make this loan.'"

He defended the amount of disclosure by Treasury on the Troubled Asset Relief Program, or TARP. Paulson said, "We have been moving with lightning speed," and added, "We're building this organization as we're going."

"The No. 1 thing we need to do is stem the housing correction."

The government lacked the authority to prevent the failure of Lehman Brothers, the investment bank that went under in September. But he said that Lehman's failure was "in my judgment a symptom, not a cause" of the financial turmoil.

President Bush "is very current and he's on top of everything we've done." He said, "I know that's not conventional wisdom among some people but it's absolutely true."

China and the U.S. should be good partners. "We won't always have the same view, but engagement in my view is exceptionally important."

Adler's final question to Paulson was what advice he would give his successor, Timothy Geithner, who is now president of the Federal Reserve Bank of New York. Paulson said Geithner doesn't need his advice, but added, "It's important when you're going through a time like this to define your job expansively."

Coy is BusinessWeek's Economics editor.

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