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EDWARD BENNETT WILLIAMS (1920-l9B8l
PAUL R. CONNOLLY (1922-1976)
December 20,2010
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ViaE-mail
Gary J. Cohen, Esq.
General Counsel
Financial Crisis Inquiry Commission
1717 Pennsylvania Avenue, NW, Suite 800
Washington, DC 20006-4614
Dear Mr. Cohen:
I write on behalf of former Treasury Secretary Henry M. Paulson, Jr. in response
to your December 16,2010 letter. Your letter sets out several remarks attributed to Secretary
Paulson that the Commission proposes to use in its upcoming report. These remarks are taken
from an unrecorded and untranscribed interview that Secretary Paulson gave to the Commission
in April of this year to help the Commission understand the role of the GSEs-Fannie Mae and
Freddie Mac-in the financial crisis. What is most striking about your letter is what it suggests
the Commission does not intend to include in its report, namely, Secretary Paulson's account of
his efforts to secure GSE reform after he took office in 2006 and his account of his efforts to
prompt the GSEs to raise needed capital in the spring of 2008.
As Secretary Paulson explained to the Commission, his view from the start of his
tenure as Treasury Secretary was that the GSEs had an inherently flawed structure of private
funding backed by implicit goverrunent support, overseen by a weak regulatory agency that had
no power to adjust statutorily mandated capital requirements. As a consequence, although
Treasury was not the GSEs' regulator, Secretary Paulson devoted significant energy throughout
his time in office seeking reforms that would secure a stronger, more flexible regulator for the
GSEs. Those efforts were consistently stymied by a lack of political consensus until the summer
of2008 when the fear of an impending crisis prompted Congress to enact legislation reforming
the GSEs. From your letter, it appears that the Commission does not intend to recount this
history fully.
WILLIAMS S CONNOLLY LLP
Gary J. Cohen
December 20, 20 I 0
Page2
It also appears from your letter, that the Commission does not intend to recount
fully the nature of Secretary Paulson's efforts in the spring of2008 to prompt the GSEs (along
with other private financial institutions) to raise capital as a bulwark against a severe financial
downturn. As Secretary Paulson explained to the Commission, he was concerned by early 2008
that many firms in the financial sector were holding insufficient capital, and, although he could
not directly regulate those firms, he began to encourage them publicly to raise capital, often
reminding them that "No institution ever got into trouble by having too much capital." After the
collapse of Bear Stearns in March 2008, Secretary Paulson made further efforts to prompt the
GSEs in particular to raise additional capital. He spoke directly with the GSEs' regulator and
their CEOs and obtained a commitment from the GSEs that they would raise additional capital in
return for a reduction in their existing capital surcharge. The purpose of this action-as
Secretary Paulson made clear to the GSEs, their regulator, and the Treasury staff involved in
implementing the final agreement-was to make the GSEs raise capital, and that is precisely
what it did. Fannie Mae raised approximately $7 billion in new capital in the subsequent
months.
It is surprising that the Commission would omit these important narratives from
its report to the American people, particularly given the amount of time Secretary Paulson
devoted to describing these events to the Commission, both in his informal interview and in his
public testimony. See, e.g., Commission Memorandum for the Record, 1-5 (Apr. 2, 2010); Hr'g
Tr., 51-56, 65-66 (May 6, 201 0). I trust further edits to the final report will rectify these
OmiSSIOnS.
With respect to the quotes the Commission currently proposes to use, several of
them are inaccurate or lacking necessary context.
First, your letter states that Secretary Paulson told the FCIC that, after he was
briefed on the GSEs in June 2006, he believed they were "a disaster waiting to happen."
Secretary Paulson did not say that in his interview (a fact that is reflected in the Commission's
own memorandum regarding that interview). That phrase was used by Commission staffer Chris
Seefer, who was quoting from Secretary Paulson's book, On the Brink. See On the Brink, 57
(Feb. I, 2010) ("In short, Fannie and Freddie were disasters waiting to happen. They were
extreme examples of a broader problem that was soon to become all too evident-very big
financial institutions with too much leverage and lax regulation."). If the Commission quotes
from Secretary Paulson's book, please cite to the book.
Second, your letter states that Secretary Paulson learned in 2006 that the GSEs
depended on "bullshit capital." What Secretary Paulson said in his interview was that one of the
GSEs' problems was that they had statutorily defined capital and a regulator who had no
discretion to adjust the level of that capital. Secretary Paulson then commented that some people
referred to this type of capital as "bullshit capital." Indeed it was his concerns about the nature
WILLIAMS 8 CONNOLLY LLP
Gary J. Cohen
December 20, 2010
Page 3
of the GSEs' capital that prompted Secretary Paulson to push for reform that would provide the
GSEs' regulator with the capital regulatory powers of a bank safety and soundness regulator.
Third, the quote your letter attributes to Secretary Paulson regarding the summer
of 2007 is not accurate. Secretary Paulson explained that in 2007, after the housing market dried
up, responsible people could not buy homes or refinance and the GSEs were the only available
source of mortgage funding. He explained that, in his view, the key to getting through that crisis
was to limit the decline in housing, prevent foreclosures, and ensure continued mortgage
funding, all of which required the GSEs to remain viable.
Fourth, the quote your letter attributes to Secretary Paulson regarding the GSEs
being the "engine needed to get through the problem" is misleading if not placed in the proper
timeframe. The "problem" referenced was the economic situation in the spring of 2008.
Fifth, the quote your letter attributes to Secretary Paulson regarding an agreement
with the GSEs being a "no-brainer" is misleading if the agreement is not accurately described.
The agreement to which Secretary Paulson was referring was the GSEs' commitment to raise
capital that is discussed above.
Sixth, the quote your letter attributes to Secretary Paulson regarding his being
"naive" enough to believe that the strains in the financial system were "all about the housing
crisis" is not accurate. What Secretary Paulson said was that in the summer of 2008 he was
naive enough to believe that placing the GSEs in conservatorship would halt the crisis because it
would put a floor under the housing decline and provide confidence to the market.
Please correct these references to Secretary Paulson's remarks before including
them in the Commission's report. If you have any questions, please feel free to contact me.
Very truly yours,
cc:
FCIC Commissioners (by courier)
@FedFRASER