Lawmakers chide Paulson for 'unchecked government power'

Lawmakers questioning former Treasury Secretary Henry Paulson Thursday honed in on the facts of the forced marriage between Bank of America and Merrill Lynch – though for starkly different reasons.

To Republicans, the Treasury Secretary had threatened the Bank of America into a merger that no longer made business sense.

To many Democrats, Bank of America CEO Ken Lewis duped Paulson and the government into funding a private merger to the tune of $20 billion.

But throughout the day-long hearing, lawmakers on both sides of the aisle were clearly troubled by new unchecked government powers that the nation's financial crisis let loose.

“Once you have crossed the Rubicon on this interventionist mindset, you have changed the nature of the capitalist system,” said Rep. Scott Garrett (R) of New Jersey.

Other Republicans called for an “exit strategy” from a world where government determined which industries and firms lived and which did not.

“This brave new world we’ve entered into of nationalizing major industries really does place a strain on a system that was never designed to make these decisions – or do the oversight," said Rep. Brian Bilbray (R) of California.

"Where is the exit strategy? What date can I tell my constituents that this committee in Congress will not be discussing how we directed the decisions in at least this major industry."

Before considering any expansion of further government regulatory powers, Congress needs to understand how those powers have been used – or misused – to date, Democrats added.

“All of this happened against a backdrop of unchecked government power, with no transparency or accountability,” said Rep. Edolphus Towns (D) of New York, who chairs the House Committee on Oversight and Government Reform.

Exhibit A was a private merger that turned into a $20 billion federal bailout.

Mr. Paulson disputed the charge that the government had threatened or bullied Bank of America into accepting the merger.

“I wouldn’t use the word threat,” he said. “I intended to give a very direct, strong, clear message.”

Backing out of the merger was not a “legally viable option” and threatened “significant harm” to the Bank of America and the financial system, he said, adding that the management and board of a regulated entity that triggered such destabilization “could be subject to removal by the Federal Reserve … and should be.”

Some Democrats had another reading of the facts: “He got the Treasury to cough up $20 billion of taxpayer money to help finance his merger,” said chairman Towns. “In the end, Mr. Lewis got everything he wanted.”

Lawmakers also pressed Paulson on the fairness of a rescue plan that helped bailed-out financial institutions back to big bonuses but left taxpayers hurting. They noted that the investment bank Goldman Sachs, which Paulson once headed, announced second-quarter profits of $3.4 billion this week.

“The people in my district are losing their homes, their insurance, everything they’ve got,” said Rep. Elijah Cummings (D) of Maryland. “They ask me: That money those people are getting on Wall Street, is that our money?”

“The thing that bothers you bothers me,” said Paulson.

“The people who are paying the price had nothing to do with the problem, but the sad truth is that if these companies had gone down, they would have paid a bigger price. There would have been more foreclosures and more people unemployed,” Paulson added “If I had done nothing, it would have been worse.”

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