Three Men And a Bailout

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But asking Congress for $700 billion overnight when lawmakers have been unable for years to find funds for all sorts of other national priorities provoked a bitter and bipartisan backlash. "Paulson confused venture-capital behavior with leading a free society," says former House Speaker Newt Gingrich. "I don't know why Bernanke thinks a problem largely created by the Fed and the Treasury is something that only the Fed and the Treasury are smart enough to fix." Others went further: "It's financial socialism," Senator Jim Bunning of Kentucky told Paulson and Bernanke at a stormy Senate Banking Committee hearing, "and it's un-American." Bunning, a conservative, was echoed by Senator Chris Dodd, a Connecticut liberal: "After reading this proposal, I can only conclude that it is not just our economy that is at risk, but our Constitution as well."

Nor could anyone guarantee that $700 billion, as staggering a figure as that is, would be enough to get the job done. After all, the people who would be brought in to do the deals would come from some of the very Wall Street firms that caused this problem in the first place. But as unpalatable as it is to bail out the wealthy financiers whose greed got the economy into this mess--and to do it, no less, in an election year when voters are already furious--the trio maintained that not doing it would be even worse. "We just haven't communicated as well as we need to. The average American looks at this as being about Wall Street. They're angry, and I'm angry too," Paulson said. "But the average American doesn't understand the implications this has for them."

Ultimately Paulson, Bernanke and Geithner must convince the public that fixing the financial mess requires a dramatic expansion of government power--and in particular, the power of their respective offices. That may be a tough sell, in part because the disaster was as much a failure of the political system as of the financial one. Over the past decade, politicians, scooping up campaign contributions from Wall Street, took down the guardrails that had existed since the Depression. And few were better connected in the corridors of power--or more successful at deflecting proposals for tighter government supervision--than mortgage giants Fannie Mae and Freddie Mac.

So lawmakers looked the other way as financial firms grew and morphed and created financial instruments no one understood well enough to oversee. When housing prices caught fire, the big financial players jumped in with borrowed money that they in turn lent out to home buyers who didn't have the means to keep up with the payments. Then the banks sliced and diced those loans and sold them as exotic new securities. All of that left everyone naked and exposed when the market crashed.

Congressional critics of the Paulson-Bernanke bailout have demanded to rewrite the plan before approving it, clamoring for aid to struggling homeowners, limits on executive pay at firms getting federal help, perhaps even requiring Treasury to get an equity stake in a firm in exchange for its subpar assets. In the interview with Time on Sept. 24, Paulson said, "I believe that we're going to get a bill that works and a clean bill. It certainly won't be exactly what we asked for--it never is--but it's got to be sufficient to let us do the job."

But the bailout is just the beginning. Even if it works, that still leaves the job of making sure it never happens again. Congress needs to remake the 1930s-era patchwork of various federal agencies that oversee banks and financial institutions. "There's so much that needs to be done, so much work," Paulson said. "Some people want to say there's too little regulation. It's not that. It's just outdated, outmoded, ineffective. The architecture was put in place in a different era, and it hasn't kept pace with the evolving financial markets."

And as Paulson pondered the work before himself, Bernanke and Geithner, it was hard not to notice that, for the first time, he sounded like a very tired man.

More Paulson Read the full transcript of our interview with Hank Paulson at time.com/paulson