A Skeptical Outsider Becomes Bush's 'Wartime General'

The pressure on Henry M. Paulson Jr. in early September was greater than at any other time during his tenure as Treasury secretary. As he pored over the books of mortgage giants Fannie Mae and Freddie Mac, he discovered that they were about to collapse and that the financial markets would experience what he called "a meltdown to end all meltdowns."

Paulson: Preserve Flexibility in Bailout

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke waged a stout defense on Capitol Hill Tuesday of their management of a $700 billion financial bailout.

The federal government would have to seize the firms. But the law said their management would have to agree, and his own staff had reservations about whether Paulson had the legal authority to force them to surrender.

"Trust me," came Paulson's curt answer. "I'll get it done."

During his 28 months at the Treasury, Paulson has accumulated more power than nearly any of his predecessors and has wielded it boldly, even brazenly at times, in a bid to tame the financial crisis of a lifetime. He has burst through the customary boundaries that separate federal agencies, bent regulations to his will and pushed up against legal limits. As financial firms tumble and traditional oversight agencies prove impotent, Paulson has filled the void with his 6-foot-1 frame, summoning the rest of Washington and Wall Street to get in line.

"Even if you don't have the authorities -- and frankly I didn't have the authorities for anything -- if you take charge, people will follow," Paulson said in an interview. "Someone has to pull it all together."

He said regretfully that the financial upheaval has forced him to be a modern Robert Moses, the controversial 20th-century urban planner who acquired minor government posts and stretched their authority to reshape New York City as he saw fit. Though Moses never held elected office, he remade the landscape of New York through the cunning exercise of power.

Paulson had twice rebuffed the Bush administration by the time it offered him the post of Treasury secretary in April 2006. Paulson finally agreed but insisted on some terms. He would answer only to President Bush and not be subject to meddling by the president's economic policy advisers. And, Paulson recalled, he wanted it in writing.

The agreement laid the foundation. After the financial crisis erupted last year, Bush privately dubbed Paulson his "wartime general" on the economy, essentially telling him he would have White House backing for whatever measure he pursued, Paulson recalled in a series of interviews. That commitment endured even as Paulson steered the administration far from Republican orthodoxy on free markets.

Paulson used his influence within the administration to win even broader powers from Congress, allowing him to nationalize major financial institutions, either in part or entirely. The bills were sweeping in scope and gave him the latitude to spend hundreds of billions of dollars as he saw fit.

And Paulson unilaterally pushed his authority to craft initiatives even when, according a senior government official, he was not sure he had an airtight legal basis.

Confronted with the implosion of Fannie Mae and Freddie Mac, he didn't hesitate in identifying his course for the firms. He gave the companies' management just one day to review the Treasury's assessment of their situation, which revealed that each was on the verge of collapse. Then he summoned individually the two chief executives, Richard F. Syron of Freddie Mac and Daniel H. Mudd of Fannie Mae, to the third-floor conference room near his office in the Treasury building. Paulson sat across from them, along with Federal Reserve Chairman Ben S. Bernanke and the companies' regulator, James B. Lockhart III.