Paulson oversees historic government intervention

The man behind the Bush administration's sweeping intervention in the U.S. financial system is a former Goldman Sachs executive who came to Washington two years ago hoping to streamline regulation of the financial services sector.

It was Treasury Secretary Henry Paulson who pushed through the government bailout of struggling mortgage finance giants Fannie Mae (FNM) (FNM) and Freddie Mac (FRE) (FRE) two weeks ago. It was Paulson - working hand-in-hand with Federal Reserve Chairman Ben Bernanke - who decided to inject $85 billion of taxpayer money to prop up teetering insurance titan American International Group Inc. (AIG) (AIG) earlier this week. And now it is Paulson who is leading the push to craft a government rescue plan to relieve financial firms of billions of dollars in bad debt.

"Henry Paulson has done the most important thing, which is to keep the markets functioning and keep essential credit flowing," said Dean Baker, co-director of the Center for Economic and Policy Research.

Many market participants and observers say the Treasury Secretary has taken critical steps to head off a total meltdown in a financial system upended by a wave of defaults on subprime real estate loans packaged and resold by Wall Street. Still, Baker said, Paulson's long-term legacy will likely hinge on whether he is ultimately able to ensure "the parties responsible for this mess are not rewarded."

Hank Paulson, a graduate of Dartmouth College and Harvard Business School, arrived at the Treasury Department in the summer of 2006 following a long career at Goldman Sachs. An Illinois native, Paulson had started in Goldman's Chicago office in 1974 and rose through the ranks over 25 years to become chairman and CEO.

At Goldman, Paulson circled the globe in pursuit of international business deals and helped lead the firm's push into China. Those experiences solidified his support of free trade and open investment policies. Paulson, who is married with two grown children, is also a strong proponent of moving the U.S. beyond the petroleum age - for the sake of the economy and the environment. An avid birdwatcher, he is past chairman of The Peregrine Fund and The Nature Conservancy.

But it was the risk of financial turmoil that led White House Chief of Staff Joshua Bolten, himself a former Goldman executive, to aggressively recruit Paulson for the Treasury job. Paulson's Wall Street experience has been critical during the current crisis, many say.

It helped him team up with Bernanke and Timothy Geithner, president of the Federal Reserve Bank of New York, to help broker the Federal Reserve-backed purchase of troubled investment bank Bear Stearns by J.P. Morgan for $2 a share in March.

And it has helped him steer the Bush administration response to the earthquake that has shaken the credit markets and brought many of the most storied names on Wall Street to their knees in recent weeks.

In an administration that doesn't always listen to Democrats, Paulson has earned a reputation as a pragmatist and a deal maker. He worked closely with lawmakers from both parties to negotiate the $168 billion economic stimulus package that delivered rebate checks to taxpayers earlier this year. And he is in regular contact with congressional leaders now.

That's not to say that Paulson and the administration have not faced criticism, including questions about why the federal government is stepping in to save financial institutions that made bad bets on subprime loans when so many Americans are losing their homes.

What's more, the irony of a Republican administration overseeing such historic market intervention is not lost on anyone. But in an interview with The Associated Press in April, Paulson stressed that after all the Wall Street excesses he has witnessed over the years, he sees an important role for regulation.

"You can't have the experience I've had in markets and be against regulation," he said. "I believe in markets. I believe you cannot have competitive and efficient markets unless you have strong investor protection and a healthy regard for systemic stability."

And in the current environment, Paulson may feel that he has no choice but to intervene.

"If you believe the government should just stay out and let the chips fall where they may," this is 180 degrees at odds with that," said Baker, of the Center for Economic and Policy Research. "But when you're standing there as Treasury secretary watching the financial markets melt down before your eyes, it's hard to just stand there and do nothing."