Henry Paulson Interviewed On Kudlow

Former U.S. Treasury Secretary, Henry Paulson, appeared on The Kudlow Report tonight to talk about the financial crisis and the bailouts which he negotiated and oversaw. He said that he went to former President Bush in 2007 and expressed his worries about a possible credit crisis. According to Paulson, the President asked him what he thought would cause a crisis. At this time, Paulson was unsure and said that it would be "almost impossible to guess," but that their was a lot of "dry timber" out there and all that was needed was a spark. That spark ended up coming from the meltdown in the sub-prime mortgage market.

Initially, Paulson thought that the problems in sub-prime could be contained. He said that mortgages had historically been considered very safe investments. There were a number of problems which Paulson cited that led to the crisis spreading throughout the financial system. He noted that the ratings agencies did not include any variable for falling home prices in their models. This led to a massive mis-pricing of risk in mortgage backed securities. Furthermore, Paulson was very critical of the level of complexity in these derivative contracts and said that this made the problem much worse. One point that the former Treasury Secretary was unequivocal about was that the entire financial system was on the brink of Armageddon and that the bailouts were absolutely necessary.