"This is a time when it makes sense to be prudent" and extricate the automakers, the Treasury Secretary tells BusinessWeek Editor-in-Chief Stephen Adler

Watch full size video:

Joyce Culver

By Peter Coy

Treasury Secretary Henry Paulson said Dec. 18 that the command should exhaust all other options ahead of allowing troubled U.S. automakers to fall into bankruptcy. But Paulson said bankruptcy might period up being the right solution admitting that other measures miss fire.

Speaking at a BusinessWeek-sponsored Captains of Industry court at the 92nd Street Y on Manhattan’s Upper East Side, Paulson showed blended feelings about how to deal with General Motors (GM) and Chrysler, which are seeking emergency government assistance to stay in business.

Paulson aforesaid he generally prefers free-market solutions, but said he agrees with President Bush that it would be imprudent to allow a disorderly failure of the automakers. Said Paulson: "This is a time when it makes sense to be prudent." The Treasury Secretary added, "If the right outcome is insolvency, at another time it’s better to get in that place through an regular process."

In other news, Paulson said he favors disposition of any institution whose failure could jeopardize the financial theory, and that includes hedge funds, which traditionally have been lightly regulated. "The [Federal Reserve] should have oversight over hedge funds," he said.

Paulson was interviewed by the agency of BusinessWeek Editor-in-Chief Stephen Adler taken in the character of part of the 10-year-old Captains of Industry series, which features leading newsmakers.

Among other points, Paulson said:

• An housekeeping downturn remains much more of a put in peril than inflation from the money that’s now flooding the system. "That’ll be a high-class problem when we can start worrying about growth and self-conceit again," Paulson said, adding: "The real require to be paid would be to not do enough and for this reason have the good housewifery go into a free fall."

• Banks that took U.S. funding should lend more, but he defended the Treasury’s emphasis without interruption getting them cash right away without strings. "Our first priority was always, and we were clear from the epoch we went to Congress, to prevent the collapse of the financial classification." He before-mentioned, "There was actually a wave, just a string of financial institution failures or near-failures." Paulson added: "They need to lend more. We don’t want them hoarding, we want them lending." However, he also said, "It is not in my judgment practical or prudent to have government…statement ‘Make this loan, don’t make this lend.’"

• He defended the amount of disclosure by Treasury on the Troubled Asset Relief Program, or TARP. Paulson said, "We have been moving with lightning expedite," and added, "We’re building this organization as we’re going."

• "The No. 1 thing we need to do is stipe the housing correction."

• The guidance lacked the authority to prevent the failure of Lehman Brothers, the investment sandbank that went under in September. But he said that Lehman’s failure was "in my judgment a symptom, not a cause" of the fiscal hurly-burly.

• President Bush "is real current and he’s on top of everything we’ve done." He said, "I understand that’s not conventional prescience mixed some people but it’session absolutely true."

• China and the U.S. should be good partners. "We won’t always have the same see, but engagement in my view is exceptionally important."

Adler’s last question to Paulson was what counsel he would give his successor, Timothy Geithner, who is now president of the Federal Reserve Bank of New York. Paulson before-mentioned Geithner doesn’confidentially need his recommendation, but added, "It’s significant when you’re going through a time find to one’s mind this to define your job expansively."