More From the Secret Diary of Hank Paulson

Guy Rolnik dips again into the private journal of the former U.S. Treasury secretary.

Dear Diary,

Yesterday was my last day as the U.S. secretary of the Treasury. Next week I'm going to be a long way away, in an ivy-bedecked building at the lovely campus of Johns Hopkins University in Maryland.

Friends keep asking, "Hank, why did you decide to go into academia and why on earth to Johns Hopkins? Have you lost it? Just last month bloggers were calling you King Henry because of the power Congress gave you when approving that $700 billion kitty, to be disposed of as you saw fit. Why are you doing it, Hank?"

Why don't I go back to business, they wonder. Why don't I take the reins at some multinational, or take one of those brilliant opportunities beckoning on Wall Street.? "A man with experience, background and contacts like you, and leadership qualities as well."

I don't answer them. Jerks.

Don't they get it? Have you ever seen anybody who works at a hot-dog plant eating a hot dog? No way. They know better. They know what goes into those things.

After six months running the production line we opened at the treasury because of the crisis, making "rescue packages" for the Wall Street banks and companies, I know too well what we cooked up. I know what sludge is there in the balance sheets of the banks and of the U.S. Federal Reserve itself. The last thing I want is to eat one of those hot dogs.

Looking back on my last few weeks on the job, one day, I think it was December 17, the penny dropped for me: Wall Street wasn't coming back. There was nowhere "back" for it to go.

I went to the office this morning and my secretary Doris reminded me that Bernanke, and Ken Lewis, the CEO of Bank of America, were waiting for me in the conference room. Yeah, it was one of those mornings.

When I entered, Ben winked at me. I realized he'd already given Ken "the treatment" and that Lewis already realized he was wasting his time.

Ken was there of course because he was dying to wriggle out of buying Merrill Lynch, that deal we'd forced him into in September.

I didn't have time for niceties, so I gave it to him straight. "Ken, you know we can't let you off. If we say the deal's off then within an hour, Wall Street explodes and the whole global financial market will be in flames again."

"But why me?" Lewis whimpered. "What do I need Merrill Lynch for? Do you know what toxic garbage is in their balance sheet?" It was pathetic, seeing the CEO of the biggest bank in America sniveling like a kid.

I looked at Bernanke but he was buried in his BlackBerry. "Ken, who do you think will buy Merrill? Citi? It's down to $5 a share. JPMorgan, after we pushed Bear Stearns down its throat? There's nobody else."

Lewis tried to gather resolve, the sort he (and I) had when we were Masters of the Universe. "You can't force me to make this crap deal," he blustered. "Since you shoved Merrill onto us we found tens of billions in toxic assets over there - it's a bomb that's going to go off inside our bank!"

"Nice try, Lewis," I sneered. "I admire your assertiveness. You know perfectly well that whatever it says on your business card, CEO of Bank of America, you don't call the shots. Tomorrow you're going to be crawling to us with or without Merrill, the moment some analyst smells a rat and your share price starts to implode. Bank of America belongs to me and I say you're buying Merrill Lynch. Now say thank you for still having a job and get out."

I looked at Ben to see his reaction, but he was still engrossed in his BlackBerry. Since the crisis began he's been hooked on that thing. He figures a bank might fall at any second. He's right. But banks collapsing have become routine. The really bad day was three days ago.

I went to the office and Doris told me that Bernanke was waiting for me in the conference room. I didn't have a meeting scheduled with Ben and it's been 48 hours since the last mega-bankruptcy. Something terrible must have happened. Ben doesn't just drop by to shoot the breeze.

I went in. "Wassup?" I asked.

"It's bad, it's really bad," he said, his eyes on his BlackBerry. "You know Bernie Madoff, that hedge funds guy."

"Yeah. I think we played golf once. Great guy, his fund's been making 10% a year for 20 years. What's he done?"

"Turns out he hasn't done anything, that's the problem," Ben answered. "His whole fund was one giant Ponzi scam. He never earned 10% a year. He paid new investors using money from earlier ones. A classic Ponzi."

"How much?" I interrupted. When Ben starts you can't stop him. He thinks he's still at Princeton sometimes.

"Ten, 20, 30 billion dollars," Ben mumbled.

"Thirty billion? Really 30 or 30 like at AIG?" I inquired.

"Maybe 50," Ben said. He's gotten cagier since AIG.

We looked at each other in silence. He nodded. We dialed the treasury dealing room, where we issue T-bills. "Wassup in the market?" I asked. "Normal," the dealer said. "A bit jittery in the morning but the last auction of short-terms went fine."

"Thanks," I said and hung up. Ben and I let out our breath.

The moment the word "Ponzi" is out there, it's just a matter of time before analysts start to ask if the U.S. government's gigantic bond issues are just another sort of Ponzi scheme. We can keep financing the financial system as long as people keep storming for our bonds.

We had a good day at the office. Nothing happened. No banks failed. Obama said he'd increase the welfare budget.

Every time he says things like that, I giggle inside. I remember all the things I said a year ago and think what he'll have to admit in a year.

The New York Times wrote that the trillions we poured into the marketplace didn't do a damn thing because the banks won't release a penny. I knew that. I don't care anymore.

Doris came in. Said Chrysler's Bob Nardelli was on the phone. Great guy. He'd been forced out of Home Depot because somebody got mad at the $230 million package he got there while the company's stock flatlined. Later, at Chrysler, Nardelli got a taste for private equity.

Big mistake.

"Hey Bob, wassup."

"Lousy, Hank. I need money like now."

That's Bob. Direct. "How much and why?" I inquired.

"Sales are down 50%. We're dead in the water."

"We gave you money last week."

"Fine, that was to roll over loans. Now we need more, to give to car buyers. Chrysler LLC needs $1.5 billion to get credit from banks."

I saw red. "You're calling for $1.5 billion? Bob, don't you read the papers? This is Hank Paulson! You want peanuts, call my assistant. He deals with the nuts out of petty cash." Doris signaled me from the door. "Gotta go," I said and hung up.

The CEO of the National Bank of Commerce was on the line. "Yeah ... yeah ... yada yada yada..."

Usual stuff. They were in trouble. Wanted money. I cut him off and asked how much. He wanted $100 million, $200 million. Huh. "You're too small to save from collapse," I said. "You're going down."

"Waitasec," he yelled. "It's all your fault."

"What?" I was astounded.

"Yeah, our portfolio was deep into shares of Fannie and Freddie, those quasi-government mortgage banks, and when you nationalized them you wiped out their regular shareholders."

Jerk. "I didn't tell you to buy stock in Fannie and Freddie," I snapped and slammed down the phone.

Truth is, I didn't. Congress did. They said that Fannie and Freddie were the road to the American dream of buying a house. But that was in 2006, about a thousand years ago, as I count it. Nerve of the guy.

Ten days to go before I can leave. I got in early, meaning to pack up my personal stuff. But Doris signaled me that Ben was already waiting.

"You remember Ken Lewis," Ben began.

Crap. What a balls-up. I knew it was just a matter of weeks before Merrill Lynch blew up in Ken's face. I hoped it would happen on Obama's watch, under a new treasury secretary. What a bummer, the biggest bank in America's going down too. Rats.

Ben started driveling about the structure of Bank of America's balance sheet and moral hazard, the market's reaction and the message we needed to send to the markets.

Truth is, I'm sick to death of this gibberish. Nobody's buying our bluffs, anyway. Everybody knows we're clueless and that we're tossing billions and more billions of taxpayer money, as though we were dropping it from helicopters. They're calling him "helicopter Ben" these days, like he's tossing cash from a whirlybird and letting it settle wherever it lands. I sighed.

"How much?" I inquired.

Ben said something like $20 billion in cash and maybe another $100 billion or $200 billion in guarantees for toxic assets they found in Merrill Lynch's balance sheet.

Doris signaled that Ken Lewis was on the line. Bank of America's stock is collapsing, she said.

"What's new, Doris?" I shrugged. "Tell me something I don't know. You think I don't know that Bank of America's damned stock will tank? What do you think, that I didn't know that a month ago when Lewis was here? What the hell do you think, Doris!" I shouted.

Doris was hurt. "You weren't like this when you first started here," she huffed.

"Yeah, Doris, when I started here I believed in the free market. I believed that the $800 million I personally earned at Goldman Sachs was for my talent and that that's how it should be," I shouted. "When I started here I thought that investment banks were emblematic of capitalism and of the American free market. I thought I understood the system and that I always knew what had to be done. And now, Doris, I don't understand a damn thing. All I want is to go home. Send my personal effects to my house. Tell Ben I left. Bye, Doris. Best of luck to you."