'A Resolution Authority'
Buffett defended Paulson's handling of the financial crisis, calling it a period "when when our financial system went into cardiac arrest." Paulson said he had asked for financial reforms on a number of occasions prior to September and October 2008. He said he is hopeful that significant financial reforms will be enacted by Congress soon.
"There needs to be a Resolution Authority so that any type of financial institution, if it is going to fail, can be liquidated outside the financial system so that it does not take the financial system down," he said.
During their talk, Buffett maintained that it was Congress that allowed Fannie Mae (FNM) and Freddie Mac (FRE) to operate at "40-to-1 leverage" and "to guarantee over a hundred times the amount of capital they had in mortgage guarantees," which created the problem Paulson has been criticized for.
Shrinking Fannie and Freddie?
Paulson said the two mortgage giants that were placed in conservatorship should become smaller institutions, but that the process of breaking them apart should not happen now because they are serving too big a role in handling the foreclosure crisis and stabilizing the housing market.
"Freddie and Fannie are not going to be able to stay in their present form," Paulson declared. "Their mission needs to be shrunk, they need to be restructure in very, very fundamental ways, but right now we need them where they are."
On Wall Street bonuses, Paulson said that compensation for highly paid executives should be primarily made of stock. "It should be something that rewards long term performance," he said.
Risked 25% Unemployment
Paulson also acknowledged that losses from Fannie Mae and Freddie Mac will probably surpass those at bailed-out insurer AIG. But he also maintains what he and the other financial regulators put in place saved the financial system and that that was paramount.
"If the system collapsed, we would have easily had 25% unemployment," he said.