Wall Street executive turned politician dissects the economic breakdown

New Jersey Gov. Jon Corzine, a Democrat and a former U.S. senator from the Garden State, was co-chairman and CEO of Goldman Sachs before he entered politics. When the investment bank went public in 1999, Corzine left the firm, netting more than $300 million. At Goldman, he worked alongside Henry Paulson Jr., who is now Treasury secretary. With questions still swirling around the just-enacted federal financial bailout package, Corzine weighed in on the crisis and on Paulson's performance. Following are edited excerpts from an October 3 interview with National Journal's Eugene Mulero.

NJ: What are your thoughts on the bailout?

Corzine: I'm going to give you the headline I say to almost everyone: Ugly, unattractive, but absolutely necessary. Trying to euphemistically call it a rescue program is really not what it is, because it is intended on making sure we have the liquidity for the financial institutions. They have gotten themselves into a position of [being] particularly overleveraged with instruments that have no liquidity or ability to be sold under current market circumstances, and it's dragging down the ability of others to get involved.

Whether it's a Wall Street bailout or it's a bailout of the financial system, it still is what it is. When people walk away from that, I think they're not being intellectually honest. It's reflective of a lot of poor decisions and the breakdown of both the regulatory system and the oversight system. In an overall economic sense, it pulled in a lot of people and a lot of participants in the financial system that it should not have. With complex instruments being created that I don't think were properly supervised and [with] leveraged capacity greatly increased within the system because of deregulation, [we] ended up with a very bad juxtaposition of a lot of things happening at the same time.

NJ: Is the economy "on the edge of the abyss," as some economists have said?

Corzine: I think a lot of people would [have the] view that we were already in, or at, the abyss well before the financial crisis struck. We saw a pretty sharp rise in unemployment that continues to this day. I think close to 800,000 jobs have been lost during the year, and each month this year you've seen that grow. We've seen deterioration in consumer confidence, in the values of homes declining 15, 16 percent, and 30 percent in some parts of the country. I think you've seen a fallout in auto sales and flat-line growth in retail activity even when you put in the uptick that occurred because of the [taxpayer] rebates. And some of that is perfectly understandable in this rising energy price world that we've had. But I think for Main Street, the recession was almost here, or already here, before the latest serious breakdown.

NJ: How has Secretary Paulson performed so far?

Corzine: I think that he has a very tough task -- the Bush administration came [into office] with a very strong deregulatory bent. Secretary Paulson's first steps were to figure out how to make the effectiveness of the financial system better, and it was basically a series of recommendations on how to deregulate financial institutions. I think he and [Federal Reserve Board] Chairman [Ben] Bernanke have been pretty good firefighters in the context of "the house is on fire." You have got to make judgments and take actions that try to stop the fire. Firefighters don't get assessed by, you know, style. They get assessed by whether they put out the fire.

NJ: Paul Krugman of The New York Times recently wrote, "We're entering a period of severe crisis with weak, confused leadership." Do you agree?

Corzine: We have had weak leadership on the economic front for eight years, and I think the results are very clear. By any metric -- whether it is deficits, whether it is our energy policy, whether it is stock market valuations, employment, and perhaps, most important, the real income for the vast majority of Americans that has declined in the last eight years -- it would be hard for anybody to say this has been a successful period of economic stewardship. There is lots of finger-pointing that can go on. Some of it is even carried over from previous periods of time.

NJ: How would you have handled this crisis?

Corzine: I hope if I had been around I would have done something by working with folks to have the administration not have a complete hands-off approach to the leverage buildup that occurred within the system. Not only did [the administration allow investment banks to] increase leverage, but [officials] left it to self-regulation what was on the [banks'] balance sheets. That's not oversight. That's not protecting the public: You create institutions that are too big to fail and then you pull back from supervising them.

NJ: Why wasn't supervision tightened earlier?

Corzine: There were a lot of folks, including myself, that asked for that, and we had debates about that in the [Senate] Banking Committee. But there was a resistance to any kind of government supervision, and a lot of us fought for restrictions on predatory lending, for reasonable steps to protect some of the buildup of bad credit that occurred. Once the house is burning, you're then in a response mode as opposed to a proactive mode.

One could bring out all kinds of other patterns of how you might have operated during the crisis, but I don't think anybody is smart enough to say one pathway of fighting that fire was better than another. Some people might say, "Why was there an action one way one time, and then another action another time with similar kinds of institutions?" That's 20/20 hindsight. People make decisions, and sometimes the consequences are not exactly as they planned, because there is a fire going on.

NJ: There is some chatter that if Democratic nominee Barack Obama is elected president, you could be the next Treasury secretary. Have you been offered the job?

Corzine: Oh heavens, no! I haven't had a conversation with anybody about this kind of thing. I mean, I know there is plenty of speculation in and around New Jersey, but I like what I'm doing.

NJ: Let's say you're offered the post in an Obama administration. Would you take it?

Corzine: First of all, I like being the governor of New Jersey. I really believe a lot of the things we do at the state level are very informative for what needs to be done at the federal level in addressing problems and how you have to discipline spending at the same time that you don't forget that there are priorities that have to be addressed -- security and education and safety-net questions. There are ways to constrain the size and scope and growth of government if you're willing to make some tough decisions. States can [continue to] be the laboratory they always have been.

NJ: What advice would you give to the next administration?

Corzine: I think there has to be a complete restructuring on regulation. But most important, you have to put people into those positions of oversight that are committed to doing their job. When I was at Goldman Sachs, we had in a 20,000-person firm probably 3,000 people in the control function. You have to be committed to the fact that you have a responsibility. So it's a mind-set as well as it is what the rules are. We talk about how you need to make sure we put a clearinghouse together on derivatives. You need to make sure that there are controls over, or at least caps on, leverage, or responsible leverage rules. Precision on those should be worked out with broad-based discussions with folks, institutions that have the ability to impact government.

The international regulatory system has to get coordinated. You can't have people playing regulatory arbitrage by going to Hong Kong or someplace else to duck and weave responsible financial leverage. And there are different ways to do that. You can be a hard guy [as a regulator] and say, "You can't do a securities transaction" or "You can't do business in the United States unless you conform with our rules." There are ways to address this, but it ought to be done on a cooperative basis.

NJ: Will this bailout work?

Corzine: As I said, I think it will work to relieve the selling pressure on the balance sheets of financial institutions across the United States. Whether it restores the confidence of lenders to get back into their normal extensions of credit, I think, remains to be seen.