A Conversation with Secretary Henry M. Paulson

Thursday, June 14, 2007

MAURICE R. GREENBERG:  Good morning.  Before I introduce the secretary, today's meeting is part of the C. Peter McColough Series on International Economics and the M.R. Greenberg Geoeconomic Center. 

Please remember to turn off your cell phones and all electronics.

Today's meeting is on the record and press is in the room.

Now it's a pleasure to welcome Secretary Paulson.  Secretary Paulson's bio is in your packet, and I'm not going to read it.  But unless you've been in a coma -- (laughter) -- for the past several years, you'd be well aware of the positive impacts that Secretary Paulson has had in the financial services world in his career at Goldman Sachs, and most importantly, the leadership he's providing as secretary of the Treasury in this critical time.

Please welcome Secretary Paulson.  (Applause.)

HENRY M. PAULSON JR.:  Thank you very much, Hank. 

Good morning, and thank you to the Council on Foreign Relations for hosting us.  It's a pleasure to be here, and it's a distinct pleasure for me to look around and see so many friends, and so many friends that got up first thing in the morning to be here.  So thank you, and it's always great for me to be back in New York.

Now, New York is the heart of the world's financial system, and Treasury secretaries often come here to talk about the role that system plays in our economic health.  Today I want to talk about something a little different -- the financial system's importance to our national security.

Throughout history, Treasury secretaries have focused their efforts on promoting policies and actions to help ensure the safety and soundness of our financial system.  Today, the secretary must focus on the security of the financial system as well as its safety and soundness.

Global financial flows are growing rapidly and greatly exceed trade in goods and services.  This is a positive trend; open finance and free trade enhance the economic security and prosperity of people in this country and around the world.  But bad actors seek to abuse this global financial system to support their illicit purposes.  The world of finance and the world of terror and weapons proliferation intersect through the same system that spreads prosperity at home and abroad.

National security is not only an integral part of my job; it is also a sobering one.  Our enemies are determined, and there are significant threats that aren't going away anytime soon.  As part of the National Security Council, I work with the president and his Cabinet to address these threats.  Treasury is now a key pillar of the president's national security and foreign policy strategy.

An integrated world economy presents challenges and opportunities.  The challenge and importance of protecting the integrity of our global financial network have never been greater.  Our financial system also presents us with enormous opportunities because technology and integration have made it more difficult for anyone using the financial system to hide. This makes financial intelligence a particularly valuable tool to detect and disrupt bad actors.  Recognizing this, Congress and the president have provided an expanded set of tools that allow innovative and more focused use of financial intelligence.  These targeted financial measures are proving to be quite effective, flying in the face of a widely held historical view that dismisses sanctions as ineffective, harmful to innocents, or both.

There are certainly times when that conventional wisdom is true, particularly with broad, country-wide sanctions that are perceived as political statements.  It can be difficult to persuade other governments and private businesses to join such sanctions.  Even when other governments agree with us politically, they generally tend to be unwilling to force their nation's businesses to forego opportunities that remain open to others.  When the private sector views such broad sanctions as unwelcome political barriers to trade, companies are unmotivated to do more than what is minimally necessary to comply.  Indeed, history is replete with examples of participants in the global economy working to evade such sanctions while their government turns a blind eye.

The dynamic is different when we instead impose financial measures specifically targeted against those individuals or entities engaging in illicit conduct.  When we use reliable financial intelligence to build conduct-based cases, it is much easier to achieve a multilateral alignment of interests.  It is difficult for another nation, even one which is not a close political ally, to disagree with targeted measures to isolate actors who are demonstrably engaged in conduct that threatens human rights or global security.  And multilateral support is critical to the success of financial measures in today's world.

When we use targeted financial measures aimed at explicit wrongdoing, the private sector around the world tends to support these measures, thereby amplifying their effectiveness.  Rather than grudgingly complying with or even trying to evade our sanctions, we have seen the banking industry, in particular, voluntarily go above and beyond their legal requirements because they do not want to do business with terrorist supporters, money launderers or proliferators.  This is a product of good corporate citizenship and a desire to protect their institution's reputation.

Once some in the private sector decide to cut off those we have targeted, it becomes an even greater reputational risk for others not to follow, and so they often do.  Such voluntary implementation by the private sector in turn makes it even more palatable for governments to impose similar measures, thus creating a mutually reinforcing cycle of public and private action. 

In the end, if we do our jobs well, especially by sharing critical information with key governmental and private-sector parties around the world, there is a potential for us to create a multilateral coalition to apply significant pressure on those who threaten our security.

Because we are learning to apply our tools in this way, our financial actions have produced demonstrable impacts on threats ranging from terrorist groups to narcotics cartels and on dangerous regimes in North Korea and Iran.  This new strategy uses conduct-based, intelligence-grounded, targeted financial measures to harness the power of the private sector and form the basis of multilateral coalitions, adding an innovative financial dimension to our national security effort.

Treasury can effectively use these tools largely because the U.S. is the key hub of the global financial system.   We are the banker to the world.  We understand that maintaining this standing, which makes our strategy possible, requires focused and fact-based action so that the private sector and other governments are most likely to amplify our measures.

The starting point for Treasury's approach to targeted financial measures is information -- good information.  To identify and act against threats, we need specific, current and reliable intelligence.  And the global financial system is a rich source of the information we need.

Illicit actors who otherwise try to avoid detection often use the formal financial system because there is no good alternative and, in many cases, no alternative at all.  Proliferation networks need import and export financing to buy materials and equipment.  Rogue nations depend on the financial system for everything from holding reserves to currency transactions.  Terrorist networks use the system to raise and move funds when more opaque alternatives are too cumbersome or too risky.

These transactions typically leave a trail of detailed information which we can follow to identify key actors and their networks.  Opening an account or initiating a funds transfer requires a name, an address, a phone number -- identification information that does not lie.  Unlike a phone call or conversation that essentially disappears if it's not captured at the moment it occurs, the financial system produces records that tend to survive.

In 2004, Treasury became the first finance ministry in the world to develop in-house intelligence and analytical expertise to use this information.  We now work with the broader intelligence community, requesting the data necessary to understand the financial networks that threaten our national security.  Treasury then evaluates this information with an eye toward potential action, be it a designation, an advisory to the private sector, or a conversation to alert other finance ministers to a particular threat or bad actor.

It is also critical that the government handle and use the information it gathers appropriately.  As Treasury implements these efforts to help protect national security, we simultaneously take rigorous steps to protect privacy and preserve civil liberties.  We seek to discover those who are abusing the system, keeping in place sufficient controls and safeguards to protect those who are not.

When considering how best to approach a threat, Treasury draws on an array of powerful authorities.  Some are very old, such as the Trading with the Enemy Act, originally passed in 1917.  Some are much newer, such as the authority to cut off access to the U.S. financial system for an entity that is "of primary money laundering concern" under Section 311 of the Patriot Act.

The innovative use of these authorities against national security threats is fairly recent.  We have drawn on lessons learned from earlier programs aimed at Colombian drug cartels.  Over the last 10 years, as these cartels, their associates and financial holdings have appeared on the Treasury list designating them as narcotics traffickers, U.S. banks have frozen their accounts and assets.  Colombian and other countries' banks have then followed suit, refusing to hold or move their money.  When given good information, honest bankers won't do business with these criminals. 

Treasury has designated over 1,400 individuals and companies, and caused the disruption or seizure of more than $1 billion in proceeds related to these cartels.  The cartels refer to being placed on the Treasury list as "muerte civil" or civil death.

Since September 11th, Treasury has been applying these lessons in a more focused effort against global terror threats, beginning with a September 23rd, 2001, executive order that authorized the identification and designation of terrorists and their facilitators worldwide. 

We have focused our actions on clear evidence and encouraged the private sector and other nations to follow suit.  Under a U.N. resolution, worldwide, targeted sanctions are now in place against members and supporters of al Qaeda and the Taliban.  The European Union and other nations have joined the United States in designating the terrorist group Hamas, and the United Nations has designated individuals responsible for the genocide in Darfur.

The targeted financial measures used against terrorists and their supporters are likely to be as effective in combating proliferation networks.  While terrorist organizations may attempt to shift their financial dealings to informal networks or cash couriers, proliferators tend to depend upon access to the formal financial system, where our controls and visibility are the greatest.  Those seeking to procure items for a nuclear program, for example, often seek to disguise their efforts by making the transaction appear to be for a legitimate commercial purpose.  Those who participate in a proliferation transaction because of profit, rather than ideology, are susceptible to being deterred from these transactions if we can credibly threaten to publicly expose and isolate them.

Recognizing this fact, in 2005, President Bush took a visionary first step:  issuing a new executive order authorizing Treasury to target proliferators and their support networks, just as we do terrorists.

The consequences of these targeted measures can be seen on a number of levels, some obvious and some less so.  Most directly, when the U.S. designates a terrorist supporter or a weapons proliferator, U.S. entities and persons, wherever located, must freeze the target's assets and stop doing business with them.  Given the U.S. system's financial prominence, this can have a severe impact.

All major U.S. and foreign banks have offices dedicated to protecting their institutions from infiltration by illicit money.  Our designations let these officials know who they need to protect against.

These measures have also led to a base of international private-sector support.  Reputable banks around the world don't want to hold accounts for terrorists and proliferators any more than U.S. banks do.  My strong view, based on personal experience, is that major financial institutions and the individuals who run them care deeply about the integrity of their financial system and the reputations of the institutions they run.  They genuinely want to be good corporate citizens and want nothing to do with illegal behavior.  Additionally, a lack of vigilance on their part is not worth the risk of regulatory action.

These institutions, which are, in a sense, the true gatekeepers of the financial system, have also become more effective in detecting and combating illicit money flows.  As a result, they have made us all safer, and they have become sounder and stronger.

We strive to make information-sharing a truly two-way street by expanding and improving the information we provide, to help make them better-informed decisions -- to help them make better-informed decisions about their customers.

The information the financial sector shares with the government is critically important to our efforts, and they do so under obligations they sometimes perceive as unduly burdensome.  We will continue to work to ensure that the security benefits justify the regulatory obligations, and we will make adjustments as warranted.  If we communicate well with the private sector, I believe that we can make our regulations more efficient and simultaneously be more effective in protecting our national security.

The impact(s) of these new measures are evident around the world, and I'd like to highlight a few notable examples.

Terrorism continues -- excuse me.  Let me start with terrorism here and just say that Treasury continues an intensive effort to track and disrupt terrorist financing that has been effective on several levels.  This effort has involved government-wide cooperation, applying law enforcement, military, intelligence and financial tools depending on the target and the situation.  While individual terrorist attacks may be inexpensive to carry out, global terrorist groups need large sums of money to pay operatives, to recruit and train members, to acquire false documents and to travel.  By exploiting the financial intelligence generated by that activity and by combining it with other available information, we have made progress in mapping these terrorist networks.  In many ways, that has been the Treasury Department's most important, but least visible, contribution to the fight against terrorist groups. 

Our actions have had additional disruptive effects.  We have frozen assets and closed off conduits, such as terrorist-supporting charities in the United States.  Some international entities have shut down simply by virtue of being publicly designated and exposed.  When we restrict the flow of funds to terrorists groups or disable a link in their financing chain, they then have to shift their focus from planning attacks to concern about their financial viability.  These designations may also have a deterrent effect on the financiers who want to keep one foot in the legitimate business world while supporting murder and violence on the side. 

When the target provides support to al Qaeda or the Taliban, we have perhaps the best example of a multilateral program of targeted financial measures.  A U.N. Security Council list that requires all member states to freeze the assets of the designated actors is very important.  Even when we don't have the multilateral regime, such as in the case of financial supporters of Hezbollah or the Palestinian Islamic Jihad, we have found that our designations make an impact beyond their formal, legal reach, as many banks around the world, who are not obligated to do so, screen their customers and transactions against our list of designated terrorist supporters. 

In North Korea, we have used targeted financial measures to help protect the U.S. financial system from the DPRK's illicit financial conduct.  We used our authorities to designate several North Korean entities involved in its weapons programs.  Because it served as a primary conduit for North Korean illicit actors to access the international financial system, we have also cut off Macau-based Banco Delta Asia's access to the U.S. financial system. 

The real impact, however, has come from the information made public in conjunction with these actions. Worldwide, private financial institutions decided to terminate their business relationships with the designated entities, as well as others suspected of engaging in similar conduct.  The result is North Korea's virtual isolation from the global financial system. The effect on North Korea has been significant, because even the most reclusive regime depends on access to the international financial system. 

It is clear to everyone in the world today that the U.S. government takes very seriously its responsibility to preserve the security of the financial system and protect it against abuses of WMD proliferation, money laundering and other illegal activities.  We have potent tools that can change behavior.  In this case, our financial measures are part of a wider campaign to change North Korean behavior, including the State Department-led effort to bring about a denuclearization of the Korean Peninsula. 

Let me say a few words about Iran.  We are currently in the midst of an effort to apply these same lessons to the very real threat posed by Iran.  It is well known that Iran is pursuing nuclear weapons in violation of international agreements and channeling hundreds of millions of dollars to terrorist groups.  Still, when I was first briefed on the details, I was surprised to learn the extent to which Iran was exploiting global financial ties to pursue and finance its dangerous behavior, and the extent to which reputable financial institutions were being drawn into these schemes.  Financial institutions that would exercise extreme caution to avoid even small-time crooks were unknowingly handling the money of Iran's proliferation front companies.  I knew that the people who run these financial institutions would be shocked and disturbed, to say the least, if they were aware of these facts. 

So to combat the Iranian threat we embarked on a strategy that combines the use of intelligence-based targeted financial measures with a concentrated outreach strategy to inform financial leaders, in governments and especially in the private sector, of what was happening.  Treasury put together a briefing describing the range of Iran's deceptive financial conduct.  We explained how Iran uses front companies and other mechanisms that make it difficult, if not impossible, for businesses dealing with Iran to know their customer or counterparty. 

We also explained how the Iranian regime uses its state-owned banks to pursue its missile procurement program and nuclear programs, as well as fund terrorism.  Repeatedly, state-owned Iranian banks, including the Central Bank of Iran, ask other financial institutions to remove their names from global transactions.  This practice aims to evade risk-management controls and threatens to involve responsible financial institutions in transactions they would never knowingly handle.

At around the same time, in September of 2006, Treasury cut Iran's state-owned Bank Saderat off from any direct or indirect access to the U.S. financial system, and publicly disclosed some of the information underlying that decision, including the Central Bank of Iran was sending money through Bank Saderat to Hezbollah.  We also disclosed evidence that Bank Saderat was providing financial services to other terrorist groups such as the Palestinian Islamic Jihad and Hamas.  Almost immediately, financial institutions around the world began to adjust their business with all Iranian state-owned banks and with Bank Saderat.  The private sector, when presented with our solid evidence, is able to act much more quickly than governments who often lack the necessary authority or the political will to take action on their own.

As part of our outreach, we shared extensive information with some of our allies about another Iranian state-owned bank, Bank Sepah, which was providing financial services to Iranian missile firms and trying to disguise its activities.  It was our hope that another nation would take the lead in pursuing an action against Bank Sepah, especially when we learned that one of our allies had independently corroborated the information we shared.  Due to a lack of legal authorities and political will, that did not happen.  So, in January of this year, we unilaterally designated Bank Sepah as a facilitator of Iranian proliferation.

Other nations often seem to lack the political will to take unilateral actions, and our goal has always been multilateral action.  To that end, our outreach eventually proved to be successful when our allies joined us in persuading the United Nations Security Council to blacklist Bank Sepah in its most recent resolution against Iran.  Now the entire world must freeze Bank Sepah's assets, and isolate it from the global financial system.

As a result of our outreach and targeted measures, financial institutions around the world are more sensitive than ever about the very substantial risks posed by doing business with Iran.  Most of the world's top financial institutions have now dramatically reduced their Iranian business or stopped it altogether.  For the most part, they are not legally required to take these steps but they have decided, as a matter of prudence and integrity, that they do not want to be the bankers for such a regime.

To those banks that have decided to stop dollar-based business, but continue to transact Iran's business in other currencies, I would say that the risk of transacting Iran's business is present in every currency.  Engagement of Iran's state-controlled banks, its Central Bank in advancing the regime's policies should be cause for great concern to financial institutions around the world.

Due to our State Department's outstanding work, the U.N. has passed two unanimous Security Council resolutions sanctioning Iran, and is working on a third.  As we approach this next resolution, we are increasingly focused on the role of Iran's Revolutionary Guard Corps.  The IRGC, a paramilitary arm of the regime, it has been directly involved in planning and support of terrorist acts, as well as funding and training other terrorist groups to pursue the military objectives of the regime.  Based on its proliferation activities, the U.N. has targeted IRGC companies and officials in recent resolutions.  The IRGC is so deeply entrenched in Iran's economy and commercial enterprises, it is increasingly likely that if you are doing business with Iran, you are somehow doing business with the IRGC.

In a country where the regime uses its state-owned banks, military entities, and state-run industries to fund, facilitate, and conceal its WMD and missile programs, the eyes of the world will inevitably turn to the decision-maker, the regime itself, and demand that it be held accountable.  By approaching the Iran issue the way we have, focusing intensely on specific illicit conduct and making the private sector a partner in this effort, we are in a better position to discuss broader measures with our allies.  While the financial isolation of the entire regime may impose costs on our partners and on us, it would be far less costly than a nuclear-armed Iran.

Now, as these examples show, the innovative use of targeted financial measures has advanced our national security, but there are gaps in this effort that must be filled.  One of the greatest challenges of this century will be to keep the most dangerous weapons out of the hands of dangerous people.  As I travel and meet with my colleagues in finance ministries around the world, everyone acknowledges that we must find effective ways to deal with these threats short of military measures.  Yet other nations are not moving quickly enough to accomplish this goal.

Specifically, nations must implement the laws necessary to give their finance ministries the authority to access and use intelligence, and they must move to integrate financial and security functions.  This will enable further cooperation and multilateral action, which is in the world's best interest.  And, these authorities must be available for use against terrorist financing, money laundering and the dangerous emerging practice of proliferation financing.

Although there has not been a terrorist attack on American soil since 9/11, terrorists have struck London, Madrid, Jakarta, Mumbai, Amman, Bali and Istanbul.  Several of our key allies who support our global effort against terrorism have yet to take such basic steps as adequately crimininalizing money laundering and terrorist financing.  An even greater number of countries have failed to develop the national authorities and capabilities necessary to apply targeted financial measures to any terrorist group other than Al Qaeda and the Taliban.

We have a shared responsibility for our mutual security; and our allies, who confront risks at least as great as those confronting the United States, must find the political will to enact the authorities they need to join in an effective multilateral action.  These authorities may not deal a knockout punch, but they can and will produce results and change behavior.

My finance ministry counterparts and I have the same responsibility -- to broaden our role beyond economic stewardship and become valuable contributors to help ensure our countries' and our citizens' security.  In performing these dual roles, we seek essentially the same end:  preserving the global financial system's integrity, which will enhance economic security and prosperity for people around the world.

Thank you.  (Applause.)

GREENBERG:  The secretary will take questions.  Please wait till the microphone gets there, raise your hand and identify yourself.

QUESTIONER:  Rick Thoman, Corporate Perspectives, Columbia University.  Hi, Hank.  How are you? 

PAULSON:  (Inaudible.)

QUESTIONER:  Nice to see you again. 

I wanted to ask you a question about a little bit of a different subject.  We've seen since the end of the '90s the arguments about the weight of Sarbanes-Oxley, the competitiveness of the financial system. We've seen our productivity declining.  My friends who are on boards tell me it's no fun anymore, and CEOs tell me the same thing.  Are we creating an environment in which growth and risk and innovation is increasingly difficult?  And if so, what do we do about it?  How do you sort of weight those factors as you think about your job and the creation of an environment much more friendly for growth and innovation?

PAULSON:  Rick, thank you for the comment -- or question.  This has been something that I have been very focused on as Treasury secretary.  And I haven't been focused on it alone, you know, there have been a good number of groups here in New York, Mike Bloomberg and Senator Schumer, focused on it.  You know, a number of groups.  And it is a complicated issue because it's important to get the balance right, to be preserving the system and not, you know, overburdening our system and hurting its competitiveness.  And as we're focusing on it at Treasury, we're looking at several different fronts, and we've been taking a number of actions.

A big focus has been looking at accounting because, as you know, the business scandals for the most part were accounting scandals.  There have been, you know, significant changes, and all of the changes haven't played out in a constructive basis.  And the relationships between accountants and boards and managements have been changed in some pretty fundamental ways.  And so we've -- we're doing a number of things. 

First of all, I commend the SEC, because the -- Section 404 of Sarbanes-Oxley, which again is a pretty innocuous section.  It's -- but the way it was implemented -- it's been implemented in such a way that it's been a real burden on companies.  And I think the SEC and the PCAOB have moved to correct that in a powerful way.  I think that the SEC has also been a proponent, as are we at Treasury, of moving toward international accounting standards. 

We have, at Treasury, put together a committee to look at the long-term viability of the auditing industry and the accounting industry.  We are also studying in Treasury and taking a look at all of the restatements, roughly some 1,400 restatements or whatever last year.  And this is -- it is not helpful to investors. 

So there's a focus there, and then we have a number of other focuses.  We are taking a hard look at the regulatory structure in the U.S., and we're going to be adding some things to say about that in a number of weeks.  And there's a lot of thought being given to the legal and the enforcement environment. 

GREENBERG:  Say that I didn't plant that question.  (Laughter.) 


QUESTIONER:  Thank you.  Bal Das from InsCap Partners.  Thank you, Secretary Paulson, for sharing your thoughts with us on an important matter. 

Coming back to the question of security of the financial markets and national security, I'd be interested in your comments on -- and medium-term concerns that you see China posing both at a macro level to national security from a financial market standpoint, and also at a micro level when you see our interests and our policies sort of running aground in countries like Zimbabwe, to a certain extent, and Darfur and other rogue regimes, where we see a difference of approach between China and United States and other countries which share views like the United States does on human rights and related matters. 

Thank you. 

PAULSON:  Thank you for your question. 

Let me begin by saying, the Chinese-U.S. relationship is a very important one.  It's a multi-faceted one.  I have devoted my efforts primarily to the long-term economic relationship between our two countries.  A number of the things you're talking about are handled primarily by the State Department, but let me still comment on a number of them. 

First of all, with regard to the financial system, I've had very direct discussions with the Chinese about the need to keep, you know, our financial system, to keep their banks and financial systems free from, you know, abuses by rogue states or bad actors around the world, including some associated with Iran, and so had very direct discussions about that. 

And then secondly, when we look at some of the situations you're pointing to around the world, again, as you could tell from my speech, I really believe the way forward is to do things on a multilateral basis.  And I am grateful for the fact that China has not voted against any of the U.N. Security Council resolutions on Iran.  And we're going to continue to work with them, and make them a multilateral partner. 

And in terms of, you know, lending practices, one of the points that we make to the Chinese is, they're no longer a, you know, small, developing nature.  They're an economic power, and they are a strategic stakeholder, and they've got a vested interest in having the global financial system, the global economy work well.  They care as much about security and should care as much about security as we do.  And so we're working diligently, and so, I think, I'll leave it at that. 

GREENBERG:  May I ask a question, Mr. Secretary? 

The council had a task force on terrorist financing two years ago, and it was done over a period of about a year.  And we found that we had difficulty getting information from Saudi Arabia on terrorist financing, and that was very disturbing.

Saudi Arabia, let me say that the -- my view is that the Saudis have been very effective at dealing with terrorists, in countering terrorists within the kingdom, and they need to do a better job holding people accountable who finance terrorism around the world.  (Laughter.)

GREENBERG:  This side, back there.

QUESTIONER:  Stanley Arkin.  Good morning, Mr. Secretary.


QUESTIONER:  In the first part of your speech, you mentioned privacy.  Are you able to articulate what sort of value we presently place on privacy in banking transactions, and what we're doing about protecting that?

PAULSON:  Well, it is a big focus on protecting privacy on banking transactions, and it was interesting.  When I -- before my confirmation, the papers were replete with this issue as it related to the -- to Terrorist Finance Tracking Program.  And so one of the first things I did on assuming my role was to take a look at that and make sure that we had all of the proper procedures and -- you know, and what I found was that was a very productive and useful program, and there was really quite an elaborate effective set of controls in place.

And I would say we in the Treasury, at FinCEN also, have, you know, have controls in place that I'm very comfortable with.


QUESTIONER:  Maurice Sonnenberg.  I want to follow up on that point you made, a program known as the Society for Worldwide Interbank Financial Telecommunications, commonly known as SWIFT, the privacy point you made.  The administration and the intelligence community approached The New York Times and pleaded with them not to expose the SWIFT program.  Would you discuss, one, that aspect of privacy in the press, easy question, and also the aspect of what damage it did to us in having that program exposed.

PAULSON:  Well, I don't think -- I appreciate your question, although some may look at that as a softball.  I just don't think it's going to do any good to talk anymore about that.  I think whatever damage has been done, it's my job to look forward and make sure that we have an effective program.

Thank you.

GREENBERG:  Muriel.  Wait until we get to you.

QUESTIONER:  (Off mike.)  I'm Muriel Siebert, and I'm going back 25 years ago when I was superintendent of banks and regulated the four Iranian banks.  And when I saw that they took our captives, I had our examiners go into the four branches and monitor every wire -- money wire transfer out and every money wire transfer in.  And then two weeks later the country froze the money and we had every knowledge, and we set up the conduit where we paid for goods that were shipped.  And the money went from Tehran to, I believe, it was Bank Melli Iran in London, who manufactures Hanover, to an upstate branch of ManiAni (sp) that was not a member of the Treasury and then back down to Bank Melli Iran.

Have you ever thought of using examiners to help you really define the amount of money that is being misused in these banks?

PAULSON:  Well, let me say, as I said to you, Muriel, that the banks are increasingly -- what we've seen is that the banks are getting better and better in terms of their controls.  And when we saw -- and I was a bit shocked when I looked at some of these transactions that the state-owned banks were, you know, were doing and the length to which they went to disguise them.  And so what we did -- and we have right with us, and I should single him out, Stuart Levy, who's sitting against the wall and is our undersecretary for Terrorism Finance and just does a very, very good job and works tirelessly.  And Stuart spent a lot of time going around the world and just reviewing in some detail how these transactions were done, how to be on the alert for them.  And so we've very much done that, and I think it's made a difference.


QUESTIONER:  Mr. Secretary, I'm Jay Goldin.  I wonder if you'd be willing to elaborate on the inference in one of your earlier answers about the tension between American international interests and the cooperation of the Chinese government, and the domestic pressures, political and otherwise, in the United States to persuade the Chinese to liberalize their economy in order to facilitate American investment and trade.

PAULSON:  Okay.  Yeah.  Okay, I didn't -- I thought the other question was more directed at some of the other activities.

Yes.  I am devoting a lot of time to the effort you refer to.  Under President Bush and President Hu's leadership, we've set up the Strategic Economic Dialogue with China.  And to me, the most interesting part of it and the most important part of this economic relationship is not the WTO compliance.  That's necessary.  That's essential.  We have dispute resolution mechanisms for compliance with the WTO.  I tend to look at what China's agreed to with the WTO as being sort of a minimal base level.  And the key to that economy continuing to develop and reform, and in a way in which it's going to be good for the Chinese and for all of her trading partners, is to continue to open up their economy to trade in goods and services and to competition.  And the longer they wait, the more difficult I think it will be, in the sense that you're getting domestic competitors who are increasingly vocal and politically powerful.

And so what we've done is, we have a mechanism which I think has garnered tangible results, will get tangible results.  We're speaking with one voice to the highest levels.  We're getting -- I would like to have more progress, but we're getting more than we would have had without this.  And it is -- you know, I just think it's -- what you referred to is going to be essential.  We have -- our exports to China are going -- growing faster than for any other country, and they were $58 billion last year, and they're continuing to grow.  But what is going to be key for the long term is opening up that economy to competition.

GREENBERG:  Back there.

QUESTIONER:  Thank you so much, Mr. Paulson.  I'm Henny Sender with The Wall Street Journal.


QUESTIONER:  I wondered if you could comment on the recent turbulence in the bond market and, on a more long-term basis, what you see as the impact on the Treasury market and the U.S. dollar as more and more of the world's savings are in the hands of these semi-sovereign investment authorities who have spoken about the need to earn more on their reserves.  Thank you.

PAULSON:  Okay.  Well, let me -- so, Henny, good to see you.  And you've -- two questions and I will answer them both.

First of all, in terms of some volatility in markets, you're always going to see volatility.  I tend to look at the underlying economic conditions, which I believe continue to still be very good.

As you noted, interest rates have moved up.  Interest rates are still low in the U.S and around the world on any kind of historical basis.

Now, I, you know, would make a point also, while I'm looking at this, is to say that borrowers need to be very conscious of the risks that they're taking on, and lenders, I think, need to be vigilant.  We've seen the relaxation of covenants on certain loans and an erosion of practices -- lending practices in a number of areas.

And so as I look at the recent move-up in interest rates, it -- you know, you can also look at it as a bit of a wake-up call to call attention to some of the potential excesses out there.

Now, in terms of global imbalances, the point that I have repeatedly made is that this is a shared responsibility and it's going to take time.  And the balances are a result of structural differences.  We have an economy that's been growing for some time.  We have a low savings rate.  In Japan we're very fortunate to have the Japanese economy growing, but we still need more structural reform, and they're very dependent on exports, and we need them to become more consumption driven.  In China that's a big issue as that economy reforms.  It needs to have more reliance on consumption.  And again, we think that greater movement in the currency, moving to a market-determined currency, more flexibility in the short term, will help in that.  And so this is something that is structural and will take some time.

Now, in terms of the reserves, I've always argued that -- two things.  First of all, countries around the world invest in U.S. treasuries and U.S. securities because they believe it gives them the best risk-adjusted rate of return.  That I repeatedly get questions, "Aren't you concerned that too many of our treasuries are held by foreign investors?"  And people will cite China or Japan or foreign investors.

And I would just simply say I think I know something about bond markets and creating demand, and I think it's a positive that we have demand for our securities from all around the world, number one.  Number two, when you look at our treasuries, the percentage held by foreign investors is not less than for most other countries, and the foreign investors give us lower interest rates.  And again, we have a big liquid treasury market.  That China is the second largest holder of our treasuries, Japan is the largest holder, but we have a market where $500 billion of treasuries trade in a day.  And so we're talking  about countries that hold, you know, a bit more or a bit less than one day's trading volume.


QUESTIONER:  Mr. Secretary, my name is David Good.  I represent the Tata Group, which is an India-based company with substantial global investments.  My question is about CFIUS.  And I know that there are several changes to CFIUS that are before Congress right now, and I'm just wondering about Treasury's position and where do you think those changes are going to go.

PAULSON:  Well, first of all, we are quite encouraged.  We have both a House bill and a Senate bill, and although it's very difficult to predict what's going to happen in Congress, I would be optimistic that we will get a good CFIUS bill.  And again, I think that's very important because, for those of you who aren't familiar with the issue, we have always been open for U.S. investment.  We're as open as any country in the world.  I mean for foreign investment.  And it's a real strength of our economy, and we've encouraged it and we want to continue to encourage it.

There was some confusion as a result of the Dubai Ports issues and a couple of other things that started to make people around the world question whether we were really open for investment, because CFIUS deals with national security issues, and a relatively very small percentage of investment in the U.S. even raise any national security issues.  And of those that are looked at, most of them are resolved without any controversy.

But it was, I think, very important to clear up this point.  I think legislation will be a positive.  The president put out a statement on the importance of open economies open for trade and investment a number of weeks ago and asked me to carry forward the message, and I had a number of events around -- in Washington and in Missouri to again emphasize the importance of investment.

QUESTIONER:  Mr. Secretary, can I follow up on an earlier question?

GREENBERG:  Let me just -- you want to -- okay --

QUESTIONER:  Am I on?  (Laughter.)  Only one more.


QUESTIONER:  After World War II, we started up the Bretton Woods currency regime; today you have several countries who let the market decide their currency -- we do, the Europeans do -- and half the world doesn't -- China, Japan and others.  How can you have a currency regime where the market sets the currency for some countries and politicians set it for others?

PAULSON:  I'm glad you asked that question.  (Laughter.)

QUESTIONER:  I thought you would be.

PAULSON:  That is a question which I am asking repeatedly.  You know, there are a good number of countries in the world that don't have market-determined currencies, but China is by far the largest.  So here you have in some ways an unnatural act, to have a country that's so big and so integrated into the global system in terms of trades and goods and services and not in terms of capital markets or currency, and so this has got to be a huge issue not only for the U.S. but for the rest of the world.

And I think we also need our multilateral institutions to change their focus.  You know, going back to the days you talked about, that was a very important role of IMF, looking at currencies.  But, you know, when you look at, you know, the need to have currency surveillance for the dollar or the euro, it's -- you know, the elephant in the living room are the -- you know, are countries like China that don't have a market-determined currency.  And so I do think that this is not sustainable over the long term, it's something we're going to have to resolve, it's something I've been trying very hard to resolve.  It won't be resolved during my 18 months here; I just hope we make some progress.

QUESTIONER:  Thank you.

GREENBERG:  One more question.

QUESTIONER:  Steve Rattner from Quadrangle.  Mr. Secretary, there's a piece in The Wall Street Journal today describing a piece on foreign affairs by a former member of the Bush administration from the Council of Economic Advisers, who argues that those of us who believe in globalization have to recognize that there are winners and losers in this country and elsewhere, but in this country, anyway, and if we want to avoid protectionist backlash and other unfortunate events, we have to, A, recognize that and, B, do something about it.  And specifically, it talks about using the tax code to do something about that, i.e., to tax the winners from globalization at a higher level and to do more for the losers from globalization.  It mentions, for example, exempting people below a certain level from Social Security taxes.

So my question really is, do you accept the notion that there are winners and losers from globalization and the idea that we should do something about it?  And do any of these ideas resonate with you as things to do about it?

PAULSON:  Steve, thank you for your question, because that's -- it's a very topical question, and I think it's going to be an issue that we'll be talking about for some time in this country and around the world.  And I think it stems from the fact that we've had a widening gap in income, going back for several decades in this country and around the world.  We are seeing greater income disparities.  And so the -- and I have no doubt that one of the reasons why there is resistance to -- let me put -- why there is protectionist sentiment -- one of the reasons is a view that the benefits of globalization are not shared equally within countries or among countries.  So that's a fact and that's a perception.

Now, the question of what to do about it -- and, you know, to step back even further -- although I think globalization is a factor, my own view -- that one of the biggest factors is technological advancement.  And it's what I've just witnessed, you know, over a long period of time.  I was looking at numbers the other day and -- because we were thinking about the manufacturing industry -- and in 1950, there were roughly 14 million manufacturing jobs in the U.S., and that was 30 percent of the labor force.

Today there are roughly 14 million and that's 10 percent of the labor force.  But guess who's the biggest manufacturer in the world?  The U.S.  We -- output is seven times greater than it was in 1950, we're 2.6 times larger than China, we are twice as big as Germany, we're bigger than Japan.  And so automation -- and I can just think of the corporate clients I used to work with, and what happened and what you see on the factory floor is a result of automation.

And so to me, the way -- the key thing is to not -- the protectionist sentiment, I think, is going to hurt those laborers and workers who we're trying to help.  We want to continue to stay open for competition, for investment, for trade, and we need to keep the economy growing.  And we -- and I think that's another part of it -- keep the economy growing, skills.  You know, I've looked at the Trade Adjustment Assistance program, and again, I think it's a -- been largely an ineffective program because it hasn't provided -- there hasn't been enough dollars that have trickled down to the people who need it, and it hasn't been effective at getting skills to the people who need it.

So I think that one of the key questions:  How do we get people the skills that they need to be effective in this economy and to keep the economy growing?  And so that's sort of the way I think about it.

And thank you all.  (Applause.)

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