The New York Times-20080128-Paulson-s Deal-Making Revives Treasury-s Relevance- -News Analysis-

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Paulson's Deal-Making Revives Treasury's Relevance; [News Analysis]

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In his first two years as Treasury secretary, Henry M. Paulson Jr. spent much of his time learning what his can-do pragmatism could not do.

Mr. Paulson, a former chairman of Goldman Sachs, tried in vain to build bridges between Republicans and Democrats about reforming Social Security and Medicare.

He started a strategic economic dialogue with China, but made little progress in persuading China to let its currency rise. He called for an overhaul of corporate tax rates, but made no headway in Congress.

But now Mr. Paulson is on a roll, owing to circumstances that had not exactly been on his agenda: an economic crisis stemming from the historic bust in housing prices and bad mortgages.

Ever since August, Mr. Paulson has been on a whirlwind of initiatives, some successful and some not, which culminated last week in a $150 billion fiscal stimulus package that he negotiated in record time with House Democrats.

The fiscal deal could still collapse because Senate Democrats plan to reopen demands for measures that Republicans oppose. But with a recession looming and elections just nine months away, both parties have ample incentives to deliver tangible relief quickly.

I don't place a lot of value on ideology for ideology's sake, Mr. Paulson said in an interview in his office last Friday. I am looking to do something that makes a difference.

That is a big change for the Bush administration, which had seemed to relish battles and disdain compromise over spending bills and the war in Iraq even after Democrats won majorities in both the House and Senate 15 months ago.

Mr. Paulson's pivotal role also signals a striking revival of the Treasury Department. Over the first six years of Mr. Bush's presidency, the Treasury had withered into little more than a marketing arm for economic policies that were conceived by a handful of people at the White House.

John W. Snow, who preceded Mr. Paulson as Treasury secretary, had traveled relentlessly to sell Mr. Bush's tax cuts, along with his ill-fated attempt to overhaul Social Security.

Mr. Paulson, by contrast, has projected a clear lack of interest in party politics. He publicly refused to make campaign speeches for Republican candidates in the 2006 midterm elections.

He has a bias for action, said Robert K. Steel, under secretary of the Treasury for domestic finance, who worked with Mr. Paulson on Wall Street for years. You start by looking at what people want to accomplish, look for where there is agreement and then work toward that.

Mr. Paulson's defining moment in the negotiations over a fiscal stimulus plan, according to lawmakers and some administration officials, came immediately after a conference call on Jan. 17 that included Mr. Bush, Mr. Paulson and Republican and Democratic leaders from the House and Senate.

Mr. Bush, according to several participants, aggravated some of the Democrats by saying he would announce his own proposal for a $150 billion plan the next day.

After the call, Senator Harry Reid, Democrat of Nevada and the majority leader, was still angry and complained publicly that Mr. Bush seemed to be acting in a unilateral rather than a bipartisan way. But even as that was happening, Mr. Paulson was calling back the lawmakers one by one to smooth over the bruised feelings. And he followed up by urging Mr. Bush to speak only about general principles and leave the specifics for lawmakers to hash out.

Mr. Bush did indeed hold back specifics, and Democrats refrained from publicly attacking specific measures that they knew Mr. Bush wanted to enact that they strongly opposed.

Last Wednesday, Mr. Paulson hammered out a deal after three long private sessions with Representative Nancy Pelosi, Democrat of California and the House speaker, and the House Republican leader, John Boehner of Ohio. Starting over a breakfast of bagels and fruit, and finishing with a meeting that ended at about 8:30 p.m., the three negotiators were joined by fewer than 10 top aides in all.

Mr. Paulson, according to one participant, left most of the talking to Ms. Pelosi and Mr. Boehner and focused instead on keeping them on track toward an agreement. But because Mr. Paulson had already held scores of phone calls with both lawmakers, and many others, the three already had a sense of both their bottom-line demands and the points they might concede.

I had a good rapport with him, Ms. Pelosi said in an interview. He knew we had to have an arrangement, so if I was going to give anything up, I had to get a lot.

Democrats were relieved that Mr. Bush did not insist that a stimulus plan include a permanent extension of his tax cuts, a move that Democrats would have blocked potentially delaying the entire effort.

Mr. Bush had repeatedly emphasized that making the tax cuts permanent was one of his top economic priorities. White House officials say Mr. Bush had no intention of linking the stimulus bill to his tax cuts, but they did not confirm that publicly until the evening before Mr. Bush's speech on Jan. 18.

The result was a bargain that both sides could call a victory. Mr. Bush and House Republican leaders agreed to provide tax rebates to almost everybody, including millions of people who did not earn enough to pay federal income taxes. Ms. Pelosi agreed to drop demands to expand unemployment benefits and food stamps.

Unlike many other top Bush administration officials, Mr. Paulson has taken pains to cast himself as a bridge-builder to Democrats.

Immediately after being confirmed as Treasury secretary, he reached out to prominent Democrats. He sounded out Representative Charles B. Rangel of New York, chairman of the House Ways and Means Committee, about ways to reduce the looming budget shortfalls in Social Security.

Somewhat naively, he suggested that he was open to all options, implicitly including tax increases, only to be reined in by Karl Rove, then Mr. Bush's top political adviser.

But in recent months, Mr. Paulson has actively sought out the views of top Democrats as he considered ways to address a rising panic about foreclosures by subprime mortgage borrowers and rising fears about an economic recession.

When Mr. Bush traveled to the Middle East 10 days ago, Mr. Paulson canvassed both Democrats and Republicans about what they might or might not accept in a fiscal stimulus package.

The answers were straightforward. Democrats wanted a mix of tax rebates and spending aimed primarily at middle- and low-income people who were most likely to be in financial trouble. Republican lawmakers abhorred any new spending on unemployment benefits or food stamps, opposed tax rebates for people who had not owed any taxes and wanted tax incentives for business.

Even Representative Barney Frank, Democrat of Massachusetts and the chairman of the House Financial Services Committee, who is often a biting critic of the Bush administration, praised Mr. Paulson for his willingness to listen as well as his ear for the political concerns of lawmakers.

We have had good conversations with Paulson, Mr. Frank said in an interview shortly before the stimulus deal was announced. And I am prepared to go out on a limb by the way and say that being in the financial services industry is better preparation to be secretary of the Treasury than either aluminum or railroads, which were the two predecessors.

Mr. Paulson has not stopped buttonholing or demon-dialing lawmakers. On Friday, when most lawmakers had gone back to their home states for the weekend, he met personally with Senator Chris Dodd of Connecticut, chairman of the Senate Banking Committee, and called at least 10 other lawmakers including Mr. Reid and Senator Max Baucus of Montana, chairman of the Senate Finance Committee.

The can-do man was leaving nothing to chance.

[Illustration]PHOTO: Henry M. Paulson Jr. (PHOTOGRAPH BY FREDDIE LEE/FOX NEWS SUNDAY, VIA GETTY IMAGES)