The following is a partial transcript of the Sept. 21, 2008, edition of "FOX News Sunday With Chris Wallace":

"FOX NEWS SUNDAY" HOST CHRIS WALLACE: And hello again from FOX News in Washington. Well, what a week it was for the financial markets, with a meltdown that officials said was the most serious since the great depression.

Now Congress and the administration are working on a plan to rescue the markets and calm investors. For more, we turn to the man at the center of the crisis, Treasury Secretary Henry Paulson.

And, Mr. Secretary, welcome back to "FOX News Sunday."


WALLACE: Let's start with the problem. How dire is the situation if Congress does nothing?

PAULSON: The markets are fragile. We have a serious situation. Last week the credit markets were frozen and clogged up. And for a while there, American companies, industrial companies, weren't able to raise financing normally.

If we get to a situation where companies can't readily raise financing, where it's difficult for farmers and small business men to get loans, where people's retirement incomes are threatened, that's a situation we don't want to have.

And that's why it is very important we move quickly and stabilize the markets by buying these illiquid loans, these illiquid mortgage loans, from the financial institutions which are clogging up the system. So that will then let the institutions play their role.

WALLACE: Again, talking pre-bailout, as we sit here today, how many more financial institutions are in danger of collapse? And is this a financial crisis or is this a threat to the entire economy?

PAULSON: Well, this is — I can't say that there won't be more financial institutions that will have problems here. But the key thing is to stabilize the markets.

And again, this is a situation that we can work through. We as a country have always worked through these situations, and we will.

But the concern I have is about the American people and the economy. In other words, we're not doing this to protect our financial institutions in and of themselves. We're doing it to protect the financial institutions because that's what is needed to protect the American taxpayer.

And unfortunately, the American taxpayer is right now at risk if there is a tough situation in the economy. So we're trying to reduce that risk to the American public.

WALLACE: All right. Let's turn to your proposed bailout. It's complicated. I want to go through a lot of parts of it, so if we can do a lightning round of quick questions and quick but responsible answers, I would appreciate it.

The draft legislation gives you $700 billion to buy troubled mortgage securities. How do you decide which to buy and what to pay for them?

PAULSON: Well, Chris, that's a very important part, because what we're going to need to do is buy them in a way in which it unclogs the system and makes the system healthier, and do it at a price that protects the taxpayers.

WALLACE: So how do you decide what to buy and what to pay?

PAULSON: Well, we're going to have some professional asset managers and some real experts working with us. And we'll use a — you know, we're working through the processes, but there'll be some form of auction process.

WALLACE: The legislation says that you can buy from any financial institution. Does that include hedge funds? Does that include foreign institutions with American affiliates?

PAULSON: The intent right now wouldn't be to buy from hedge funds.

But obviously, we would want to buy from financial institutions that are employing people and are an important part of our economy, because to the American people, if an institution that's doing business here is clogged and can't perform the role they need to do, it's a distinction without a difference, whether it's a foreign- or a U.S.- owned, as long as they have operations here.

Remember, our system is a global one, and I'm also going to be pressing our colleagues around the world to design similar programs for their banks and institutions where they are appropriate.

WALLACE: But I think one thing that people are concerned about — for instance, the hedge funds which have been highly speculative.


WALLACE: You've got people who've made billions of dollars. They've got the private jets. Are you going to be spending taxpayer money to bail out these hedge funds?

PAULSON: It certainly is not our intent to be buying assets from the hedge funds.

But remember, step back on this program. All the assets we buy is with the intent of minimizing the risk to the taxpayer, because unfortunately, the taxpayer is already at risk if we have broader problems in the economy.

So what we're trying to do is reduce the cost and reduce the risk to the taxpayer through this action.

WALLACE: Well, let's — that brings me to my next question in the lightning round. What guarantees are there that these securities will ever be worth anything, that taxpayers won't end up holding billions of dollars of bad paper?

PAULSON: Well, Chris, there are no guarantees, and the taxpayer is at risk.

But I think it is very important to understand the difference between what we're doing and an expenditure or an outlay. This is not a spending program.

This is a program where the government would buy illiquid assets, hold those assets and sell those assets, and the funds would come back into the treasury, and it would be extraordinary circumstances — highly unlikely — that the cost would be anything like the amount you spend for the assets.

And the cost will be determined by how quickly the economy recovers and how quickly housing prices stabilize. And again, I don't like the fact that we have to do this. I hate the fact that we have to do it. But it's better than the alternative.

And once we stabilize the markets, we then have to take actions to make sure this doesn't happen again. And we have a regulatory system that is broken. It's outdated. It's outmoded. It doesn't fit the world we live in. We have regulatory authorities that are broken and outdated and need to be updated.

There's a lot of work that needs to be done, a lot of reform that needs to be done. But first we need to stabilize the system and move quickly.

WALLACE: I want to get back to the question of protecting the taxpayer. Since we're bailing out these banks and investment firms, do you limit executive salaries?

And do taxpayers — because after you take the bad debt off, these firms are going to become big again and make millions of dollars. Will taxpayers get a piece of the action, get a piece of equity, in firms as they start to make money?

PAULSON: Chris, that's a very important question. I'm going to take a little bit longer to answer that, because where we've come in, where the government has come in, the fed has come in, to failing firms and injected capital directly into those firms, there have been very strong steps taken to limit compensation, to protect the taxpayer — the GSEs's, with AIG.

This program is much different in intent. This is not to just deal with institutions on the brink of failure. This is to protect the system by avoiding as much failure as possible.

And so what we want to do is go across the whole spectrum of financial institutions and buy assets so that the system isn't clogged.

WALLACE: But the answer is no, you're not going to be eliminating executive salaries.

PAULSON: But the — I want to say it this way, because if we design it so it's punitive and so institutions aren't going to participate, this won't work the way we need it to work.

Let's talk about executive salaries. There have been excesses there. I agree with the American people. Pay should be for performance, not for failure. We've got work to do in that regard. We need to do that work.

But we need this system to work, and so we — the reforms need to come afterwards. And my whole objective with the plan we have is to give us the maximum ability to make it work.

WALLACE: All right. Your immediate challenge now is to get this through Congress. And Democrats are saying, "Wait a minute, if you're going to bail out Wall Street, you've got to bail out Main Street."

If they add, particularly, mortgage relief to this package, some way to help people deal with possible foreclosure, will the president sign it or will he insist on a clean bill?

PAULSON: I need to go back to the forest through the trees. This program, in and of itself, is designed to minimize the cost to the American public and the taxpayer — much greater risk in not doing this than in doing it, number one.

Number two, we want this to be clean and we want it to be quick, and it's urgent that we get this done. So you know, it's very important that it be done that way.

WALLACE: But are you insisting on a clean bill? Are you saying that if the Democrats — let me just ask my question, Mr. Secretary.


WALLACE: If the Democrats insist there has to be a mortgage relief component to this package, is the president going to say yes or no?

PAULSON: Well, I — first of all, I think there should be a mortgage relief component to this. We've been working very hard to keep homeowners who want to stay in their home and have the ability to stay in their home financially in their home.

We've had a lot of efforts, and I would sure — I would be very, very surprised and disappointed if, at a time when the government owns a lot of these securities, we won't have more leverage to do that. And that should be a big focus.

WALLACE: Between this legislation and the earlier bailouts, we're talking about roughly $1 trillion that the government is taking on in new debt. What does that do to the economy? What does that do to the dollar? What does that do to inflation?

PAULSON: Well, let me — I think you need to look at this carefully. Fannie May and Freddie Mac are situations where the government lived up to its responsibilities.

Those charters were created many years ago, those congressional charters, with their ambiguities and obligations, and if we hadn't stepped in very quickly to do that before this situation materialized, we'd be in a dire situation now, and fortunately we did that.

Now, in terms of these other situations, AIG and the — and this plan, as I've said to you, you need to think about them differently than a normal spending plan, because this will be a purchase of asset and then a resale of asset, and then money coming in.

WALLACE: But it could be years from now.

PAULSON: Right. It will be years from now, so this will cause federal debt to increase, and then money to come in over time.

So there's no doubt that this — that this plan is something that puts the — is something that is going to increase the debt of the United States of America, the debt that we issue.

WALLACE: You said earlier, "I hate this plan. I hate the fact that I'm part of this plan."

A lot of taxpayers — and I think you can sympathize with them — are going to say, "Look, when the markets were going up, there was all this talk, particularly from a Republican administration, about free markets and deregulation, and people were making lots of money and living high on the hog. And now when they're in trouble, and I understand the reasons, because there's a threat to the entire economy, we have to bail them out."

Can't you see how that sticks in people's craws?

PAULSON: Of course I can. And if I had been Rip van Winkle and waken up, you know, I would say the same thing. It is this — this sticks in my craw. But it is, by far, the least costly way to proceed for the American economy, for the American people.

And all I can say to the public is I don't just hate it, but we need to do something about it. The first thing we need to do is protect the system, stabilize the system.

Months and months and months ago, I had spent a long time putting out a regulatory blueprint to deal with this outdated, outmoded regulatory system we have. There are all kinds of policy prescriptions and reforms that need to be done.

This is a humbling, humbling time for the United States of America as we go around the world and talk to people about our financial system. We will work through this. We need to stabilize it first, and then we need to take steps to clean things up.

WALLACE: We've got a couple of more minutes, and I want to ask you a couple of questions. When you were last here in March, the Fed had just bailed out Bear Stearns, a company that ended up being sold and no longer exists, and I asked you the following question. Take a look.


WALLACE: Are more Wall Street firms in danger, at risk, of going under?

PAULSON: Chris, I've got great confidence in our financial market, our financial institutions. Our markets are resilient. They're flexible. Our institutions, our banks and investment banks, are strong.


WALLACE: Mr. Secretary, weren't you and other government officials too optimistic about the situation? And if you had acted sooner, could we have avoided a $1 trillion bailout?

PAULSON: Well, Chris, I'm not sure what we could have done sooner. We're dealing with a situation that people have said to me, and I agree with, in terms of the run-up in real estate prices and the correction — you know, a once-in-a-50-year kind of a situation here.

And there is no way that we could have gone to Congress and got the authority to inject capital into the banking system by buying illiquid assets unless there was the clear and urgent and obvious need.

So although many of us looking at it said it could come to something like this, we are hoping to avoid it. And the key here was the speed of the housing price correction.

WALLACE: Finally, there are a lot of nervous people listening to you on this program right now. What guarantee can you give them that their life savings that are in a bank or in an investment firm will be safe with this bailout?

PAULSON: Well, let me say to the people that are watching, if you have money in an FDIC-insured bank account, $100,000 or less, no one in the history of that program has lost a penny, and you won't lose a penny in that program.

The next thing I will say to them is we moved very quickly to take actions to guarantee money market accounts using Treasury's authorities. So those accounts are safe.

The last thing I'll say to them — there are no guarantees in terms of the overall economy, but this program is designed to work. I believe it will work.

And I just will say to the American people we can have confidence. We're a great country. We've worked through these problems. We're going to work through this problem.

And remember, it all goes to the American people. We're the most entrepreneurial, hard-working people. That's the root cause — the root strength of our economy. I'm sorry we're in this situation, but we're going to work through it.

WALLACE: Mr. Secretary, I think that's a good place to leave it. I want to thank you so much for coming in and answering our questions. And as this situation develops, please come back, sir.

PAULSON: Thank you. Thank you, Chris.