The men were speaking before the annual meeting of the Greater Omaha Chamber of Commerce in Omaha, Nebraska, where Buffett's insurance and investment company Berkshire Hathaway Inc is based. CNBC simulcast their talk on its website.
Paulson and many other regulators have been faulted for letting Lehman Brothers Holdings Inc go bankrupt on September 15, 2008, a signal event in the global financial crisis and still by far the largest bankruptcy in U.S. history.
Yet Paulson, a former Goldman Sachs Group Inc chief executive who became treasury secretary under Republican President George W. Bush in 2006, called the credit crisis of 2008 a doozy, one whose scope he never foresaw.
He praised the still-controversial agreement by former Bank of America Corp Chief Executive Kenneth Lewis to buy Merrill Lynch & Co, an accord announced roughly an hour before Lehman went bankrupt.
That move still dogs Lewis, who retired from the bank six weeks ago and was hit with a civil fraud lawsuit last week by New York Attorney General Andrew Cuomo over his conduct in the merger. Lewis' lawyers have rejected the charges.
Merrill wouldn't have lasted a week had Bank of America not bought it, Paulson said. Lewis was a confident, decisive CEO, and buying Merrill was a stabilizing action for the financial system, he said.
Still, Paulson said Wall Street pay remains out of whack and that the highest-paid workers should be compensated mainly in equity, in a way that rewards long-term performance.
Last week, Goldman said Paulson's successor Lloyd Blankfein would get $9 million for 2009 in the form of a stock bonus. That is below the $67.9 million he was awarded in 2007, when Goldman also turned a record profit. Analysts believe the lower sum could defuse some critics of pay on Wall Street and at Goldman.
Buffett was interviewing Paulson about the latter's new book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.
Long supportive of Democratic causes, Buffett said the book gave him a better understanding of how Bush and Paulson handled the financial crisis.
I really did gain an appreciation for the fact that he understood what was going on and that he understood what needed to be done, Buffett said, referring to Bush.
He recalled Bush's pithy summary of the crisis in late September 2008, in which the president was quoted as saying: If money isn't loosened up, this sucker could go down.
(Reporting by Jonathan Stempel; editing by Andre Grenon)