CQ Transcriptswire

SPEAKERS: SECRETARY OF THE TREASURY HENRY M. PAULSON JR.

UNDERSECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS DAVID H. MCCORMICK

[*] PAULSON: Last Friday, Congress finalized and President Bush signed into law the bipartisan Emergency Economic Stabilization Act. The EESA provides the Treasury, the Federal Reserve, and the FDIC with important new authorities to complement existing ones.

We will continue to coordinate with other federal regulators and use these tools to implement our strategy to address the four key challenges in our financial markets today: confidence, capital, systemic risk, and liquidity.

Although we are facing particularly difficult circumstances, I remain confident that we will work through this challenge as we have always successfully worked through every economic challenge in the history of the United States.

We are a strong and a wealthy nation with the resources to address the needs we face. I am confident that, with the right policy response, time and effort, we will conquer these challenges, as well.

U.S. and global financial markets continue to be severely strained. A chain of events caused by the ongoing housing correction has reverberated throughout -- through U.S. banks and financial institutions and has seriously impacted the underlying economy, reaching American households and businesses.

A root cause of this situation is the housing correction and a lack of confidence in mortgage assets, as well as a lack of confidence in many of the financial institutions that hold these assets.

Because of this widespread uncertainty, investors are hesitant to commit capital to financial institutions. Investor confidence is critical to restore liquidity and enhance the stability of our financial system.

This financial turmoil is now directly affecting more families and businesses.

PAULSON: When banks cannot finance at reasonable levels and cannot or are not willing to lend, everyone in our economy who depends on credit suffers. The capital markets are the pipes through which money flows to finance student loans, car loans, home loans, and small businesses’ payrolls and inventory.

And uncertainty and a lack of confidence have clogged our basic financial plumbing.

While our actions have been aimed at restoring financial markets and institutions, our purpose is to prevent financial market difficulties from further impacting businesses and families across the country.

Over the last six months, the U.S. government has addressed a number of significant problems on a case-by-case basis. In my judgment, these actions, a number of which were quite significant, were necessary, but not sufficient.

By September, uncertainty had led to a credit market freeze, and it became clear that we needed to take a systemic approach on a significant scale to get at the underlying cause of much of this turmoil.

We went to Congress and asked for broad new authorities to address the current troubles affecting our financial markets, including the root cause of the financial system freeze, the illiquid mortgage assets weighing on balance sheets.

And Congress met the very difficult challenge of providing these authorities by passing the EESA. Specifically, the EESA empowers Treasury to use up to $700 billion to inject capital into financial institutions to purchase or insure mortgage assets and to purchase any troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability.

The new law also gives the Federal Reserve the authority to pay interest on reserves and temporarily increases FDIC and NCUA deposit insurance from $100,000 to $250,000.

Two days ago, the members of the President’s Working Group on Financial Markets, the PWG, made clear that we will coordinate the use of our existing and new authorities to restore market confidence by strengthening financial institutions, preventing systemic impact from bank failures, increasing liquidity to financial markets, and keeping mortgage or credit available and affordable. The Treasury Department is moving rapidly to implement the EESA to help strengthen financial institutions while also protecting taxpayer interests.

As I have said before, the ultimate taxpayer protection will be a stable financial system that supports normal economic activity. Towards that goal, the EESA adds broad flexible authorities for Treasury to buy or insure troubled assets, provide guarantees, and inject capital.

We will use all the tools we’ve been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size. We will design programs that encourage healthy institutions to participate.

Much attention is focused on the use of auctions to purchase troubled assets from financial institutions. We are moving as quickly as possible to organize and implement the most effective process possible. We expect it will be several weeks before our first purchase.

Consistent with EESA, I have appointed an interim assistant secretary to manage the program and begin its rapid implementation. I am currently working with the president to identify a leader to submit for confirmation, as called for in the legislation, to manage the program and help ensure its long-term success.

I will also consult with congressional leaders and Senator McCain and Senator Obama during this process. It is our intent to have an appointee confirmed by the Senate as soon as possible, and I look forward to working with the Senate when they return in November to ensure we maintain strong leadership and continuity for this unprecedented effort.

We have also identified and retained other very experienced interim leaders for the office, including an interim chief financial officer. We have published guidelines on our procurement and conflict management processes.

We have already sent out several essential requests for proposals that require 48-hour turnaround so we can contract with private-sector experts, some even as early as later this week, who will bring complementary skills and expertise to the Treasury team.

We have several policy teams designing detailed programs to purchase mortgage-backed securities, whole loans, and other instruments.

In addition, we have begun work on compliance, executive compensation guidelines, foreclosure mitigation, and oversight.

PAULSON: Our teams have already been working with Treasury’s inspector general and are scheduled to meet with the General Accounting Office. Yesterday, we held our first meeting of the program’s Oversight Board, and we are committed to transparency in all aspects of the program.

We will implement our new authorities with one simple goal: to restore capital flows to the consumers and businesses that form the core of our economy.

One thing we must recognize: Even with the new Treasury authorities, some financial institutions will fail. The EESA doesn’t exist to save every financial institution for its own sake.

Therefore, a second prong in our strategy is designed to mitigate financial market disruption when a bank fails. In addition to insuring deposits up to the new, temporary level of $250,000, the FDIC has the ability to use its insurance fund and its substantial lines of credit with Treasury to address systemic financial risk that may be posed by a bank failure.

It is the policy of our federal government to use all resources at its disposal to make our financial system stronger. In light of current conditions, the FDIC, with the full support of the Fed and the Treasury, will use its authorities and resources, as appropriate, to mitigate systemic risk, by, as appropriate, protecting depositors, protecting unsecured claims, guaranteeing liabilities, and adopting other measures to support the banking system.

As we address issues of capital and financial strength in our banks, we must also address the liquidity in our markets. The Federal Reserve has introduced innovative facilities and policies to enhance the liquidity that is vital to market stability and has frequently done so in coordination with the European Central Bank.

Today’s announcement of a coordinated rate cut, including Europe, China, and other large economies, is a welcome sign that central banks around the world are prepared to take the necessary steps to support the global economy during this difficult time.

The EESA granted the Fed permanent authority to pay interest on depository institutions’ required and excess reserve balances held at the Federal Reserve. This will allow the Fed to expand its balance sheet to support financial stability while maintaining its monetary policy priorities. In recent weeks, the commercial paper market has suffered severe stress and illiquidity. Businesses ranging from financial institutions to industrial companies rely on the commercial paper market every day to fund their business activities.

In particular, financial institutions sell commercial paper and use the funds to lend to millions of consumers and businesses across the nation.

In the wake of the uncertainty surrounding financial institutions’ balance sheets, many investors are reluctant to buy commercial paper from financial institutions, in essence, unwilling to hold this unsecured debt for any significant length of time, even when the particular institution is healthy, because of the -- and this is because of the fear of not having access to liquid markets.

Yesterday, the Federal Reserve announced a new facility to provide a liquidity backstop to U.S. issuers of commercial paper. Through a U.S. -- excuse me, through a special purpose vehicle, the Fed will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers.

I expect this initiative to significantly improve the availability of funding for financial institutions and corporations that depend on the commercial paper market. Until those that depend on commercial paper can issue it again in significant maturities, funding pressures will continue to ripple through our economy, dramatically shrinking the availability of credit to support families and businesses.

As I have long said, the housing correction is the root cause of the current financial market turmoil. We must continue to keep mortgage credit available and support the housing market so that we can more quickly turn the corner on the housing correction.

To provide critical additional funding to our mortgage markets, FHFA has directed Fannie Mae and Freddie Mac to increase their purchases of agency mortgage-backed securities. Supporting the availability of mortgage finance is the mission of the GSEs.

There is headroom over $150 billion between the current GSE portfolios and their regulatory limit. FHFA will supervise the growth in these portfolios, under its current expanded authorities to monitor GSE risk management.

We also expect Fannie and Freddie to increase direct support to the mortgage market through their ongoing securitization activities.

To further support the availability of mortgage credit, Treasury has also established a program to purchase agency MBS directly. The program began in September.

PAULSON: This will complement the capital provided by the GSEs and help facilitate mortgage availability and affordability.

Stabilizing Fannie and Freddie to support mortgage availability has been constructive. As the rest of our markets experienced increased turmoil, the interest rate on 30-year fixed-rate mortgages has come down from its peak of 6.6 percent earlier this year to a low as 5.9 percent this week, a decrease that helps American households reduce monthly mortgage payments and increase the potential for more homeowners to refinance mortgages at lower rates.

As Treasury and the GSEs increase their purchases, mortgage affordability should improve for Americans. If we were not actively engaged at the GSEs, we would have expected the rate to increase and further slow the progress of the housing correction.

We see the evidence every day that world economies and financial markets are more connected and interdependent than at any time in history. Economic momentum has slowed substantially across the industrialized countries as a consequence of the ongoing financial turmoil, the acute stresses facing our financial institutions, continuing housing and market adjustments in the United States and other countries, and volatile, albeit moderating, commodity prices.

Emerging markets are also beginning to show signs of slowing. We see evidence that the freezing of credit markets is having a tangible impact on everyday lives of citizens all around the world.

Addressing these challenges requires the dramatic steps we are taking here in the United States, and it requires strong international partnerships.

Governments have and must continue to take individual and collective actions to provide much-needed liquidity, strengthen financial institutions through the provisions of capital and the deposition -- excuse me, disposition of troubled assets, prevent markets abuse, and protect the -- the savings of our citizens.

We must also take care to ensure that our actions are closely coordinated and communicated so that the action of one country does not come at the expense of others or the stability of the system as a whole.

Over the past 12 months, President Bush and I have been in regular contact with our international counterparts, and we have collaborated in a variety of ways. This weekend, I will be meeting with my G-7 colleagues to discuss the steps each of us are taking to confront this crisis and ways to further enhance our collective efforts.

In addition, in consultation with Brazil, the G-20 president, I am calling for a special meeting of the G-20 that will include senior finance officials, central bankers, and regulators from key emerging economies to discuss how we might coordinate to lessen the effects of the global turmoil and the economic slowdown on all of our countries.

Although the tasks are not easy, I am regularly heartened as I work with my international colleagues who are also committed to securing stability and growth in their domestic economies and to promoting the orderly functioning of the international financial system.

While most Americans understand that economic cycles occur, we are experiencing some extraordinary and difficult challenges at home and abroad, challenges that make it clear that Congress was correct to take swift and bold action, and that we have no time to waste in implementing the new law.

We also know that getting it right is as important as getting it done quickly. We can and we will do both.

The President’s Working Group on Financial Markets and all financial regulators are working together to achieve our necessary goal of restoring stability and orderly to our -- excuse me, orderliness to our financial markets.

Every effort will require careful analysis, deliberation, and transparency, and some measure of patience from the American people, as we create the most effective process possible.

We have already taken a number of extraordinary bold actions on the liquidity front that I am convinced have been exactly the right policy steps, including the emergency action to provide a guarantee to our money market funds, actions to stabilize the GSEs and drive down mortgage rates, and the Fed’s new program to provide 90-day liquidity to commercial paper issuers.

It is the policy of the federal government to use all resources at its disposal to make our financial system stronger, to safeguard depositors and savers, to help ensure an adequate flow of capital, and to minimize systemic risk.

The Congress has recently provided the Treasury with broad powers to acquire financial assets, and to make capital available, and to strengthen the balance sheets of individual institutions.

PAULSON: The Federal Reserve has also been given new authority to ensure that the system has sufficient liquidity.

The FDIC has the authority and the access to resources necessary to protecting the banking system.

The Treasury, the Federal Reserve, and the FDIC will use all of their authorities to promote the process of repair and recovery and to contain risks to the financial system that might rise from problems at individual institutions.

But patience is also needed, because the -- because the turmoil will not end quickly and significant challenges remain ahead.

Neither passage of this new law nor the implementation of these initiatives will bring an immediate end to current difficulties. It will take time and bipartisan leadership, cooperation, and collaboration, as well as well-conceived and -executed policies to overcome the challenges our nation is facing. And we will overcome them.

Despite our problems, the U.S. economy is the largest and wealthiest in the world. We will, as we have in the past, emerge stronger and better able to provide new opportunities for our workers and increased prosperity for our families.

Thank you. I will now take some questions.

QUESTION: Thank you, Mr. Secretary. Your counterpart in the U.K., Gordon Brown, has suggested that the G-7 should guarantee interbank lending. What do you think of that proposal?

PAULSON: Well, there are a number of proposals. And what I would say is that the -- that we’re going to find different -- different solutions based upon the particular needs in different countries, the needs of financial institutions in different countries.

So we’re going to see that. And I think the important thing is for all of us to have very good communication and good coordination as we -- as we work through this. Thanks.

QUESTION: So are you saying that the chances of a -- sort of a coordinated fiscal response from the G-7 are small and that each country is going to do its own thing?

PAULSON: Well, that may be an overstatement. But what I will say is we have the -- I think the -- you’re seeing the E.U. is -- is coordinating. You’ve seen, I think, some very helpful statements coming out of the E.U.

I think that, when we look at the G-7, we have very different countries, economies of different sizes, financial systems with -- with different needs. And so I think it would not make sense to have -- to have identical policies.

I think you’re going to have -- you’re going to have different policies, but the key thing is that we continue to work closely together, we continue to communicate, we continue to coordinate, and there are plenty of instances where -- where -- where close coordination is -- is -- is necessary and it’s going on.

And I would say the way that the, you know, the central bank coordinated a response today is -- is -- is an indication of that kind of action.

QUESTION: Senator John McCain has unveiled his Homeownership Resurgence Plan that would direct the secretary of the Treasury to purchase mortgages directly from homeowners and mortgage-servicers and replace them with manageable fixed-rate mortgages. Are you planning to do this anyway? And to what extent?

PAULSON: Well, let me say, I need to learn more about the plan and the details of the plan. But let me say that what we have right now, with the new authorities -- and we not only have the authorities, but the plan to buy not only the mortgage-backed securities, but whole loans from financial institutions, number one.

Number two, we’re already working hard with the -- with the -- the Hope for Homeowners legislation. We’re working hard at FHA and other places in the administration to do what we can to avoid preventable foreclosures.

And as I have emphasized to Congress, and as we’re directed to by the legislation that -- the EESA legislation, when we -- to the extent we -- we are owners of -- of -- of securities, we will have more leverage as we work to make efforts to keep homeowners in -- in their homes.

So, generally, we’re going to be working to unclog the system, going to be buying mortgage and mortgage-related assets, and we’re going to be working to avoid foreclosures.

And I -- yes?

QUESTION: Thank you, sir. Is Russia included in the international coordination efforts? Are you aware of their own ideas for resolving the crisis, as presented today by their president?

QUESTION: What are your plans for working with the Russian -- your Russian counterpart when he comes for the G-7, G-8 meeting?

PAULSON: I would say I need more details. I’ve been reading about the Russian plan. I have talked regularly with my Russian counterpart, Minister Kudrin, visited him in Russia, but talked regularly as we’ve gone through this period.

So he’s called, posted me on actions they’ve taken, and -- and vice versa. So, yes, I look forward to -- to discussing these issues with him this weekend, as I have all the way through this.

QUESTION: The EESA program, do you think it will help -- the purchasing program, troubled asset relief program, will it help much to rebuild the capital base of the financial institutions?

PAULSON: Yes. Yes, that is -- that’s what’s -- what’s critical. There is -- capital has been reluctant to come into certain financial institutions, because a lack of visibility, in terms of the uncertainty, in terms of the value of -- of some of these assets.

So the -- the -- the prime motivation is to lead to the recapitalization and the stronger capitalization of the -- of the industry.

QUESTION: On the -- on the same program, you said a few weeks before you can make the first purchases. Are there certain hurdles that you’re facing right now, in terms of choosing the process by which you buy them? Or a related question for you: Are there pros and cons of different options you’re looking at?

PAULSON: Yes, I -- I would say that -- all of the above. You know, first of all, we, as I said, we’re moving as quickly and as expeditiously as we can do it, but we -- we’ve got to get it right.

And so we’re -- we’re going through all the processes you would expect us to go through, in -- in -- in terms of conflict resolution, in terms of getting out to -- to contractors and going through that, going through that process.

We’re also working to -- to formulate programs. And so we’re -- we’re working as quickly as we can, and it’ll be -- it’ll be several weeks.

QUESTION: What steps are you taking -- what guidelines or policies do you have in determining which institutions you will allow to fail and which institutions you may step in to...

PAULSON: Yes, well, the -- in terms of what we’ve -- what we’ve said right now is that the -- that the stability of the financial system is of paramount importance. And today there’s a heightened awareness of the fragility of the system.

And so we’ve been pretty clear in saying that we -- in reminding people of the authorities that the -- that the -- that the FDIC has. You know, the -- when there’s a systemic risk declaration, we’ve been clear about that. We’ve been clear about all of the various tools we have.

And -- and so we’re -- we’re very aware of -- of the fragility right now in -- in the marketplace. And that’s going to be paramount as we work through -- work through the months ahead.

QUESTION: Mr. Secretary, would you be willing to support the Federal Reserve in a program of unsecured term lending to banks, along the lines that you’ve supported the program to purchase commercial paper?

PAULSON: Well, we have worked in close cooperation with -- with the Fed in a number of programs. And -- and I think I’ll just leave it at that.

We’ve got a -- we’ve got a very good working relationship. And where we -- each of us agree that something makes sense and it makes sense to cooperate and work together, then we work together.

And there are some things where -- where, you know, we’re doing them at Treasury, and I seek their advice and counsel and rely heavily on their advice, and, you know, there are other areas where -- where we provide advice for them, and some -- some -- some areas where we provide more support than advice. So we’ll do what makes sense.

QUESTION: Given that the U.S. is buying the frozen mortgage assets to free up banks to do traditional lending, is there any requirement in the legislation that passed that requires them to do that lending? Are there any reporting requirements for them to show progress on a regular basis?

PAULSON: It is -- the -- the -- the question is anything that require banks to -- to do lending? No, there’s no requirement, and I don’t know how anyone would ever enforce a requirement like -- like that.

PAULSON: It’s -- the key is to -- to increase the confidence, increase the liquidity, the capitalization, and only there are you going to -- are you going to get the kind of lending we -- we need to see.

QUESTION: Mr. Secretary, since the bankruptcy of Lehman Brothers, the crisis of confidence in the markets has worsened. Looking back, do you feel that that was a mistake not to have found a way to save them?

PAULSON: I -- I think that, looking back, we’ve taken the right moves. And there was -- there was no buyer for Lehman Brothers. There was no buyer; there was no -- no hole to fill.

And as I think we’ve said repeatedly, we -- we did not have the wind-down authorities we needed for financial institutions that -- non-banking financial institutions. So I’ll leave it at that.

QUESTION: Mr. Secretary, despite your understandable call for patience from the markets, as you progress your efforts, they seem to have reacted with considerable impatience to date. Is it conceivable, therefore, that the Treasury might have to take far more far-reaching measures (OFF-MIKE) and, in particular, might that include the U.S. do some sort of recapitalization of its banking system?

PAULSON: Yes, I’m not going to speculate on all the things we -- we may have to do. I would simply say we have a broad range of authorities and tools in the -- in the TARP. And so we -- we’ve emphasized the purchase of the liquid assets, but we have a broad range of authorities. And I’m confident we have the authorities we need to -- to work with going forward here.

Got time for one more.

QUESTION: Yes, you asked the American public to be patient. How long is it going to take, do you think, for the economy to recover from this?

PAULSON: The -- I’m not going to make predictions on the time it’s going to take the economy to recover. What I’m looking to do is to take all of the steps that -- that we -- we need to take to stabilize the financial system in order to -- to -- to mitigate the -- the -- the negative impact that a weakened financial system is having on our economy. And that’s our priority. And I don’t have forecasts -- economic forecasts.

QUESTION: Any encouraging signs in the credit markets just in the last couple of days here?

PAULSON: Well, I would -- I would say, I think it’s too early to -- to -- to look for -- for encouraging signs in -- in the credit markets, that -- that the -- you know, we continue to have a -- a -- a good number of the markets performing as normal, but there’s -- there’s still many of the markets that aren’t performing as normal. And it’s going to take a while to -- to work through this problem.

Thank you all.

END

.ETX

Oct 08, 2008 15:53 ET .EOF

Source: CQ Transcriptions

© 2008, Congressional Quarterly Inc., All Rights Reserved