CQ Transcriptswire

Oct. 14, 2008

SPEAKERS:

SECRETARY OF THE TREASURY HENRY M. PAULSON JR.

FEDERAL RESERVE SYSTEM BOARD OF GOVERNORS CHAIRMAN BEN BERNANKE

FDIC CHAIRMAN SHEILA BAIR

PAULSON: America is a strong nation. We are a confident and optimistic people. Our confidence is born out of our long history of meeting every challenge we face. Time and again, our nation has faced adversity, and time and again, we have overcome it and risen to new heights. This time will be no different.

Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered because it poses an enormous threat to our economy.

PAULSON: Investors are unwilling to lend to banks, and healthy banks are unwilling to lend to each other and to consumers and to businesses.

In recent weeks, the American people have felt the affects of a frozen financial system. They have seen reduced values in their retirement and investment accounts. They have worried about meeting payrolls, and they have worried about losing their jobs.

Families are across our nation have gone through long days and long nights of concern about their financial situations today and their financial situations tomorrow.

Without confidence that their most basic financial needs will be met, Americans lose confidence in our economy and this is unacceptable.

President Bush has directed me to consider all necessary steps to restore confidence and stability to our financial markets and get credit flowing again.

Ten days ago, Congress gave important new tools to the treasury, the Federal Reserve, and the FDIC to meet the challenges posed by our economy.

My colleagues and I are working creatively and collaboratively to deploy these tools and direct our powers at this disruption to our economy.

Today, we are taking decisive actions to protect the U.S. economy. We regret having to take these actions. Today’s actions are not what we ever wanted to do, but today’s actions are what we must do to restore confidence in our financial system.

Today, I am announcing that the treasury will purchase equity stakes in a wide variety of banks and thrifts. Government owning a stake in any private U.S. company is objectionable to most Americans, me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.

When financing isn’t available, consumers and businesses shrink their spending which leads to businesses cutting jobs and even closing up shop.

To avoid that outcome, we must restore confidence in our financial system. The first step in that effort is a plan to make capital available on attractive terms to a broad array of banks and thrifts so they can provide credit to our economy.

From the $700 billion financial rescue package, treasury will make $250 billion in capital available to U.S. financial institutions in the form of preferred stock.

Institutions that sell shares to the government will accept restrictions on executive compensation including a claw-back provision and a ban on golden parachutes during the period the treasury holds equity issued through this program.

In addition, taxpayers will not only own shares that should be paid back with a reasonable return, but will also receive warrants for common shares in participating institutions.

We expect all participating banks to continue and to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure. Foreclosures not only hurt the families who lose their homes, they hurt neighborhoods, communities, and our economy as a whole.

While many banks have suffered significant losses during this period of market turmoil, many others have plenty of capital to get through this period but are not positioned to lend as widely as necessary to support our economy.

Our goal is to see a wide array of healthy institutions sell preferred shares to treasury and raise additional private capital so that they can make more loans to businesses and consumers across the nations.

At a time when events naturally make even the most daring investors risk averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.

Nine large financial institutions have already agreed participate in this program. They have agreed to sell preferred shares to the U.S. government on the same terms that will be available to a broad array of small and middle-sized banks and thrifts across our nation.

These are healthy institutions, and they have taken this step for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses.

PAULSON: I am joined here this morning by Chairman Ben Bernanke and Chairman Bair, who have also taken extraordinary actions to support investor confidence in our financial system so that funds will again flow through our banks to the U.S. economy. Each of them will describe their actions.

Combined, our actions are extensive, powerful, and transformative. They demonstrate that the government will do what is necessary to restore the flow of funds on which our economy depends and will act to avoid, where possible, the failure of any systemically important institution.

These three steps strengthen -- significantly strengthen -- financial institutions and improve their access to funding, enabling them to increase their financing of consumption and business investment to drive (inaudible) economic growth.

Market participants here and around the world can take great confidence from the powerful action taken today and our broad commitment to the health of the global financial system.

We are acting with unprecedented speed, taking unprecedented measures that we never thought would be necessary. But they are necessary to get our economy back and on an even keel and secure the confidence of the future of our markets, our economy, and the economic well-being of all Americans.

Thank you.

Now, I am going to turn the podium over to Chairman Ben Bernanke.

BERNANKE: Good morning. Before I begin, I want to express my appreciation of my colleagues, Secretary Paulson and Chairman Bair, for their efforts in what has been an extraordinary collaboration.

As Americans well know, the challenges evident in the financial markets and in the economy are large and complex, but I believe that the steps taken today will help us to overcome them.

Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks. But we will not stand down until we have achieved our goals of repairing and reforming our financial system and, thereby, restoring prosperity to our economy.

Over the past year, the Federal Reserve has actively used all its powers and authorities to try to help this economy through this difficult time. And central banks around the world have consulted closely and cooperated in unprecedented ways to reduce strains in our financial markets and to bolster our economies.

We will continue to do so. However, clearly, the time had come for more comprehensive and broad-based solutions. History teaches us that government engagement in times of severe financial crisis often arrives very late, usually at a point at which most financial institutions are insolvent or nearly so.

Waiting too long to act has usually led to much greater direct costs of intervention and, more importantly, magnified the painful effects of financial turmoil on households and businesses.

This is not the situation we face today. Fortunately, the Congress and the administration have acted at a time when the great majority of financial institutions, though stressed by highly volatile and difficult market conditions, remain capable of fulfilling their critical function of providing new credit to our economy.

The Congress’ prompt and decisive action in passing the financial rescue legislation made possible the critical steps that we are announcing this morning.

I also find it heartening that we are not seeing just a national but a global response to the crisis commensurate with its global nature. Indeed, this past weekend the finance ministers and central bankers of the G-7 industrialized countries announced a set of principles embodying a comprehensive approach to dealing with the crisis.

The steps we are taking today are fully consistent with those principles.

As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets which has had cascading and unwelcome effects on the availability of credit and on the value of savings.

The actions today are aimed at restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses.

The voluntary equity purchase program described by the secretary will strengthen financial institutions capacity and willingness to lend. The guarantee of senior debt of all FDIC-insured depository institutions and their holding companies will restore the confidence of these institutions creditors and reinvigorate the crucial interbank lending markets.

BERNANKE: Additionally, the Federal Reserve is pressing forward with its facility to provide a broad backstop for the commercial paper market so vital to the functioning of our businesses.

Policy-makers here and around the globe have taken a series of extraordinary steps. Americans can be confident that every resource is being brought to bear -- historical understanding, technical expertise, economic analysis, and political leadership.

I am not suggesting that the way forward will be easy. But I strongly believe that the application of these tools together with the underlying vitality and resilience of the American economy will help to restore confidence to our financial system and place our economy back on a path to healthy, vigorous growth.

Thank you.

BAIR: Good morning, and thank you for coming.

As Secretary Paulson and Chairman Bernanke indicated, the extraordinary steps we’re taking today are innocent intended to bolster public confidence in our financial institutions and throughout the American economy.

Achieving this goal will require a sustained and coordinated effort by government authorities.

In short, all of us are prepared to do whatever it takes to fix whatever problems arise and to work with Wall Street and Main Street to unclog the financial system so that it can continue fueling economic growth and creating jobs.

Our efforts also parallel those of the international community. Their guarantees for bank debt and increases in deposit insurance would put U.S. banks on an uneven playing field unless we acted as we are today.

Despite what we hear about the committee crisis and the problems facing banks, the fact is that the bulk of the U.S. banking industry is healthy and remains well capitalized. What we do have, however, is a liquidity problem largely caused by certainty about the value of mortgage assets. This is making banks reluctant to lend to each other and to lend to consumers and businesses.

Today’s actions to inject more capital into the banking system combined with other recent coordinated measures to free up credit markets should give banks the self-assurance to resume normal lending.

In addition to the actions just announced by Secretary Paulson and Chairman Bernanke, the FDIC board yesterday approved a new temporary liquidity guarantee program to unlock interbank credit markets and restore rationality to credit spreads. This will free up funding for banks to make loans to credit-worthy businesses and consumers.

The program, which voluntary, has two key features. The first feature guarantees certain new senior unsecured debt issued by any bank, thrift, or holding company. This will help banks fund their operations.

Both term and overnight funding of banks has come under extreme pressure with costs of funding ballooning to several hundred basis points. This guarantee will allow banks and their holding companies to roll maturing senior debt into new issues fully backed by the FDIC. However, guaranteed maturities cannot extend beyond three years. The ability to tap into this program expires at the end of June 2009.

Is the second feature of the new program gives unlimited insurance coverage for non-interest bearing deposit transaction accounts. These are mainly payment processing accounts, such as payroll accounts used by businesses.

Frequently, the accounts exceed the current maximum insurance limit of $250,000. Many smaller healthy banks have been losing these accounts to their much larger competitors because of uncertainties in the financial system.

This new temporary guarantee, which runs until the end of next year, should help stabilize these accounts. Thus, we can avoid having to close otherwise viable banks because of deposit withdrawals.

This aspect of the program allows bank customers to conduct normal business knowing that their cash accounts are safe and sound. This is the fundamental goal of deposit insurance, safeguarding people’s money, and vital to public confidence in the banking system.

Let me stress that the problem does not rely on taxpayer funding nor does it rely on the deposit insurance fund. Instead, both aspects of the program will be paid for by direct user fees included as part of the bank’s regular insurance premium. Coverage for both parts of the program will be automatic for the first 30 days without charge. After that, the FDIC will begin assessing premiums for the coverage unless an institution opts out.

BAIR: If an institution opts out, the guarantees are good only for the first 30 days. These are all major steps necessitated by the crisis in our credit markets which has been fed by mounting fear about our economic future. They are designed to hold down the costs of any future bank failures and to lead to return to normal bank lending activity.

The FDIC is taking this unprecedented action because we have faith in our economy, our country, and our banking system. The overwhelming majority of banks are strong, safe, and sound. But a lack of confidence is driving the current turmoil, and it is a lack of confidence that these guarantees are designed to address.

Above all else, there must be no doubt in our government. Institutions like the FDIC, created 75 years ago to deal with times of financial stress, are strong. And we will do our part to bring the country through those extraordinary times.

Thank you.

END

Source: CQ Transcriptions, Oct. 14, 2008

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