CQ Transcript: Treasury Secretary Henry Paulson Interviewed on Fox News’ “Journal Editorial Report”

GIGOT: We’ll see how that evolves. Let’s talk about the new financial rescue, the $700 billion financial rescue plan. It’s been six weeks or so since it’s passed, yet the jobless rate keeps falling and the economy is, if anything, struggling a little more. What can you tell taxpayers that they’ve received for that $700 billion?

PAULSON: What I can tell taxpayers they received is the financial system’s been stabilized. We never promised that the -- that this rescue package was going to solve all ills of the economy or the government could push a button and do that.

But, at the time we went to Congress, we were at the tipping point. Credit markets were frozen. Interbank markets were frozen. It was passed on October 2nd. By the -- ten days later, by the 14th, we had 9 banks with -- accounting for 55 percent of the deposits in the united states commit to take dollars. Ten days later, we had $115 billion out the door to those banks.

We’re working very hard. It’s going to take us a good bit longer to get the rest of the money into the banking system. It’s -- as I said, the system is stabilized but there’s much more to do.

GIGOT: So what you’re saying is we stabilized, stop the panic, prevented a real systemic collapse. But what about prices within the financial system? I’m thinking about interbank lending rates or, for that matter, mortgage rates which really haven’t fallen.

Do you see any that chance mortgage rates are going to fall?

PAULSON: Paul, I’m not going to make a projection there. But what I will say is that sometime before we went to Congress, we stepped into the situation of Fannie Mae and Freddie Mac, that these were, as you know, two big institutions that had a very flawed regulatory regime, that there was a lot of confusion around the -- what the government -- whether the government was really on the hook or not.

And, of course, we knew that we had a responsibility there, and we stepped into that situation and stabilized it.

And as a result, what you’ve seen -- what is an effective government guarantee of their obligations, is that while other credit rates have gone up, that mortgage rates have largely been insulated from what has happened here and have held relatively constant. And I think that’s very positive.

GIGOT: But are you disappointed there hasn’t been more mortgage lending opening up so far? Those mortgage markets, if anything, there’s pretty tight credit limits being put by the banks on mortgage borrowers.

PAULSON: Yes. It’s going to take a while. It’s definitely going to take a while. I think the most effective thing we can do here is have the banks be well-capitalized and have the banks lending.

(CROSSTALK)

PAULSON: When you’re going through a period like this when the economy is turning down, banks are naturally going to be hesitant to lend. And so getting capital into the system and encouraging them to lend is going to make a meaningful difference here.

CQ Transcript: Treasury Secretary Henry Paulson Interviewed on Fox News’ “Journal Editorial Report”

GIGOT: You said this week you’re going to make an adjustment in your rescue plan to no longer buy these troubled bank assets. I wonder what’s changed because those toxic assets on the balance sheets of banks are still a problem, aren’t they?

PAULSON: Yes, they sure are. This was a good idea when we conceived the plan and it’s still a good idea, but we need to change for the reasons I’m going to go through in a minute. But the plan was always about capital and illiquid assets. By buying illiquid assets, we free up the capital for the banks and it would create a price discovery process.

But, by the time Congress had passed the law, it was pretty clear to all of us that the situation was more severe than we had anticipated. The facts had changed, and the best way to deal with this was to put capital into the banks. And then, I think that gives them more capability to dispose of these assets, write them down, and continue lending. So given the magnitude of the problem we faced, and given the fact that we’re dealing with a finite resource here, the best way to use this, these funds to protect the taxpayer is to focus on capital. And so we announced that although we needed to wait to see how the first $250 billion program worked and reassess it, we thought the prudent thing to do, the necessary thing to do was to hold back more funds so they’ll be available for capital.

GIGOT: All right. Now, we’ll get into this a little bit more, right after this, with treasury secretary, Henry Paulson.

(COMMERCIAL BREAK)

GIGOT: We’re back with Treasury Secretary Henry Paulson.

When you were talking about getting capital into the system this week, you talked about devoting some of those $700 billion worth of rescue money into consumer finance areas like auto loans and student loans and credit cards, but the details were a little sketchy.

Are you talking about direct purchases through the Troubled Asset Relief Program of these kinds of loans?

PAULSON: Let me explain the idea to you here. And, again, this isn’t a firm proposal. We were talking about an idea which we are working quickly to develop with the Federal Reserve. And here’s the idea. In our economy, 40 percent of the consumer lending takes place outside of the banking system, takes place through securities.

The AAA-rated securitizations for student loans, for auto loans, as you said, for credit cards, this market has ground to a halt. It’s all but collapsed.

And so the concept here is a Federal Reserve liquidity pool, and the rescue plan would make a modest investment in that, which then could be levered many times over. Then investors, when they hold this paper, which is intermediate term paper, could it to the liquidity fund and get non- recourse term financing against it. And so this...

(CROSSTALK)

GIGOT: Mr. Secretary, it sounds like you’re saying the Treasury’s going to provide some capital to -- via the Fed, so the Fed doesn’t have to make an allocation itself and maybe take losses.

CQ Transcript: Treasury Secretary Henry Paulson Interviewed on Fox News’ “Journal Editorial Report”

PAULSON: Well, the way this would work is the Fed can do what it legally can do, and the way this would work -- and let me give you an example. If someone came, an investor came, let’s say, with a AAA- rated student loan paper and came to the Fed facilities and got non- recourse financing at 80 percent of value there, then the first loss would be taken, obviously, by the investor if there was a loss, and the next loss by the rescue plan.

But we believe that there’s enough -- there’s enough in this, given the way the market is trading, so that if we put money in -- taxpayer money into that facility, that the taxpayer will be protected and should actually make a bit of money because, right, now this paper -- for instance, AAA-rated auto loans are trading at 850 basis points over LIBOR where there isn’t a market for them.

GIGOT: So you just can’t get a market for them. OK.

(CROSSTALK)

GIGOT: I want to ask you about this long line of companies that are getting in line to be able to get a piece of this federal rescue, starting with the life insurers. What do you think of their request, and what’s the systemic risk to the financial system if a life insurance company fails?

PAULSON: Well, that is the right question to ask. Life insurance companies are lenders in the system, but what we’re doing is we are adding a plan that focuses -- our plan focuses on banks and thrifts. And the reason it does is because of the systemic implications, number one; they need to get lending going, number two; and, number three, we have federal regulators.

Treasury doesn’t have capability, and I don’t know anyone at the Federal level that has capability to evaluate the companies and make the kinds of judgments that need to be made if you don’t have a federal regulator.

So a number of companies are becoming bank holding companies. And when they do, their regulator can submit them to Treasury and then we will make a judgment and either fund them or not.

GIGOT: But it sounds like you’re skeptical of that idea.

PAULSON: Well, I’m saying we’re sure not focused on it today.

GIGOT: All right. In terms of you know the pressure coming from Capitol Hill for the auto makers to tap into this rescue fund, I know you say there’s not the authority for that right now in the original law.

But if Congress passed it, changed the law, do you think that’s good use of this money to help Detroit?

PAULSON: Well, as I said all along, that’s not the intent. The intent of this package is not to be all things to all people. It’s to deal with the financial system. We’ve got a big job ahead of us here. We moved quickly to stabilize it. There’s much more to be done. That’s where the focus should be.

CQ Transcript: Treasury Secretary Henry Paulson Interviewed on Fox News’ “Journal Editorial Report”

What I’ve suggested, and I’ve respectfully suggested, we have this Department of Energy bill, which was passed by Congress which has already set aside $25 billion for the auto industry, and perhaps that could be modified to deal with that problem.

GIGOT: One of the issues here I think that some of us are worried about is how long the government is going to be shareholder in a lot of these institutions and the danger of politically-directed credit. As you look at this into the next presidency, how long do you think the government should try to keep a stake in these things?

Are we talking about one year, five years, 10 years, forever?

PAULSON: Certainly, not forever. Listen, no longer than is necessary. We structured this program -- we’ve structured it to be not obtrusive. We’ve structured it so it won’t crowd out private capital. We’ve taken preferred shares and the warrants are in common that won’t be voted. And we’re hiring asset managers to manage the money.

So this is about getting capital into banks to help the economy and stabilize the system. And this is anything but a program to come in and nationalize or have the government be there for a longer term.

And it’s very different than other programs you’ve seen described that taken place in other countries around the world and some of the programs of that been designed in Europe.

GIGOT: All right, Mr. Secretary. Thanks. We’ll see what the next administration does.

END

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Nov 16, 2008 15:04 ET .EOF

Source: CQ Transcriptions

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