From the NewsHour with Jim Lehrer, to be aired tonight.
JIM LEHRER: Mr. Secretary, welcome.
SECRETARY HENRY PAULSON: Good to be here.
MR. LEHRER: Is it correct to say, at this point, Mr. Secretary, that the $700 billion rescue plan has not worked?
SEC. PAULSON: Oh, I wouldn’t say that at all; I would say quite the opposite, that what we’ve been able to do since that legislation has been passed is stabilize our financial system. And I think that was very important; the financial system was at the tipping point. The credit—inter-bank credit market was frozen—banks weren’t lending to each other—that situation has resolved itself, when you look at the Fed funds rates and the inter-bank rates and so on, it’s—that market is working better.
Now, I would say that the economy has some very significant challenges and the financial markets have some significant challenges and they will for some time; we’re not going to work through these stresses until the biggest part of the real estate price correction is over. And it’s going to take—it took a long time to build these things up, and it’s going to take a while to work through them.
MR. LEHRER: But the expectation, wouldn’t you agree, Mr. Secretary, when in September, when you and others—everybody was saying, hey, we’ve got to pass this rescue plan. If we don’t, things are going to get worse. The plan was passed, and things have gotten worse in the financial markets—in the economy—everything—every measurement is worse, is it not?
SEC. PAULSON: Yeah, well, I think in the economy, that’s right. The economy has worsened, but I think what we sure tried to say is that if this isn’t passed, things are really going to get worse, because we need a stable financial system that is functioning. And so part of the issue we always had was, I think, to the American people, generally, they look at the equity markets—some of them going up and down; they’re not focused on the inter-bank funding or the credit markets or the banking system.
But what we saw, when we went to Congress, was we saw that the markets were frozen, lending had stopped, the economy was turning down—so we could see all this happening and we knew how severe it was going to get if we didn’t stabilize the system. But I never intended to say, nor did I ever say, that the process of recovery and repair was going to be a quick one. This is—the situation we’ve confronted is the kind of thing that happens once or twice every hundred years.
MR. LEHRER: But the lending, for instance—that was a key part of the rescue plan—I almost said bailout, I know that’s a bad word, but—at any rate, they’re still not lending. People still can’t borrow money. They can’t buy a house, buy a car—all those things.
SEC. PAULSON: Well, let’s go back—lending is going to be a key part of this. And what happens when you’re in a period of financial stress, banks pull in their horns, regulators reinforce it as banks are concerned about continuing slowdown in the economy and credit losses, that is restricted. What we have done by taking steps to make sure the banks are well-capitalized—and let’s remember that we are still in the process of getting that money out—the nine big banks have $125 billion and they account for 55 percent of the assets, and we’ve got another 20 or so out the door, but we’ve got much more to go, there.
But, again, to get back to your point, the thing that I will say—if this works, lending will be much more than it would have been, okay, that it would have been. But the key is that—if the banks are confident and people are confident in dealing with the banks, there’s going to be more lending. But the first benefit is the stability to the system. But let me say one other thing about lending, which I think is very important, and it happened this week—that I can exhort banks to lend, but I’m not a regulator.
And what happened this week, which was for the first time I’ve ever heard of, we had a statement come out signed by the four regulators in this country—the Fed, OCC, OTS and FDIC—that addressed four things. It addressed the lending; it addressed compensation practices; it addressed dividend policy and the area of mitigating foreclosures. And it was a strong statement focused on the need for prudent lending. Now, for that statement to come out is one thing, and then when you look at what the regulatory supervisors do, I think it will make a meaningful difference. But, again, you should not take my comment as meaning that this credit is immediately going to become available like it used to be and that the economy is going to turn around right away.
MR. LEHRER: All right. And yesterday, you announced a whole change in your approach. You said the first part was not working and so now you –
SEC. PAULSON: No, I did not say that.
MR. LEHRER: Well, all right. Say what you did say.
SEC. PAULSON: Okay, because it was very clear; I didn’t say the first part wasn’t working. When we went to Congress, we pointed to the fact that there was a great deal of illiquid assets in financial institutions and –
MR. LEHRER: Illiquid assets means money that can be lent, right?
SEC. PAULSON: Holding mortgages—mortgage-related assets—money tied up in this. And we said something at that time which was a very good idea, and it still is a good idea, which is, if we bought those assets—invested in them—this would put capital into the banks and there would be a price discovery process that would cause more capital to go into the banks.
But what happened is, the situation worsened as it took a good while to get through Congress, the situation worsened. By the time we had that legislation passed on October 2nd, I had concluded that when you looked at the finite amount of resources we had, that the more powerful way to deal with the issue—because the problem was of a greater magnitude, and to protect the taxpayer—was to go the capital route, and so –
MR. LEHRER: Which means put the money directly in the banks?
SEC. PAULSON: Put the money directly in the banks, which then puts them in a stronger position to sell the illiquid assets and continue lending. The money will go further. So what we said—so what I said yesterday, so we—right out of the legislation, we moved with lightning speed to being implementing this program. Ten days after legislation, getting the money in the nine largest banks—we’re working on that. So what I said yesterday was, after, again, looking at the problem we have before us and looking at the TARP resources, how best to use –
MR. LEHRER: TARP, that’s the name of the bill.
SEC. PAULSON: Yeah, for the rescue package. And what they also say on these investments, this is money the taxpayer will get back; these are investments. These are preferreds in these banks are well-protected and I believe that will be a good investment. But what we said is, looking at what we’ve got before us, the best thing we can do is have additional money, ample additional money to continue to put equity into financial institutions, if needed, and also equity to put into institutions if there’s a systemic event and it needs to be a rescue. And so, what we said is, we want to evaluate this first plan once it’s done and then determine the best way to go forward as needed with additional capital programs.
MR. LEHRER: And it correct to say, is it not, Mr. Secretary, that everything that’s been done, up until now, has not resulted in the kind of lending that this whole thing was designed to freeze?
SEC. PAULSON: I take big issue with that because what I say is, we were clear from day one that we were talking about stability of the system, that this system was at a tipping point and this plan, thank goodness Congress enacted it. And I also am very grateful that we were
able to see the size of the issue in front of us and move as quickly as we did to stabilize the financial system with the actions the FDIC took in terms of hardening their bank guarantees and the capital program.
Now, what you are saying, which I agree with, is that the economy is having a tough time, that credit is being restricted, we’re not seeing the kind of lending we’d like to see and that is clear. Now, I will say to you, it’s going to take a while. The banks just got these funds and, even if this is working better than expected, you’re still going to see lending restricted more than we would like given the severity of what’s going on in the economy.
MR. LEHRER: All right, in the general thing of the economy, the financial system, everything, as we sit here right now, are things continuing to get worse?
SEC. PAULSON: Well, here’s what I would say to you. In terms of the financial system—and I’m repeating myself—there’s—the system has been stabilized and that is a huge positive here and around the world. So that’s been stabilized. In terms of the economy, okay, in terms of the economy, this is a tough period and our focus has got to be on recovery.
MR. LEHRER: But what I’m getting at is this, Mr. Secretary, most of the folks don’t know the difference between a financial system and an economy if they can’t buy a car, if their house is being foreclosed and they’re losing their jobs. What’s the difference?
SEC. PAULSON: Well, I would say this –
MR. LEHRER: It’s a technical difference.
SEC. PAULSON: It is. It’s not just a technical difference, because if the banking system had failed, they would know the difference, okay, because it would be much, much worse. And so what—and I do empathize and I do say that there’s no doubt that we’re going through a real challenge. And, consequently, we made another suggestion, not something that we are prepared to roll out yet, but something we’re working on, which will take a relatively smaller amount of TARP assets, which is the rescue plan funds, to invest in a Federal Reserve program which would provide big amounts of liquidity for credit for consumers because, in this country, 40 percent of the lending takes place through a securitization market outside of the banking system.
So when you look at people who borrow to buy a car, there are—there’s AAA-rated auto-loan paper, there’s AAA-rated credit card, there’s AAA-rated student loan. That market has all but collapsed and when that collapses, it’s hard for the American people to get the money they need to get the economy going. And so that will be—that’s another program we’re working on. It isn’t as systemically important, but it’s very important to the economy.
MR. LEHRER: And if it’s important to the economy, that means it’s important to everybody in the country.
SEC. PAULSON: You betcha.
MR. LEHRER: So, you mean, it isn’t just a little bit over here; the financial system, a little over here, it’s called this. That’s my main point.
SEC. PAULSON: Yes, and I want to come back to you on that because it’s all—all of this is about the economy and the American people. We don’t want to do anything to do something for the banks’ sakes; this is about the American people. But here’s a distinction I’m making; the TARP or the rescue package was never intended to be the panacea for the whole economy, okay? It wasn’t intended for that; there were other plans. This was intended to stabilize the financial system and it’s done that.
MR. LEHRER: Now, there are a lot of people who believe, a lot of experts, who believe that the key to this, from the very beginning, was not the financial system so much as it was the housing problem. And that’s what started all of this. And one of the end results of it was a bad financial system, but it began with housing. Why has—why have you and the other rescuers not done more about that?
SEC. PAULSON; Well, I think, I, again, take issue with that. I think that’s been a huge focus because one of the things that we did at Treasury—let me step back and say that in this country, we do have government guarantees for securitized mortgage financing. We have Fannie Mae and Freddie Mac.
MR. LEHRER: But those systems collapsed.
SEC. PAULSON: Yes, and what happened? This was a flawed system. We had a flawed congressional charter. We had a system where the regulator was set by law and the regulator had no authority. I went to Congress before those companies collapsed. I got the authority to deal with it. We moved very, very quickly to come in and stabilize that situation. And they are providing a lot of mortgage finance. And I would say this—that while the cost of other credit has gone up a lot, the cost of Fannie Mae and Freddie Mac-insured mortgages has been relatively constant, has been insulated from that.
I’d like to see those rates lower. But that was, I think, a very strong statement. And the other thing I would say, the more we can do to help the financial system and lending, and have lending going, that’s the number-one thing we can do for the housing. But I think it’s very hard to—when you look at how long it’s taken for these excesses to build up and for these home prices to appreciate, to suddenly say maybe government could push some button and make it all go away and solve the problem. So I think we’ve dealt with it in as effective a way as –
MR. LEHRER: But again, it isn’t—the value of the average home in America goes down as we sit here right now.
SEC. PAULSON: You’re absolutely right.
MR. LEHRER: The ability to get a loan is harder now every day as we sit here. And so, what—until that is fixed, can the rest be fixed? That’s really what I guess I’m asking.
SEC. PAULSON: Well, I have always said that at the heart of the problem is the housing correction. And until the biggest part of the price decline in houses is behind us, we will have stresses in the financial markets and in the economy.
MR. LEHRER: When is that going to get better?
SEC. PAULSON: I can’t give you a date for when that’s going to get better. But I can tell you because we’re dealing with that and we’re dealing with that as effectively as anyone can come up with an idea, stabilizing Fannie and Freddie. And while we’re dealing with that, we sure as heck better stabilize our banking system, which we did.
And so, we didn’t come forward with the TARP and say—or the rescue plan and say vote for this and all the economic problems will be behind us. And the housing correction will be over and credit will be easy. We said do this because the situation is at the tipping point. We need to stabilize it.
MR. LEHRER: I take your point, Mr. Secretary. I’m just talking from the ordinary folk on the street, saying, hey come on. You know, rescue this, bail out, and things continue to get worse. But one other question—very specific question that’s on the table right now—the automobile industry. Everybody says, if the United States automobile industry is about to go down the tubes, if it does, it’s going to be a huge thing to everybody in this country. You do not believe anything should be done about this?
SEC. PAULSON: I have said quite the opposite, okay? What I’ve said repeatedly is I think the auto industry is a very important industry. I think it would be harmful to see a bankruptcy of a major auto manufacturer, particularly during this period. And I’ve said that I think anything that is done should show a path to long-term viability. And I’ve said that I’ve cited a auto bill that was passed by Congress, $25 billion, Department of Energy bill. And I’ve suggested that one idea for Congress would be to modify that to make that money available to lead to a viable auto industry.
The only thing that I’ve said about the rescue plan is that the intent of that—again, getting ba
ck to my earlier point—Congress didn’t pass that and say, go take those resources and use them on whatever you feel like. That was passed to deal with our financial system, the viability of our financial system, the strength of our financial system, to get lending going again and stabilize that. And so, clearly, I am of a view you should do something for the auto industry –
MR. LEHRER: But not through the rescue plan.
SEC. PAULSON: Yeah, I’m just saying that is not the congressional intent.
MR. LEHRER: Finally, Mr. Secretary, I take it from what you’ve said on all these things, you’re comfortable with what your role has been and how you have performed in your capacity as secretary of the Treasury in this crisis?
SEC. PAULSON: Yes, I am. You know that we’ve had a lot of challenges. We’ve dealt with some unprecedented events. We’ve taken some unprecedented actions. We dealt with a number of these on a case-by-case basis. When it became clear that you needed to take a broader, systemic approach, we went to Congress. Some people have said to me you should have gone to Congress earlier. And I said, well, it wasn’t real easy to get something through Congress even when we were in the middle of a crisis. And if we’d gone to Congress earlier, the challenge was how do you go to Congress if you know you’re not going to be able to get something done?
So as soon as we saw that we needed to go, and it was clear to us and to Chairman Bernanke and me, when it was clear, we went. Do I wish we had got the rescue package done earlier? Yes. And as you’ve shown right here with me, maybe my greatest strength is not communicating broadly with the American people. But again, it’s a challenge when you’re up there and when people say, tell us how grave and how severe the problem is and all the bad things that are going to happen if we don’t pass the legislation. And I don’t like to talk that way and don’t like to scare people. And so, Ben and I had a interesting challenge. But we got the legislation and the system is stabilized. And we’ve got a lot of challenges ahead of us as you’ve pointed out. But you don’t get yourself into a situation like this overnight and you don’t get yourself out of a situation like this overnight.
And the last thing I’d say to you that I’m never going to apologize ever for changing an approach when the facts change. My job is to look at this trust that’s been given to me and look at these resources, this $700 billion to invest to protect the system, and use them in a way that I believe they will have the biggest impact for the American people.
MR. LEHRER: Mr. Secretary, thank you very much.
SEC. PAULSON: Thank you.