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November 13, 2008

Peter Cook's Interview with Secretary Paulson

Bloomberg

PETER COOK: Carol, thanks very much. I'm joined now by the Treasury secretary of the United States, Henry Paulson. Mr. Secretary, as always, we appreciate the time. Thanks for joining us here on Bloomberg.

SECRETARY HENRY PAULSON: Peter, good to be here.

MR. COOK: Let me ask you, first of all - before I get into the shifting focus for the TARP Program, I want to ask you the big picture. Where do we sit at this moment in time? Do feel better today about the current situation - the current financial crisis then you did say even a month ago?

SEC. PAULSON: Peter, I do because today we have stabilized our financial system - our banking system - here in this country and around the world. So I feel good about that. A month ago or certainly in the - you know, coming up to the middle of September and the end of September, the credit markets were frozen, banks weren't lending to each other, and I think the steps that have been taken have helped remedied that problem. So I feel better about that. Clearly, we're going through a tough patch in our economy and -

MR. COOK: Do you see a light at the end of the tunnel, for lack of a better expression?

SEC. PAULSON: Well, what I said - there's always light at the end of the tunnel, right? It just depends on how long the tunnel is. But the - but I surely do see a stabilized financial system and the credit markets are not frozen, at least in the inner-bank markets, and so the situation is better. In terms of the overall economy, we've got challenges and the big focus has got to be on recovery, on repair, and that's going to take a while. And in terms of the financial system and the turbulence there, some of the stresses, some of the volatility, you've got to expect that to continue as long as real estate prices - housing prices - are continuing to decline in this country. And with the economy slowing down, that's going to take a while. But the system, in my judgment, has been stabilized.

MR. COOK: Let me ask you about the shift in focus for the TARP program.

SEC. PAULSON: Right.

MR. COOK: The $700 billion rescue package.

SEC. PAULSON: Right.

MR. COOK: The original plan, as you pitched it to Capitol Hill, was to go and buy this toxic debt, in trouble financial institutions, to try and unlock some of those credit markets.

SEC. PAULSON: Right.

MR. COOK: Now, it shifted to more of a focus on direct capital injections into banks and now we hear, as well, more of a focus on the consumer credit sector. Is this an acknowledgment that that original plan was unworkable? Was unfeasible?

SEC. PAULSON: Peter, I don't look at it that way. I look at it as to say the original was a good plan. It would still be very useful if we were able to buy illiquid mortgage assets today because when you buy these assets, they put capital into the bank. They - there's a price discovery process that makes it easier for private capital to come in. So that was valid when we suggested it. It's still valid today. Now, what changed was our understanding of the magnitude of the problem and I think as the facts changed and as we came out of the period when we're up working with Congress - and the legislation was passed I believe on October 2nd - and by that time, I could see that the problem was significant enough that we needed to do something. It was going to be much more powerful.

And when you look at finite funds - $700 billion's big but finite - and you say, how do we spend that? How do we invest it so that we can get the maximum impact into our job of stabilizing the financial system, help get lending going again? That money can be used faster and more powerfully and levered much better if it is to buy prefers from banks, put capital into the system because then we get at the problem another way and the banks now will have added capacity to keep lending while they sell these securities and mark them down.

MR. COOK: Well, let me ask you about that because right now if you look at the - have you ruled out then, for the moment, buying up any of these mortgage-related assets? Is that off the tee?

SEC. PAULSON: Well, what I said yesterday is a fact. I said that this was not going to be the major focus. The major focus was going to be to first complete our existing capital program and we're not going to go forward with the new capital program until we evaluate how that's going. You need to evaluate that, look at the facts as you see them then. But in my judgment, we're better served holding TARP power back for future capital programs and to deal with the one-off situations when they present themselves. So I think that's got to be the first. The first priority is to make sure we have capital to continue to have capital available to put into the financial system. That's the first priority.

And then, you mentioned looking at consumer credit and securitization. And what we said yesterday was, although no decision has been made, and although this would be a much smaller use of TARP assets, one of the things we pointed to was the fact that in this country, 40 percent of the financing that go to consumers in this country are outside of the banking system. So this is lending. This is direct lending that is important to the economy. And there is a series of consumer credit products - securitizations for auto loans, student loans, credit cards, other similar products, which again - 40 percent of what's done here. And that market has ground to a halt. So what we said was, we were working with the Federal Reserve to put a relatively small amount of TARP assets in a liquidity facility -

MR. COOK: Can you give us a ballpark stand, sir? You've got about 350 billion (dollars) left that you would use half that for this -

SEC. PAULSON: Oh, no, no, no, much, much less. What this would be - again, this is to provide liquidity. And this would be a program where the Fed would allow investors that own these AAA products, if and when this program is going, to come to the Fed, borrow against them on a non-recourse basis, and so that there would be financing for investors and this would be very supportive of that marketplace. But that would be - this would be funds that could be levered, you know, maybe up to 20-to-one. And you could use a program like this not only to get at securitizations for consumer finance; you could use them also to get at mortgage and mortgage-related products and provide liquidity and leverage so that investors would be able to avail themselves of that on a non-recourse basis to invest in those securities also.

But you asked me whether we took the illiquid assets off the table. We didn't take them off the table altogether. We said that would not be the focus. And we were going to continue to look at the possibility of more targeted programs. But that wasn't going to be the big focus. And our major emphasis was on capital.

MR. COOK: Let me ask you about one program, one other focus - at least an area that doesn't seem to be a focus for you, at least in terms of the TARP program. And that's the automakers. Members of Congress, as you know, Congressman Frank telling us yesterday, he's thinking about $25 billion from this TARP money to go to the automakers. You've said you don't think that's a good idea. My question to you is why?

SEC. PAULSON: Peter, it's very simple. But I want to start with the automakers, because I understand how important the automakers are to this country. And I understand a bankruptcy; a failure in that industry wouldn't be a good thing. It's something we should avoid.

MR. COOK: (Inaudible.)

SEC. PAULSON: The country can withstand a lot of things. I just simply said it's something that I think should be avoided. It's not a good thing. This is an important industry.

I've also said that what we need is anything that's done should be something where there's a path to long-term viability.

MR. COOK: What does that mean?

SEC. PAULSON: In other words, that means having an industry and a company that has got a viable strategy and on a standalone can be competitive.

MR. COOK: (Inaudible.)

SEC. PAULSON: What I said was that I thought anything that was done was that there be that long-term path. I haven't been inside. I haven't analyzed it. But you've got to ask that question about any company that might be on the brink of failure.

Now, to step back again to the TARP, what we have suggested is there are other paths. Congress has passed 136, which appropriated, set aside $25 billion for the auto industry. So one thing they might consider doing is amending that. And with regard to the TARP, what we said was the intent was very clear by Congress. The intent of the TARP was to deal with financial institutions and to deal with major systemic issues and getting lending going in capital institutions - excuse me, financial institutions. That was the intent.

MR. COOK: Sir, you know that the auto industry responds to that - and some lawmakers on the Hill say - you look at an industry responsible for one out of every 10 jobs in this country. It's hard to argue, in their minds, they say, that that's not just as important to financial stability in the country. What are the banks - (inaudible)?

SEC. PAULSON: Well, all I can say is, what I'm doing is, I went to Congress and I asked for authorities to deal with the financial rescue. Congress gave us those authorities. It was debated, discussed, that was the intent, that Congress, I believe, should address the question of the auto industry.

MR. COOK: (Inaudible, cross talk.)

SEC. PAULSON: Let me say, I encourage Congress to come up with a pot, to get money to deal with this issue. And, again, as I said, I don't think a bankruptcy is a good thing. I think it's very important that there be also a path to viability and that is - again, Congress debated it, came to the conclusion. Congress also debated the auto industry and passed 136 and, in their wisdom, they put a number of restrictions on that money for the auto industry that apparently doesn't make it readily available to deal with this situation.

So, again, I'd say, if this is important Congress - and I think it should be important to Congress - then, you know, there's other paths they can take.

MR. COOK: Let me ask you a little bit about the transition that's taking place right now. First of all, do you think it would be helpful for Barack Obama to name your successor sooner rather than later? Would you be prepared to work with that person side-by-side even before January?

SEC. PAULSON: Let me say, I would not presume to recommend to Barack Obama when he names my successor but I've been very, very clear to everyone, including to the president-elect, how committed I am to having a first-rate, seamless transition, how much I would welcome the opportunity to work with the new administration, incoming administration in transition. We had gone out a long time ago and said we're looking for and have found some good candidates who could be permanent heads of the TARP and be confirmed, have found some people we thought would be attractive to both parties. We have a candidate or two that we believe should be very attractive and we think they probably are -

MR. COOK: (Inaudible, cross talk.)

SEC. PAULSON: - to the president-elect. Well, no, I - but we've met with the transition team and we want to work seamlessly with them. And I've also gone further to say, when I look at the TARP, I have a real responsibility to use that very important resource in the way it was intended and to protect our system and to make changes when I think changes are called for, to do the best I can see in front of me to deal with the issues at hand.

But I am not looking to put in place programs that don't need to be put in place before the new administration comes on board.

MR. COOK: Let me make sure I understand you correctly. Would you be prepared, for example, to not tap that additional $350 billion you have access to? Even before you leave office, are you expecting -

SEC. PAULSON: Well, I would say this; right now, I have no timeline for drawing down the next $350 billion, number one. Number two, I believe that a new Treasury secretary, you know, will come in and will find, just in terms of the existing programs we have, all of which I think are very important: Fannie Mae and Freddie Mac in conservatorship, the guarantee we have on money-market funds, all of the liquidity programs we have for Fannie and Freddie, the capital purchase programs. To understand those and run those is going to take some doing and we will do everything we can and I know we can get them up to speed and they will be knowledgeable and so they'll be ready to take those on.

If there are other programs that we need to put in place before I leave, we will put them in place, but we will put them in place, obviously, making sure there's a seamless transition. And if there are things that don't need to be put in place right now, and could be deferred with no cost to our economy or our system, I would look to do that only because out of deference to the next Treasury secretary, it will make his or her job easier.

MR. COOK: Let me ask you one final question, if I could: the G-20 summit taking place this weekend, President Bush talked about it today. Leaders from around the world are coming to talk about what's happened with this global financial crisis and how to deal with it going forward. You mentioned to someone yesterday in your own comments that the U.S. had a special responsibility given the fact that some of it markedly started here. Does the U.S. bear much of the blame for what's happened and, as a result, should the U.S. be prepared to accept international regulatory changes we otherwise wouldn't like?

SEC. PAULSON: Well, Peter, rather than casting blame, there's no doubt that there's a lot of things we could do better. And so we were an important part of the problem. But those who want to say this is all about the housing correction or sub-prime in the U.S. or about what happened in the U.S. are going to miss getting at the root cause of the problem if they do that because, as I look around the world and I look at everything from banks in Ireland to Denmark to Germany to Russia to Spain, this is not - when I look at the situation - that's not about sub-prime in the U.S. or the housing crisis in the U.S. What, in my judgment, we've seen happen, was there were large structural global imbalances that had been building up for some time. The U.S., for instance, didn't save enough; we borrowed a lot. There were structural imbalances in Asia with exporters, with oil exporters for a whole variety of things.

These led to capital flows increasing dramatically, so very, very large levels of capital flows dwarfing trade flows or other economic flows, capital raining down through financial institutions around the world, high levels of liquidity, low levels of inflation, institutions looking for yield, reaching for yield, mispricing risk, access is building up, global financial architecture that was not adequate to deal with the global economy, financial architecture in every country that I've looked at, in Europe as well as the U.S., that is not up to snuff.

So we have a lot of work to be done. There are some things that you can work on immediately and this will be a very important first step in that process, a very important step in assessing where the global economy is because the first focus has got to be on recovery and repair. We are not - those that say we've solved it, now let's just go about reform; they've missed something.

So there's certain things you can look at and you can put in place a process for reform. We know we've got to do something on the rating agencies. We're well on our way to doing that, right. We know we need to do something with regulatory systems in our individual countries and harmonizing them on a global basis so that they - so that there's great - a common sense of standards and we don't have regulatory competition with one financial center trying to play itself off against the other.

You know, there are important things to be done there. We have more work to do with the securitization process, more work to do with credit default swaps and over-the-counter derivatives, a lot more work to do there. We've got much, much more work to do in a whole variety of particular regulatory issues. And we can begin that process, a lot of it is well underway but we can't miss the forest through the trees. And the forest through the trees is we're going to need to come together on a global basis and make some significant changes in the global architecture, in the way in which major countries work with each other to deal with some of these imbalances.

MR. COOK: Mr. Secretary, we've got to leave it there. Thank you very much for your time. We've probably taken up too much of yours. Thanks again for joining us here on Bloomberg.

SEC. PAULSON: Peter, thank you.

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