Paulson Announces New Credit, Mortgage Programs

HENRY PAULSON, TREASURY SECRETARY: Today the Treasury and the Federal Reserve are announcing a facility to finance issuance of non-mortgage asset-backed paper in order to support lending to consumers and small businesses which is vital to our economy. The consumer asset-backed securities market is a source of liquidity to financial institutions that provide federally guaranteed small business loans and consumer lending such as auto loans, student loans and credit cards.

Issuance of ABS in these areas reached $240 billion in 2007, but credit market stresses led to a steep decline in the third quarter of 2008, and the market essentially came to a halt in October. As a result, millions of Americans cannot find affordable financing for their basic credit needs. Credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy.

To address this need and support the return of consumer lending, the Treasury will provided 20 billion of credit protection to the Federal Reserve in connection with its $200 billion term asset-backed securities loan facility. By providing liquidity to issuers of consumer asset-backed paper, the Federal Reserve facility will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower cost consumer finance and small business loans. The facility may be expanded overtime and eligible asset classes may be expanded later to include other assets such as commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes.

Throughout this financial market turmoil, our focus has been to stabilize the system and to support the lending that is vital to our economy. Toward that end, we've taken steps to strengthen the capital position of our financial institutions, to stabilize the system and to enable them to increase lending to American consumers and businesses. Similarly we've acted to stabilize the GSEs and to purchase GSE mortgage-backed securities in order to increase the availability of affordable mortgage credit throughout our nation. Today's initiative to support small business and consumer finance market is similarly aimed at increasing the availability of affordable lending.

Today's announcement by the Fed that it will purchase direct debt obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and also mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie Mae underscores our support for the housing market. Nothing is more important to getting through this housing correction than the availability of affordable mortgage finance. It will take time to work through the difficulties in our market and our economy and new challenges will continue to arise.

I and my regulatory colleagues are committed to using all the tools at our disposal to preserve the strength of our financial institutions and stabilize our financial markets to minimize the spill-over into the rest of the economy. Now I'd be happy to take your questions.

Yes.

QUESTION: Does today's action mean that the conservatorship hasn't worked out as you wanted, and also now you only have $20 billion left in T.A.R.P., will you go to Congress and asked for the last T.A.R.P.?

PAULSON: I would say, two things. First of all, the conservatorship has worked out as we had hoped, and this is just a very strong statement of support, and it's a very strong statement of support for the housing market because we have the -- essentially the federal government has guaranteed Fannie and Freddie paper. Mortgage spreads have not come down as much as they might have.

But I would say mortgage financing has remained -- agency financing has remained available and it has not risen nearly as fast as the cost of other credit. But what this does is really supports that market. And in a way in which I think it will help families and get affordable mortgage finance. And it's I think clearly a strong signal of support for those agencies.

QUESTION: And the remaining $20 billion?

PAULSON: Oh yes. What we're doing is, and I think what you saw today with this ABS facility, we're continuing to work, to develop and deploy T.A.R.P. capital in programs that make sense. We have no timeline for drawing down the next tranche, but Congress set a process in place for doing that, and we're focused on the programs. And when the time is right, we'll avail ourselves of that congressional process.

Yes.

QUESTION: How much of what's going on here in the spreads do you think now -- I mean there's the financial market problems, but how much of it do you think is due to the fact that consumers are just tapped out right now and they were over leveraged?

PAULSON: In terms of spreads?

QUESTION: Yes.

PAULSON: In the ABS market, yes, I think that - I think what's going on is something else here. What's going on is the financing markets aren't working as we'd like them to work. And hen you have AAA-rated paper that is a conventional paper that's been outstanding for a long time and the markets used to sing, and when there's no market for that at any reasonable price. That tells us we're seeing some distortions and dislocations as a result of this financial crisis that are not, clearly not right, and this is meant to address that situation.

Yes. QUESTION: Are there any plans or have there been any discussions about allowing insurance companies to access the T.A.R.P.?

PAULSON: Well, what we've -- our approach with the insurance companies has been unless we have institutions where there's a federal regulator, and there are a number of insurance companies that are bank holding companies, and those insurance companies that are bank holding companies have applied using their bank holding company status, and we have a federal regulator there. And so we are dealing with those applications as they come in. But to broadly go to insurance companies, we have not made that decision yet.

QUESTION: How concerned are you that consumer spending has dropped by the -- shrank by the most in 28 years with GDP shrinking by some 0.5 percent from July through September? How concerned are you about that? And will this do anything to help?

PAULSON: That's what we're focused on. And I think what we've consistently been saying is that you know there are two issues that people sometimes confuse, but they're very closely related. There is the strength and the stability of our financial system. And it's very important that that system remain stable and remain strong and lending is very important to consumers.

Secondly, the economy. And what has gone on in financial system is impacting the economy. And as the economy is turning down, it is very important that lending continue to be available and be available to consumers. So what we're doing with this facility is to support -- is to support consumer lending.

QUESTION: How concerned are you about today's numbers?

PAULSON: Well, I'm saying this action shows that we are concerned and we're addressing it.

Yes, Debra (ph).

QUESTION: I'm curious, how much you think the broad guarantee of banks that hurt the ability or for the desire of folks to buy agency- backed debt and whether this measure will sort of counteract some of those unintended consequences?

PAULSON: You're looking at, Debra, two different actions. What we had said in early October after the Congress gave us the T.A.R.P. authority, that this authority and this capacity is very important, and at that time what we said very clearly, that we were going to work very closely with the other federal regulators and we were going to combine creatively our combined powers to effectively stabilize and strengthen the banking system.

So what you saw with the -- in the situation with Citigroup and with the guarantee of the tail risk on that group of assets, you saw the combination of these authorities, using these tools in the most effective way possible.

This Fannie-Freddie agency action is something that is separate, and it's aimed at the housing market and mortgage financing. And for some time we've said the root cause of the economic problem in our nation was a major housing correction. Now it has spilled over into other parts of the economy. But that continues to be a very major focus, and I think the most important thing we can do is have mortgage financing be available and rates continue to decline here.

QUESTION: Maybe I didn't make it clear. Why do you think people aren't buying agency-backed debt?

PAULSON: People are buying agency-backed debt. You know this is the -- there's plenty of agency-backed debt being sold. So Fannie and Freddie have been -- had their market share increase. There's plenty of buying of agency-backed debt. I think what we're doing in Treasury with our program and what the Federal Reserve is doing is doing something that is aimed at getting rates lower, number one.

And number two, it's a great investment for the taxpayer because if the government is ultimately behind that paper, which it is, you know that that's money good. And so when you can finance you know with Treasuries and buy and hold, there's no way that the taxpayer is going to lose money on that. And so it's just a -- it's a very effective transaction.

Yes.

QUESTION: Is there a T.A.R.P.-related program coming to deal with mortgage foreclosures? Or is that something that will be left to the next administration?

PAULSON: Well, we are continuing to work on this. As I've said, we're working all the time to develop and deploy programs when we think we've got programs that are effective and meet the needs and will work. And we're continuing to work every day on coming up with a program to mitigate -- a T.A.R.P. program to mitigate foreclosures. I'm glad you made that differentiation. Because we've done a lot in terms of other programs.

QUESTION: As you know, I mean you are, in the setback, on the clock here, and you know some might say the intention is to run out the clock and leave the problem for the next administration.

PAULSON: I tell you, I am going to run right to the end, OK? If you've got any doubt about that, I tell you, you're missing the point. Because we are working to deal with this situation in the most effective way possible. And we're going to continue to develop programs, deploy them when they're ready to go and work on having a very seamless, very seamless transition here.

Yes.

QUESTION: How quickly do you expect consumers to see a direct impact from today's announcement? How did you come up with $200 billion? Where did that come from?

PAULSON: Well, remember that $200 billion is a starting point. This is going to take a while to get this program up and going. Then it can be expanded and increased overtime. It can be expanded to include new commercial mortgage-backed securities that are highly rated or new highly rated residential mortgage-backed securities. It can be expanded to just be bigger within the asset class as we've laid out. But the first thing is to get it up and going.

And to get to your question in terms of timing, I wish and I know you all wish that there was just sort of one action we could take and all of this would end and the economy would turn around and the financial system would be in the kind of shape we'd like it to be. But that's not the world we live in today. So what we're doing is coming up with programs that deploy the T.A.R.P. assets as effectively as possible to address what we believe are the major issues.

And they are the stability and strength of our financial system and lending. And this asset-backed program addresses both. Because it gives institutions liquidity, institutions that are holding these securities. And it's clearly direct lending that will help consumers.

Yes.

QUESTION: Sir, when you do go back to Congress to ask for the second $350 billion in the T.A.R.P., do you anticipate that they will require you to broaden the focus of the program either to provide direct mortgage relief or to include the automakers?

PAULSON: As I have said all along, what we're doing is we're developing the programs that we think are going to be most effective in dealing with the issues we have before us. We're working on programs for relief for -- to help mortgage holders facing foreclosures, to give them relief. We're working on those.

And as I've said, we have no timeline for going to Congress. Congress has set a process, when it's right to avail ourselves of that process, we'll do that and we'll describe if and when that comes, we'll describe the programs we have and the challenges before us. '

Yes.

QUESTION: Mr. Secretary, a week ago you told Congress that the financial system was largely stabilized and concerns over a systemically important institution failing has largely abated. How do you reconcile that with the need to rescue Citigroup and how do you characterize the stability of the financial system right now?

PAULSON: I'd say two things. First of all, we're dealing with a historic situation here. It's once or twice in a hundred-year situation. So there's -- and if we've seen one thing over the last number of months, there's an unpredictability to certain events.

But the point I've made then and the point I'm going to make now is that by virtue of the T.A.R.P. and the authorities and the capacity we have in the T.A.R.P., we are in a much different situation.

And I just want to go back a bit. In early October after getting the T.A.R.P. authorities, we stood up with our fellow regulators and we said, we now have more capacity, more authority, and we are going to work together -- all of us are going to work together to creatively and effectively generate solutions to make sure that the financial system is stable and to strengthen the financial system.

We also stood together with our G-7 finance ministers and Central Bank governors around the world and again also said we globally are going to work together, and we laid out the strategy to integrate the various authorities we have to stabilize the global financial system. And I continue to believe very strongly we're in a much different situation today after receiving the T.A.R.P. authorities than we were before receiving them.

We're in a different situation domestically and globally. I would look at -- if the Citi action is being evidence of that. That is, we laid out the strategy. We said stability of the financial system is critical. We said the strength of the financial system is critical. We said we have these new authorities and we're going to work together and creatively use them to stabilize and strengthen the financial system. That's exactly what we did in the case of Citi.

Yes.

QUESTION: When the bailout was being discussed, the whole reason was to unfreeze the credit market. Is it fair to say now that that bailout in T.A.R.P. was not enough, and are you surprised today to prescribe more medicine?

PAULSON: Again, let me step back and say I wish, and I know everyone wishes that one piece of legislation, a bill would suddenly be passed and then magically the credit markets would unfreeze or that there could be a single action that was taken. And magically they would unfreeze. But we went to Congress, we said the credit markets are frozen.

We need the capacity to strengthen the financial system and to stabilize the financial system. It's on the verge. And we need to -- we need to stabilize the financial system.

The authorities we got from Congress were what we needed. We have strong capacity right now and now it's a matter of using that in conjunction with other regulators.

What?

QUESTION: It didn't work, it didn't unfreeze -

PAULSON: I would say the only way you can say it didn't work is if you magically thought you could just -- naively thought that there could be a piece of legislation and there would be a single action and that a hundred -- once or twice in a hundred year historic situation would immediately be resolved. That's not the kind of situation we're dealing with.

But what you saw is us move very quickly, first of all with our counterparts around the world. And we now had the wherewithal to be able to effectively work with them on a strategy which stabilized the global financial situation and in the U.S. what we did, we're able to work with our fellow regulators to have the tools we need to stabilize this situation.

Now let's look at the economy. I think this is part of the issue that exists in helping the American people understand the challenge before us. When we went to Congress, we were talking about the financial system. But we repeatedly made the point that we were not doing anything for the banks just to help the banks. This was about the American people and it was about credit and credit availability and the economy was turning down pretty dramatically, partly as a result of what was going on in the credit markets.

And so we then got the authorities and the American people see the economy continuing to turn down and the situation worsened. This was not a surprise to us because we saw it happening. And I know it's a hard sail, to tell people, if you hadn't done this, it would be worse. But this is -- the fact is it would be much worse if we hadn't done it. The fact is we now have the tools and the capacity to stabilize the system and work to get credit flowing again. It will take a while to do that. This is --

QUESTION: Isn't it there are members of Congress think that it would be that one piece of legislation?

PAULSON: I can't speculate what various people thought. I can just say that it is -- it is naive for any of us to think that when you're dealing with a situation of this magnitude, that a bill could be passed or a single action could be taken to make all the issues go away. And I just would say our focus is on stability and strengthening the financial system.

And we now have the tools and powers we need to work with others. And the other point I would make is this let's us much more effectively deploy the T.A.R.P. assets in a way in which we get as much impact from them as possible.

One more.

QUESTION: Did you, Mr. Secretary, did you consult with your counterpart, Mr. Geithner about this action in advance? And going forward, will you consult with them, and if they have any serious objections to any of your initiatives, will you take that into account?

PAULSON: Well, let me say two things. First of all, Tim Geithner is the president of the New York Fed. And so we worked on this together, OK, as we have every one of these situations. We've worked as a team. He was working right with us all weekend. And that's his job as Ben Bernanke and Sheila Bair. So we've all worked together. And this is an important part of what we do.

Now, in looking at Tim's new job as Treasury Secretary, an incoming Treasury Secretary, we will obviously work seamlessly with the next administration on a first-rate transition and on -- and we will discuss with them very, very carefully any programs that we are developing and any programs that we implement because it's very important that the next team understand everything we have in place and be able to -- be able to carry them out effectively. And I would say that Tim is very well positioned for that, because he understands every thing that we have in place today and participated very actively in helping put it in place.

Yes.

QUESTION: Back to the foreclosure mitigation issue. Is Treasury considering specifically directing institutions that receive T.A.R.P. funds to rework mortgages under the FDIC model?

PAULSON: What we have -- in terms of what Treasury is doing, I want to step back and say the regulators came up with a statement that I think was very clear in terms of wanting and requiring financial institutions to be proactive in modifying mortgages, number one.

Number two, Treasury played a lead role in working with the GSEs, Fannie and Freddie, in developing their master servicing guideline which can be a standard for the nation. And that was based on the basic FDIC protocol, the so-called IndyMac protocol.

And so that is something that we have been very active in supporting the GSE services guideline. Now, in terms of the T.A.R.P. funds, we have been and continue to work to say how do we develop programs that are going to be most effective. And the challenge in developing these programs is how to get the balance right between you know helping those homeowners who need it the most and not providing government funds to those homeowners who don't need it or government funds for modifications that would be taking place anyway, given all the various things that are going on.

And again, how to get the balance right between the homeowners and the banks. This is a -- this is a challenging area, to come up with programs that are going to be effective. And we're working hard and we're making progress.

One more question, yes.

QUESTION: Do you know if tax-exempt paper might be included yet? Or is that something that would be -- tax-exempt asset-backed paper, or is that included now or is that something that might be included as it expands later?

PAULSON: Well, there's a number of ways - again, we're looking at programs that and thinking broadly about dealing with state, local, governments, municipalities that do tax-exempt financing. And we are not looking at the T.A.R.P. doing that directly. And so whenever we think about these -- this area, we think about it in terms of some of the insurance programs that would make sure that these issuers had a strong AAA rating that would let them do funding. So, the asset- backed paper program is not focused on tax-exempt financing.

OK. Well, enjoy your Thanksgiving turkey and have a good holiday. Thank you.