Video: Hank Paulson with Jim Lehrer -- Defending TARP
Transcript is below.
Watch how neatly the narrative changes, from buying toxic assets - the Federal Reserve and Fannie & Freddie would eventually assume that responsibility - to capital injections and common stock purchases. Some have since conjectured that he planned it that way from the beginning.
Paulson says:
- "The interbank credit market was frozen; banks weren't lending to each other."
Some would call this reckless hyperbole. But it is just another lie.
Get that man a chart:
The truth about interbank lending during the crisis:
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Former Goldman Sachs CEO and current Treasury Secretary Henry Paulson announced a major shift in the government's bailout program Wednesday, saying the $700 billion rescue package will not be used to purchase troubled assets as originally planned.
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Economists discuss Treasury Secretary Henry Paulson's announcement Wednesday that the government will shift its focus from buying troubled assets to shoring up institutions that manage credit cards, auto loans and other types of borrowing.
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The Senate on Wednesday approved a financial rescue package that could cost up to $700 billion -- the largest government intervention in U.S. history. Analysts discuss whether the plan will be enough to fix the ailing economy.
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Partial Transcript - A True Must Read
JIM LEHRER: Is it correct to say at this point, Mr. Secretary, that the $700 billion rescue plan has not worked?
HENRY 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 interbank 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 interbank rates and so on, 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.
JIM LEHRER: But the expectations -- would you not 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 is -- every measurement is worse, is it not?
HENRY PAULSON: Yes, 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 interbank 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 of 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. The situation we've confronted is the kind of thing that happens once or twice every 100 years.
JIM 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, or buy a car, all those things.
HENRY 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, if this works, lending will be much more than it would have been, OK, than 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 of the system.
And 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 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 will do, I think 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.
Revising the approach
JIM LEHRER: All right, yesterday you announced a whole change in your approach. You said the first part was not working, and so now you're...
HENRY PAULSON: No, I did not say that.
JIM LEHRER: Well, you -- well, all right. Say what you did say.
HENRY PAULSON: OK, 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...
JIM LEHRER: Illiquid assets, meaning money that can be lent, right?
HENRY 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'd 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...
JIM LEHRER: Which means you put the money directly in the banks.
HENRY 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 begin implementing this program 10 days after the 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, and how best to use...
JIM LEHRER: TARP, that's the name of the bill -- the legislation, right.
HENRY PAULSON: Yes, of the rescue package. And let me also say, on these investments, this is money the taxpayer will get back. These are investments. These preferreds in these banks are well protected, and I believe that will be a good investment.
But what we've 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 there 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.
JIM LEHRER: But it is 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 free?
HENRY PAULSON: I take big issue with that.
JIM LEHRER: OK.
HENRY PAULSON: Because what I say is we were clear from day one we were talking about stability of the system, that this system was at a -- 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 -- to stabilize the financial system with the actions the FDIC took, in terms of hardening the bank guarantees, and the capital program.
Now, what you were 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 to more than we would like given the severity of what's going on in the economy.