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LOU DOBBS THIS WEEK
Bailout Fury; Wall Street Chaos; Failing FDA; Enforce This; Real Solutions?
Aired September 21, 2008 - 19:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DON LEMON, CNN ANCHOR, "NEWSROOM": All right we go now to "LOU DOBBS TONIGHT." And make sure you join us at 10:00 p.m. Eastern.
KITTY PILGRIM, CNN ANCHOR: Tonight, the federal government takes sweeping action to prevent further chaos in the worst financial crisis since the Great Depression. The Bush administration announcing what it calls a bold approach to restore confidence in our financial markets and telling the nation that approach will cost hundreds of billions of dollars.
We will have complete coverage. All that and much more from an independent perspective straight ahead tonight.
ANNOUNCER: This is "Lou Dobbs This Week" news, debate and opinion. Here now Kitty Pilgrim.
PILGRIM: Good evening, everyone.
Tonight, the federal government announcing a sweeping plan to address what President Bush calls unprecedented challenges facing our economy.
Treasury Secretary Henry Paulson, meeting with Congressional leaders of both parties this weekend, calling for bi-partisan legislation by the end of next week. Now the cornerstone of this government's proposed plan is a Depression era government fund that will take over financial firms' bad debt. All told, the government's rescue plan is expected to cost hundreds of billions of dollars.
Elaine Quijano reports.
ELAINE QUIJANO, CNN CORRESPONDENT: The president bluntly spelled out how America's financial crisis could get even worse.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES OF AMERICA: Further stress on our financial markets would cause massive job losses, devastate retirement accounts, and further erode housing values, as well as dry up loans for new homes and cars and college tuitions.
QUIJANO: With top economic officials at his side, the president grimly conceded, confidence, a critical ingredient in a healthy economy had been shaken.
BUSH: Investors should know that the United States government is taking action to restore confidence in America's financial markets, so they can thrive again.
QUIJANO: Earlier, Treasury Secretary Henry Paulson described the mammoth cost of that action in what's expected to be an unprecedented bailout.
HENRY PAULSON, SECRETARY OF THE DEPARTMENT OF TREASURY: Now, we're talking hundreds of billions. This needs to be big enough to make a real difference.
QUIJANO: The details have yet to be hammered out with Congress, but the aim is to soak up bad debt, allowing banks to freely lend money once again.
BUSH: We will weather this challenge too. And we must do so together.
QUIJANO: Just weeks away from the election and amid criticism that his administration didn't do more to head off the crisis, President Bush urged Congress to set aside partisanship.
BUSH: There will be ample opportunity to debate the origins of this problem. Now is the time to solve it.
QUIJANO: Aides say the goal is to negotiate details of the plan with members of Congress over the weekend, all of it with an eye towards the market's opening on Monday.
Elaine Quijano, CNN, the White House.
PILGRIM: After more than a year of crisis in the housing and mortgage and credit markets, the financial crisis began to escalate rapidly in the early morning hours of Monday.
PILGRIM: It began as a manic Monday. Lehman Brothers, the 158-year- old Wall Street original files for bankruptcy. Another Wall Street stalwart, Merrill Lynch bought; Bank of America takes it over.
The markets are sent reeling. The DOW Jones industrial suffered the worst single-day point drop since September 17th, 2001; 504 points off the board. That was Monday.
Tuesday, in an unprecedented move, the government, through the Federal Reserve, steps in to rescue one of the world's largest insurance companies, American International Group; AIG entangled in the sub- prime mortgage crisis. An $85 billion bailout for the New York City- based insurer paid for by you, the taxpayer.
The Treasury Secretary says, recent government intervention in financial institutions has been the only option for the global economy. PAULSON: Nothing is more important right now than the stability of our capital markets. And so I think it's important that regulators remain very vigilant.
PILGRIM: Wednesday, a traditional flight to safety. Cash ripped from stocks and poured into treasury bonds and gold. Gold prices saw the largest ever one-day price increase; the DOW down another 449 points.
Thursday, rumors swirl around the last two independent investment banks left standing, Goldman Sachs and Morgan Stanley.
The president tries to calm fears.
BUSH: The American people can be sure we will continue to act to strengthen and stabilize our financial markets.
PILGRIM: AIG is tossed out of the DOW 30, replaced by Kraft Foods. Investors welcome the Central Bank's infusion of billions of dollars into global money markets. The DOW soars 410 points.
Then came Friday, President Bush and his top economic advisers announcing a plan to buy up bad mortgages and debt; a bailout plan that will cost taxpayers hundreds of billions of dollars. This sign of action is welcome news to investors, sending the DOW soaring up more than 350 points, ending the week almost where it began.
PILGRIM: The federal government has committed more than $800 billion of taxpayer money to bailouts and loans this year. That includes the $85 billion loan to AIG, up to $200 billion for the mortgage giants Fannie Mae and Freddie Mac, and in addition, the federal government could spend as much as $300 billion to ensure failing mortgages through the Federal Housing Administration.
By some estimates now, the Federal Reserve has about $200 billion in outstanding short-term loans to those banks in addition. And the government has promised $29 billion as well to support JP Morgan- Chase's purchase of Bear Stearns that was back in March. That brings us to a total of $814 billion of taxpayer money so far committed to supporting failing financial institutions.
Senators McCain and Obama reacted to the federal government's bailout plan.
Senator McCain Friday said it's time for the Federal Reserve to, quote, "Get out of the bailout business." McCain condemns what he called egregiously lax regulation for the financial crisis. Senator McCain called for the President to fire SEC Chairman Christopher Cox. He also called for the creation of a new trust that would strengthen troubled institutions before they fail.
Senator Obama said he fully supports the Bush administration's efforts to work with Congress in finding a solution. Senator Obama, however, said he would refrain from presenting a more detailed plan to address the economy until he sees the government's plan. Senator Obama said it's critical that their work is, quote, "Unimpeded by partisan wrangling."
Foreign investors are closely watching the financial crisis in this country. Some see an opportunity. U.S. Investment bank Morgan Stanley this week held talks with Communist China's sovereign wealth fund.
The possibility of Communist China taking a major stake in one of our biggest financial institutions raises new concerns about sovereign wealth funds. Those funds answer to foreign governments, many of them hostile to the United States.
Bill Tucker reports.
BILL TUCKER, CNN CORRESPONDENT: $3 trillion roughly equals one quarter of the American economy. And that's how much one investment bank estimates is currently in sovereign wealth funds, investment funds financed and controlled by governments. China, awash in dollars collected from Chinese-made goods sold in the United States and the Middle East, flush with dollars from the loyal are the richest of the sovereign wealth funds.
LLOYD WOOD, AMERICAN MANUFACTURERS TRADE ACTION COALITION: They're just perched out there like vultures waiting for the market to bottom out and then they can go in and cherry pick some of America's best assets at pennies on the dollar and then take those revenue streams and ship them back to their home countries.
TUCKER: While their value is estimated at $3 trillion in assets, State Street financial sees those funds more than doubling in size to $7 trillion in four years thanks to some judicious bottom feeding by the funds among cash-starved American companies.
MICHAEL MADUELL, SOVEREIGN WEALTH FUND INSTITUTION: Right now they're kind of waiting out and seeing if they can get them for a great discount. If you wait longer, the stock price is probably going to keep on dropping. Therefore, your ownerships can go up.
TUCKER: The larger the stake, the greater the save. In its report, State Street says, quote, "As patient long-term investors, SWFs are in a position to influence key corporate decisions, such as the selection of chief executives or of major acquisition targets."
Because Sovereign Wealth Funds are government capital funds, the growing influence is sparking a backlash in Washington even though they possess the very thing the markets want right now -- cash, and lots of it.
TUCKER: That political backlash is over the very real concern that those investments are being made for strategic reasons and that those reasons, perhaps, might not be in the best interest of this country -- Kitty.
PILGRIM: Bill, as you looked into this, what is being done to regulate Sovereign Wealth Funds at this point?
TUCKER: They're sensing the attention of regulators, thank goodness. The federal government is going at ways of restricting their possible investments and the International Monetary Fund is looking into ways to make these funds more transparent. Because that's part of the problem here and we can't see into the funds and we're not quite sure where that money's coming from.
PILGRIM: Is there any indication of where they are in this crisis? In the specifics?
TUCKER: Largely on the sidelines.
As we mentioned in the piece, they have participated some. They did give a direct injection into the market, back in the summertime.
But Kitty, this is a lot of debt they don't want to buy. If they would buy it, I would write the thank you notes. But they're not picking this debt up, and that's why we're having to do it.
PILGRIM: All right, thanks very much, Bill Tucker.
Well, coming up, a stunning decision on immigration enforcement this week. We'll have that story.
Also new evidence, a common chemical poses serious health risk. So why does our federal government refuse to protect the American public? We'll have a troubling special report.
And much more on the financial crisis from the stock market to the economy all the way to the campaign trail.
We'll talk with advisers to the McCain and Obama campaign.
Stay with us.
PILGRIM: The FDA once again this week tried to reassure consumers that the chemical Bisphenol-A is safe despite more evidence to the contrary. Now a new research study finds BPA may pose risks of heart disease and diabetes. In spite of this latest evidence, the FDA still says BPA is safe.
Louis Schiavone reports.
LOUIS SCHIAVONE, CNN CORRESPONDENT: Are the plastics we use from infancy for liquids and foods poisoning us? A new high profile study offers damaging new evidence about root plastics chemical Bisphenol-A.
FREDERICK S. VOM SAAL, UNIVERSITY OF MISSOURI: These people had a statistically increased probability of diabetes, heart disease, including heart attack. SCHIAVONE: The study of 1,500 adults was just released in the journal of the American Medical Association and it was topic A as a Food and Drug Administration panel met to review the science surrounding Bisphenol-A or BPA.
Said government scientists --
MICHELLE TWAROSKI, FOOD & DRUG ADMINISTRATION: The FDA has considered the available data and determined that the margin of safety for Bisphenol-A exposure in all populations is adequate and the continued use of Bisphenol-A and the manufacture of food contact substance is concluded to be safe.
SHCIAVONE: This summer FDA, Commissioner Andrew von Eschenbach offered his take on the FDA Website.
ANDREW VON ESCHENBACH, FDA COMMISSIONER: The science FDA has reviewed does not justify recommending that any one discontinue using these products.
SCHIAVONE: Industry defenders say the studies critical of BPA are flawed and they told the FDA panel.
JOHN VAN MILLER, BPA PRODUCERS: We agree with FDA's draft assessment. FDA's approach was thorough, objective, transparent, and strongly supported by scientific data.
JOHN ROST, NORTH AMERICA METAL PACKAGING ALLIANCE: No other food packaging performs as well in situations such as disaster relief, homeland security, or famine relief.
SCHIAVONE: But public interest groups testify there was ample reason to suspect BPA and most vulnerable, say critics, those without a choice.
UNIDENTIFIED MALE: The fetus is and the newborn is considered to be at greatest harm.
SCHIAVONE: Louise Schiavone, for CNN.
PILGRIM: As we have reported, scientists at The Centers for Disease Control detected BPA in 93 percent of the people they tested. That indicates widespread exposure in this country.
The National Institutes of Health warns that BPA could cause neural and behavioral effects in fetuses, infants, and children at the current exposure levels. Canada has declared BPA a hazardous material.
Well, in spite of all that, in the United States the FDA stands by its approval of the bottles that contain BPA and it has stood by that approval for decades and it still declares them safe. The FDA cites two studies, both funded by the plastics industry. Coming up, cracking down on employers of illegal aliens, a new decision that could have national implications. We'll have that report next.
And what would the presidential candidates do to fix our financial crisis? Top economic advisers from both the McCain and Obama campaign will join me here. Stay with us.
PILGRIM: Americans are calling for the enforcement of our immigration laws tonight and they're celebrating a legal victory.
A federal court of appeals Wednesday upheld Arizona's employee's sanctions law. Now, this law provides for harsh punishment of employers that knowingly hire illegal aliens.
Casey Wian has our report.
CASEY WIAN, CNN CORRESPONDENT: Anna Johnson owns a Phoenix embroidery business. In 1995 she lost most of her workers after an audit found they were illegal aliens using stolen or fake ID's. She's happy Arizona now requires companies to use the federal government's E- Verify Employee Identification System or risk losing their business license.
ANNA JOHNSON, ARIZONA BUSINESS OWNER: I can charge fair prices, because the person down the street isn't hiring people for less-wages. I think it's better for everybody.
WIAN: Wednesday the Ninth Circuit Court of Appeals in San Francisco upheld Arizona's employer sanctions law over the objections of business lobbying and Latino advocacy groups. They argue that only the federal government can regulate immigration. The Ninth Circuit cited with the lower court that ruled states can regulate businesses.
ANDREW THOMAS, MARICOPA COUNTY ATTORNEY: There are some business interests that, for whatever reason, and I'll let others speculate about it, didn't want the employers sanctions law passed. The bottom line is, the law is the law. It's going to be enforced and as long as I'm county attorney, this office will enforce it.
WIAN: Thomas says Arizona's employer sanctions law has deterred companies from hiring illegal aliens. So far, no businesses have been prosecuted. The ACLU said in a statement, "We are disappointed the court didn't overturn Arizona's misguided and unconstitutional sanctions regime at this stage."
The National Immigration Law Center says this law does nothing to solve perceived immigration problems. Governor Janet Napolitano who only reluctantly signed the law concedes it has not caused the widespread economic harm predicted by some employers.
GOV. JANET NAPOLITANO, (D) ARIZONA: Nobody's been put out of business for it or any of that.
WIAN: Arizona has passed several laws cracking down on illegal immigration. And officials say tens of thousands of illegal aliens have left the state during the past two years.
WIAN: The Ninth Circuit did leave room for future challenges to the employers' sanctions law if there are problems with the way it's enforced. Meanwhile, an attorney who helped write Arizona's law says he expects it to open the floodgates for other states who want to make it unlawful for businesses to hire illegal aliens.
Casey Wian, CNN, Los Angeles.
PILGRIM: Coming up, do the presidential candidates have their own plans to fix the financial crisis? Well, the top economic advisers to both the McCain and Obama campaign will join us here next.
Also, will the Bush plan actually work? We'll hear from three of the nation's top economists and they'll join me here.
LISA SYLVESTER, CNN CORRESPONDENT: Senators McCain and Obama reacted to the government's latest bailout plan for the economy.
Senator McCain called for the creation of a new trust fund that would use taxpayer money to strengthen troubled institutions before they fail.
We'll talk with an adviser to the Obama campaign in just a moment. But first, Douglas Holts-Eakin is a senior policy adviser to the McCain campaign. He explained Senator McCain's position on government bailouts.
(BEGIN VIDEO CLIP)
DOUGLAS HOTZ-EAKIN, MCCAIN SENIOR POLICY ADVISER: The Senator firmly believes that we should not be putting taxpayer money in casually. The only time it make sense to put it in is to put money in to save the financial system and thus people in business from greater harm this is an approach --
SYLVESTER: Let me just make sure and clear on this, does he support putting in taxpayer money for some type of bailout? Does he echo some of the same sentiments that Secretary Paulson outlined earlier today.
HOLTZ-EAKIN: The first choice is to not put tax payer money in but the reality is that some institutions, AIG for example, are so large and present such a great threat to the American economy that we would be negligent if we didn't get them through their problems, using minimal taxpayer bailouts, minimal taxpayer finances, and in this case, find a way to not put them in bankruptcy. Find a way to get ahead of the curve. Be proactive, give them a place to go where their workouts can happen and they can emerge as contributors to society in our economy, not a drag on it.
SYLVESTER: All right, I want to play a sound bite for you at Senator Obama today and what he had to say about the current situation.
(BEGIN VIDEO CLIP)
SEN. BARACK OBAMA, (D) PRESIDENTIAL NOMINEE: Given the gravity of this situation and based on conversations I've had with both Secretary Paulson and Chairman Bernanke, I will refrain from presenting a more detailed blueprint about how an immediate plan might be structured until I can fully review the details of the plan proposed by the Treasury and the Federal Reserve.
(END VIDEO CLIP)
SYLVESTER: What is your reaction?
HOLTZ-EAKIN: Well, and Senator McCain actually has a plan. He has a plan that minimizes the taxpayers' involvement, it gets ahead of the problem, it doesn't put the liabilities on the government books, it doesn't do what we did with Fannie Mae and Freddie Mac and take on $5.6 trillion of liabilities.
Senator Obama is just going to vote present once more in a crisis. You need some ideas, you need to be able to stand up, take some leadership. We hope the Bush administration; we hope the Congress gets together and realizes that Senator McCain has a plan and should adopt it and move forward.
SYLVESTER: Whoever is elected the next president will have to deal with this crisis squarely. What type of regulations will we see coming out of a McCain administration so that we are not in the same situation down the road?
HOLTZ-EAKIN: Well, you want comprehensive regulation that treats every economic transaction exactly the same, no matter where it takes place. If it takes place in Chicago, in New York, on an electronic trade, it should have the same regulatory structure.
What should come out of that should be a regulator that has safety and soundness for every financial institution and the ability to shut it down if it's a danger to Americans, some consumer protections, no more mortgage fraud, some corporate governance reforms so we don't see CEOs walking away from failed institutions with multimillion dollar golden parachutes. And we'd like to make sure that the system has some stability and there was a check on that stability.
There's a path for that through the Congress, the senator is dedicated as president to making it happen. And we think this is a way forward in the 21st century to set the rules of the road right so we can have a good financial industry but not see the excess and the real failures of the recent path. SYLVESTER: Really quickly, there are a number of Democrats that are proposing some type of help or relief for middle class families that are struggling. The idea being that as Congress gets set forth to bail out Wall Street that something should be done for the folks on Main Street.
What are your thoughts there?
HOLTZ-EAKIN: I think it's imperative that we have hope for Main Street. That's why John McCain wants to make sure that Main Street doesn't get crushed by this Wall Street problem. That Main Street has the chance to create jobs, and build the foundation of future prosperity. And quite frankly this Senator from Illinois, Senator Obama's plan to give someone a $500 tax credit, that's not going to be much help if you're out of work.
You need a plan to have job, and John McCain's creating jobs. And healthcare plans, energy plans, tax plans, it's the future for the middle class.
SYLVESTER: All right, Douglas Holtz-Eakin is the senior policy adviser to the McCain Campaign, thank you very much for joining me.
HOLTZ-EAKIN: Thank you.
SYLVESTER: And joining me now from Chicago is Austan Goolsbee, he is the senior economic adviser to Senator Obama. Thanks very much for joining us.
AUSTAN GOOLSBEE, OBAMA SENIOR ECONOMIC ADVISER: My pleasure.
SYLVESTER: First off, your reaction to this massive bailout plan, hundreds of billions of dollars will be on the line of taxpayer money. Your thoughts?
GOOLSBEE: Well, my first thought is, what an awful situation that we got to this point. It leads me to start wondering, who tore up the rules of the road for the last 26 years in Washington that got us here.
But then the second is, you know, there was a moment of great turmoil. The Fed, the Treasury, and everybody else has got to come together and take emergency measures to make sure that the financial system doesn't completely implode.
UNIDENTIFIED FEMALE: Now, your candidate has not put any specific details of a plan. Why not? Why is he refraining from going out front and saying what he thinks on this issue?
GOOLSBEE: I do not agree with that.
He put out an extremely detailed plan for financial oversight and regulation six months ago. He reiterated and expanded on those the day before yesterday.
The clip that you played where he's talking about, he wasn't going to provide specifics, was in response to people asking, what do you specifically think about the terms of this arrangement?
But they haven't released the terms of this arrangement yet. On the ones they have released, like the insuring the money market fund deposits he absolutely agreed with that so we don't have runs on the banks.
It's completely normal not to judge the details of a plan until they give them to you.
SYLVESTER: But his opponent has come up with a six-point plan. And in fact, the McCain campaign, we heard this earlier in that sound bite, in that clip in which he's saying that Obama is essentially voting present, that he is not taking a stand on this issue.
GOOLSBEE: Yes. But the six-point plan is actually Senator Obama's. And I will refer you to his speech from the day before yesterday.
What Senator McCain put forward that they keep saying is a specific plan; I invite you to look on their Website. It is literally ten lines long. It looks like it could have come out of a fortune cookie. It is not specific. It is not a specific plan.
Barack Obama's organization that he has put together, this six-point program for financial oversight was forged with the input of people like Paul Voeker, Bill Donaldson, Bob Rubin Laura Tyson, a number of experts. We met in Miami with Senator Obama this morning to go through what the options are. And it's clear that we have to take a long-term focus.
We have to focus on the real problems in the economy, the job market, the industrial declines, the unemployment rate being high and the housing crisis. And we need to do that in an institutional structure that is going to address the issues of financial crisis for the long run. Senator McCain spent the last 26 years ripping up the rules of the road.
REPORTER You know I have to ask you.
GOOLSBEE: He and his economic advisers have been deregularators and now they have an 11th hour conversion once they've seen the damage that it's done.
REPORTER: I have to ask you. You know, we are hearing a lot of talk, but people want specifics. What is the plan, then? You're saying Senator Obama has a plan. What is that plan?
GOOLSBEE: OK. It outlines six basic action steps that we need to take to re-establish public trust. Step number one, we must immediately put in place anyone that has access to the lender of last resort feature from the Fed, the sacred insurance policy that is underwritten by the American taxpayer must be subject at all times to capital and liquidity requirements, the way commercial banks were in the past.
The fact that we've had investment banks running up 30, 40 to 1 leverage ratios when they are going to be able to turn to the government in a moment of crisis means that they are taking risks with the taxpayers' money and that has to be changed. Number two, we have to immediately strengthen the enforcement and stop degrading the capabilities of our oversight agencies like the S.E.C. and the CFTC.
REPORTER: OK. We have just a couple of seconds here. If you can wrap up.
GOOLSBEE: OK. I was trying to give you the specifics.
REPORTER: All right. Well, Austan Goolsbee, thank you very much for your time and we appreciate it.
GOOLDBEE: My pleasure, anytime.
REPORTER: We'll certainly be hearing more from the Obama campaign. Appreciate your time.
KITTY PILGRIM, CNN HOST: Coming up, will the Bush administration's new bailout plan save us from this economic turmoil?
Also, some of the nation's most brilliant financial minds will join me next.
And later, we'll talk to our political panel about McCain and Obama's response to the bailouts. Now, do they can that either plan can help America's hardworking middle class? Stay with us.
PILGRIM: The U.S. government this week proposing a massive bailout to help stem the financial crisis in this country. Well, joining me now, some of the nation's best economic and investment minds. We're joined by Allen Sinai. He's the chief global economist of "Decision Economics." We have Peter Morici, business professor at the University of Maryland. And the founder of PIMCO, Bill Gross and he runs the world's biggest bond fund.
Gentleman, thank you very much. And with this level of expertise, we should be able to get through quite a bit. Let's turn to Treasury Paulson's plan. I'd like to actually bring up a comment that he said today. The total loans and bailouts this year, approaching $800 billion. Let's listen to what he had to say.
(BEGIN VIDEO CLIP)
HENRY PAULSON, TREASURY SECRETARY: The ultimate taxpayer protection will be the stability of this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced this that bold approach will cost American families far less than the alternative.
(END VIDEO CLIP)
PILGRIM: All right. Now, these are very reassuring words from the Treasury Secretary, but do you think what we're doing now is sufficient? Let's start with you, Allen? ALLEN SINAI, DECISION ECONOMICS: No, but it's better than what we've been doing so far. It's a broad-sweeping kind of thing. The Treasury Secretary didn't want to scare anybody about the alternative, but the alternative I think that they're thinking about is something akin to the Great Depression. They're really quite scared. The measures taken deal with some of the mortgage finance and housing problem, not housing directly, but the mortgage problem. They are dealing with liquidity in the system, which is totally frozen. And they are helping to make our savings as individual money market funds safer. And the - I think the - banning the short selling is a little thing. I think that is actually something that was absolutely essential to do.
PILGRIM: You know, I would actually like to bring up a comment from President Bush that speaks to your point, Allen. He says the risk of doing nothing is greater than the risk of what they're doing now. He actually said the financial system is at risk of grinding to a halt. To hear the president of the United States say that is very startling. Let's listen to something that was said at a White House press conference this week.
(BEGIN VIDEO CLIP)
PRES. GEORGE W. BUSH, UNITED STATES OF AMERICA: Given the precarious state of today's financial markets and their vital importance to the daily lives of the American people, government intervention is not only warranted, it is essential.
(END VIDEO CLIP)
PILGRIM: Peter, you've written extensively on the economy. What's your assessment of President Bush's comments and the way that the Bush administration is handling this crisis now?
PETER MORICI, PROF., UNIVERSITY OF MARYLAND: Well, I think he's absolutely correct. The banks in New York are no longer securitizing the loans that regional banks around the country make into bonds. So there's essentially been a dry up of liquidity to these banks to do things like make mortgages and auto loans and all the business loans that are essential to the functioning of the economy.
Now, this plan would take some of the bad paper, the bad mortgages in the form of bonds and so forth off their books and has two downsides. One is I doubt they're going to get all their money back the way they did with the savings and loan debacle because the housing market has fallen so much further than it did in those days.
And the second is it doesn't fix the banks. During the savings and loan crisis, the banks weren't really broken, they were victims of deregulation. This time around, they have some very shoddy business practices and nothing is being required of them to fix what they do or to re-enter the securitization process.
PILGRIM: Hold on. Let's get into this in a second. You know, President Bush did say that this money eventually will be paid back. Bill, I would like to get your thoughts on that. And also the fact that they're trying to rush re-regulation through Congress. How fast can this be done and how fast can we restructure this quickly? Bill.
BILL GROOS, FOUNDER, PIMCO: Sure. I think much of it will be repaid and the government stands the chance of making a profit. It depends upon the purchase price for these secondary mortgages at 65 to 70 cents on the dollar. They stand a good chance of making a profit. It was a necessary step. Not only that but stabilizing the money market funds.
Yesterday, there was a run, basically on the American financial system, a run on the American economy that had to be stopped, it has been stopped. But ultimately the fate of the U.S. economy and its markets depends on the willingness of banks to lend. You can lead a bank to water, but you can't make it lend. And that's the ultimate problem.
PILGRIM: Allen, you know, there's two parts of this. One is dealing with the immediate crisis, one is restructuring the system. Basically, you gave your assessment on how you think they're handling the immediate crisis. In terms of restructuring the system, how quickly could they get that finished and in place and thought through with all the implications realistically with Congress with one more week to go?
SINAI: They really can't at all. And that's a risk to what happens going forward. They're going to have to figure out some stop gap measures, which will now allow markets without really choking markets. It won't allow markets to do what markets were doing before, which was basically taking one investment bank and brokerage firm after another and driving it to ruin.
I think whether they were headed for ruin or not, the market mechanics were doing that. They're going to have to find a way to prevent that and then we're going to have to wait frankly until after the election. I think we'll see action in Congress, discussions, hearings even before the election, but we can't get any legislation. That's why they have to do it - whatever they're going to do in the next week. We're not going to rewrite the rules of the system in one week. So we're going to be faced with having to deal with this after the first of the year. And hope that we don't have another tsunami collapse.
Bill had it right. The system was shut down yesterday in an incredible way and the day before and I think not knowing the consequences of that, decision makers can't sit on their hands and let that just go by.
PILGRIM: Peter, they did some emergency measures, they stopped short selling and there's been a good deal of scapegoating of short selling, which certainly does not sum the extent of the problem in the system. What do you think about these short-term measures and then the efficacy of long-term regulation? Do we have the luxury of waiting until the next administration?
MORICI: No, we really don't have the luxury of waiting until the next administration. Certainly, the ban on short selling was very useful. We want to get rid of naked short selling, maybe for good. But we need to be careful not to overdo it with short selling, because it does perform a necessary function in normal times.
I think that we have within our grasp the ability through the loans that we're making to the banks in New York to demand some changes, for example, in their compensation schemes which encourage their bankers to make reckless bets and are also encouraging them to go away from the securitization business, because returning to plain vanilla securities as they had earlier in this decade wouldn't yield a lot, the kind of profits they want for their bonuses.
I think we can condition some changes in behavior right now by bringing them together with fixed income investors and talking about what kind of plain vanilla bonds would work so they can start providing liquidity to the banks. We can make participating in securitization a necessary function for them to get aid.
PILGRIM: Bill, what would you like to see done in the next week, that you think would really dovetail what they've done this week?
GROSS: Well, I think continuing support of the mortgage problem. I mean, when you listen to Secretary Paulson, you hear that he knows and believes that the heart of the problem is basically home prices and mortgage financing. And to the extent now that the Treasury and the Fed can buy mortgages in the secondary market next week, I think that's an important first step and then the RTC II type of provision that allows to buy secondary mortgages, jump mortgages basically from banks and other institutions, that follows. But ultimately, let's support home prices and that will lead to an improvement in the economy going forward.
PILGRIM: Gentlemen, expertise like this is not easily found. Thank you very much for joining us on the broadcast this evening. Peter Morici, Allen Sinai and Bill Gross. Thank you very much.
GROSS: Thank you.
PILGRIM: Up next, Barack Obama and John McCain spar over this country's financial crisis. But does either one of the candidates know how to fix our troubled economy? Three of the best political analysts will join me next. Stay with us.
PILRGRIM: Joining me now are three of the best political analysts in the country. We have CNN contributor, "New York Daily News" columnist Errol Louis. And Errol is also the host of the morning show on WWRL in New York City. We have CNN contributor and democratic strategist Hank Sheinkopf. And in our D.C. bureau, we're joined by syndicated columnist and CNN contributor Diana West. And Diana is also the author of "Death of the Grown-up," which was just released in paperback this week. So congratulations on that, Diana.
DIANA WEST, SYNDICATED COLUMNIST: Thank you.
PILGRIM: We come to a show where we really have to analyze a lot of information from a week. It's a tough week. Let's start with President Bush and what he said. He said basically, this move is absolutely essential to stop the financial crisis. In political terms, he did step forward into the leadership role and declare that this was the time for the government to step forward. What's your reaction to the timing of that and the sort of intensity of that, Hank?
HANK SHEINKOPF, CNN CONTRIBUTOR: Intensity great, timing is late. The crisis has been going for some time. You cannot pile up the kind of debt, do the kinds of things people have done for all these years and somehow show up and say, I'm going to fix it now. He should have been in front of this problem years ago.
PILGRIM: Well Fannie and Freddie what, two weeks ago, they had an intervention then. Presumably, it would have been a time to make such a statement. Diana, your thoughts on this?
WEST: Well, the Fannie - yes, I agree. Although I think that a lot of these things, you know, people react, even presidents react, even presidential candidates react to these monster headlines we're seeing. And so I think it's just a matter of people's pulse racing that drives them to make these intense statements. People are worried no one really has unraveled what is going on yet, and so you see them trying to calm people and stabilize markets.
PILGRIM: You know I would like to actually take a comment from President Bush before I get Errol's comments on this. Let's listen.
(BEGIN VIDEO CLIP)
BUSH: We believe that this decisive government action is needed to preserve America's financial system and sustain America's overall economy. These measures will require us to put a significant amount of taxpayer dollars on the line. This action does entail risk, but we expect that this money will eventually be paid back.
(END VIDEO CLIP)
PILGRIM: And President Bush went on to say that the risk of not doing this is significantly higher than the risk of doing it. Errol, your thoughts?
ERROL LOUIS, CNN CONTRIBUTOR: I got to tell you, it's infuriating. I've been covering the story for over five years. Five years ago I attended press conferences at which 49 attorney generals across the United States said what the Bush administration is doing is creating a road map for bad guys to evade state regulation, to evade regulatory oversight, to start creating toxic financial products that are going to be pushed out all across the marketplace and that's exactly what happened.
So this isn't community groups who are you know waving banners, although those folks of course were doing the same thing. The Consumer Federation of America, AARP, they were all complaining. But then again, state attorney generals, republicans, democrats, it was bipartisan. And there was this insistence from the White House that they would overrule state regulation, that they would do away with it, that they would give a free hand to these operators and the toxic mess that resulted was absolutely foreseen.
PILGRIM: It seems that this summer we were in a very deep period of denial. And we had actually President Bush and Secretary Paulson coming forward. Actually, I recalled Secretary Paulson saying, the economy's going to grow by the end of the year. President Bush saying, we're in a fundamentally strong economy. How could they have been looking at the balance sheets of some of these institutions on a federal level and not have understood what kind of crisis was building up?
SHEINKOPF: Because they weren't. Because they allowed the private sector and they allowed Wall Street to do whatever the private sector and Wall Street wanted. Even Teddy Roosevelt and Dwight David Eisenhower, Republicans understood that you can't do that. Why? You can't give a heroin addict drugs and say don't shoot them. It's that simple. The job is to take money and make money. You got to watch them.
PILGRIM: We've seen a lot, a lot of people in the last week decrying short sellers. It's almost as if they would like to scapegoat short selling as the entire problem. It is not, is it not? Diana?
WEST: Well, I think - frankly as a culture critic, and I think you can look at this problem as a manifestation, a personality change. I mean, once upon a time, bankers were the caricature in our society of caution and sobriety and only going with the sure thing. I mean, since we've seen changes in us as a people, with you know, some of the themes of infantilization that I like to explore.
I think we see the instant gratification hitting Wall Street just as it hit every other facet of society. So I think a lot of this has to do with that personality change and frankly, a lot of this also has to do with the understanding that the federal government was always going to come in and pick up the pieces if these institutions were whether it's the quasi public, Freddie and Fannie or the private institutions messed up. And maybe that's something that we need to re-examine.
PILGRIM: As there is a lot of societal soul searching that has to go on. But still there's a systemic problem here.
LOUIS: This systemic problem I think it's unconscionable that they put, borrow on short selling. I mean, one of the few ways for people to try and make some money back whether it's as individuals or through their mutual funds or through their hedge funds is to simply get on the right side of where the market is clearly going. If Washington Mutual is going down, you should be able to short that stock and try and recoup some of your losses or at least hedge some of the losses. And for them to slam the door like that, I mean, it makes the economic mismanagement picture complete.
PILGRIM: All right. We're going to take a short break, Errol. And when we come back, we'll talk about the how the campaigns are handling this financial crisis and what they're saying about it, stay with us.
(COMMERCIAL BREAK) PILGRIM: We're back with Errol Louis, Hank Sheinkopf and Diana West. Let's talk about how the campaigns are handling this finance crisis and we had a lot of statements. Not all of them makes a lot of sense. Let's start with Senator McCain. He said the Federal Reserve needs to stop bailing out Wall Street. And let's for a second to what the Senator had to say about Senator Obama on this issue.
(BEGIN VIDEO CLIP)
SEN. JOHN MCCAIN (R), PRESIDENTIAL CANDIDATE: We heard a lot of words from Senator Obama over the course of this campaign. But maybe just this once he could spare us the lectures and admit to his own poor judgment in contributing to these problems. The crisis on Wall Street started in the Washington culture of lobbying and influence peddling and he was right square in the middle of it.
(END VIDEO CLIP)
PILGRIM: Now, obviously, Senator McCain using this as a political leverage against Senator Obama. He also came out with some very deep specifics on what he would do, sort of a template, he'd like to start a new agency to deal with the federal crisis, that would be an early intervention program. He talked with about the corruption and manipulation of the home mortgage system. So he had some specifics to say. What's your reaction to Senator McCain's approach to this crisis?
SHEINKOPF: It's called (secular) populism. He's got everything in place. He's trying to create an inspirational moment. He has found the enemy. It needs (inaudible) religion and he has got an economic drum to beat. Welcome to America. Not much has changed since the 19th century.
PILGRIM: All right. Diana?
WEST: Well, you know, I think it is political, of course. But I think that a lot of what this crisis will ultimately shake out, because I think the polls as we can see, more closely resemble EKG measurements than actual political sentiment. But Senator Obama's, two of his most trusted campaign advisers are deeply implicated in the mess at Fannie and Freddie. And I'm speaking of Franklin Raines and Jim Johnson.
I don't know how Senator Obama distances himself from that. I think that's a very important point politically for Senator McCain to hit home. But it doesn't strike me as simply a matter of partisan politicking. It is just a political fact that Senator Obama must explain.
PILGRIM: Well, Senator Obama also came out and in fairness, let's put up his comments that he had to say about the plan for the financial markets.
(BEGIN VIDEO CLIP)
SEN. BARACK OBAMA (D), PRESIDENTIAL CANDIDATE: We cannot only have a plan for Wall Street. We must also help Main Street. I'm glad that our government's moving so quickly in addressing the crisis that threatens some of our biggest banks and corporations but a similar crisis has threatened families, workers and home owners for months and months. And Washington has done far too little to help.
(END VIDEO CLIP)
PILGRIM: Now, this seems more like standard political campaign talk. He did not have as many specifics about what he would do. In fact, he actually took a step back and said, now is the time for the Treasury and the President to take the lead on this and offered very few specifics. Errol, thoughts on this?
LOUIS: Yes. I mean, that reflects the reality that he doesn't have perfect or even decent information about what to do. This is not a time to start, you know, trying to make policy for one of the biggest crisis that hit the economy in a generation. But you know, I got to address something that Diana said. I mean, it is true that people who are involved in the mess are close to the Obama campaign but it's nothing nearly like what's going on on the McCain side.
Lobbyists for Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, all of -- AIG, all of the groups that are being bailed out are right here at the top of this campaign and he himself as long time chair of the Commerce Committee was part of the oversight mechanism in Washington. So if it's broken, you know, the guy who was there for years and years and years I think has to take at least as much, if not more, blame for what has gone on.
PILGRIM: Let me raise this point. You know, we had a bailout two weeks ago for Fannie and Freddie. We had this crisis building for literally years. The American public, and I'd like to put up this poll, has said that the economy is the top concern. Here's the most important issue to your vote. The economy. This has come in every poll that we've seen for months and months and months. Why are both campaigns so slow off the mark in addressing this crisis? Hank?
SHEINKOPF: More than a year ago on this program, we said the economy would be the issue going into this presidential campaign. We've been talking about this crisis building for months. No one seems to listen. The economy and telling the bad news is not what moves numbers in polls. And campaigns in the modern form constructed entirely on polls, you tell people bad economic news, that there is bad economic news and it doesn't necessarily help you, you become very specific. You become attacked for the specificity of your argument. Therefore, keep it loose.
PILGRIM: But doesn't it just seemed terribly reactive to have everyone coming out and making sort of broad brush statement at this point. Diana, any thoughts on this?
WEST: Yes, I agree. And I would say that Senator Obama in his statement actually shows prudence in not rushing out with a template. I mean, I think that the underlying causes have yet to be unraveled. That said, it's also notable that his general reaction is to sort of expand government from Wall Street to Main Street, which can be a disturbing message. But it's something that really needs careful, as you were saying earlier, sort of soul searching, as to how we conduct financial affairs and going for the bottom dollar rather than for the long term more safe (inaudible).
LOUIS: I think this is the time for thoughtful people in both parties to step forward, to put forward, really, their best ideas. What the candidates should be confining themselves to, I think is broad statements of philosophy, to let people know the general direction, the general framework they've used to try and approach this crisis. Because that's the best and most truthful thing that they can really say at this time.
PILGRIM: Well, as the next president, I think they sort of owe it to the American people, despite Hank's observations.
SHEINKOPF: My argument is very simple, this is a moment when the next commander in chief will actually be looked at very carefully, because this is a real crisis. People are looking for inspiration and leadership. They don't mind if you take a risk. Take the risk, say something, come up with a plan. Go to action because if we're at war or something terrible happens, they expect you to do the same. That's the difference.
PILGRIM: All right. Thanks very much. Diana West, Errol Louis, Hank Sheinkopf, thank you very much.
Thank you for joining us. Please join us tomorrow. For all of us here, thanks for watching. Good night from New York.