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Bailout, Banking Hearing
Aired September 23, 2008 - 10:55 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
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SEN. CHRISTOPHER DODD (D), CHMN. SENATE BANKING CHAIRMAN: ... serve our country, and that goes for all of you there at the table. There are obviously concerns that have been expressed here strongly this morning. I hope it's been valuable for you to hear from across the country how our colleagues are hearing from these constituents and their own concerns about these issues. In no way should this be an interpretation of our lack of respect and admiration for those willing to serve our country. And we appreciate immensely your willingness to do it. We admire, as well, your background experience you bring to this issue.
So with that, we thank you for being here this morning. Anxious to receive your testimony and answer some questions.
HENRY PAULSON, TREASURY SECRETARY: Thank you very much, Chairman Dodd, Senator Shelby, members of the committee. Thank you very much for the opportunity to appear before you today.
I very much appreciate the comments you made. And I understand them and I appreciate them. I also --
UNIDENTIFIED MALE: Bring that mic a little closer.
PAULSON: -- I also share the comments that you all made about the importance of this situation and the importance of this hearing. This is a difficult period for the American people. I very much appreciate the fact that congressional leaders and the administration are working closely together so that we can help the American people by quickly in enacting a program to stabilize our financial system. We must do so in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American family's financial well-being, the viability of businesses, both small and large, and the very health of our economy.
The events leading us here begin many years ago, starting with bad lending practices by banks and financial institutions and by borrowers taking out mortgages they couldn't afford. We've seen the results on homeowners, higher foreclosure rates affecting individuals and neighborhoods. And now we're seeing the impact on financial institutions. These loans have created a chain reaction, and last week our credit markets froze. Even some main street, nonfinancial institutions -- excuse me -- some nonfinancial companies had trouble financing their normal business operations. If that situation were to persist, it would threaten all parts of our economy. Every American business depends on money flowing through our system every day, not only to expand their business and create jobs, but to maintain normal business operations and to sustain jobs. As we've worked through this period of market turmoil, we've acted on a case-by-case basis, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers and lending to AIG so it can sell some of its assets in an orderly manner.
And here I would make the comment -- I've heard your comments on executive compensation, I share your frustrations, I feel those frustrations. Practices throughout America also upset me. Let me just say that with regard to Freddie and Fannie and AIG, in case you or your constituents don't know, in those cases, CEOs were replaced. The government got warrants for 79.9 percent of the equity. Golden parachutes were eliminated. Strong action was taken.
I will also say to the comments made about Freddie and Fannie and the bazooka, you all can be darn glad you gave us the bazooka, because we needed it. Let me tell you something -- those -- the root of that problem was in congressional charters started many, many years ago. We were living up to our obligations here. There were ambiguities, there were obligations around those charters. And what we did was we came in, we stabilized the market, mortgage rates went down so that capital could flow through our system. And I can just say, I for one -- and I know that the other witnesses feel very glad about this -- thank goodness that was done and they were stabilized before we had some investment banks report their earnings. Let me tell you, this would be a much more serious situation than it is today. So there was an example of broad authorities working the way they were supposed to work to stabilize our system.
Now -- sorry for that ad hoc response.
But we've also taken a number of powerful tactical steps to increase confidence in the system, including a temporary guarantee program for the U.S. money market mutual fund industry. These steps have been necessary, but not sufficient. More is needed. We saw market turmoil reach a new level last week and spill over into the rest of the economy. We must now take further decisive action to fundamentally and comprehensively address the root cause of this turmoil. And the root cause is the housing correction, as you've all pointed out, which has resulted in illiquid mortgage assets that are choking off the flow of credit, which is so vitally important to our economy. We must address this problem and this underlying problem and restore confidence in our financial markets, in financial institutions, so they can perform their mission of supporting future prosperity and growth.
We have proposed a program to remove troubled assets from the system. We would do this through market mechanisms available to thousands of financial institutions throughout America: big banks, small banks, savings and loans, credit unions, to help set values of complex, illiquid mortgage and mortgage-related securities to unclog our credit and capital markets and make it easier for private investors to purchase these securities, and for the financial institutions to raise more capital after the market learns more about the underlying value of these hard-to-value, complicated, mortgage- related securities on their balance sheets.
This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and effectively.
And let me give you another ad hoc comment there.
When we all met Thursday night, as you'll recall, Chairman, with the leaders of Congress, you all said to us, "Don't give us a fait accompli. Come in and work with us." We gave you a simple three-page legislative outline, and I thought it would have been presumptuous for us on that outline to come up with an oversight mechanism.
That's the role of Congress. That's something we're going to work on together. So if any of you felt that I didn't believe that we need oversight, I believe we need oversight.
We need oversight. We need protection. We need transparency. I want it. We all want it. And we need to do that in a way that lets this system -- lets this program work effectively, quickly, because it needs to work effectively and quickly, and it needs to get the job done.
Now, the market turmoil we are experiencing today poses great risk to U.S. taxpayers. When the financial system doesn't work as it should, Americans' personal savings and the ability of consumers and businesses to finance spending, investment and job creation are threatened.
The ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system. Don't forget that. This system has to work and it has to work right, and that will be the ultimate market protection. I am convinced that this bold approach will cost American families far less than the alternative, a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion.
Again, I'm frustrated. The taxpayer is on the hook. The taxpayer is already on the hook.
The taxpayer already is going to suffer the consequences if things don't work the way they should work. And so the best protection for the taxpayer and the first protection for the taxpayer is to have this work.
Over these past days, it has become clear that there is a bipartisan consensus for an urgent legislative solution. We need to build upon this spirit and enact this bill quickly and cleanly, and avoid slowing it down with provisions that are unrelated or don't have broad support. This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people, and to stimulate our economy.
Earlier this year, Congress and the administration came together quickly and effectively to enact a stimulus package that has helped hardworking Americans and boosted our economy. We acted cooperatively and faster than anyone thought possible. Today, we face a much more challenging situation that requires bipartisan discipline and urgency.
When we get through this difficult period, which we will, our next task must be to address the problems in our financial system through something you've all talked about. We need reform that fixes this outdated financial regulatory structure. You've all heard me talk about that a lot. And we need other strong measures to address other flaws and excesses in the system.
And there are plenty, and we've all talked about them. And they can't be addressed this week. They're going to take -- we need to take time to address these.
I've already put forward my recommendations on this subject. Many of you have strong views based on your expertise. We must have that critical debate, but we must get through this period first.
Right now, all of us are focused on the immediate need to stabilize our financial system. And I believe we share the conviction that this is in the best interest of all Americans. Now let's work together to get it done.
Thank you.
SEN. CHRISTOPHER DODD (D), BANKING COMMITTEE CHAIRMAN: Thank you very much, Mr. Secretary.
I'd be remiss if I didn't just point out -- and thank you, by the way. But for the cooperation of Senator Shelby and the overwhelming majority of the members of this committee, we were able to enact that legislation in July that you referenced. And it doesn't mean that everybody supported every detail of it, but it was an example of coming together and getting a job done. It took some time, but we got it done.
And I thank you for your comments about it. And I thank Senator Shelby and members of this committee, Democrats and Republicans, who worked with us to get that done.
Chairman Bernanke.
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Mr. Chairman, Senator Shelby, I have submitted formal written testimony for the record. With your permission, I'd like to speak just a few minutes about the Treasury proposal.
The Fed supports the Treasury initiative. We believe that strong and timely action -- we believe that strong and timely action is urgently needed to stabilize our markets and our economy. But I believe some clarification is needed about why this proposal could make a positive difference, and I'd like to offer a few thoughts on that subject.
Let me start with the question: Why are financial markets not working?
Financial institutions and others hold billions in complex securities, including many that are mortgage-related. I'd leak to ask you for a moment to think of these securities as having two different prices.
The first of these is the fire sale price. That's the price a security would fetch today if sold quickly into an illiquid market.
The second price is the hold to maturity price. That's what the security would be worth eventually when the income from the security was received overtime.
Because of the complexity of these securities and the serious uncertainties about the economy and the housing market, there is no active market for many of these securities. And thus today, the fire sale price may be much less than the hold to maturity price.
This creates something of a vicious circle. Accounting rules require banks to value many assets at something close to a very low fire sale price rather than the holds maturity price, which is not unreasonable in itself given their illiquidity. However, this leads to big write-downs and reductions in capital which, in turn, forces additional sales that send the fire sale price down further, adding to pressure.
Meanwhile, private capital is unwilling to come in because of uncertainty about the value of institutions and because of the prospect of more write-downs. One suggestion that has been made is to suspend mark-to-market accounting and use banks' estimates of hold-to- maturity prices.
Many banks support this, but doing this would only hurt investor confidence because nobody knows what the true hold-to-maturity price is. Without a market to determine that price, investors would have to trust the internal estimates of banks. So let me come to the critical point.
I believe that under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.
First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down.
Second, liquidity should begin to come back to these markets.
Third, removal of these assets from balance sheets and better information on value should reduce uncertainty and allow the banks to attract new private capital.
Fourth, credit markets should start to unfreeze. New credit will become available to support our economy.
And fifth, taxpayers should own assets at prices close to hold- to-maturity values which minimizes their risk.
Now, how to make this work.
To make this work we do need flexibility in design of mechanisms for buying assets and from whom to buy. We do not know exactly what the best design is. That will require consultation with experts and experience with alternative approaches.
Second, understanding the concerns and the worries of the committee, we cannot impose punitive measures on the institutions that choose to sell assets. That would eliminate or strongly reduce participation and cause the program to fail.
Remember, the beneficiaries of this program are not just those who sell the asset, but all market participants and the economy as a whole. But finally, and very importantly, this is not to say that the financial industry should not be reformed.
It should be. It's critical. I agree with the Treasury secretary. The Federal Reserve will give full support to fundamental reform of the financial industry. But whatever reforms the Congress makes should apply to the whole industry, whether they participate in this program or not.
So in summary, I believe that under the Treasury authority being requested, a program can be undertaken that will help establish reasonable hold-to-maturity prices for these assets. Doing that will restore confidence and liquidity to financial markets and help the economy recover without an unreasonable fiscal burden on taxpayers. So I urge you to act as soon as possible.
Thank you.
DODD: Thank you, Mr. Chairman, for that testimony.
Christopher Cox.
CHRISTOPHER COX, SEC CHAIRMAN: Thank you, Chairman Dodd and Ranking Member Shelby, members of the committee, for inviting me here today to discuss the current turmoil in our markets and our policy responses to it. The extraordinary nature of recent events has required an extraordinary response from both policymakers and regulators.
Last week, by unanimous decision of the commission, and with the support of the secretary of the Treasury and the Federal Reserve, as well as close coordination with regulators around the world, the SEC took emergency action to ban short selling in financial securities and to stabilize markets as you consider this legislation. At the same time, the commission unanimously approved two additional measures to ease the crisis of confidence in the markets. One makes it easier for issuers to repurchase their own shares on the open market, thus providing additional liquidity. The second requires weekly reporting to the Securities and Exchange Commission by large investment managers of their daily short positions. In addition, the SEC recently issued new rules that more strictly enforced the ban on abusive naked short selling under our regulation show.
Beyond these immediate steps, the SEC is vigorously investigating how illegal activities may have contributed to the subprime crisis and the recent instability in our markets. First and foremost, the SEC is a law enforcement agency, and we already have over 50 ongoing investigations in the subprime area alone.
The Division of Enforcement has undertaken a sweeping investigation into market manipulation of financial institutions, including through the use of credit default swaps, a multitrillion- dollar market which is completely lacking in transparency and is completely unregulated. Last month, the Enforcement Division, working with state regulators, entered into agreements that will be the largest settlements in SEC history on behalf of investors who bought auction rate securities from Merrill Lynch, Wachovia, UBS and Citigroup. Happily, the terms of these agreements would provide complete recovery for individual investors. The commission also recently brought enforcement actions against portfolio managers at Bear Stearns Asset Management for deceiving investors about the hedge funds' overexposure to subprime mortgages.
The commission is using its regulatory authority simultaneously to ensure that the market continues to function. Last week, the commission's Office of Chief Accountant provided guidance to clarify the accounting treatment of banks' efforts to support their money market mutual funds. This will help protest investors in those funds.
And our examinations of the major credit rating agencies for mortgage-backed securities exposed weaknesses in the ratings processes and led to our sweeping new rules to regulate this industry under the new authority that this committee and the Congress have given us. We are also working to mitigate the impact of recent events.
In the past week, the SEC oversaw the sale of substantially all of the assets of Lehman Brothers, Inc. to Barclays Capital. Hundreds of thousands of Lehman's customer accounts with over a billion dollars in assets can now be transferred in a matter of days, instead of going through a lengthy brokerage liquidation process.
With all that has happened, it is important to keep in mind how we got here. The problems that each of these actions has addressed have their roots in the subprime mortgage crisis, which itself was caused by a failure of lending standards.
The complete and total mortgage market meltdown that led to the taxpayer rescue of Fannie Mae and Freddie Mac was not built in to the stress scenarios and the capital and liquidity standards of any financial institution. Bank risk models in every regulated sector, for better or for worse, failed to incorporate the scenario that has caused so much damage in financial services firms of all kinds.
The SEC's own program of voluntary supervision for investment bank holding companies, the consolidated supervised entity program put in place in 2004 was fundamentally flawed because it adopted these same bank capital liquidity standards, and because it was purely voluntary. It became abundantly clear with the near collapse of Bear Stearns that this sort of voluntary regulation doesn't work.
Working with the Federal Reserve, the Division of Trading and Markets moved quickly last spring to strengthen capital liquidity at investment bank holding companies far beyond what the banking standards require. And we immediately entered into a formal memorandum of understanding with the Fed to share both information and expertise. But the fact remains that no law authorizes the SEC to supervise investment bank holding companies, let alone to monitor the broader financial system for risk.
For the moment, this regulatory hole in the statutory scheme is being addressed in the market by the conversion of investment banks to bank holding companies. But the basic problem must still be addressed in statute by filling that regulatory hole, as I've reported to Congress on previous occasions.
I will conclude, Mr. Chairman, by warning of another similar regulatory hole in the statute that must immediately be addressed or we will have similar consequences. The $58 trillion notional market and credit default swaps to which several of you have referred in your opening comments that is double the amount that was outstanding in 2006 is regulated by absolutely no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimum disclosure to the market.
This market is ripe for fraud and manipulation. And indeed, we are using the full extent of our anti-fraud authority, our law enforcement authority, right now to investigate this market. Because CDS buyers don't have to own the bond or the debt instrument upon which the contract is based, they can effectively make sure the debt of companies without any restriction, potentially causing market disruption and destabilizing the companies themselves.
As the Congress considers reform of the financial system in the current crisis, I urge you to provide in statute for regulatory authority over the CDS market. This is vitally important to enhance investor protection and to ensure the continued operation of fair and orderly markets.
Mr. Chairman, I appreciate the opportunity to discuss this current market turmoil. And I look forward to answering your questions.
DODD: Thank you, Mr. Chairman.
Let me just very briefly -- we received your testimony about 20 minutes before the hearing began today. Other chairmen over the years have talked about it. And again, I'll just raise it briefly here with you. We need to get the testimony -- and I appreciate the fact we did from other witnesses last evening -- we need to get it from the SEC earlier than 20 minutes before a hearing.
Mr. Lockhart.
JAMES LOCKHART III, DIRECTOR, FEDERAL HOUSING AGENCY: Chairman Dodd, Senator Shelby, and members of the committee, thank you for the opportunity to testify on the Federal Housing Finance Agency's decision to place Fannie Mae and Freddie Mac into conservatorship.
Fannie Mae and Freddie Mac share the critical mission of providing stability, liquidity and affordability to the nation's housing market. Between them, these enterprises have $5.3 trillion of guaranteed mortgage-backed securities and debt outstanding which is equal to the total publicly held debt of the United States. Their market share earlier this reach reached 80 percent of all new mortgages made.
During the turmoil that started last year, they had played a very important role in providing liquidity to the conforming mortgage market. They required capital to support a very careful and delicate balance between safety and soundness in mission.
That balance was upset as house prices, earnings and capital have continued to deteriorate. In particular, the capacity to raise capital without Treasury Department support vanished.
That left both enterprises unable to fulfill their mission. Worst, it threatened to further damage the mortgage and housing markets if they had to sell their assets.
Rather than letting those conditions worsen and put the financial markets in further jeopardy, FHFA decided to take action. The goal of these dual conservatorships is to help restore confidence in Fannie Mae and Freddie Mac, enhance their capacity to fulfill their mission, reduce systemic risk, and make mortgages -- and this is the most important -- make mortgages available at lower costs for the American people.
FHFA based its determination on five key areas, each of which worsened significantly over the last several months.
First, there was accelerating safety and soundness weaknesses.
Second, there was a continued and substantial deterioration in equity debt and MBS market conditions.
Third, the current and projected financial performance and condition of each company as reflected in its second quarter financial reports and our ongoing examination.
Fourth, the inability of the companies to raise capital or to issue debt according to normal practices and prices.
And lastly, the critical importance of each company in supporting the country's residential mortgage market.
I shared our growing concern with Federal Reserve Chairman Bernanke, who was made our consultant in the law you passed in July, and with Secretary Paulson. They agreed that a conservatorship was necessary, as did the boards of both firms.
A detailed list of events leading to our conclusion to appoint a conservator is provided in my written statement. I'll just highlight a few.
It became apparent during this intense supervisory review that began in July that market conditions were deteriorating much more rapidly than anybody expected. We supplemented our examination team with senior examiners from the Fed and OCC. All three sets of examiners corroborated that there was a significant deterioration in the credit environment and it was a threat to the capital of these two companies.
We also finished our semiannual examination ratings of the companies, and across the boards, the ratings were significant in critical weaknesses. The companies themselves disclosed in their second quarter filings how rapidly the environment had deteriorated and was negatively affecting their outlook and their ability to raise capital. Freddie Mac reported losses of $4.7 billion over the last year, Fannie Mae reported losses of $9.7 billion.
Now let me turn to the conservatorships.
The first signs are that conservatorships are positive. The enterprise funding cost and the spreads on MBS have declined. This lower cost has been passed on to homebuyers with 30-year mortgage rates well below 6 percent for the first time since January.
On the first day, business opened as normal, but with stronger backing for the holders of their mortgage-backed securities, their debt and their subordinated debt. Over the next 15 months, they were allowed to increase their portfolios to provide support for the housing market. They will also be able to continue to grow their guaranteed MBS books.
As the conservator, FHFA assumed the power of the board and management. Highly qualified new chief executive officers and non- executive chairmen have been appointed. They will be delegated significant powers in order to conserve over $2 billion in annual capital, the common stock, and preferred dividends were eliminated.
The U.S. Treasury financing facilities which were critical to this conservatorship are all in place and will provide the needed support to Fannie Mae and Freddie Mac to fulfill their mission over the long term, while giving upside potential for taxpayers. FHA will continue to work expeditiously on the many regulations need to implement the new law. The new legislation adds importantly affordable housing, a trust fund, and mission enforcement to the responsibilities of the safety and soundness of regulators. We are also continuing to work with the enterprises on loan modifications, foreclosure preventions, pricing and credit issues.
The decision to appoint a conservator for each enterprise was a tough but necessary one. They can now become part of the solution. Unfortunately, all the good and hard work put in by the FHFA and the enterprises was not sufficient to offset the consequences of the antiquated regulatory structure which was overwhelmed by the turmoil in the housing markets. Conservatorship will give the enterprises the time to restore the balances between safety and soundness and their mission.
Working together with the enterprises, Congress, and the administration, and other regulators, I believe we can restore confidence in the enterprises. And with the new legislation which you passed, build a stronger and safer future for the mortgage markets, homeowners and renters in the America.
Thank you. I'd be pleased to answer questions.
DODD: Thank you very much, Mr. Lockhart.
Senator Tester was presiding over the Senate when we were gathering here, and everyone else had a chance to make a brief comment.
And Senator Tester, do you have a brief comment you'd like to make?
SEN. JON TESTER (D), MONTANA: I do. Thank you, Mr. Chairman. And thank you for allowing me to just ask a few questions.
Ten years ago I got involved in politics because of electrical deregulation in the state of Montana. It was a total disaster.
I've got plenty of questions to ask about the plan, and I will as they come forth. But I guess my concern is this -- six months ago we heard about Bear Stearns. And then we've had Fannie and Freddie and we've had some other ones come down the pipe.
A week ago you came forth with a $700 billion bailout plan, $700 billion. And it was made clear that this was going to be -- there was going to be nothing added on to it. Accountability, demanding of deregulation -- and my question -- and this is the concern I have -- you guys are a lot smarter in financial than I am. I'm a dirt farmer. You guys have been in the business. A former chairman of Goldman Sachs.
Why do we have one week to determine $700 billion that has to be appropriated or this country's financial systems go down the pipes? Wasn't there some opportunity sometime down the line where we could have been informed of how serious this crisis was so we could take some preventative steps before this got to this point?
That's it.
Thank you, Mr. Chairman.
DODD: Thank you, Senator, very much.
Let's -- again, we'll turn the clock on here and try and move along. And let me pick up sort of on that question.
I appreciate, Chairman Bernanke, your laying out why you think this particular plan will work. But I'd like for you if you could to step back. In addition to laying out why you think the plan would work, tell us -- and again, Senator Schumer mentioned the other night when we sat on Thursday night the reason why we have to act.
And put aside whether we're going to act this week or next week. But for a minute tell us why you believe it's critically important, one, that we act. What are the circumstances out there that warrant us responding as quickly as we're being asked to?
And secondly, do you believe that the amount being asked for is going to adequately address the issue, particularly if you adopt -- if we adopt the plan as suggested by the secretary?
BERNANKE: Mr. Chairman, the financial markets are in a quite fragile condition. And I think absent a plan, they will certainly get worse. But even at the current state, they are not serving the necessary function to support the economy.
Credit is not being provided. Secretary Paulson mentioned nonfinancial companies are not able to finance themselves overnight. Credit is just not going to be available. It's also going to affect savers because of the value of their assets that they have. So, even in the current condition, even if things don't get severely worse -- but I think they would get worse without some kind of action -- this will be a major drag on the U.S. economy and will greatly impede the ability of the economy to recover in a healthy way.
The amounts involved are intended to be enough, adequate. We don't want to go in and underwhelm the situation. That might lead us to just more problems down the road.
There have been some ways of looking at it. This is about 5 percent of all the mortgages outstanding, for example, $700 billion. But it certainly illustrates the size of these markets and the size of the problem.
I think it is important to state that, as I mentioned before, that this is not an expenditure of $700 billion. This is a purchase of assets, and if auctions are done properly, if the evaluations are done properly, the American taxpayer will get a good value for his or her money. And as the economy recovers, most, all, or perhaps more than all of the value will be recovered over time, as was the case in other similar situations in the past.
DODD: Let me ask you this. Again -- and we've heard our colleagues here across the spectrum here, both politically and geographically, talk about the impact this is having beyond obviously the information we're aware of in terms of firms that have disappeared or been consolidated, and the concerns about what's happening to people in the country, their homes being lost and the like.
Explain, if you would, what is your concern as chairman of the Federal Reserve if we were not to act? Give us some idea of what you think the implications would be if we did not respond in one way or another to this situation that you just described in terms of what happens outside of the financial services sector.
BERNANKE: Of course.
DODD: What happens to people out there who have a job, getting ready to retire, worried about their kids' education. These are matters which are going to be directly affected, I presume. That's the argument you're making. Give us some sense as chairman of the Federal Reserve why those people's concerns are going to be in even more dire straits than they would be if we did not act.
BERNANKE: Senator, you made my point for me. I'm a college professor. I was criticized for taking the job without having been working on Wall Street. I never worked on Wall Street. I don't have those interest or those connections.
My interest is solely for the strength and the recovery of the U.S. economy. I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon. GDP will contract. That the economy will just not be able to recover in a normal, healthy way no matter what other policies are taken. I therefore think this is a precondition for a good, healthy recovery by our economy.
These institutions provide credit for homeowners. They provide credit for businesses that create jobs.
It's about the people who need that -- those services and that credit. It's about people retiring who need to have assurances about the value of their investments and their assets. Again, I think if this is not done, that there will be significant adverse consequences for the average person in the United States.
DODD: And that's your recommendation as chairman of the Federal Reserve?
BERNANKE: Yes, sir, it is. And I do believe we need to act to stabilize the situation which is continuing to be very unpredictable and very worrisome.
DODD: Let me, if I can, look just quickly at the foreclosure mitigation issue.
TONY HARRIS, CNN ANCHOR: So this is it. This is the debate of the day, the debate of recent times, it seems, on Capitol Hill right now. What is happening with our financial markets?
Treasury Secretary Henry Paulson; Fed Chairman Ben Bernanke; Christopher Cox, the chair of the Securities and Exchange Commission; right now back and forth, the questions and the answers.
We will take a quick break and we will come back and we will work over, parse out all that we are hearing this morning.
You're in the CNN NEWSROOM. (COMMERCIAL BREAK)
HARRIS: ... break and we will come back and work over, parse out all that we are hearing this morning. You're in the CNN NEWSROOM.
(COMMERCIAL BREAK)
HARRIS: So here we go. The debate is on. A live picture here, Capitol Hill. As you see, the Treasury Secretary Henry Paulson, the Fed Chairman Ben Bernanke, also the chairman of the Securities and Exchange Commission, Christopher Cox, all on the hot seat this morning.
Welcome everyone to CNN NEWSROOM. We will keep an eye on that debate on Capitol Hill. Right now, the questions and the answers. And at some point, we will turn the corner and try to ascertain what all this means for the two men who would be president of the United States.
But first the Bush administration's money man on Capitol Hill, right now hoping to sell the $700 billion financial rescue plan and the going, pretty tough. Before we get to a little more analysis on this, take a look at Wall Street right now. And the markets have been open for close to two hours, just a little over two hours right now. And as you can see, we are trading at positive territory, up 82 points. At one point at the beginning of the day we were actually close to triple digit territory. But the markets really nice gains, up 88 points, two hours into the trading day.
At least one member of the Senate Banking Committee says the bailout plan, $700 billion, just won't work.
(BEGIN VIDEO CLIP)
SEN. JIM BUNNING (R), KENTUCKY: The Paulson plan will not help struggling homeowners pay their mortgages. The Paulson plan will not bring a stop to the slide in home prices. But the Paulson plan will spend $700 billion worth of taxpayer money to prop up and clean up the balance sheets of Wall Street. This massive bailout is not a solution. It is a financial socialism and it's un-American.
(END VIDEO CLIP)
HARRIS: And take a listen to Treasury Secretary Henry Paulson, voicing his and our frustration with where we are right now.
(BEGIN VIDEO CLIP) HENRY PAULSON, TREASURY SECRETARY: I believe we need oversight. We need oversight. We need protection. We need transparency. I want it. We all want it. And we need to do that in a way that let's this system, let this program work effectively, quickly. Because I it needs to work effectively and quickly. And it needs to -- it needs to get the job done.
(END VIDEO CLIP)
HARRIS: Congress is reluctant to give the Treasury secretary a $700 billion blank check. Some lawmakers want provisions to help homeowners. Limits on golden parachutes for executives and other strings attached.
Christine Romans with the CNN money team is live with us from New York. And Christine, look, I'm confused every day with this story. What is better here? To do something fast, or to do it and get it right? As we heard throughout the morning, there's no guarantee this will work or the pricing is even right on here.
So, why on earth would we do this in a matter of days?
CHRISTINE ROMANS, CNN CORRESPONDENT: Well, Secretary Paulson is saying we've got to do it now. The time is of the essence. It must be immediate. We don't have time, that it has to be done quickly. And you saw how animated he was responding to criticism that he gave Congress a three-page blueprint and then was asking for all this power.
He said no, I'm not asking for all this power. I'm saying I want to work with the Congress to get this done. But it's got to be done quickly and I'm going to work with you folks. I gave you three pages because I thought together we could do it all together. So he was responding to criticism there. These are the first public hearings about what is a massive bailout. And our concerns, pushback, if you will, on both sides.
I want to listen quickly to Senator Enzi, from Wyoming. This is what he had to say. He's concerned about taxpayers footing the bill.
(BEGIN VIDEO CLIP)
SEN. MICHAEL ENZI (R), WYOMING: We're talking about the equivalent of $2,300 from every U.S.citizen. This committee would not be doing its job if that were allowed to happen.
(END VIDEO CLIP)
ROMANS: Now, Democrats are concerned that home buyers are not being helped, the people in trouble with their mortgages aren't being helped. They want to alter the bankruptcy code. Something they've been trying to do for a long time. You know, if you've got a whole bunch of houses; your second, third, fourth and fifth house. If you file for bankruptcy, those are protected. You can change the terms of them under bankruptcy, but not the first. So, if you're bankrupt and you only have one house, you can't change the terms of your bankruptcy under one house. So, they want to change that because they feel like that helps the rich people. It doesn't help people who have only one home who filed for bankruptcy.
So, an urgent call to Congress, Tony, for this bailout. An urgent call from what I've been saying is the multi millionaire and the college professor. These are the two people who we're being asked to trust.
HARRIS: Hey Christine, if you were in that room right now, what's the one question you would have for the members of that panel?
ROMANS: For the members of that panel. You know, I would ask Secretary Henry Paulson (sic), I would say, are you willing to stick around and see this through? Are you willing to have this be your brain child and your legacy? Are you willing to be the one who is going to provide continuity and see this massive huge project through? Because there's only a few months left in this administration.
HARRIS: Yes. Christine, appreciate it. That's a great question. I hope someone picks up on that and asks that question. Christine Romans for us from New York.
Well, here's another question for you. How do you feel about your hard-earned money being used to pay for the big mistakes of big business? Here's some reaction we're hearing about this billout.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: Why they're bailing out these big multi million dollar corporations and putting the burden on the taxpayer. And then the executives and these companies leave and they get these big sums of money. So, as a taxpayer it makes me angry and I just want to find out when that's going to stop.
(END VIDEO CLIP)
HARRIS: Just a sampling of the word on the street. When we come back, one of the most difficult things to do in the southeast these days.
(COMMERCIAL BREAK)
HARRIS: And running on empty. Frustrated drivers facing severe gas shortages in several big cities in the southeast. AAA says Nashville, Tennessee, is seeing the worst of it. Long lines and empty pumps all across the city. We've got the same thing happening right here in Atlanta. Yours truly stuck in one of those long lines yesterday. No fun. It is absolutely bringing out the worst in some motorists.
(BEGIN VIDEO CLIP)
ANN JAIPERSAUD, GAS STATION OWNER'S WIFE: We get punched out, we get -- somebody punched the glass this morning. Luckily it was bullet proof.
MATTHEW HENLEY, STRANDED DRIVER: Yesterday I had to have my truck towed home. And I'm looking for gas now to get to work.
(END VIDEO CLIP)
HARRIS: The gas shortage is due to supply problems caused when hurricane Ike hit Texas. The last report is nine major Gulf Coast refineries were still off-line.
CNN iReporters are sending us their gas shortage video. This one from Michael Lanfreschi. He was struck in this 40-car line at a gas station in suburban Atlanta. Michael says the station eventually ran out of gas and so did his car. He had to call his boss to hitch a ride back to work.
And listen to this iReporter, also in suburban Atlanta.
(BEGIN VIDEO CLIP)
VOICE OF GARY BERMAN, IREPORTER: Here at Sam's Club in Marietta, Georgia, the tanker truck just got here. All the stations are still closed. But I'm sure there will be lines forming momentarily as people are waiting for gas. There are no gas stations around with gas. So, I'm sure it won't be long before cars start lining up here to get some gas.
(END VIDEO CLIP)
IReporter Gary Burman tells us this gas station had been out of gas for three days.
Oil prices are trading lower right now. Traders cashing in profits from yesterday's big rally. Anxiety over the government's big bailout plan pushed crude oil to its biggest ever one-day surge up more than $16, to settle around $120 a barrel.
Now, who's to blame for the financial fiasco? Many Americans say it's the GOP by a 2-1 margin. A new CNN Opinion Research Poll shows 47 percent of people polled say Republicans are responsible for the crisis. 24 percent say Democrats. The poll also indicates more Americans think Democrat Barack Obama would do a better job handling the economy than Republican John McCain. And 77 percent of those polled are either very worried or somewhat worried that the people responsible for the financial crisis will benefit if the government takes action.
Next hour, we will bring you new poll numbers on how the financial crisis is affecting you. Find out if people are selling stocks and taking money out of money market funds. The candidates are going after each other over the financial crisis issuing a slew of attacks. Who's the facts?
Josh Levs with the CNN Truth Squad has been looking into the latest back and forth. And he is here to break it all down.
What did you find, Josh?
JOSH LEVS, CNN CORRESPONDENT: It is inevitable on a daily basis, isn't it?
HARRIS: Yes.
LEVS: And I know you're really interested in the ones we've got going today, too. This whole idea of, do you have a plan? How can you have a plan? Who has a plan?
HARRIS: Because you're going to face an entirely different set of circumstances when you take office. But that's a whole other debate to have.
LEVS: And that's what is behind this latest attack. Let's take a look at it.
(BEGIN VIDEO CLIP)
SEN. JOHN MCCAIN (R), PRESIDENTIAL NOMINEE: Senator Obama has declined to put forth a plan of his own. At a time of crisis when leadership is needed, Senator Obama has simply not provided it.
(END VIDEO CLIP)
LEVS: OK. Now, let me show you what's going on there. We tackled this at the Fact Squad. We actually determined that when -- Truth Squad, excuse me.
When you really look into this it's kind of misleading to see that. Let me go to a graphic because what I want to do is, I want to show you what each candidate is saying right now about how to tackle this financial crisis.
Barack Obama is talking about some ideas. He's saying there should be no writing of legislation behind closed doors. There should be greater supervision by the Federal Reserve. He's also calling for an act that he says, would help strengthen the position for homeowners.
Let's go over to McCain now. A couple examples of what he's talking about in the midst of this. He wants a mortgage and financial institutions trust that he says would work together with the private sector and with regulators to help avoid any of the kinds of things we're seeing these days, Tony. He also wants Wall Street reforms to prevent concealing poor business practices.
But that is as specific as either of them get. When the Truth Squad looked into this, they found them pretty even. And speaking of even, I want to quickly an attack on the other side from Barack Obama, who is claiming that John McCain wants to do to health insurance, what is has already happened to banking in America.
Let's look.
(BEGIN VIDEO CLIP) SEN. BARACK OBAMA (D), PRESIDENTIAL NOMINEE: John McCain says he wants to do what the health care system what Washington's done to the banking system. The radical idea that government has no role to play in protecting ordinary Americans has wreaked havoc on our economy.
(END VIDEO CLIP)
LEVS: All right. Now, at the Truth Squad, you know what, he actually doesn't espouse that radical idea that the government should have no role. Let's go to the last graphic now. This is what John McCain actually said and what set off this whole discussion.
He wrote for this magazine for actuaries, that just published. And he said, opening up the health insurance market to more vigorous nationwide competition, as has been done for banking, will provide more choices basically. So, that's his argument. So, he wants one kind of deregulation for health insurance, not everything that's been done for banking. So, as you see, Tony, when you hear these attacks, you have to be wary.
HARRIS: OK. We're out of time.
LEVS: I know. I'm hearing the same thing you are. We could talk all day and they know it, which is (INAUDIBLE).
HARRIS: All right. Josh, appreciate it. Thank you.
LEVS: Next hour we'll do more.
HARRIS: OK.
LEVS: See you, Tony..
HARRIS: What a horrible story we're following for you here in the CNN NEWSROOM. Terror on campus. 10 dead, more wounded in a school shooting today. Police say they had the gunman in custody yesterday, but let him go.
(COMMERCIAL BREAK)
HARRIS: All right. Once again, you're going to see pictures in just a moment here. There it is. See it live. The Senate Banking Committee holding hearings right now on the proposed bailout of the financial sector of the banking sector. $700 billion. If you'd like to see it as it unfolds right now you can see it live at CNN.com/live.
New details coming in right now about that early morning college scooting in Finland. 10 people shot dead at a trade school about 180 miles from Helsinki. A hospital official tells CNN that the gunman who shot himself in the head after the rampage has died of his injuries.
We are also following developments on images posted to YouTube. Finnish police investigating right now if this man seen at a shooting range is the suspected school shooter.
(WEATHER REPORT)
HARRIS: A politician is talking about your pocketbook. Are you nervous?
(COMMERCIAL BREAK)
HARRIS: Six weeks and counting to election day. The financial crisis, issue number one on the campaign trail. John McCain is in Ohio right now.
Here's what he's saying.
(BEGIN VIDEO CLIP)
MCCAIN: I appreciate the endorsement. I appreciate your engagement and I want to assure thaw we're going to bring economic recovery and jobs to Ohio.
I know that a lot of eyes have been on Wall Street and Washington, for the past week as we all process the credit crisis that has hit our economy in such a devastating fashion. But I want the people in Ohio here to know that I've not forgotten the economy on Main Street. Not Wall Street, not Washington, D.C., but Main street is the focus of our attention and our efforts.
And I'm going to put in place priorities and policies that will create jobs in Ohio. And one important way that we're going to create jobs here is with the development of additional nuclear power plants and through investments in clean coal technology. We will invest as much as $2 billion a year to develop clean coal technology. America sits on the world's largest coal reserves and we have to use it and clean coal technology is the best way.
Not only will investment in our energy infrastructure create millions of new jobs across the country, it will help lead our nation toward the -- the absolutely vital goal of energy independence. My opponent is against the expansion of nuclear power. His running mate here in Ohio, recently said they weren't supporting clean coal either. And the fact is that there billions of dollars in higher taxes that would kill jobs here in Ohio. That's not what Ohio needs and that's not what America needs.
My economic focus throughout this campaign has always been pro- growth policies that will create jobs. I share that focus with Pat Sync and the operating engineers local A team which represents thousands of workers here in Ohio. I am honored and happy to accept their endorsement.
(END VIDEO CLIP)
HARRIS: And later today, John McCain takes his message to Michigan.
Democrat Barack Obama promising a new vision for the economy. He blames Republicans for the crisis. Here's Obama in his own words in Wisconsin. (BEGIN VIDEO CLIP)
OBAMA: We're in this mess because of a bankrupt philosophy that says we should give more and more to those with the most and hope that prosperity trickles down to the rest of us.
We're here because for too long the doors of Washington have been thrown open to an army of lobbyists and special interests, who've turned our government into a game only they can afford to play. Who have shredded consumer protections, fought against common sense regulation and rules of the road, distorted our economy so that it works for them instead of for you.
We're here because of an epic of irresponsibility that swept through our government, leaving politicians with the belief that they can waste billions and billions of your money on no good contracts for friends and contributors. Slip pour pork projects into bills in the dead of night. Spend billions on corporate tax breaks we can't afford and old programs that we don't need.
And today -- today, even as Congress debates an emergency plan to save our economy on the verge of collapse, there are reports that lobbyists and CEOs are already lining up to figure out what's in it for them. To find out how they can get theirs. Green Bay -- how about yours? Green Bay, enough is enough. It is time for us to stand up and say, no more. We are going to start doing things differently here in America, under a new president with a new vision for our economy and new vision for our future.
(END VIDEO CLIP)
HARRIS: And there you have Barack Obama in his own words.
