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Paulson & Bernanke Discuss Handling of Bailout Funds; Wildfires in California Cause Serious Destruction
Aired November 18, 2008 - 09:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
HEIDI COLLINS, CNN ANCHOR: Financial rescue pie on Capitol Hill's menu. And you paid for the ingredients. This hour, the bakers explain why they change the recipe. And later, hungry automakers try to get a slice.
Plus, firefighters keep battling California wildfires as more residents return to what's left of their home.
It's Tuesday, November 18th, I'm Heidi Collins. You are in the CNN NEWSROOM.
The $700 billion bailout, it's your money, and it is the focus this hour on Capitol Hill. What good has it done so far? Well, lawmakers want to know, and are looking for answers today from the two men behind the bailout.
Let's set the stage now. CNN's Brianna Keilar is on Capitol Hill this morning with the very latest. Good morning to you, Brianna.
BRIANNA KEILAR, CNN CORRESPONDENT: Good morning, Heidi.
We'll be hearing from Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. We're also going to be hearing from the head of the FDIC, Sheila Bair, all of them before the House Financial Services Committee today for a hearing, talking about the handling of the $700 billion bailout so far.
Now last week, Secretary Paulson made it clear that he was changing strategies. That instead of taking these toxic mortgages, these troubled assets off of the balance sheets of these financial institutions, instead, he was going to be pushing this money towards directing or infusing capital directly into these institutions by having the government buy stock, by taking some ownership stake in these companies, and this is one of the things that some lawmakers are definitely going to be grilling him on.
Some are not a fan of this. They say it was not the intent of the package, and their going to have some tough questions for him on that. But some of the other questions we're going to hear, some of the other concerns, having to do with a lack of restrictions on these funds, and how institutions use these money -- use these moneys, if they're able to get them through the rescue plan.
Some people here on Capitol Hill have voiced concerns that institutions can hoard the cash, that they can use it to pay dividends to shareholders, and that these companies, these corporations are not using the money to free up credit, to help struggling homeowners on a very individual level -- Heidi.
COLLINS: Brianna, any idea, by the end of the day today, by the end of these hearings, what more we will know about this?
KEILAR: No. But it's going to -- you know, I -- can't answer that question exactly, but these questions are going to be asked, and basically people are going to be very much hanging on the words of Treasury Secretary Henry Paulson, as well as Fed Chairman Ben Bernanke, to see what they have to say, to see if they can shed light on this.
And at this point, Heidi, about -- I think $150 billion of the $700 billion bailout has been spent. So the interest here is there's so much more money in the bank to be spent, you know, moving forward.
COLLINS: Right.
KEILAR: Maybe how can changes be made or how is it going to work and just to understand better, because this whole thing was rolled out very quickly.
COLLINS: Yes, that's right. Obviously very important questions to be asking, as well. We will be watching all of it live.
All right. Brianna Keilar, sure do appreciate that. Live from Capitol Hill this morning.
Also today on Capitol Hill, the big three automakers will make their case for a $25 billion bailout. They'll be joined by the head of the United Auto Workers Union. They say the loans are desperately needed to keep the nation's auto industry alive.
Many Republicans say the industry must first fix its many problems. Right now, the aid package is considered unlikely to pass.
Earlier, on CNN's "AMERICAN MORNING," we heard from Ford's CEO.
(BEGIN VIDEO CLIP)
ALAN MULALLY, CEO, FORD MOTOR COMPANY: The automobile industry is just absolutely essential to the United States' economy. We're in an economic situation now with the credit crisis and the financial and the banking issues that we really more than ever -- the automobile industry needs to be part of the solution.
And the only thing that we're asking for is to set up a bridge loan mechanism. And if the economy continues to deteriorate in the near-term, that we could access that so we could continue to invest in the products that people really do want and value, and help be part of this economic recovery.
(END VIDEO CLIP)
COLLINS: Meanwhile, things are tough all over. Fears of a global recession are hammering markets overseas. In Asia, stocks are way down. China's Shanghai Composite index Tuesday sank 6.31 percent. Japan's Nikkei fell 2.3 percent.
Stocks are also struggling in Europe. Markets in England, France and Germany have all been down 1 percent or more at some time this morning.
Obviously, once again, we have a lot of ground to cover, and CNN's money team is breaking it all down for you. Our CNN's Christine Romans is in New York now with some new numbers and more reasons, unfortunately, to be nervous.
Christine, let's go ahead and start now with this new bailout numbers that we've been talking about.
CHRISTINE ROMANS, CNN CORRESPONDENT: Yes, let's talk about this, because Americans woke up this morning and they -- own a share in more banks than they did when the -- at least a couple of days ago.
The Treasury Department doling out more money for stakes in these banks, without strings attached. They're doling out the money, they're becoming preferred shareholders in a whole host of banks. So now we've got some $33.6 billion added to the payout, that overall pie.
$350 billion is still left to be spent. Congress has to approve it first. 21 banks on Monday got $33.6 billion. There are $125 billion given to nine banks previously. Among them, I should point out, Citigroup, which just yesterday announced it was laying off 50,000 workers, so taxpayers injecting money into that bank, and the bank laying off a lot of people yesterday, and then -- so there's still another, looks like, $91 billion set aside for banks.
Don't forget AIG is going to get $40 billion, and there are $60 billion there left to spend, Heidi. This is the money the treasure secretary and his team can spend right now. They already have congressional approval for. They have to go back to Congress for the rest of that half, Heidi.
COLLINS: Boy, that's a confusing pie chart, certainly more slices than I ever had in any math class that I went through.
Listen, we also have these new wholesale numbers out this morning to talk about.
ROMANS: Yes, these are inflation numbers, and this is called the Producer Price Index, the PPI. There's the price -- the wholesale prices and then there are retail prices and for the -- for the wholesale prices, before they get to the store shelves and before you pay for it, those wholesale prices plunged by a record amount. 2.8 percent, and that includes your food prices and your energy prices.
Energy, as we know, energy prices have just fallen over the past couple of months. Down some 22 percent in this reading. And so that dragged down the overall number. That's a reflection, Heidi, of a weak economy. You know that -- called demand destruction in the economics textbooks. People aren't buying a lot of -- you know they're not buying as much energy as they were before, because it costs so much. And now, boom, it's going to down. When you look outside of food and energy, core inflation ticked up 0.4 percent a little more than people expected.
But overall, when you look at food and energy and the wholesale PPI number, people are saying that this is a sign, again, of a weak economy.
COLLINS: All right. As if we need any more signs.
ROMANS: Right.
COLLINS: All right, CNN's Christine Romans for us in New York this morning.
Christine, thanks for that.
Some more businesses to tell you about now, too. Internet giant Yahoo! is searching for a new CEO. The company's cofounder Jerry Yang is stepping down from that role as soon as his replacement is found.
Yang has faced shareholder revolt after balking at a takeover bid from Microsoft this past spring. Yahoo's stock has been sliding ever since, and closed yesterday at less than one-third the price that Microsoft had offered back in May.
(BEGIN VIDEO CLIP)
DEBORAH MIDDELTON, HOUSE DAMAGED BY WILDFIRE: You know, with the -- housing market, with what's, you know, my 401(k), and my stock, I mean, it's gone for all intents and purposes, and now the house.
UNIDENTIFIED REPORTER: What is it like to be back here and seeing it?
MIDDELTON: I think this is the closest I've ever been to a war zone.
(END VIDEO CLIP)
COLLINS: Hundreds of homes damaged and destroyed in the Southern California fires. California Governor Arnold Schwarzenegger now asking for a federal disaster declaration.
Three major fires charring large parts of the region. The Freeway Complex Fire is the largest, burning more than 28,000 acres, 155 homes destroyed and at least a thousand people still evacuated. The fire is now 60 percent contained.
The Sayre Fire is the most devastating of the three. It destroyed 484 homes in one mobile home park. But right now it is 64 percent contained.
Firefighters have stopped the Tea Fire, though. It is 100 percent contained this morning. The Tea Fire was the first one to get started last week. It destroyed 210 homes, mostly in Montecito.
Picking up the pieces, many homeowners getting their first chance to see the fire damage and to see what survived.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: It's just amazing. You saw how this thing was through all that -- the whole house is burned, except for this.
(END VIDEO CLIP)
COLLINS: A teddy bear makes it through the devastation, yet again. Stuffing intact. We'll have that story ahead in about 25 minutes.
Rob Marciano is standing by now in the weather center to talk a little bit more about all of this.
Yesterday we said they're going to be getting, you know, a bit of a break and they were able to get more containment, because we've seen those percentages go up a bit.
ROB MARCIANO, CNN METEOROLOGIST: Yes, well, the weather has cooperated a little bit. The winds died down just a bit yesterday, so that has helped.
Some interesting photos I want to show you. We'll slide into the Sayre Fire, where you -- as you mentioned almost 500 homes were burned to the ground. This is a satellite picture, high resolution, of what it looked like before the fire. You see all these roofs pretty much looking the same, pretty much all intact. And this is what it looks like now. I mean you, you...
COLLINS: Wow.
MARCIANO: ... can visibly see the complete devastation there. A little bit farther to the east, you see where the fire kind of ends there, and where the homes are a little bit more intact. But certainly a vivid depiction there of just how widespread that fire damage was.
All right. Southwest corner, we're not as prone to the Santa Ana's today. As a matter of fact, we start to cool things off today, and even more so tomorrow. This Pacific Northwest storm will help fuel that marine push, which will bring in some higher humidity, as well.
(WEATHER REPORT)
MARCIANO: Let's check out some of these snow totals really quick, Heidi. Ellicottville, New York, 28 inches.
COLLINS: Wow.
MARCIANO: Stockton, New York, 20 inches. We're not even into Thanksgiving yet. COLLINS: No, we're not.
MARCIANO: So promises to be a long journey.
COLLINS: Yes, it is.
All right. Rob, thanks so much for that. Appreciate it and check back later on.
Meanwhile, you are helping us tell the story in Southern California. This iReport picture from Alex Broumand shows the Tea Fire near in Santa Barbara. As we said, crews now have this one under control.
The second picture comes from iReporter Daniel Rosenberg. It shows the devastated mobile home park in Sylmar, California, nearly 500 homes were destroyed there. He took the picture with his cell phone.
If you got pictures of the California wildfires, we would like to see them. All you have to do is log on to ireport.com, but as always, make sure you stay safe, if you choose to do so.
Trying to make your trip to grandmother's house a little bit easier. New government plans for holiday travel.
(COMMERCIAL BREAK)
COLLINS: If you're planning to hit the road next week, here's another reason to give thanks. Gas prices, they've dropped for the 62nd consecutive day. Today the national average just under $2.07 a gallon. A drop of nearly 2 cents from just a day before.
Meanwhile, oil prices dropped more than $2 a barrel yesterday. The closing price now just under $55. That is the lowest price, in fact, in 22 months.
So, you get a price break if you're driving somewhere for Thanksgiving. Now President Bush wants to give you a break if you're flying. In a few minutes, he'll be talking about his strategy to cut down on those dreaded holiday flight delays.
CNN's Kathleen Koch is at the White House now with more on this.
Sounds like a good deal, Kathleen.
KATHLEEN KOCH, CNN CORRESPONDENT: Well, if anything that helps delays is something, obviously, Heidi, that air travelers are going to appreciate. And what numerous aviation sources are telling me is that President Bush today is going to announce very similar measures to those he announced last year.
First of all, let's start with the East Coast. The government will be opening military air quarters up and down the East Coast, Maine to Florida to commercial air traffic during the holiday season. Now what sources tell me is the president is going to announce that more military air corridors will be open for longer periods of time, and in more parts of the country, including the West Coast.
I'm also told the president will be talking about consumer protection measures, things to help passengers who are stuck for interminably long periods of time on planes, on tarmacs, also ways to crack down on airlines that operate chronically delayed flights.
And also we're told that the FAA is going to be repeating some of the delay-reducing measures that it put in place last year, like putting aside any kind of nonessential maintenance during the holidays, just to keep the traffic moving, Heidi.
COLLINS: Kathleen, as a woman who would be traveling with a 7- month-old on her lap, I have a question about how much of a difference some of these measures we will actually be able to feel, you know, as consumers on those planes.
KOCH: Good news, Heidi. First of all, air delays, flight delays are down over last year, which was the second worst year on record. Also good news, they're expecting about 10 percent fewer people to fly over the holidays this year.
Now, at the same time, the airlines have cut their schedules by 10 percent, so congestion is still a possibility. Want to point out what the Air Traffic Controllers Union says. They say, though, that these measures, just like last year, don't help the problems on the ground where they have 7 percent fewer air traffic controllers than last year, not enough gates, runways, but we are expecting the president to tout some progress on runways.
There are three new ones opening at very important airports this week, right in time for the holidays, Chicago O'Hare, Washington Dulles and Seattle, Heidi. Don't know if you're flying to any of those destinations, but hope it helps.
COLLINS: Yes, no. No, I'm not. But anyway, we will keep our fingers crossed.
All right, Kathleen Koch, sure do appreciate that. Thank you.
KOCH: You bet.
COLLINS: Tomorrow, in fact, we are all about holiday travel. All day long, we'll be sharing some tips with you, what you need to know about how to get where you're going, stress-free. Plus, where to find the best deals and how to stay healthy. That's all happening tomorrow right here on CNN.
Sweet deal? You're laid off, and you still get 96 percent of your salary. A lucrative perk at GM. We take a closer look at UAW contracts.
(COMMERCIAL BREAK) COLLINS: Two days left to vote for your favorite CNN Hero. Go to CNN.com/heroes to see their stories, vote, and then join Anderson Cooper to vote for CNN's Hero of the Year. Vote now at CNN.com/heroes. Remember, you only have two days left.
Speaking of voting, Senate Democrats decide this morning what to do with Joe Lieberman. The Democrat turned independent openly supported Republican John McCain this past election, and angry Democrats want him punished.
Congressional sources tell CNN Lieberman likely will not be kicked out of the caucus and will probably stay chairman of the Homeland Security Committee.
Senate Republicans are in a quandary over Ted Stevens. The long- time lawmaker was convicted of federal corruption charges last month, and his fellow Republicans could vote today to kick him out of the caucus. With that assumed, he has been re-elected. Alaska as you know, is still counting votes in that race.
Another undecided Senate race is the one currently held by Minnesota Republican Norm Coleman. He is leading Democrat Al Franken by a mere 215 votes. Election officials are expected to start recounting the ballots beginning tomorrow.
President-elect Barack Obama continues to deliver on his promise to choose a bipartisan Cabinet. He is meeting with high-level leaders from both parties as his selection process continues.
Yesterday, he met with former rival Senator John McCain in Chicago. They talked about working together on critical issues facing the country.
CNN White House correspondent Ed Henry is live in Chicago with more on this this morning.
Boy, this was one that we all wanted to sort of -- be flies on the wall, if you will, for that meeting.
ED HENRY, CNN WHITE HOUSE CORRESPONDENT: That's right. A very tough and bitter campaign, but I can tell you people working for both men insist it was a pretty cooperative spirit. They both want to turn the page, and the president-elect, in particular, is trying to pull some former rivals into his tent.
And, you know, Heidi, what's interesting is that John McCain, you know, some of the issues he wanted to talk about was ethics reform. He also talked about immigration reform.
The bottom line is that both of these men sort of want to turn the page on that campaign. It's in their interest to try and work this out. John McCain, you know, doesn't want to go back to the Senate as a sore loser, and Barack Obama wants to show the American people that he can work cooperatively with John McCain, and that a lot of the talk during the campaign about bipartisanship was not just talk. You know, and I think the other thing that, obviously, has been going on is this speculation about the Cabinet. People who work for both McCain and Obama insist that there's not going to be a Cabinet post for John McCain, that they'll work together on legislation, but they're not going to be so-called working on a so-called team of rivals.
But speculation is intensifying that Hillary Clinton could be secretary of state, and that's largely in part because two Obama transition officials say that they've started looking through various records for Bill Clinton, taking a look at his post presidential life, trying to take a look at his finances, and that scrutiny suggests that the vetting is because they are serious about potentially having Hillary Clinton as secretary of state.
A lot of senior Democrats say they wouldn't be going through all this to try to sort out potential conflicts of interest unless she was a serious contender for the job, Heidi.
COLLINS: Well, yes, and I actually heard some of the same type of comments from analysts last night, saying that, yes, if she didn't want the job, she wouldn't be going through all of this herself.
Anyway, was there anybody else that we have any idea that President-elect Barack Obama could have been looking at for secretary of state?
HENRY: Absolutely. I mean, he's certainly looking at Bill Richardson, the governor of New Mexico. He was the U.S. ambassador to the United Nations under Bill Clinton, so he has a lot of foreign policy experience.
Senator John Kerry, a very senior member of the Foreign Relations Committee in the Senate, and also somebody who, frankly, you know, talked a lot about these important issues like Iraq, Afghanistan, back in the 2004 presidential campaign.
You also hear the names of some potential Republicans, as well. Dick Lugar, the former chairman of the Senate Foreign Relations Committee. He has said he's not interested in the post, but Republican Chuck Hagel, who's retiring from the Senate, he's very much interested in the Cabinet post, and his name was popped up, as well.
So there are others out there, but nobody with quite the stature of Hillary Clinton. And people in the Clinton camp point out that while there's a lot of talk about these conflicts of interest that could pop up potentially, point out that a lot of Clinton's post presidential work has been positive in their eyes. A lot of his charitable work trying to fight AIDS in Africa, for example.
And they think in the end after you go through the records and you figure out what's there, that they're willing to face any kind of scrutiny, because they think it's a net plus for the Clintons, and could be a net plus for Barack Obama, if he had not only Hillary Clinton, but Bill Clinton on the sidelines sort of helping him, rather than being on the outside, maybe, not being happy about the Obama administration, Heidi.
COLLINS: So when are we going to know, Ed?
HENRY: You know, that's the $64,000 question. I wish I could tell you right now.
COLLINS: Come on.
HENRY: But the bottom line is that -- Obama people are being very tight-lipped about when they're going to start rolling this out. What I can tell you is that we're expecting at least some of the high- level Cabinet appointments by the end of November, because they've said privately and publicly that they want to move this up a little bit quicker, try to hit the ground running.
Most -- in the modern era, most of the big Cabinet appointments happen in December. We're expecting to start rolling some of this out in late November, Heidi.
COLLINS: All right. Well, excellent. We, of course, will be watching all of that very closely.
Ed Henry, thanks so much for that. Appreciate it.
The TARP. That's no longer covering bad mortgages. The Bush money team about to explain their changes to the bailout package. Congress is waiting. Live pictures there.
(COMMERCIAL BREAK)
COLLINS: Stocks went into reverse yesterday, as concerns about the U.S. auto industry plagued investors. Today, the CEOs of the big three are testifying on Capitol Hill.
So how will Wall Street react to all of this? As the opening bell rings right now, Susan Lisovicz is at the New York Stock Exchange with a preview of the trading day.
Hi there, Susan.
SUSAN LISOVICZ, CNN CORRESPONDENT: Hi, Heidi. Well, as you know, Wall Street hates uncertainty. There is a lot of uncertainty about those Big Three. Big Three, they are shrinking all the time, though. And until we've really learned what's happening to GM, Ford and Chrysler you know, stocks are going to have a hard time pulling out of the slump.
Of course, there are a lot of other things that are weighing on sentiment. In the meantime, Ford is selling off most of its 33 percent stake in Mazda Motors for more than $500 million. The economic slump leading to more job cuts -- this time, at Pepsi Bottling Group. The company announcing a restructuring that will result in the reduction of 3,000 positions worldwide.
Meanwhile, news at Yahoo! Its founder, co-founder, Jerry Yang, giving up his job as CEO. Analysts say it could open the door to a takeover by Microsoft. That's one of the things that Yang fiercely resisted while running the company. Yahoo! shares are taking off right now, up 13 percent.
And on the earnings front, let's enjoy this one, Heidi. A real rarity. Hewlett Packard expects fourth quarter and next year result to beat Wall Street estimates. That's right, to beat Wall Street estimates. HP shares are part of the Dow 30, up right now, 14 percent.
Another thing helping to boost sentiment this morning, wholesale prices plunged by a record amount last month. Nearly 3 percent, a nearly 3 percent decline in one month. You guess it, the reason, tumbling oil prices. Crude has dropped more than 90 bucks in just four months. Tomorrow we'll see if the savings are being passed on to us, the consumer.
In the meantime, well, stocks not doing much at all. The Dow is slightly negative. The Nasdaq, slightly positive. We have hours to go and plenty of time for a lot of gyrations as we're used to seeing, Heidi.
COLLINS: Yes, I detected a bit of sarcasm there. All right, Susan Lisovicz. We, of course, will check back later on to keep an eye on those numbers.
Right now, we are keeping an eye on this. Capitol Hill, a focus on the $700 billion bailout. Are you getting your money's worth? Well, lawmakers want answers from the architects of the financial rescue plan. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke. Of course, Barney Frank, right there. They are testifying before the House Financial Services Committee. We're going to be listening in to some of that testimony. You see the banging of the gavel there. It looks like it's just now getting underway.
Also on Capitol Hill today, executives from the nation's big three automakers. They are asking Congress for a $25 billion rescue, and say their very survival may actually depend on it.
Leading Democrats support the loans, as many Republicans oppose it. They say the auto industry must first fix the problems that have pushed the companies to the edge.
Labor joining management. The UAW and the big three team up to try to win a government bailout package. But was the union the key player in creating the automakers' crisis in the very first place. We'll tell you more about that and the background of that. But first, we do want to get back to the hearing that's taking place on Capitol Hill now.
(BEGIN VIDEO CLIP)
REP. BARNEY FRANK (D), MASSACHUSETTS: You were asked last September by the secretary of the Treasury, supported by the chairman of the Federal Reserve, to pass a very extraordinary piece of legislation. Putting potentially at risk, although we hope in the end not, $700 billion of public money for purposes that go beyond what government has ordinarily done and what almost everybody, including I believe the two gentlemen at the table think government should do. But it was in necessary response to a crisis.
Some questions have arisen about decisions that have been made with regard to the expenditure of those funds. We certainly want to hear from the secretary and the chairman, their assessment of what's happened so far. And let me say the outset.
We do have a problem with all of us that there tends to be a focus on those areas of disagreement. And so, accomplishments, areas of agreement, things which worked well, tend not to get a lot of discussion. It is important so that we can understand what's happened and evaluate what we did. That there will be a full discussion today, both of the successes of this program -- and I believe there have been significant successes, and also of the concerns many of us have.
There were two that I hope we can address. And we've talked about these in a variety of ways, publicly, privately, with these two officials. One, there is concern that the banks which were the recipient of capital infusions under the capital purchase program, have not used the funding entirely for relending, which many people here understood would be the purpose.
There is both unhappiness at what would appear to be in the part of some financial institutions, excesses in use of the money, although AIG attracted the most attention there, and that was initially not out of the $700 billion program. But even more, substantively, there is concern that we hear this, anecdotally, from people we represent that credit is still tighter than it ought to be. And that the banks which receive the money have not yet begun to lend it out.
The second major concern is over foreclosure prevention. And here, I believe there is a very fundamental disagreement on the part of other members where the decision recently made. But we understand that decisions are subject to re-examination, et cetera.
When the program was passed, very explicit language was included to provide for mortgage foreclosure as -- mortgage foreclosure diminution as one of the purposes. There's very specific language in there. And the question was, well, investment versus spending. But the bill itself specifically says that we should, as we buy up mortgage assets, reduce the amount that has to be paid to a reasonable level to avoid foreclosure. So no one can argue that it was not contemplated. Indeed, it was a very important part of, frankly, the effort to get votes for this bill, that we would do mortgage foreclosure reduction.
The secretary's recent announcement was that none of these funds would go towards mortgage foreclosure reduction, although there are other programs on which we are working to do that. And I welcome recent evidence by several of the largest banks, all of whom were recipients of the capital funds, and there is no direct connection. But it is true, several of the largest banks have now begun to get active.
We also got an announcement by Fannie Mae and Freddie Mac of movement, although we have some concerns about how far they go, and why they lagged the programs that the FDIC has put in. But the fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction. It is unfortunately not the case, that all of our other efforts have been fully successful. I was a strong proponent of our hope for homeowners bill. And now believe if we were doing that, we would do it differently in some ways. We learn from experience.
There -- I believe, is an overwhelmingly and powerful set of reasons why some of the TARP money must be used for mortgage foreclosure. First of all, mortgage foreclosures continue at an excessive pace from the standpoint of the economy. The negative effect of this cascade of foreclosures goes far beyond the individuals who lose their homes. It has to do with neighborhood deterioration. It has to do with municipal inability to make the governments work. And it impacts, obviously, the macro economy.
Secondly, there is a matter of public confidence. A number of things need to be done to get us out of this recession, in my judgment. Fiscal stimulus, increased lending, which I talked to at first, but foreclosure reduction. And it may well be that further action has to be taken. I have to say, at this point, that public confidence in what we have done so far is lower than anybody would have wanted to be, to the point where it could be an obstacle to further steps.
So -- because I want to keep strictly to the time for everybody, I would just reiterate. It is essential that we do something to use some of the TARP funds for the diminution of the rate of mortgage foreclosures, and the chair of the FDIC whom we have invited has been very much in the lead on this. No one here is endorsing any specific plan, but the need to use TARP funds as the bill contemplates to reduce foreclosures is paramount.
The gentleman from Alabama.
SPENCER BACHUS (R), ALABAMA: Thank you, Mr. Chairman, for holding the hearing. And I welcome Secretary Paulson and Chairman Bernanke and Chairman Bair, and I appreciate your service to the country.
There have been some reports in the press recently that the use of the TARP funds for direct injection of capital into the financial institutions is somehow contrary to the intent of Congress. I actually think that is a -- is not correct.
The legislation that we passed specifically authorized direct injection of capital into the financial institutions through the purchase of equity-- our shares. As I think, the panel realizes, there was a debate during the entire legislative process, and exactly how the situation would be addressed. And the final legislation that passed authorized both the purchase of distressed assets and capital injections.
And I think what happened -- I think we would all hopefully agree on this -- is we simply found that it was quicker, simpler, and I think safer for the taxpayers to purchase shares of stock. I've always had objections, or at least reservations about the government purchasing what's been called trouble or toxic assets, and having to manage them. So, I, for one, Secretary Paulson, applaud you for -- and I think most economists applaud you for actually taking -- being flexible and taking an approach which was clearly authorized by the legislation.
As the chairman said, confidence is critically important to the financial markets and to the overall economy. And it is in the best interest of not only the economy, but also of the public that as we shift and improvise on occasions that we clearly communicate the objective and the basis for what we're doing. And I think we all agree on that.
Conditions on the ground change, and you must be agile and adjust. And I hope we all understand that. I have a particular concern. And that's that we don't appear to have an exit strategy. We continue to purchase assets, bring them on to the books of the government, in the neighborhood of a trillion dollars.
And most of us, I think, on the Republican side, have been troubled since day one about government intervention into the private markets. That one of our concerns has been that we're taking capital that could be used by more efficient, more successful companies and enterprises with better business models, and we're shifting that money to companies that are less efficient and whose business models need changing.
And by putting capital into those companies, we almost enable them or allow them not to confront some of the inefficiencies in their own enterprises. Let me close by saying this: We -- there's been a lot of discussion about the greatest economic challenge since the Great Depression. One thing that I've tried to do is go back and look at the nine or ten recessions we've had since World War II.
What at least I found, and you may tell me that I'm wrong, is that the GDP, in all but the last two of those recessions, dipped by as much as 5 percent in one of the -- in at least one quarter. In this quarter, which many people are saying is the worst quarter, we expect maybe a 4 percent dip in GDP. So, at least, when you look at the history of the recession since the World War II, you find that this recession may, in fact, not be any greater, at least now. I don't know if it's something that we -- in the future, but at least right now, this recession, as far as the loss of GDP, is no greater than -- than at least eight of our ten recessions since World War II.
So the question that I would ask, and I'll close with this, is if we are in a recession that is at least from a GDP standpoint is no greater than eight of the last ten, why are we in this recession having so much government intervention? And thank you, Mr. Chairman.
FRANK: The gentleman from New York is recognized for three minutes. We're going to the rule for cabinet officials of 25 and 23.
The gentleman from New York.
UNIDENTIFIED FEMALE: Thank you. I welcome our distinguished guest, and thank you for your --
(BEGIN VIDEO CLIP)
COLLINS: A little bit of a taste of what we are hearing at the very beginning of the events on Capitol Hill today. You are watching the House Financial Services Committee -- of course, Chairman Barney Frank spoke first, and then Representative Spencer Bachus there. We will go back to those events, and that's happening as soon as Hank Paulson takes to the microphones. Obviously, Ben Bernanke and Sheila Bair are also there. But we're going to bring you the comments from the Treasury secretary when he goes to the microphone.
In the meantime, if you would like to continue watching these proceedings, you certainly can. Just go to cnn.com/live. A quick break here. We're back in a moment.
(COMMERCIAL BREAK)
COLLINS: Remembering the troops this holiday season. Volunteers around the country are getting the trees trimmed. About 16,000 donated Christmas trees will be shipped to troops overseas, and to 40 military bases in the United States. The trees you see here are headed to Iraq and Afghanistan.
(BEGIN VIDEO CLIP)
DOUGLAS G. DUNCAN, PRESIDENT AND CEO, FEDEX FREIGHT: Not only will we be sending trees, but holiday greetings, Christmas cards, banners, poems, essays -- just letting the troops know that we still remember them. We're proud of them. And we hope they come back to us very soon.
This, in fact, is the fourth year of the trees for troops campaign. If you would like to know how you can help, just log on to treesfortroops.org to find out what is being done in your area.
A small gesture pays big dividends at the drive-thru.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: We pulled up to the window and when we get to the window, the girl in the window says there is no charge today.
(END VIDEO CLIP)
COLLINS: Huh. You can thank the guy in front of you. Kindness and coffee spread around.
(COMMERCIAL BREAK)
COLLINS: Quickly, we want to take you directly back to the House Financial Services Committee as we are listening in now to Treasury Secretary Henry Paulson.
(JOINED IN PROGRESS) HENRY PAULSON, TREASURY SECRETARY: Congress took the critically important step of providing important authorities and resources to stabilize our financial system. Until that time, we faced a financial crisis without the proper tools. With these tools in hand, we took decisive action to prevent the collapse of our financial system. We have not in our lifetime dealt with a financial crisis of this severity and unpredictability.
We have seen the failures or the equivalent of failures of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae and Freddie Mac and AIG -- institutions where a collective $4.7 trillion in assets when this year began.
By September, the financial system had seized up presenting a system- wide crisis. Our objective in asking Congress for a financial rescue package were to first stabilize the financial system on the verge of collapse, and then to get lending going again to support American consumers and businesses.
Over the next few weeks, conditions worsened significantly. Confidence in the banking system continued to diminish. Industrial company accessed all aspects of the bond market was dramatically curtailed. Small and middle-sized companies with no direct connection to the financial sector were losing access to the normal credit needed to meet payrolls, pay suppliers and buy inventory.
During that same period, the FDIC acted to mitigate the failure of Washington Mutual and made clear that it would intervene to prevent Wachovia's failure. Turmoil had developed in European markets. In a two-day period at the end of September, the governments of Ireland, the UK, Germany, Belgium, France and Iceland intervened to prevent the failure of one or more financial institutions in their countries.
By the time legislation had cleared Congress, the global market crisis was so broad and severe, powerful steps were necessary quickly to stabilize our financial system. Our response in coordination with the Federal Reserve, the FDIC and other banking regulators was a program to purchase equity in banks across the country.
We have committed $250 billion to this effort. This action, in combination with the FDIC's guarantee of certain debt issued by financial institutions, and the fed's commercial paper program helped us to immediately stabilize the financial system.
The capital purchase program for banks and thrifts has already dispersed $148 billion. And we are processing many more applications. Yesterday, Treasury announced the terms for participation for non- publicly-traded banks, another important source of credit in our economy. We have designed these terms to help provide community development financial institutions and minority depositor institutions with capital for lending to low-income and minority populations.
These institutions have committed to use this capital for businesses and projects that serve their communities. In addition, we are developing a matching program for possible future use by banks or non- bank financial institutions. Capital strength enables banks to take losses as they write down or sell troubled assets.
Stronger capitalization is also essential to increasing lending, which although difficult to achieve during times like this, is essential to economic recovery. We expect banks to increase their lending overtime as a result of these efforts and as confidence is restored.
This lending won't materialize as fast as any of us would like, but it will happen much, much faster having used the TARP to stabilize our system. As we continue significant work on our mortgage asset purchase plan, it became clear just how much damage the crisis had done to our economy.
Third quarter GDP growth showed negative .3 percent. The unemployment rate rose to a level not seen in 15 years. Home price status showed that home prices in ten major cities had fallen 18 percent over the previous year, demonstrating that the housing correction had not abated. The slowing of European economies has been even more dramatic. We assessed the potential use of remaining TARP funding against the backdrop of current economic and market conditions.
It is clear that an effective mortgage asset purchase program would require a massive commitment of TARP funds. In September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum in a worse economy simply isn't enough fire power.
We have, therefore, determined that the prudent course at this time is to conserve the remaining funds available from the TARP providing flexibility for this and the next administration. Other priorities that need to be addressed include actions to restore consumer credit. Treasury has been working on a program with the Federal Reserve to improve securitization in the credit marketplace. While this would involve investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, it could have substantial positive benefits for consumer lending.
Finally, Mr. Chairman, Treasury remains committed to continuing to work to reduce avoidable foreclosures. Congress and the administration have made substantial progress on that front through HUD programs, FDIC's IndyMac approach, our support and leadership of the Hope Now alliance and our work with the GECs, including an important announcement they made last week, establishing new servicer guidelines that will set a new standard for the entire industry.
Our actions to stabilize and strengthen Fannie Mae and Freddie Mac have also helped mitigate the housing correction by increasing access to lower-cost mortgage lending. As some on the committee know, I have reservations about spending TARP resources to directly subsidize foreclosure mitigation because this is different than the original investment intent.
We continue to look at good proposals and are dedicated to implementing those that protect the taxpayer and work well. Mr. Chairman, the access -- the actions of the Treasury, the Fed and the FDIC have stabilized our financial system. The authorities and the TARP have been used to strengthen our financial system and to prevent the harm to our economy and financial system from the failure of a systemically important institution.
As facts and conditions in the market and economy have changed, we have adjusted our strategy to most effectively address the urgent crisis and to preserve the flexibility of the president-elect and the new secretary of the Treasury to address future challenges in the economy and capital markets.
Thank you again for your efforts and for the opportunity to appear today. I would like to just make one last comment in response to a question that Congressman Bachus asked. Because it's one I hear a lot of. The distinction between the financial markets and the economy.
So, when we talked about the crisis in the financial markets and being unprecedented and having to go back to the Great Depression to see anything of this magnitude and presented this amount of difficulty, we're talking about the financial markets.
Now, when the financial markets have problems, they hurt the economy. So the reason that it was very important to get in quickly and stabilize was to mitigate damage to the economy. When we were here before you, we saw what was happening to the economy. We talked about it. We took the steps. The economy has continued to get worse. The American people look at the worsening economy. And as your chairman said to me yesterday, in politics you don't get much credit for what might have happened and didn't happen. What the American people see is what's happening to the economy. But again, our purpose in coming to you was to take --
(CROSSTALK)
FRANK: Mr. Secretary, Chairman will have his five minutes.
Mr. Chairman?
BEN BERNANKE, CHAIRMAN OF THE FEDERAL RESERVE: Thank you. Chairman Frank, (INAUDIBLE) Bachus and others members of the of the committee, I appreciate having the opportunity to review some of the activities to date of the Treasury's Troubled Asset Relief Program, or TARP and to discuss recent steps taken by the Federal Reserve and other agencies to support the normalization of credit markets.
The legislation that created the T.A.R.P. put in place a financial stability oversight board to review the actions of the Treasury in administering the program. That oversight board includes the Secretary of Treasury, the Secretary of Housing and Urban Development, the chairman of the Securities and Exchange Commission, the director of the Federal Housing Finance Agency and the chairman of the Federal Reserve board.
We have four times reviewing the operational plans and policy initiatives with the T.A.R.P. and discussing possible additional steps that might be taken. Officers for the oversight board have been appointed and the Federal Reserve and other agencies are providing staff support for the board. Minutes of each meeting are being posted to a special web side established by the Treasury. In addition, staff members of the agencies whose heads are participating in the oversight board have met with staff from the Government Accountability Office to explore strategies for coordinating the oversight that the two bodies are required to perform under the enabling legislation.
The value of the T.A.R.P. in promoting financial stability has already been demonstrated. The financial crisis intensified greatly in the latter part of September and spread to many countries that had not yet been touched by it which led to grave concerns about the stability of the global financial system.
Failure to prevent an international financial collapse would almost certainly have had dire implications for both the U.S. and world economies. Fortunately, the existence of the T.A.R.P. allowed the Treasury to react quickly by announcing a plan to inject $250 billion in capital into U.S. financial institutions.
Nine large institutions received the first $125 billion. The remainder is being made available to other banking organizations through an application process.
In addition, the Federal Deposit Insurance Corporation announced that it would guarantee non-interest bearing transaction accounts at depository institutions and certain other liabilities to depository institutions and their holding companies. And the Federal Reserve expanded it's provisions of back stop liquidity to the financial system. These actions, together with similar actions in many other countries, appeared to stabilize the situation and to improve investor confidence in financial firms.
Notably, spreads on credit default swaps for large U.S. banking organizations which had widened substantially over the previous few weeks declined sharply on the date of the joint announcement. Going forward, the ability of the Treasury to use the T.A.R.P. to inject capital into financial institutions and to take other steps to stabilize the financial system including any actions that might be needed to prevent the disorderly failure of a systemically important financial institution would be critical for restoring confidence and promoting the return of credit markets to more normal functioning.
As I noted earlier, the Federal Reserve has taken a range of policy actions to provide liquidity to the financial system and thus promote the extension of credits to households and businesses. Our recent actions have focused on the market for commercial paper which is an important source of short-term financing for many financial and non- financial firms. Normally, money market mutual funds are major lenders in the commercial paper markets. However, in mid September, a large fund suffered losses in heavy redemptions causing it to suspend further redemptions and then close.
In the next few weeks investors withdrew almost $500 billion from prime money market funds. The funds, concerned with their ability to meet further redemptions, began to reduce their purchases of commercial paper and limit the maturity of such paper to overnight or other very short maturities. As a result interest rate spreads paid by issuers on longer maturity commercial paper widened significantly. And issuers were exposed to the costs and risks of having to roll over increasingly large amounts of paper each day.
The Federal Reserve has developed three programs to address these problems. The first allows money market mutual funds to sell asset- backed commercial paper to banking organizations which are then permitted to borrow against the paper on a non-recourse basis from the Federal Reserve Bank of Boston. Usage of that facility peaked at around $150 billion. The facility contributed importantly to the ability of money funds to meet redemption pressures when they were most intense and remains available as a back stop should such pressures reemerge.
The second program involves funding of a special purpose vehicle that purchases highly rated commercial paper issued by financial and non- financial businesses at a term of three months. This facility has purchased about $250 billion of commercial paper, allowing many firms to extend significant amounts of funding into next year.
A third facility expected to be operational next week will provide a liquidity back stop directly to money market mutual funds. This facility is intended to give funds confidence to extend significantly the maturities of their investments and reduce overtime the reliance of issuers on sales to the Federal Reserve special purpose vehicle.
All of these programs which were created under section 13.3 of the Federal Reserve Act must be terminated when conditions in financial markets are determined by the Federal Reserve to no longer be unusual and (extent). The primary objective of these and other actions we have taken is to stabilize credit markets and to improve the access of credit through credit of businesses and households. There are some signs that credit markets while still strained are improving.
Inter bank short-term funding rates have fallen notably since mid October. We're seeing greater stability in money market mutual funds and in the commercial paper market. Interest rates and higher rated bonds issued by corporations and municipalities have fallen somewhat. And bond issuance for these entities rose a bit in recent weeks. The on-going capital injections under T.A.R.P. are continuing to bring stability to the banking system and have reduced some of the pressure on banks to deleverage. Two critical first steps towards restarting flows of new credit.
However, overall, credit conditions are still far from normal with risk spreads remaining very elevated and banks reporting that they continued to tighten standards through October. There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks.
To help address the tightness of credit on November 12th the federal banking agencies issued a joint statement on meeting the needs of credit worthy borrowers. The statement took note of the recent strong policy actions designed to promote financial stability and improved banks access to capital and funding. In light of those actions which have increased the capacity of banks to lend, it is imperative that all banking organizations and their regulators work together to insure that the needs of credit worthy borrowers are met in a manner consistent with safety and soundness. As capital adequacy is critical in determining a banking organization's ability and willingness to lend.
The joint statement emphasizes the need for careful capital planning including setting appropriate dividend policies. The statement also notes the agency's expectation that banking organizations should work with existing borrowers to avoid preventable foreclosures which can be costly to all involved, the borrower, the lender and the communities in which they are located.
Steps that should be taken in this area include ensuring adequate funding and staffing of mortgage servicing operations and adopting systematic proactive streamlined and streamlined mortgage loan modification protocols aimed at providing long term sustainability for borrowers. Finally the agencies expect banking organizations to conduct regular reviews of their management compensation policies to ensure that they encourage prudent lending and discourage excessive risk taking. Thank you. I'd be pleased to take your questions.
FRANK: Chair of the FDIC, Sheila Bair.
SHEILA BAIR, FDIC, CHAIRWOMAN: Thank you. Chairman Frank, Ranking member Bachus and members of the committee, I appreciate the opportunity to testify on recent efforts to stabilize the nation's financial markets and to reduce foreclosures. Conditions in the financial markets have deeply shaken the confidence of people around the world and their financial systems. The events of the past few months are unprecedented to say the least. The government has taken a number of extraordinary steps to bolster public confidence in the U.S. banking system, the most recent were measures to recapitalize our banks and provide temporary liquidity support to unlock credit markets, especially interbank lending. These moves match similar actions taken in Europe.
Working with the Treasury Department and bank other regulators, the FDIC will do whatever it takes to preserve the public's trust in the financial system. Despite the current challenges, the bulk of the U.S. banking industry remains well capitalized. Btu what we do have is a liquidity problem. This liquidity squeeze was initially caused by uncertainty about the value of mortgage-related assets. Since then credit concerns have broadened considerably, making banks reluctant to lend to each other and to lend to consumers and businesses.
As you know, in concert with the Treasury and the Federal Reserve, we took a number of actions to bolster confidence in the banking system. These included a temporary increasing deposit insurance coverage and providing guaranties to new senior unsecured debt issued by banks, thrifts and holding companies. The purpose of all these programs is to increase bank lending and minimize the impact of deleveraging on the American economy. As a result of these efforts, the financial system is now more stable and interest rates spreads have narrowed substantially. However, credit remains tight and a serious threat to the economic outlook.
Regulators will be watching to make sure these emergency resources are mainly used for their intended purpose, responsible lending to consumer and businesses. In the meantime we remain focused on the borrower's side of the equation. Everyone agrees that more needs to be done for homeowners. We need to prevent unnecessary foreclosures and we need to modify loans at a much faster pace.
Foreclosure prevention is essential to helping find a bottom for home prices, to stabilizing mortgage credit marks and restoring economic growth. We all know there's no single solution or magic bullet. But as foreclosures escalate we're clearly falling behind the curve. Much more aggressive intervention is needed if we're to curb the damage to our neighborhood and to the broader economy.
Last Friday, we released the details of our plan to help 1.5 million homeowners avoid foreclosures. Our program would require a total of about $24 billion in federal financing.
The plan is based on our practical experience in modifying thousands of mortgages at Indymac Federal Bank. As we've done at Indymac, we would convert unaffordable mortgages into loans that are sustainable over the long term. The plan would set loan modification standards, eligible borrowers would get lower interest rates and in some cases longer loan terms and principal forbearance to make their monthly payments affordable. To encourage the lending industry to participate, the program would create a loan guarantee program that would absorb up to half the losses if the borrower defaults on the modified loan.
While we applaud recent announcements by the GSEs and major servicers to adopt more streamline approaches to loan modifications along the lines we have employed at Indymac, the stakes are too high and the time is too short to rely exclusively on voluntary efforts.
Moreover, these recent announcements do not reach mortgages held in private labels securitization. We need a national solution for a national problem. We need a fast track federal program that has the potential to reach all homeowners regardless of who owns their mortgages. What we're proposing is a major investment program that can yield significant returns by attacking the self-reinforcing cycle of unnecessary foreclosures placing downward pressure on home prices.
Average U.S. home prices have declined by more than 20 percent from their peak and are still spiraling down. If this program can keep home prices from falling by just three percentage points, less than otherwise would be the case. Over half a trillion dollars would remain in homeowner's pockets, even a conservative estimate of the wealth effect this could have on consumer spending would exceed $40 billion. That would be a big stimulus for the economy and nearly double our investment.
In conclusion, the FDIC is fully engaged in preserving trust and stability in the banking system. The FDIC stands committed to achieving what has been our core mission since we were created 75 years ago in the wake of the Great Depression, protecting depositors and maintaining public confidence in the financial system. Thank you.
FRANK: Thank you. Before I start -
COLLINS: All right. So there we have the opening statements from all three of the witnesses, if you will, at the event that is taking place right now, House Financial Services committee. We're back to the chairman now, Barney Frank there.
But obviously we have heard from the three people that we wanted to hear from and that we were expecting to hear from today. Treasury Secretary, FDIC chairman and also Ben Bernanke, of course, head of the Federal Reserve. A lot to take in off of that opening remarks.
