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Transcript:

November 21, 2008

DEBORAH AMOS: Welcome to the JOURNAL. Bill Moyers is away. I'm Deborah Amos.

Congressional hearings have rarely been as popular as they were this week.

BRIT HUME: There are questions on Capitol Hill…

DEBORAH AMOS: It's been must-see TV as the principal architects of the bailout plan took the hot seat.

BARNEY FRANK: It is nobody's view that we have been as successful as we need to be for the sake of the economy in reducing foreclosures.

HENRY PAULSON: As I think we've turned the corner in terms of stabilizing the system, preventing a collapse.

DEBORAH AMOS: Back when the financial crisis first struck and a posse of panicked bank and investment firms were demanding government help, the Treasury Secretary said he felt like "Butch Cassidy and the Sundance Kid. Who are these guys that just keep coming?"

The latest was the Big Three. The auto companies took a road trip to Washington, hat in hand, looking for a little cash to tide them through the tough times - just $25 billion. The CEOs left the next day as cash poor as they had come - in their private jets, a perk not unnoticed by lawmakers.

REP. BRAD SHERMAN: I'm going to ask the three executives here to raise their hand if they flew here commercial. Let the record show no hands went up.

DEBORAH AMOS: With the bailout billions on the table, others are looking to help themselves - giant financial companies like The Hartford, were quietly preparing a spot in line by buying up failing banks. And why? That purchase instantly qualifies them for government bailout funds.

Outside the Capitol, the deepening recession could be seen in one historic statistic after another. For example, new housing starts dropped to 50-year lows. Hundreds of thousands jobs lost in just a month. The stock market sunk again, taking retirement savings with it. There is no end in sight.

Joining me now to talk about what we learned this week is Joe Nocera. He's an award-winning business columnist for the NEW YORK TIMES. Last year, he was a finalist for the Pulitzer Prize in commentary. His latest book, GOOD GUYS AND BAD GUYS, is a collection of his writing covering the saints and scoundrels of American business.

DEBORAH AMOS: Welcome to the Journal.

JOE NOCERA: Thanks for having me.

DEBORAH AMOS: Henry Paulson told us this week that we've turned a corner, that the markets are stabilized. But yet we saw banks losing their value. I read at Citicorp they've even taken the stock ticker off the televisions in the office because the news is so bad. So if Paulson's convinced we're stabilizing, is the bailout working?

JOE NOCERA: In a word, no. The bailout was intended to restore capital in the major banks. And one of the reasons they gave it to all nine banks that they gave it to was they wanted to try and disguise which banks were troubled and which weren't, so that people wouldn't lose confidence in particular institutions. But everybody knew that Citicorp was in the worst trouble. And events over the last few weeks have just kind of worsened its condition. And now the market really doesn't believe that the $25 billion they got from the federal government is going to be enough. And in fact Paulson's statement was really premature. And the sad part is, to me, that his actions this week have really kind of signaled that he's shutting down between now and January 20th. It's like, "I'm done. I'm out of here."

DEBORAH AMOS: So who's in charge?

JOE NOCERA: Boy, that is a good question. And we need so badly need somebody to be in charge. It does and others have pointed this out, but I'll point this out as well. In 1933, you know, in the interregnum between, when Hoover was leaving and FDR was coming in, Hoover desperately tried to get FDR to engage and to come in together with him to make broad policy decisions. And FDR wouldn't do it. And people got very upset at him. He lost some popularity and credibility. But he didn't want to be associated with Hoover's plan. So he let bad things happen in that timeframe and then you know, obviously came in roaring as president in the famous first 100 days. Now, Obama is not doing that particularly. I mean, he's not obviously distancing himself. And really there's not a lot he can do because it is still the Bush administration. And so the fact that the Treasury Department seems to have said, you know, "No mas. We're out of here," is I think extraordinarily negligent.

DEBORAH AMOS: This week Paulson defended his bailout plan. And he defended essentially what's a U-turn. This is a pile of money at first intended to buy up some of what's called those toxic…

JOE NOCERA: Right.

DEBORAH AMOS: …mortgages. Then he said, "No, actually it's now about finance." And he said, "I don't have to apologize for changing my mind. Things changed."

JOE NOCERA: Right.

DEBORAH AMOS: But it's led to some criticism that he's been shooting from the hip.

JOE NOCERA: Well, it's worse than that. He has destroyed confidence in the Treasury Department on Wall Street. I mean, because you've only mentioned two things that he said. But, in fact, last week he came out and said, "We're going to help credit. We're going to help Americans start buying things again." Now, the question of whether Americans should be buying things again is a whole other story. But he said, you know, "We're going to get credit card loans rolling again and auto loans." And it turned out nobody else in the government barely even knew about this idea. And it was dead within 24 hours. And then he said, you know, they had always had this idea that eventually we will start buying these toxic securities, even though we're going to do the recapitalization of the banks first. So then this week he said, "Oh, never mind. We're not going to do that either." Now, I happen to think that from a purely technical standpoint, buying those toxic assets from banks would have been extremely difficult for the Treasury to do.

DEBORAH AMOS: And these are essentially the mortgages?

JOE NOCERA: Yes. The pools of mortgages that are subprime and that are troubled. There are all sorts of technical reasons why it's much harder than it sounds. And people on Wall Street sort of understood that. And after the bill passed, they kind of were telling Treasury, you know, this isn't really going to work. Still, there was an expectation in the marketplace that they would do some of it. So when he announced this week that they were not going to do it after weeks of saying that they were going to do it, it had a terrible effect on the market. Terrible. It is part of the reason why Citi is now declining so quickly. It is part of the reason why credit default spreads are widening once again. It has just even though they would say, "Well, it shouldn't have that much of an effect," but it's an example of the Treasury Secretary changing his mind for the third or fourth or fifth time and destroying confidence in the ability of the government to help us. And so the opposite happens. It hurts us.

DEBORAH AMOS: Is then this the case that there isn't an agreement on what needs to be fixed?

JOE NOCERA: Well that's an interesting question. I would say there certainly is agreement that if financial institutions continue to have trouble, the government's going to have to throw more money at them because one thing we learned in the last few months is you cannot let one of these fail. The willingness of the federal government to let Lehman Brothers default in mid-September was the single worst mistake that it made, that it had powerful, powerful ramifications.

DEBORAH AMOS: And that seems to be now a common view?

JOE NOCERA: Right. All over the world. And everybody agrees with this except Hank Paulson at this point. The third element, though, upon which there is huge disagreement, is what we should do for homeowners. This is not an issue of compassion or liberalism or anything like that. This has to do with solving the financial crisis. You cannot solve the financial crisis if you don't solve the problem at the root, which is on Main Street in people's homes where they either have sub prime mortgages that are going to reset in ways that will make them unable to pay their mortgage, or they're already facing foreclosure.

DEBORAH AMOS: When there was talk in the beginning about the bailout plan, that was one of the major issues that Hank Paulson talked about that we have to fix the mortgage crisis. He acknowledges that it is at the basis of what the problem is. And yet he hasn't addressed it. Why?

JOE NOCERA: It's so hard to figure out. Number one, as Barney Frank said this week in one of those hearings, Mr. Secretary, it is explicit in the legislation that preventing foreclosures is one of the things this money is for, which he kind of keeps denying. Secondly, he makes this distinction between investing in the financial institutions, which he does call investing, and giving money to homeowners or doing something for homeowners, which he calls spending. In other words, he sees that as a government spending program. And he's opposed to that. But if you don't do something for homeowners, not only will it hurt the economy, it'll hurt neighborhoods. It'll hurt the next door neighbor. And by the way, it'll go all the way up the chain of Wall Street and you'll start to see the write offs all over again and the same problems all over again.

DEBORAH AMOS: The counter-argument has been about moral hazard. That if you bail out, bail out homeowners, there'll be more people who will say, "I need help."

JOE NOCERA: And there's more than a little truth to that. And the moral hazard is a real argument. And it has driven a lot of the thinking in Treasury about what to do about homeowners. It's like if you give people incentive to foreclose, more people will decide, "Hey, I'm about to foreclose." So my problem with it really is that if you're going to say that about homeowners, why don't say the same thing about financial institutions? Why doesn't moral hazard work for them as well? And, you know, the government has bent over backwards to give money to financial institutions whether they need it or not. And they just don't seem to have the same set of standards.

DEBORAH AMOS: Let me ask you about Sheila Bair.

JOE NOCERA: Sure.

DEBORAH AMOS: She was in the hearings this week. She was appointed to head the FDIC, the Federal Deposit Insurance Corporation. She has a different plan. She's actually done some mortgage readjustments. Tell me about why her plan is different than what Paulson's talking about.

JOE NOCERA: Well, she has been in this position where she has, the FDIC took over a bank in California, IndyMac, and they have used it as a petri dish to experiment with mortgage modifications to see what can be done, what can't be done, how many can we do. Now, the program is still in its beginning stages. There are 60,000 mortgages at IndyMac. And I think they've only modified 3,000 or 4,000. But she does view this as a way to do major modifications. And the idea is, you know, you get it down to 31 percent of their income, however you have to do it. Income, interest rate readjustments, even some principle readjustments. You broaden the length of the loan. You make them fixed rates. There's a lot of things she's doing.

DEBORAH AMOS: And they work?

JOE NOCERA: They absolutely do work. Now, what she wants to do on the federal level is cut a deal with banks that basically says if you modify mortgages so you take a bit of a hit and you do same thing we're doing at IndyMac, we will guarantee that you won't lose any more money on those deals. In other words, if the person re-defaults after you do a modification, the government will guarantee to cover the loss on the re-default. The estimate for that at the moment is about $40 billion. She has been negotiating with the White House for well over a month on this and the Treasury Department. And they basically think it's too much money and they don't want to spend it. And they also think her criteria is too broad, and they want to narrow it. So she finally, in disgust really, just posted her plan on the FDIC website and basically said, "Here, America, is what I want to do and they won't let me do it." She is completely broken with the administration.

DEBORAH AMOS: She's a political appointee.

JOE NOCERA: That's right.

DEBORAH AMOS: Just like the Treasury Secretary.

JOE NOCERA: Right.

DEBORAH AMOS: Why did she break so publicly? And why did she choose the hearings this week to do it?

JOE NOCERA: Well I think she's just disgusted. She has gotten increasing resistance, she has just basically decided time is running out. They're not going to be here that much longer. I'm probably not going to be here that much longer. There's no downside in my just telling the country what we could do if they would let us.

DEBORAH AMOS: I've read that her background is as a small banker, as opposed to Hank Paulson, who is a big banker. Do you think that that's a mindset that is the difference between how they look at this?

JOE NOCERA: I think the mindset is slightly different. He is, you're right, a big banker, an investment banker, a deal maker. She has basically spent most of her life as a regulator. And one of the things that's been missing in this crisis is people who think like regulators. That's not a dirty word, you know? A good regulator can do a lot of good. A bad regulator can do a lot of bad. So she's actually thinking like a regulator. So one of the things you know, she and Ned Gramlich, who's the late former the late Federal Reserve governor, were the two people in government who kept saying, "This is going to be a problem. We can see the numbers," because that's what they do at the FDIC. "We can see that there are going to be all these subprime resets and people are not going to be able to pay for their mortgages." And, you know, nobody wanted to hear it. Nobody wanted to hear it

DEBORAH AMOS: The credit markets are in deep freeze.

JOE NOCERA: Again.

DEBORAH AMOS: Again. This was also to be part of the bailout, to fix the tap, to get the banks to turn on the tap. What gets credit moving again?

JOE NOCERA: You know, the only answer to that is a psychological answer. It's not a physical answer. And it's not a monetary answer. It's confidence. It's confidence. And what is the saddest part about Paulson's actions these past months is that instead of restoring confidence, it is helping destroy confidence. He can give $100 billion to Citigroup if he wants. But if the marketplace and the investment community and the clients and the customers don't have confidence in Citi, it doesn't matter. And if banks don't have confidence in each other, they won't do inter-bank lending. And if banks don't have confidence in businesses and customers, they won't lend the money.

DEBORAH AMOS: As simple as that?

JOE NOCERA: It's really, really that simple. I was in Chicago this week and just talking to a company or two about how they're dealing with the credit crisis. And it's just so clear that nobody trusts anybody to pay anything back. So, you know, cost of capital for a company that used to be three percent is now 15 percent. I mean, it's almost like 1980 again. They're trying to jawbone banks into making loans. But banks are scared. And banks don't think there's much percentage in making loans right now. And they think the money is better spent shoring up their balance sheet. So they can jawbone all they want, but it's not going to make that much difference.

DEBORAH AMOS: As we watch the bailout unfold, there's a lot of people that say it's tax money; therefore, it's my money. There's not enough transparency even though it was called for in the original bailout plan. Why not? Why don't we know?

JOE NOCERA: It is so baffling. The Treasury Department just doesn't seem interested in ferreting out this information or at least supplying this information to the American people. I think it has to do with Paulson's background, that he is an investment banker. That when you're an investment banker, you don't want anybody to know who your trading partner is. You don't want anybody to know that you're going to sell a big position because they'll front run you. And, you know, there's a whole aura of secrecy justifiably in many cases in how you trade in the marketplace.

DEBORAH AMOS: So he's thinking like an investment banker and not like a Treasury Secretary?

JOE NOCERA: Right and meanwhile, you've got a situation where, you know, AIG is sucking up government money like crazy. I mean, they're over $100 billion. They have kept coming back for more. And nobody knows where that money is going. That's taxpayer money. What institutions is AIG, AIG is using this money for collateral.

DEBORAH AMOS: It's a big insurance company, AIG.

JOE NOCERA: Right. And they made they did had one division that did a lot of dumb things with derivatives and credit default swaps. And now they're paying the price. And the price they're paying is they have to send this money out as collateral to their trading partners. We don't know who those partners are. We don't know what the collateral, how much the collateral is. We don't know who we're propping up by sending this money to AIG. And it's really shameful.

DEBORAH AMOS: For you, what's the headline this week?

JOE NOCERA: I think the headline this week is "Government Shuts Down." Or, no, "Government Throws in the Towel." It's a terrible thing to say, but I do think that's the headline this week. The one good headline, we haven't really talked about it much, is that the Democrats told the auto companies to come back with a plan in 12 to 14 days. And you think to yourself, "Guys, don't you realize you should have come up with a plan in the first place?" You can't just come up and beg for money after all the problems you've had.

DEBORAH AMOS: And come in your private jets.

JOE NOCERA: Well look, if they each had one private jet instead of a fleet of seven or eight, I wouldn't have that much of a problem with it. I don't know that I really want Rick Wagoner to be flying commercial. People would just hit him over the head. So the secondary headline is, if the auto companies could just come up with a plan and say, here's how we get the profitability if you give us this money there's some hope that something could be done for them between now and January 20th.

DEBORAH AMOS: And if there is agreement and there's talk of another session of Congress sometime between now and the end of the year and there is a bailout for GM, and the other two, does that restore confidence? Is that a sign that government didn't throw in the towel?

JOE NOCERA: Well Treasury won't have very much to do with it, for one thing. No, it's not. All it is, it gives you a little breathing room. But it is not, it will not be the confidence thing that we need. I mean, really, let's be realistic. We need an Obama administration to get in there with smart people who know what they're doing, who can sound decisive, and who can make moves that will cause the marketplace to say, "Phew. Thank god they're here."

DEBORAH AMOS: What do you worry about in these nine weeks before the Obama administration takes office? What keeps you up at night?

JOE NOCERA: Well, the thing I most worry about really is that the financial institution problem will re-rear its ugly head. That is the thing I'm most worried about. Everything else is going to be gradual. The foreclosure problem can be dealt with in January. The auto problem can probably dealt with in January. But if you have another re-rearing of the Citibank and then the contagion goes to Morgan and then it goes to Goldman Sachs and then it goes to Europe again and Asia again and, the Republican administration only has another month to run. And they have to go to Congress to get authorization for the other $350 billion, that's what you don't want.

DEBORAH AMOS: This crisis doesn't work on a holiday schedule.

JOE NOCERA: You know my friend John Gapper from the FDA has had the best line of the whole thing. Early on in September he said, "God, I wish Hank Paulson would just take the weekends off." But he can't. You're right. It's been a brutal, brutal three months.

DEBORAH AMOS: Thanks very much, Joe Nocera, for joining us on the Journal.

JOE NOCERA: Thank you.

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