Bernanke & Paulson Take To The Hill
Tuesday, July 15, 2008SUSIE GHARIB: The nation's three top financial officials were on Capitol Hill today defending their rescue plan for Fannie Mae and Freddie Mac. But that didn't help shares of the mortgage giants. Both plunged over 25 percent today. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and Christopher Cox of the Securities and Exchange Commission were grilled by lawmakers on what steps they're taking to stabilize the nation's financial system. Washington bureau chief Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury Secretary Henry Paulson again and again stressed there are no immediate plans for Fannie and Freddie to tap the unlimited federal line of credit he is proposing. It is really about psychology. If the backstop is unlimited, Paulson says the markets will feel reassured. But if the credit line were too small, Paulson argues it would almost surely be tapped.
HENRY PAULSON, TREASURY SECRETARY: If you've got a squirt gun in your pocket, you may have to take it out. If you've got a bazooka and people know you've got it, you may not have to take it out. You're not likely to take it out. By having something that is unspecified, it will increase confidence, and by increasing confidence it will greatly reduce the likelihood it will ever be used.
GERSH: To Senator Jim Bunning, a long-time critic of the government-sponsored mortgage giants, that kind of thinking is all wet.
SEN. JIM BUNNING (R), KENTUCKY: A lot of us would like to believe what you're saying, but we're a little skeptical, because every time we propose and do something, it always gets used. And you want an unlimited amount used.
GERSH: Debt issued by Fannie and Freddie is an asset on the books of pretty much every major financial institution in the world. That makes some sort of action by Congress to shore up confidence in that debt a good bet. Lawmakers are clearly concerned more banks may follow IndyMac (IMB) into insolvency, but Federal Reserve Chairman Ben Bernanke assured senators the banking system is well-capitalized.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: My concerns have turned more -- have turned less on the solvency of these institutions and more on their ability to extend the credit that our economy needs to keep growing. Because in many cases, banks are de-leveraging or shrinking or reluctant to raise the extra capital needed to take advantage of business opportunities.
GERSH: Bernanke and Paulson both stress the goal of backstopping Freddie and Freddie is to help the housing market, and through it the overall economy, not to bail out Wall Street or company shareholders. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: At today's hearing, SEC Chairman Cox said his agency is launching emergency action to stem short selling abuses in shares of Fannie Mae and Freddie Mac. Starting on Monday, the SEC will bar the so-called practice of naked short-selling in which traders sell a stock short without first borrowing the shares. An order requiring pre-borrowing will last for 30 days and apply to shares Fannie, Freddie, and major broker dealers, like Lehman Brothers (LEH), Merrill Lynch (MER), and Morgan Stanley (MS). Cox said naked short-selling is a big factor behind the steep drop in shares of Fannie and Freddie.
CHRISTOPHER COX, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION: What we do know is that the combination of short selling and other manipulation in the market can be a very, very volatile mix. Indeed, it's a witch's brew of very dangerous activities.
GHARIB: Meanwhile, Fed Chairman Bernanke gave lawmakers a gloomy assessment of the U.S. economy, saying it faces, quote, "numerous difficulties." Analysts say Bernanke's comments about the economy and the turmoil in the financial sector suggest the Fed will not raise interest rates anytime soon. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: If there's one thing Wall Street hates, it's uncertainty. But that's exactly what Federal Reserve Chairman Ben Bernanke says the U.S. economy is now facing: BERNANKE: Many financial markets and institutions remain under considerable stress, in part because the outlook for the economy, and thus for credit quality, remains uncertain.
MILLER: In his much anticipated semi-annual testimony before the Senate Banking Committee, Bernanke warned of numerous economic headwinds.
BERNANKE: The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets, all represent significant downside risks to the outlook for growth.
MILLER: Merrill Lynch economist Sheryl King says Bernanke's tone was decidedly gloomy.
SHERYL KING, U.S. ECONOMIST, MERRILL LYNCH: There are a lot more downside risks to growth than what was apparent in any previous testimonies that we have seen so far this year. And the financial market turbulence that has reemerged just since -- in the last few weeks and most especially in the last week really took front and center in his testimony.
MILLER: Economist Conrad DeQuadros says the Fed chairman also intensified concerns about inflation. DeQuadros says the Fed is no longer just worried about the impact of rising energy and commodities prices.
CONRAD DEQUADROS, ECONOMIST, RDQ ECONOMICS: What came out in this testimony was now the Fed is focusing on the risk of an inflation-wage spiral. So, inflation moves higher, then wages move higher, that pushes inflation even higher, and you get into this adverse spiral.
MILLER: But investors were pleased to hear Bernanke explicitly state that stabilizing financial markets is a top priority. Just two days ago, the Fed and the Treasury Department offered Fannie Mae and Freddie Mac the possibility of emergency loans. Economists say Bernanke's views on the economy and financial markets today reduce the odds of an interest rate hike soon.
DEQUADROS: I think all of that argues for the Fed holding policy steady through at least the end of this year, and we're probably going to be in for an environment of accommodative monetary policy for some time.
MILLER: Fed Chairman Ben Bernanke will continue his testimony tomorrow before the House Financial Services Committee. Although his prepared remarks will be the same, observers expect him to use the question and answer session to clarify any misperceptions from today's testimony. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
