Bernanke & Paulson Take To The Hill
Tuesday, September 23, 2008SUSIE GHARIB: The government's $700 billion financial rescue plan ran into turbulence today on Capitol Hill. At a hearing of the Senate Banking Committee, lawmakers grilled the plan's architects, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, demanding more details about the plan and assurances it will resolve the financial crisis. Paulson and Bernanke urged quick approval of the bailout, but the senators said they need more time to determine if the plan in its current form makes sense. We have two reports tonight looking at the key issues raised at today's hearing, including whether the government should regulate credit default swaps, which played a critical role in the credit crisis. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: Federal Reserve Chairman Ben Bernanke explained to senators that he and Treasury Secretary Henry Paulson want $700 billion in taxpayer money so they can stop banks from being forced to sell off their mortgage assets at what Bernanke called "fire sale prices."
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: 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.
GERSH: Bernanke warned that pressure will lead to a financial heart attack, with banks cutting off lending, sending unemployment higher, and the economy into recession. Obviously, lawmakers don't want that, but the critical question was raised by Utah's Robert Bennet: What price will the Treasury pay for assets the market is not willing to buy?
SEN. ROBERT BENNET (R-UT), BANKING COMMITTEE: If you end up paying too little to these institutions, you're not giving them the support that they need. If you end up paying too much, then there's no upside potential for the taxpayer.
GERSH: One idea the Treasury is considering is a giant version of eBay in reverse. Instead of buyers bidding for junk, banks selling junk assets will compete on the price they are willing to accept from the Treasury. The lowest price wins. While it's possible the mortgages the Treasury buys as part of its Troubled Asset Relief Program will eventually be worth far more than their fire sale price, senators like Evan Bayh worry taxpayers will be left paying off Wall Street's bad bets.
SEN. EVAN BAYH (D-IN), BANKING COMMITTEE: So the taxpayers do bear some downside risk here. What do they get in exchange for bearing that downside risk? Why should they not be allowed to participate in the potential upside? And then that gets to the question once again of possible equity participation.
GERSH: Meaning the taxpayers would get a stake in any bank that participates in the Treasury auctions. Paulson all but called that a deal- killer. He wants thousands of banks and savings and loans to participate in the auctions. The more institutions that join in, Paulson argues, the harder it will be for anyone to dump their worst assets on the taxpayers, which is one reason he opposes punishing banks that sign up for the program.
HENRY PAULSON, TREASURY SECRETARY: If we have to have to grant -- have companies grant equity stakes, grant options, that would render this ineffective.
GERSH: But how exactly that program would set prices was still unclear after close to five hours of testimony. Paulson only promised to hire the best asset managers, presumably from Wall Street, and then adopt the best plans he can come up with.
PAULSON: This is not a situation where we can come up and say, here's what we want to do, here's how we want to price it, here's the -- here's exactly how the reverse auctions will work. GERSH: Answers like that prompted Senate Banking Committee Chairman Chris Dodd to leave the hearing calling the Paulson plan "unacceptable." But Dodd said Congress could still pass a plan quickly if some changes are made. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Stephanie Dhue. Also at today's hearing, the sprawling $62 trillion market for credit default swaps came under fire. CDS are insurance-like contracts that pay out in the event of a default on an underlying security. And unlike stocks or bonds, which are traded on exchanges, credit default swaps are traded between individual parties largely outside the scope of regulators. While the SEC has anti-fraud authority over the CDS market, Chairman Christopher Cox called on Congress for more.
CHRISTOPHER COX, CHAIRMAN, SECURITIES & EXCHANGE COMMISSION: This market is rife 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.
DHUE: Credit default swaps played a major role in the problems at Bear Stearns, Lehman Brothers (LEH), and AIG (AIG). Treasury Secretary Paulson told lawmakers the shortcomings in the CDS market made the financial crisis worse.
PAULSON: Even more important than the wind down in the insurance is the "too big to fail." And part of the reasons for the "too big to fail" is the lack of all the infrastructure and protocols and discipline around the over-the-counter derivatives market.
DHUE: New York State is already planning to regulate credit default swaps by classifying them as insurance starting January 1st. The goal is to ensure sellers have sufficient capital and risk management policies in place to protect buyers. But Greg Zerzan of the International Swaps and Derivatives Association says that will likely drive the business out of New York.
GREG ZERZAN, COUNSEL, INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION: The credit default market is overwhelmingly occupied by banks, investment banks, otherwise regulated institutions. So having the state of New York try to put an extra layer of regulation on top of that probably won't end up making these markets any more well-regulated.
DHUE: The industry also opposes regulation by the SEC. When senators asked today if they needed to include federal regulation of credit default swaps in the bailout bill, Paulson said no.
PAULSON: You can't deal with this immediately. This is -- this is a huge market that has built up over a long period of time.
DHUE: The SEC says it is investigating whether swaps were used in stock manipulations, but it has yet to bring a major case involving credit default swaps. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
