JIM LEHRER: And to our Newsmaker interview with Treasury Secretary Henry Paulson. I talked with him earlier this evening.
Mr. Secretary, welcome.
HENRY PAULSON, U.S. Treasury Secretary: Good to be here.
JIM LEHRER: Is it correct to say at this point, Mr. Secretary, that the $700 billion rescue plan has not worked?
HENRY PAULSON: Oh, I wouldn’t say that at all. I would say quite the opposite, that what we’ve been able to do since that legislation has been passed is stabilize our financial system. And I think that was very important.
The financial system was at the tipping point. The interbank credit market was frozen; banks weren’t lending to each other. That situation has resolved itself. When you look at the Fed funds rates and the interbank rates and so on, that market is working better.
Now, I would say that the economy has some very significant challenges, and the financial markets have some significant challenges, and they will for some time. We’re not going to work through these stresses until the biggest part of the real estate price correction is over, and it’s going to take — it took a long time to build these things up, and it’s going to take a while to work through them.
JIM LEHRER: But the expectations — would you not agree, Mr. Secretary, when in September, when you and others, everybody was saying, “Hey, we’ve got to pass this rescue plan. If we don’t, things are going to get worse.”
The plan was passed, and things have gotten worse in the financial markets, in the economy. Everything is — every measurement is worse, is it not?
HENRY PAULSON: Yes, I think in the economy that’s right. The economy has worsened. But I think what we sure tried to say is that, if this isn’t passed, things are really going to get worse, because we need a stable financial system that is functioning.
And so part of the issue we always had was, I think, to the American people generally, they look at the equity markets, some of them going up and down. They’re not focused on the interbank funding or the credit markets or the banking system.
But what we saw when we went to Congress was we saw that the markets were frozen, lending had stopped, the economy was turning down, so we could see all of this happening. And we knew how severe it was going to get if we didn’t stabilize the system.
But I never intended to say — nor did I ever say — that the process of recovery and repair was going to be a quick one. The situation we’ve confronted is the kind of thing that happens once or twice every 100 years.
JIM LEHRER: But the lending, for instance, that was a key part of the rescue plan. I almost said “bailout.” I know that’s a bad word. But at any rate, they’re still not lending. People still can’t borrow money. They can’t buy a house, or buy a car, all those things.
HENRY PAULSON: Well, let’s go back. Lending is going to be a key part of this. And what happens when you’re in a period of financial stress, banks pull in their horns, regulators reinforce it, as banks are concerned about continuing slowdown in the economy and credit losses that is restricted.
What we have done by taking steps to make sure the banks are well capitalized. And let’s remember that we are still in the process of getting that money out.
The nine big banks have $125 billion, and they account for 55 percent of the assets, and we’ve got another 20 or so out the door. But we’ve got much more to go there.
But, again, to get back to your point, the thing that I will say, if this works, if this works, lending will be much more than it would have been, OK, than it would have been.
But the key is that, if the banks are confident and people are confident in dealing with the banks, there’s going to be more lending. But the first benefit is the stability of the system.
And let me say one other thing about lending, which I think is very important and it happened this week, that I can exhort banks to lend, but I’m not a regulator.
And what happened this week — which was for the first time I’ve ever heard of — we had a statement come out, signed by the four regulators in this country — the Fed, OCC, OTS, and FDIC — that addressed four things.
It addressed lending. It addressed compensation practices. It addressed dividend policy and the area of mitigating foreclosures. And it was a strong statement focused on the need for prudent lending.
Now, for that statement to come out is one thing. And then when you look at what the regulatory supervisors will do, I think will make a meaningful difference.
But, again, you should not take my comment as meaning that this credit is immediately going to become available like it used to be and that the economy is going to turn around right away.
Revising the approach
JIM LEHRER: All right, yesterday you announced a whole change in your approach. You said the first part was not working, and so now you're...
HENRY PAULSON: No, I did not say that.
JIM LEHRER: Well, you -- well, all right. Say what you did say.
HENRY PAULSON: OK, because it was very clear. I didn't say the first part wasn't working. When we went to Congress, we pointed to the fact that there was a great deal of illiquid assets in financial institutions. And...
JIM LEHRER: Illiquid assets, meaning money that can be lent, right?
HENRY PAULSON: Holding mortgages, mortgage-related assets, money tied up in this. And we said something at that time which was a very good idea, and it still is a good idea, which is, if we bought those assets, invested in them, this would put capital into the banks and there'd be a price discovery process that would cause more capital to go into the banks.
But what happened is the situation worsened. As it took a good while to get through Congress, the situation worsened.
By the time we had that legislation passed on October 2nd, I had concluded that, when you looked at the finite amount of resources we had, that the more powerful way to deal with the issue, because the problem was of a greater magnitude, and to protect the taxpayer was to go the capital route. And...
JIM LEHRER: Which means you put the money directly in the banks.
HENRY PAULSON: Put the money directly in the banks, which then puts them in a stronger position to sell the illiquid assets and continue lending. The money will go further.
So what we said -- so what I said yesterday -- so we, right out of the legislation, we moved with lightning speed to begin implementing this program 10 days after the legislation, getting the money in the nine largest banks, we're working on that.
So what I said yesterday was, after, again, looking at the problem we have before us and looking at the TARP resources, and how best to use...
JIM LEHRER: TARP, that's the name of the bill -- the legislation, right.
HENRY PAULSON: Yes, of the rescue package. And let me also say, on these investments, this is money the taxpayer will get back. These are investments. These preferreds in these banks are well protected, and I believe that will be a good investment.
But what we've said is, looking at what we've got before us, the best thing we can do is have additional money, ample additional money to continue to put equity into financial institutions, if needed, and also equity to put into institutions if there's a systemic event and there needs to be a rescue.
And so what we said is we want to evaluate this first plan once it's done and then determine the best way to go forward as needed with additional capital programs.
JIM LEHRER: But it is correct to say, is it not, Mr. Secretary, that everything that's been done up until now has not resulted in the kind of lending that this whole thing was designed to free?
HENRY PAULSON: I take big issue with that.
JIM LEHRER: OK.
HENRY PAULSON: Because what I say is we were clear from day one we were talking about stability of the system, that this system was at a -- at a tipping point.
And this plan -- thank goodness Congress enacted it. And I also am very grateful that we were able to see the size of the issue in front of us and move as quickly as we did to -- to stabilize the financial system with the actions the FDIC took, in terms of hardening the bank guarantees, and the capital program.
Now, what you were saying -- which I agree with -- is that the economy is having a tough time, that credit is being restricted. We're not seeing the kind of lending we'd like to see. And that is clear.
Now, I will say to you, it's going to take a while. The banks just got these funds. And even if this is working better than expected, you're still going to see lending restricted to more than we would like given the severity of what's going on in the economy.
Navigating a 'tough period'
JIM LEHRER: All right. In the general thing of the economy, the financial system, everything, as we sit here right now, are things continuing to get worse?
HENRY PAULSON: Well, here's what I would say to you. In terms of the financial system -- and I'm repeating myself -- that the system has been stabilized, and that is a huge positive, here and around the world. So that's been stabilized. In terms of the economy...
JIM LEHRER: It's getting worse.
HENRY PAULSON: In terms of the economy, this is a tough period, and our focus has got to be on recovery.
JIM LEHRER: But what I'm getting at is this, Mr. Secretary, that most of the folks don't know the difference between a financial system and an economy if they can't buy a car, if their house is being foreclosed, and they're losing their jobs. What's the difference?
HENRY PAULSON: Well, I would say this...
JIM LEHRER: It's a technical difference.
HENRY PAULSON: It is. It's not just a technical difference, because if the banking system had failed, they would know the difference, OK, because it would be much, much worse.
And so what -- but I do empathize and I do say that there's no doubt that we're going through a real challenge. And, consequently, we made another suggestion, not something that we have prepared to roll out yet, but something we're working on, which will take a relatively smaller amount of TARP assets -- which is the rescue plan funds -- to invest in a Federal Reserve program, which would provide big amounts of liquidity for credit for consumers.
Because in this country, 40 percent of the lending takes place through a securitization market outside of the banking system. So when you look at people who borrow to buy a car, there's AAA-rated auto loan paper. There's AAA-rated credit card. There's AAA-rated student loan.
That market has all but collapsed. And when that collapses, it's hard for the American people to get the money they need to get the economy going. And so that will be -- it's another program we're working on. It isn't as systemically important, but it's very important to the economy.
JIM LEHRER: And if it's important to the economy, that means it's important to everybody in the country.
HENRY PAULSON: You betcha.
JIM LEHRER: So, I mean, it isn't just a little bit over here that's called the financial system, a little over here that's called this. That's my only point.
HENRY PAULSON: Yes, and I want to come back to you on that, because all of this is about the economy and the American people. We don't want to do anything to do something for the banks for the banks' sake. This is about the American people.
But here's the distinction I'm making. The TARP or the rescue package was never intended to be the panacea for the whole economy, OK?
JIM LEHRER: OK.
HENRY PAULSON: It wasn't intended for that. There are other plans. This was intended to stabilize the financial system, and it's done that.
JIM LEHRER: Now, there are a lot of people who believe, a lot of experts who believe that the key to this from the very beginning was not the financial system so much as it was the housing problem.
HENRY PAULSON: Yes.
JIM LEHRER: And that's what started all of this. And one of the end results of it was a bad financial system, but it began with housing. Why have you and the other rescuers not done more about that?
HENRY PAULSON: Well, I think -- I, again, take issue with that...
JIM LEHRER: OK. All right.
HENRY PAULSON: ... because I think that's been a huge focus, because one of the things that we did at Treasury -- let me step back and say that, in this country, we do have government guarantees for securitized mortgage financing. We have Fannie Mae and Freddie Mac.
JIM LEHRER: Those systems collapsed.
HENRY PAULSON: Yes. And what happened, this was a flawed system. We had a flawed congressional charter. We had a system where the regulator was set by law, and the regulator had no authority.
I went to Congress before those companies collapsed. I got the authority to deal with it. We moved very, very quickly to come in and stabilize that situation. And they are providing a lot of mortgage finance.
And I would say this, that, while the cost of other credit has gone up a lot, the cost of Fannie Mae- and Freddie Mac-insured mortgages has been relatively constant, has been insulated from that. I'd like to see those rates lower, but that was, I think, a very strong statement.
And the other thing I would say, the more we can do to help the financial system and lending and have lending going, that's the number-one thing we can do for the housing.
But I think it's very hard to -- when you look at how long it's taken for these excesses to build up and for these home prices to appreciate to suddenly say, "Maybe government could push some button and make it all go away and solve the problem."
So I think we've dealt with it in an effective a way as...
Housing, auto industry crucial
JIM LEHRER: But, again, it isn't -- the value of the average home in America goes down as we sit here right now.
HENRY PAULSON: You're absolutely right. The...
JIM LEHRER: The ability to get a loan is harder now every day as we sit here.
HENRY PAULSON: Yes.
JIM LEHRER: And so what's -- until that is fixed, can the rest be fixed? That's really what I guess I'm asking.
HENRY PAULSON: Well, I have always said that at the heart of the problem is the housing correction. And until the biggest part of the price decline in houses is behind us, we will have stresses in the financial markets and in the economy.
JIM LEHRER: When is that going to get better?
HENRY PAULSON: And I can't give you a date for when that's going to get better. But I can tell you, because we're dealing with that, and we're dealing with that as effectively as anyone can come up with an idea, stabilizing Fannie and Freddie, and while we're dealing with that, we sure as heck better stabilize our banking system, which we did.
JIM LEHRER: One final...
HENRY PAULSON: And so we didn't come forward with the TARP and say -- or the rescue plan and say, "Vote for this, and all the economic problems will be behind us, and the housing correction will be over, and credit will be easy." We said, "Do this because the situation is at the tipping point, and we need to stabilize it."
JIM LEHRER: I take your point, Mr. Secretary. I'm just talking, from the ordinary folk on the street...
HENRY PAULSON: I understand.
JIM LEHRER: ... saying, "Hey, come on. We know rescue, we'll do this, bailout, and things continue to get worse."
But one other question, very specific question that's on the table right now. The automobile industry, everybody says, if the United States automobile industry is about to go down the tubes, if it does, it's going to be a huge thing to everybody in this country.
HENRY PAULSON: Right.
JIM LEHRER: You do not believe anything should be done about this?
HENRY PAULSON: I have said quite the opposite, OK? What I've said repeatedly is I think the auto industry is a very important industry. I think it would be harmful to see a bankruptcy of a major auto manufacturer, particularly during this period.
And I've said that I think anything that's done should show a path to long-term viability. And I've said that -- I've cited an auto bill that was passed by Congress, $25 billion, Department of Energy bill, and I've suggested that one idea for Congress would be to modify that to make that money available to lead to a viable auto industry.
The only thing that I've said about the rescue plan is that the intent of that -- again, getting back to my earlier point -- Congress didn't pass that and say, "Go take those resources and use them on whatever you feel like."
That was passed to deal with our financial system, the viability of our financial system, the strength of our financial system to get lending going again, and stabilize that. And so clearly I am of a view you should do something for the auto industry.
JIM LEHRER: But not through the rescue package?
HENRY PAULSON: Yes, I'm just saying that's not the congressional intent.
Assessing Paulson's performance
JIM LEHRER: Finally, Mr. Secretary, I take it from what you've said on all these things, you're comfortable with what your role has been and how you have performed in your capacity as secretary of the treasury in this crisis?
HENRY PAULSON: Yes, I am. You know, we've had a lot of challenges. We've dealt with some unprecedented events. We've taken some unprecedented actions. We've dealt with a number of these on a case-by-case basis.
When it became clear that you needed to take a broader systemic approach, we went to Congress. Some people have said to me, "You should have gone to Congress earlier." And I said, "Well, it wasn't real easy to get something through Congress even when we were in the middle of a crisis."
And if we'd gone to Congress earlier, the challenge was, how do you go to Congress if you know you're not going to be able to get something done?
So as soon as we saw that we needed to go and it was clear to us and to Chairman Bernanke and me, when it was clear, we went.
Do I wish we had got the rescue package done earlier? Yes. And as you've shown right here with me, maybe my greatest strength is not communicating broadly with the American people.
But, again, it's a challenge when you're up there, and when people say, "Tell us how grave and how severe the problem is and all the bad things that are going to happen if we don't pass the legislation." And I don't like to talk that way and don't like to scare people.
So Ben and I had an interesting challenge. But we got the legislation and the system has stabilized. And we've got a lot of challenges ahead of us, as you've pointed out.
But you don't get yourself into a situation like this overnight, and you don't get yourself out of a situation like this overnight.
And the last thing I'd say to you, that I'm never going to apologize ever for changing an approach when the facts change. My job is to look at this trust that's been given to me, and look at these resources, $700 billion to invest, to protect the system, and use them in the way that I believe they will have the biggest impact for the American people.
JIM LEHRER: Mr. Secretary, thank you very much.
HENRY PAULSON: Thank you.