00:00:22
uh good evening and thank you Doug for
00:00:23
that kind
00:00:25
introduction I'd also like to thank
00:00:26
Wharton for hosting this event today you
00:00:29
know given the severity and the
00:00:30
complexity of the credit crisis I think
00:00:33
it's essential that we have a vigorous
00:00:35
dialogue to really understand the causes
00:00:37
of the crisis learn from it and make
00:00:39
sure that we can prevent these from
00:00:40
happening again and I think that the
00:00:43
warten community is ideally suited to
00:00:45
contribute to that discussion so as a
00:00:47
warden alumnist it's really a privilege
00:00:48
for me to be here with you
00:00:50
today what I'd like to do tonight is
00:00:52
first establish a foundation by offering
00:00:54
some prepared remarks uh briefly
00:00:56
explaining what led to the
00:00:58
crisis why we had go to Congress to seek
00:01:01
unprecedented authority to create a $700
00:01:03
billion program how we use that
00:01:06
authority to prevent a financial
00:01:07
collapse and where we're now headed but
00:01:09
then what I really want to get to is a
00:01:11
discussion a Q&A so I want to spend the
00:01:13
most of the time on Q&A and hearing from
00:01:15
you and having an active dialogue so let
00:01:18
me Begin by reviewing very quickly how
00:01:21
the financial system affects Americans
00:01:24
and their families every American and
00:01:26
every American Family Banks as you know
00:01:29
serve as the primary Ary intermediary
00:01:30
between borrowers and Savers Americans
00:01:33
save for their Futures and for their
00:01:35
families and these Savings of individual
00:01:37
Americans are combined and made
00:01:39
available to other people and to
00:01:41
businesses who need to borrow money for
00:01:43
their specific needs the financial
00:01:46
system links millions of individual
00:01:48
Savers around the country with millions
00:01:50
of individual borrowers around the
00:01:52
country through billions of individual
00:01:55
transactions this extraordinarily
00:01:57
complex but usually efficient system
00:02:00
includes both Banks where you and I have
00:02:03
our savings accounts and non-banks such
00:02:05
as uh financial institutions that
00:02:08
provide credit cards and car loans and
00:02:10
student loan financing now this system
00:02:13
has developed over our nation's history
00:02:15
and it is built on confidence and on
00:02:18
trust Savers be they individuals or
00:02:20
businesses need to have confidence in
00:02:23
the institutions and the people they
00:02:25
entrust with their money and because no
00:02:28
single Bank can touch every family or
00:02:30
every business Banks must have
00:02:32
confidence to lend to each other for the
00:02:34
system to work now with that background
00:02:38
let me briefly describe the fundamental
00:02:40
causes of the credit crisis as I see
00:02:43
it the seeds of the crisis were planted
00:02:45
during a decade of benign economic
00:02:47
conditions including low interest rates
00:02:50
and low
00:02:51
inflation Financial Innovation which has
00:02:53
served our economy well over the years
00:02:55
also accelerated investors gained
00:02:58
increasing confidence
00:03:00
in the effectiveness of new Financial
00:03:02
products to diversify and to distribute
00:03:05
risks with this perceived reduction in
00:03:08
Risk leverage increased across our
00:03:10
financial system underwriting standards
00:03:13
for mortgages weakened as more and more
00:03:15
Reliance was placed on the value of the
00:03:17
home rather than on
00:03:20
affordability homeowners took out ever
00:03:22
larger mortgages with little or no money
00:03:24
down and little or no documentation of
00:03:27
income Regulators in investors and
00:03:30
homeowners all took comfort from the
00:03:32
belief that home prices only go
00:03:34
up now as we have learned painfully that
00:03:38
belief was
00:03:39
incorrect to understand the consequence
00:03:41
of that
00:03:42
miscalculation consider that the
00:03:44
Residential Mortgage Market in the US is
00:03:46
an 11 trillion Market that's a big
00:03:49
Market to get
00:03:50
wrong with banks highly leveraged
00:03:52
balance sheets and minimal down payments
00:03:54
on home loans even a minor drop in home
00:03:58
prices and rise in defaults
00:04:00
can result in a big hit to bank's
00:04:02
Capital large losses can then threaten
00:04:05
the solvency of financial
00:04:07
institutions rooted in housing this
00:04:10
credit crisis is Complicated by a number
00:04:12
of related factors first home prices
00:04:15
adjust downward slowly in part because
00:04:18
homeowners are reluctant to realize
00:04:19
losses most homeowners would rather keep
00:04:22
their home than sell it if they can
00:04:24
avoid it because they don't want to take
00:04:26
a loss because it's usually their
00:04:27
largest financial asset
00:04:31
second this necessary housing correction
00:04:33
which is still not over is setting the
00:04:35
pace of the credit crisis and this slow
00:04:38
adjustment makes it difficult to Value
00:04:40
mortgages and mortgage back Securities
00:04:42
because investors don't know for certain
00:04:44
where the bottom of the housing market
00:04:46
is and when it will be
00:04:48
reached but investors are
00:04:50
forward-looking with the high leverage
00:04:52
in our financial system and the large
00:04:55
necessary housing correction investors
00:04:57
quickly realized that the financial
00:04:59
system had insufficient Capital to
00:05:02
withstand the expected losses from the
00:05:04
housing
00:05:05
correction but the opacity of mortgage
00:05:07
back Securities and the difficulty in
00:05:09
valuing mortgage assets meant that it
00:05:12
was hard for investors to determine for
00:05:13
certain which institutions were at
00:05:16
greatest
00:05:17
risk so investors didn't want to be
00:05:19
exposed to a failing
00:05:20
institution but they were also unable to
00:05:23
determine which institutions were at
00:05:24
risk they pulled back wherever they
00:05:27
could so a capital problem for for some
00:05:30
institutions led to a liquidity problem
00:05:32
for all
00:05:34
institutions that liquidity problem
00:05:37
created a serious risk that our
00:05:38
financial system as a whole both in the
00:05:40
US and abroad could
00:05:43
fail now secretary Paulson and chairman
00:05:46
Bernan recognized early that there might
00:05:48
come a time when the private markets
00:05:50
would become unwilling to provide the
00:05:53
necessary Capital to the financial
00:05:55
system to deal with the large losses
00:05:57
from the housing correction in such a
00:05:59
scenario only the federal government
00:06:01
would be in a position to step in to
00:06:03
support the financial system to provide
00:06:05
the needed Capital to prevent a
00:06:07
collapse although government leaders
00:06:09
have numerous tools to deal with
00:06:12
financial
00:06:13
crises there was no existing tool to
00:06:16
provide Capital to the financial
00:06:18
system government intervention was not
00:06:20
our first choice as it often has
00:06:22
unintended far-reaching
00:06:24
consequences but it was a necessary
00:06:26
choice so we began contingency planning
00:06:29
in early
00:06:31
2008 now the crisis deeply intensified
00:06:34
in the spring of 2008 and our largest
00:06:37
financial institutions came under severe
00:06:39
pressure from deteriorating market
00:06:41
conditions and the loss of
00:06:43
confidence in a short period of time
00:06:45
several of our largest financial
00:06:47
institutions failed in March 2008 be
00:06:51
Sterns in July indac in September we
00:06:55
witnessed the conservatorship of Fanny
00:06:57
May and Freddy Mack the bankruptcy of Le
00:06:59
Brothers the rescue of AIG the
00:07:02
distressed sale of wacovia the failure
00:07:04
of Washington Mutual eight major US
00:07:07
financial institutions effectively
00:07:09
failed in six months six of them in
00:07:11
September
00:07:13
alone as a result credit markets froze
00:07:16
the commercial paper Market shut down
00:07:19
three-month treasuries dipped below zero
00:07:21
and a money market mutual fund broke the
00:07:23
buck for only the second time in history
00:07:26
the savings of millions of Americans and
00:07:29
the ability of businesses and consumers
00:07:31
to access Affordable Credit were put at
00:07:33
serious
00:07:35
risk recognizing the threat to every
00:07:38
single American family we knew the time
00:07:41
had come to provide government support
00:07:43
for the US Financial
00:07:45
system on September 18th we went to
00:07:47
Congress to ask for unprecedented
00:07:49
authority to prevent a financial
00:07:51
collapse to their great credit Congress
00:07:55
also recognized this threat and just two
00:07:57
weeks later Congress passed and
00:07:59
President Bush signed into law the
00:08:01
emergency economic stabilization Act of
00:08:04
2008 creating the tarp program we worked
00:08:07
hard with Congress to build tremendous
00:08:09
flexibility into this legislation
00:08:11
because the one constant throughout the
00:08:13
credit crisis has been its
00:08:18
unpredictability now the stress in the
00:08:20
financial system that I've been talking
00:08:21
about is reflected in one of a number of
00:08:24
different measures that we look at one
00:08:25
in particular is the liore ois spread
00:08:29
which is a key measure of risk in the
00:08:30
financial system typically that spread
00:08:33
is between five and 10 basis points
00:08:35
higher levels means more risk on
00:08:38
September 1st 2008 the one- month spread
00:08:41
was 47 basis points by the 18th when we
00:08:45
first went to Congress the spread had
00:08:47
climbed to 135 basis points by the time
00:08:51
the bill passed just two weeks later on
00:08:53
October 3rd the spread had nearly
00:08:55
doubled again to 263 basis points and
00:08:59
credit markets continued to deteriorate
00:09:02
and just one week later the spread
00:09:04
spiked to 338 basis points almost 50
00:09:08
times normal levels our nation was
00:09:11
facing the potential imminent collapse
00:09:13
of our financial
00:09:14
system so many people have asked me what
00:09:17
if the financial system had collapsed
00:09:19
what would have
00:09:20
happened businesses of all sizes might
00:09:23
not have been able to access funds to
00:09:24
pay their employees who then wouldn't
00:09:27
have money to pay their bills
00:09:29
families might not have been able to
00:09:31
access their
00:09:32
savings basic Financial Services could
00:09:34
have been
00:09:35
disrupted the severe economic
00:09:37
contraction and large job losses that we
00:09:40
are now experiencing were triggered by
00:09:42
the credit crisis if the financial
00:09:44
system had collapsed this recession
00:09:47
including terrible job losses and
00:09:48
numerous foreclosures could have been
00:09:51
far far more
00:09:53
severe as conditions deteriorated
00:09:55
rapidly it became clear to us that we
00:09:57
needed to use our new Authority granted
00:09:59
by Congress as aggressively as possible
00:10:02
to quickly attempt to stabilize the
00:10:04
system now a program as large and
00:10:07
complex as the tarp would normally take
00:10:09
many months or even years to establish
00:10:12
but we didn't have months or years we
00:10:14
had to move as fast as possible so we
00:10:17
designed a capital purchase program to
00:10:19
invest up to $250 billion in Banks it
00:10:23
would be the fastest most direct way to
00:10:26
inject much needed Capital into the
00:10:28
system and restore confidence
00:10:29
idence but a big question
00:10:32
remained would Banks
00:10:34
participate Banks traditionally resist
00:10:37
government assistance because they fear
00:10:39
it could make them look weak and
00:10:41
undermine the Market's confidence that
00:10:43
is so vital to their business if they
00:10:46
did not participate our plan would not
00:10:48
work so we asked the CEOs of nine major
00:10:52
Banks to come to Treasury and meet with
00:10:54
us on the afternoon of Monday October
00:10:56
13th and we asked them to participate in
00:10:58
this new program
00:10:59
and to their great credit they all
00:11:01
unanimously agreed 2 weeks later our
00:11:04
investments were complete this action
00:11:07
combined with a guarantee of Bank debt
00:11:09
by the FDIC stabilized the system and
00:11:11
prevented a collapse in short it
00:11:15
worked while we started with those nine
00:11:17
Banks this program was designed so that
00:11:19
healthy Banks of all sizes across the
00:11:22
country could apply all banks large or
00:11:25
small would get the same terms in the
00:11:28
seven months since Congress passed the
00:11:30
legislation treasury has now completed
00:11:32
around $200 billion investing in 579
00:11:36
healthy banks in 48 states Puerto Rico
00:11:39
and Washington DC with new Investments
00:11:42
each week the Investments have ranged
00:11:44
from as high as $25 billion to as small
00:11:47
as
00:11:48
$300,000 and the median investment is
00:11:50
around $15
00:11:51
million most of the banks treasury is
00:11:54
investing in are small community banks
00:11:57
that never got involved in the risky
00:11:58
mortgages that that led to this crisis
00:12:01
and there are hundreds of additional
00:12:02
applications in the
00:12:03
pipeline it is important to remember
00:12:06
treasury is buying preferred stock from
00:12:08
these Banks not giving them money
00:12:11
treasury has already received almost $3
00:12:12
billion in dividend payments and I
00:12:15
expect the vast majority of these Banks
00:12:17
to pay back the treasury in full with
00:12:20
interest people often ask me why are we
00:12:22
investing in healthy Banks shouldn't the
00:12:25
tarp just be used for failing Banks once
00:12:28
we had prevented a collapse our Focus
00:12:30
turned to minimizing damage to the
00:12:32
economy we needed to get lending out to
00:12:35
Consumers and to
00:12:36
businesses healthy banks are in the best
00:12:39
position to support lending in their
00:12:40
communities by extending credit if you
00:12:43
have a dollar and you invest that dollar
00:12:44
in a healthy Bank it is far more likely
00:12:47
to turn around and make new loans than
00:12:49
if you gave that same dollar to a
00:12:50
failing bank which will just try to
00:12:55
survive treasury also helped the Federal
00:12:57
Reserve establish a lending program to
00:12:59
reduce borrowing costs for consumers
00:13:01
including auto loans student loans small
00:13:04
business loans and credit card loans
00:13:07
they are planning to expand this lending
00:13:08
initiative to include commercial
00:13:10
mortgage back Securities and other asset
00:13:12
classes this program you've probably
00:13:14
heard about is called the talf and it's
00:13:16
now underway and showing real promise
00:13:18
helping to restart the securitization
00:13:20
markets that are essential to providing
00:13:22
credit to our
00:13:24
economy under secretary G's new
00:13:26
Financial stability plan Treasury and
00:13:28
the banking Regulators launched a stress
00:13:31
test of the 19 largest banks in America
00:13:34
to make sure they had enough capital and
00:13:36
the right kind of capital to continue
00:13:38
lending even in a more severe economic
00:13:41
scenario than we
00:13:43
expect the results of those tests are
00:13:45
now complete and several banks are now
00:13:47
out there raising meaningful new Equity
00:13:49
from private investors that is good for
00:13:52
the system that is good for those Banks
00:13:54
and that is a good indicator that
00:13:56
markets are beginning to heal Tre Trey
00:13:59
also stands ready to provide additional
00:14:01
Capital if institutions need it from the
00:14:04
government as you may know treasury also
00:14:06
launched a multi-part housing program to
00:14:08
reduce borrowing costs and encourage
00:14:10
long-term sustainable loan modifications
00:14:12
for homeowners and finally treasury
00:14:15
launched a public private investment
00:14:17
program to purchase illiquid assets from
00:14:19
Banks and that has received strong
00:14:21
interest from private
00:14:23
investors now as you all know during
00:14:25
this time we have unfortunately had to
00:14:28
step in to stabilize
00:14:29
several large institutions whose
00:14:31
failures would pose a systemic risk to
00:14:34
our financial system and to our
00:14:36
economy let me be clear we regretted
00:14:39
having to take these actions to put so
00:14:42
many taxpayer dollars at risk to support
00:14:45
individual firms that had made bad
00:14:47
decisions but our choice was clear when
00:14:50
the consequences of inaction so Sever
00:14:54
and the potential cost to taxpayers and
00:14:56
to American families so much greater
00:14:59
than the cost of
00:15:00
intervention today that liore ois spread
00:15:03
that we track has fallen from a peak of
00:15:06
around 338 basis points down to around
00:15:09
20 basis points I believe the combined
00:15:12
actions of Treasury the Federal Reserve
00:15:14
and FDIC have prevented a financial
00:15:17
collapse but there is still a lot more
00:15:19
work to do to get credit flow into our
00:15:23
communities people have been asking what
00:15:25
are the banks doing with the money that
00:15:26
we've invested in them we designed
00:15:29
important features into our investment
00:15:30
contracts to limit what they could do
00:15:32
with the money first we restricted
00:15:34
dividend increases and share repurchases
00:15:37
and second we imposed important
00:15:39
standards on executive
00:15:41
compensation by increasing A bank's
00:15:44
Capital we are creating strong economic
00:15:46
incentives for the banks to deploy that
00:15:48
Capital profitably banks are in the
00:15:51
business of lending and will provide
00:15:53
loans to creditworthy borrowers wherever
00:15:56
possible if a bank doesn't put the new
00:15:59
Capital to work its returns for its
00:16:01
shareholders will
00:16:02
suffer people have then asked well how
00:16:04
will we actually track lending
00:16:06
activity in January treasury began
00:16:09
measuring lending collecting data from
00:16:11
the 20 largest recipients of capital
00:16:13
under this Capital purchase program
00:16:15
representing around 90% of our CPP
00:16:18
Investments we've now published the
00:16:20
first four monthly lending surveys and
00:16:23
these surveys show Bank by Bank The
00:16:25
Lending and Inter and intermediation
00:16:27
activities of institutions by category
00:16:30
such as consumer commercial and real
00:16:32
estate loans these are all published
00:16:35
monthly on treasury's website you can go
00:16:37
look for yourself Bank by bank now it's
00:16:39
important to remember in recessions
00:16:42
credit levels and lending typically
00:16:44
Falls because both Banks and borrowers
00:16:47
get nervous about extending and taking
00:16:49
on new
00:16:50
loans the survey shows that through Q4
00:16:53
of 2008 lending held up remarkably well
00:16:57
basically flat at these inst tions
00:16:59
despite one of the most severe quarterly
00:17:01
economic contractions in decades I am
00:17:04
confident to say lending levels would be
00:17:07
far far lower had we not taken these
00:17:10
actions now with investments in almost
00:17:13
600 institutions and hundreds more in
00:17:15
the pipeline we must ensure that our
00:17:18
investments are targeted at helping the
00:17:20
economy but we must also take great care
00:17:24
not to try to micromanage recipient
00:17:27
institutions however well- intended
00:17:29
government officials are not positioned
00:17:31
to make better commercial decisions than
00:17:33
lenders in our
00:17:35
communities the government must not
00:17:37
attempt to force Banks to make loans
00:17:39
whose risks they are not comfortable
00:17:41
with or attempt to direct The Lending
00:17:43
from
00:17:45
Washington bad lending practices were at
00:17:47
the root cause of this crisis and
00:17:49
returning to those practices will not
00:17:51
help end this financial
00:17:53
turmoil the provision of credit that is
00:17:55
vital to our economy will not
00:17:57
materialize as fast as any of us us
00:17:59
would like but it will happen much
00:18:01
faster as a result of using the tarp to
00:18:03
stabilize the system and increase
00:18:05
capital in our
00:18:07
banks I like to summarize it by saying
00:18:10
the bursting of the housing bubble
00:18:12
damaged our financial system which then
00:18:15
damage our
00:18:16
economy that recession is now looping
00:18:19
back further straining our financial
00:18:21
system in a vicious cycle as Americans
00:18:23
lose their jobs they then fall behind on
00:18:26
other types of loans further damaging
00:18:28
the Financial
00:18:29
system the federal government has put in
00:18:32
place extraordinary programs to support
00:18:34
the financial system the tarp the
00:18:36
Federal Reserve the FDIC and the
00:18:38
economic stimulus package is designed to
00:18:40
strengthen our economic
00:18:42
fundamentals we must attack the problem
00:18:44
from both directions to break that
00:18:46
vicious cycle and that's exactly what we
00:18:48
are
00:18:49
doing the current crisis took years to
00:18:52
build up and it will take time to work
00:18:54
through but I believe we have the right
00:18:56
programs in place and as they continue
00:18:59
to ramp up we will continue to see more
00:19:02
progress thank you now I would very much
00:19:04
look forward to having a
00:19:12
discussion so I'm I'm happy to take
00:19:14
questions if people have them comments
00:19:17
maybe you could begin just by commenting
00:19:19
briefly on on um the tracks of your
00:19:23
career that took you out of Goldman sa
00:19:25
sacks up to the it would be helpful just
00:19:27
to hear your background from the Govern
00:19:28
from the service perspective sure um I
00:19:31
began my career as an aerospace engineer
00:19:33
before going to Wharton uh worked in
00:19:35
engineering for a few years and then
00:19:37
went to Wharton hoping to combine uh
00:19:40
engineering and business I didn't know
00:19:42
what I was going to do when I left
00:19:43
Wharton I ended up joining Goldman as a
00:19:45
technology investment banker here in San
00:19:47
Francisco as the optimal way for me to
00:19:49
try to combine technology and business
00:19:52
had a great experience I had always had
00:19:54
an interest in
00:19:56
government and uh when I was had been at
00:19:59
Goldman for four years and I applied for
00:20:00
a program which many of you may know
00:20:01
about called the White House Fellowship
00:20:04
a very prestigious program very
00:20:05
competitive and the senior partner that
00:20:08
I worked for at Goldman arranged for
00:20:10
then Henry pson CEO of Goldman to sign a
00:20:13
letter of recommendation on my behalf
00:20:15
this was in January of 06 I applied for
00:20:18
the program got halfway through got
00:20:19
dinged in the regional finals some of
00:20:21
you may know what that is was very
00:20:23
disappointed and by the grace of God a
00:20:26
few months later President Bush elected
00:20:28
Henry paulon to be treasury secretary so
00:20:29
I called him up and I said you remember
00:20:32
me uh I had met with you I wanted to
00:20:34
apply for this program if you're putting
00:20:36
a team together I want to come with you
00:20:37
I don't care what you're going to have
00:20:38
me do I just want to come in and I'll
00:20:40
prove myself and it worked out I got
00:20:44
very
00:20:45
lucky I it's a great lesson you know um
00:20:48
lesson for me and for all of us that I
00:20:51
had my heart set on something I thought
00:20:52
it was exactly what I wanted I didn't
00:20:54
get it I ended up getting something much
00:20:55
much better uh and I'm very blessed for
00:20:57
having it
00:21:00
I have two questions U first question on
00:21:02
the stress test how do you think that
00:21:05
will influence regulatory ex going
00:21:07
forward now I know the government said
00:21:08
this was sort of a one time public thing
00:21:10
but just going forward in a private sort
00:21:12
of way how do you think it will affect
00:21:13
the
00:21:15
regular so let me um Let me give some
00:21:18
context and I I will answer your
00:21:20
question I want to give some context for
00:21:21
everyone else here so The Regulators in
00:21:24
treasury undertook a stress test which I
00:21:25
talked about the 19 largest banks there
00:21:27
are already existing Capital standards
00:21:29
for banks that are established and that
00:21:32
have been established for a long time
00:21:34
and what Treasury and the FED did this
00:21:36
time is they said let's look at these
00:21:38
biggest banks these systemic Banks and
00:21:40
look out over the next two years and say
00:21:42
if we forecast a more severe economic
00:21:45
scenario Than People expect today will
00:21:48
the banks have enough capital and will
00:21:50
they have the right kind of capital to
00:21:51
be able to continue lending through that
00:21:53
more severe scenario but they were very
00:21:55
careful to say that they're not creating
00:21:57
a new capital standard
00:21:59
so while they're not going to change how
00:22:01
much capital A Bank needs to hold 3
00:22:04
years from now or 5 years from now I
00:22:06
think that they've learned a lot about
00:22:08
trying to apply a consistent view across
00:22:11
institutions typically what happens is a
00:22:13
regulator looks at excuse me with
00:22:15
company management an individual
00:22:17
institution looks at their loan
00:22:18
portfolio looks at their business and
00:22:21
takes a fairly narrow view of is that
00:22:23
institution sound what this stress test
00:22:25
has done has given The Regulators a
00:22:28
broader perspective to say yes is this
00:22:30
institution sound how does it compare to
00:22:32
other institutions what's happening in
00:22:34
the broader Financial landscape so what
00:22:37
I've heard from The Regulators I'm not I
00:22:38
was not a regulator was they've learned
00:22:41
a lot from this and it's been a very
00:22:42
valuable experience that they're going
00:22:44
to incorporate elements of this into
00:22:46
their more normal supervisory work going
00:22:49
forward did I answer your question yeah
00:22:50
to make it more forward looking I I
00:22:52
think to make it more forward-looking
00:22:53
and to apply more consistency across
00:22:56
institutions you know they're they're
00:22:57
not only looking at what's in A bank's
00:22:59
portfolio Securities loans they're
00:23:02
looking at the earning power of the
00:23:03
individual institution they're looking
00:23:05
at different macro effects
00:23:08
um that's okay and the second question I
00:23:11
had was
00:23:12
um as you said banks that receive top
00:23:15
were strong Banks what do you think the
00:23:17
government would do when a strong Bank
00:23:18
gets into trouble would it be likely
00:23:21
then that they would have access to more
00:23:22
government Capital because they've been
00:23:24
deemed a strong
00:23:26
bank I think it depends on if a bank is
00:23:28
deemed systemic or not we segmented the
00:23:31
world into two
00:23:33
camps healthy Banks who we wanted to
00:23:36
make even healthier so they could
00:23:38
support lending and systemic Banks if
00:23:41
you have a bank that is neither healthy
00:23:42
nor systemic then we have something
00:23:44
called receivership where the FDIC comes
00:23:46
in and winds down a bank and sells it um
00:23:50
so I think it really depends on the
00:23:52
situation the other thing to consider is
00:23:54
when we've had to intervene on
00:23:55
individual institutions the context of
00:23:58
the financial markets and the context of
00:23:59
the economy are very important so look
00:24:01
at Bear Sterns if Bear Sterns had
00:24:04
happened instead of March 2008 March
00:24:06
2005 when markets were normal and
00:24:08
healthy we may have had it reach a
00:24:10
different conclusion maybe I'm
00:24:12
speculating maybe we would have
00:24:13
concluded beur is not systemic in 2005
00:24:17
but given the fragility of our Capital
00:24:19
markets we felt that we had to take the
00:24:20
action that we took so um it's a complex
00:24:24
answer to say that we look at each case
00:24:26
individually in the context of what's
00:24:28
happening around at the time so there's
00:24:29
not a reluctance to lose the top money
00:24:32
that's already being invested well I
00:24:34
don't think that we established a
00:24:36
standard the healthy Bank standard where
00:24:38
we said we want to evaluate whether or
00:24:40
not a bank is deemed viable before we
00:24:43
put any government money in because we
00:24:45
didn't want to put money into banks that
00:24:47
ultimately were going to fail if we
00:24:49
could avoid it now we've invested in
00:24:50
almost 600 Banks I can't imagine we were
00:24:53
perfect I also don't believe that
00:24:55
putting good money after bad is a good
00:24:57
idea
00:24:58
if the bank is deemed not
00:25:03
systemic I was wondering what
00:25:06
government's criteria was or treasury
00:25:08
criteria in giving out house money to
00:25:11
some banks or even helping other Banks
00:25:14
get acquired with the governor's banking
00:25:16
whereas some banks like Washington rual
00:25:18
and brothers were left on their own so
00:25:23
um this is a very complex question
00:25:26
remember in the case of Washington
00:25:28
mutual and Leman Brothers the tarp did
00:25:31
not exist so let's let's let me take two
00:25:34
examples to start with let's take be
00:25:35
Sterns and let's take Leman Brothers in
00:25:37
neither case did the tarp exist the
00:25:40
Leman Brothers failed on Monday on
00:25:43
Thursday September 18th we went to
00:25:44
Congress so we couldn't have done what
00:25:46
we did with tarp there because we didn't
00:25:47
have the legal authorities in the case
00:25:50
of be Sterns be Sterns happened very
00:25:52
quickly in the matter of a week or two
00:25:54
it went from everything is fine to
00:25:56
tremendous funding pressures to an A
00:25:58
near
00:25:59
collapse treasury didn't have the legal
00:26:02
authorities to intervene the Federal
00:26:04
Reserve has very powerful authorities to
00:26:06
lend money in exigent circumstances but
00:26:09
the law requires the Federal Reserve to
00:26:11
be secured with secured collateral when
00:26:14
they make those loans so that they're
00:26:15
not taking much risk so in the case of
00:26:17
be Sterns there was a collateral pool of
00:26:20
$30 billion of mortgages and mortgage
00:26:22
assets that the FED lent against and
00:26:25
that collateral secured the loan that
00:26:27
they made and that collateral was
00:26:29
available so they were able to loan
00:26:30
against it now after bear shance failed
00:26:34
the markets the expression we use is the
00:26:36
markets turned their attention to the
00:26:38
next slowest deer okay the next slowest
00:26:41
deer was Leman brothers so bear failed
00:26:43
all of the markets attention term to
00:26:45
Leman Leman be started coming under
00:26:47
pressure and over the course of the next
00:26:49
six months if you watched their stock
00:26:51
price you looked at their CDs spreads
00:26:52
Leman came under more and more and more
00:26:54
and more
00:26:56
pressure now I was not in New York I was
00:26:58
in New York for beay weekend I was not
00:27:00
in New York for Leman weekend so I
00:27:01
didn't work on Leman personally but um
00:27:05
it is reasonable to conclude that as
00:27:07
lhan was coming under more and more
00:27:09
pressure whatever quality collateral
00:27:11
they had they were having to pledge to
00:27:13
other private sector funders to try to
00:27:16
keep themselves afloat so after six
00:27:18
months happens and lhan finally runs out
00:27:20
of funding and is going into bankruptcy
00:27:22
or about to go into
00:27:24
bankruptcy there was no collateral left
00:27:26
for the FED to then Lending against and
00:27:28
meet their legal requirements so
00:27:30
secretary Paulson and chairman banki
00:27:32
have spoken about this a lot and said
00:27:33
very clearly that in the case of Leman
00:27:35
it was not a question of will meaning
00:27:38
desire it was a question of legal
00:27:40
authority to take the action uh in the
00:27:42
case of AIG they lent against assets
00:27:45
then we got the tarp Authority which for
00:27:47
the first time enabled us to put in
00:27:49
equity or to really take risk and at the
00:27:51
end of the day this is about the
00:27:53
government the taxpayers taking risk in
00:27:55
the financial sector the FED is lending
00:27:57
money against secured assets they're not
00:27:59
taking much risk the private markets
00:28:01
were unwilling to take risk we had to be
00:28:03
able to take risk that's what the tarp
00:28:05
was
00:28:08
about excuse
00:28:12
me so so over the last
00:28:15
year you've determined that there are
00:28:17
certain institutions that are too big to
00:28:19
fail and obviously that's part of the
00:28:20
rescue as you look ahead maybe five or
00:28:23
10 years one question it's probably
00:28:26
being wrestled with now is are these
00:28:28
institutions too big to exist and if if
00:28:31
as you look ahead do you see what does a
00:28:33
financial landscape look like 10 years
00:28:35
from now and hopefully this is in the
00:28:37
rearview
00:28:40
mirror I think that there will be large
00:28:43
there will be and there should be large
00:28:45
regulatory changes that come about as a
00:28:48
result of this and there's momentum
00:28:50
building in Washington for such
00:28:51
regulatory changes my personal view is I
00:28:54
think we should take our time because
00:28:55
these are very complex issues and we
00:28:57
will benefit from getting the crisis
00:28:59
behind us studying it with the benefit
00:29:01
of time to really make the right changes
00:29:04
you know you could see there this is how
00:29:06
complex this is if you have some huge
00:29:08
Global institution that is systemically
00:29:11
important too big to fail too
00:29:12
interconnected to
00:29:14
fail then in a in a sense it will always
00:29:17
be able to issue debt cheaply because
00:29:19
the people who buy that debt believe
00:29:21
that the government is standing behind
00:29:23
it so what do you do about that you know
00:29:25
there are some people who are proposing
00:29:27
that we should
00:29:29
put a tax on all these institutions that
00:29:32
are deemed systemically important to
00:29:34
effectively increase their borrowing
00:29:36
cost so that they no longer have a
00:29:37
competitive advantage over institutions
00:29:39
that are not too big to fail you could
00:29:40
call it a debt tax or systemic tax I
00:29:43
don't know um I don't know if that's the
00:29:44
right answer but I think that the
00:29:46
regulatory changes that come out of
00:29:48
Washington over the next several years
00:29:50
are going to have a large effect on what
00:29:52
the financial landscape looks like in
00:29:54
five or 10 years or in 20 years it's
00:29:56
going to take a while if you if you look
00:29:58
coming out of the depression the massive
00:30:00
changes in government regulations and in
00:30:02
government agencies and institutions it
00:30:05
took a long time for those to all form
00:30:07
and to and for the market to adjust to
00:30:10
those new realities so I don't have a
00:30:12
good lens into what that's going to look
00:30:13
like I do know it's going to be
00:30:16
different in the back you you talked
00:30:18
about the tarp having strong protections
00:30:21
on executive compensation uh how does
00:30:23
AIG figure into that would there $400
00:30:25
Million worth of bonuses paid out there
00:30:28
sure
00:30:31
um the bonuses paid in terms of AIG
00:30:35
which got so much
00:30:37
attention were entered into in Ironclad
00:30:40
contracts in the spring of 2008 6 months
00:30:44
before or longer before the federal
00:30:46
government got involved in AIG now we
00:30:48
didn't have the legal authority to tear
00:30:50
up contracts right we're a country of
00:30:52
laws the sanctity of contracts is the
00:30:54
Bedrock of our capitalist system uh that
00:30:57
is really differentiated the US relative
00:30:59
to other countries that investors could
00:31:01
invest in now I talked about something
00:31:03
called receivership when a individual
00:31:05
Bank fails a small Bank a thousand
00:31:08
little banks failed in the SNL crisis in
00:31:10
the late 80s or early 90s the FDIC comes
00:31:13
in and puts the bank into receivership
00:31:15
and that is a legal framework under
00:31:17
which the FDIC can then uh repudiate
00:31:20
contracts can decide we're going to pay
00:31:22
this contract we're going to pay you
00:31:23
this amount or this amount we're going
00:31:25
to honor these we're not going to honor
00:31:26
these for the these large Global
00:31:28
institutions like AIG or like City group
00:31:31
that are these big global bank holding
00:31:32
companies there's no receivership
00:31:34
Authority so one of the things that the
00:31:36
new the current Administration is asking
00:31:38
for and secretary Paulson and chairman
00:31:40
banki asked for it last year was New
00:31:42
authority to put these big global bank
00:31:44
holding companies into receivership to
00:31:46
give us these tools the problem with
00:31:49
having to intervene to stabilize an
00:31:51
institution when you don't have these
00:31:52
legal authorities you don't get to pick
00:31:55
and choose which contracts you want to
00:31:56
honor because if we went went in to AIG
00:31:59
and said we're going to just arbitrarily
00:32:01
tear up certain contracts because we'd
00:32:03
feel like it those creditors could then
00:32:06
put the company into bankruptcy they'd
00:32:08
have a legal ability to do that and that
00:32:10
would undermine the very stability that
00:32:11
we're looking to achieve so we did put
00:32:14
in place strong executive compensation
00:32:16
requirements Congress passed part of the
00:32:19
tarp legislation required us to uh but
00:32:22
again it did not go back and
00:32:23
retroactively try to change contracts
00:32:25
because our system is built on the San
00:32:28
of contracts other
00:32:33
questions we work closely with abs funds
00:32:36
trying to raise Capital uh for
00:32:38
investment in vintage MBS Securities um
00:32:41
one question that we typically face from
00:32:43
investors is the Bedrock of an investor
00:32:46
confidence is usually placed within the
00:32:48
pooling and services agreement that was
00:32:51
entered into and uh with increasing
00:32:54
activity in the loan modification space
00:32:56
uh it's becoming very unclear as to how
00:33:00
investor interests are protected while
00:33:02
borrower loans are actually
00:33:04
modified and uh what do you see as U
00:33:07
sort of a road map to protect
00:33:10
investor um interests in Securities
00:33:12
investment that they entered a long time
00:33:14
ago but their loans are being modified
00:33:17
at the back end and uh you know we know
00:33:19
that the investors can be anywhere in
00:33:21
the in the globe right now not just in
00:33:23
the US sure um and just to give some
00:33:26
context for everybody so all these Home
00:33:28
Loans are packaged up into mortgage back
00:33:30
Securities you have your different
00:33:31
tranches AAA all the way down and there
00:33:34
are these pooling and servicing
00:33:35
agreements which tell the servicers who
00:33:37
collect your loan payments how you're
00:33:39
supposed to interact with the borrower
00:33:41
so if a borrower falls behind here's
00:33:43
what you're supposed to do to try to
00:33:44
maximize cash flow now the servicers are
00:33:47
trying to maximize cash flow for the
00:33:49
investors in the aggregate they're not
00:33:51
supposed to be picking and choosing
00:33:52
which tranch of investors to be favoring
00:33:55
supposed to be acting on behalf of all
00:33:56
of them the loan modification programs
00:33:59
that have been designed that I've worked
00:34:00
on are designed to try to help
00:34:03
homeowners who want to stay in their
00:34:05
home and have a reasonable chance of
00:34:07
staying in their home some people bought
00:34:09
homes they could never hope to afford
00:34:12
and modifying their mortgage is not
00:34:13
going to help them it's not going to be
00:34:15
good for investors so these loan
00:34:17
modification programs are designed to be
00:34:19
very targeted to help those homeowners
00:34:22
who want to and can fundamentally afford
00:34:24
a reasonable mortgage the analysis that
00:34:26
we've done suggests that those type of
00:34:28
loan modifications are in fact in the
00:34:30
interest of the aggregate of investors
00:34:33
now there may be some investors
00:34:35
depending where they sit in the capital
00:34:36
structure they may prefer a foreclosure
00:34:39
okay but the investors in the aggregate
00:34:41
if someone can afford to make a
00:34:42
reasonable payment that is better for
00:34:44
the investors in the aggregate so we've
00:34:46
designed this on the front end to take
00:34:48
investors views um into account the
00:34:51
interesting thing though is some of the
00:34:53
minority investors who let's say prefer
00:34:55
foreclosure are very loud
00:34:58
right and they squeal a lot and they
00:35:00
they threaten servicers and they say
00:35:02
don't you dare modify those loans put
00:35:04
them into foreclosure or we're going to
00:35:06
sue you and so by getting the industry
00:35:08
to move and at once and getting the
00:35:10
federal government to come in and
00:35:12
support a view of helping targeted
00:35:15
homeowners who want to stay in their
00:35:16
homes where it's in the investors's
00:35:18
collective interest we think that that's
00:35:20
striking the right balance and stopping
00:35:22
short of abating
00:35:24
contracts other questions
00:35:29
pardon me I have a little bit of leitis
00:35:30
so I apologize um getting back to the
00:35:32
stress tests a bit um when we talk about
00:35:35
sort of what the assumptions were for
00:35:37
the worst case scenario some of the
00:35:38
things that I've read have kind of put
00:35:39
us sort of not potentially not beyond
00:35:43
that but certainly on a path to go quite
00:35:45
far beyond what was originally predicted
00:35:47
as sort of the worst case stress
00:35:49
scenario and I'm wondering you know is
00:35:51
there a plan C you know what happens if
00:35:53
employment exceeds 8.9% and real estate
00:35:56
doesn't find a bottom and the commercial
00:35:57
real estate problem is much larger than
00:35:59
you know it's kind of an unknown right
00:36:02
now and you know 1.8 million subprime
00:36:04
mortgages almost brought the banking
00:36:06
structure to its knees and we've got 8.1
00:36:08
million all day starting to reset the
00:36:10
end of this year and you know what
00:36:12
what's sort of the case beyond the
00:36:14
stress test case and and where do you
00:36:17
see that bringing us you know as a
00:36:19
country
00:36:21
so it's interesting because there
00:36:23
certainly are some commentators who say
00:36:24
the stress test was not a p istic enough
00:36:29
but a lot of the banks say are you
00:36:30
kidding me this was far more aggressive
00:36:32
than we think is uh credible given what
00:36:34
they're seeing in their loan portfolios
00:36:36
so I don't think you're going to ever
00:36:37
make everybody happy um and so we I
00:36:39
think Treasury and The Regulators tried
00:36:41
to find the right
00:36:44
balance the biggest risk we now face is
00:36:46
a political risk if the economy
00:36:48
stabilizes the way the econom The
00:36:51
Optimist think it will where we could
00:36:53
see GDP growth as early as Q4 bottoming
00:36:56
sometime this year I think we're going
00:36:57
to be fine because I think that that
00:36:59
vicious cycle it will be broken and
00:37:01
it'll it'll start to unwind and the
00:37:04
programs that we have in place will be
00:37:06
appropriate given the economic
00:37:08
fundamentals if the economy deteriorates
00:37:10
much much further than we expect then I
00:37:13
think we may need to go back to Congress
00:37:14
to get additional authorities to
00:37:16
stabilize the financial sector and to
00:37:18
continue to get lending going again and
00:37:20
that's going to be tough because right
00:37:21
now the political environment is so bad
00:37:24
almost every member of Congress is
00:37:25
saying don't come anywhere near us right
00:37:26
now asking for more Authority now I I
00:37:30
certainly hope it doesn't come to that
00:37:31
and again many economists don't think it
00:37:33
will come to that uh if the recession
00:37:36
gets much much
00:37:38
worse the American people will feel it
00:37:41
and that's why we did this we did this
00:37:43
for American families and members of
00:37:45
Congress will feel it and they will hear
00:37:47
it from their constituents again I was
00:37:50
very skeptical in the two years I was in
00:37:51
Washington at congress's willingness to
00:37:54
move and take uh unpopular action was
00:37:57
necessary but look what they did when
00:38:00
the people spoke and when we faced the
00:38:02
crisis in the fall they acted in just
00:38:03
two weeks if the economy gets
00:38:06
substantially worse I think Congress
00:38:08
will need to act and they will act is
00:38:11
there a point in which it's like not
00:38:12
better to keep putting banking system or
00:38:15
is that always the right
00:38:17
answer I mean I guess the question is if
00:38:19
we don't do it it credit is people
00:38:22
describe credit as the lifeblood of our
00:38:24
economy if we are not able to provide
00:38:26
credit of our Financial system is not
00:38:28
functioning we will have a deeper longer
00:38:31
recession than we need to have and
00:38:33
that's the choice we have to ask
00:38:34
ourselves do we want to even this is as
00:38:37
distasteful as this is would we rather
00:38:39
have a longer deeper recession I think
00:38:40
most people would say
00:38:43
no got uh two two quick questions the
00:38:46
first one is Americans have been
00:38:48
encouraged by the administration to go
00:38:49
off refinance take advantage of um the
00:38:53
the lower interest rates the problem is
00:38:55
as you alluded to earlier um apprais B's
00:38:57
coming lower there's been there's been a
00:38:59
decline in the prices so you effectively
00:39:02
it's kind of like two-sided you know you
00:39:03
can get better rates but you have to
00:39:05
pump more money into your property to
00:39:07
maintain those rates and I'm wondering
00:39:09
like what um if anything um you think
00:39:13
whether it's the administration or
00:39:15
something should be done about that
00:39:16
because I think that's kind of a a
00:39:17
tension the second question is um I saw
00:39:20
your interview on Charlie Rose I thought
00:39:22
it was great I'm just curious um why you
00:39:25
left government what you're planning to
00:39:26
do next sure so the first question is
00:39:29
about underwater borrowers which has
00:39:31
gotten a lot of attention you know for
00:39:34
in August of 2007 so I've been at
00:39:37
treasury for a year secretary pson asked
00:39:39
me to lead the department to work on
00:39:40
housing so I looked at with it with the
00:39:42
department and with the FED dozens and
00:39:44
dozens of uh homeowner programs Housing
00:39:47
Programs foreclosure programs and the
00:39:49
issue of what to do about people who are
00:39:50
underwater is a really tough issue
00:39:53
because when people get way underwater
00:39:55
they may not want to stay them their
00:39:56
house anymore so I always talk about
00:39:58
wanting to help people who want to keep
00:40:00
their home okay if you're underwater and
00:40:03
you don't want to keep your home people
00:40:05
like to do this analysis let's say you
00:40:07
call up your bank and you said hey look
00:40:09
I'm underwater if you don't cut my
00:40:12
principle reduce my mortgage balance I'm
00:40:14
going to walk and you're going to have a
00:40:17
foreclosure that seems like that's a bad
00:40:19
trade for the bank the bank should cut
00:40:20
your principle because maybe they're
00:40:21
only going to get 60 cents on the dollar
00:40:23
in foreclosure the problem is moral
00:40:25
hazard because if you do it every one of
00:40:27
your neighbors is going to pick up the
00:40:29
phone and say hey cut my principle too
00:40:31
I'm going to walk if you don't cut my
00:40:32
principle I'm underwater and that moral
00:40:34
hazard problem the banks would rather
00:40:37
lose you to foreclosure than modify
00:40:39
every home on your street because the
00:40:41
economics are better to lose you to
00:40:42
foreclosure so the underwater problem is
00:40:45
something economists love to talk about
00:40:47
but they haven't thought through the
00:40:48
Practical implications of if you own a
00:40:50
bunch of loans how you modify them which
00:40:52
ones you modify them the hard part about
00:40:54
housing is again targeting the
00:40:56
assistance to the homeowners who need it
00:40:58
who can benefit from it without creating
00:41:01
the wrong incentives for all the other
00:41:02
homeowners on your block or without
00:41:04
providing that assistance to the banks
00:41:06
and the mortgage back Securities
00:41:07
investors rather than to the homeowners
00:41:09
who need it so you've identified a huge
00:41:11
problem that I've not heard a good
00:41:13
solution for one thing that this
00:41:15
Administration has done is if you happen
00:41:17
to have a fanny or Freddy loan Fanny May
00:41:20
Freddy Mac loan typically you need to
00:41:22
have 20% down to get a a fanny or Freddy
00:41:25
loan but you let's say you have a May
00:41:27
loan today and you're now at 100 LTV so
00:41:31
you were in at 80 your home has lost 20%
00:41:34
of its value you're now at a 100 LTV
00:41:36
Fanny May already owns your risk so what
00:41:39
the administration has done is said look
00:41:41
if you're already a Fanny May loan Fanny
00:41:43
May can now refinance you up to 105 LTV
00:41:46
it's not increasing the risk of the
00:41:47
government because they already own the
00:41:48
loan but it's enabling you to achieve a
00:41:51
lower interest rate which actually
00:41:52
lowers your risk so that's a clever
00:41:55
narrow area where we could could try to
00:41:57
address this problem but beyond that
00:41:59
I've not heard a good solution uh to
00:42:01
that uh in terms of why I left
00:42:04
government I was appointee of the Bush
00:42:05
Administration President Bush and
00:42:07
secretary Paulson appointed me so my
00:42:10
term was due to expire on January 20th
00:42:12
with all the other uh Bush appointees
00:42:14
the Obama Administration and secretary
00:42:16
gner asked me to stay for a brief period
00:42:19
to help with the transition it ended up
00:42:20
being a lot longer than I expected and I
00:42:23
concluded my service on May 1st when my
00:42:26
successor was announced and had then
00:42:27
come into Treasury and we transitioned
00:42:29
for a few weeks so it's I mean 3 years
00:42:32
in treasury was a long time in this
00:42:34
period and uh I'm looking forward to
00:42:36
taking some time off and then
00:42:38
re-entering the private sector I have no
00:42:40
idea what I'm going to do
00:42:42
yet a couple of questions somebody had
00:42:44
asked about the commercial markets uh
00:42:47
which effectively collapsed it's just
00:42:49
hasn't been um visualized yet because uh
00:42:53
people are still hanging on to their
00:42:54
properties so what do you see as the
00:42:56
Govern govern's uh uh attempts to shore
00:42:59
up the commercial Market the way they
00:43:01
have the residential market and then
00:43:03
secondly if you could just comment on
00:43:05
your views of how all this funding and
00:43:08
infusion of capital is going to affect
00:43:12
inflation the second one's hard um the
00:43:15
first one regarding the commercial
00:43:17
mortgage Market that's an area of stress
00:43:20
that a lot of people are pointing to as
00:43:22
the next shoe to drop so to speak and
00:43:24
you know commercial mortgages and
00:43:26
commerce is very tied to our macro
00:43:28
fundamentals so if our macroeconomy
00:43:29
comes under a lot of pressure it's
00:43:31
common to expect that the commercial
00:43:33
Market is going to come under
00:43:34
pressure the best tool we have right now
00:43:37
the most promising tool is this program
00:43:38
I mentioned called the tal program where
00:43:40
the FED is going to be extending likely
00:43:42
going to be extending the duration of
00:43:43
the lending that they're going to
00:43:45
provide the loans that they're going to
00:43:46
provide to commercial mortgage back
00:43:48
Securities one of the big challenges
00:43:50
right now is not just um people falling
00:43:52
behind on their commercial mortgages
00:43:54
it's rollover risk people who need to
00:43:56
refinance the markets are Frozen right
00:43:58
now so as we get this talf program
00:44:00
expanded we think that that can really
00:44:02
help restart the commercial mortgage
00:44:04
back security markets we announced the
00:44:06
talf program in November it's a very
00:44:08
complex program and it took four or five
00:44:10
months to get up and running it started
00:44:11
functioning in March but even at program
00:44:14
announcement we saw markets react in
00:44:17
anticipation of the program and we're
00:44:19
starting now to see securization markets
00:44:21
begin to show some thawing I think this
00:44:24
month they did 10 billion of
00:44:25
transactions the previous month we three
00:44:28
that's focused on new I agree but
00:44:30
there's but we if you look at the
00:44:31
treasury announcements they're focus on
00:44:33
two things expanding to include other
00:44:36
new asset classes including commercial
00:44:38
mortgage back Securities which could be
00:44:40
refinances of existing commercial
00:44:42
mortgages as well as something we call
00:44:45
Legacy talf expanding talf to include
00:44:48
Legacy mortgage back Securities
00:44:50
including both residential and
00:44:52
Commercial that's not going to help the
00:44:54
indiv expanding talf to Legacy is not
00:44:56
going to help help the individual
00:44:57
property owner but expanding tal to new
00:45:00
commercial mortgage back Securities will
00:45:03
and so we think both of those in com
00:45:05
combination will help to restart the
00:45:06
market all of this is about trying to
00:45:08
get private Capital flowing back into
00:45:10
these markets and again I think we're
00:45:12
seeing some early signs of progress but
00:45:13
it's still very
00:45:16
early oh inflation
00:45:20
um um you know I would have to defer to
00:45:24
my colleagues at the FED there's no
00:45:26
question inflation is a risk anytime the
00:45:29
government is spending so much and
00:45:30
borrowing so much but I think given
00:45:32
where we are our economic fundamentals I
00:45:35
think the choice is pretty clear that we
00:45:37
need to do what we're doing in the
00:45:38
financial system and the economy to get
00:45:40
through the crisis and then we need to
00:45:41
unwind our programs in a prudent manner
00:45:44
once we're through it right now if we
00:45:46
have to a I would air on the side of
00:45:48
being more aggressive rather than less
00:45:50
aggressive let's get through the crisis
00:45:51
let's put the fire out let's be sure
00:45:53
that it's out and then let's deal with
00:45:56
our longer term Fiscal situation which
00:45:58
is very important in the back um the
00:46:02
idea of Leverage has kind of been
00:46:03
demonized in the middle of the credit
00:46:06
crisis and obviously leverage has its
00:46:08
pros and cons so I wanted to hear how
00:46:10
you think about what's appropriate and
00:46:12
wise and then a second question is uh
00:46:15
opportunities for mbas and federal
00:46:16
government going forward and what do you
00:46:18
think of
00:46:20
that so leverage has been demonized I
00:46:23
think that few people would argue that
00:46:25
some of our largest banks had too much
00:46:27
leverage non-banks in particular had too
00:46:30
much leverage I also think there was too
00:46:32
much leverage across our financial
00:46:34
system uh individual
00:46:37
Americans didn't save enough had too
00:46:39
much leverage I think that
00:46:42
the illness or the symptom of too much
00:46:45
leverage manifested itself throughout
00:46:47
our financial system and I think it's
00:46:49
hard to argue that there was not too
00:46:50
much leverage and we're going through a
00:46:51
deleveraging process right now and where
00:46:53
we settle this new equilibrium is going
00:46:55
to be very important in terms of what
00:46:57
our economy looks like in the future we
00:46:58
don't know where it's going to settle
00:46:59
right now savings rates have gone way up
00:47:02
from way up it's still only four or 5%
00:47:04
but it's way up relative to where it was
00:47:06
just a year or two ago so I think that
00:47:09
you know leverage you're right has a
00:47:10
role to play it's not we should all have
00:47:12
no leverage but it needs to be prudent
00:47:14
and it needs to be rational did I answer
00:47:16
your question on Leverage yeah okay and
00:47:18
you have any more specific you know I I
00:47:21
don't because it's so situation specific
00:47:24
in terms of individuals in terms of
00:47:26
banks in terms terms of non-banks Etc
00:47:28
it's hard to it's hard for me to
00:47:30
generalize um in terms of mbas and
00:47:33
government you know I was
00:47:35
very I didn't know what to expect when I
00:47:37
got to treasury you know I came from the
00:47:39
private sector both as an engineer as an
00:47:41
banker and as a banker and I think I had
00:47:44
an expectation that people don't work
00:47:46
hard in government which couldn't be
00:47:47
further from the truth people are
00:47:49
working very very hard um day and day
00:47:51
out not just because of the credit
00:47:53
crisis but now in particular the last
00:47:54
couple years you know we at Treasury and
00:47:56
the office of financial stability
00:47:59
treasury is a policy department so it
00:48:01
makes it writes papers and it writes
00:48:03
policy proposals year in year out it's
00:48:05
not an investing uh department so we had
00:48:07
to build this from scratch so the tarp
00:48:09
legislation created something called the
00:48:10
office of financial stability which I
00:48:12
ran and I was the first employee of the
00:48:14
office in the last 6 months we hired
00:48:17
around 135 or 140 people full-time
00:48:20
people dedicated to financial stability
00:48:22
we hir people from within the government
00:48:25
um out of schools from the private
00:48:27
sector from Banks from Consulting
00:48:28
companies from law firms all people
00:48:30
coming in trying to help out do whatever
00:48:33
they could to try to make our program
00:48:34
successful so I would encourage folks
00:48:36
who are interested in government to look
00:48:38
doesn't have to be at the federal level
00:48:40
could be at the state or local level I
00:48:42
think you there are great opportunities
00:48:43
to take on large responsibility early in
00:48:46
your career to really be a part of
00:48:48
something important and I think you can
00:48:50
develop good skills that I do think are
00:48:51
transferable back to the private sector
00:48:54
I certainly hope they am they are um
00:48:57
but but I would encourage it and I think
00:48:59
that uh figure out what you're
00:49:00
interested in and you know go to their
00:49:02
websites you know meet people who are in
00:49:04
government Etc and uh and and
00:49:12
try about 30% of the the tarp funds that
00:49:15
have been deployed so far uh have been
00:49:17
invested in city and B if I'm correct
00:49:19
about 90 billion can we reasonably
00:49:22
expect that to be repaid um and you have
00:49:25
a time frame roughly you know how how
00:49:26
long that will take and can tar be
00:49:29
profitable for the taxpayers if that
00:49:30
doesn't happen because it's such a huge
00:49:32
portion of
00:49:38
tar you know it's not let me say let me
00:49:41
say it this way I don't think it's
00:49:42
appropriate for me to speculate about
00:49:44
individual
00:49:45
institutions I will say that when we
00:49:49
have had to intervene to stabilize
00:49:51
individual
00:49:52
institutions the money that we've
00:49:54
invested those have been higher risk
00:49:56
Investments
00:49:57
than we've than when we've made the more
00:49:58
General investments in these hundreds of
00:50:00
banks so AIG is in that category General
00:50:03
Motors is in that category Chrysler in
00:50:06
that category as well as B OFA and City
00:50:09
I think that if you look at those two
00:50:11
institutions those were part of the
00:50:13
stress test The Regulators have gone
00:50:14
through analyzed their balance sheets
00:50:17
analyzed their Capital positions and
00:50:19
have given them feedback in terms of
00:50:20
what additional Capital they need to
00:50:22
raise so I think the way we're going to
00:50:25
get paid back as much as possible is by
00:50:28
Banks and
00:50:30
institutions earning money over the long
00:50:32
term and paying back the money over the
00:50:34
long term I can't put a time frame on
00:50:36
when institutions are going to pay us
00:50:37
back about a dozen small banks have
00:50:39
already paid back the tarp and many
00:50:41
other banks are applying right now for
00:50:44
those big institutions it's hard for me
00:50:45
to say when and in what form you know in
00:50:48
the case of City this is all public we
00:50:51
have uh announced that we're going to
00:50:52
enter into an exchange offer and convert
00:50:54
some of our preferred stock for common
00:50:56
stock stock and treasury is in the
00:50:58
process of developing policies on when
00:51:00
it would then sell that common stock and
00:51:02
so there are a lot of variables is what
00:51:04
happens in the broader economy what
00:51:05
happens to the institution what happens
00:51:07
to the banking Market to try to forecast
00:51:10
when and for how
00:51:12
much
00:51:14
others you mentioned uh early on in your
00:51:17
talk that there were reluctant to act uh
00:51:20
in the crisis
00:51:22
because there are often unintended
00:51:25
consequences of those actions I wonder
00:51:28
we someone already mentioned inflation
00:51:29
but are there any other unintended
00:51:32
consequences that you're sort of seeing
00:51:34
uh in the market or maybe five or 10
00:51:36
years from
00:51:37
now one of the biggest ones that I'm
00:51:39
concerned about uh I don't see it yet
00:51:42
but I'm concerned about is we want the
00:51:45
tarp to be temp
00:51:47
temporary and to wind down after a few
00:51:50
years uh once the markets are stabilized
00:51:53
if you look at the Great Depression and
00:51:56
housing was part of the problem in the
00:51:57
Great Depression four major government
00:51:59
agencies were created coming out of the
00:52:00
Great Depression Fanny May FHA the
00:52:04
federal housing Administration the
00:52:06
federal home loan Banks and the
00:52:08
homeowners loan corporation three of
00:52:10
those four are still in existence today
00:52:12
and no one in the 1930s could have
00:52:14
predicted that Fanny May would pose a
00:52:16
systemic risk to our country 80 years
00:52:19
later so we certainly hope that the tarp
00:52:22
and the office of financial stability is
00:52:23
a temporary program that is wound down
00:52:25
soon after after it's it's run its
00:52:27
course but you never know and that's a
00:52:30
risk also if you look at what we've had
00:52:32
to do in the auto companies it's nothing
00:52:34
we wanted to do we wanted in December
00:52:36
for Congress to act uh Congress was
00:52:39
working on legislation to try to deal
00:52:41
with the auto companies the tarp was
00:52:43
focused on the financial sector it was
00:52:45
not the right vehicle but we were forced
00:52:47
Congress knew we could act frankly and
00:52:49
so they didn't take the the hard measure
00:52:51
to pass their own legislation and we
00:52:53
were forced to act given how perilous
00:52:55
the broader economy was at the time it's
00:52:58
not impossible to Envision with this
00:53:00
type of an authority that it could be
00:53:02
misused to stabilize favored industries
00:53:05
that may not be systemic that's
00:53:07
something else I think we should be very
00:53:08
careful of and to try to design against
00:53:10
and prevent that from happening in the
00:53:12
future so again I'm not seeing it yet
00:53:13
but those are things I worry about other
00:53:18
questions um one of the uh corner inss
00:53:20
of the American Dreams obviously said to
00:53:23
be owning a home right and do you do you
00:53:26
really
00:53:27
feel that that's still the case given
00:53:29
all the uh U things that have happened
00:53:31
in the housing sector is it is it still
00:53:34
a meaningful dream for everyone to have
00:53:36
a have a home I don't I don't think the
00:53:39
that dream is for everyone and I think
00:53:41
that the EV the experience of the last
00:53:43
couple years proves that out if you look
00:53:45
at I can't remember the number but if
00:53:47
you look at the percentage of Americans
00:53:48
owning homes it had been fairly stable
00:53:51
for many years and then it climbed up in
00:53:52
recent years and homeowners maybe who
00:53:55
should not have been owning homes but
00:53:56
who should have been renting were
00:53:57
getting into the market and so I think
00:54:00
that there is a balance uh that needs to
00:54:02
be struck and I don't think it's
00:54:03
necessarily for the government to say
00:54:05
this is the percentage of Americans that
00:54:06
should own their home but I also don't
00:54:08
think it's realistic to think that
00:54:09
everybody is going to have the financial
00:54:11
capacity to own a home I think clearly
00:54:13
some people need to be renters um and
00:54:16
that may change you know people may rent
00:54:17
and own a different parts of their
00:54:20
life how are we doing on time 10 15
00:54:23
minutes okay right here in the industry
00:54:27
and um a lot of this upheaval in the
00:54:29
market started you know when you started
00:54:31
coming up with Creative Mortgage
00:54:33
products in the past few years started
00:54:34
doing zero down loans and that kind of
00:54:36
stuff and it led to this collapse what
00:54:39
makes you think this is not going to
00:54:41
happen again when you've got FHA is
00:54:42
still doing loans with 3 and a half%
00:54:44
down borrowers with credit score that
00:54:47
just now became 620 and until a month
00:54:49
ago was zero f could get a home aren't
00:54:53
you creating another wave of the same
00:54:55
because some of the banks that you're
00:54:57
lending money to are adding a second
00:54:59
loan be an FHA and letting a borrow byy
00:55:01
a house with half a percent down so what
00:55:03
is there to check that something that
00:55:06
started and has resulted in this is not
00:55:08
going to happen
00:55:09
again so let's unpack what you just said
00:55:13
because there's a lot in there FHA
00:55:16
Federal housing Administration provides
00:55:18
loans makes loans to Americans with as
00:55:20
little as around 3% down three and a
00:55:22
half I thought it was three
00:55:26
okay um and people would argue that
00:55:30
that's risky and that's a fair point the
00:55:31
point of FHA is to try to provide
00:55:33
especially for home first-time home
00:55:35
buyers the ability to get in to buy a
00:55:37
house and people legitimately say gee
00:55:39
isn't that risky that's a fair point so
00:55:41
we are taking risk as people are buying
00:55:44
new homes their first home at the same
00:55:46
time we have to strike a balance here
00:55:48
because if we raise underwriting
00:55:50
standards so high that people most
00:55:53
people cannot buy homes it's going to
00:55:55
put even more pressure on the mortgage
00:55:57
markets one of the things we had to do
00:55:59
last year we spent a lot of time last
00:56:01
summer designing programs to stabilize
00:56:03
Fanny and Freddy that was absolutely
00:56:05
essential because we needed to keep
00:56:07
credit flowing to the housing market we
00:56:09
have a necessary housing correction home
00:56:12
prices need to adjust back down to where
00:56:15
ordinary people with regular jobs can
00:56:17
afford to buy a home in their
00:56:18
neighborhood okay it's fundamental
00:56:21
affordability that that could be an
00:56:23
overcorrection or it could be a very
00:56:25
disorderly correction
00:56:26
if the flow of credit to the housing
00:56:28
market dries up and if you own a house
00:56:31
but you can't sell it because no one can
00:56:32
afford to get a loan what's the value of
00:56:35
that house it ends up plummeting and so
00:56:37
ensuring that the government was there
00:56:39
to provide credit to keep the housing
00:56:41
market functioning was very important to
00:56:43
allow the correction to progress while
00:56:45
trying to minimize damage to the economy
00:56:47
so I take your point on FHA having said
00:56:50
that if you look at virtually every
00:56:52
private sector source of Finance Housing
00:56:54
Finance underwriting standards have
00:56:55
taken off off okay you don't see that
00:56:58
well because on your toxic assets you
00:57:01
know you bought loans that originated
00:57:03
before March of O8 right okay that's
00:57:05
what we're buying with tar funds until
00:57:07
January of this year if you've got a
00:57:09
lender like B lending without any income
00:57:11
documentation you've got the same
00:57:13
problem that's going to happen on
00:57:15
manifest three years from now well I
00:57:18
have to defer to you on whether BFA or
00:57:20
any other lenders were offering no no
00:57:23
doc loans in January of this year until
00:57:25
janary of 09 January 17th of this year
00:57:29
this is I mean I'll just be canid with
00:57:31
you I've heard the complete opposite
00:57:33
from everyone else that I've spoken with
00:57:35
including the banks including people
00:57:36
trying to get loans more often than not
00:57:38
the calls that I've been getting are I
00:57:40
can't get a loan I've been perfect to my
00:57:42
credit score I made every one of my
00:57:44
payments and I can't get a loan and my
00:57:46
bank just pulled my credit line so
00:57:48
you're one of one voice when there are
00:57:51
hundreds of others in the other
00:57:52
perspective saying that banks are
00:57:54
tightening standards too much markets
00:57:56
are pretty efficient after they made a
00:57:59
mess right so more often than not people
00:58:02
are saying that banks are being too
00:58:04
tough right now and what I say to people
00:58:06
is that as I mentioned in my talk in
00:58:08
recessions underwriting standards
00:58:10
tighten and borrowers get more nervous
00:58:12
about taking on so you see credit levels
00:58:14
falling so we want markets to find the
00:58:17
right balance we don't want them to be
00:58:18
too loose right now we want people to be
00:58:20
able to get loans but we also want them
00:58:22
to be prudent so I don't have a better
00:58:24
answer for you than that um I'm
00:58:26
surprised because what I was hearing is
00:58:28
that you know the the crisis really
00:58:29
reached a fever pitch around Christmas
00:58:31
time of
00:58:32
07 and underwriting standards in most
00:58:35
banks had really ratcheted up at that
00:58:37
point especially in housing markets now
00:58:39
it's the other classes of loans where
00:58:41
people are continuing to tighten
00:58:44
standards other questions right here
00:58:47
yeah you talked a little bit earlier
00:58:48
about the need to delever but the tal
00:58:52
program itself is just another form of
00:58:54
Leverage uh so so isn't it just this
00:58:57
cycle you're just you're just moving
00:58:58
leverage from the banks onto private
00:59:00
investors balance sheets well we're
00:59:02
moving in this case we're moving
00:59:04
leverage to the federal government's
00:59:06
balance sheet well okay Federal
00:59:08
government's balance sheet yeah so again
00:59:09
this is all about the the nature of the
00:59:12
adjustment we need to deleverage but
00:59:15
what's the speed at which that
00:59:16
deleveraging takes place and how
00:59:18
damaging is that deleveraging process to
00:59:20
our broader economy while we go reach a
00:59:22
new equilibrium so if the government If
00:59:24
the Fed and treasury did nothing
00:59:26
markets would find their own equilibrium
00:59:29
but it could have been incredibly
00:59:30
damaging to our economy while they got
00:59:32
there so things like the talf are trying
00:59:34
to provide a more graceful approach to
00:59:37
those new equilibriums things like the
00:59:39
tal are designed to be very
00:59:42
expensive relative to what normal market
00:59:44
conditions provide that cost of that
00:59:46
leverage as an example so that when
00:59:48
markets begin to heal those programs
00:59:51
will unwind themselves and the private
00:59:53
sector will return to using their other
00:59:55
sources of Leverage
00:59:56
so again I'm not I'm not disagreeing
00:59:58
with you it is another source of
01:00:00
Leverage but again it's about trying to
01:00:02
find a graceful approach to this new
01:00:04
equilibrium did I answer your question
01:00:06
well yeah but when when when the program
01:00:08
unwinds you're saying the hope is at the
01:00:12
end it equals it reaches that
01:00:14
equilibrium and that the government
01:00:16
itself doesn't want that equilibrium
01:00:18
reached too quickly which could be
01:00:19
damaging correct what's the problem
01:00:22
about it though what I mean that's what
01:00:23
I don't understand in the market what's
01:00:25
the problem of having that big drop and
01:00:27
then having private investors come in at
01:00:29
that point and and meet it private
01:00:32
investors have a lot of cash and they
01:00:34
are using the tal as well as other
01:00:36
programs as well as just private Equity
01:00:38
Funds and their own Investments to buy
01:00:40
cheap assets when it gets too cheap
01:00:42
they're coming in and they buy it and
01:00:43
then that's a fair price sure the
01:00:46
problem is when look at what happened to
01:00:48
us in the fall so in the first 6 months
01:00:51
of the crisis the fall of 07 our uh
01:00:55
constant message was we were pounding on
01:00:57
banks raise Capital recognize losses
01:00:59
raise Capital recognize losses hoping
01:01:01
that the private sector could deal with
01:01:03
this adjustment on its own through
01:01:05
private Capital coming in doing exactly
01:01:06
as you said but at some point the
01:01:09
private sector got too fearful and
01:01:11
pulled back from the financial system
01:01:13
and we're unwilling to come in at
01:01:14
virtually any price and when the private
01:01:17
sector is unwilling to come in at
01:01:18
virtually any price the price plummets
01:01:21
and you can effectively render your
01:01:23
financial system insolvent and collapse
01:01:25
the financial Cal system and so when
01:01:28
again within bounds of reasonably normal
01:01:31
market conditions what you're describing
01:01:32
works perfectly but when the private
01:01:34
sector has such fear in it that the
01:01:37
market just completely collapses then
01:01:39
the damage to our system can be
01:01:41
catastrophic and that's not a risk we
01:01:42
were willing to
01:01:44
take
01:01:46
others Neil I was wondering a lot of the
01:01:49
economists have predicted that subprime
01:01:52
uh the subprime mortgage Market was
01:01:55
rough L 2 to 3 trillion whereas the top
01:01:58
money that you have handed out is around
01:02:00
700 billion do you see the 2 to3
01:02:02
trillion number close or do you think
01:02:05
the 700 billion that you have put in has
01:02:07
sort of plugg plugged the bleeding for
01:02:10
now
01:02:12
well tarp was $700 billion of which
01:02:16
roughly 400 has been spent meaning
01:02:18
either cash out the door or
01:02:20
contractually committed and around 200
01:02:22
billion more has been allocated to
01:02:23
various programs leaving about a 100
01:02:25
billion
01:02:27
roughly unallocated it's important to
01:02:30
remember when you put in a dollar of
01:02:32
equity because banks are leveraged
01:02:35
that's roughly equivalent to buying $10
01:02:38
of assets so it's not apples and apples
01:02:41
to say 700 billion of tarp and two or
01:02:44
three trillion of assets because of the
01:02:46
leverage effect number one number two
01:02:48
we're using tarp is one of many tools
01:02:51
that we're using to try to stabilize the
01:02:52
system right the Federal Reserve has
01:02:54
massively expanded its balance balance
01:02:56
sheet by1 or2 trillion dollar supporting
01:02:58
various asset markets you have the tarp
01:03:01
you have the FDIC debt guarantee which
01:03:03
is guaranteed several hundred billion
01:03:05
dollars of Bank debt so combined we're
01:03:07
talking about massive amounts of
01:03:09
resources going at stabilizing the
01:03:11
system and so looking at subprime is
01:03:14
important looking at mortgages in
01:03:15
general are important but all of our
01:03:17
programs are designed at getting various
01:03:19
components of their credit markets
01:03:21
functioning
01:03:23
again um thank you very much for your
01:03:26
presentation tonight it's been just
01:03:27
great uh the failure of our regulatory
01:03:31
authorities is staggering in this crisis
01:03:35
and the failure of the credit rating
01:03:37
authorities is staggering at least in my
01:03:41
view given how difficult it is
01:03:45
to redo those organizations especially
01:03:49
under the pressure of politics that have
01:03:52
lobbying groups Trying to minimize the
01:03:54
real impact is there anything that we
01:03:58
can do is there anything citizens can do
01:04:00
to try to give government the backbone
01:04:03
it needs to really change these
01:04:05
regulatory authorities fix them the
01:04:09
credit rating which are private
01:04:11
organizations but those those
01:04:13
organizations failures um are have
01:04:17
really um we will be back in the soup if
01:04:20
we don't strengthen those those those
01:04:22
institutions
01:04:26
I think it's a great question you know I
01:04:28
look at I look at the rating agencies a
01:04:32
lot like I look at sside equity research
01:04:34
which you should you should know what
01:04:36
you're getting right no offense but you
01:04:38
should know what you're getting and who
01:04:39
they're representing and who pays their
01:04:41
salaries now I don't put
01:04:45
disproportionate blame on the rating
01:04:46
agencies only because every one of their
01:04:49
models and every one of the banks models
01:04:52
and every one of the investors models
01:04:53
all had the same assumption home prices
01:04:56
only go up and if home prices only go up
01:04:58
those models are brilliant but when that
01:05:01
when that fundamental assumption is
01:05:02
wrong all those models don't work
01:05:04
anymore and so
01:05:06
I'm I don't know how you design a
01:05:09
regulatory system or a um rating agency
01:05:14
system that is going to be able to push
01:05:16
back against a belief that the entire
01:05:19
country shares think about it if you
01:05:21
were a regulator the entire country
01:05:24
believes that owning a home is the
01:05:27
American dream for every American and we
01:05:30
all believe that home prices only go up
01:05:32
and you're somehow that regulator who's
01:05:34
going to stand up and say no no no I
01:05:35
know better and you got to trust me
01:05:38
that's a really tough thing to do I'm
01:05:39
not saying it's impossible so I guess
01:05:41
what I would say is having an active
01:05:44
dialogue with your representatives and
01:05:46
your leaders and demanding that I don't
01:05:50
know how to do this but demanding that
01:05:51
they
01:05:52
lead that they not just reflect the
01:05:55
current emotion that we're all feeling
01:05:57
and the excitement that we're feeling
01:05:59
about this Market OR tech stocks or
01:06:01
whatnot it's a really hard thing that I
01:06:03
have not heard a good solution to but I
01:06:06
think the best thing I can say is the
01:06:08
American people demanding that their
01:06:10
leaders in Washington
01:06:11
lead that's that's a hard
01:06:14
thing anyway thank you all very much I
01:06:16
really enjoyed it
