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CNBC Exclusive Interview: Chief Washington Correspondent John Harwood Interviews Presidential Candidate and Senate Banking Chairman, Christopher Dodd (D-Conn), on Kudlow & Company (Transcript Included)

DATE: August 20, 2007
NETWORK: CNBC
PROGRAM: "Kudlow & Company"
TIME: 5:30 PM ET

The following is the unofficial transcript of a CNBC interview with Presidential Candidate and Senate Banking Chairman, Christopher Dodd (D-Conn), on CNBC's "Kudlow & Company" today at 5:30 PM ET. All references must be sourced to CNBC.

In the interview, Dodd discusses Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the credit crunch, the housing crisis

HARWOOD: what grade do you give bernanke and paulson?

DODD: I'd give two grades. the grade on how they are reacting to this right now, i'd give bernanke pretty good grade. i think the decision last week to raise the rate at the discount window was the right thing to do. i think he's not overreacting here. pretty solid is my judgement. i'd have to say, this goes back, predates bernanke's tenure, the fed was asleep at the switch on these issues here. these regulators were given responsibility in 1994 on the hope up bill, specifically, not a suggestion but a requirement a mandate, they deal with the deception and fraud that was occuring in the mortgage markets. and didn't do so. only beginning this year did they start talking about issuing some advisory opinions on the stuff. and only lately are now talking about specific regulations. but that's all after the fact. this should have happened before. so on that score the fed gets very low marks.

HARWOOD: was congress also asleep at the switch?

DODD: well sure, in my view. should have been conducting the oversight., we now know, i just discovered in jan, when i became chmn of the cmte. that the fed staff was aware of the problem 3 1/2 years ago. to have known that and not taken action, to try and do something to at least hedge against the possibility of this occuring, i think is wrong.

HARWOOD: what about paulson?

DODD: i like hank paulson. known him for a long time when he was at gs. he's a solid guy and really knows the stuff treamendously well. i want hank paulson to be hank paulson. he knows the issue really well and knows what needs to be done here. my concern is you have an idealogically framework dealing with fannie and freddie at the white house. when i heard federal regulator deciding we weren't going to suggest raising the portfolio limit at fannie and freddie mac. what's the regulator saying that? where's the presidential leadership or the executive branch leadership. it seems that belongs there more than the regulators job. under the authority they have now i believe they can do this. i'm a little disappointed that they are not at least insisting that availability be out there. i'm worried about that frankly.

HARWOOD: concern of appearance of political pressure on the fed or treasury?

DODD: this is just fulfilling my responsibility as chmn of banking cmte. we are not in session during aug when this all came on us. i thought as part of monitoring this, a chance to sitdown and talk about this and what the chmn is thinking about whould be a responsible thing to do here. i don't want to be engaged here. i know language and words have a huge effect here. i'm not suggesting this meeting is going to involve some dramatic statements to be made. as chmn of this cmte fulfilling my responsibilty to be fully informed of what the fed is doing, how it is reacting and what their plans may be

HARWOOD: crisis or short-term phenomenon?

DODD: i hope its short term. it depends where you are sitting. if youve lost your home or are about to it's a crisis. that's whats going on with a lot of people. the numbers range from 1-3m of people that may lose their homes not to mention the implications of seizing up this market. a lot of other people suffer from it. not limited to u.s. spreading to europe and asia as we now know. could explode further. no question about it. clearly steps taken by fed last week. how the market has reacted are certainly encouraging to me. from that perspective this need not become as major of a crisis as it could. but i'll go back, we need to be stepping in. not only talking about what needs to be done to not allow this to happen again. or to deal with those out there that are making money off of this. but that homeowner that is sitting out there wondering if they are going to be able to stay in their home and what will happen to their mortgage rates. to them it's a crisis. this is the most important asset that most americans will ever have. if they lose that than this is a massive crisis to them.

HARWOOD: moral hazard arguement?

DODD: there are some people here who are speculating., buying 2-3 homes hoping the housing market is going to rise at unprecedented levels. that's one sector. i dont want to see anyone lose money. what i'm primarily concerned about is people who were talked into these adjustable rate mortgages. teasing them with the teaser rates rather than talking about full index rate. not talking about escrow accounts. lying about incomes poeple had. letting brokers be paid depending on how high interest rates were. having pre-payment penalties. that's unconsionable. that's unfair and its wrong. i'm deeply concerned about that person. i'm not bailing anybody out here. but keeping peole in their homes is very much in everyones best interest in this country. that is something that i think we ought to be looking at. and hopefully we will be. ways to see to it that it can be done. i'm confident, by the way, having met with a number of these people that there are things that can be done without a federal infusion of massive dollars that could happen so these peole could keep these homes.

HARWOOD: concerned about hedge funds, ct constituents?

DODD: things we need to do, liquidity issue here. seeing to it that we have regulations in place that this doesn't continue to happen. providing assistance to people that are there today. also looking at these other issues such as hedge funds to determine where these resources are going. how opaque is it. how much do the regulators actually know. so they have a better determination as to where things are headed. certainly things we need to be looking at. clearly many are located in ct something we are proud of not disappointed. these have been valuable wealth creators here. paid peoples pensions, colleges, retirements, endowments and other things have benefitted here. before we decide this is all bad we need to understand the value, the good that can be created here. need to know what is going on. certainly having a better view of that is something that i support.

HARWOOD: what does congress need to do?

DODD: brokers have to, this is almost an unregulated area. are they representing hte borrower or the lender. if you go to their website they talk about how the first thing they should do is convince the borrower that they're their mentor, their financial advisor. which is hardly the case when you consider they're being paid on how much of an interest rate, how high an interest rate they can convince the borrower agree to take. that's hardly being on the borrower's side in my view. so clearly the brokers we need to look at. secondly, a major issues area that's hardly been talked about and deserves a lot more attention is the credit rating agencies. the idea that credit rating agencies are being paid by the very people they are rating is fundamentally a problem to me. some people have suggested that as much as 60-70% of their revenues comes from entities they are rating. obviosuly they have made huge errors in declaring some of these to be aaa or such high quality that an investor would have no lack of confidence in making those investments. something has to be done about that. i'm deeply worried about allowing the credit rating agencies to continue operating the way that they are.

HARWOOD: same page as schumer?

DODD: i think you are probably talking about the portfolio increase at fannie and freddie. chuck is talking about some legislation and that is fine. i thikn we're in the middle of a crisis. how large or small is subject to some debate. i'm convinced right now the pres and regulators of fannie and freddie have the authority to do what needs to be done to raise those portfolio limits and to get that liquidity out there. you don't need a legislation from congress to do that. we maybe dealing with the gse legislation in the coming weeks, when we come back. but you don't need to wait for that in order for this to happen. i'm not opposed to looking at legislation, we will. but in the meantime something needs to be done immediately, in my view, with regard to liquidity at least to make that possibility available. and that can be done with existing law.

HARWOOD: criminal chargers for lenders?

DODD: certainly i do. i think some of these activities that wnet on were violation of basic principles of fairness. to watch some people on fixed incomes be drawn into these adjustable rate mortgages when they had very little obligations at all. getting them into second mortgages that basically pushed them out of their homes. let me mention one factor here, if you take a 1/8, which is the size of a sq block in an urban area and if one home in a fragile neighborhood is foreclosed the value of every other home will decline by $3000-$5000 immediately on the foreclosure on one property. there are ripple effects on what's happened here. those that have been engaging in these practices that under exisiting law, the law i mentioned in 1994, i think criminal charges certainly be somehting that us attorneyrs and others are looking at.

HARWOOD: taking advantage vs. opportunity for some that couldn't otherwise get it?

DODD: i'm a huge supporter of sub-prime lending. there's a very big difference between sub-prime lending and predatory lending. predatory lending is the kind we've been describing here. people have been going in and taking innocent people who are on fixed incomes in many cases and luring them into financial arragements they can never possibily beat. that is an action that deserves very strict penalites, in my view and punishments for those who engage in it. sub-prime lending, making it possible for people who don't necessarily have great assets but want to get into home ownership. and providing that opportunity realistically. telling them exactly what the fully indexed rate will be so they can understand that. having a clear idea what their incomes are like so they can manage those numbers. there's nothing that does more to stabilize a neighborhood, a community, nothing that creates greater wealth for someone than getting that american dream of being able to own your own home.. there's great value in doing what we can. that's why i'm such a storng supporter of modernizing the fha. they clearly would allow a different avenue for people to get cheaper more stable, reliable credit than just the sub-prime market. but sub-prime markets well managed and well done can make a huge difference for people. so i hope people don't think the words are interchangable. predatory and sub-prime. they are not at all.




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