Transcript: Paulson on Fannie, Freddie Bailout

Liesman: I'm here with Hank Paulson at the Treasury, and there's more than a few questions here for the Treasury Secretary. Thank you for joining us, sir.


Paulson: Steve, it is good to be with you.

Liesman: Do you really mean that?

Paulson: I mean it, yes.

Liesman: The first question people want to know is how much will this cost taxpayers and how do you go about counting that?

Paulson: Well, we obviously don't know that yet. To say to the taxpayers, if and when we put money in, the taxpayer is going to be protected and the government will be repaid before the shareholders get a penny, number one, and I think -- your question ultimately is going to be answered by how long will it take for housing prices to stabilize in our economy to comeback and the housing markets to come back. Of course, these things will ultimately happen and it may not take too long for them to happen.

I really believe this is an important step that will be helpful, because remember, the first thing we are doing is stabilizing the companies and they are going to be run to do what they do well, to provide mortgage financing for Americans throughout this country. I think a good vibrant mortgage market, availability of mortgage finance, is very important in ingredients to the housing recovery. You have heard me say before that the housing downturn is at the heart of the problems that our economy is facing right now. Until the bulk of the correction is behind us, we are going to continue to have stress and turmoil in our financial markets.

Liesman: Sorry, but I have to come back to this. There must be some analysis in your mind, is it in the tens of billions, in the hundreds of billions, how much are you prepared to pay?

Paulson: I don't -- there is no specific analysis. This was not -- we didn't sit there and figure this out with a calculator. This was about our financial markets, it was about confidence in the financial markets, confidence in our economy, and the validity of the mortgage finance.

Liesman: I think we have to talk about some of the charges out there about the politics relative to the timing. Some people say, hey, wait a second, this followed the Republican convention and it is very far from the election. Did that play a role in when you decided to move?

Paulson: Oh, absolutely, no role. Steve, we have been working around the clock for weeks. People say to me, you always do these things on the weekends. We have been working every weekend. The amount of work that has been done here by the Federal Reserve, the OCC, FHFA, my team here at Treasury, we have been analyzing data, looking at the situation, getting ready. And we moved as quickly as we could move and as was appropriate. If we could have moved quicker, we would have done that.

Liesman: What kind of pressure did you get, what kind of concern was there on behalf of foreign and central banks and how much did that play a role in what you eventually ended up doing?

Paulson: It was not the major driver, but there's no doubt that there's fragility in the capital markets. The situation was looking increasingly like the situation it looked in March. There was concern. As I said before, I think housing is at the heart of the problem, and these companies are so big and they are owned by investors all around the world. You are obviously going to get concerns. There was -- it was definitely concerning overseas, but there was concern in this country. I tell you, my phone is ringing the most from investors here. From the most in the country.

Liesman: There's some speculation that overseas buyers said we are not going to continue to buy into the markets and/or we are not holding the screws we already hold. Are we that close to a meltdown in the market?

Paulson: There was not anything quite like that. But overseas buyers had reduced the level of buying, some stopped buying, and there have been some modest selling, no doubt about that. This was, when you say what has, what is the event or what was the particular call? This was just obvious. There was grave concern that throughout this country and outside of this country, it was largely related to the fact that these companies are just too big. They are just really big.

Liesman: How did you get the boards to agree so apparently seamlessly without a fight? They came in and voted to agree do conservatorship?

Paulson: Steve, when the head of FHFA is meeting with the board and we have the secretary of the Treasury and the chairman of the Fed and we are explaining to them how important this is, that this goes beyond their individual situations. This is about our capital markets. This is about the economy. Clearly, the right thing to do. The boards consented. I want to step back a bit and say, as I said to them, when I talked with them, I said, I'm certainly not casting a finger of blame at you all. You didn't create the ambiguities around this charter or the structural flaws around your companies. This was created by Congress a long time ago. It was a system that shouldn't have existed. You are not responsible for the housing decline. And, to me, it's the housing correction, the housing decline, the structural issues with the GSEs that were the cause of this. And so as we went through this, I personally felt sorry for the people on the other side of the table, but they were a part of this historic event. It was a sad event for them and for many of us, but I think they recognized it was the right thing to do, just like we did.

Liesman: I talked to somebody who was in the meetings over the weekend, and the person suggested to me that it was a matter of you saying, look, not you, but the Treasury and the government are saying, look, your reputations are on the line here and they were not so much threatened as kind of told that if you guys don't agree to this, it is not going to look good upon you and the directors and the executives.

Paulson: Well, I don't think it is appropriate for me to get into the details of what is said in private meetings. What I will say is that these boards and CEOs did the right thing. They did the right thing for them and for the country.

Liesman: Let me ask you about some comments that have been made. On July 15, you said that oil executives at Fannie said the company was well capitalized. August 6th, Mr. Stein said the company was well capitalized.

Paulson: Let me say this, I never said the company was well-capitalized. What I said is the regulator said they are adequately capitalized and the market has concerns about that, because I had no basis to say it. I had never been inside. It was only after we had gone inside with the appropriate people and the appropriate teams that it was clear to me that the layer of capital was thin, and it was not as substantial as you would like. The statutory requirements for capital in these companies was set at a very low level, and what was counted as capital, what was defined to be capital, in many instances, in my judgment, was perfectly appropriate under the accounting standards, was not economic capital.

Liesman: When it came time to sort of figure out -- first of all, do you have a vision for how the companies should emerge from the process yet? Do you provide that to your successor?

Paulson: Steve, obviously, the first order of business is to make sure they are run very well and stabilize.

Then what I thought was the appropriate thing at this time was that heaven help us and our nation if we don't figure out what the right structure is going forward. I pointed to the conflicts and the structural flaws, and I said, there are various ways to fix this depending on what your viewpoint is about the appropriate role for the government in the housing policy. So this could be fixed with different roles for the government.

I also said that I would say some things about this in the future before I leave. I don't think that's appropriate now, because I don't think this is about that. This is not about long-term philosophies, this is about dealing with the immediate situation, but also teeing this up so that Congress and the future administration will be able to deal with it.

Now, when I say Congress and the future administration, it is not because I wouldn't like to deal with it myself, but this can't be dealt with in this period of time. And it is not going to be dealt with while this president is still in office and this Congress is still here.

What Are The Shares Worth?

Liesman: Markets want to know, Mr. Secretary, at this point, have we advanced the ball in terms of fixing this thing, or have all you done here is preserve the status quo such as the private entities, the entities are now able to guarantee mortgages?

Paulson: Let me just say to you, I think this action more than any other action I have seen done here has advanced the ball for those focusing on the structural issues, because I think it is quite clear to the vast majority of observers here that there are systemic risks. It is quite clear there are. With these companies in conservatorship, this is something that needs to be dealt with. There are a number of aspects of this transaction that will, I think, encourage future policymakers to address this problem. It just has to be addressed. I'm sure it will be addressed. This is an important step forward in addressing it.

Liesman: Does that include the fact that the government will now provide financing to the mortgage-backed security market?

Paulson: That is -- this in terms of the government buying mortgage-backed securities, that is a temporary measure and it is one, I think, that will be a sign of confidence, and I also believe that the government treasury buying mortgage-backed securities is not a difficult thing to do given the fact that we know these are going to be money good now, and given the spreads here, I think we can manage that in a way in which the taxpayer certainly won't lose any money and it should help the mortgage market be a very important part of what we are doing.

Liesman: Mr. Secretary, there are millions of shareholders of Fannie Mae and Freddie Mac both holding the common and preferred wondering, does the Secretary believe my shares have any money or any value at all right now? How do you respond to that?

Paulson: I can't respond to that, because that question can only be answered when we look to the future, and there are certainly very reasonably scenarios, very reasonably scenarios where the housing market recovers, the economy recovers, the situation works out over a time frame where there will be value in those shares. If there's value in those shares, no way the government will lose anything.

Liesman: But the government gets paid back first before anything is available for the common or the preferred?

Paulson: Absolutely. That's the way it should be.

Liesman: You stated before your philosophy on this: the common and the preferred as equity ought to bear the risk here. Of course, that's the way the system works. If you have the right to succeed, also with it, has to come the right to fail. I mean, for the government to come into a situation like this the way we have, the taxpayers have to come ahead of the shareholders. In your philosophy and thinking on this, the subordinate debt holders shouldn't bear the same risk?

Paulson: In my thinking on this, we decide to come in and came in below the subordinated debt holders. We thought that was important with what we were trying to do for the capital markets and for the housing market to come in at this level here.

Liesman: Last question here, Mr. Secretary, as you have said, there are a lot of commercial banks out there, private commercial banks, that own a lot of the preferred. Are you concerned about the effect on the banking system from what's happened now with the preferred?

Paulson: Well, there's a lot of work done on this by all of the banking regulators, and what they said, they could identify very few, a limited number of banks have owned enough Fannie or Freddie preferred, so it would make a significant difference.

No one knows for certain, because it is impossible to identify every bank that might hold this. So what the regulators have done is come together. I'm sure you have heard what's been said. They are all over this. Any bank that has Fannie or Freddie preferred and realized or unrealized losses were such that it could risk their status and they should come into their agency and the regulators will work with them to address the problem on a case-by-case basis. I think this is something that is manageable.

Liesman: At the end of the day, are we going to be happy we did this? Or is this something we are going to look back on later?

Paulson: This is not something I wanted to do. This is not something you are happy about, but I'm not going to second guess it because this was something that was necessary. It was so much better than the next best alternative that - as I've said all the way along, all I can do is play the hands I've been dealt and play them in a way I think is going to be in the best interest of the American people.

Liesman: Mr. Secretary, thank you for your time this morning.