Hank Paulson and Ben Bernanke (and Chris Cox and James Lockhart, but do you think anybody really cares what they say?) are guests of the Senate Banking Committee this morning.
Paulson’s opening statement is here. Bernanke’s is here. They contain nothing newsworthy. Committee Chairman Chris Dodd and ranking Republican Dick Shelby are being feistier in their opening remarks (which don’t appear to be available online yet). Shelby, who is speaking as I write, is reading back all sorts of embarrassing past quotes from regulators reassuring Congress about the soundness of the financial system. And he says Treasury’s $700 billion plan “merely codifies Secretary Paulson’s ad hoc approach.”
Anyway, this rhetoric is all for the viewers at home. What will be interesting to see is if the Q&A gives us any hint as to what kind of compromise we’re headed for. So I’ll keep updating this post as the hearing proceeds.
Update: And now it’s over. My sense: something is gonna pass, at least in the Senate. It’s going to include a lot of stuff not in the bare-bones Treasury plan, but it won’t include any kind of big-time equity investment in the financial system by Treasury. Both Paulson and Bernanke were pretty strongly opposed to that. They said you take equity stakes when you save institutions on the brink of failure, and the idea here is to buy junk from reasonably healthy institutions too. If they insisted on getting warrants to buy stock in every bank and other financial firm they bought securities from, both argued, most of the industry wouldn’t participate. And there’s lots of other stuff, about auctions and oversight and shared outrage, after the break.
2:22 Sorry, missed a few minutes. Was on the phone. They’ve apparently been “filibustering for Schumer”–that is, asking silly questions in hopes that the absent Senator Chuck will return and use his allotted time to ask something ineffably wise. But Hank says he’s really got to go. Dodd adjourns it! Our long national nightmare is over! Until tomorrow, when the House Financial Services Committee meets to ask the same danged questions.
2:03 Jon Tester wants to know if all this spending might cause investors to get worried about the soundness of Treasuries, thus sending interest rates higher. Bernanke: “I don’t think so but I don’t know how the rating agency does its analysis.”
2:00 You miss a lot watching on TV. Here’s Jay Newton-Small’s account of Bunning’s exchange with Paulson on his pre-Treasury career. Note: There’s a crowd of Code Pink antiwar campaigners at the meeting):
JB: How long were you ceo of Goldman Sachs?
Audience: Laughter, applause from Code Pink
Code Pink woman: And what’s your net worth?
JB: I don’t need help from the audience, I can ask the questions on my own.
1:57 Daniel Akaka wants to know how this fits with the Fed’s twin mandate of striving toward full employment and price stability. Bernanke: “Without financial stability we’re not going to have full unemployment and price stability.” Also, and I found this interesting: “The Federal Reserve would like to get out of dealing with these crises, for which there’s no broader authority or broader support, and get back to monetary policy.”
1:36 Evan Bayh is back on the question of the equity stake. Paulson: “If we have to have companies grant equity stakes … that would render this ineffective.” When an institution is on the brink of failure, Paulson says they’ve got a good record of getting taxpayers a stake (they didn’t with Bear Stearns, but have at Frannie and AIG). “I think you’ll see us continue to do that,” he says. “But we want a broad array of institutions to participate.” So he’s saying they expect more rescues of individual institutions, even with this $700 billion securities-buying plan. I guess at this point most of them will be banks and thrifts, and at least we’ve got a procedure for dealing with them. But it does make clear that, while $700 billion probably overstates the actual cost of this particular program, there may still be hundreds of billions more of other bailout spending outside of it.
1:29 Justin here. Yeah, I went off to talk to some advertisers about what a 24/7 brand TIME is. I’m not sure we’re really 24/7 enough to handle much more committee-hearing liveblogging. Jim Bunning is talking and talking. He says he’s “frightful almost to the point of panic” because Paulson will leave office in January. Why’s he so sure Paulson’s gonna leave office in January? Couldn’t we just include a provision in the bill making him Treasury Secretary for Life?
Bunning has another question, and while I’m no big fan of the guy it’s a pretty good one: What if $700 billion isn’t enough? Bernanke’s confidence-inpspiring response: “I can’t predict the future and I’ve been wrong before.” Buuut, $700 billion is a whole lot, he goes on. It may turn out to be more than they need.
1:24 Justin is back! I’m passing the ball back to him. I’m a little tipsy, anyway, from having a shot every time Paulson says “I share your frustration” or “I share your outrage.” This has been Barbara Kiviat, reporting for Justin Fox on The Curious Capitalist. Over and out.
1:18 Senator Casey asks why not use this as an opportunity to help people facing foreclosure, to expand the Help for Homeowners provision in Congress’s July housing legislation. I find it interesting that Congress doesn’t want to hand over $700 billion without first seeing if the whole auction thing works, yet Casey suggests expanding an FHA program that doesn’t even go into effect until Oct. 1.
1:15 A Senator–I’m not sure which one, sorry–asks Bernanke if this is the best idea he’s got. I will refrain from snark. Bernanke says yes, the only other model they’ve got is the “failed bank model” (e.g., the S&Ls) and that doesn’t apply here. Bernanke says, “This is our best shot,” and Paulson rings in, “Not only is it our best shot, we’re going to make it work.” He says it with a broad smile and laugh, and I wonder if he’s slept at all the past two weeks.
1:11 Another oversight question. Paulson repeats: “I welcome oversight.” He didn’t include an outline for it in the 3-page summary he sent to Congress because he thought it would be presumptuous to tell Congressmen how to do their jobs.
1:05 Bernanke says he’s received emails from some of the world’s leading auction experts saying we wan’t to come work with you on this. He asks that Congress not impose any limits on how they set it up.
1:00 Senator Brown says he doesn’t think he’s gotten one call yet that supports this proposal. Middle-class people, turns out, don’t like that those people on Wall Street get paid so dang much. He asks: “Do you think Wall Street owes the American people an apology?” (Professor) Bernanke responds: “Wall Street itself is an abstraction. There were many people who made mistakes”–he includes regulators among them–“and we need to figure out what those were and make sure they don’t happen again.” Paulson, again, shares the outrage. A lot of blame to go around he says.
12:53 A question about what the Treasury did in terms of guaranteeing money market funds, and how they had the authority to do it. Paulson says that some money left money market funds, and there was great concern about this–kind of an understatement, but moving on… Paulson says the Treasury has a stabilization fund, and after getting legal opinions, they decided they could on an emergency basis guarantee all money market funds. They are working out the fee that institutions have to pay to participate. The emergency action is in place for one year, and he doesn’t think it needs to be codified in law, because he doesn’t think it needs to be done permantly.
12:50 Paulson reiterates: The taxpayer is already on the hook. He can’t quantify the risk, as much as some Senator–who is that, anyway?–wants him to. Bernanke underscores that these aren’t expenditures, these are investments, but no, he can’t put a number to how much money we should expect to be recouped when the assets are ultimately resold.
12:48 And if you wind up with a value you don’t think is legitimate? Bernanke says that’s one reason we need to include insitutions that aren’t already in trouble. To get a robust reading on what the “real” price is.
12:46 More questions about how the auction is supposed to work. Bernanke draws an analogy to how a painting is sold at Sotheby’s: “You don’t know what the painting is worth until the auction is over.” Um, I’m not sure that’s the explanation for these Senators to take back to the Heartland.
12:41 Dodd asks if CDS regulation should be worked into the current proposal. Paulson: “You can’t deal with this immediately. This is a huge market, and it’s built up over a huge period of time.” And it’s been incredibly useful in preventing companies from failing, he points out: “They are really valuale tools.” Then he sends a shout-out to Tim Geithner at the New York Fed for how he and his staff have been working on the CDS issue. Cox says that you could give a government agency regulatory oversight without jumping in and exercising it right away.
12:37 Senator Dole asks about CDSs. Paulson says it’s not just as simple as saying, Let’s regulate it. He says the New York Fed has been making huge in-roads, and they’ve been focusing on it for a long time. Bernanke says the Fed has been “extremely active” working with participants to increase transparency, develop protocols for what happens when there are problems, and move toward a central clearninghouse. “We’re working on that,” says Bernanke. “It’s part of a broader plan to try to make the system more resilient… We understand your concern, and we’ve been working on making that system better.”
12:34 Dodd asks, if along the way, you discover something that would work better, say an equity infusion, you’ll pursue it? Paulson says he couldn’t have said it better himself, absolutely they’ll learn from what they do and adjust as necessary: “I did not want to find myself in this position, being here, asking for these authorities, but under the circumstances, I think they’re better than the alternative. As we learn, if there are better ways of doing things, our whole objective will be to minimize the ultimate cost to the taxpayer.”
12:31 Lockhart gets a question! What are his thoughts on an inspector general for oversight? Lockhart says great, and then we start going down the line. Cox says yep. Bernanke says they’re effective. Paulson says sounds good, but they can’t design it here today. That was a really useful question.
12:27 Paulson says they want the “best and brightest” working on this program. Good news for all those kids on Wall Street losing their jobs?
12:23 Senator Hagel wants to know about oversight. Paulson likes the question: “We need an oversight board. We need and we want it. The way I envision this working is with great transparency so that the board knows what we’re doing, we can explain this to the America people, as complicated as it is.” Paulson says they imagine doing a small tranche to begin, with simply structured securities–plain old MBSs. Then they can go out and explain to the American people what they’ve done. He stresses to the American taxpyer that this is not an expenditure, but an investment.
12:16 Schumer asks if we could do $150 billion of this at first, see if it works, and then come back in January and maybe devote more resources, instead of the entire $700 at one shot. Paulson says of course they plan to do this in tranches, but they can’t wait around until January to see if they need more money. Schumer repeats: “Could you live with less?” Paulson says “It would be a grave mistake. What this is about is market confidence and having the tools to do the job.” Schumer says he’d like Paulson to think about it. “It’s a huge sum of money, and the confidence of the market will be determined by how well it works initially, not how much money you have in your pocket.” Paulson repeats: “I don’t like to be in ths position asking for things. It’s a sad story, but the American taxpayer is already on the hook. This is not about big financial institutions, every American employer deends on moeny flowing through our financial system not only to create new jobs but to sustain existing ones.”
12:12 Heya, it’s Barbara, sitting in for Justin for the next few minutes. Senator Schumer wants to know if we should have an FDIC-style fund for the entire financial system. Financial systems would pay a fee to participate. Paulson says he’d be open to it. Bernanke says “potentially yes” he’d be open to it, but it wouldn’t be big enoguh to address the current problem.
12:07 Jack Reed brings up the big idea of taking an equity stake. Why shouldn’t the government get a stake in the institutions it’s helping out here? Retorts Bernanke: “If we’re dealing with going concerns, we don’t want to do anything that will drive their share price down to zero.”
Says Paulson: “RTC was about failure. Putting capital into institutions is about failure. This is about success.” He does say that in certain cases where institutions are in trouble Treasury might want to take an equity stake. But in general he wants healthy institutions to want to participate, and he doesn’t think they’ll want to dilute their shareholders. Reed mutters something along the lines of, “Yeah, but that also translates to helping people who don’t need help.”
12:00 Bob Bennett wanted an explanation of how this whole auction process will work. I missed some of Paulson’s explanation, but basically he said there are lots of different ways, and they’ll get a lotta experts together and come up with solutions, maybe different ones for different asset classes. Which is why he needs all that flexibility and leeway. Bennett then pinpointed the core issue: If Treasury pays current fire-sale market prices for the assets it won’t help the banking system all that much, but if it pays anything more than how does it know it’s not overpaying.
11:49 Tim Johnson wants to know what kind of punitive actions are in store for those naughty bankers. Paulson says that when the feds take over a failed institution, they’re mighty punitive. And there’s lots of regulatory reform needed later. But focusing too much on regulation and compensation and all that now will slow things down too much. Paulson adds, “When you ask about taxpayers being on the hook: Guess what, they’re already on the hook.”
11:43 Paulson’s mantra of the day: “I share your frustration.”
11:41 Now we’ve gotten to the heart of the matter. Paulson: “Some said we should just stick capital in the banks, take preferred stock in the banks. That’s what you do when you have failures.” Treasury had decided, Paulson says, that it makes more sense to intervene using “market measures” to prevent failures. “As we looked at this and thought about this, we ultimately said that until the biggest part of the housing crisis is over there’s no way you can have a stable financial system.”
Bernanke: “The situation we’re dealing with now is unique and new. The firm’s we’re dealing with now, they’re not necessarily failing. They’re contracting, they’re leveraging they’re pulling back. So the methods involved in resolving failed institutions in other situations are not really appropriate.”
11:34 Bernanke says this bailout fund could be used to purchase second liens. It’s the Mark Zandi plan (pdf)! (Zandi, the chief economist at Moody’s Economy.com, thinks second mortgages are at the heart of the current foreclosure mess.)
11:30 Dodd asks Bernanke why now, why $700 billion. Bernanke: “Financial markets are currently in a quite fragile condition, and without the plan they’d get much worse. Even if things don’t get worse, this will be a major drag on the U.S. economy. The amounts involved, are intended to be enough.” Bernanke says that “most, maybe all” of the $700 billion will eventually be recovered.
Then Dodd asks what happens to regular folks–not Wall Streeters–without the bailout? Bernanke: “I was a college professor. I’ve never worked on Wall Street.” His worry is rising unemployment, economic trouble. “This is a precondition for a strong, healthy recovery for the economy.”
11:14 SEC Chairman Chris Cox is sticking to his text. But when he’s done, Dodd chides him for turning it in only 20 minutes before the hearing started. The Federal Housing Finance Authority’s James Lockhart is sticking to his text too.
11:10 Bernanke throws out his prepared statement and gives an economics lesson. “Why are financial markets not working?” he asks. It’s because there are lots of mortgage securities out there with a real fire-sale price and a theoretical hold-to-maturity price. If banks value all those assets at the fire-sale price, they’ll be more or less insolvent. What the Treasury plan would do would be to establish “reasonable hold-to-maturity prices” for mortgage assets.
11:04 Aha! Jay reports that Chris Dodd’s warning that he would clear the room (mentioned below) was in response to audience applause after unlikely populist Mike Enzi said Congress should act to help “Main Street, not because the federal government is being held hostage by Wall Street.”
Another bit of improv from Paulson: “If any of you thought we thought we didn’t need oversight …. I believe we need oversight.”
10:58 The committee members have finished their opening statements! A summary: We know we’ve got to do something, and we’re gonna do something. But we’ve got to protect taxpayers, help Main Street, and make sure the bad deeds of dastardly financiers don’t go entirely unpunished. That takes care of pretty much everybody but Liddy Dole and Mel Martinez, whose message was: It’s all Fannie’s and Freddie’s fault.
Now Paulson is talking. A little improv not in the prepared text: “I share your frustrations. I feel those frustrations.” Also says things would be even worse now if Congress hadn’t given him permission to take over Fannie and Freddie. He’s probably right about that.
10:48 Now dead and endangered animals have become a theme. Evan Bayh describes what he thinks things will look like in the Banking Committee hearing room a year or two from now: “All the interests will circle this place, like hungry birds looking at carrion.” Bob Corker says Treasury and the Fed are gripped by a “deer in the headlights mentality.” And we’re still not done with the opening statements!
10:40 Jay Newton-Small reports from on-scene that “Bernanke and Paulson both arrived equipped only with thin folders (in Paulson’s case literally a manila file) while Cox and Lockhart came loaded down with thick binders.” This seems to be a pretty good representation of the power relationships. In fact, maybe Cox and Lockhart were actually carrying Paulson’s and Bernanke’s binders.
10:31 We’ve been going for an hour, and it’s still the danged committee members making their opening statements. Liddy Dole claims that if Congress had regulated Fannie and Freddie better, none of this would have happened. I’m dubious.
10:15 Fireballer Jim Bunning: “We could probably hold this hearing for a week and still have more to talk about.” Aaaaaaarghhh!
10:10 Chuck Schumer is talking now. “I want to reassure markets … that we will not be dilatory,” he says. By now it’s getting to be pretty clear from the opening statements that these guys are all (except maybe Shelby, who was ornery enough to vote against Glass-Steagall repeal in 1999) going to support the legislation. Just not the Treasury version, which basically amounted to “Give us $700 billion, and we’ll call you later.” I don’t think Paulson ever expected them to go for that. He just wanted to start with it as a negotiating position.
10:05 Wyoming Republican Mike Enzi’s says the plan will cost each and every American man, woman and child $2,300. Paulson seems to shake his head. But maybe he’s just got something in his ear. Oh, and Enzi says he wants taxpayers to get an equity stake. And Dodd suddenly threatens to clear the room. “There will be no outbreaks, this is a serious hearing.” By the way, we’re still on the opening statements from the members of the committee. We haven’t even gotten to Hank and Ben yet. Maybe I should go get some work done and come back later.
9:58 Utah’s Bob Bennett says we’ll always have bubbles and crashes. And thanks to the pre-Senate entrepreneurial successes of Bob Bennett, we’ll always have Franklin Covey planning products.