here's a transcript for the 8-12-09 warren msnbc vid:
MSNBC: Are we out of the woods when it comes to toxic assets?
WARREN: No.
M: How bad is it, still?
Warren: Well, you remember last September, October when Secretary Paulson came to us and said I need $700 billion dollars to clean up this toxic asset problem, get these off the books of the banks or else the economy will be gone by next week. By the time Congress got it passed and he got ready to spend the money, he changed his mind and he said,
""No, we're gonna put money directly into the banks. Now, some of that money was used to write down some of the toxic assets. But, by and large the toxic assets that brought us to this point are still on the books of the banks.
m: So, where did the $700 billion go?
w: Well, 700 billion, the first 350 billion of it, which is what Secretary Paulson spent, went directly into the banks for stocks and warrents, direct infusion of cash into the banks. I think we talked about this, this was the 'don't ask don't tell money. Remember? We didn't ask how they were going to spent it and they didn't tell how they were going to spend it. The second 350 is the part that Secretary Geithner is holding onto and he's doing the sort-of two dollar bets
all over the table in Vegas. I hate to say that, with that many billion but the point is he spread it out. He put so much into home mortgages, some into different kinds of programs that he is trying to do. Now, what we have is a program called PPIP. I know, someone really needs to do the acronyms. But, it's the Public Private Investment Program, so PPIP. And this is one where they are trying to jump start this market to get some private money in, so they'll buy the assets off the banks.
m: It's never gotten off the ground, has it?
w: Nope. And here's the problem. They're getting ready to do the launch but they've skinnied up what they are trying to do. And they are going to try to buy the securitized assets. This creates a different kind of problem. The securitized assets, you remember, this is where they sliced them and diced them, those are only held by big banks. The intermediate sized banks and smaller banks, they also have lots of toxic assets. But, they hold them as, what are known as, hold lines. And so here's the Treasury putting this program together: A, it's
modest and B, it's aimed only at the big boys.
m: Are you saying that if they mark to market and if these assets were priced at what they are really worth now, these banks would still be under water?
w: You know, this is the problem. What has left the assets on the banks, and you put your finger right on it, is that back
when you had to mark them to market, that if the market says it's worth $100, you've got to carry it on your books at $100, once the folks changed the accounting rules, which is what happened over the last few months and they said, Well you can use other forms, there are problems with mark to market. That means you can carry them on your books at a higher level than the market would treat them and now the problem is the banks say, in effect, Why do I want to sell them? Because if I sell them, I can't sell them at that value. I'm gonna have to sell them down at the lower market value. That means I'll have to recognize the loss. Recognize enough losses and...
m: We're lying to ourselves.
w: I have to say, one of the things we push for in the report, once again, everytime we talk about transparency. If we don't have bookkeeping that everyone can believe in, then we can't get...[unclear].
m: People have talked, we've had this first hit and then the market goes back up and the second one is coming. An awful lot of these great big banks are under water. If you priced their assets at what they are worth, you could have a second big hit here, couldn't you?
w: You could have real trouble. And I'm gonna now make it a little bit worse. And that is, in addition to what we've got with the toxic assets that we've identified, which are all the home mortgages that are not paying off, we've got a real problem coming with commercial mortgages. Commercial mortgages come up for maturity a little later. They weren't on the short resets that the home mortgages were. So, we're looking at 2010, 2011, 2012. And the estimates out of folks like Deutsch Bank are that we're talking about potentially 50 to 60%
default rates on these mortgages. Now this is a very serious problem. And, once again, one that's going to be concentrated in the intermediate and smaller banks because they hold a lot of these commercials.
m: A breath of fresh air.
m: On the financial regulatory reforms moving around the hill right now: A. What do you see as the prospects of anything getting passed before the end of the year? and B. The Administration has put forth, or the Congress, the equivalence of a 911 commission. A commission to look at the roots of the economic and financial crisis, try to go deep and understand how we got into this. Is the commission's report due in december 2010? All this activity on the hill, providing financial regulatory reform, it seems like they are going to try to pass a lot of stuff. And yet we're gonna get the answers to the question of how we got into the mess in the first place a year after the reforms are passed. It seems the sequencing here is a little backwards.
w: Well, I'm not sure that I agree that the sequence is backwards. You know, look, I'm an academic. I have to do all the research. And believe me, I could spend an entire career doing the research, right? We know how to stretch that out. But the reality is that we're trying to rebuild this economy. And if the idea behind trying to rebuild the economy is, Let's use the bad practices that we've been using for the past 5 years and see if we get a little bubble going, and yeah, let's rebuild the bomb. I have to say that much of what is wrong
and needs to be fixed is not rocket science. Much of it we can tell needs some clearer rules and some clearer curbs on this road. And I think we are heading in that direction tomorrow is the right thing to do.
m: ...You've been looking at this for almost a year, was Paulson right? If Congress didn't write that $700 billion check, would the banks have collapsed, would our economy gone into a death spiral? Would we have never recovered?...
w: I'll start with a plug for the industry I work in. There'll be about a million PhD dissertations written on that over the next generation.
m:...What's your gut right now?
w: I have to say that I think there would have been some real pain. There are businesses that are alive today that would have been wiped-out, some large financial institutions. I'm just not convinced that we would have gone into a death spiral.
m: Presented with the facts he knew at that time, do you think it was the right call?
w: The question about whether or not the world-as-we-know-it has ended depends on what you think is the world-as-we-know-it. If you think the world-as-we-know-it is a handful of huge financial institutions, the dinosaurs that ruled the earth, then you're right, they're not going to exist without huge infusions of government money. On the other hand, if what you really believe is our economy and our world is 115 million Americans and households that are out there, jobs, then you start to see it very differently. If the dinosaurs are
gone there's still a lot of stuff to be done. There are real policy choices. |
