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Paulson, Bernanke testify, get grilled

From NBC's Wendy Jones
Barney Frank
's House Financial Services Committee heard today from three panels of witnesses on the Emergency Economic Stabilization Act of 2008. The economy's big guns were on the first panel: Treasury Secretary Henry Paulson, Federal Reserve Chair Ben Bernanke and FDIC Chair Sheila Bair. As usual, Frank was irascible, but kept his members within their allotted five minutes.

At the end of almost three hours, Bernanke assured the representatives that the "bailout" was "not a failure of capitalism...it's a problem of execution. Historically, in other countries, the failure of the financial system can bring down an otherwise strong economy. ...This is not an indictment of the broad market system."

Frank's focus was on the surprising evolution of the bailout plan.

"When the program was passed, very specific language was included for mortgage foreclosure diminution as one of the purposes of the bill," Frank said, adding, "The fundamental policy issue is our disappointment that funds from the $700 billion are not being used to support mortgage reduction... The need to use TARP funds as the bill contemplates is critical."

Paulson's answer to this, and similar questions: "Our objective in asking for a rescue package was to stabilize a system on the verge of collapse ... and then get lending again. ... By the time this legislation had cleared Congress the global crisis was so severe that powerful action was necessary ... our response was a program to purchase equity in banks. ...This action helped us to stabilize the financial system."

He reasoned that "stronger capitalization encourages lending. ...We expect banks to increase lending over time.

There were some testy exchanges. At one point, Paulson talked about Treasury's intent in coming to Congress; Frank shot back, "You are talking about your intent ... our intent is also relevant ... I don't accept other actions to not do what is in the TARP."

And California's Brad Sherman (Harvard Law) dryly noted, "[There has been] earlier discussion of the intent of the Secretary of the Treasury and the intent of members of Congress being balanced in interpreting this law ... I want to point out that under the Constitution, Congress writes the law and legislative intent is the only intent that should govern the construction of a statute."

Paul Kanjorski (D-PA) urged the secretary to be more "forthcoming," and to avoid more "180-degree turnarounds."

Paulson's response: "The intent of the TARP was to stabilize the system and prevent its collapse. ...I said I believed that turning the corner meant we had stabilized and prevented a collapse ... I said we had a lot of work ahead of us. ...The TARP is aimed at the financial system ... in terms of autos, I have said it would not be a good thing."

Paulson suggested that Congress modify the bill authorizing $25 billion for DOE.

But not all the monies allocated under TARP will be spent: as Paulson put it, "We have determined that the prudent course is to preserve the remaining funds in the TARP for this and the next Administration."

California's Maxine Waters took the secretary over the coals: "I come here troubled by the direction Mr. Paulson has taken ... the purchase of toxic assets was at the center of this program. ...The fact is that you, Mr. Paulson, took it upon yourself to ignore the direction this Congress has given you."

There was a suggestion of betrayal, as she said, "I want you to know that I and others worked hard to pass this. ...I was looked at with suspicion by the Black Caucus. ...I was asked if the homeowners would be helped. ...I worked [hard] to sell this program to those who were suspicious."

A similar tack was taken by New York's Nydia Velazquez: "I hope you understand the pain of the homeowner who is losing his home. It is not enough to say to the banks 'Here is money, and I trust you.' They are not lending."

Waters denounced HOPE Now as "a failure" with inexperienced staff, and pointed to the FDIC's Inde Mac program as the way to go. (Chairman Bair was then given a chunk of time to detail the program, which has modified 30,000 mortgages out of 40,000 which were delinquent.)

Gary Ackerman (D-NY) was another who sounded a note of betrayal: "You came to us with a plan ... and made a strong case for over $700 billion ... based on a particular premise. ...We listened and asked questions and, in turn, were asked questions by our constituents. ...We sold them the plan ... suddenly we woke up to find that the $700 billion was to be used for a different plan. ...You seem to be flying a $700 billion-plane by the seat of your pants."

Not mincing words, Ackerman added, "This seems to be the second-largest bait and switch ... second only to the arguments used to invade Iraq."

Steven LaTourette (R-OH) grilled the panel about Ohio's National City Bank and its takeover by PNC. His charge was that National City had not been permitted to apply for TARP money.

Without characterizing either bank, Paulson said, "I will make the general point ... if a bank in distress is acquired by a healthy bank, it's better for everyone ... This program is not to be used to prop up banks that might fail."

Paulson explained that neither bank had submitted an application, but under pressure, agreed to talk to OCC's John Dugan more.

Today's second panel was to consist of Steven Bartlett, Edward Yingling, Cynthia Blankenship and Cameron Findlay; the third of professors Alan Blinder and Martin Feldstein.