Rescue Me

Paul Gigot: Coming up next "The Journal Editorial Report," world leaders gather in Washington to address the global financial panic as the Bush administration announces a retooling of its $700 billion rescue plan. U.S. Treasury Secretary Henry Paulson is here. And bailing out the Big Three. Detroit's auto makers are calling for help, and Democrats in Congress have a $50 billion answer. But will it cure what's ailing the U.S. car industry? "The Journal Editorial Report" begins right now.

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Gigot: Welcome to "The Journal Editorial Report." I'm Paul Gigot.

Twenty world leaders gathered today in Washington to review their progress toward calming the global financial crisis and to set a course toward preventing the next one. The meeting comes amid news that the Bush administration is revamping its own $700 billion rescue plan to put a greater focus on the struggling U.S. consumer.

U.S. Treasury Secretary Henry Paulson is, of course, the face of that effort, and he joins me now from Washington.

Mr. Secretary, welcome.

Paulson: Paul, good to be with you.

Gigot: Good to have you here. Let me ask you first about the G-20 meeting. Have you talked at all with the President-elect Barack Obama, given him any advice about whether or not to participate?

Paulson: Paul, I haven't.

Gigot: OK. Gordon Brown, the prime minister of Britain, has floated this idea. I know it's not going to come to anything this summit, but he's talked about this idea of a vast global regulator for financial institutions. What do you think of that idea?

Paulson: I think we need obviously to see regulatory coordination because we have a global marketplace. But I don't believe a one regulatory--one global regulator is practical.

Gigot: Why isn't it practical?

Paulson: Well, we have a good number of sovereign nations. In the EU, they don't even have one global regulator, or one EU regulator. But I think the principle, which is important here, is we have a global capital market system, and I think having common principles and seamless coordination is a very good idea.

Gigot: OK, well, we'll see how that evolves. Let's talk about the new financial rescue, the $700 billion financial rescue plan. It's been now, I think, six weeks or so since it's passed, yet the jobless rate keeps falling and the economy is, if anything, struggling a little more. What can you tell taxpayers that they've received for that $700 billion?

Paulson: What I can tell taxpayers they received is the financial system has been stabilized. We never promised that the--that this rescue package was going to solve all ills of the economy or the government could push a button and do that. But at the time we went to Congress, we were at the tipping point. Credit markets were frozen. Interbank markets were frozen. It was passed on Oct. 2. By the--10 days later, by the 14th, we had nine banks with--accounting for 55% of the deposits in the United States commit to take dollars. Ten days later, we had $115 billion out the door to those banks.

We're working very hard, and it's going to take us a good bit longer to get the rest of the money into the banking system. It's--as I said, the system is stabilized, but there's much more to do.

Gigot: So what you're saying is we stabilized, stopped the panic, prevented a real systemic collapse. But what about prices within the financial system? I'm thinking about interbank lending rates or, for that matter, mortgage rates, which really haven't fallen. Do you see any that chance that mortgage rates are going to fall?

Paulson: Paul, I'm not going to make a projection there, but what I will say is that sometime before we went to Congress, we stepped into the situation of Fannie Mae and Freddie Mac, that these were, as you know, two big institutions that had a very flawed regulatory regime, that there was a lot of confusion around the--what the government--whether the government was really on the hook or not. And of course we knew that we had a responsibility there, and we stepped into that situation and we stabilized it.

And as a result, what you've seen--what is an effective government guarantee of their obligations, is that while other credit rates have gone up, that mortgage rates have largely been insulated from what has happened here and have held relatively constant. And I think that's very positive.

Gigot: But are you disappointed that there hasn't been more mortgage lending opening up so far? Those mortgage markets, if anything, there's pretty tight credit limits being put by the banks on mortgage borrowers.

Paulson: Yeah, it's going to take a while. It's definitely going to take a while. I think the most effective thing we can do here is to have the banks be well-capitalized and have the banks lending. But when you're going through a period like this when the economy is turning down, banks are naturally going to be hesitant to lend. And so getting capital into the system and encouraging them to lend is going to make a meaningful difference here.

Gigot: All right, you said this week that you're going to make an adjustment in your rescue plan to no longer buy these troubled bank assets. I wonder what's changed, because those toxic assets on the balance sheets of banks are still a problem, aren't they?

Paulson: Yeah, they sure are, and this was a good idea when we conceived the plan, and it's still a good idea, but we need to change for the reasons I'm going to go through in a minute. But the plan was always about capital and illiquid assets. By buying illiquid assets, we free up the capital for the banks, and it would create a price discovery process. But by the time Congress had passed the law, it was pretty clear to all of us that the situation was more severe than we had anticipated. The facts had changed, and the best way to deal with this was to put capital into the banks. And then, I think that gives them more capability to dispose of these assets, write them down, and continue lending.

So given the magnitude of the problem we faced, and given the fact that we're dealing with a finite resource here, the best way to use this, these funds, to protect the taxpayer is to focus on capital. And so we announced that although we needed to wait to see how the first $250 billion program worked and reassess it, we thought the prudent thing to do, the necessary thing to do, was to hold back more funds so they'll be available for capital.

Gigot: All right. Now, we'll get into this a little bit more, right after this, with Treasury Secretary Henry Paulson.

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Gigot: We're back with Treasury Secretary Henry Paulson.

When you were talking about getting capital into the system this week, you talked about devoting some of those $700 billion worth of rescue money into consumer finance areas like auto loans and student loans and credit cards. But the details were a little sketchy. Are you talking about direct purchases through the Troubled Asset Relief Program of these kinds of loans?

Paulson: Yeah, let me explain the idea to you here. And again, this isn't a firm proposal. We were talking about an idea which we are working quickly to develop with the Federal Reserve. And here's the idea: In our economy, 40% of the consumer lending takes place outside of the banking system, takes place through securities. The AAA-rated securitizations for student loans, for auto loans, as you said, for credit cards--this market has ground to a halt. It's all but collapsed.

And so the concept here is a Federal Reserve liquidity pool, and the rescue plan would make a modest investment in that, which then could be levered many times over. And then investors, when they hold this paper, which is intermediate-term paper, could bring it to the liquidity fund and get nonrecourse term financing against it. And so this--

Gigot: Mr. Secretary, it sounds like you're saying the Treasury's going to provide some capital to--via the Fed, so the Fed doesn't have to make an allocation itself and maybe take losses.

Paulson: Well, the way this would work is the Fed can do what it legally can do, and the way this would work--and let me give you an example. If someone came, an investor came, let's say, with a AAA-rated student loan paper and came to the Fed facility and got nonrecourse financing at 80% of value there, then the first loss would be taken, obviously, by the investor if there was a loss, and the next loss by the rescue plan. But we believe that there's enough--there's enough in this, given the way the market is trading, so that if we put money in--taxpayer money into that facility, that the taxpayer will be protected and should actually make a bit of money because, right, now this paper--for instance, AAA-rated auto loans are trading at 850 basis points over Libor where there is a market for them.

Gigot: So you just can't get a market for them. OK.

Now let me ask you, I want to ask you about this long line of companies that are getting in line to be able to get a piece of this federal rescue, starting with the life insurers. What do you think of their request, and what's the systemic risk to the financial system if a life insurance company fails?

Paulson: Well, that is the right question to ask. Life insurance companies are lenders in the system, but what we're doing is we are having a plan that focuses--our plan focuses on banks and thrifts. And the reason it does is because of the systemic implications, No. 1; the need to get lending going, No. 2; and No. 3, we have federal regulators. And Treasury doesn't have capability, and I don't know anyone at the federal level that has capability to evaluate the companies and make the kinds of judgments that need to be made if you don't have a federal regulator.

So a number of companies are becoming bank holding companies. And when they do, their regulator can submit them to Treasury and then we will make a judgment and either fund them or not.

Gigot: But it sounds like you're skeptical of that idea.

Paulson: Well, I'm saying we're sure not focused on it today.

Gigot: All right. In terms of--you know the pressure that's coming from Capitol Hill for the auto makers to tap into this rescue fund, I know you say that there's not the authority for that right now in the original law. But if Congress passed it, changed the law, do you think that's good use of this money to help Detroit?

Paulson: Well, as I've said all along, that's not the intent. The intent of this package is not to be all things to all people. It's to deal with the financial system. We've got a big job ahead of us here. We moved quickly to stabilize it. There's much more to be done. That's where the focus should be. And what I've suggested, and I've respectfully suggested, we have this Department of Energy bill, which was passed by Congress, which has already set aside $25 billion for the auto industry, and perhaps that could be modified to deal with that problem.

Gigot: One of the issues here I think that some of us are worried about is how long the government is going to be shareholder in a lot of these institutions and the danger of politically directed credit. As you look at this into the next presidency, how long do you think the government should try to keep a stake in these things? Are we talking about one year, five years, 10 years, forever?

Paulson: Certainly not forever. Listen, no longer than is necessary. And we've structured this program--we've structured it to be not obtrusive. We've structured it so it won't crowd out private capital. We've taken preferred shares, and the warrants are in common that won't be voted. And we're hiring asset managers to manage the money. So this is about getting capital into banks to help the U.S. economy and stabilize the system. And this is anything but a program to come in and nationalize or have the government be there for a longer term. And it's very different than other programs you've seen described that have taken place in other countries around the world and some of the programs that have been designed in Europe.

Gigot: All right, Mr. Secretary. Thanks. We'll see what the next administration does.

When we come back, more on the Detroit rescue battle. Democrats want another $25 billion in emergency aid for U.S. auto makers, but will that cure what's ailing them? Our panel weighs in after the break.

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Gigot: Well, despite the Bush administration's objections, Democrats want some of that $700 billion in bailout money to go to U.S. auto makers. Congress has already approved $25 billion in loans for Detroit, and House Speaker Nancy Pelosi is pushing to send $25 billion more in exchange for a government ownership stake in the Big Three. Hearings on the plan are expected next week.

Shares of General Motors hit their lowest level since 1943 on Tuesday and some analysts believe the companies could run short of cash by January.

Joining the panel this week, Wall Street Journal columnist and deputy editor Dan Henninger, columnist Mary Anastasia O'Grady and Washington columnist Kim Strassel.

Kim, there's wariness on the part of the Bush administration. But the Democrats and Barack Obama seem intent on pushing this $50 billion idea. Is this going to happen, first of all, in this lame duck session?

Strassel: It looks increasingly less likely that it will. Remember, Nancy Pelosi and Harry Reid have some problems of their own. They have been struggling this week to decide if they actually want to do this auto vote, because they are worried that the White House is going to say, If you want to do any big legislation in this lame duck, we also want to you do some things that we want to do, like the Colombia trade deal. So this entire thing has been mixed up with a lot of other questions that are out there at the moment. By this week, you heard some Democrats backing away, claiming they didn't have enough Republican support to do this.

The answer is, it's just totally up in the air in the moment, but at the moment, the odds are betting there may not be a bill.

Gigot: But you have no doubt that it would happen next year if it doesn't happen this year?

Strassel: No. I think that that's entirely the case. Once the Democrats not only are running both the White House and Congress and with bigger majorities, they will step up and they will put this money to Detroit. It's a question of then or now.

Gigot: All right, Mary, this is my question. Congress has already passed $25 billion worth of loans for Detroit. Why isn't that enough?

O'Grady: Paul, this is supposed to be about saving jobs. And I hate to sound like hard-hearted Hannah here, but the dollars from Congress do nothing to restructure these companies, and that's basically what we have to do. I mean, General Motors, for example, had more than 40% of market share in 1985. Now it's sinking to the 20% range. And if a company like General Motors wants to survive, what it has to do is declare bankruptcy, restructure so that its size and its balance sheet are relative to what the market is asking for. That doesn't happen under this bailout plan. This is life support for another couple of months.

Henninger: And, of course, the bailout plan is going to come with all sorts of strings. They want--

Gigot: Like the first $25 billion did. It's only for green cars.

Henninger: Right, which is precisely what the companies don't need if they're going to reorganize. They need the freedom to reorganize their companies in a way that the market demands, not the way Washington demands. So it's a contradiction in terms the way this bailout has been designed.

Gigot: Mary, there's talk about a trade, as Kim suggested, between--Democrats get their bailout money for Detroit and the Bush administration would get votes on these free trade agreements. Is that, in your view, a fair trade politically? Is that worth it? Given the fact the bailout's probably going to happen next year anyway, so maybe let's get some free trade agreements this year?

O'Grady: It wouldn't be a bad thing if we could get not just Columbia but I think South Korea--

Gigot: South Korea?

O'Grady: --has to get done also. But the problem is that somebody in January or February or March next year is going to have to go out to the public again and say, You know what? All that money that we put into those companies? It's again gone. And I don't think anybody wants to be saddled with that responsibility, and that's one of the reasons why they're dancing around right now.

Gigot: Kim, I wonder about the danger here for Democrats of a political backlash. I keep hearing more and more anger about these bailouts and taxpayer money going to more and more companies. Is beginning to sink in in Congress at all?

Strassel: I think that sunk in back in September. That's why we haven't had a Detroit bailout yet. Remember, the Michigan delegation in Congress, it started pushing for a Detroit bailout all the way back when the financial crisis first started. And the Democrats--at the time, they had the option to put that in there, and they chose not to, because they were worried about voter unhappiness with that kind of thing--especially because, as Mary and Dan point out, this has a potential to be $25 billion or $50 billion worth of loans that we will never see again.

Gigot: Will the unions agree, Dan, briefly, to renegotiate contracts if they get just a check?

Henninger: I think it would be very difficult to get them to agree to that because they've got so much at stake here. I think they'd oppose an idea like that.

Gigot: All right, thank you all very much.

We have to take one more break. When we come back, our "Hits and Misses" of the week.

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Gigot: Winners and loses, picks and pans, "Hits and Misses." It's our way of calling attention to the best and the worst of the week.

Item one, Barack Obama's second foreign-policy test. Dan?

Henninger: Yeah, Paul, last week we introduced the Joe Biden prophecy watch. Of course, Biden prophesized that our enemies would test Barack Obama. This week, Iran stepped up to the plate by firing off a test missile, two-stage rocket which can easily reach Israel and maybe the southern tip of Europe. So last week, it was Russia putting missiles--said they put missiles up to the border of Poland. This week, Iran actually launched them. Welcome to the big leagues, Mr. President-elect.

Gigot: All right, Dan, thanks.

Next, the U.S. hasn't seen a new nuclear power plant come on line in more than a dozen years. But maybe that's about to change. Mary?

O'Grady: Scientists at the Los Alamos Laboratory in New Mexico announced that within five years, we're going to see mini-nuclear power plants, the size of a garden shed, available for sale to small communities. And these are going to be encased in concrete, buried in the ground, and able to power a community of 20,000 homes. And they've licensed a company to sell them already, and that company says it has 100 orders.

Gigot: All right. We'll see, Mary. Thanks.

Finally, some voting mischief in Minnesota. Kim?

Strassel: Yeah, well, we've got this close Senate recount in Minnesota, and voters are already getting a sense how the Democrat, Al Franken, operates. Put aside this whole week where there was some initial vote checking, and you had this odd circumstance where the Republican sitting senator, Norm Coleman, his lead went from 700 votes to 200 votes. We now are finding out that Mr. Franken's idea for this recount is not just to count the votes that were cast in this last election but have a do-over. His litigation team filed--they're asking now for absentee voter names so that they can try and get new ballots into the box. So keep your eyes on Minnesota.

Gigot: Hardball for Al Franken.

That's it for this week's edition of "The Journal Editorial Report." Thanks to my panel and to all of you for watching. I'm Paul Gigot. We hope to see you all right here next week.