INTERVIEW TRANSCRIPT

C-SPAN’S “NEWSMAKERS”

Guest: Richard Shelby, Housing and Urban Affairs Committee

Reporters: Ed Andrews, New York Times & Damian Paletta, Wall Street Journal

Moderator: C-SPAN

TAPE DATE: Thursday, September 11, 2008

AIR DATE/TIME: SUNDAY, September 14, 2008 at 10 a.m. and 6 p.m. ET

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PETER SLEN, HOST, C-SPAN’S “NEWSMAKERS”: This is C-SPAN's Newsmakers program and our topic this week, “The Federal Takeover of Fannie Mae and Freddie Mac.” Senator Richard Shelby is the top Republican on the Senate Banking Committee and he is our guest this week. Our reporters panel, Ed Andrews of the New York Times and Damian Paletta, of the Wall Street Journal.

Senator, before we get started with our reporters, if you could, explain what, if any, is the Congressional role in the proposed Federal takeover of Fannie Mae and Freddie Mac and whether or not it can be stopped and whether Congress should have a bigger role.

RICHARD SHELBY, BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE: Well, I wouldn't want to stop it. As a matter of fact, I predicted that if we did not have a strong regulator and shore up the capital of the GSE's that what has happened, would happen.

I wish it hadn't happened but we probably could've prevented this four years ago but where we are today I don't believe that we would want to prevent the takeover, the conservatorship. I think that would be folly.

What we – our role would be now, as I would envision it, is one of oversight. To see what the conservatorship does, how they do it and how long – what's the next step. It might be the next Administration.

SLEN: What do you expect to hear from your hearing next Tuesday?

SHELBY: That's a good question. We don't really know, yet but I would assume that it would be similar – met a similar message to what we heard, in the last few weeks, dealing with the Treasury and so forth. That they looked at the books. They had an objective look, from someone not with Goldman Sachs, Paulson's firm and found that capital was just not there.

That the firms were in worse shape than they thought they were. And the debacle happened. I hate that it happened but this model doesn't work. And it doesn't work because its a hybrid model. The implicit guarantee of the Federal Government, now explicit and private ownership.

If we had grown it and built the capital base on it, it would probably still be viable to some extent but I hope we will not go down that road again. I hope, at the end of day and we don't know when that will be or what administration will be in place but that we will downsize these entities. And spin them off.

I don't believe that the government should be doing all of this. We do have a housing presence in FHA but there are other ways. You know I like the securitization. I think they've done some good things with securitization but you know these firms were abused, big time, by the management, as you well know.

The accounting practices, which were fraudulent, to say the least.

DAMIAN PALETTA, REPORTER, “WALL STREET JOURNAL”: Senator, first with Bear Stearns in March and now with Fannie Mae and Freddie Mac, taxpayers are probably saying what's next? Are we on a slippery slope here?

SHELBY: Absolutely. That's a good term, slippery slope. We're on a financial slippery slope. This is the biggest challenge.

I've been here – this is my 30th year, in the House and the Senate, together, in Washington and I've never seen anything like this, as far as, the challenges to our whole banking financial system that has occurred in the last – say, brought to light, in the last two years. And I think we have not seen the bottom of it yet.

ED ANDREWS, ECONOMICS REPORTER, “NEW YORK TIMES”: Senator, you are correct that you and the Administration, as well, were warning for a long time that the basic structure of Fannie Mae and Freddie Mac was dangerous. That they were piling on too much risk. But its also true, isn't it that the fundamental disruptions, in the market, were created from the private sector side and in a sense, Fannie and Freddie were blindsided by the hole blown into the housing market by all of the subprime lending.

So, my question is, do you – have you got a strong opinion? Do you think it will be necessary to impose much tougher restraints on the kinds of practices that led up to the crisis we have now?

SHELBY: Well, I'll tell you what, I don't know who came up with the subprime securitization and the wraps that made them investment grade. Somebody with a lot of imagination did but firms have paid dearly for it. The taxpayers paid dearly for it.

Fannie and Freddie, they were involved in some of that too. They've paid dearly for it. But you know looking back, it looks to me like that someone, somebody should've known – regulators should've know what subprime problems and risk were.

We you know in the oversight committee on banking, Senator Dodd and I and before that when I was Chairman, Senator Sarbanes, we didn't know that. We were never told that. There was no inkling as to that but somebody that knew a lot about high finance should've known that there was great risk there. That these were not mortgages they were packaging that were like the mortgages of old that very few ever defaulted.

SLEN: Next question.

PALETTA: Senator, could you tell us a little bit, what are your expectations of the taxpayer exposure are here with this Fannie and Freddie conservatorship?

SHELBY: Well, I think that's a central question that we all are concerned with, what is the cost to the taxpayer? We don't know yet. Up until now, there hadn't been any real cost but I fear that there will be.

I sat through the debacle, the fiasco of the thrift industry. A lot of you probably covered that on the banking community. I think this is much larger and potentially, exposure to the taxpayer. Some people say $100 billion, $200 billion, $300 billion. I don't know.

We will – as we work into this and I think a lot of it depends on the performance of the market, the real estate market. How long will it take before it starts performing in the right way again? I fear its going to be another year or so. I don't believe we've got to the bottom of it yet.

I think we're into it. Maybe, I'm just guessing, a third into a tough year, this year and probably a tough year next year.

ANDREWS: Senator, given the fact that Lehman Brothers is in a very severe downward spiral and a number of other big financial institutions are, as well, would – do you see yourself as needing to step in and somewhere, at least, try to oppose further bailouts or do you think that Congress needs to sort of sit back and let the regulators and the Administration work these things out but …

SHELBY: Thank you for bringing that up. I go back, here, when I first came to Congress and we had the – just to set the record straight, I had – we had the Chrysler loan – the Chrysler bailout. I voted against that. I have always thought, fundamentally that nothing was too big to fail, including, Fannie Mae and Freddie Mac.

A lot of people believe that they are too big to fail. That if we let them fail, including, some of our financial houses that it would do irreparable damage to the market. And it will do damage to the market. Its a question of when.

But people learn by failure. I learned by failure. You mentioned Lehman Brothers. Lehman Brothers is on the ropes, to say the least, right now, even today. I hope they survive. They've been a stellar company for a long time but most of our investment houses, if you study this and I know you two do, very closely, they're highly leveraged.

And they take great risk and if those risks work out they make gobs of money. But right now, I question and we had hearing, questioned why the Fed jumped in and bailed out Bear Stearns. In other words, took on the debt where JP Morgan could take them over.

But they crossed that line and where we are today with the Fed. Fed's got a lot of power. I hope they will not use all their power on all their rabbits in doing this.

PALETTA: Senator, Secretary Paulson seems to have lost a little bit of credibility with Capitol Hill. First, it was with the stimulus package where he told Senate Republicans they would not go for the (INAUDIBLE) increase and they went for it. And then, with Bear Stearns and now you know he asked for the bazooka, a month ago, with Fannie and Freddie and didn't say he was going to use it. Is that going to be an issue over the next several months?

SHELBY: It won't be with me. I've had my differences with the Secretary but I've also supported him. He's got a tough situation. Secretary Paulson, I know when he came down here, over two years ago, after being the Chairman of Goldman Sachs, he didn't come down here expecting all of this. But I worked with him early-on trying to reform the GSE's.

We figured, all along that when he asked for the standby authority that he might have to use it. And I don't think he wanted to use it. I think he agonized over that deeply because he talked with me about it, on a number of occasions. But after someone from, I believe, it was Morgan Stanley, went over there and started looking at the real capital of Fannie Mae and Freddie Mac and saw that it was questionable, to say the least, probably a house of cards, as I've called it, they had to step in.

And Paulson, I think, was probably a little surprised, too. Not surprised at the long-term problems with Fannie Mae and Freddie Mac. None of us were or shouldn't have been but the immediacy of it and I think that's what surprised some people that they were taken over so quickly. But a lot of it is their own doing.

SLEN: Senator Shelby, does Congress bear some responsibility in creating the current situation?

SHELBY: Absolutely. When – especially when we created the GSE's. I was not in Congress when we created the GSE's, the government-sponsored enterprises and who are they, Fannie Mae, Freddie Mac among others. The Federal Home Loan Banks and we haven't talked about that yet and probably won't until we have a real crisis.

But when we have a hybrid deal here, you're going to have problems. And when you have the implicit guarantee of the taxpayers, people at Fannie Mae and Freddie Mac are going to leverage, its human nature, to leverage their – what little capital they had, which was very little. They would've been closed years ago if they were an ordinary bank.

If they were a community bank, they would've been closed by FDIC or the comptroller of the currency immediately. You followed this; you know it. I think Congress’ oversight role should have been to make it fair; make it clear that Fannie Mae and Freddie Mac were on their own years ago. But none of that happened.

There was always the implicit guarantee of the Federal Government or the taxpayers. This has brought us to where we are today.

SLEN: We are talking about the Freddie Mac and Fannie Mae takeover by the Federal Government. Senator Richard Shelby is the ranking member on the Senate Banking Committee. Ed Andrews is with the New York Times; Damian Paletta with the Wall Street Journal. Gentlemen, next question.

ANDREWS: Senator, do you have any – in looking back now, to last March when the agencies that Fannie Mae's Chief Regulator O'Feo (ph) said they were adequately capitalized and lifted the added restraints that were on Fannie Mae and Freddie Mac, at that time. Do you have any criticism for what the regulator and the Treasury Department signed on to, at that point?

Because at that time, if you recall, the regulator said we view you know the actions that they had taken so far as getting their capital in-line and that the possibility of a bailout now seems to be nonsense. So do they – did they make things worse at that time by lifting restraints and encouraging them to actually expand?

SHELBY: I don't really know. That's an excellent question because in March, as you related, the regulator, Mr. Lockhart (ph) and I believe Treasury indicated that Fannie Mae and Freddie Mac were adequately capitalized. And they may have been, at the moment.

But they were thinly capitalized then and thinner as the summer went old but sure. I'm sure they'll be criticized for not acting sooner but I said sometimes you have to wait until the opportune time. I always feared, five years ago as I got into looking at Fannie and Freddie's capital and the $5 trillion worth of debt, more than U.K. and France combined. I worried about it.

I tried to reform it. I tried to bring capital. If we had passed – if the Democrats stood in the way and they blocked our bill, on the floor of Senate. We passed it out by a Republic majority and they blocked the bill because Fannie and Freddie had some of the most powerful lobbying friends, hired lobbyists, I've ever seen in Washington.

And now, they're paying for it but ultimately, what's happened as I've said a couple of times here today, the taxpayer's probably going to have to pay a big load, which could have avoided, hopefully.

PALETTA: Senator, we've seen 11 bank failures so far this year, seven since July, are you – this is nowhere near what we saw during the (INAUDIBLE) crisis but are you worried about the growing intensity of these and whether the government can handle resolving?

SHELBY: Absolutely. If you look at the job that Sheila Bear (ph), who is the Chairman – Chairwoman of the Federal Deposit Insurance Corporation, she's got her hands full. She's very able and very strong but the FDIC fund was around, if I recall, $53 billion. That is insurance fund. The IndyMac debacle failure in California, ate – probably ate 10 percent of that up.

We've had you know dribbling – just continue to dribble in bad news. Some people think and I hope they won't but some people say that if – that it will have, at least, 100 banks to fail. Some of them medium-sized; some of the small; some of them large and I think it'll pick up.

I wished I could tell you that I thought otherwise but I think this is a real banking crisis and a lot of banks are going to be deeply challenged. A lot of them need capital. Capital is the key. Management is important and supervision or oversight's important, too.

ANDREWS: Given all of that what is the – what are the most important things that either Congress or the Administration should be doing now, going forward?

SHELBY: Well, I think that the regulators that is the Comptroller of the currency; the FDIC; the community bank regulator; our credit unions, which we haven't run that they should bear down and be – and try to nurse – see problems; anticipate problems. Be looking very carefully at these balance sheets and on capital and what they're carrying in their portfolio.

I think a lot of these banks can be saved, now, if there's great cooperation now. Some of them will never be saved but I worry about the risk to the taxpayer, ultimately. I worry about the risk to our whole community – our economy.

SLEN: Senator Shelby, to follow-up on Ed Andrews question, do you see a new regulatory structure being contemplated in Congress?

SHELBY: Absolutely, I do. That has been proposed. Both of you've probably written about it. Proposed by …

SLEN: Do you support it?

SHELBY: Well, I want to see the details. You know that would – you know the Fed plays a role as a central banker and a regulator, you know all this. The Treasury's involved through the Comptroller. The FDIC's involved.

We have the state banking deals. A lot of nations just have one powerful banking regulator. Our system seems to work. Plus, the SEC's involved here, too, not just as a bank regulator but regulating you know stock, privately owned – publicly owned companies.

So, I think that the next Congress, which will start in January, I think we will be looking at this very closely. Senator Dodd and I have talked about it some. I think that whatever we do, we ought to be careful but if we can improve the structure of today's regulations to make our financial systems stronger, more efficient; more viable for our economy and our people, we ought to do it. But we ought to know what we're doing; be careful.

PALETTA: Senator, with so many banks with their stock prices beaten down, its become very expensive for them to raise capital. In some areas, the capital's just not there. Do you think the government should loosen up the standards about where they can get capital, like, allowing private equity and (INAUDIBLE) funds to …

SHELBY: You talking like hedge funds?

PALETTA: Right.

SHELBY: Well, there's a rule on that and you're familiar with that too, I'm sure but I – the hedge funds – most of the hedge funds, some of them are public now but most of them are private and I don't recall the rule. But you know if you're a big investor you know 25 percent or something like that then, you're going to have to declare all your assets and so forth, too. You'll be under more scrutiny.

I see nothing wrong with that. If they want to invest, they ought to pay the price. But there's a lot of money sitting on the sidelines. You've said capital's hard to come by. Capital – ultimately, money will make its best investment, ultimately.

We all make mistakes but right now, people are nervous. They're anxious but there's a lot of cash in this country.

SLEN: Senator Shelby, who benefits from this takeover and who is hurt the most?

SHELBY: Well, first, the stockholders of Freddie Mac and Fannie Mae. If they're not wiped out, they're almost – ultimately, probably will be.

SLEN: Is that fair?

SHELBY: And they don't benefit at all. Ultimately, the immediate takeover, probably, is the dropping of the interest rates and people that are buying homes or refinancing homes because there's – they've knocked out the spread there. And you've seen what the 10-year bond, which real estate prices are basically based on, has gone up in value and gone down in price. And so, I think the real estate and refinancing and the economy will benefit.

The bondholders; a lot of people that have the securities, not stock, necessarily, have benefited. You've seen the prices rally on that. And a lot of those bonds and securities have been bought all over the world and we've had the implicit guarantee of the country behind it. And so, they will certainly benefit from it.

SLEN: Damian Paletta's newspaper, the Wall Street Journal, had an editorial this week calling it a bailout for billionaires because the bondholders are, essentially, wealthy and they're getting their money.

SHELBY: Well that's probably true, to a certain extent. I wouldn't – the bondholders always have a higher priority than the stockholders and the people that bought the bonds. I'm sure the securities will have preferential treatment and I don't have any but people will – I guess were smart that will do this but the sad thing about this, is the role of the taxpayer.

This has fallen on the taxpayer's lap. All of the American people and it shouldn't have been that way.

ANDREWS: Well, Senator, just to come back to that question, for a moment, where would you draw the line or can that line be drawn? What kind of institution, what major Wall Street firm or big bank would we not try to rescue, at this point?

SHELBY: Well that's a good point you make. I think that we started, year ago, with the doctrine somethings too big to fail. I've said, earlier on, I didn't think anythings too big to fail but maybe, I'm in the minority.

I think we learned from that. Would it be a jolt to our system if a big bank failed? Absolutely but others would learn. You'd learn the hard way but as long as some institutions are so large that they know or have reason to believe that they're too big to fail, they're going to take inordinate risk and we shouldn't do that.

PALETTA: Senator, Fannie and Freddie – Fannie Mae and Freddie Mac are still originating or in the last month, they have about 75 percent of all home mortgages. They're funding banks that originate those loans. Is it dangerous now for the government to be overseeing, essentially, the origination of three-quarters of America's mortgages?

SHELBY: Well, I don't think its dangerous. I think its the only game in town, right now because the banks, the people that were in the securitization mortgage business, have dried up because they've lost a lot on subprime and they've lost their capital. And they're challenged even to survive.

The fact is and the reality is that Fannie Mae and Freddie Mac are keeping the real estate business homes going in America and they will for sometime. And I think that what we've got to do as a model, is probably, as Alan Greenspan has suggested, to get away from systemic risk, is to nurture these two entities. Make sure they're run right.

Try to build their capital up. And downsize them and probably into many pieces and spin them off. That'll take some time but we did it in the railroads. You know we did it with Conrail, a number of years ago. But I guess, if the government's the only game in town, right now, we have to play with it. I wish we weren't.

SLEN: Senator Shelby, what's your confidence level in James Lockhart (ph), the Head of the Federal Housing and Financing Authority?

SHELBY: Well, he's – I think he's a very able man. He has not had the tools to work with. He did not have the power and Fannie Mae and Freddie Mac, their lobbyists wanted to make sure he didn't have the power to make them raise capital; to approve their products and all thee things.

I bet they wished they had now but they didn't. So he's been operating, probably, like a man with one hand tied behind him and a chain on his legs. Now, he's got a different situation. Let's see what he does with it.

SLEN: One more question each.

ANDREWS: Sure. Senator, you went through the Savings and Loans crisis and the criticism, in hindsight, as I think you alluded to earlier, was that we made the problem worse by procrastinating and sort of massaging it for a while. How would we be able to prevent that same phenomenon from happening this time around? What would you do?

SHELBY: Well, I would – if I were Secretary of the Treasury, I'd bring in some of the experts in finance and say, look, how do we get these entities, Freddie Mac and Fannie Mae, on their feet; operating again; keep building their capital up to where they would be valuable, in the marketplace. And downsize them and spin them off.

There will be a market for entities like that if they're well run and well capitalized. That's what I would do. I think the worst thing we could is say, look, the government's in a conservatorship. We might nationalize them and keep them forever.

I don't want to go down the French model. That's not the American model.

PALETTA: Senator, it seems like you know Democrats and Republicans are already trying to take sides on this, do you anticipate a big slug fest next year if these things aren't resolved easily? Could this drag on for several years about the future of these companies?

SHELBY: It could. The next administration, if its the McCain administration or if its the Obama administration, they're going to have these two big financial giants in their laps and we're going to have a lot in our lap to say about it, in the banking committee. So we've got our hands full.

Its kicking it for a few months, maybe, to another day but we should not let it drag on for years and years.

SLEN: And finally, Senator, you've referred twice to the lobbying powers of Fannie Mae and Freddie Mac. That in your view, was that an out-sized power and did it create this situation?

SHELBY: Absolutely. The most – they're probably the most – have been together, the most powerful lobbying group of forces I have seen in my 30 years in Washington. They killed, with the help of their allies, mainly, Democrats but a few Republicans, they killed legislation that would've reformed them; would've re-capitalized them and saved them because they like the status quo.

Today, they're not lobbying and I think we're better off.

SLEN: Senator Richard Shelby is the top Republican on the Senate Banking Committee. Senator Christopher Dodd is the Chairman and there will be a hearing on Tuesday to discuss this. Secretary Paulson and James Lockhart (ph) will both be at the hearing. Thank you, Senator.

SHELBY: Thank you.

SLEN: Gentlemen, how big is this takeover, this bailout, whatever you want to call it? Is it bigger than the Savings and Loan crisis of the 90s – 80s, 90s?

ANDREWS: We don't know precisely how big the bailout of Fannie Mae and Freddie Mac, specifically, will be. Certainly, there are estimates that it could easily in the area of $100 billion net cost to taxpayers. It'll take quite a long time before we really know.

The government's going to put money into these companies. It doesn't necessarily lose the money. The question is, how much it ultimately loses from that investment but it could you know really on the order of $100 billion.

And they've allocated the possibility that you know that they provide up to 100 billion for each company. So, pretty big numbers and that's really only part of the overall mess that we're in. So would it …

SLEN: What do you mean by that Ed Andrews?

ANDREWS: Well, we have other – we've already had the Federal Reserve loan about $30 billion to manage the shotgun marriage of Bear Stearns to JP Morgan Chase and certainly, there are going to be a number of other problem institutions, crisis institutions coming down the road. So the bill doesn't end with Fannie Mae and Freddie Mac.

PALETTA: And we don't have any indication, now that is where they're going to draw the line. Every time one of these bit situations has come up, the government's had to come up with a new ad hoc model. So, I think we're going to keep watching it and obviously, Wall Street's going to keep watching, too, how the government responds. And as there's more pressure, on the government to try to handle these bigger messes, its likely the cost is going to increase, too.

One interesting thing about the Fannie Mae/Freddie Mac takeover, was that there was no dollar sign attached to it. Its very open-ended. There's no exit strategy. There's no plan for when this is going to end. Its very much like Senator Shelby said, going to fall into the laps of either Senator McCain or Senator Obama.

So its going to be very expensive. Its going to be – the plan's going to change immensely, especially, come November or December and the you know the dollar cost to the taxpayer's is really probably going to depend on where housing prices across the country go, which we don't know where that's going to be.

SLEN: Gentlemen, did you hear from Senator Shelby, a legislative solution or a potential for legislation down the road here, at all; new regulatory structure? Did you hear anything specific?

ANDREWS: I heard a man who sounded like he was struggling immensely with the whole problem. He almost sounded humble, at times, about you know the complexity and the difficulty of the decisions that are coming forward, so wasn't clear.

He would, obviously, like to you know have the role of Fannie Mae and Freddie Mac reduced in the mortgage market, bring it back down to size and control them. But in terms of how we get out of the overall mess and how we deal with future bailout questions, I didn't hear an answer.

PALETTA: And I think one of the most interesting things he said, was how when asked if this could compare with the Savings and Loan crisis, he made it sound like its not even a comparison. This sounds like this is much worse.

We're maybe in the first third of this. Its only going to get – we've much longer to go. Treasury Secretary said not too long ago that we're closer to the end than the beginning, so I think there's, like you said, a very humble recognition amongst some on Capitol Hill that this is really going to drag on for a while.

SLEN: Has – let's put politics into play, we are in an election year for both Congress and the President. Are people talking about this issue? Is there a bipartisan effort, in this issue?

PALETTA: Well, there's definitely not a bipartisan effort, I don't think. But I think it is very much resonating on the campaign trail. I mean, typically, during presidential elections, you don't have candidates talking about Fannie Mae and Freddie Mac.

But I talked to Senator John Sinunu whose running for re-election in New Hampshire and he said he's getting questions about it from people on the stump. So I think especially when there's dollar figures attached and also, when this affects the value of people's homes, which is probably their biggest investment, there's a lot of concern and anxiety right now.

ANDREWS: Sure, people know now that the housing crisis – it has reached down to the neighborhood level and its been that way for months now, so under those circumstances people know darn well the importance that Fannie Mae and Freddie Mac have, and its just one more thing that's added up on their anxiety meters.

SLEN: Tuesday's banking hearing with Secretary Paulson and James Lockhart (ph), what do you expect to learn from them?

PALETTA: I think it’s going to be interesting to see. We've already heard some senators feel like they were bait-and-switched by the Treasury Department who initially told them that they just want this new power. It probably wasn't going to be used and then just over a month later you know Treasury takes this historic step.

So I think there'll be a little bit of that. I think they'll also probably press for what is the plan? How long is this going to last you know when in all likelihood you know Secretary Paulson won't even probably be there when this all resolved because it'll you know go into the next administration. So I think its going to be interesting.

ANDREWS: Yes, I don't think we're going to get very many clear answers because they don't know. They have really only their own ballpark estimates as to how far that particular problem, Fannie Mae and Freddie Mac, goes.

SLEN: If you had time and the ability to ask Secretary Paulson one question, what would you ask him? Or what is one question that you would ask him?

PALETTA: Well, I think we all want to know if he does have a strategy for how this will all get resolved. What would he like to see happen to these two companies? He's tried to sort of put the ball in Congress's court and say, this is something you need to address. But what does he think should be done to fix this whole hybrid that Senator Shelby alluded to.

ANDREWS: Sure, I think that's a basic question. And I guess the question I would like to ask Mr. Paulson, is whether in hindsight, just looking back to last March, they made the problem more worse or if they have any second thoughts about letting Fannie Mae actually expand more, at that time? They did it for a very solid reason, which was, they were desperate.

The housing market was in a shambles and getting worse. And the economy was going down and they were the only game in town but perhaps, they blinked when they shouldn't have.

SLEN: Ed Andrews, New York Times; Damian Paletta, Wall Street Journal; gentlemen, thank you for being on Newsmakers. We're looking forward to Tuesday's hearing.

PALETTA: Thank you.

END