[Congressional Record Volume 154, Number 152 (Wednesday, September 24, 2008)]
[Senate]
[Pages S9363-S9366]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                              MAIN STREET

  Mr. GREGG. Mr. President, the reason I wanted to take a half hour is 
to discuss at some length and in some depth the situation we are in 
right now, as I see it, relative to the financial markets as they 
affect Main Street because there is a lot of confusion out there and 
this issue is about Main Street. It is that simple.
  Why is it about Main Street? It is about Main Street because if our 
financial markets become totally destabilized, that leads directly to 
the ability of people to keep their jobs, to keep their savings, and to 
create more economic activity on Main Street.
  How does this work? It is very simple. If you are working for a small 
company or even a medium-sized company and certainly if you are working 
for a large company, it is very likely those companies borrow money to 
do things. They may borrow money to buy the materials you work on in 
order to create their product. They may borrow money in order to pay 
their suppliers. They may borrow money to pay their payroll every week 
to make your paycheck. That is just the natural order of commerce in 
our Nation. That is the way banks work. That is the way Main Street 
works.
  You have a little restaurant, a mom-and-pop restaurant, and they 
didn't make quite enough this week to pay their payroll, so they go to 
their local bank or the community bank and they say: Will you give me a 
loan to get me through this week so I can make payroll?
  A person who makes a significant or a reasonable amount of money 
takes their money and puts it in their bank, into a savings account or 
maybe into a money market instrument because they get more interest on 
a money market instrument, and that becomes a big asset in their life.
  Let's say a person wants to go out and buy a car. Most likely, they 
are going to borrow money to do that, either from their local bank or 
through their car dealership or they are going to borrow money from a 
major financial entity such as GE or GMAC. The same is true if you are 
buying a house, obviously, or if you are buying a lot of things. If you 
are adding on to your house, you are probably going to try to get a 
home equity loan. If you are going to expand or improve your kitchen, 
put on a playroom for your kids or, if the kids are old enough, send 
them to college, you are probably going to borrow money to pay for 
their college education.
  The ability to borrow, the ability to use credit in our system is at 
the essence of the economic lifeblood of our system. Every person in 
this country is affected by it.
  Unfortunately, what we are confronting and what we almost saw last 
week is a total seizing up of our financial industry, and not just the 
big banks in New York we hear so much about--not just Lehman Brothers 
and Merrill Lynch and Bear Stearns--but the mom-and-pop bank in your 
local town, the medium-sized bank in your local county or your State. 
All of these were under huge pressure. And why is that? It is because 
underlying the banking system is the business of trading and exchanging 
credit, of buying and selling debt between banks.
  One of the main elements of buying and selling debt is a debt 
instrument called a mortgage-backed security. Now, what is that? A 
mortgage-backed security is a debt instrument, as if you went to your 
local bank and borrowed money, only it is a big set of debt 
instruments, and the security for those debt instruments is mortgages. 
What has happened, because of the real estate meltdown and because of 
the subprime event and the collapse of the real estate industry, 
primarily in our bigger States, such as Arizona, California, and 
Florida, is it has become extremely hard to value the security below 
that debt instrument--those mortgage-backed securities--because the 
value of that asset has reduced so much, the house price has reduced so 
much.
  The reason for that is because a lot of the loans which were made to 
buy those securities--to the person who is actually paying the loan, 
the person who lives in the house, theoretically, or the person who 
speculated and bought the house as part of their investment--were made 
at a time when money was so cheap to borrow that

[[Page S9364]]

they were made at interest rates which were extraordinarily low and are 
today being reset, as those notes become due under the terms of them, 
at a much higher interest rate and at an interest rate that the person 
who lives in that home can't afford to pay. That is called the subprime 
issue. And there are also a lot of variations of that, by the way. So 
the person who is responsible to pay that note, first, has an asset 
which probably isn't worth what the note was issued for because of the 
drop in the value of the home prices and, second, finds themselves with 
a debt they can't afford to pay because the interest rates have jumped 
so much. That translates into thousands, tens of thousands, hundreds of 
thousands of situations which merged together in these mortgage-backed 
securities which were then sold and then insured and then reinsured and 
reinsured through something called credit default swaps in order to 
avoid failure, in order to give coverage, and all of that system has 
essentially frozen up--frozen up--so that those mortgage-backed 
securities are no longer tradeable because nobody knows the value of 
them, and the insurance that was issued on them is at risk, also, 
because of the fact that the asset has depreciated and the revenue to 
pay the cost of that debt has depreciated.
  How does this affect the person on Main Street, the person in Epping, 
NH, or Raymond, NH, or Lancaster, NH? The way it affects them and the 
way it affects all Americans is that when that freezes up and the 
banking system can no longer get value for the debt which it has on its 
books and it has to start writing down that value, then the banking 
system starts to contract dramatically because the assets which the 
bank was depending on in order to be able to lend against are 
depreciating radically. As a result, the financial ability to get 
credit dries up and contracts, and people react to that, and they did 
last week.
  This is not a theoretical event, by the way. This type of 
destabilization is upon us, unfortunately, and what we are trying to do 
is avoid it becoming an epidemic. But last week, in response to the 
fact that people couldn't get money and didn't have confidence in 
lending money or borrowing money, we had $335 billion taken out of 
money market accounts and basically moved over to Treasurys.
  What did that do? It was essentially a run on money market accounts. 
Well, if you have a run on money market accounts, you have a very 
serious problem. Last Wednesday night, we had that problem, because 
what happens when there is a run on money market accounts? Well, the 
entities that have those money market accounts have to pay them off, 
which means they have to hoard their cash in order to support and 
defend their money market accounts which are in their banks. So they 
can't lend any more money; they have to actually start calling in 
accounts. So when somebody comes into their office and says--and this 
is a simplified way of explaining this--OK, I need some commercial 
paper, some financing to get through my next payroll, which is going to 
be this week, because I didn't make enough money on my business this 
week--it is maybe a seasonal event or a seasonal slowdown--and they 
say: I need to get some commercial paper to make my payroll, well, they 
can't get it because the bank can't lend it to them because the bank is 
holding its money or the finance house is holding its money for the 
purpose of supporting its own capital position or for the purpose of 
defending itself against the fact that so many of its money markets are 
being called in. The practical effect of this is that you create the 
potential for massive destabilization of the economy at a level we have 
never seen, potentially.
  Now, some might say that is hyperbole. I don't think it is. Mr. 
Greenspan doesn't think it is. The former Chairman of the Fed said this 
is a 100-year event. Warren Buffett doesn't think it is--a Democrat--
and I am quoting him because he said this morning that he had never 
seen an event like this in his life with the potential for this type of 
destabilization.
  I think anybody who is honest about it recognizes that the last few 
weeks have been extraordinary and the threat to our economy and to the 
everyday life of Americans has been immense--the threat.
  What has happened to try to address this? Fortunately, we have had a 
very activist, very bold, and very creative Federal Reserve Chairman 
and Secretary of the Treasury. Leading up to where we are today, we had 
three major fiscal crises that were addressed aggressively. The first, 
of course, was Bear Stearns, the first financial house to go down. That 
was aggressively addressed by an infusion of support, not for Bear 
Stearns--the stockholders of Bear Stearns lost all their money, as did 
their debtholders--but for the underlying financial institutions and 
the debt structure built around Bear Stearns.
  The second was Fannie and Freddie. Here, the Federal Government, 
again, and the Congress, acting in a very responsible bipartisan way, 
passed legislation which allowed us to stabilize those two entities. 
Why did we need to stabilize those two entities? Because they own $5 
trillion of the mortgages in this country. Mr. President, 70 to 80 
percent of the mortgages in this country are run through those two 
companies. Had they been allowed to collapse, had they been allowed to 
totally implode or to become massively dysfunctional, the entire credit 
market would have frozen, the mortgage market would have frozen, and a 
lot of people would have lost their homes. So, again, the Congress, 
acting in an extraordinarily responsible way with the Secretary of the 
Treasury, created the authority to move forward to settle that.
  Then, the third event was last week, last Tuesday night--AIG, an 
insurance company. Why, you say, do we need to step in to defend an 
insurance company? We didn't need to step in to defend the insurance 
company. What we needed to do was to defend the insurance which they 
had issued. Why? Because almost every bank of any small or medium size 
in this country uses insurance issued by AIG to insure much of its 
capital assets so those capital assets can be used against lending. 
Whether a bank can lend depends on how much they have in capital 
assets. Had AIG gone down, the insurance--the rating agencies would 
have rated that insurance as nonperforming, for all intents and 
purposes. I am simplifying it, but that is basically what would have 
happened.
  That would have meant the banks would have had to contract their 
capital immediately and that would have meant dramatically less 
lending; good loans being called, people who paid their loans would 
find their loans no longer existing as the banks had to collect more 
capital to get their capital requirements up. Many banks might even 
have failed as a result of that event. It was a systemic problem 
because the insurance was so pervasive throughout the system and it so 
supported the banking and financial houses, to say nothing of the money 
market area where it also played a major role.
  Again, Chairman Bernanke in this situation stepped in to stabilize 
that insurance. He didn't bail out AIG. Don't say to Mr. Greenberg, who 
was the primary stockholder in AIG and who lost $5.8 billion in 1 week, 
I think it was, that he was bailed out. No, the stock basically went 
down to $1, I think, $1 or $1.50. The senior debt was replaced by debt 
owned by the Federal Reserve, which is paying 11 percent and I think 
everybody agrees that in the end that will end up being a financial--
the Federal Reserve will make money on it.
  Now we are at the fourth event of this very tenuous and difficult 
financial dislocation that we confront and that is the request by 
Chairman Bernanke and Secretary Paulson to give Secretary Paulson the 
authority to basically use up to $700 billion of Federal debt to go in 
and buy debt which is not performing off the books of various lending 
agencies and financial houses so the market can begin to perform. This 
goes back to those mortgage-backed securities I talked about; to get 
that freeze which has occurred, that logjam to break up so the markets 
can function in an orderly way and people can borrow money and people 
on Main Street can finance their payrolls, can finance their homes, can 
finance their house, can finance sending their child to college, and 
the economy grows rather than contracts. Instead of losing jobs, we 
will add jobs; instead of losing net worth, we add net worth. That is 
what this is about.

[[Page S9365]]

  There has been a lot of misrepresentation, exaggeration, and 
political statements made around here--especially in the ``talking 
head'' area of the media. They say, basically, there is a $700 billion 
bailout, we are going to take $700 billion of taxpayers' money and 
throw it at financial institutions across this country and get the fat 
cats off the hook, so to speak. We need to go back and talk about what 
happens to the taxpayers in all four of these events.
  I will represent upfront I do not know exactly what is going to 
happen. Nobody else does. But I also represent upfront that the cost to 
the taxpayer will be dramatically less than any of these numbers which 
are being thrown out there in a most irresponsible and inappropriate 
way. When somebody says $700 billion to $1 trillion this is going to 
cost taxpayers, they are being dishonest when they make that statement. 
It is never going to cost that type of money, never even be close to 
that type of money. In fact, the taxpayers are going to come out of 
this making money because we will replace other investors, and when 
those investors pay off, they will make a little money.
  Let's go through all four of these items as to how much it is going 
to cost the taxpayers. Bear Stearns, $29 billion. That is what the 
Federal Reserve put into Bear Stearns. That is the Federal Reserve, 
remember. This is not off the Federal budget. It is not from the 
Federal taxpayer. The Federal Reserve is an operating corporation. It 
has about $895 billion of assets. Every year it makes $25 billion to 
$30 billion, which it pays to the Federal Government as income. 
Chairman Bernanke has decided to take $29 billion and invest it in 
various bonds that were issued by Bear Stearns, to give those bonds 
stability. It is very likely the Federal Reserve will get all that 
money back, or a large percentage of it back. It is totally unlikely 
the Federal taxpayers will end up with any type of bill from this 
exercise. That is probably a zero cost to Federal taxpayers. The only 
thing that could possibly happen that would affect Federal taxpayers is 
the Federal Reserve might make less money this year and, thus, pay less 
into the Government as part of its contribution, when it makes a 
profit, to our revenues. But even if that occurs, in the outyears, it 
is likely that amount of money will be higher because they will be 
getting that money or a large percentage of it back. So that doesn't 
cost us anyway.
  So when someone in the press--not the press, I don't want to pick on 
the press--when someone says it is a $29 billion taxpayer bailout with 
taxpayer dollars, it is not. That is plain wrong.
  The second event I wish to talk about because it is similar--it is 
not in sequence, but it is significant--is the AIG, $85 billion. In 
this instance, once again it is the Federal Reserve investment. It is 
not taxpayers' dollars being invested. The Federal Reserve has taken 
$85 billion and essentially bought AIG. In buying AIG, they got the 
parts as well as the holding company. The holding company is where the 
problems were. The parts, the subsidiary insurance companies--of which 
I think there were about 150 or 160--were actually quite economically 
strong and viable. In buying that company, not only did they wipe out 
the stockholders, not only did they kick out the management, not only 
did they eliminate the golden parachutes, but they took back securities 
which guaranteed an 11.5-percent payment to the Fed before anybody 
else. So as AIG starts to make money again--which it certainly will 
because it and its subsidiaries are a very viable company--the Fed is 
going to make 11.5 percent at a minimum. I don't think there is anybody 
who has looked at this exercise who has not concluded that this is 
going to be a financial benefit to the Fed. The Fed is actually going 
to make money off that in the sense that over the long run--when I say 
``long run,'' I am talking about less than 5 years--over 5 years they 
will have a return on that purchase of AIG which will exceed the $85 
billion they put up.
  So when somebody says that was a bailout with taxpayers' dollars, 
once again they are totally inaccurate and they are misrepresenting and 
trying to scare people by saying that.

  Now we come to the two big items. Big items? The other ones are 
pretty big; $85 billion would take care of the State of New Hampshire 
for I don't know how long--probably 20 or 25 years or so.
  Now we come to the two very large exercises; first, Fannie Mae and 
Freddie Mac. In those instances, the Congress, in a bipartisan, 
extraordinarily constructive way, joined with Secretary Paulson and 
said to Secretary Paulson: We are going to give you $100 billion of 
authority for each company, $200 billion total, that you can use to 
stabilize those two institutions. Why so much money? Because we had to 
make it clear to the people who were dealing with Fannie Mae and 
Freddie Mac that the Government would be there to stabilize them.
  By stabilizing them, it would cost us a lot less. If we allowed them 
to unravel, if we allowed them to basically go into a destabilized 
situation, then the contraction to the economy would have been so 
overwhelming because mortgages would essentially have been called all 
over this country and mortgages would not be able to be obtained by 
virtually anybody. We would have seen a massive contraction on top of 
the already serious situation we have in the real estate industry and 
that would have had a huge impact, not only on Main Street and on John 
and Mary Jones, who want to buy their house or stay in their house, but 
on the Federal Government in the way of revenues because taxes would 
have fallen off precipitously. By stabilizing those two companies, we 
were able to keep the ordinary business of lending for mortgages in 
this country going forward and moving in a constructive way. We had to 
put enough money on the table or represent that we were willing to put 
enough money on the table so nobody could question that we were not 
going to be able to stabilize those two institutions and that is why 
the numbers were picked.
  How much has actually been spent of taxpayer dollars? Five billion 
dollars, that is what the Treasury has had to put in so far. As a 
result of this putting in that $5 billion, we are seeing mortgage rates 
actually come down because we are actually getting a Fannie Mae and 
Freddie Mac that are able to function again. So that is all good news. 
I don't know how much more will have to go in, but it certainly will 
not have to be $200 billion or anything near that number.
  Furthermore, once again, with that $5 billion, we are buying assets 
that have value. How much value is still up in the air. But we will get 
some sort of return on that $5 billion. Thus, under the scoring rules 
that we work under in our budget, because this is a credit action, this 
is not going to score as a $5 billion hit on the Federal deficit, even 
though $5 billion has been spent because CBO is going to say some 
percentage of that $5 billion is going to come back to us as these 
assets mature and as people make payments on those assets and, thus, 
maybe it will only be $1 billion; maybe we will get $4 billion back. So 
the effect on the Federal deficit will be $1 billion. I don't know how 
CBO is going to score it, but they are going to score $5 billion as 
dramatically less than $5 billion as a hit on the deficit.
  At the same time, we have been able to stabilize, to some degree, the 
Fannie Mae and Freddie Mac situation because we took aggressive and 
bold action, which brings us to where we are now.
  This whole issue of whether we need to move forward with a major 
effort of stabilization and recovery for the financial industry, 
generally, by having the Federal Government come in and basically buy 
up a lot of securities which today cannot be traded on the market 
because nobody can value them. That is what I was talking about 
earlier. You cannot value these securities because nobody understands 
what the underlying equity that supports these securities is, the value 
of that home; and nobody knows whether the people paying on that debt 
originally are going to be able to make their payments as these 
mortgages reset.
  The Federal Government is going to come in. What Treasury Secretary 
Paulson has asked is for the Federal Government to have the authority 
to come in and start buying up these securities in classes, in groups, 
across the board. The question becomes, will he have to spend $700 
billion to stabilize the financial markets? And how much will that cost 
the American taxpayer?

[[Page S9366]]

  First off, the easy answer to it is it is not going to cost anywhere 
near $700 billion, even if he uses the whole $700 billion, which he 
probably will not do. But even if he were to use the entire $700 
billion authority, he would be out buying assets.
  He would be out buying notes that have security behind them and, 
therefore, we will be paid, to some degree, as to their value and 
depending upon what he buys these notes at. Let's say he is not going 
to buy them at face value. Let's say someone borrowed $100,000 secured 
by a house, and nobody knows what the house's value is now, and the 
person who borrowed the money cannot repay that because the cost of the 
note, the reset interest rate is too high. That note is not going to 
sell for $100,000, it is going to sell for something less, maybe 
$70,000 maybe $60,000.
  It is not clear what the Treasury is going to buy that for right now. 
I want to get into that in a second, but whatever they buy it for, they 
will be getting an asset. And the question will be, is the price they 
paid for that asset above or below what they can, in the end, get for 
that asset?
  Now, the big advantage the Federal Government has is we do not have 
to do what is known as mark to market. We do not have to write down 
these assets the way a bank does or a financial house does as they 
become destable, as the assets become destable. We are the Federal 
Government. We can hold that asset until it is paid off at face value, 
for example.
  So not only do we get the 70 cents back, but we get 100 cents back on 
the dollar, so we can actually put ourselves in a position where if we 
pay a reasonable price for an asset we may make money on the asset. We 
do not know that that will happen, because the purpose here is not to 
make money, the purpose is to stabilize the financial markets and give 
them the ability to start freeing up, trading and freeing up activities 
so that the credit markets start to move back and forth once again.
  But if we are successful, and we will be if this plan is approved, 
then the credit markets will start to move once again, and that will 
raise the economy. And as the economy improves, then these mortgages 
that we will have bought, these mortgage-backed securities, and their 
other things such as loans, will start to improve in their performance, 
and the chances of us getting a good portion or all of the money back 
that we put into this effort will be pretty high.
  What is the effect of that? That means that instead of costing $700 
billion, we may get $600 billion back, we may get $500 billion back, we 
may get $800 billion back. Whatever we get back, that is going to be a 
net figure. So when CBO scores this activity, they are not going to say 
the deficit is going to increase by $700 billion as a result of us 
passing this proposal, they are going to say it is going to increase by 
the net difference between the $700 billion and what they estimate we 
will get back from the assets that we purchase.
  I suspect that estimate is going to be--I do not know what it is 
going to be, but it is certainly not going to be anywhere near $700 
billion, $100 billion. It is going to be a shot in the dark because 
nobody knows. But we do know we are going to get some value for this 
investment. In fact, if things were to work out, we might get as much 
value back as we put in, maybe even more. That is not the expectation, 
that is not the purpose.
  But clearly when somebody gets on the public airwaves and says: We 
are putting $700 billion of taxpayers' money into this and we are not 
getting anything back, we are throwing it at these big companies, they 
are big demagogues, they are big, dishonest, they are heightening the 
problem rather than addressing the problem. They are certainly not 
factually accurate as to what is going to happen here. The deficit will 
not be aggravated by anything near that number.
  Now, will the Federal debt go up? Yes. But then it comes back down as 
we get the money back. So that also is not a legitimate argument. If 
you have got a legitimate complaint, it is this as a conservative: When 
we make this investment and we start to get this money back, which we 
will, over the next 5 years, so that money is flowing into the Treasury 
at a pretty big rate, $500 billion, $600 billion, $700 billion, we 
better make darn sure that money goes to reduce the debt of the Nation 
and does not get spent around here on various products, which is what 
we tend to do with money when we see it arriving at our doorstep. That 
is what I am concerned about.
  I am hopeful that whatever the final agreement is, it will have 
language in it that says as we start to get this debt repaid, the 
Federal Government starts to receive monies as a result of the 
investment we have made, those monies will go directly to reduce the 
debt of the Federal Government, and the debt we are passing on to our 
children.
  But what is the practical effect of doing this, of putting this type 
of commitment up, this type of commitment to stabilization? The 
practical effect is that we stabilize, hopefully, the financial 
markets. What is the effect of not doing this? What is the effect of 
not doing this? We are playing with fire. We are rolling the dice. We 
are confronting potentially one of the most significant economic events 
in the history of this country, and it is not a good event if we do not 
take action.
  There are a lot of very thoughtful people around here who know that. 
Last week we almost saw that event occur when there was $335 billion of 
money market funds pulled out of the market and we basically saw the 
banks unable to continue to operate in an orderly way because of that 
until the Fed and the Treasury came in to basically stabilize the 
situation.
  We do not want to take that gamble as a nation. The cost of not 
taking that gamble is not that high. It is not $1 trillion, it is not 
$700 billion, as I have run through the scenario. It is virtually no 
dollars in the Bear Stearns-AIG event; it is a marginal number of 
dollars potentially in the Freddie Mac and Fannie Mae event; and in the 
big event, the $700 billion, we do not know what it will be, but we 
know it is dramatically less than $700 billion because we know we are 
going to recover a large amount of those assets, and the net cost of 
that activity will be well below $700 billion, assuming there is even a 
net cost over a 5-year or 10-year period as we work out these loans.
  But the cost to us if we do not do this? Potentially staggering to 
everybody in America. This is not about Wall Street; this is about Main 
Street. This is about people keeping their jobs; small mom-and-pop 
businesses being able to borrow money to operate; people being able to 
send their kids to college; an economy being able to be a growth 
economy rather than a contracting economy.
  That will affect everyone, everyone in America. So I think it is time 
to put an end to the theater and to the politicization and to the 
hyperbole.
  I congratulate a lot of folks on the other side of the aisle. I 
congratulate the Senator in the chair, from Pennsylvania. He has been 
responsible. I have heard Senator Schumer, who is a leader in this 
area, make some extraordinarily constructive ideas. Senator Dodd is 
trying to be constructive.
  I think there is a willingness in this body to act at least in a 
bipartisan, constructive way. That is what we need is some mature 
action around here. That is our responsibility as a government. We have 
a crisis upon us. There are ways to avoid it. We have a responsibility 
to pursue a course of action which gives us the best chance of avoiding 
that for the American people.
  I yield the floor and I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. ALEXANDER. I ask unanimous consent that the order for the quorum 
call be rescinded.
  The PRESIDING OFFICER (Mr. Menendez). Without objection, it is so 
ordered.

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