'Meet the Press' transcript for August 10, 2008

MR. TOM BROKAW (Beijing):  Our issues this Sunday:  All eyes on Beijing as the 2008 Summer Olympics get under way.  The United States and China, where do they go from here?

And back at home, the economy, the stock market, the housing crisis--all challenges for this man, our guest here in Beijing, U.S. Treasury Secretary Henry Paulson.

Then, jobs and the economy also front and center in the race for the White House.

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Narrator #1:  (From political ad) Barack Obama, a new vision for our economy.

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(Videotape)

Narrator #2:  (From political ad) Life in the spotlight must be grand.  But for the rest of us, times are tough.

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MR. BROKAW:  Plus, will an offer to speak at the Democratic convention be enough to ease tensions between the Obama campaign and the Clintons?  And former presidential candidate John Edwards admits to an affair.  Our political roundtable weighs in from Washington:  Washington Post columnist David Broder; the anchor of CNBC's "Street Signs," Erin Burnett; Washington Post columnist E.J. Dionne; and The Wall Street Journal's editorial page editor Paul Gigot.

But first, good morning from Beijing, where it is now a kind of stormy Sunday evening.  And here at the Olympic Games, I sat down with Treasury Secretary Hank Paulson yesterday to talk about all the momentous economic news and the future of U.S./China relations.

Mr. Paulson, thank you for being here.  I, I know you're on a family vacation, so we're very grateful for you taking this time.

SEC'Y HENRY PAULSON:  Tom, it's good to be here with you.

MR. BROKAW:  Let me also say I know you're a sports fan of a certain age. Remember the old Joe Louis line about one of his opponents, "He can run, but he can't hide"?  You can come all the way to Beijing, but you can't escape what's going on at home.  So I'm going to share with you and with our viewers some of the more tough news that we've heard this week.  Freddie Mac lost $821 million in the last quarter, and then Fannie Mae reported a loss of $2.3 billion.  These are the government-sponsored mortgage agencies.  On July 20th of this year, you told my friend Bob Schieffer on "Face the Nation," "Well, I think it's going to be months that we're working our way through this period. Clearly, months.  But remember, the long-term fundamentals are very solid." After what we heard from Freddie Mac and Fannie Mae this week, have you changed your mind about how long it's going to take to get out of this?

SEC'Y PAULSON:  No, I think what, what I said to Bob Schieffer is, is, is consistent what I, what I believe today.  I, I believe that we, we have got some serious issues we're dealing with in our economy, and, as I said to him, I believe that it's going to take us well beyond the end of the year to work through the housing--all of the housing problems.  But I think the key question is when will the largest part of this housing correction be behind us?  Because until the biggest part of the housing correction is behind us, we're going to continue to have turmoil in our capital markets.  And I think the housing correction is really at the heart of our economic problems as a, as a nation right now.  So, again, I think given that Fannie Mae and Freddie Mac are solely involved in housing--that's their sole business--and given the magnitude of the housing correction we've had, it, it, it's not a surprise to me to, to see those, those losses.

MR. BROKAW:  You have the ability now to insert money into Freddie Mac and Fannie Mae.  Do you think that that's going to become necessary, given the size of these losses?

SEC'Y PAULSON:  Well, we have no plans to insert money in, in, in, in either of those institutions.  I, I think it was very important that we get these temporary backup facilities because Fannie and Freddie are very important to our capital markets broadly.  There's $5 trillion of securities that they have outstanding--$3 1/2 trillion in the U.S., a trillion and a half outside of the U.S.--and they're responsible for funding about 70 percent of the mortgages in the United States today.  And so a key to our getting through this, this housing situation, this housing correction and getting some stability is that we continue to have mortgage financing available.

MR. BROKAW:  Those two agencies were not well known to most taxpayers in this country...

SEC'Y PAULSON:  Yeah, yeah.

MR. BROKAW:  ...until the housing crisis hit.

SEC'Y PAULSON:  Right.

MR. BROKAW:  But we also know that they were caught in some significant accounting irregularities.  They changed the management at the top; now they're both hemorrhaging money.  You do have the authority to bail them out if it becomes necessary.  But a lot of taxpayers are saying, "Why should I have to foot the bill for this?" I mean, there are wealthy investors who bought these bonds knowing that the government would not back them.  Now, suddenly, they've got a fail-safe arrangement with the Treasury secretary.

SEC'Y PAULSON:  Well, I've heard a lot of those same comments, and what I say to all those who make the comments to me is I say to them, you know, this was not a pleasant task for me to go to the Congress and ask for these backup facilities.  Matter of fact, it was a very unpleasant task.  But it was an easy one because it was better than the alternative.  These institutions are right now critical to the stability of our capital markets, and they're critical to us getting through this, this housing situation.

And I would like to point something else out.  In addition to these backup powers we have, these backup authorities, what we have now is a legislation calling for a strong new regulator with real powers to deal with, with capital adequacy, to deal with systemic risk.  And the issue we've had, Tom, is, for some time, people in Washington have looked at these government-sponsored entities and on one side people have said they are really significant risks. Others said there weren't significant risks, and for, for, for many, many years nothing was done.  And we now have a new regulator with very strong powers.  The Fed is going to have a seat at the table.  And so, in addition to working through this period of turmoil, we're in a position where the country will now be able to focus looking ahead at the systemic risk, and I, I think it's going to be very difficult for someone to argue there isn't systemic risk.

MR. BROKAW:  But will those two agencies have to be fundamentally reorganized in a completely different way?  Some people were saying we just ought to nationalize them and forget the idea that they're kind of a semi-public or semi-private agency.

SEC'Y PAULSON:  Tom, I've heard a lot of that, and, and some of these ideas are--involve enormous changes.  And I think that the focus today needs to be on stability, getting through this period of turmoil, getting through the housing correction.  But there will be discussions when, when, when--with a new regulator in place and looking at systemic risk, there will be discussions about structural issues, and while, while there should be looking ahead.

MR. BROKAW:  At Freddie Mac, the risk manager in 2004 went to the chairman, Richard Syron, and said, "Look, we've overextended ourselves here." Sent him a memo in fact.

SEC'Y PAULSON:  Yeah.

MR. BROKAW:  Syron said, "I have no choice but to continue with this." Now the other day when he reports these big losses, he said, "Well, we were just caught in the market downdraft," or words to that effect.

If Mr. Syron were working for you in your old job at Goldman Sachs, would he still have a job?

SEC'Y PAULSON:  Well, I, I, I don't think I should hypothesize.  What, what I should say is that these organizations, for some time, people have looked at them.  And people, really, in, in both parties have looked at them and said, you know, "They're an odd construct." And, and Dick Syron has said that. They've got on one hand responsibility to their shareholders, on the other they're government-sponsored entities.  They haven't had an regulator with the necessary powers.  So I would like to look forward and say we can take some satisfaction in, in the fact that we now have a regulator that is going to be able to begin to deal with these systemic issues.

And to the American people, all I can say is that the stability of our capital markets is very important to you.  What's going on in our economy is, is going to be determined to, to a large extent by the speed with which we get through this housing correction, and when we see--when we begin to see more stability with regard to home prices.  And it's very important that Freddie Mac and Fannie Mae continue to play their very important role they're playing right now in funding so much of the mortgage financing in this country.

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