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Paulson on Fannie Mae Profit: I Had to Pinch Myself

Politics / Credit Crisis Bailouts Apr 04, 2013 - 06:23 PM GMT

By: Bloomberg


Former Treasury Secretary Hank Paulson spoke with Judy Woodruff in an interview airing on Bloomberg Television at 9:30 pm/ET this Friday. Paulson said that he "had to pinch himself" in reaction to the news that Fannie Mae generated record profits last year. "I could hardly believe what I was reading."

Paulson also said that the U.S. needs to slow the growth of entitlement programs and raise more tax revenue by closing loopholes: "We may need more revenues...This should be part of doing something with entitlements, because I think to just keep postponing entitlement reform is a big mistake."

"Conversations with Judy Woodruff" airs Friday evenings at 9:30 pm/ET with repeats over the weekend, including Sundays at 10:30 am/ET.

Paulson on Fannie Mae and Freddie Mac:

"Well, I read the Wall Street Journal and the Washington Post today, and I had to pinch myself. I could hardly believe what I was reading. But first of all, with regard to Fannie or Freddie, yes, the housing is recovering. And so when housing recovers, of course they're going to make more money, and that's a good thing now, because the government losses will end being - or the taxpayer losses will be less than projected. But this really troubles me if anyone is going to look at that and say, now we shouldn't reform them, because if we start again - today, the government is guaranteeing 90 percent of the mortgages. If the government keeps doing this, and markets aren't allowed to work, we'll be right back where we were in 2007 and 2008."

On the U.S. economy:

"I have significant concerns about the deficit, which is the huge issue. The debt we have, the fact that entitlements are growing faster than the U.S. economy, and we need to do something about that. But I feel better today than I did, you know, a month or two ago about growth. I mean, I think this is going to be a good quarter. I see business investment picking up. You know, housing is starting to recover. The consumer is back a bit. And so I - I'm cautiously optimistic about growth this year. I think we could see growth around 3 percent, 200,000 jobs a month. Now, that's the good news. And the bad news is, at that level, it's going to take a long time to work our way through this high level of unemployment we have. And I think it's going to take some real compromise in Congress to restore the competitiveness of the U.S. economy."

On what entitlement cuts need to be made:

"We need to slow the growth. And that's for certain. And there's various approaches you could use to doing that. You know, I'm a believer in means testing. It's sort of ridiculous that I get the same Medicare benefits that those who are struggling to make ends meet do. I think it's perfectly reasonable to extend the retirement age for those that are under 50, for instance. I think we're going to have to do some things. And if we don't, we're leaving a very heavy burden for our children and grandchildren."

On whether tax reform would include higher revenues:

"I think it would be perfectly fine to have higher revenues. I think we may need more revenues. But I think this should be part of doing something with entitlements, because I think to just keep postponing entitlement reform is a big mistake. And you can't solve this problem just with taxes. No matter what you do with taxes, we're going to be eaten alive by debt over the long term if we don't slow the growth of entitlements. But in terms of tax reforms, I would be pretty radical. I would eliminate essentially all deductions, you know, in the personal income tax and - and lower the rate. And I would eliminate virtually all deductions or preferences when we're dealing with corporate income taxes."

On the Federal Reserve and Chairman Bernanke:

"Well, as treasury secretary, I never commented on monetary policy, and I guess I shouldn't as a former treasury secretary, but I'll say a few things. I've, first of all, got great confidence in Ben Bernanke, number one. Number two, he's been forced to do some pretty dramatic things to restore our economy, because there's been a lot of inaction in the executive branch and in Congress. Now, what the Fed has done has kept interest rates at an artificially low level. And this has given us a grace period to deal with our fiscal problems, but if you stop and think about it, with 10-year Treasuries yielding about 2 percent in the 1990s, the average was well over 5 percent. And if you take a look and project what is going to happen, in terms of the interest on our debt, when rates go up to a more normal level, that's another reason why I think we need to move pretty quickly and deal with the deficit."

On whether the Fed should start unwinding stimulus:

"I'm not close enough to that. I have confidence that I think he's needed to do what he's done. I have confidence that they'll figure out that the chairman will figure out the right path here. But this can't go on forever. And there is a cost to everything. There is no perfect solution. So when you have very, very low interest rates, artificially low interest rates, it benefits people that are borrowers and we've needed to do that while we're deleveraging - it benefits the equity market - wealthy people that own equities, but it takes a big hunk out of those that live on fixed incomes and are retired."

On whether Lehman Brothers should have been handled differently:

"It's amazing that I still get this question as often as I do, because no one made a decision to let Lehman Brothers go, that Ben Bernanke, Tim Geithner and I have said countless times that there really wasn't a decision to make, because the Fed did not have any powers - anything they could have done that was legal that would have prevented a failure of Lehman. And, you know, we learned at the time of the Bear Stearns rescue that, when an investment bank is disintegrating, it goes very, very quickly. And a Fed loan - and it wouldn't have worked and it didn't work - loan in Bear Stearns. It took a buyer coming in to inject capital. And, frankly, as I've thought about it more, about the Lehman situation, in some ways, we were fortunate, because we tried very hard to come up with a solution, and we were hopeful BofA would buy Lehman, but what was happening was we had at the same weekend that Lehman was going, we had AIG, Merrill Lynch, and Lehman going, and it turns out BofA bought Merrill Lynch. And if BofA had bought Lehman and Merrill Lynch had gone down, it would have been worse, because Merrill Lynch was a lot bigger. So as I look back today on the financial crisis, I feel great gratitude for the way we worked together, and I think that dealing with sort of an unprecedented set of circumstances, we collaborated - Treasury, with the Fed, with the FDIC - and the major decisions we made were the right ones, and prevented a huge disaster."

On how he would grade the Obama administration's handling of the financial sector and the economy:

"Well, I would say really, really well, because you had this huge advantage, that Tim Geithner was a key member of the team, putting in these reforms in place, working with him closely. So President Obama selected him. And then what they did - and I think it was very courageous on Obama's part because there was all these bailouts, these rescues were so unpopular - but Tim persuaded him to stick with the capital markets stabilization programs we had put in place. And then they adapted those very well - a number of them - to meet the changing situation and managed them very well. And so to me, there was complete continuity. I think the programs were largely in place when Obama came in the office. They - and I think there could have been - must have been real temptation to go in different direction, to nationalize the banks, et cetera. But they managed those programs flawlessly. And then they did other things, like the stimulus plan."

Copyright © 2013 Bloomberg - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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