INTERVIEW TRANSCRIPT

C-SPAN’S “NEWSMAKERS”

Guest: Anthony Ryan, Assistant Treasury Secretary for Financial Markets

Reporters: Neil Irwin, Washington Post & Greg Ip, Wall Street Journal

Moderator: C-SPAN

TAPE DATE: Thursday, March 20, 2008

AIR DATE/TIME: SUNDAY, March 23, 2008 at 10 a.m. and 6 p.m. ET

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CONNIE DOEBELE: Our guest this week on "Newsmakers" is Anthony Ryan who has been assistant secretary of the treasury for financial markets for the past 15 months.

And in that capacity, he coordinates the work of the interagency President's Working Group on Financial Markets, which was established in 1987, after the turmoil in the markets at that time.

And Mr. Ryan is one of Treasury Secretary Paulson's chief deputies in the government action in the financial markets this week.

And questioning him this week will be two reporters who have both had front-page articles in their respective papers about this current credit crunch. Joining us in Greg Ip. He is chief economics correspondent for the Wall Street Journal and Neil Irwin, the economics reporter for The Washington Post.

We'll start with you, Neil.

NEIL IRWIN: Thanks, Connie.

Tony, we've heard a lot of talk in the last several weeks, the last several months, about the credit markets and how they function and how they work.

Why does this matter to ordinary Americans? Why should these obscure markets that some people haven't even heard of, why do they matter?

ANTHONY RYAN: Well, we have very diversified credit markets, but they do play a critically important role in terms of facilitating economic activity.

It matters to every American, individuals who borrow money, whether it's through credit cards, whether it's through mortgages to help finance a home purchase, whether it's through student loans to help finance educations.

Everybody is impacted by the functioning of our credit markets, and not just on the borrower side, but we also have to recognize that Americans save, and as they save they invest, and as they invest, many of those investments are made in our financial institutions and in other types of securities that are traded in our credit markets.

So, they have a role on both sides, and it impacts everybody, and hence our interest in making sure that our credit markets and our capital markets are functioning as effectively as possible.

IRWIN: So, after a wild weekend with the Bear Stearns action taken by the Fed and a very tumultuous several months, how has this past week been? Are things stabilizing? Are things functioning the way that you're happy with?

RYAN: Well, I think some of the actions have helped facilitated more stability and more orderliness in our capital markets. I think we have to recognize that the current conditions are a function of a series of excesses that have been built up over a number of years.

They have created challenges as some of these changes are occurring, but we're working through that. I have a great deal of confidence in our capital markets. We're addressing these challenges and we're addressing them both from a public policy perspective, and certainly some of the actions as recently as this weekend have helped facilitate additional liquidity into our capital markets, which helps those capital markets function more effectively.

But the responsibility is not just that of the public policy makers and regulators; it's also an important role by our market participants. And they can and are working through these challenges, and I'm confident they'll continue to do so in the weeks ahead.

GREG IP: Why are there these enormous problems in the markets? The average person sees the Dow go up and then go down. They see mortgage rates go up.

Can you explain why we're having these problems? You know, it started in something called subprime mortgages, but a lot of people say, "I don't have a subprime mortgage. Why am I suffering?"

RYAN: Well, it's a great question, Greg.

What happened is – you're absolutely right – some of the challenges that we are working through today are not explicitly directly related to subprime mortgages. But I think it's a great illustration of how interconnected our capital markets are today.

And the trigger that started a lot of the turmoil was a very grand expansion of delinquencies, with some of the mortgages that were underwritten back in 2004, 2005 and 2006.

And this goes back to the point I made earlier with respect to some of the excesses that were going on. And there was a general weakening of underwriting standards and credit extension in the mortgage marketplace during that period of time. And as a result, we had an alarming rate of delinquencies in some of those mortgages that were originated.

That started the challenges. But it quickly spread to other segments of the capital structure and had implications not just in our credit markets, but within financial institutions, and not just here in the United States, but around the world. And it's another illustration of how interconnected our markets are, not just across asset classes, but across geography.

IP: We read that the Federal Reserve lent $30 billion to help Bear Stearns be taken over by JP Morgan on the weekend. Explain to us how this loan works. And the question I think a lot of people have is, you know, President Bush has said no bailouts, why is it therefore that Bear Stearns and its counterpart he's going to bail out but the average homeowner does get a bailout.

RYAN: Well, I think the key thing to focus on here is certainly with respect to the shareholders of Bear Stearns, they've suffered a significant loss. The focus that we have at the Treasury Department and with our colleagues in the regulatory community is the functioning of our capital markets, the stability and the orderliness of our capital markets.

That benefits everybody. That benefits the entire system. And we need to see that stability in our financial institutions and in our financial marketplace.

So the actions taken by the Federal Reserve over the weekend – and there were a series of actions taken – were all done with the ambition of facilitating orderliness and stability in our capital markets.

And when those attributes exist, additional liquidity comes into the system and ultimately continues to enhance investor confidence and the functioning of these economic activities that are so important to both users of credit and providers of capital.

IP: Why was the $30 billion necessary?

RYAN: The portfolio of actions that were taken were all done to facilitate liquidity and orderliness in the markets. The specifics of the terms and conditions were between the counterparties involved in that transaction.

IP: But the Fed did seek approval of the Treasury for that particular transaction.

RYAN: Well, we work in close concert. It's very important that we communicate with each other, understand what's going on, share thoughts and share perspectives. And we focused on what's in the best interest of the markets, what's in the best interest of the stability of the financial system. And we remain in close contact with the Federal Reserve.

IRWIN: If you look where Bear Stearns stock is trading now, it's much higher than the deal announced last weekend, suggesting that investors think there's going to be other offerors (ph) or some kind of other value – something else might happen.

Is that something you would expect for the Treasury Department to be involved in keeping some new bidder or new intervention in that company's potential acquisition by JP Morgan? Is that something that creates risk for the broader markets?

RYAN: We constantly are monitoring the markets. We're very vigilant in reviewing what's going on in the markets, how markets are reacting.

I'm not going to speculate what's going to happen with other individual companies or what individual institutions may or may not do.

But I can assure you we want to do and see activities and market participants taking actions that will enhance this ability of our markets and enhance liquidity in the capital markets.

IRWIN: So, back to Greg's question. Here's this massive intervention in the workings of investment banks and a bunch of Wall Street rich guys.

Why shouldn't there be a similarly massive intervention to help ordinary homebuyers who got in over their heads or facing hard times?

RYAN: Well, in terms of what the Fed did and what other regulators are doing to help facilitate orderliness in our capital markets, I do think that helps everybody, given their vested interested in ensuring that financial institutions can lend to them and that there's stability in their investments that they make into the capital markets.

With respect to some of the other challenges that individual homeowners have and the challenges given the head winds to the economy in the housing sector, there are a series of actions that we have supported to help meliorate some of the challenges in the housing sector.

But this is a very real challenge that the economy is facing. But we've been facing it for almost two years now. And I have a great deal of confidence in our economy. It's very resilient. It's continued to grow.

But certainly, we have some real challenges today and we're addressing those in the housing sector, and we're also looking to do all we can to mitigate the spill-over from the events in the capital markets and in the credit markets spilling over into the real economy.

IRWIN: So, these events of the last couple of weeks have not changed your stance or the administration's stance on, for example, the kind of proposal that Senator Dodd and Congressman Frank are working on to buy up mortgages and try to return some stability to that section of that mortgage market?

RYAN: Well, we share the ambition to have the housing marketplace work through. We have put forth a series of initiatives. And our focus, going back to last summer, was to try to prevent as many foreclosures that could be prevented, where there was affordability by the homeowners.

And our focus is on the homeowners. And we had facilitated the establishment of this alliance, this Hope Now Alliance, with nonprofit counselors, with investors, with financial institutions, with lenders, with other product providers to really improve the efficiency and the coordination associated with preventing affordable foreclosures. And that group is working well, we're making progress. And that's a big part of what needs to be done.

The FHA is playing a role. We would really like to see Congress move forward with FHA modernization. That would allow the FHA to play even a larger role and help more homeowners. So that would certainly be a constructive part of an overall solution.

And third, the GSEs. They played an important role in this marketplace. And we saw some actions as recently as yesterday by their regulator, and hopefully that will also be part of the solution to contribute to that. And we want to continue to work and see Congress move forward with comprehensive GSE reform.

I think the important thing to recognize, whether we're talking about the challenges in the capital markets with respect to credit, or challenges in the housing sector of the economy, that there are a host of related issues which combine to create these challenges, and as such the solution to address these challenges will also be a combination of different initiatives and actions.

So we're very engaged on both fronts.

DOEBELE: What is GSE?

RYAN: I'm sorry. Governor-sponsored enterprises. So Fannie Mae, Freddie Mac.

DOEBELE: OK. Thank you.

IP: Are the taxpayers at risk of losing money as a consequence of the money that the Fed has lent to Bear Stearns and now plans to lend to other broker-dealers?

RYAN: Well, the Federal Reserve is a function of a capability of a lending facility, and they have policies and practices in place to ensure that loans that they make out to the institutions are collateralized, and they set the guidelines for that.

IP: We read that the Treasury and the Fed might actually make money on this loan. Is that true?

RYAN: The terms and conditions of that are probably best addressed by the Federal Reserve.

IP: OK. Going back to a Neil question for a second, the specifics of the Dodd-Frank proposals. They would like to go beyond the steps that you and the Congress have already talked about with respect to FHA modernization and make its resources available to guarantee as much as $400 billion in mortgages, as long as the lenders write down the value of those mortgages.

Can you tell us whether the administration sees some value, whether they want to at least negotiate this, whether they're willing to, perhaps, meet them halfway on this proposal?

RYAN: Our focus is really making what we have move forward with as effective as it possibly can be. We feel that is the best thing to be doing. It is working. We don't want to see things that could compromise or undermine that effort.

But, as I said, there are a host of other things that could be done. I think FHA modernization would really be an additional step that would be very, very constructive to see. And the GSEs continue to play a role in facilitating that type of capital being deployed into the mortgage marketplace.

IRWIN: Tony, you've worked in financial markets for a long time in the private sector before you came to the Treasury Department. What has surprised you about how this event – this series of events over the last several months has played out?

What are the stress points or tensions or problems in the financial markets that you never could have imagined?

RYAN: Well, I think there are a host of issues. And this is actually something that we have been doing in parallel.

Obviously, our first and most important focus is on working through the current challenges in the capital markets and to mitigate those implications into our real economy. We want to make sure that our real economy can continue to grow so that companies have access to capital, so they can make investment, continue to hire people, have jobs growth, et cetera.

With respect to the capital markets, in addition to getting through the current challenges, we've also been working over the last several months in a parallel way to look at, "How did we get here?"

And I talked a little bit earlier about the trigger event and some of the weakness that helped facilitate starting this turmoil.

But at the same point in time, we've also looked at the weaknesses that helped enable this turmoil to spread across ASA (ph) classes, across geography and to see how pronounced it's become.

And over the last several months, when I use the word "we," it's not just my colleagues and I at Treasury; it's also our colleagues within the regulatory community at the federal level that's comprising the President's Working Group on Financial Markets.

And we have looked at all of the underlying practices and evaluated those to address what were the weaknesses that enabled this to spread. And more importantly, what recommendations should we put forth that would help mitigate some of those weaknesses so that we can make our capital markets stronger and reduce the likelihood of this type of turmoil in the future,

And just last week, Secretary Paulson, in his capacity as the chairman of the President's Working Group on Financial markets, which also includes the Federal Reserve, the Securities and Exchange Commission and the Commodities Futures Trading Commission, put forth a policy statement which diagnosed all of these weaknesses and also put forth a broad array of recommendations that we feel, when implemented, and that's the stage we're moving to now, will significantly address those weaknesses and make our capital market stronger.

IP: Can you give us one or two examples of problems and the solutions that you've put forward?

RYAN: Sure, I'd be happy to.

I think one of the key issues to recognize here is that we didn't want to get into the finger-pointing, this is the where the blame lies. As we looked at all of the practices in the capital markets, we recognized that there was room for improvement by everybody. That include mortgage originators. That included issuers of securitized credit. That included the role of the rating agencies. That included the role of investors. That included the role of their financial institutions. And importantly, it also included the role of the regulatory community.

So across the board we said everybody can look at their existing practices, put forth recommendations that we felt would help strengthen those practices, and said let's get to work addressing these, but let's be really thoughtful about how we implement these so that we don't exacerbate the current challenges that we're working through.

But, for example, with respect to rating agencies, we said they need to …

UNIDENTIFIED PARTICIPANT: And what are rating agencies?

RYAN: Rating agencies are firms that are responsible for evaluating certain securities that then are issued into the marketplace and providing a rating.

IP: These are the ones, for example, that would say this bond is worth – is AAA and therefore it's top quality.

RYAN: Exactly.

And part of the challenge that we've had in the capital markets is, given the relatively long period of very benign economic and financial conditions, investors became somewhat complacent about risk. And some perhaps over-relied on ratings who looked at a specific security and said, "Oh, it's AAA," and made some assessments about what they thought that meant.

And one of the recommendations that we put forth is we need to do a better job of sensitizing all market participants and regulators about risk. So we need to increase the awareness of risk and focus not just on returns, but also on risk. And a big part of what has exacerbated some of the challenges and the solutions in working through the turmoil is some of the complexity that has started to become so pervasive in our capital markets with respect to structures and with respect to instruments.

And in addition to some of the complexity, one of the corresponding attributes is opacity. And part of one of the broader themes of the recommendations that we've put forth was to enhance disclosure and to provide additional information so that investors are, a, more aware of risk.

And when I say risk, broadly defined – not just credit risk or probability of default risk, but to think about liquidity risk, to think about counterparty risk, to think about reputational risk. There are a whole host of aspects that we need market participants to be more sensitive to and that are managed.

And so, part of the recommendations were geared toward providing that information to investors and to financial institutions to, a, be more aware of risk, but, more importantly, better manage it.

IRWIN: You don't want to point fingers. I'm going to ask you to point fingers. Is this a market failure we're experiencing or a regulatory failure, or is this not a failure at all? Is this just the way markets work and the way capitalism goes?

RYAN: Well, as I – as I look at it, I think that there's – there were certainly weaknesses. Certain practices compromised our discipline in the marketplace, which is something that we, as policy-makers, rely very heavily on – for investors to act in their own self-interest and consistent with the rules and regulations, to have actions (ph) for investors.

And, as we look across the continuum, we felt everybody could strengthen and enhance and fortify their practices.

And that includes regulators too. I think it's a fair point that some of the regulatory policies and guidance that was there failed to mitigate some of the weaknesses in the – by the market participants.

So certainly there are tangible, responsible – responsibilities for the regulators to pick up and move forward on in terms of putting forth rules and guidance that will strengthen market discipline and to work with their entities that they regulate, whether those are investors, rating agencies or financial institutions.

And that's true, not just domestically. But one of the things we've learned is how interconnected capital markets are globally. So, it requires a great deal of communication and coordination across regulators at both the federal level, at the state level and internationally.

And so, we're working in close concert with the foreign regulatory community and we're working through the Financial Stability Forum and the G-7, and they'll be coming out with additional recommendations in the weeks ahead.

IP: Tony, with the Federal Reserve now lending money to broker dealers directly for the first time, basically, since it was created in 1913, some people on Congress are pointing out that now that that money is at risk (ph), the Fed really ought to have some say in supervising these entities.

In fact, they argue that possibly the fact that a very large brokerage firm nearly failed without anybody realizing in what hard shape it was until almost the last minute suggests that there is a case to be made for a reform of the prudential oversight.

What are your thoughts on that? Do you think that, perhaps, we do need to think about whether we need to broaden or revamp the oversight? Should there be some rule for the Fed overseeing these terms now that they are also lending to them?

RYAN: Well, I think – a few thoughts. One is, we need to continue to make sure we work through the current challenges in the markets. This has to be job one. And the actions by the Federal Reserve to help facilitate orderliness and stability is very, very important.

Number two, with respect to the President's Working Group and the recommendations that we put forth last week, there are a host focused on many of these issues as they relate to financial institutions.

And we need this communication and coordination by the various regulators. And the SEC, in conjunction with the other bank regulators, are working on reviewing the practices of our financial institutions' risk management, including liquidity risk management, which is really at the heart of the recent developments.

And as we look forward and look at the broader issues of regulatory structure within the United States, I think we all recognize that the framework that we have in place today is, as you suggest Greg, is a reflection of literally decades of evolution. And we have a very fragmented regulatory structure.

This is an issue that Secretary Paulson put a light on last year when we were focused on the issues surrounding capital markets competitiveness, and the Treasury has been working on reviewing the broader question, the strategic question of, is our regulatory framework for our financial services industry optimally structured to enable our economy to continue to thrive and compete in the 21st century. And this is something that the Treasury will be speaking out on and providing more insight on in the weeks ahead.

IP: Do the events of the past weekend and the Federal Reserve's insertion into, you know, the business of lending to securities dealers add a new urgency to that process or suggest you need to go and think some more about these issues? Does it give you new things to think about?

RYAN: Well, this is something we've been spending a great deal of time on and working on and will be coming out in the weeks ahead, but certainly we, as part of that process, we've had extensive conversations with the regulatory community and with market participants. We solicited input from the marketplace. And all of that has been factored into our thinking and our review.

IRWIN: Well, what you've offered both today and in the President's Working Group proposal a couple weeks ago, what kind of outlines of examining flaws in the system and looking for ways to address them – when might we expect some more specific either legislation or regulations to deal with some of these holes, and is this something that will call for some kind of sweeping legislation passed by Congress, or is this something that will exist more in kind of different agencies revising how they do things?

RYAN: Well, I think first we have to be sure we don't exacerbate the current challenges in the capital markets as we move toward implementation with many of these recommendations.

Second, there's a lot of market discipline being wrought out in the capital markets today. And so, market participants are moving in the right direction and making up for some of the weaknesses of the past.

But we want to continue to work with market participants and find the best way to move to implement these ideas.

Certainly, the regulators are already engaged with those that they regulate to review those practices, review those guidance, review those rules and modify them as necessary so that they're consistent with the recommendations.

Our ambition is to see the market practices change. And we want to and will continue to monitor market developments, monitor practices in the marketplace, and if those practices are not moving in the direction that we want to see in terms of enhancing market discipline, mitigating systemic risk, strengthening risk management practices, enhancing risk awareness, improving the infrastructure of our capital markets, then we'll either make addition recommendations, or, if necessary, if we need additional regulatory authority, I expect the regulators to seek it.

But we're going to stay on top of this. The secretary has pledged that at the end of this year we'll give a status report, an update, on what we've seen and how it's moving.

But we're very focused on ensuring that the weaknesses are addressed.

DOEBELE: The credit crunch is now topic number one, I'll bet, in restaurants and homes, around dinner tables. What do you tell people who are just scared now, just plain scared?

RYAN: Well, investor confidence comes from seeing capital markets effectively function, to know that there's regulators monitoring what's going on in the financial institutions and the health of those financial institutions.

I think it's important to recognize we are making progress. And some significant developments have occurred. We've seen financial institutions take these write-downs. We've seen many financial institutions take actions to strengthen their balance sheets.

I think it's important for people to recognize that our financial institutions entered into this period of turmoil with strong capital ratios and we are continuing to see policy-makers stay very engaged, taking appropriate actions, facilitating liquidity in the capital markets.

And we need market participants to do the same. It's a shared responsibility.

But, obviously, our focus is just that – to see the capital markets working well, to make sure that credit is being able to be extended to those that need it, and that they have confidence in our capital markets.

But we have very diverse capital markets; very resilient capital markets. And I'm quite confident that we'll continue to work through these challenges. And, as we do, and as these recommendations are implemented, I'm quite confident that our capital markets will be that much stronger.

DOEBELE: Anthony Ryan has been assistant secretary of the treasury for financial markets for 15 months now.

Thank you very much for joining us on "Newsmakers."

RYAN: Thank you very much for having me. Thanks.

(BREAK)

DOEBELE: Neil Irwin with the Washington Post and Greg Ip from the Wall Street Journal, what did you hear?

IP: Well, I heard the administration still trying to, in some sense, stick to the message that, "Let's let the initiatives that we've already announced do their job before we move to more radical solutions, such as those that some Democrats on Capitol Hill are talking about."

I guess from an analytical perspective, you want to ask whether they really have that kind of time, you know?

It seems that every week the crisis gets work and a new sector of the market falls under stress, a new type of firm has troubles meeting its financial obligations. And when people sort of see their 401(k) suffering because of these mysterious markets blowing up, there's a lot of pressure on the administration to act and to show momentum.

And so, you really have to wonder how long they can sort of, like, hold off the pressure to do something more, especially on the front of expanding the Federal Housing Administration's lending ability.

DOEBELE: Congress is out this week. And so, will there be a big change when they get back? I mean, all at once, these members will all come coming together and they will not have been together since the Bear Stearns issue.

IRWIN: Well, that's the thing. Whatever the merits of – the administration would argue that trying to create some kind of program to help the mortgage markets to help home buyers directly that it's fraught with technical problems and challenges.

How do you avoid just bailing out banks and people who made bad loans? How do you avoid bailing out speculators who made bad bets and engaged in irresponsible behavior?

And they're right, it's very tricky to try and design some program that doesn't have those faults in it.

That said, the political environment may have changed when you have a situation where $30 billion is at stake to make this acquisition of Bear Stearns happen.

It's kind of hard to do that and then say, "Well, we're not going to intervene in these private markets, we're not going to have any bail outs," especially when homebuyers are on the hook.

That said, it's a much trickier and harder thing for Congress and the administration to try and write up (ph).

DOEBELE: Do you think the administration represented by Mr. Ryan has been successful in their PR effort part of this?

IP: That's very difficult to answer because you have to calibrate that against how the environment around them keeps changing.

And, frankly, the Federal Reserve has the same problem. Some people have criticized them for, you know, being slow initially to trim interest rates and communicating a message which seemed too focused on the problem of inflation than the problem of the economy. But the fact of the matter is that events are really moving at light speed now. I mean, what we saw with basically the situation of Bear Stearns going to the brink of failure in a matter of days is that today's markets move much more rapidly. And so the message that the administration puts out this week may seem suddenly like antiquated and out of date by the following week.

IRWIN: It's a tremendous problem for them. They have a kind of free market approach to this. They want to respect private markets and not bail out Wall Street, not bail out people who made bad decisions, but the worse this thing becomes, the harder that line becomes to maintain.

DOEBELE: In the presidential working group, as we go forward from here, how much should people pay attention to that group itself? Is it key as we look to the future?

IP: Not so far in what they've done, sadly. I mean, to use an analogy, in some sense they're debating how to improve the fire code while the fire is still raging, you know what I mean? I mean, it has to be done, it's important work, but right now the real – the pressure is on to solve – put the fire out, and that's where people are still struggling to find the right tools and use them with enough aggressiveness.

DOEBELE: Now, the whole working group came into effect in the last problem. We had this in '87. Do you think there'll be changes in the working coming out of this?

IRWIN: Well, the working group is just kind of the group of these agencies that deal with these issues. The important thing is the working group has existed for 20 years, and for a lot of that time they met four times a year and didn't do much of anything.

Under Secretary Paulson – Treasury Secretary Paulson – has taken on a more dominant role in dealing with the regulatory and financial infrastructure. We would expect that to only continue and expand now.

DOEBELE: What should we be looking for in the next week? Is there any way to look to get a feel for what you're looking for?

IP: I think there are two areas that I would watch, Connie.

The first one would be see whether the administration starts making noises publicly about moving toward the Democrats on Capital Hill with respect to expanding the Federal Housing Administration's lending capacity. And the second thing I would look to see would be more thoughtfulness about how to reform the regulatory structure.

As I was trying to get across in my questions to Assistant Secretary Ryan, now that the Federal Reserve is in the business of lending not just to banks but to security brokerages, there's a really reasonable question to be asked, well, shouldn't they have some real oversight over them.

DOEBELE: And on Capitol Hill, when the Congress comes back, you mentioned Congressman Frank. You mentioned Senator Dodd.

Are those going to be the key people to watch?

IRWIN: They are. Senator Dodd chairs the Senate Banking Committee. Chairman Frank of the House Financial Services Committee.

They're kind of the key nodes of trying to work out solutions to this.

The thing is, just the mechanics are very difficult – trying to design some kind of proposal to deal with home buyers and the excesses in the mortgage market that have built, as Tony said, over many years, is a very, very difficult thing.

They will be trying to put together packages. They already have some broad ideas out there. If they can put together a law and get it passed, it will surprise a lot of people.

DOEBELE: Then it's your job to explain that very difficult thing to – in language that makes sense to the regular American audience. Thank you both very much for coming today. Our guests have been Neil Irwin, the economics reporter for The Washington Post and Greg Ip, the chief economics correspondent for the Wall Street Journal.

END