JOHN HOCKENBERRY: A lot of people, particularly in the financial world, are
remembering just one year ago, this weekend. The U.S. financial system changed forever.
Lehman Brothers filed for bankruptcy by Monday, Bank of America agreed to buy Merrill Lynch,
Insurance giant AIG was asking for a bailout from the government. If you ask Timothy
Geithner, he might say, "what a difference a year makes."
[Treasury Secretary Tim Geithner, on tape] "Last September, of course, we faced the risk of catastrophic financial
failure and the risk of a great depression. Today, because of comprehensive policy actions
put in place since then, we are back from the edge of the abyss."
HOCKENBERRYComprehensive policy actions: read, $700 billion of taxpayer
money to shore up the banks and keep the financial system operating here in the U.S. and by
implication, the rest of the world. Joining us now is perhaps the best person to ask how
we're doing, Elizabeth Warren is a Harvard professor and chair of the Congressional oversight
panel for the bailout, the so-called "TARP fund." Elizabeth Warren, good morning to you.
ELIZABETH WARREN: Good morning to you.
HOCKENBERRY: Are you feeling better, a year after the events of Lehman
Brothers debacle, AIG, Bank of America, all the stuff we were going through a year ago?
WARREN: Sure, everyone feels better, I think, than we felt a year ago. I
mean, it was complete chaos a year ago. People weren't sure what was going to happen. They
were talking total meltdown. Words used were words of "catastrophe." And we have backed off
from the abyss, as Secretary Geithner said.
HOCKENBERRY: But when we were using those words, "catastrophe," and throwing
money at the financial system, the question of how we oversee that pile of money was really
pretty challenging. Yesterday, Secretary Geithner suggested at least $50 billion would be
repaid as soon as between now and the end of the year. How are we doing on the payback part
of all this?
WARREN: Well, we're at the under-10% on the payback part of this,
HOCKENBERRY: Really, not a good investment.
WARREN: We're still low on that ... no, no, I don't mean a 10% rate of
return, I mean 10% of the money back, the principal. But that's not surprising; a lot of it
is still out there, still being used. We have to remember, backing up 6 inches from the abyss
and saying, "Oh, let's dust ourselves off, problem solved, business as usual" ... those are
not the same two things. We are still standing close to the edge. There's still a lot of hurt
out there, a lot of trouble. We can start in the real economy. I don't have to tell you:
unemployment, mortgage foreclosures, people whose savings have been wiped out. We're talking
about the folks that drove this economy. Remember, we had an economy that was about 2/3
driven by consumer spending, and the consumer is pretty much flat on his back right now. So
it's not as if things are up and running again. Not only that, the congressional oversight
panel, we've been doing these reports every single month. And we look at things like the
amount of toxic assets that remain on the books of the banks. Remember a year ago, what we
were talking about? We were talking about Henry Paulson, the American people came to
Congress, and said, "Toxic assets on the banks of the books, you've got to get rid of them."
Many of those toxic assets – in fact, most of those toxic assets – are still
HOCKENBERRY: Do you have a dollar amount, what it looks like, what sort of
reserves have to be put up against these so-called toxic assets?
WARREN: Interesting you should ask that! That's exactly the question that I
asked Secretary Geithner yesterday, because when we did our report, we couldn't put a dollar
amount together, based on the data that are available. And the secretary said, "Don't worry."
HOCKENBERRY: "Don't worry."
WARREN: He said, "That's okay, we've got it in hand."
HOCKENBERRY: so, Joe Nocera, I'm sure you know Joe...
WARREN: .. yes.
HOCKENBERRY: ... he's a columnist for the New York Times, and he
was on this program last week, and he said something I'd love to run by you. He said that of
all the pots of money that went for this bailout, the one that we are least likely to get
back, that the government is ever likely to see again, involves AIG. That the other side of
the picture is brighter, but the AIG crater is probably going to get deeper before it gets
shallower, and a lot of that money is just down a rathole. Do you agree with that?
WARREN: Well, I think AIG, the ability of AIG to repay is ... as people say
politely, "deeply problematic." That's going to be a tough one, and you have to remember our
exposure there: It's $70 billion of TARP money and another $100 billion of Treasury loans, so
this is a huge commitment we've made to AIG, and frankly, part of the problem is, most of the
money just went out the door in the blink of an eye. If you take one second, what made it
really interesting is that the money went out the door, think about this – it went out
the door to a bunch of counterparties on credit default swaps, so here were people holding an
obligation from an insolvent institution, and they ended up effectively with taxpayer
dollars, getting a 100% repayment. Now switch over to Chrysler and GM, where the government
put money in, but in those cases it said to the bond holders, it said to the creditors, it
said to the shareholders: "That's it. You have to take a big haircut. You're not going to get
100% repayment." So a real shift.
HOCKENBERRY: So the people who played the casino with the credit default
swaps, Elizabeth Warren, who's the TARP oversight panel chair. Places in the real economy,
probably not made whole... I guess I'm wondering, and you've already criticized Secretary
Paulson, former Treasury secretary, for some of the things he said a year ago. Here's
something he said on Oct 20th, 2008, and I'm wondering if there's any accountability for this
[on tape] "This is an investment, not an expenditure. And there is no reason to
believe that this program will cost taxpayers anything."
HOCKENBERRY: He's referring to buying stock and taking equity positions in
banks as part of the bailout. Is he right about that, and if he's not, does anybody hold him
WARREN: He's not only not right, he wasn't right at the moment he said it,
and he knew he wasn't right. The way we know this is what we got in stocks and warrants in
return for the initial investment of the $300 billion he's talking about in that clip. The
Congressional Oversight Panel went back and valued the stock and the warrants in the banks.
Secretary Paulson told us explicitly these were par transactions: for every $100 of taxpayer
that went in, we got $100 of stocks and warrants back. We did an independent valuation and
found out that no, in fact, we got $0.66 on the dollar, back. We did not get a full
dollar-for-dollar exchange, here.
HOCKENBERRY: Ouch .. that's the headline and the takeaway. I'd love to talk
with you more, but we're going to have to go out of this segment, but it's worth remembering:
$0.66 on the dollar rather than 100 cents on the dollar. Elizabeth Warren, Harvard professor
and chair of the Congressional Oversight Panel for the bank bailout, thanks for being with