Sen. Chris Dodd Talks About Bank Troubles

July 14, 2008— -- The following is a transcript of ABC News Business Correspondent Betsy Stark's interview today with U.S. Senate Banking Committee Chairman Chris Dodd, D-Conn., on the government's action to prevent mortgage giants Fannie Mae and Freddie Mac from collapsing.

STARK: What can you tell us about the way this plan came together. Was there broad consensus on the need to take emergency action over the weekend?

DODD: I think there was a consensus that fear was really producing results that didn't reflect reality. That the Fannie and Freddie situation is actually a lot better than certainly the fear would have indicated. They're highly capitalized, more than the federal laws require. Access the markets, capital markets have been very good. But fear was taking over. And so, I think the action by the Treasury with support of the Fed and the SEC today indicates, uh, their confidence in this, and they're willing to stand behind that confidence. And that has the desired effect of calming things down, which is what we really needed. You had today -- Fannie and Freddie, I think, had dead issuances that raised some $3 billion; there was a tremendous amount of investor interest, in that uh, auction, and so, they did very, very well at a time when you might have thought the opposite would be the case.

STARK: Yeah, well, there definitely was a burst of optimism at the start of stock trading. But that seemed to fade, and I mean [the Dow closed down 45 points], are you still saying that's a good day, given, all things considered?

DODD: Well, all things considered, and we're going to give the Fed the authority they need this week for the additional powers they're taking, as well as the equity interest and lines of credit, which requires some statutory authority. Tomorrow morning, I'll have the chairman of the Federal Reserve, the secretary of the Treasury and the head of the Securities Exchange Commission before my banking committee, so we can probe these ideas a little more thoughtfully and get an indication of what else may be needed done. Barney Frank, the congressman who chairs the financial subcommittee, and I plan on having that complete housing bill and it's new authority adopted, hopefully, by the end of this week or the first part of next week.

STARK: But, if at the end of the day, you've got shares of Fannie and Freddie down again, is this plan a success?

DODD: But it will be. Again, you know, remember that Fannie and Freddie never were bottom feeders in the residential mortgage markets. There were some alt-A and some subprime mortgages there, but the bulk of the overwhelming majority with 30-year, fixed rate, very solid well-rated mortgages, these institutions are in good shape. Again, fear has been taking over here. Because of what happened with IndyMac and some of the other investment banks, there's been that notion of fear out there. But Fannie and Freddie are very, very liquid; they're in good shape, in my view. And, of course, the indication of that dead issuance today further confirms that. So, these moves by the Fed are important, I think, to shore up and give people that needed confidence. But the institutions are sound and in good shape.

STARK: So, I mean, even if the stocks of Fannie and Freddie don't end up positive today or, you know, fallen down another notch, you still think that this was the right thing to do, and today proves that?

DODD: It does. I think this was the right thing to do. Again, you have very jittery markets. They opened in the Pacific Rim markets, the Asian markets showed a level of calm. Here, while there is some volatility, they started higher and they're ending up at the end of the day. But the relative calm, we need several more days of this. The important point is that I want to ensure people, give them a sense of confidence that we're going to get this right, these institutions are in good shape, and the action by the Federal Reserve, particularly the Treasury and Henry Paulson, I think, are the right moves, they make a lot of sense, and they're going to, I think, dispel a lot of that fear in the southeast.

STARK: So, that's a big part of what it's about -- sending a message that we're on top, the government is on top of this and time to restore some calm?

DODD: That's exactly right. And I'm confident we'll do that and the markets have already reflected that. Today, the dead issuance, today, is a very strong signal that these were highly subscribed proposals, and they showed tremendous invested interest. In fact, they were yielding at 2-basis points better than what was occurring two weeks ago. That's the best barometer of all. Is there investor interest? Are they able to sell those dead issuances? And they were $3 billion worth. That's a very good signal that these moves are producing the desired results.

STARK: Do you have reason to believe that some market players have deliberately been spreading false rumors to generate profit and have created this crisis of confidence?

DODD: I do. I think what [SEC Chairman] Chris Cox is doing and reminding people that the rumors, false rumors out there, are, these are crimes to do this, and he's going to utilize the authority he has in resisting statutes to pursue those that may be engaging in that. And the message ought to go out -- they're going to come after you, if you engage in those ideas. Secondly, there are people that have never liked these government-sponsored enterprises. They've been hostile to them for years. And I don't think they've helped, either, in all of this. And frankly, they're contributing to this notion that these institutions are in deep trouble. That is not the case. The facts do not reflect that at all. And that's not just one chairman of a committee talking here, that's also been reflected by the secretary of the Treasury and the chairman of the Federal Reserve.

STARK: What about people who say this has been the result of a lack of congressional oversight?

DODD: Well, hardly. I mean, you know, I agree with that -- if you go back a couple of years ago, and where were the regulators? You know, we had legislation adopted back 14 years ago, but the Federal Reserve never issued a single regulation to deal with deceptive and fraudulent practices in the residential mortgage markets. You had people out there giving out mortgages to people who frankly had no capacity to meet those obligations whatsoever. It was in my view, criminal behavior to be treated as such. And where were the cops, where were the regulators? Why weren't they stepping up and stopping these kinds of activities when they began? That's the reason we have a housing crisis, that's the reason we have a foreclosure crisis, and that's the reason we have an economic crisis -- because they were not doing their jobs.

STARK: Is this a bailout?

DODD: No, not at all. Not whatsoever. There's been absolutely no bailout here. Those words have absolutely no application to what we're talking about, to shore up the confidence people need to have in Fannie and Freddie.

STARK: Will there be congressional approval, do you think? And how quickly?

DODD: I think very quickly, I hope it's this week, early part of next week. We'll make it a part of the overall housing bill that passed the Senate last Friday, 63-to-5, with strong support for that bill ... On the House side, with some changes, they'll send that back, I hope, in the next day or two. We'll either accept it or reject it. My hope is accept what they send, if it's reasonable. And then send that bill over to the president for his signature, and that bill ought to include this limited authority over a limited period of time that the Treasury is seeking.

STARK: Should taxpayers or investors be worried that, after two emergency interventions in five months, the government has been spending its wad or at risk of running out of ammo or problems deepen or persist?

DODD: Well, I think it's, it's stepping up. Unfortunately, these problems never had to occur. Had people been doing the work they should have been doing five, six years ago, they wouldn't be in this situation today, Betsy. That's the bad news. And history, I think, will record that. They never should have allowed this to happen in the first place. But it is what it is, and we are in the situation that we're in, and I think the actions being taken make sense.

STARK: Are you concerned that you are setting a bad precedent to have the government essentially come in and become the guarantor ... become the guarantor of a private company?

DODD: That's not the case here. Fannie and Freddie, there's no federal guarantee in legislation behind Fannie and Freddie. What's the alternative? To let fear rule and take over, and end up with runs here? Then that process creates far many more problems than frankly we would like to have. This is the right step to be taken. It's practical, it's pragmatic, and it's necessary.