Exclusive Interview With Treasury Secretary Henry Paulson

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THANKS VERY MUCH. I AM JOINED BY THE TREASURY SECRETARY, HENRY PAULSON, TO TALK ABOUT THE HOUSING SITUATION AND THE STATE OF THE ECONOMY. THANK YOU SO MUCH OF THE TIME. >> PETER, AGREED TO BE HERE. >> YOU MENTION OF THE PAST FEW MONTHS OF THE HOUSE IS SITUATION IS TAKING A BITE OUT OF THE U.S. ECONOMY BUT THE OVERALL ECONOMY REMAINS SOUND. IS IT, HOWEVER, YOUR SENSE THAT IT IS WORSE THAN BEFORE START? >> PETER, I THINK — MY VIEW ON THIS IS CLEAR. WE HAVE GOT AN EXCEPTIONALLY STRONG GLOBAL ECONOMY, WE’ VE GOT A FUNDAMENTALLY SOUND U.S. ECONOMY. THE EMPLOYMENT SITUATION CONTINUES TO BE STRONG IN THIS COUNTRY. WE HAVE GROWTH OUTSIDE OF THE U.S. DRIVING THE EXPORTS. SO, AGAIN, I HAVE SAID ITS IS MY EXPECTATION THAT EVEN KNOW HOUSING IS A RISK AND WE ARE WATCHING IT, WE WILL CONTINUE TO GROW. >> IS IT YOUR SENSE THAT YOUR PRIMARY MISSION IS TO KEEP THE U.S. ECONOMY OUT OF RECESSION? >> LET ME SAY THIS — I AM FOCUSED ON THE ECONOMY, I AM FOCUSED ON KEEPING A GROWING, KEEPING PRODUCTIVITY RATES HIGH, CREATING NEW JOBS, THAT IS MY FOCUS. >> YOU KNOW A LOT OF ECONOMISTS ARE RAISING THE PROSPECT OF RECESSION. CAN YOU GIVE US YOUR OWN SENSE. IS THIS A REAL RISK? >> PETER, I SAID IT AND I WILL SAY IT AGAIN, I SAID HOUSING IS A RISK ” — WE ARE FOCUSED ON HOUSING AND WHAT IS GOING ON AND THE CREDIT MARKETS AND REPRICING THAT RISK IS CLEARLY GOING TO TAKE A PENALTY. BUT WE HAVE A FUNDAMENTALLY SOUND AND HEALTHY ECONOMY AND I BELIEVE IT WILL KEEP GROWING. >> LET ME ASK YOU ABOUT THE HOUSING SITUATION. SOME OF THE IDEAS YOU HAVE BEEN WORKING ON THE TREASURY DEPARTMENT, SPECIFICALLY THE TALK OF A POSSIBLE AGREEMENT WITH LENDERS TO GET THEM TO FREEZE CERTAIN SUBPRIME MORTGAGES, THE INTEREST RATES, AT THE CURRENT LEVELS BEFORE THE RECESS. TELL US WHERE THAT STANDS? >> WELL, PETER, FIRST OF ALL, TO FRAME THIS ISSUE — BECAUSE IT IS AN IMPORTANT ISSUE — THAT WE HAVE BEEN WORKING WITH THE MORTGAGE INDUSTRY, AND IT IS VERY MUCH IN THEIR INTEREST TO COME UP WITH A PROGRAM TO ASSIST THE SUBPRIME MORTGAGE HOLDERS WHO ARE FACING RESETS THAT HAVE BECOME UNAFFORDABLE. NOW, WE WILL NOT GOING TO HAVE TO NEED ALL OF THESE OWNERS, SOME IT MAY BE IMPOSSIBLE TO KEEP IN THEIR HOMES. SOME WILL LOVE NO TROUBLE MAKING THE PAYMENTS. AND THEN NUMBER OF OTHERS MAYBE NOT MADE DOWN PAYMENTS ON THE HOMES, THERE WILL NOT BE AFFORDABLE SOLUTION SO THEY WILL BECOME RENTERS AGAIN. WE ARE FOCUSED ON THE CENTER, AND OF THOSE WHO ARE GOING TO HAVE PROBLEMS, AND WHETHER IT’ A REAL NEED TO COME UP WITH CRITERIA TO DO MODIFICATIONS AND REFINANCING QUICKLY. THAT IS WHERE THE FOCUS IS, AND I AM OPTIMISTIC THAT WE ARE GOING TO HAVE SOMETHING TO ANNOUNCE BEFORE THE END OF THE WEEK. BUT I WANT TO EMPHASIZE ONE VERY IMPORTANT POINT HERE, THIS IS NOT A SILVER BULLET. THIS PLAN IN AND OF ITSELF IS NOT GOING TO DEAL WITH ALL OF THE PROBLEMS ASSOCIATED WITH THE HOUSING MARKET AND A BAD LENDING PRACTICES. AND CONGRESS ALSO NEEDS TO DO THEIR PART. THEY ARE COMING BACK, AND WE REALLY NEED ACTION. WE NEED ACTION ON THE FHA MODERNIZATION PROGRAM, WE NEED ACTION ON GSE REFORM, AND WE NEED ACTION ON PROVIDING RELIEF TO THOSE MORTGAGE HOLDERS WHO ARE GOING TO GET MORTGAGE RELIEF, SO THEY ARE GOING TO NEED TAX RELIEF. WE ARE GOING TO NEED APPROPRIATIONS FOR FUNDING FOR MORTGAGE COUNSELING. AND TODAY WE PRESENTED AN IDEA WHICH AGAIN WILL TAKE LEGISLATION TO GET STATE AND LOCAL GOVERNMENTS MORE FLEXIBILITY FOR TAX-EXEMPT FINANCING TO HELP THEM WITH LOCAL PROGRAMS ARE MORE REFINANCING. >> LET ME COME IF I COULD COME AND GO BACK TO THE AGREEMENT. AGAIN, STILL NOT FINALIZED. YOU ARE AWAITING SOME DETAILS WITH SOME OF THE PARTICIPANTS. WHAT ARE YOUR OWN EXPECTATIONS? THERE ARE SOME 2 MILLION MORTGAGES BUT COULD RESET IN THE NEXT TWO YEARS, ARE WE TALKING ABOUT HALF A MILLION OR LESS THAN THAT ARE MORE? >> I AM NOT GOING TO PUT A NUMBER ON IT NOW. WE WANT TO KEEP AS MANY PEOPLE AS POSSIBLE IN THEIR HOMES. WHAT WE ARE TRYING TO DO IS DEAL WITH THOSE HOMEOWNERS WHO HAVE THE CAPABILITY TO STAY IN THEI CMBREAKPOINT HOMES. ONE WAY I THINK ABOUT THIS IS THAT THERE HAS BEEN A LOT OF INNOVATION. AN INNOVATION MAY HAVE ABOUT RUN AT THE ABILITY OF THE PRIVATE SECTOR TO COPE IN IT WITHOUT THE PRIVATE SECTOR COMING TOGETHER WITH THE HELP OF GOVERNMENT, AND I HOPE THEY WILL COME TOGETHER AND FACILITATE A SOLUTION THAT WILL GET THEM READY TO DEAL WITH THE REFINANCING ON THE SCALE THAT THEY ARE GOING TO SEE NEXT YEAR. >> PART OF THE GROUP THAT NEEDS TO COME TOGETHER, THE INVESTORS, THE MORTGAGE BOND INVESTORS. BASICALLY THE GOVERNMENT IS SUGGESTING THESE PEOPLE NEED TO TAKE A HAIRCUT. >> WHAT THE GOVERNMENT IS SUGGESTING IS THAT IT IS IN THE INTEREST — AND I THINK LENDERS AND INVESTORS HAVE ALWAYS FELT THAT IT IS IN THEIR INTEREST TO AVOID FORECLOSURES IF THE HOMEOWNERS GOT THE KIDS ABILITY TO OWN A HOME, BECAUSE FORECLOSURES ARE EXPENSIVE — IF THEY HAVE THE CAPABILITY TO ON THE HOME. WHEN WE ARE DEALING WITH IS COMPLEX BECAUSE THE FIRM THAT IS RECEIVING THE MORTGAGE PAYMENT EVERY RUN IS VERY OFTEN DOING IT ON SOMEONE ELSE’ S BEHALF, THE SERVICER. THE INVESTORS ARE SCATTERED AROUND THE WORLD. SO, OF THE KEY CHALLENGE HERE IS TO BRING TOGETHER THOSE INVESTORS AND LENDERS TOGETHER OR WITH THE SERVICERS AND COUNSELORS TO COME UP WITH CRITERIA THAT MAKES SENSE FOR EVERYONE. AND THAT IS WHAT HAS BEEN DONE. >> IF THIS IS WORKED OUT, WILL THIS HELP STAVE OFF A WORSENING ECONOMY? >> I WOULD SAY — LISTEN, THIS WILL MAKE A DIFFERENCE, AND IT WILL BE A POSITIVE, AND IT CLEARLY WILL HELP MITIGATE THE IMPACT ON THE U.S. ECONOMY. BUT AS I SAID, IT IS NOT A SILVER BULLET. WE HAVE AND THE HOUSING MARKET FOR MANY YEARS, AND

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