The exchange is a great illustration of the disagreement between Paulson and many Democrats--as well as FDIC Chairman Sheila Bair, a Republican--as to whether bailout funds should be used to prevent foreclosures.
From my transcript (I watched the hearing on C-SPAN):
Frank: First, Mr. Secretary, I am going to put into the record a four-page memo of sections of the law that we passed that mandate that if you buy assets, you do mortgage foreclosure [mitigation]. And make it very clear, when you say spending, I first have to say this: We obviously all appreciate the concern for taxpayers’ money, but the chair of the FDIC talks about $24 billion--that’s what, 40 percent of what we just gave to AIG out of this program? And you say this is for an investment, not spending. I don’t know what investment counselor--absent macroeconomic conditions--would have advised you to invest in AIG. I suspect that it does not rate highly as an investment these days. I hope it goes well going forward, and there is no question that this will be helpful to it. But $40 billion for AIG, and then we can’t find $24 billion on the mortgage foreclosure, is part of the reason we have the real problem with the country.
But let me just say, there are pages--it’s four pages--of specific authorization to buy up mortgages and write them down. Section 109 C: “Upon any request arising under existing investment contracts, the secretary shall consent where appropriate, considering net present value to the taxpayer, to reasonable requests for loss-mitigation measures.” Section 110: “Homeowner assistance by agencies: To the extent that the federal property manager holds loans or controls mortgages, they shall implement a plan that seeks to maximize assistance for homeowners.” The bill is replete with authorization to you not simply to buy mortgages but in effect to do some spending, because we are talking about writing them down. So the argument that, frankly, of all the changes that have come in the program, this wouldn’t be a change. This was the program. . . . So the argument that this is not part of the program simply doesn’t work. So do you agree, Mr. Secretary, that in fact the bill does authorize aggressive action--not simply to buy up mortgages but in buying them up, take some action to reduce in some ways the amount owed so we diminish foreclosures?
Paulson: Mr. Chairman, two things. First, I need to just say a word about AIG, because the primary purpose of the bill was to protect our system from . . . collapse. AIG was a situation, a company that would have failed had the Fed not stepped in. Had we had the TARP at that time, this is right down the middle of the plate for what we would have used the TARP for. . . . As it turned out, we needed to come in again to stabilize that situation and maximize the chances that the government would get money back. So, I just wanted to . . .
Frank: I am not objecting to AIG. I am just saying, though, that the standards of what we do, and obviously foreclosure is a serious problem for the economy . . .
Paulson: I agree with you on the bill. There is no doubt that--so, don’t misunderstand what I say--that when we came to Congress with the intent to get at the capital program that banks were facing and the system was facing through purchasing large amounts of illiquid assets. And so the bill--and it was to purchase those assets and then resell them--and our whole discussion, because that’s what we were talking about, was how to use these, and use this investment position to make a difference and mitigate foreclosures. My only point is now that we haven’t bought those assets, illiquid assets, that at least the intent as I had seen it, at least all the discussions we had, went to buying assets and reselling them. It didn’t go to a direct subsidy. But . . .
Frank: Mr. Secretary, I have to interrupt you. You are talking legitimately about your intent, but we had to get the votes for the bill. Our intent was also relevant. And I read you sections of the bill which says, “Write it down, give them assistance.” So the bill could not have been clearer that one of the purposes--and by the way, we are talking about $24 billion out of $700 billion, you’re talking about 4 percent of the total amount. But the point is that clearly part of this was not just to stabilize but to reduce the number of foreclosures for good macroeconomic reasons. And so, again, the intent couldn’t be clearer from what I’ve read.
Paulson: Let me then, Mr. Chairman, say what you’ve heard me say a number of times before, and that going back many, many months before--it was as topical as it is now--we’ve been working very very aggressively in individual, helping individual[s], because as recently as last week . . .
Frank: Mr. Secretary, I’m sorry. We don’t have a lot of time, and I don’t usually do this, but the question is: The language in the TARP, we understand that there are other activities going on, I don’t accept them as a substitute for using the authority that we very specifically and carefully wrote into the TARP and that was essential to it getting passed.
Paulson: Well, what you’ve heard from me, and what you heard from me last night, and which I will say again, is that I am going to keep working on this and looking for ways to use the taxpayer money as they expect me to here with regards for foreclosure mitigation. We have been, as recently as last week, taking a step, which I think will have . . .
Frank: No, I’m sorry, Mr. Secretary, those are not substitutable. Because I will tell you this, and I apologize for taking the time, it is nobody’s view that we have been as successful as we need to be for the sake of the economy in reducing foreclosures. We have a very large pot that was intended to be part of that effort that is going untapped.