The Tennessean - Cooper Discusses Financial Crisis, Next Steps to Take
Cooper speaks with The Tennessean about financial crisis and economic rescue plan
On Monday, October 13th, Rep. Jim Cooper (TN-5) was interviewed by The Tennessean. The topics discussed were the current economic crisis and the congressional rescue plan. Below is a transcript of the interview, which was published in The Tennessean on October 14, 2008.
U.S. Rep. Jim Cooper, D-Nashville, answered questions about the economic bailout in a live video session on Tennessean.com Monday. Here are excerpts from the interview, conducted by Senior Editor Deborah Fisher and Assistant Business Editor Ryan Underwood:
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It appears that the government is going to inject money directly into banks, which would give the federal government an ownership stake. What's your reaction to that?
As the crisis has worsened, stronger and stronger medicine seems to be necessary. Just two or three weeks ago, government ownership of private banks would have been almost unthinkable in this country. It hasn't happened since the Depression. But as I've said for weeks now, we need to do whatever it takes to get the economy back on track. I think Americans have always been practical people who are willing to do what's necessary to strengthen the economy, to keep jobs and incomes strong.
Should the government be an owner of banks? That idea really turns some people off, especially since they are banks the government regulates.
But remember that we Tennesseans are a practical people. Should the government own the power company? Well, you can have a hot debate, but it's called TVA. Should the government own the retail distributor of electricity? We can have a hot debate, but it's called NES.Markets needed more confidence than was available with the prior relief. So it looks as if this further step is necessary.
Do you think this would last forever? Is this a fundamental change?No. People forget their American history. We've bailed out groups before. In fact we bailed out Chrysler, we bailed out Lockheed two private U.S. companies. The government got an ownership stake, and when those companies got back on their feet, the taxpayer made a profit. That's what we should be looking to do this time a temporary government stake, so that we can ease the liquidity crisis and hopefully the taxpayer can make a profit.
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Was this cash injection always a piece of the bailout legislation? So much of what was talked about was purchasing "toxic assets." Is this something new?
The Treasury Secretary had very broad authority in the legislation, including buying ownership stakes. For example, he had already done that with the purchase of AIG, we got 80 percent of that. But the Treasury Secretary made it clear that he did not want to have equity ownership stakes, that it would be a last resort or near the last resort. And now it turns out a few weeks later we're closer to that resort and he's got the authority to do that.I would expect him to exercise this authority in a measured and prudent basis. There's a column today you may want to take a look at, Paul Krugman in The New York Times, which points out that Gordon Brown and the Chancellor of the Exchequer in England have actually pioneered this strategy. It seems a little radical for us, but it seems to work great in England.So on a temporary basis, maybe we can do it. It's not unheard of in this country. It happened in the Great Depression. It happened in the New Deal. So there are precedents for it in this country.
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Along those same lines, and in mentioning AIG, what is there to prevent the kinds of executive excess like Sen. Obama mentioned in last week's debate, where there was something like a $400,000 retreat given after the bailout?
That was also part of the bailout measure that passed. It places limits on executive compensation because when the taxpayers get an ownership stake, the taxpayers get rights in the company that can determine executive compensation. So I think you're going to see much, much tougher limits on executive compensation. Taxpayers are outraged by golden parachutes, things like that.Would that be something that would be able to prevent the kinds of things like this $400,000 retreat at AIG? Is this enough to be able to prevent a similar situation?
We need to watch these executives like a hawk. We know from their past behavior that they have sometimes abused their shareholders' rights. We need to make sure they do not abuse tax-holder rights. Now that the taxpayer is going to be at least partial owner of some of these companies, the companies need to behave.
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But who gets to decide? Is the latitude just given to Henry Paulson to decide what is too much on executive compensation?
Usually what happens is the government puts a designated board member or board members on their board of directors and the board has the legal responsibility for determining the compensation, and in fact, for hiring and firing managers. So it depends on the size of the ownership stake. But given the need for government capital, I would expect the taxpayers to get a much larger ownership stake than you would probably expect in a regular market transaction. These companies need our help right now, and they should pay dearly to get that help. So I think you're going to see a very loud voice of Sec. Paulson's designate in terms of determining compensation and overall company behavior.
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Would the government buy normal shares of a company or would there be preferred shares issued?
It's usually preferred shares because you want the taxpayer to be in a preferred position. And that means they have a senior claim on the assets of the companies. So just in case something does go wrong, the taxpayer would come first. The regular, common equity shareholder would not fare so well. This is a very careful negotiation that's worked out, but usually government investment comes in the form of preferred shares.
We have a question from a reader who wrote about Henry Kissinger's plan for a new international monetary regime and was wondering if there was anything in this bill that would set up a World Trade Organization or NAFTA for currency?
No, the last International Monetary Fund was set up in the so-called Bretton-Woods agreement back in the 1940s. That set up world monetary policy after World War II. It's true, there was a finance meeting in Washington this weekend of the G-7 nations, the G-20. The different advanced nations of the world are trying to figure this out, and we are so fortunate, America, because we have by far, thank goodness, the strongest position.
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Another reader asks, in the bailout bill, the debt limit was raised to $11.3 trillion from $10 trillion, freeing up about $1.3 trillion. But the bailout was $700 billion. So why the difference in that amount?
Well, the reader hadn't realized that the debt limit had already been increased to around $10.6 trillion. So the increment increase is for exactly the $700 billion.
The last time we checked in with you was right before the second House vote on the bailout bill. What have you heard from constituents since it passed?
It's been pretty amazing. I've been going to every public event I can find the last several days, and I haven't gotten a single word of criticism I think increasingly as people have learned about our complex, modern economy and how inter-connected everything is, even Tennesseans who have never been to New York and don't care a thing about Wall Street are now starting to realize that part of their home mortgage or their credit card line or their car loan probably originated somewhere on or near Wall Street. But we better make sure those loans are still available because, like it or not, the American economy depends on credit. And if credit were to dry up, we'd really be in a world of hurt.
Did you hear from anybody though, amid the sharp losses last week, asking why hasn't the bailout worked?You know, they advertise instant relief drugs on TV. But most of the time when you go to the doctor and get a shot, you don't feel instant relief. It takes a while. The body has to heal itself. Now, medicine can help, but it takes a period of healing, especially when you're talking about a worldwide market crisis.
The fundamental problem is a lack of confidence. Gradually that confidence is being restored. We have to acknowledge that too many companies borrowed too much money. I even know some individuals who maybe borrowed too much money because we were being tempted every day. It just seemed so easy. They advertised the monthly car payment, and it just seemed so low. But that assumed you'd keep your job. And that assumed you wouldn't have a pay cut. Some of those assumptions turn out to be invalid. http://www.tennessean.com/apps/pbcs.dll/article?AID=/20081014/BUSINESS01/810140327/1003/NEWS