C-SPAN/NEWSMAKERS

Host: Greta Brawner

Guest: Edward Yingling, American Bankers Association

Reporters: Victoria McGrane, Benton Ives

GRETA BRAWNER, HOST, NEWSMAKERS, CSPAN: Our guest on Newsmakers is Edward Yingling, President and CEO of the American Bankers Association, and joining us for our questioning this morning, Victoria McCrane – McGrane – excuse me, reporter with Politico and Benton Ives, Economics Reporter with CQPolitics. Benton Ives has the first question. Go ahead.

BENTON IVES, ECONOMICS REPORTER, CQPOLITICS: Mr. Yingling, the so-called mortgage cram-down bill is returning to the House floor this coming week. What are – what are your hopes for that legislation going forward? Are you looking to see it defeated? Would you not like to see it come out of Congress at all or are you hoping to make some modifications to it before it’s cleared by the Congress?

EDWARD YINGLING, PRESIDENT & CEO, AMERICAN BANKERS ASSOCIATION: Our assumption is that it will come out of Congress. There’s fairly broad support for doing something; the question is what. What we would like to see actually is it to be closer to what the Obama administration has now indicated they want it to be. Now the devil’s in the details.

We haven’t seen a version yet that we think is not a problem. There are really two problems with this legislation. One is that it will impact the cost of mortgages, the interest rate for anybody out there who wants a mortgage going forward, because it affects the value of the security and if the security is less stable or worth less, it causes a higher interest rate. And the other thing, and this is what the Obama administration is focusing on right now; they’ve just put forward a very bold plan to keep people out of foreclosure and you want people to use that plan as their first choice, not to use bankruptcy as their first choice.

So my assumption is that these things will be worked out over the next few weeks and that something will be enacted, but we hope it’s something that doesn’t cause these problems.

VICTORIA MCGRANE, REPORTER, THE POLITICO: Now the mortgage cram-down bill was sort of unexpectedly close on the House floor this past week. What do you know about the events that led to that or – and did the ABA have some role in perhaps you know persuading members that you know they shouldn’t move forward as quickly as they were planning to?

YINGLING: Well there are a lot of rumors about what happened. The biggest rumor is that Senator Durbin said something to a reporter. And Senator Durbin has been the principal pusher of the bill on the Senate side and he said something to a reporter that got reported that he was willing to compromise. And that made some of the moderates, particularly in the Democratic caucus a little upset because they don’t want to take a vote that they’re not happy about and then have it moderated on the – on the Senate side. And so I think that may have been the principal reason. And it wasn’t quite right, but just my – again, our assumptions is it will go back to the Rules Committee, they’ll make some modifications and it’ll go back to the floor and probably pass.

MCGRANE: What about ABA’s role, though, behind the scenes this week up on Capitol Hill?

YINGLING: We’ve been working on it. It’s part of a bill that has, like everything else in Washington, nothing’s simple these days and is part of a bill that has some other provisions in it that we’re interested in; it makes the $250,000 insurance limit permanent. We’ve been, just in a straightforward fashion, expressing the concerns that I talked about earlier about the bill and kind of let the chips fall where they may. Again, our assumption is, given the support in Congress and the given the fact that the Obama administration has said they want something, that it’s just a matter of time here. So we’re just trying to get it as workable as possible.

IVES: Are there any – are there any members in the House in particular that you’re looking to in hopes of crafting this new compromise bill?

YINGLING: No, I think there are just some discussions going on behind the scenes and my understanding is that the Secretary of HUD is going to come up and meet with the Democrats Monday, I guess it is, and that they’ll have some discussion. So far the administration just has its general position. They have not come in and said this is what it means in legislative language and I don’t know that they’ll do that.

And whatever happens on the House, there will be some changes in the Senate. There’s no doubt about that. So I think it’s being run by the Blue Dogs and the New Dems on one hand and Chairman Conyers of the Judiciary Committee on the other hand primarily.

MCGRANE (ph): Now let’s talk a little bit about lobbying numbers that have been thrown out there on this legislation.

YINGLING: Yes.

MCGRANE (ph): Last year when this bill came up, there was reports that people in the banking association industry spent millions of dollars to kill this legislation last year. Give us an idea of what your efforts were and are you spending money to change this bill this time around? How does it work?

YINGLING: Those numbers are always meaningless to me because we lobby hundreds of issues, particularly these days. And so I don’t know where people get those numbers, cause you’re talking about a lot of issues.

What we did last year was we made our case. We have a – we’re a very large association, so we have people to go to the Hill and make our case. Our primarily – primary strength is frankly we have bankers in every town and city around the country and they were very upset, particularly – still upset, particularly the versions that were – that were floating around last year would have really meant that everybody who got a mortgage in the future would have paid a materially higher interest rate. And we still to this day have members that right now are saying cause I don’t know what the rules are going to be I’m pulling back a little bit on my mortgage lending, so that’s a problem.

But basically what we did last year was we made our case on the Hill and our bankers around the country and we did the normal grassroots thing where we send them things and say if you’re upset about this issue then call your member of Congress and here’s some points to make.

MCGRANE (ph): So are you confident that the compromise that’s going to be worked out over the next several weeks is going to be better than what was produced last year? Because I read, I think it was a blind quote by a you know financial services industry lobbyist who said we always knew it was going to be worse if Obama got elected; worse than – I think they were referring to the Chabot/Conyers compromise that came out of House Judiciary last year that limited it to subprime mortgages specifically, whereas this bill does not limit it to subprime mortgages.

YINGLING: I don’t know because there actually some new issues that have been introduced. One of them is that we’re in a very obviously difficult economic period here, particularly in the mortgage markets. And if they’re not careful, people are now realizing that this bill could have an impact on the value of existing mortgage securities. And I don’t want to get too technical, but the way those securities are structured, it actually could move the ratings of some of them and cause banks to have to raise additional capital.

And so it will be different. Whether or not it will be a little better, a little worse, we’ll just have to see.

IVES: Changing gears a little bit, with this – the announcement that Citigroup is now going to be backed more by the U.S. Government, does that cause any concern for you that one of the largest banks in the U.S. is now – now looks to be in more trouble?

YINGLING: Well, really, as I understand the announcement, which has just come out, the level of government backing at this point has not changed. They’re talking about converting some of the existing preferred shares that the government has to a very complicated, but eventually could convert to some common shares. So it really hasn’t changed. It may change their voting percentage cause the difference in the securities may mean that the government has a – has a higher voting percentage.

I thought Chairman Bernanke’s testimony this week was very important because there’s been so much confusion about what’s going on about the health of the banking industry. As Chairman Sheila Bair was saying earlier this week, we have over 90% of the banks in the country are well capitalized; they are lending. And so I thought Bernanke did an excellent job of trying to bring home the fact that these banks are well capitalized and that this test that they’re going through is about looking to the future and really a much worse scenario than most people think. And if that turns out the be the case as they test these banks against that then some of them will be coming back to the government for additional capital.

Not that they want to, but one of the problems is the private capital markets are closed. In a normal circumstance they would go to Wall Street, raise more capital and be fine. But those markets are just shutdown right now, so they really don’t have any choice if they’re going to be made super-safe – we call it insurance to have that come from the government. We’ll have to see because we don’t know how this is going to work out and we all hope that the economy will not be as bad as these projections – these hypothetical projections they’re using would indicate.

IVES: Yes.

MCGRANE (ph): What did you think about this $750 billion placeholder that the Obama administration put into its budget proposal as you know a potential amount of money you know TARP III or another round of bailout funds that they would need? Did that strike you as a correct number; as something that will definitely come to pass?

YINGLING: Well I don’t think it definitely comes to pass and I don’t think there’s anybody in Washington that understands the budget process fully. I must say, I’ve been here all my life and it’s just – it’s a mess. And so as I read about the budget proposal from the administration, they were trying to do some things and I think it’s honest. I think it’s honest to say we may have to come back to Congress for additional funds.

Now one thing that is important that people understand; this is not an expenditure like going out and buying a tank or building a school because these are actually investments that are made in institutions, or in some cases they may be investments that are made to buy mortgage bonds or something like that. And the hope is – and we’ll just have to see. The hope is that this will largely return to the government. And for example, the investments that they’re talking about making in this next round, if necessary, that we were just talking about will pay a 9% interest and be convertible into stock that could be worth a lot of money.

So if the economy does what we all hope it will do and sometime later this year start to turn around, our projections show the government’s going to make money on this, so it’s not the same as an expenditure. If it gets a lot worse then they probably won’t get that kind of return. But it’s not – it’s not just a straight expenditure.

IVES: With so many outside economists both predicting slowing growth and further problems for many of the largest financial institutions, it would seem likely that – or a lot of folks are predicting that there will need to be more capital injected by the government. Do you have any concerns thought that, with the atmosphere like it is in – on Capitol Hill right now that that could potentially cause some serious problems and that Congress might refuse to grant that money?

YINGLING: It’s a real problem. There is a lot of anger among the American public and everybody can certainly understand why that would be the case. And there’s a lot of misunderstanding about this whole situation and again, I thought Chairman Bernanke was trying to clarify that to some degree in these hearings.

One of – one of the problems we have – and frankly we had a concern about the President’s speech the other night and I wrote him a friendly letter about it – is they used the term bank so broadly. And so there – it sounds like everything was banking. And if you’re a typical banker out there somewhere around the country, you never made one subprime loan, you didn’t have anything to do with causing this crisis, you’re well capitalized, you’re probably doing fine, but since the economy’s in such terrible shape now, you’re starting to have some loan losses. So when you hear everything referred to as a bank, it really upsets you.

And so one of the things we’re trying to do is help people understand. Another thing that’s now being pointed out by both the Treasury and Chairman Bernanke in his testimony is this phrase, we have to do X so banks will lend again. And we always kind of scratch our heads and say are our doors closed or what? And there’s some really important numbers out there.

One thing that people don’t understand is two-thirds of the credit markets in this country are not traditional bank lending. And those are the – those – and this is what Bernanke was saying. Those are the types of the credit markets that are really in the tank, the securitization, commercial paper, although that’s coming back. The one-third that is traditional bank lending actually grew in 2008. And even in the fourth quarter, it just went down by four-tenths of 1% according to the FDIC this week. And that’s remarkable because we now know in the fourth quarter; the economy really went in the tank. And normally when you’re having a recession bank lending goes down cause small businesses aren’t borrowing as much and consumers aren’t buying cars.

So we have – I’m not saying we don’t have problems in the credit markets, but to your point, there needs to be a lot more clarity about what’s going on. The misperceptions need to be cleared up and obviously the public needs to be assured that this money is being used for a – for a wise cause or they may not be able to pass it if they need it.

MCGRANE (ph): Just to sort of build on that you know even this, aside from you know the vote to possibly pass this extra you know money for financial stability, do you find that this anger, whether it’s misplaced or not, against the banks, against the financial players, is getting in the way of pursuing other priorities? Or are you concerned that as you you know try to push through the rest of the legislative agenda that this atmosphere is going to kind of hamper your efforts?

YINGLING: Definitely. Hamper would be a – hamper would be an understatement.

MCGRANE (ph): OK.

YINGLING: It’s interesting because there are so many conflicting currents here and it’s not so much our efforts, but that at this point you have to really work to make sure you’re getting the right policy. And an interesting thing is that the banking industry is getting conflicting messages. And actually, Chairman Barney Frank on the House side is going to hold a hearing in the next couple of weeks and the title of it, basically, is Conflicting Messages. And I’ll just – I’ll just give you an example and it’s very harmful.

The simple one is we want banks to lend and we – and so lend and then we understand that. But at the same time, we do have examiners coming into banks and of course they want us to be super-safe and they literally are saying to us, don’t make those kind of loans. So on the one hand, we’re being told to lend and the other hand, we’re being told not to lend. And there are a series of these.

One of the big ones that I think you’re going to see the Congress really start looking at over the next couple of weeks with some bills and some hearings is accounting policy. And this gets – sounds very dry, so I promise you I’m not going to go into a long description of accounting policy. But basically, as we’re talking about, this is all about getting capital in banks and yet we have government sanctioned accounting policies that go in and eat up bank capital like Pac-Man. And it’s called mark to market accounting and what it means is you have to mark your assets, in many cases, to fire sale prices in markets that basically are totally dysfunctional. And that has caused a spiraling down effect and the term is procyclical.

And a very important event was that Paul Volcker came out with a – in the lead of a study done by a group called the Group of Thirty and he said this is a problem that needs to be dealt with now. And it does need to be dealt with. Just for example, at the end of this year, this mark to market accounting ate a big hole in the credit union industry because they had to mark some assets down well below what they’re really worth. You can go in these securities and see they’re worth this much, but they’re only selling for this much cause nobody’s buying.

And so there are a number of these policies that are conflicting and need to be straightened out and addressed. We’re being pushed and pulled at the same time.

MCGRANE (ph): Just a quick follow up there. Do you find that kind – that problem on both sides of the aisle? I mean are you encountering the same kind of resistance from Republicans that – or conflicting messages that you are from Democrats?

YINGLING: I don’t – I don’t know and no is the answer. And I don’t know that in Congress it’s on purpose that we’re being pushed and pulled or within the same agency or in the same administration. It’s, one, a lack of clarity and, two, there are different – within the subsets of the government, there are different ways that they think about it.

So if you’re – if you’re the government or Treasury and the Fed and here in Washington you’re saying we want banks to lend, but if – and we actually tell our examiners that. But if you’re an examiner, you’re going to be super-conservative cause the one thing you don’t want is for one of your banks to fail because you weren’t tough enough on them. And so you have these kind of conflicting incentives. Now the mark to market really is a government problem that needs to be addressed.

BRAWNER: What about when you talk to members of Congress over the phone or in their offices and you’re trying to get your point across about even this mortgage legislation? What do they say to you about the mood of the public?

YINGLING: They say two things. Again, a little bit of a – of a conflict and they say the mood of the public is terrible and that they’ve never seen the public so angry. And you have to understand that you know one simple way is how many people have had their 401Ks turned into 201Ks and the rate we’re going, 101Ks. And so they see that anger and they talk to me about it.

On the other hand, they do understand, although their rhetoric doesn’t always go in this direction, that there’s a big difference between Wall Street and Main Street banks, and so we often have to – I often have a discussion about bank lending like we’ve just done and say – and I said this to a group of Democratic senators two weeks ago. And I said would you please make sure in your in your rhetoric that you make the distinction between what’s going on Wall Street and how this problem was caused, the fact that the people that made the subprime loans and there are studies – recent ones by the Federal Reserve that show this – were not primarily banks. They were unregulated mortgage brokers and similar people outside the regulatory sector and then they took those mortgages and sent them to Wall Street. Your average bank never made any of these.

And so they understand it, but I have to say make sure in your rhetoric you make that distinction and make sure in your policies that you make that distinction. We just – I’ll just give you an example. We had-- everybody is understandably mad about some of the big bonuses on Wall Street and the – what the head of Merrill Lynch did with his office and that type thing. And so we get these amendments on the Senate floor that just passed overnight about executive compensation. But when you looked at the language of them, they – and the way they applied, they literally said that if you were a community bank you couldn’t pay incentive compensation to your branch manager to get more deposits and make more loans, again, conflicting with what they want us to do.

So I talk to them a lot about let’s get the history of it straight and understand what we’re doing and be careful so we get the right targeted policies and don’t do stuff that’s counterproductive.

BRAWNER (ph): We have only a few minutes left, so let’s talk a little bit about the so-called TARP program that is now being called the Capital Purchase Program; there – that’s one part of it. There’s more than 70 banks listed on the Treasury’s web site for this Capital Purchase Program. Are these banks lending?

YINGLING: Well there are many different programs. So the Capital Purchase Program and it’s – we’ve been trying to get people to understand that that’s a separate program, so thank you. And it’s different from the program they’re instituting now. That program was generated by the government and you may remember that TARP was supposed to be used to purchase assets and then all of the sudden, literally overnight, they call nine banks in and they say they – Secretary Paulson would say, we asked them if they didn’t want to take this money. Everybody knows they said you will take this money, and it was for healthy banks.

And it was – the banks didn’t ask for it; they didn’t negotiate it. And so you actually have a little over 400 banks that are in that program now. And one of the problems is now those banks – the rules are being changed on them after the fact and they really wanted to have several thousand banks participate in it, healthy banks, because they would be kind of a wall against future economic problems and increased lending. And that’s not going to happen now cause they’ve scared them off.

Those banks by and large are increasing lending with this caveat, and this is what the Treasury’s saying; you cannot look at whether they have more loans today than they had six months ago, although many of them do, because we are in a massive recession. And lending goes down in a massive recession, so the Treasury, I think, has to define this correctly.

Are they making more loans than they otherwise would have without this program? And not in every instance because in some instances they just don’t have the demand.

BRAWNER (ph): Let’s get one more question in, if we can, from each of our reporters.

YINGLING: OK.

IVES: Looking forward, several key House lawmakers have talked about moving a tougher mortgage overhaul bill.

YINGLING: Yes.

IVES: They’re talking about restricting some of the compensation structures that mortgage-brokers use, your so-called – your yield spread premium, as well as getting into assigning liability, which could probably raise some eyebrows on Wall Street.

YINGLING: Yes.

IVES: What are your views about that and are you expecting that bill to move forward in the Senate after the House?

YINGLING: I think there will be a bill addressing this and, again, the devil’s in the details. One of the things, as I’ve been talking about, is to understand that the traditional banking industry wasn’t the real problem in making these mortgage loans. That doesn’t mean we didn’t have some that were – that were doing the wrong thing, but not many, and that’s what Chairman Frank has said. And so we – the focus needs to be on the unregulated part of it and not so much just redoing extra regulation on the regulated part of it.

So to us, I think that’s the key thing.

MCGRANE: What are your thoughts about the systemic risk regulator? That looks like the first piece of this you know great big overhaul of the financial regulatory system that Congress is going to move on. Barney Frank’s you know plans – planning to hold hearings next month. What are – what is the ABA’s thought on that?

YINGLING: Well we’re supportive and I’ve testified to the need to have a systemic regulator. It’s probably going to be the Fed, although there’s some question about what that would mean for the Fed. I think a simple way to think about it is, believe it or not, in this country we don’t have an agency that is charged with sitting – I use the example of sitting up on Mount Olympus and looking around and seeing there’s a fire. And why do we have that fire? How can I prevent that fire?

We have a bunch of agencies that sit on smaller hills and look around their area. And so we really do need a systemic regulator, I think, and we support. I think one problem’s going to be that, as you get into that, it raises more issues and more issues and more issues. It’s going to be very complicated, but I – there’s broad support everywhere for making sure we have a systemic regulator going forward.

BRAWNER: Mr. Yingling, we’re out of time. Thanks for joining us on CSPAN’s Newsmakers.

YINGLING: Thank you. Thank you very much.

BRAWNER: Benton Ives, let’s talk about where this mortgage legislation goes next week.

IVES: Well I think Mr. Yingling gave a good indication of where the industry thinks it’s headed and that’s towards passage in the House and probably pretty quickly. The House may make some changes. They may narrow the scope of the measure. But I think everyone’s looking to the Senate now as the proving ground for this bill. It’s unclear exactly what the shape of the legislation will be when it comes out of the – of the Senate, but one would expect them to water it down in the hopes of winning 60 votes and passage over there in some way.

BRAWNER: Victoria McGrane, you wrote a story this week about Mel Martinez …

MCGRANE: Yes.

BRAWNER: And possibly him switching his vote from a no to a yes, so what does it look like in the Senate?

MCGRANE: Well, as Benton says, it’s still unclear how they get to that 60, but I think Mel Martinez is interesting in that you know here’s someone who is opposed, but he’s also from a state that has been hit so hard by this mortgage foreclosure crisis and so that, you know, you may be – the Democrats may be able to pick off more people like that, especially if the administration, which they have been, has been really stressing like we mean this as a last resort. We don’t want to send a ton of people to bankruptcy. So you know there seems to be a pathway forward.

BRAWNER: Benton Ives, what do you think this final legislation looks like then, if we’re talking about a watered down version?

IVES: That’s a – that’s a tough question to answer. I suspect it will narrow the type of mortgage that will be eligible for bankruptcy, probably maybe end capping it with a timeframe maybe, maybe defining it to a certain mortgage product, say sub – just subprime loans. But I mean this is – this is really the issue that the lobbyists, lawmakers are fighting out tooth and nail in the trenches right now.

MCGRANE: Another thing that HUD Secretary Sean Donovan said yesterday when he was testifying on the Hill …

BRAWNER: On Thursday.

MCGRANE: … said that – on Thursday, when he was testifying on the Hill was that they – the administration first saw perhaps capping the size of the loan, so you wouldn’t have you know million dollar houses, people who own those kind of homes using bankruptcy as a way to get out of their mortgage.

BRAWNER: There was also talk about limiting this to those who had only subprime loans. Where is that discussion?

IVES: That seems probably – while I mentioned it, I think it might be less likely at this point, because the problem is is that problems in the mortgage industry have spread now beyond subprime mortgages to include all sorts of so-called normal or standard issue mortgage products. So for lawmakers in the House who support the bill or support the general principal, now they’re saying well, if we just limit it to subprime loans then we’re not going to get a whole bunch of borrowers who need help as well and so the bill becomes toothless, effectively, if you just narrowed it to that. But you know if the crisis has taught us anything it’s that what was true six months ago is not true, necessarily next week.

BRAWNER: And, Victoria McGrane, you asked him about priorities for the banking industry and given the – given the current situation, what’s it like for him. What’d you hear in his answer?

MCGRANE: That they – he recognized how tough it is. I mean I’ve had other sources tell me you know is we have a hard time even asking for a glass of water these days, like especially the financial services section of the business community. Things are really tough because of this populace anger out there and this bailout fatigue. And I think there’s – the administration is very concerned that they’re not going to be able to get the votes to pass additional bailout money that they very well may need.

BRAWNER: Benton Ives, he talked a little bit about the lobbying effort made up on Capitol Hill. You’re up there; you’re in the hallways. What did you see this week when it came to this mortgage legislation?

IVES: You know it happened very fast and furious, so it’s hard to follow exactly who did what to who, but it would appear that a lot of the banking industry targeted maybe members who weren’t as familiar with some of these issues, some of the newer members, and just tried to highlight the fact that the financial services industry is very, very concerned about this bill. And I think for some House members that raised a few eyebrows. Maybe they weren’t quite aware of the full ramification of the legislation and that caused everybody to hit the brakes pretty firmly on the ...

BRAWNER: Stepping back, looking at the whole issue, Victoria, what did you hear from our guest as far as the state of U.S. banks?

MCGRANE: I mean they were trying to put forward a strong front. You know they don’t want to shake confidence any further than it’s already been shaken, but you know he did also mention like if – while the hope is that on some of this TARP money that the taxpayer’s going to get a return, if the economy gets a lot worse you know all bets are off. So there you know it’s a very real possibility that things are going to get even uglier.

BRAWNER: Benton Ives?

IVES: Yes, I would – I would agree with everything Victoria said. I think the industry is in a very defensive posture right now and they’re doing a lot of trying to explain very complicated things and that puts them in a – in a very tricky position, whereas before they could beat back a lot of these regulatory efforts. Probably now, with public sentiment the way it is and with the economy so bad, they’re forced to go out and make a much more nuanced case and sort of hope for the best, if you will.

BRAWNER: Benton Ives, CQPolitics.com, economic reporter, and Victoria McGrane, reporter with Politico, thank you both. Appreciate it.

MCGRANE: Thank you.

IVES: Thank you.

END