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MR. GREGORY:  We’re back.  King Abdullah of Jordan spent the last week here in Washington with a full agenda:  meeting with the president, the secretary of state, congressional leaders and a full military arrival ceremony at the Pentagon.  Before returning to Jordan on Friday, he stopped here at MEET THE PRESS for an exclusive interview.

Your Majesty, welcome back to MEET THE PRESS.

KING ABDULLAH II:  Thank you very much.

MR. GREGORY:  President Obama is now the third U.S. president that you have worked with.  You spent time with him this week and even during the campaign. Tell me your impressions here as he comes upon 100 days in office?

KING ABDULLAH II:  Well, I–from I think day one that I, I, I met him, a very impressive man.  A lot of depth.  A lot of, I think, instinctive understanding of the challenges that the world faces.  And obviously I’m here in Washington to talk about relaunching negotiations between Israelis and Palestinians, and Israelis and Arabs, and we had a meeting of the minds, very fruitful discussions.  And I think he has a clear understanding of, of what the challenges are.

MR. GREGORY:  How do you compare him to the president you worked the most with, and that’s President Bush?

KING ABDULLAH II:  Well, I think, again, President Bush had the instinctive understanding that we have to solve the core issue of the Middle East, which is the Israeli-Palestinian ones.  We’re here relaunching an initiative that allows Arabs to reach out to Israel if we can move on the two-state solution, which is critical for stability and peace for our region.

MR. GREGORY:  But is it fair to say that at the end of President Bush’s term in office you grew more impatient with him and his team and his approach?

KING ABDULLAH II:  I think he was dedicated to moving the process forward.  I think I was getting frustrated with the team that didn’t have a sense of urgency.  But a lot has changed in the world–the economic crisis for one, recently–that if we don’t sort of get a win somewhere, 2009, 2010 is going to be very difficult.

MR. GREGORY:  Speaking about President Bush, last December he spoke about the frustration along the path of his presidency, but also the state of the Middle East as he saw it.  This is what he said.

(Videotape, December 5, 2008)

FMR. PRES. GEORGE W.  BUSH:  Despite these frustrations and disappointments, the Middle East in 2008 is a freer, more hopeful and more promising place than it was in 2001.

(End videotape)

MR. GREGORY:  Do you agree with that?

KING ABDULLAH II:  Yes, but nowhere near what we need as the endgame.  I mean, it’s all relative at the end of the day.  Until you solve the problem, you’re going to get an up and down on how free or stable it is.  But we still haven’t solved the core issue.  So you can’t say that, that the, the future for the Middle East is any brighter.  Unless we solve the core issue of the Israeli-Palestinian, Israeli-Arab challenges, then we will always be an area of instability that costs all of us.

MR. GREGORY:  But it’s interesting that you raise that point as that being the core problem.  You ask most Americans and certainly the government, the core problem out of the Middle East right now is terrorism, is al-Qaeda.  And President Obama spoke about that very issue and seemed to be speaking to voices like yours when he was recently in France.  Listen to that.

(Videotape, April 3, 2009)

PRES. OBAMA:  Al-Qaeda is still bent on carrying out terrorist activity.  It is–you know, don’t fool yourselves.  Because some people say, “Well, you know, if, if we changed our policies with respect to the Israeli-Palestinian conflict or, or if we were more respectful towards the Muslim world, suddenly these organizations would stop threatening us.” That’s just not the case.

(End videotape)

MR. GREGORY:  He seems to be contradicting you a bit.

KING ABDULLAH II:  Not at all.  What, what, what he’s trying to say and, and what I’m trying to say is the challenge that we have in front of American public is connecting the dots.  Any crisis that you want to talk about, whether it’s al-Qaeda, Iraq, Syria, Pakistan, Afghanistan, all comes back to the sore, the emotional issue that is Palestine and Jerusalem.  Any conflict that you pick in the Middle East today, all roads lead back to Jerusalem is probably be a better way of, of explaining it.  So until you deal with the Palestinian issue it is more difficult to deal with al-Qaeda, whether it’s Pakistan, all these other problems that you’re facing.

MR. GREGORY:  But, but isn’t–doesn’t that suggest, and he seems to be suggesting that that’s not the case; that if you just solve this problem that somehow al-Qaeda goes away, isn’t that fantasy?

KING ABDULLAH II:  Well, well, but what, what is al-Qaeda’s platform is, is, is the, the plight of the Palestinians in Jerusalem under occupation.

MR. GREGORY:  That’s what they say.  Is that what they really believe?

KING ABDULLAH II:  Well, I mean, you’re always going to have extremist elements that are going to be there to, to find a, a, a platform for recruiting.  But you can’t really take them that seriously when the core issue, the major grievance in the Arab and Muslim world is solved.  And so in Arab and Muslim minds, the most emotional aspect is the Palestinian cause and that of Jerusalem.  And from there leads all the other problems.

MR. GREGORY:  As you know, the president is expected to speak to the world, to the Muslim world, to the Arab world from an Arab capital some time during the first 100 days.  It may slip and go beyond the first 100 days.  What do you think his message should be?

KING ABDULLAH II:  Well, his message has been consistent in that he is showing that America has an outreach to the Muslim and Arab world.  We in, in Jordan initiated the, the Amman Message, which is an outreach of–well, actually inter-Islam to begin with, but also to Christians, Muslims and other–Jews and other faiths in the world.  But I think it’s never done at the level–it never has been done at the level of the president of the United States.  You have the most powerful, most capable country in the world, and the message of outreach from Obama has resonated extremely well in the Arab world.  But again, that’s only delaying the, the, the confrontation or the, the conflict unless we solve the core issue.

MR. GREGORY:  Hm.

KING ABDULLAH II:  And I–every time you come up and show me an example of a, of a problem, I’m going to point you back towards the Palestinians and Jerusalem.

MR. GREGORY:  What’s the image of the United States in the Middle East today?

KING ABDULLAH II:  Fantastic.

MR. GREGORY:  Really?

KING ABDULLAH II:  I, I, I, I, I want to say that I have been following, by chance, President Obama around the world.  I was in England a, a day or two behind him, I was in the Czech Republic.  I just come from Japan on the way here to Washington.  Wherever you go, and all the leaders that I’ve spoken to the–in the Middle East, this president provides hope.  Now, there was tremendous sympathy internationally for the United States and anger after 9/11, but today there’s a collective hope that there’s a new America.  And a new America means new values for, for the world.  What everybody believed America to stand for is what I think Obama encompasses.  But how long is that goodwill going to last?  And that’s some of the challenges that you have.

MR. GREGORY:  Let me turn to an issue that has really gripped this country this week, and that is the issue of how the United States government and its interrogators treated September 11th prisoners after those attacks.  You were sitting next to President Obama this week when this question came up about the release of those memos about how to treat prisoners, the, the–and the torture issue, and this is what he had to say.

(Videotape, Tuesday)

PRES. OBAMA:  We rely on some very courageous people not just in our military, but also in the Central Intelligence Agency, to help protect the American people.  Having said that, the, the OLC memos that were released reflected, in my view, us losing our moral bearings.  That’s why I’ve discontinued those enhanced interrogation programs.

(End videotape)

MR. GREGORY:  Do you think the United States lost its moral bearings?

KING ABDULLAH II:  I, I think that the view of America was negatively affected by, by this issue.  This–look, I mean, the questions that have been asked of the president, me as a non-American, it’s, it’s in a way none of my business. But all I will say is that when you want to go down that path that you’re opening sort of Pandora’s box of where, where does it end.  We…

MR. GREGORY:  Do you think the United States engaged in torture?

KING ABDULLAH II:  Well, from what we’ve seen and what we’ve heard, that–there are enough accounts to show that that is the case.  But there is still a major battle out there, and I think that America–and I think this is what President Obama is trying to do, is make sure that the, the legal system that America is known for is, is, is transparent to make sure that…

MR. GREGORY:  Right.

KING ABDULLAH II:  …illegal activities aren’t taking place.

MR. GREGORY:  That’s an important point.  You actually do believe that the United States engaged in torture.

KING ABDULLAH II:  From what I see on, on, on, on the press, that shows that there were illegal ways of, of dealing with detainees.

MR. GREGORY:  Does torture work?

KING ABDULLAH II:  I…

MR. GREGORY:  Does it produce valuable intelligence?

KING ABDULLAH II:  I’m not an expert to be able to say one way or another if it does.  Again, it’s such a gray area when it comes to, to a country at war. I think there, there are smarter ways of being able to deal with getting information.

MR. GREGORY:  But yet Jordan is one of the most stalwart U.S. allies in the Middle East.  There’s a lot of business that’s done between the two countries and a very tight relationship.  Did Jordan engage in torture in concert with the United States?

KING ABDULLAH II:  No.  And I, I, I have been told by my people that I’ve asked on, on many occasions, as these international issues came up, I think that we have been very smart in, in, in being intelligent of convincing operatives that we have come across to, to end up working for us.  And you can’t do that when it comes to torture.

MR. GREGORY:  The Human Rights Watch issued a report about Jordan which contradicts that, and it said the following.  I’ll put it on the screen and allow you to react to it.  “From 2001 until at least 2004, Jordan’s General Intelligence Department served as a proxy jailer for the U.S. CIA, holding prisoners that the CIA apparently wanted kept out of circulation, and later handing some of them back to the CIA.  More than just warehousing these men, the GID interrogated them using methods that were even more brutal than those in which the CIA has been implicated to date.  …  If the Jordanians did indeed promise the U.S. authorities that prisoners rendered there would not be tortured, it was a promise that neither the U.S. nor Jordan believed.”

KING ABDULLAH II:  I–when that report came out, or when I was asked that question I think by one of your colleagues several years ago, I went straight back to my director of intelligence at the time and I said, “Is there any foundations to this?” And he said categorically no.  And I made it quite clear to him and all the colleagues that have come up the ranks since then that we don’t tolerate that.  So I’d like to think that my people were telling me the truth.

MR. GREGORY:  Bottom line on this, do you think you can defeat an enemy like al-Qaeda without resorting to what some people would consider torture?

KING ABDULLAH II:  Well, again, if we look at how Jordanians have been successful in the past in being able to get people to work for us back against terrorist organizations, I think using your intelligence and, and a good, sound argument have, for us, has shown a way of extreme success.  And obviously I can’t go into any, any operations in the past or ongoing operations.

MR. GREGORY:  Mm-hmm.

KING ABDULLAH II:  But I think that your intelligence would probably tell you that our method works.

MR. GREGORY:  Will the release of photographs of detained prisoners who are apparently abused, being released in the United States this week, will that inflame the situation even more?  Will it hurt the U.S. in the Middle East and beyond?

KING ABDULLAH II:  Well, it, it will–obviously any pictures or any cases like that will have a negative attitude internationally.  But again, I think President Obama has been very clear in, in his campaign and very clear from, from the start that that is not tolerated.  America is providing a new image of what and how things should be done.  And I think that the world has a belief in the president, a lot of faith in what he has to say.  Obviously the pressure on the president is to deliver.

MR. GREGORY:  Right.

KING ABDULLAH II:  But the carte blanche that you’ve started with is actually a pretty good one and I hope one that is not, not used properly.

MR. GREGORY:  I want to get to a couple of important matters, both Iran and the question of Israeli-Palestinian peace.  First with Iran.  What are Iran’s intentions in the Middle East?

KING ABDULLAH II:  I, I think as in previous decades, it would like to be the policeman of the gulf.  It wants to have its presence felt in, in the region. And having said that, I think that President Obama’s gesture of, of, of a dialogue is one that Iran shouldn’t take for granted, and let’s see where dialogue will take us.

MR. GREGORY:  The new prime minister of Israel, Benjamin Netanyahu, has been very clear, and he agrees with the United States in this regard, and that is that Iran is pursuing a nuclear program, they believe.  And this is what Prime Minister Netanyahu said to Jeff Goldberg in an interview of The Atlantic magazine.  He said:  “The Iranian nuclear challenge represents a `hinge of history’ and added that `Western civilization’ will have failed if Iran is allowed to develop nuclear weapons.  …  `You don’t want a messianic apocalyptic cult,’” he said, “`controlling atomic bombs.  When the wide-eyed believer gets hold of the reins of power and the weapons of mass death, then the entire world should start worrying, and that is what is happening in Iran.’” Do you see it that way?

KING ABDULLAH II:  Well, again, let me go back to saying I think that the challenge we have here in America of connecting the dots.  If you have an issue that the threat that Iran poses to Israel, which is what Netanyahu was saying, the best way of solving that problem is solving the core issue, which is the Palestinian problem and that of Jerusalem.  Because that regime goes to their people to say that the reason why we have nuclear weapons, the reason that we need to, to challenge Israel is, is because of the suffering of the Palestinians and the occupation of Jerusalem.

MR. GREGORY:  Mm-hmm.

KING ABDULLAH II:  I go back to–if we, if we start solving this Israeli-Palestinian problem, it allows us to get Arabs and Muslims to the, to the negotiating table with the, with the Israelis, then there’s not a problem anymore.

MR. GREGORY:  Do you think a nuclear program in Iran is inevitable?

KING ABDULLAH II:  There’s more of an incentive for the Iranians to continue down that path when there’s an argument that they want to use in front of their people that Palestinians are under occupation.  I would imagine that when it comes to an economy that is suffering, like many economies are suffering around the world, a nuclear military program is extremely expensive. And if you’ve solved the core issue in the Middle East, I think a lot of leaders will be sort of checking their calculators to see whether it’s worth to go down the military nuclear road.

MR. GREGORY:  And what do you think is the best way for the United States to pursue or to persuade Iran to back away from a nuclear program?

KING ABDULLAH II:  Solving the Israeli-Palestinian problem.

MR. GREGORY:  That’s it.

KING ABDULLAH II:  That allows us to then solve the Israeli-Arab-Muslim problem.

MR. GREGORY:  Right.

KING ABDULLAH II:  There’s 57 nations in the world, a third of the United Nations, that don’t recognize Israeli today.  So what we’re doing is saying 57 nations, Iran has signed this document, believe it or not, that is saying, “Look, Israel, if you solve the Palestinian problem, if you allow us to solve the problems of Jerusalem, we all want to have peace with you.”

MR. GREGORY:  Do you think Iran fears an attack from Israel, fears an attack from the United States?

KING ABDULLAH II:  I think all of us consider that, that–no, I think not from the United States.  But the, the rogue question would be what Israel would do. And therefore, I think it is an imperative over the next month or two to start negotiations, because I think any military strike against Iraq–Iran would be extremely counterproductive and I, I don’t see the outcome of that.  OK, you hit Iran.  What happens then?  And it’s the, the not knowing I think creates a lot of fears with all of us around the world.

MR. GREGORY:  Let me turn to the very important issue of Israelis and Palestinians in the Middle East.  Your father, King Hussein, was on this program 40 years ago talking about his concern that time was slipping away to solve this issue.  This is what he said.

(Videotape, April 13, 1969)

KING HUSSEIN I:  The ability of all to move towards peace are being impaired. If conditions remain the way they are I believe there is very, very grave danger of an explosion in the area or at least the loss of this chance, which we feel is the first and maybe the last one, of establishing a just and thus durable peace in the area.

(End videotape)

MR. GREGORY:  Forty years later you are preparing your own memoir, and the working title at this point is “The Last Best Chance.” A similar message to your father 40 years ago.

KING ABDULLAH II:  That’s right.

MR. GREGORY:  What do you mean by that?

KING ABDULLAH II:  Well, what, what I’m trying to do with this book is to explain the dynamics have changed in the Middle East, and really this is our last best chance.  What my late father was saying is that then there was a major opportunity slipping past.  And I think 40 years later how many wars, how much death and destruction, how many Israelis, Arabs and Muslims have lost their lives.  Are we prepared to go another decade?  And believe you me, if we do not solve the problem today of the Israelis and Palestinians, it’s only going to be a matter of time of another conflict.

MR. GREGORY:  Mm-hmm.

KING ABDULLAH II:  And I had come here to the United States to predict the war in Lebanon several months before, I came to predict that…(unintelligible)…was going to happen, although it took me by surprise by being two months earlier.  I thought it was going to happen by the time Obama came into office.  And in the next 18 months, if we don’t move the process forward and bring people to the negotiation table, there will be another conflict between Israel and another protagonist.  And how many people have to continue to lose their lives?  And so the message of the book is basically say this is our last chance, because geographically the future of a Palestinian state is under fire.  And we’re now arriving at the crossroads that if we do not have a negotiator separate from Israelis and Palestinians, then there may never be a chance.  So Israel has to decide, does it want to make a relationship with 57 nations or does it want to stay Fortress Israel?  And how does that hurt all of us?

MR. GREGORY:  And was your message to President Obama, “We need a complete paradigm shift here.  It is time for the United States to impose a solution, time for the United States to start making some demands”?  Is that your view?

KING ABDULLAH II:  The only way that we’re going to be able to solve this problem–you–if it, if it’s left to the players, the Israelis and Palestinians by themselves, we’re not going to get anywhere.  It can only happen if there is an American umbrella with a determined American president that is going to get the Israelis and Palestinians to sit on the table, because both sides historically have always come an excuse why not to go the last mile.  And I believe that Obama understands how much this resonates.  For the first time, I think Americans can clearly say that a two-state solution is in the vital national interests of the United States.

MR. GREGORY:  I don’t want to have you go without asking you about the fragile situation in Pakistan.  The United States, this administration has said Pakistan is not doing enough to stand up to the Taliban in that northwest frontier.  How concerned are you?

KING ABDULLAH II:  I think Pakistan should be of tremendous concern to, to, to all of us, and these are one of a multitude of, of, of discussions that we had with the president.  And again, I think that as you move towards Israeli-Palestinian reconciliation I hope in the next month or two, Arab and Muslim countries will be doing more to assist coalition forces, assist the Pakistanis in being able to deal with that threat.  But people are looking for a signal of the United States.  And I know that President Obama is waiting until Prime Minister Netanyahu comes here and listens to what he has to say. But if right after that visit there’s not a clear understanding of how America is going to weigh in on these problems, then I think the goodwill of the United States will disappear and I think that people will start cutting their own deals.

MR. GREGORY:  And finally, a lot of attention on gift-giving right now as the president travels overseas.  He gave DVDs and he also gave an iPod to the queen of England.  You came here bearing a gift that was very interesting. You gave the president a royal weaponry set complete with four different types of daggers and an ax.  Are you preparing the president for battle here, Your Majesty?

KING ABDULLAH II:  I think the president is prepared for battle, and basically he knows that he has somebody standing next to him on his right and helping him through this.

MR. GREGORY:  All right, Your Majesty, good luck.

KING ABDULLAH II:  Thank you very much, sir.

MR. GREGORY:  Thank you very much for being here.

KING ABDULLAH II:  Thank you.

MR. GREGORY:  … But first, here live is Treasury Secretary Timothy Geithner.

Welcome to MEET THE PRESS.

SEC’Y GEITHNER:  Thank you, David.  Good to be here.

MR. GREGORY:  Thank you.  I want to start with some basic terms here.  Can you explain as simply as you can why increasing bank lending is so important to the economy?

SEC’Y GEITHNER:  Absolutely, David.  Economies require banks because they require credit.  Credit is like the blood, it’s like the oxygen of any economy.  And for us to get the economy growing again, we need to make sure there’s going to be credit available to businesses and families across the country so that businesses can meet payroll, so that they can expand, so that families can put their kids through college, can borrow to finance purchase of a car or a new house.  That’s, that’s why financial systems matter, and there is now way to get this economy back on track unless we have a financial system that’s working with the recovery rather than against recovery.

MR. GREGORY:  My mother out in California, I presume, is watching this morning. She’s like a lot of Americans, worried about her job and wondering why not just bank lending, but something called nonbank lending, securitization–what is that, and why does that matter to her?

SEC’Y GEITHNER:  We, we came through a period where people borrowed too much and we let our financial system take on much too much risk.  And the consequences of those choices, made over years, were–was a huge boom.  And that boom–the air is now coming out of that, and that’s causing enormous damage.  And financial crises are, are brutally indiscriminate in the pain they–and suffering they cause.  The burden falls not just on people who took too much risk, but on people who were careful and responsible in their business.  That’s why it’s so unfair.  That’s why Americans are so frustrated and angry And that’s why it’s so important that your government act very aggressively to help contain the damage.

MR. GREGORY:  But I want to go back to what–I want to understand the terms here. What is securitization, and why does that matter?

SEC’Y GEITHNER:  In our system we have banks–community banks, large banks, small banks–that provide credit to businesses and families.  But in our markets we also have these securitization markets where–which, which match investors directly with borrowers through the capital markets.  We need both those to work.  Both are not doing enough now.  They’re not working, doing the kind of job they need to do to get credit going again.  And so to fix this mess we’re in, the mess we inherited, need to make sure banks are strong enough…

MR. GREGORY:  Right.

SEC’Y GEITHNER:  …but we also need to make sure these credit markets are working again.

MR. GREGORY:  And let me–on that point, on the nonbank lending, the securitization market is where actually most of the lending goes on right now. Is that right?

SEC’Y GEITHNER:  Well, well, typically in, in our financial system, somewhat less than half of lending for businesses and consumers comes from those markets.  So we need to get those markets going again just as we need to fix our banking system.  And the programs we put in place are already having some effect in helping unfreeze those markets.  So just as an example, last week the Fed announced–the Fed put in place a program with the Treasury, very powerful program that led to about $9 billion in new issuance of automobile loans and credit card loans.  That was more than you saw in the past four months combined.

MR. GREGORY:  Mm-hmm.

SEC’Y GEITHNER:  That will help bring down interest rates and, again, make it easier for people to get access to the credit they need to get through this.

MR. GREGORY:  All right, we’ve defined our terms a little bit, now let’s talk about the big news this week, your plan to help save the banks.  The bank stabilization plan.  We’ve come up with an example here and we’ll role-play a little bit, because I think this is the easiest way to explain this.  So here’s how a transaction would work.  Bank USA, we’re calling it, has a loan, a toxic asset, and it’s valued on their books for $100 million.  And it’s for sale, right?  So there’s going to be an auction here and investors like me could come in, and I’m going to come in and I’ve got–my highest bid is for $70 million, OK?  That’s the price for the $100 million loan that I’m actually going to pay.  Now, here’s how the transaction actually works, right?  I’m the investor, I put in $5 million.  You, the Treasury Department–you’re really the taxpayer–put in $5 million, and then the government in the form of the FDIC is going to provide 60 million at very good terms, going to guarantee that loan.  So the government’s on a hook for a lot of this.  That’s called leverage, right?  How does it work and what’s the upside?

SEC’Y GEITHNER:  David, let me just step back for one second.  Part of what’s, what’s causing this problem in our financial system is banks made a bunch of bad loans, many of them backed by real estate; residential, commercial real estate.  Those loans are now sitting on the books of the financial system and they’re taking up room, preventing banks from extending new credit on the scale they need.  And we have two choices in this context.  We can leave it as it is, hope banks will earn their way out of this process over time, and I am certain that will create the risk of a deeper, longer recession.  Again, the classic lesson in financial crises, if governments wait to act, they wait too late and that means more damage to the economy, higher deficit in the future, greater cost to the taxpayer.  We’re not prepared to take that approach.

Another approach many people advocate is that the government itself come in…

MR. GREGORY:  Right.

SEC’Y GEITHNER:  …and buy these assets, take on all the risk itself.  The government would set a price for the assets and bear all the losses and all the costs in that context.  Our judgment is that would be much more expensive for the taxpayer, create much greater risk for the taxpayer, and we’re not prepared to take that approach.

MR. GREGORY:  And the point in our model, if we can just put that slide up again, where you see investor puts in five million, Treasury puts in five million, the FDIC guarantees it at $60 million in terms of providing the loan.  There’s upside there.  In other words, if the value of that loan goes up, the taxpayer wins, the investor wins.

SEC’Y GEITHNER:  Right.  The investors are taking risk.  Their money is at risk and at stake.  They’re the ones that set the price for which this transactions will take place.  So using their self-interest to get the price better, better than what the government would do in that context.

MR. GREGORY:  Right.

SEC’Y GEITHNER:  We’re using their expertise to help manage these assets.  And the–and as you said, the taxpayer will share in the upside.  This is a relatively conservative structure.  It’s not very different from when your family buys a house.  It’s a more conservative structure than a bank typically operates.  But the key thing is it allows the government to work with the private investor to help get through this crisis.

MR. GREGORY:  Hm.

SEC’Y GEITHNER:  That we don’t want the government taking on all the risk and all the losses.

MR. GREGORY:  Right.

SEC’Y GEITHNER:  We need to work with the private sector to help get this, get this recovery going again.

MR. GREGORY:  All right, but here’s the key point.  The investor presumably is on board because, you know, they stand to gain a lot.  The government wants to get all of these toxic assets off the banks’ balance sheets.  It’s been estimated between $1.5 and $3 trillion of bad stuff out there.  But will the banks participate?  And here’s my question based on our example.  Hundred million dollar loan, but the auction price is $70 million.  Well, if you’re the bank and you say, “Hey, wait a minute.  This is really worth $90 million or $80 million.  I’m not going to sell that for $70 million and take that loss on my books.” Are you going make them sell?

SEC’Y GEITHNER:  Banks already hold reserves against that $100 million.  So the gap is not between 100 and 70, for example, it’s a narrower gap.  Now, banks are going to have an incentive because they want to raise, go raise private capital from the markets.  And it’s going to be easier for them to do that if they can show their investors a cleaner balance sheet.  And that’ll help improve the incentive for banks to participate.

MR. GREGORY:  But you can’t make them sell, can you?

SEC’Y GEITHNER:  Well, you can make it compelling and economic for them to sell.  And again, if you think about the markets today, if you had to sell your house tomorrow, in a market where no one can get a mortgage, then the price you would get if you sold in that market would be a tiny fraction of its basic value in a more normal.  And our markets are not working today.  People, in effect, in these securities markets, can’t raise financing.  And there is a very good case in that context for the government to provide financing on appropriate terms to help provide a market for these assets.  And by doing that, we’re going to make it more likely that interest rates come down and, and the financial system has the capacity to provide the credit, the oxygen.

MR. GREGORY:  Mm-hmm.

SEC’Y GEITHNER:  That economies need to grow.

MR. GREGORY:  Isn’t the government on the hook here for a lot of risk?  Isn’t there a lot more risk here for the government than there is for that investor?

SEC’Y GEITHNER:  David, the choice we face is whether to have the government take on all the risk in solving this, which we don’t want to do.  So if you compare this to the classic alternative, which is again, the government sits back, hopes the market solves this, which would be much more damaging to the economy, or the government takes on all the risk, buys all the assets itself, makes up a price, would risk overpaying, provide a much greater subsidy, this proposal is a much better approach to solving this problem.

MR. GREGORY:  Paul Krugman, Nobel laureate, New York Times columnist, been very critical of this plan.  He and others have said this is effectively a transfer of wealth from the banks’ balance sheets to the government’s balance sheets. A bailout for the banks, trash for cash.  You’ve heard all of these terms. And in fact, Krugman writes in a column last Sunday that your approach is very similar to your predecessor’s in the Bush administration, Hank Paulson.  This is what he writes.  I want to have you respond to it:  “The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them.  In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.  And so the plan is to use taxpayer funds to drive the prices of bad assets up to `fair’ levels.  Mr. Paulson proposed having the government buy the assets directly.  Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff.  …  The Geithner scheme would offer a one-way bet:  if asset values go up, the investors profit, but if they go down,” and again, these are all mortgage backed, “the investors can walk away from their debt.  So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.” Respond, please.

SEC’Y GEITHNER:  David, the investor’s money is at risk.  They can lose all their money.  Now, again, you have to compare these to the alternatives.  In the alternative scheme the government, in our view, would be taking on much more risk.  The taxpayer will be much more exposed to losses.  Life’s about choices.  Life’s about alternatives.  This is a better way to help get these markets working again.

But let me just step back for one sec.  What we’re trying to do is to get the entire financial system, our complicated finances working again so that we get credit where it needs to go in the economy.  And that requires strengthening our banking system.  It requires making sure there is enough capital in the financial system to withstand a deeper recession.  And we’re going to make sure that that capital comes with conditions to make sure that banks restructure, that there’s accountability for board and management, that the firms emerge stronger, not weaker, and that there are tough conditions to protect the taxpayer.  That is a critical part of what we’re going to do.

But our, our system is much more–depends on more than just banks, and so we have to do things to get these markets working again by providing financing directly to those markets that small business, consumers depend on.  And, and, but it’s going to require a comprehensive approach.  This particular proposal is not going to solve all our problems, but it is a critical part of the solution and we think it’s the best approach to protect the taxpayer and make sure that the market is working with us.

Now, just, just one more thing.  We’re not going to get through this unless we get a–willing to take risk again.  You know, the financials took too much risk.  The great danger for us now is they’re going to take too little risk, they’re not going to take a chance on a viable business or a family that wants to put their kids through college.  So we need to get them working with us in this context.  And of course, for them to take risk they’re going to need to have more confidence about what the rules of the game are going forward, that there’s clarity about conditions and they don’t face the risk of great uncertainty about those conditions going forward.

MR. GREGORY:  And to that point, are you this morning providing a guarantee to those investors that the rules of the games will not change?  If they make money in these transactions, that Congress won’t try to go get their gains and change the rules?

SEC’Y GEITHNER:  We have to do that or they won’t come.  And it’s a simple proposition.  Again, for these, all these programs to work, all these programs to work…

MR. GREGORY:  So the rules of this, of this program won’t change?

SEC’Y GEITHNER:  No, they cannot change.

MR. GREGORY:  Will the banks need more money?

SEC’Y GEITHNER:  We have a substantial amount of resources that Congress has authorized.  We’re moving forward to use those resources as quickly as we can to get them where they need in the economy.  Just to give you an example, the president’s housing program, which was the first major initiative we launched after I laid out that broad framework for financial recovery, has had a big effect working with the Fed and bringing interest rates down to historic lows, making–allowing millions of Americans who were not able to refinance to refinance.  Just to give you a simple example, typical American lives in a house that’s worth roughly $180,000.  Refinance in this environment could save up to $2,000 a year.  That’s a substantial amount of resource that they can use to spend on things that will help get this economy going again.  Where we are acting, you’re seeing progress and impact.

MR. GREGORY:  I want to turn to the issue of anger on Wall Street and those AIG bonuses.  The president said a couple of weeks ago this:

(Videotape, March 18, 2009)

PRES. OBAMA:  I don’t want to quell anger.  I think people are right to be angry.  I’m angry.

(End videotape)

MR. GREGORY:  You shared–you said in a letter, you shared the president’s outrage, and yet the reality is that these bonuses first came to light back in October of 2008.  You were still at the New York Fed.  They were also the subject of hundreds of e-mails between Treasury and the Fed and AIG during the transition and when you came into office.  In fact, the Treasury Department even negotiated with Senator Dodd with regard to executive compensation when the Treasury Department said, “No, no, don’t have this deal with retroactive bonuses.  We can’t abrogate those contracts.” So if you were so outraged about all of this, why didn’t you deal with this back when these first came up?

SEC’Y GEITHNER:  David, how could people not be angry with this?  With the challenges we’re facing now as a country in part because of risks our financial sector took on, how could people not be angry?  But our obligation and our deep obligation responsibility is, again, to try to fix this problem so that the trauma in the financial system is not causing more damage to the lives and fortunes of Americans and businesses across the country.  That’s the most important thing we do.  Everything we do has to be judged by the test of whether we’re getting the economy going again and recover…

MR. GREGORY:  Well, and that’s all fair.  But if you were so outraged, why didn’t you say that then?  Instead, you said, “I was outraged and we should try to get this money back.” The government knew about these bonuses several months ago.

SEC’Y GEITHNER:  Look, we had no good choices in that context, David.  These were contracts written before the government got involved, before Ed Liddy became CEO of AIG.

MR. GREGORY:  Mm-hmm.

SEC’Y GEITHNER:  We’re a nation of laws.  We cannot get the economy going again if there’s an expectation the government’s going to come in and break contracts.  Just not a tenable thing to do.  But what we did is–and we had no good choices, David–was when, when I was informed about the details of those provisions, we moved very quickly to ask that they–those that could be renegotiated get renegotiated, the government get those–or reduce those payments going forward.  And we’re going to use the authority we have to go recoup those payments where we have a good legal basis for doing that.  And you’ve already–we’re seeing a lot of those payments returned.  But the important thing is going forward that we establish clear conditions, clear rules of the game, prevent this kind of compensation practice in the future from coming back and putting our system at risk.  And we want to make sure that where the government is putting up assistance for these, for these banks, that that assistance is going to get lending going again…

MR. GREGORY:  Right.

SEC’Y GEITHNER:  …not to enrich the people that helped get us in this mess.

MR. GREGORY:  But, but my question is, is this:  If you thought this was so outrageous at the time, why didn’t you put this on the agenda then?  And if you felt that you didn’t have any good choices, that you really couldn’t dissolve those contracts, then when it came to light, why didn’t you and the president stand up and say, “This populist anger is understandable, but you have to understand it has to be put in context and it has to stop”?

SEC’Y GEITHNER:  Well, that–but that’s what the president did say.  And again, we’re trying to make sure that people understand…

MR. GREGORY:  The president said, “We shouldn’t govern in anger,” and then he said, “Yes, I’m angry, too.  I don’t want to quell the anger.” You said this was outrageous.

SEC’Y GEITHNER:  But…

MR. GREGORY:  Did anybody stand up and say, “Let’s put this in context.  We didn’t have good choices.  This is not worth getting so upset about”?

SEC’Y GEITHNER:  But, but, as you’ve seen the president say over the course of the week, the most important thing is we recognize that of course we don’t want to reward failure and we don’t want the government assistance going to reward failure, but we need to make sure we get this economy on–back on track.  That’s going to require the financial system getting fixed and repaired.  Of course we’re going to put strong conditions on the compensation…(unintelligible).  Remember, the first–the second week in office, the president put out very, very broad, ambitious standards on compensation practice.  That was before the Congress acted.  He was a–took early initiative in this area because we knew this was going to be a significant problem.

MR. GREGORY:  Let me turn to the issue of staffing at the Treasury Department. The president nominated you back on November 24th.  He understood the priority of having a Treasury secretary in place to deal with this recession.  And yet here we are at this date in March, and if you go to your own Web site on treasury.gov, the only confirmed Treasury official is you, the secretary of the Treasury.  The Economist writes this in its issue this week:  “Filling senior department jobs is always a torturous business in America, but Mr. Obama has made it harder by insisting on a level of scrutiny far beyond anything previously attempted.  Getting the Treasury team in place ought to have been his first priority.” I know there were some new nominations just this weekend.  Has it been a priority?

SEC’Y GEITHNER:  Absolutely, David.  And, and we’ve had some terrifically talented, dedicated public servants working at the Treasury from day one.  And look at what we’ve done in this period of time.  I mean, you have seen this government do more in eight weeks most governments do in years.  We’re moving much more aggressively, much more pre-emptively.  Look at the scale of programs we enacted and look at the impact they’re having.  You have not seen this scale of action before in this country or many countries.  And even this week we laid out a set of broad, comprehensive reforms to help make sure that our financial system never goes through this kind of crisis again.  We’re moving very quickly.  We’ve got some very strong, talented people.

MR. GREGORY:  Right.

SEC’Y GEITHNER:  We announced some new appointees this week.

MR. GREGORY:  But in terms of confirmed people in the Treasury Department, what’s gone wrong?  Is it the vetting standards?  Is it that you don’t want to work with people from Wall Street?

SEC’Y GEITHNER:  Confirmation process always takes time.  It always takes time.  People, people forget when you look back at transitions how long it takes to get people in office.  But we’ve got no choice but to act.  And again, we’ve been doing a huge amount of important, productive, consequential programs in a short period of time because we’ve got terrific people there working with me for the president to help get this economy back on track.

MR. GREGORY:  Do you want people with expertise on Wall Street to come work for you?

SEC’Y GEITHNER:  We need people who have experience in policy, in markets, in banking, in supervision, and we’re going to get terrifically talented people to come work for the country.  Because again, I think Americans know we’re at a moment of crisis and opportunity, and, and if you…

MR. GREGORY:  So Wall Street people don’t have a taint in your book?

SEC’Y GEITHNER:  No.  We’re, we’re going to make sure we take people–we get people with experience, as I said, in markets and in banking.

MR. GREGORY:  Mm-hmm.

SEC’Y GEITHNER:  Not just in policy.  Because that’s what’s going, that’s what it’s going to take.  You know, we’re trying to protect the interest of the taxpayer.  That requires people that have knowledge and expertise.

MR. GREGORY:  A couple of more moments here.  I want you to take a moment to explain the government regulation that you are proposing, which is very aggressive going forward.  How would this work?

SEC’Y GEITHNER:  Core thing is to make sure that the institutions at the center of our financial system are subject to much more conservative, much tougher requirements on capital and leverage that are applied more evenly and more effectively, frankly.  We need to make sure that hedge funds and derivatives come within a framework of oversight so we protect the system from the risks they may present.  And we need to make sure the government has the authority it needs to come in more quickly, to help contain the damage, restructure the system, so we can have a stronger system going forward.

MR. GREGORY:  But is the government really capable of moving in on companies that may need it?  Does the government have the level of expertise to unwind something like AIG’s financial products division?  You’re having your own problems even staffing up the Treasury Department.  Isn’t that a lot to, to ask the American people to support?

SEC’Y GEITHNER:  But, but there’s no choice.  I mean, how–what would you, what would you prefer, that we live with the kind of choices we saw in Lehman, AIG?  Catastrophic damage, or the government putting huge amounts of taxpayer dollars at risk to help and contain that damage?  We need a better model. What we’re proposing to do is use a model that exists for small banks that was designed by the Congress in the wake of the S&L crisis, build on that model and give the government a capacity to act more quickly, more effectively to contain the damage at least risk to the taxpayer and the economy as a whole.

MR. GREGORY:  Time magazine this week has its cover, and it’s very interesting.  I want to put it up on the screen for our viewers to see.  “The End of Excess: Why the crisis is good for America.” And there’s a big red “reset” button. And everybody talks about reset.  Obviously this is not a good crisis for America right now.  But take a longer view.  In the long run, is this crisis necessary for this economy?

SEC’Y GEITHNER:  I think the adjustment to a period of excess is necessary. You never, you never want to have a crisis to remind people of the importance of living within your means, not borrowing too much or why regulation of the…(unintelligible)…is important.  You never want to have a crisis that’s damaging to make that point.  But we’re going to emerge stronger than this. When we get through this people are going to care less about what they make, more about what they do, what they achieve with what they make, and that will help make this country stronger.

MR. GREGORY:  Will the economy be fundamentally different?  Will people own fewer homes?  I mean, home ownership, will that go down?  Will consumption change? Will our lives change in a meaningful way?

SEC’Y GEITHNER:  I think people will be living within their means more, which is helpful.  We want to have, you know, a stronger, more sustainable recovery. Not a recovery based on a artificial boom that’s not going to be sustained. We need to end this, this, this pattern of having booms and busts at the kind of frequency we’ve seen.  That has to change.  And that’ll make the, that’ll make this a better place to live and a more productive economy going forward.

MR. GREGORY:  Before you go, it’s been a fairly bumpy ride for you so far.  You’ve had Republicans calling for you to resign.  Some on Wall Street have questioned your effectiveness.  Do you think at this stage you’ve been able to shore up your credibility as not only a steward for economic policy, but as a spokesman for the president’s policies?

SEC’Y GEITHNER:  David, when I came into this job I knew two things.  One is I knew we were starting with a set of enormously complicated challenges and a deep sense of anger and frustration about the burden Americans were bearing because of a long period of excessive risk taking.  And I knew we were going to face really tough choices.  We were going to have to do things that are going to be deeply unpopular, hard to understand.  We’re not going to get it perfect everywhere.  But this is a great privilege for me, a great honor to help this president do what it takes to help get this economy back on track. This job, it comes with a lot of heat by definition and there’s nothing surprising in that.  But we have a great moment of opportunity for this country and it is, again, a great privilege for me to be part of an effort to try to make sure we put in place a stronger economy, stronger financial system for the future.

MR. GREGORY:  Secretary Geithner, good luck with your very important work.

SEC’Y GEITHNER:  Thank you.  Nice to see you.