Bob Corker

WASHINGTON — In his third year in the U.S. Senate, Sen. Bob Corker, R-Tenn., has become his one of his party’s leaders on banking and finance matters.

Never one to mince words, he has drawn attention for his equal opportunity Senate Banking Committee grillings of former Treasury Secretary Hank Paulson and his successor, Timothy Geithner, along with other federal officials overseeing the economy.

Recently, he got into a tiff on national television with House Financial Services Chairman Barney Frank, D-Mass., accusing Democrats of “still running against George Bush” instead of being “coherent” on the credit crisis. That prompted an indignant retort by Rep. Frank that Sen. Corker’s “partisan attack in the name of partisanship” was disingenuous.

The Times Free Press recently talked to Sen. Corker to discuss the credit crisis.

Q: You’ve said several times that there are banks that should be allowed to fail. Why is that, how should this occur, and which banks are you talking about?

A: What we’ve been doing is using taxpayer money to put just enough capital in many institutions to get them to the next quarter or the next six months.

What we’ve done is allowed them to take our money, to, in their own self-interest, hoard our money because they know future losses are coming. They’re acting in their own intelligent self-interest as this is done, but the fact is, we’re not solving this problem.

I just met with a major company (that is seeing) tremendous difficulty right now getting credit. The customers they sell to are smaller businesses, (and) they’re having problems getting credit.

Until we cause these (banking) institutions to acknowledge the true value of the assets they have on their books and have appropriate capital injected — in other words, that’s going to mean significant write-downs in asset values — we are not going to solve our credit situation.

I’ve been saying this when the Bush administration was here and saying it now that the Obama administration is here, and hopefully next week, (Treasury Secretary) Tim Geithner will come forth and lay out something that will give people faith in our financial institutions.

Until that happens, people are not going to invest in our financial institutions with private money. And financial institutions are not going to be lending in the way they have in the past. And this creates a self-fulfilling prophecy. That is what is driving our economy into the ground right now.

In addition to that, there are some institutions, candidly, that are in such bad shape, they need to be seized. That’s what the FDIC does to protect taxpayers.

I have co-sponsored legislation with (Sen.) Chris Dodd (D-Conn.) that would give the (Federal Deposit Insurance Corporation), instead of the $30 billion line of credit they have today, a $100 billion line of credit. The $30 billion was established back in 1991. At that time, bank assets were $4.5 trillion. Today, bank assets are $13.5 trillion. So we would expand that to $100 billion.

Secondly, it would, on an emergency basis, give the FDIC access, with the approval by the Fed and Treasury and others, access to $500 billion in the event there was an extraordinary circumstance where a bank needs to be seized.

One of the consequences of this legislation important to community bankers is that they have received a special assessment of 20 basis points right now and this legislation would also allow the FDIC to maybe not make as strong as a special assessment, which for some community banks is an entire quarter’s earnings.

But the point is, it equips the FDIC to be in the position of being aggressive if they see that depositors are at risk.

What we’ve done, and what you’re going to see, is the Treasury is getting ready to come out with its stress test.

It’s a test that will assume what unemployment rates are going to in 2010 and what the continued drop in house prices will be. And then it will assume what amount of tangible common equity that is required in a bank for it to be, in essence, healthy.

I’m hoping that the stress test that the 19 largest banks will be put through, banks above $100 billion in assets, is a difficult stress test, so that when they’re through with these machinations, the public will finally have confidence in where these institutions are and where they say their balance sheets are in respect to the strength of the institution when you take into account assets that are diminished in value.

Q: This FDIC bill that you’re talking about, nationalization is obviously a big buzzword, what does your plan do in terms of nationalization?

A: As it relates to the FDIC bill, this happens all the time. They come in, they secure depositors, they guarantee everybody $250,000. They take momentary control, they sell off the assets, they bring in another owner, and they move on. That’s a very different thought process than talking about nationalization.

This is something the FDIC has done numerous times. They’ve done it numerous times in 2008 and 2009. They’re going to do it many more numerous times, and what I’m trying to do is make sure they’re armed with the capital necessary to be aggressive when they think depositors are at risk.

Q: You have the chairman of Bank of America, Ken Lewis, saying that contrary to some of the things you’ve said, his company (one of the largest recipients of rescue money) is well-capitalized and won’t need any more government assistance.

A: I’ve never made reference to any specific bank.

Q: But when you hear banks talk like that, are they being phony? Are they just saying what shareholders want to hear?

A: Well, who knows? I remember Bear Stearns up until 48 hours before JP Morgan had to take them over at $10 a share, they were saying they were healthy. They were sending out press releases. So, I don’t know.

The last thing I want to do is make a statement about a particular institution that may be false. One of the things we try to do around here is major in facts. I don’t know.

But, again, hopefully this information that has been submitted by Bank of America and Citigroup and all the major banks will be put up against a stress test — and I hope it’s a difficult stress test — and hopefully the outcome over the next 30 days is that we either know these institutions are solid or something is done to make them solid or those that don’t need to be around aren’t around.

Until those things occur, there’s not going to be confidence in the system that’s necessary for additional capital flow to occur.

We’ve certainly met with almost all of these institutions. Each of them has a company line, if you will, as to where they are. Hopefully the exercise the Treasury is going through right now will edify and give us a chance to know.

Q: You’ve acknowledged that Timothy Geithner is in a difficult spot. If you were in his shoes, what would you propose to fix the credit problem as you’ve described it?

A: No. 1, I would get the TALF (Term Asset-Backed Securities Loan Facility) program going. There’s a liquidity issue as it relates to commercial paper. Consumer loans that are backed by asset-backed securities, creating a place for those to be sold so that liquidity returns to the market. I think that’s important. It was announced by the former Treasury secretary (Hank Paulson) and (Ben) Bernacke, our Fed chairman. That needs to occur.

A major qualm I would have with the Treasury secretary (Mr. Geithner) is his tremendous lack of clarity.

Basically what he did several weeks ago at the (Senate Banking Committee) hearing where he was supposed to lay out to the world his plan, he threw out this — I could use a word for it, but I won’t for your reading audience — thing and then left the world hanging with a tremendous lack of clarity. It was a really bad move on his part. He should have just waited.

Examining these banks, putting these banks through — the major banks, those that are considered to be systemically creating a risk for our country — putting them through that difficult stress test is important. What he should do is be clear about what that is.

And then figuring out a way of dealing with the issue of these toxic assets. I would put that at third level, behind TALF and behind this whole issue of making sure our 19 largest banks have gone through this stress test, and either they exist and people have confidence in them, or they don’t.

Q: The chairman of Wells Fargo, Richard Kovacevich, recently called the stress test “asinine.” You see some frustration on the part of banks going through this program. What’s your response to them?

A: Any time you allow yourself to get in a position where public taxpayer dollars are at risk and they have to be invested in your institution for the public to have some sense that you’re going to continue to exist, I don’t really worry too much about the frustration that the CEO of that particular entity or any other entity might have.

Q: But he’s saying he was forced to take (Troubled Asset Relief Program) money, that he didn’t want any part of it.

A: Pay it back. My guess is that as these institutions continue to see the entanglement that occurs when you become dependent on government funding, as many of them have, hopefully they will be creating exit plans to extricate themselves.

Certainly, if I were the CEO of a major financial institution, that would be plan No. 1, to remove myself from the entanglement of the federal government.

Q: You mentioned recently that any institution that takes government money should have a separate set of rules, so that there’s not an incentive to keep taking on taxpayer money. Can you talk about what rules you would institute?

A: Just in general, when you become part of the public sphere, there’s a different standard that you have to live by. Whether it’s appropriate or inappropriate, that’s life.

When you run for public office, there are disclosures that the public expects you to generate. I’m just getting ready to fill out my public disclosure this year.

There’s a different set of rules that occur when you get entangled with government funding.

Looking at compensation issues, when in essence, your entity would not exist if it weren’t for U.S. taxpayers and you’re living off the public, that just generates a different set of sensibilities and an understanding of the frustration that the public has that their taxpayer dollars are being used to shore up entities that basically made some really bad calculations. I hope that’s a disincentive.

Q: The AIG bonuses. There’s now legislation to make them pay the money back. What’s you’re take on that?

A: Again, there’s a different set of sensibilities that companies have to have. I think that in spite of the fact that these were contractually done, the fact that we’re even having to be involved is unfortunate. You would think that the CEO of the company would sit down with the people who are impacted.

These contracts were in place prior to them ever receiving government money. I remember when AIG did this. I remember they did it in response to the fact that the company was going through a tough time and there were a lot of people who were thinking about abandoning ship. So they did it in a way to retain good people.

Since that time, though, circumstances have changed and they’ve received public dollars.

This is the type of thing — and again I get back to sensibilities — that you hope would have been worked out internally, and people would have figured out a different way of dealing with this issue in a way maybe that after the taxpayers were dealt with, maybe compensation accrued.

There’s a sensibility issue that has been lacking among many that have received government funding.

Q: There have been calls by some members of Congress that AIG executives should resign, or worse. Should they resign?

A: If you want to take that, maybe we should go back. There’s a lot of blame that could go around. I could go back to the New York Fed leader, Tim Geithner, who really improvised the beginning of this. It was the New York Fed, not the Treasury, that began this whole bailout of AIG. I have a lot of questions. I asked Ben Bernacke a number of things the other day.

If you look at our response in the first place. The fact that we didn’t in an orderly way dismantle AIG. The fact that we have no governing authority that has the ability to dismantle AIG. I could go through a whole host of issues. Then the fact that in these contracts, instead of just honoring losses that occurred in credit default swaps, AIG’s putting up collateral in advance, a distressed company.

I have a lot of questions. They begin with Sec. Geithner, they go through the Fed, there’s a lot of blame to go around as it relates to AIG. But I think we should begin with realizing this whole bailout proposal began with the Federal Reserve, the New York Reserve, Sec. Geithner.

There are a lot of conditions that could have been placed on the company. Hindsight is 20/20 and I know in a crisis you can’t always think through a lot of these issues, but there certainly is a lot that could have been done at the time to prevent these kind of things from occurring.

Q: You’ve become your party’s point man on banking issues. How did your role evolve in this?

A: I try to stay away from rhetorical responses. I try to understand the issues as they really are. And then I try to put forth, to the best of my ability, pragmatic responses or solutions to where we are.

I do think it began during the hearing process. I know that we had a number of senators that I think had a great ability to speak on numbers of issues. I’m glad I’ve been able to contribute in a small way. We do try and work during almost every waking hour of the day to spend time with people.

I was just with Bob Zelleck, (president of) the World Bank, and the head of the IMF to understand how this financial crisis is affecting the world. We will follow up with individual meetings with them. Hopefully it’s because we do a tremendous amount of work and have an understanding as a result of our focus on this issue.