Gingrich on Bailout Bust: 'I Don't See How the President Can Avoid Firing Secretary of Treasury'

This is a rush transcript from "On the Record ," September 29, 2008. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: Joining us live is former Speaker of the House Newt Gingrich. Speaker, I'm going to ask you in a second what you think of this bailout bill that's now been rejected, but let me ask you first an economics question, and that's this, that I keep hearing things like that Main Street will have, quote, "trouble getting loans," which is a far -- which is much different than sort of a -- you know, a catastrophic, cascading of failure. Is -- you know, what's sort of the end point on this? Is it possible there could be a complete collapse of our financial system, or just difficulty?

NEWT GINGRICH (R), FORMER SPEAKER OF THE HOUSE: No, I think it's much more likely to be difficulty than a complete collapse, but I do think the difficulties can be real. I think if you are in an industry that uses a lot of capital or if you're an industry that relies heavily on credit, it could be a very painful year and it could lead to a fairly significant recession.

These are not outcomes we want. We want to find a way to work through this. But I think that it requires a very different approach than Secretary [Henry] Paulson has been taking, and I think that the vote today indicated that even when they'd worked for five days to try to improve what was really a pretty terrible original plan that he sent up, it still couldn't get a majority in the House.

VAN SUSTEREN: Is Secretary Paulson the right guy to be spearheading this?

GINGRICH: No. I mean, I think that he must have been a terrific deal-maker at Goldman Sachs and a great chairman of Goldman Sachs, but I don't think that's the same job as being a secretary of the Treasury. And I think the president would be much better off if Undersecretary Kimmet was now replacing Secretary Paulson. The administration won't like to hear that, but I think it's true.

One reason is that there's a step they could take tomorrow morning that would dramatically improve things with no congressional action, and that is to change the accounting rules that the Sarbanes-Oxley bill imposed on the system called "mark to market." It's a complicated issue, but I think it's so central to our future, Greta, that every American needs to understand. We adopted an artificial rule which drives down the price of everything in a period when prices are declining. So we artificially make it much worse for companies.

Both Chairman Bernanke and Secretary Paulson have indirectly admitted this when they said that they would pay two or three times the market value for paper because the paper is so dramatically undervalued. Now, that's a sign that it's the core accounting system that's wrong.

Two Chicago economists indicated on Thursday they thought this was 70 percent of the problem. That's $500 billion of the $700 billion that Paulson wants. The European central bank warned in 2004 that this would be a disaster, that you cannot do what we tried to do under Sarbanes-Oxley.

So my challenge to the administration is simple. Suspend tomorrow morning the mark-to-market requirement. Replace it temporarily with a three-year rolling average. You will overnight explode the amount of liquidity on the street. Companies will immediately have relief all across America. It will be a stunning effect. And you will have bought plenty of time to now think through in a better way what was so badly designed by Secretary Paulson and that, frankly, could not be salvaged.

VAN SUSTEREN: All right. If this is so simple -- and Secretary Paulson is a man certainly with a long history in the financial system, having been at Goldman Sachs -- if this is so easy to change to this three- year rolling average, which you say will introduce liquidity into the system so quickly, why isn't he doing this? I mean, he doesn't -- he seems like a guy who would know this stuff.

GINGRICH: Well, I think there are at least two major reasons. The first is that Chairman Cox of the Securities and Exchange Commission sees his job as implementing the rigidity of Sarbanes-Oxley, and so he's doing what the Congress said during the last crisis. The fact that it's making it clearly and demonstrably worse doesn't seem to be getting through to him.

In the case of Secretary Paulson, I honestly believe -- and this is obviously grounds for real debate. But my personal belief is that he liked the idea, as a former chairman of Goldman Sachs, that he would get to spend $700 billion and he wanted the power.

Let me give you a single example. They could have come in and asked for a loan authority. They could have said, We will loan money at Treasury plus 2 percent to any firm that has a liquidity problem, but the firm has to work it out and it can't be a bailout. He didn't take that route. He was asked by House Republicans over and over again. He wouldn't take that route. He wanted the authority to go up and buy these assets -- and by the way, to buy them at prices that he arbitrarily set based on his judgment, not at market value.

And so I think that part of this is, if you will, a kind of hubris that was centralizing so much power in the Secretary of the Treasury that I think was very unhealthy for the American system. I was delighted when Senator McCain intervened the other day, and with his help, Congressman Boehner and the House Republicans significantly improved what was a very bad bill. And my fear now is that Speaker Pelosi will move to the left and make the bill dramatically worse by Thursday or Friday.

VAN SUSTEREN: All right. I'm going to get to Senator McCain in a second and his contribution, or at least -- or lack thereof -- however -- you'll say, of course, it was good, but others may disagree. But is Secretary Paulson -- you say hubris. Is it hubris, or is it inept or something else?

GINGRICH: Well, look, I can't tell you, psychologically. I don't know him that well.

VAN SUSTEREN: No, but if you say that...

GINGRICH: I only ever talked to him once.

VAN SUSTEREN: But if you say this is obvious -- if you say this is obvious and you say your solution is one that will introduce liquidity so quickly and if credit is -- if this is a credit crisis and people need credit to run their daily lives, I mean...

GINGRICH: I'm doing a speech tomorrow morning at the National Press Club. I'm going to outline quote after quote from person after person, expert after expert saying that this particular accounting mess is a scandal, that it is causing a large part of the problem. In the last few days, I have talked to -- I'm currently talking to you from Oklahoma City, where I talked to two leading businessmen here today who said it was a problem. I was in Silicon Valley for three days last week, where people said it was a problem. I was in Atlanta Saturday talking to business leaders, who said it was a problem. I have talked to people in Las Vegas, who said it was a problem.

Every time I turn around, somebody says to me, "Let me tell you my horror story." Let me tell you how bad mark to market is because what it does is, it says to a firm, if you have one bad sale, you remark your inventory based on this new market, and that drives your inventory down. And now you've got to go out and borrow the extra money to cover this change in your values. On an upward cycle, it would lead you to overvalue your property. On a downward cycle, it leads you to undervalue your property.

And all you have to -- don't take my word for it. Read the testimony of Bernanke and of Paulson, who both said -- the chairman of the Federal Reserve and the secretary of the Treasury, who both said under oath that they would pay two or three times the current market value because the paper is actually worth dramatically more than its current value.

Now, that tells me what we have here is an accounting problem, which is leading to a liquidity problem. And as a simple test, I would challenge -- Chris Cox is an old friend of mine. I would challenge him tomorrow morning, take the gamble. Suspend it for two weeks and see what happens. If it works beautifully if the markets reliquidify, if we suddenly have dramatically less of a problem, then don't reimpose it. but if it turns out to be a problem, two weeks later, you have the authority to put it back in.

But take the gamble of helping America tomorrow. Don't cut a deal that moves the country into even more corruption and even more big government. You know, the Democrats at one point in this negotiation had a proposal to give left-wing community groups $20 billion as part of the price for passing this. I can't imagine what they're going to try to charge on Thursday.

VAN SUSTEREN: All right. You mentioned Senator McCain. He came back -- he got criticized some, and the term political stunt -- I'll use that, my word, to describe what I think how people are calling it. What was -- was his returning to Washington a contribution to trying to find a solution or not?

GINGRICH: Well, the Republicans in the House are the most conservative element in Washington. And they were firmly opposed to the bill, and nobody was paying any attention to them because they thought they could run over them. When Republican leader John Boehner went down to the White House with Senator McCain and they went around the room, everybody else had cut the deal. Everybody else was in on the fix. They got to Boehner, and he said, We can't go along with it, the House Republicans. And McCain said essentially, I'm with Boehner.

At that point, Barney Frank and other liberal Democrats blew up because they thought that they had a deal. They thought the administration had basically sold out the House Republicans and was going to deliver them, and they suddenly realized that with Senator McCain siding with Congressman Boehner, that they had to negotiate. That was on Thursday.

Watch Greta's interview with Gingrich: Pt. 1 | Pt. 2

There was a long, painful, hard negotiation. And the fact is that they dramatically improved the bill. I said this morning if I had been in the Congress, I would have hated it, it makes me very angry, but I would have voted yes. And I said that because I watched Congressman Roy Blunt and Congressman John Boehner and Congressman Cantor and Paul Ryan really improve the bill significantly. It was still not a good bill, but it was dramatically better.

That would not have happened without John McCain's involvement. And by the way, on the other side, I don't believe Senator Obama delivered a single vote in the House today to try to help pass this. I think he once again was voting present.

VAN SUSTEREN: All right. So now -- so now where does that leave us with -- I mean, Senator McCain made a contribution and he got some Republicans to consider it or vote for it, but we're still back at square one. We have no bill.

GINGRICH: Well, and as I said, I think, therefore, the first thing they should do tomorrow -- since the Congress is out for the Jewish holidays, the first thing they ought to do tomorrow morning is suspend mark to market, which the administration can do internally without any bill. The second thing they should do is rewrite the bill.

But I would rewrite it to move it towards being a lending authority, not a purchasing authority and to enabling people to have a work-out, not a bailout. And I believe you could pass a work-out bill with a substantial number of Republican votes, where I think it's extraordinarily hard to get votes for a bailout. And I really am afraid, the way the Congress works, that the next stage will be to move with Speaker Pelosi to a very left-wing bill designed to buy votes by giving away money domestically.

VAN SUSTEREN: What about President Bush and Vice President Cheney? I mean, what -- where do you see their role in this, at this point?

GINGRICH: I -- listen, I think that they have not played a significant role in this. I think the president's speeches did not have any significant impact. I think the country deeply dislikes this proposal.

I think that what happened was when Secretary Paulson sent up a proposal to allow him to spend $700 billion with no congressional oversight and with no judicial review, a three-page proposal for $700 billion, he created a negotiating environment that was hopeless. And because it was so clearly seen as a bail-out because he wanted to buy the properties, rather than lend money to create liquidity, I think he created a tone in which the average American is sitting out here -- and I say this having been in a lot of cities recently. The average American walks up to me here in Oklahoma City today and says, you know, I don't get a bailout.

VAN SUSTEREN: Yes, but the problem is...

GINGRICH: If I get a problem...

VAN SUSTEREN: The problem is...

GINGRICH: ... I got to figure out how to solve it.

VAN SUSTEREN: But the problem is, Mr. Speaker, is that on the flip side of that is what a lot of people think is that this is just for the rich people or the rich corporations getting bailed. The problem is, if there is no credit in the system, the truth is, you can't go buy that car. You can't run your small business because you can't get the loan. So it does affect them.

GINGRICH: No, I didn't say it didn't affect them. I said they think it's very unfair. If you say to them, as I have repeatedly now for a week, What if we loan the money at Treasury plus 2 percent, but the person who made the bad deal had to actually work at it and pay it off over five years, they say, Fine. They don't mind solving the liquidity problem so that you have credit in the system. They hate the idea that a bunch of rich guys are going to be bailed out by a former chairman of Goldman Sachs, who's going to spend the money the way he wants to with unlimited capacity to take care of his friends.

VAN SUSTEREN: Does he have a conflict of interest? I'm talking about Secretary Paulson.

GINGRICH: Well, look, I was startled yesterday by a -- and this is what really pushed me over the edge decisively. There was a New York Times report that the New York Federal Reserve had a meeting about AIG, the gigantic insurance company, and the only private-sector firm in the room was the chairman of Goldman Sachs, which happened to have a $20 billion concern.

VAN SUSTEREN: A $20 billion thing. I got the article right here because it has scandalized virtually everybody, wondering what in the world was going on.

GINGRICH: I don't understand how the president -- I don't understand how the president can avoid firing the Secretary of the Treasury, when you have a former chairman of Goldman Sachs who wants to have unlimited ability to spend money, and you have the current chairman of Goldman Sachs the only private-sector person in a room, which, by the way, two weeks later, the U.S. government put up $85 billion to help AIG, in which Goldman Sachs has a $20 billion exposure. The average American looks at -- when the average American understands this, they are going to be so angry at this Congress if it passes a deal to give Secretary Paulson money.

VAN SUSTEREN: We've got to take a quick break. We'll be right back with you, Mr. Speaker, because at this hour, markets have just opened in Asia and we're going to have the very latest on that and this financial crisis that is rocking virtually the entire world. We'll be right back.

(COMMERCIAL BREAK)

VAN SUSTEREN: This is grim, and worse, we are so uncertain what is going to happen. The bail-out bill has not passed, the market is now open in Asia. And former Speaker of the House Newt Gingrich is still with us. Mr. Speaker, we were talking about this New York Times article. It's obviously scandalized both of us, with the Goldman Sachs man in the room with his $20 billion stake at hand on this AIG bail-out. But anyway, why isn't someone screaming about this besides one newspaper article and now you?

GINGRICH: You know, I don't know. I don't understand. I think that the liberal Democrats, frankly, are pretty happy with Paulson because they hope he's going to get them a whole lot of money to spend, and they figure they may take over at the election and then they get to spend all that money. I think the conservative Republicans are embarrassed that it's a Republican administration, and so they're a little bit timid to speak out.

But on both sides, this should be seen as an extraordinary scandal. Here you have a former chairman of Goldman Sachs, Secretary of the Treasury. You have Goldman Sachs being in a privileged position to be in a meeting at the New York Federal Reserve to discuss the bailing out of AIG. Then you have the government put up $85 billion for AIG, in which Goldman Sachs has a $20 billion exposure.

I mean, there's something fundamentally so wrong about this whole picture that it's no wonder that it's hard -- and frankly, when I've talked to House Republicans over the last three days, their level of hostility towards Secretary Paulson and their belief that he totally rejects and ignores all of the alternative ideas, except the ones he wants, is pretty - - pretty solid. I think the president will be far better off to have Bob Kimmet up there, the undersecretary of the Treasury, negotiating this bill than he is to have Secretary Paulson. And I think you'd have a much fairer sense in the country of what's going on. I do think this is getting -- this bad, and I think it's going to get worse in appearances.

VAN SUSTEREN: What do you -- what would you expect or want from your candidate, Senator McCain, on this?

GINGRICH: Well, I think that Senator McCain owes it to the country, as does Senator Obama, to outline the principles of what they would do now. I mean, I'd like to hear both of them describe whether or not they agree that we should suspend the mark to market accounting procedure because that could be done immediately in the morning. I mean, that could affect -- you know, if he wanted to, Chairman Cox could open the day before the markets by announcing at 7:00 or 8:00 AM that that had been suspended for the next couple weeks, and you would immediately have relief in all sorts of areas of the financial system involving hundreds of billions of valuation.

I mean, take the amount that Bernanke and Paulson, the chairman of the Federal Reserve and the secretary of the Treasury -- take the amount they have implied in their testimony. They think the market is currently undervalued in terms of how they would buy paper, and you are talking about a potential resurge of several hundred billions of dollars of liquidity just by having Chairman Cox and the Securities and Exchange Commission with a stroke of the pen, without any legislation...

VAN SUSTEREN: All right. Let me ask a crude question. This is, of course, at a time when the nation is concerned about its financial stability, but it does have political implications, and it seems at least now, looking at the polls, that Senator Obama -- that because of the interest in the economy that the voters seem to think that he's better at handling this. We have a minute left. Your thought on that.

GINGRICH: Sure. I think in the absence of Senator McCain making a clear and vivid case that people believe in and understand, inherently, in an economic hard time, the out party and the Democratic Party -- in this case, they're the same -- has a substantial automatic advantage. So the challenge is for Senator McCain to offer such decisive and clear alternative that people decide that it's a better choice. And I'd say the polls are telling you he has not yet done that.

VAN SUSTEREN: Is that possible? I mean, there's such a short amount of time...

GINGRICH: Yes.

VAN SUSTEREN: ... Between now and Election Day.

GINGRICH: In the age of television and in the age of the Internet, 72 hours can be an eternity, as you well know.

VAN SUSTEREN: And indeed...

GINGRICH: We're a long way off from the end of the election.

VAN SUSTEREN: And indeed. So you're not the least bit surprised by the poll numbers, at least as they are now.

GINGRICH: No. I mean, given where we are and given the fact that everybody has now been vividly reminded that President Bush is in office and have been reminded of how unhappy they are and have been reminded of how much they want change, all of those things were net advantages for Senator Obama. So I think the question is, over the next four weeks, can Senator McCain communicate so vividly and so clearly a better future than Senator Obama that people decide they'll get the real change from McCain? If he can, he'll win the presidency despite everything. If he can't, I suspect he'll lose.

VAN SUSTEREN: Mr. Speaker, thank you, and we'll see you in Washington soon. Thank you, sir.

GINGRICH: Thank you.

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