This is a rush transcript of "Special Report With Bret Baier" from March 12, 2009. This copy may not be in its final form and may be updated.


SEN. JUDD GREGG, R-N.H.: You say the markets look forward. The markets are looking forward. They're looking forward and saying why would we invest in the United States when we're going to see a massive expansion of the government that will burden this country in a way that it can't afford?

TREASURY SECRETARY TIMOTHY GEITHNER: If you look at the lessons of history and the lessons of the financial crises, the most important thing is how quickly it is to move together quickly, comprehensively, and not to wait and not to be too tentative.


BRET BAIER, HOST: Treasury Secretary Timothy Geithner on the hot seat up on Capitol Hill today, talking about the bank bailout — every lawmaker wanting more details about that — also talking about the budget.

This on a day when there is some breaking news at the Treasury Department. Another person has pulled his nomination for deputy treasury secretary. H. Rodgin Cohen was up to be deputy secretary of the treasury and that name has been withdrawn.

He has withdrawn his name from consideration, the second in a row to pull out as treasury is looking for some more people to fill the spots there.

Let's bring in our panel now: Mort Kondracke, executive editor of Roll Call; Nina Easton, Washington bureau chief of Fortune magazine, and syndicated columnist Charles Krauthammer.

Nina, first of all, this news about another nominee pulling his name.


BAIER: Shocking.

EASTON: There is this sort of a sense of lack of heft going on at the Treasury Department, I think.

The markets have been trained to look to the treasury secretary for confidence. And we've seen — frankly, we have seen Secretary Geithner shrink in stature, as witnessed by the "Saturday Night Live" skit last Saturday where he was portrayed to offering $400 billion for anyone who can come up with a solution to this crisis.

The problem is — now he did acknowledge, he did give some comfort today in acknowledging that this is more like a $1 trillion problem. He is at least being realistic about the numbers. But the problem he has, I think, is, first of all, there aren't people with real serious operational capability on the economic team. These are academics, most of them, or bureaucrats, like Geithner.

Second of all, all of these sort of wealthy, money-grubbing, greedy investors that have been condemned by this administration are exactly the people you need to invest in this public/private partnership that is at the root of the banking plan to buy up these toxic assets.

You need to bring in these people and with the promise of a high return, which Congress isn't going to like. You know, your hedge fund guy is not going to come in for five percent. He is going to come in hoping for 25 percent. That's not going to go over well in Congress.

And so that's a real dilemma that he faces, and I think that's one reason for the delay in this and it's one reason for the lack of confidence.

BAIER: Mort?

MORT KONDRACKE, EXECUTIVE EDITOR, ROLL CALL: Well, look, he's a very smart guy, but he looks like a graduate student in a job that requires somebody who sounds like a dean of a university, if you're going to use the academic setting — I mean, somebody senior and who can instill confidence when he starts talking, Paul Volcker-style.

But the fundamental problem is that you got to figure out how to value these toxic assets. And there has been sometimes a building consensus, and then it seems to have gone away, that one way to do this would be to reconsider this mark to market rule for what an asset is valued at.

Right now it gets valued at zero because there is no market for it. Nobody wants to buy it. But the asset, if it's composed of mortgages, for example, those mortgages are not worthless.

So if you could figure out some reasonable other way to value this, intrinsic value or some other value, then that would drive up bank stocks. It would give them an opportunity — they wouldn't have to write their portfolios down to practically zero, and they would have more money to lend.

So that's something — Geithner was asked a question about that today, and he said we got to be very careful about that. Well, I would like to see more discussion on that point.

BAIER: Charles?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: Apart from the issue that there is not a plan to solve the banking crisis, and, in fact, it may not exist out there, is the soluble problem of staffing.

We have never had a situation in which treasury essentially is at the helm of the U.S. economy — a $14 trillion economy — when it runs Fannie and Freddie and AIG and has a decisive voice in Citi and in the Bank of America, and is deciding, essentially, the existence the fate of the auto industry.

All of this stuff is heaped on top of treasury, which normally looks after budgets and taxes and stuff like that.

So the job is inflated because of the crisis, and in that circumstance, there's nobody at treasury, as we heard. We already had another withdrawal of a deputy secretary. And apparently his problem was, as it said in The Wall Street Journal report, the connections with the banking industry.

Well, how are you are going to get somebody who knows about these issues who doesn't have a connection with the banking industry? This Caesar's wife standard is absurd.

In part, it's the populism in the House and the Senate, which will refuse anybody who has any kind of connection. But in part, it's also the self-righteousness of the Obama administration in deciding it will be above politics.

KONDRACKE: One thing that's happened...

KRAUTHAMMER: You cannot have people who are going to run this who know about this who haven't actually been involved in one way or another, and you get your sleeves dirty when you do that.

KONDRACKE: Well, there is apparently the staff of the Senate Finance Committee is putting every nominee that comes through there through a tax audit. Not just a vet, but a thoroughgoing audit, where you have to come up with the receipts for everything connected with your income tax in the last five years.

And this is turning away nominees. People are just refusing to take the jobs.

BAIER: Nina, last thing: Is the administration trying to find a voice here of confidence? Tomorrow, Larry Summers, senior economic adviser to the president, is going to give a speech. Are they trying to say, "OK, you don't like Geithner. You want to try Summers?"

EASTON: Well, I think Summers — former Dean of Harvard, and so forth, a former treasury secretary — he definitely adds heft to the team in his public visibility.

But they need more. Charles is right. They need — there are these key spots at Treasury Department. These undersecretary spots were really key during the Bush administration and they remain empty now. And he needs those people in.

BAIER: Last word.

KRAUTHAMMER: The phones are ringing in these offices, and nobody is answering.

BAIER: Something has to give this weekend in Pakistan, as protestors converge on the capital and the government vows to keep them away.


PENTAGON SPOKESMAN GEOFF MORRELL: It is an area of very real concern for us. The country as a whole, and the challenges they and we face there.


BAIER: The panel tells us what's at stake after the break.



NAWAZ SHARIF, PAKISTANI OPPOSITION LEADER: The situation in Pakistan is bad. The future is very dark, and the situation is getting worse inside this country every day.

ROBERT WOOD, STATE DEPT. SPOKESMAN: With regard to some of the activities that are going on on the ground in Pakistan, we wanted to make sure and make clear to everyone that peaceful democratic activity needs to take place in Pakistan. Violence is something we don't need.


BAIER: Antigovernment protestors are converging on the capital city of Islamabad. Pakistan has some trouble, the nuclear-armed country dealing with a lot of issues.

We're back with the panel. Charles, what about this?

KRAUTHAMMER: As they say in Washington, Pakistan is too big to fail, but already has. It's a completely dysfunctional country, a very weak democratic government with an accidental leader, the widower of Benazir Bhutto, unpopular.

The opposition, as we saw in that clip, is from a former prime minister who is not a friend of ours, who is weak in the war on terror, and who wants to destabilize Pakistan.

All of our talk about economic aid is completely, I think, beside the point. This is the sixth largest, by population, country on the planet. It is not a Grenada or an Iraq or a West Bank where you can influence it by economics. We're not going to have any influence on them in that way.

Our only hope is the military — to support it with arms, with training, and with money, because it is the only institution that actually works.

I think what is possible, and perhaps even likely, is that by the end of this year the military is going to have to step in and take over. If it doesn't, its leader, General Kiyani, who is a friend of ours, wouldn't want to do that prematurely because it would look like he is taking over a power grab.

However, if there is chaos, which is likely, or possible, I think the army steps in and takes over in a temporary way. And if it does, it will deserve our support, because that's the only way that it keeps from falling apart. And it is a country, as you said, with nukes, and we can't allow that.

BAIER: Nina, Richard Holbrooke, the Obama administrations envoy to Pakistan and Afghanistan, called President Asif Ali Zardari today. Is the Obama administration focusing on this enough? It has a lot on its plate, obviously.

EASTON: Obviously they need to focus on it more. And obviously it has been front and center, I think, of their strategy, certainly with Afghanistan. I mean, it's on their plate.

I think what it does, though, with this administration is it tests this whole notion of a smart power strategy, which under Obama means what? It means let's do economic aid. Let's do diplomacy, but let's do military as well.

And he's already finding out that the downsides of military, because in this case the Zardari government is further weakened because of popular protests over our use of drones, for example, to go after terrorists training camps, and so on.

So he's finding out that he needs Pakistan for that reason, as well as not to be destabilized because of nuclear weapons, and he's finding how difficult it is to keep that under control.

KONDRACKE: Look, we just had a military government headed by Pervez Musharraf. And Musharraf got thrown out, basically, because of a popular uprising against his policies.

And the army, the problem with the army is that it's all lined up against India. A majority of their troops are lined up against the Indian border instead of fighting an internal insurgency, which is ripping the country apart.

This is a country that wants to be a democracy. The population wants to be a democracy. It does not vote for Islamic candidates. But the forces of democracy, Zardari and Nawaz Sharif, whose pictures we saw, and also these lawyers, are all busy squabbling amongst themselves instead of concentrating on the real threat, which is the terrorists.

I mean, I think Holbrooke, who has got the second toughest job in the United States government to Geithner, I think, needs to go over there and have a come to Allah meeting with these various characters, and have them stop beating each other up.

BAIER: And General Kiyani was just here in the U.S. He has been trained in the U.S. at Fort Leavenworth. Charles, he's the hope for this administration?

KRAUTHAMMER: He is the one guy you can ultimately rely on if you have chaos. And that's what the United States understands, and, in extremisis, we will have to rely on him.

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