... FDIC [Federal Deposit Insurance Corp.], established 75 years ago in the Great Depression. ... How does it feel being head of FDIC during another grand crisis?

It's a very important place to be right now. We're getting a lot of media attention, and I think that's positive because I think the FDIC is all about public confidence. That's how we maintain the stability with people having confidence in our brand and our insurance guarantee, and I think we've done that fairly successfully. We have seen a lot of stability. People are keeping their money in banks, which is good. ...

I think we'll be judged by how history judges us, whether we continue to be effective in trying to stabilize the banking sector and maintaining people's confidence in the banking system. ...

You say in speeches that the FDIC and yourself saw a storm brewing over the last two years. ...

When I came to the agency, we were still in a very benign economic environment, but the FDIC staff, our supervisors as well as our economists, were expressing a lot of concerns about what we call the underpricing of risk. There was just too much credit out there, and there was a risk premium being charged for the credit that was being extended. And that was particularly true in the mortgage markets. ...

Most of the really weak underwriting occurred in loans that were packaged in securitizations by Wall Street and then sold off to private investors. So we bought a database that included these loans to try to get a handle on how bad the situation was. And it was pretty frightening what we saw, especially with the subprime market, these very, very steep payment [resets]. You had starter rates that were very high already, 8 or 9 percent. Then they would go up to 11, 12, 13 percent after two or three years. And they really weren't designed to be affordable after that reset. They were designed to prompt another refinancing, so you get another whole round of fees and, in some instances, prepayment penalties. They weren't designed to be a long-term sustainable product.

Of course, you can only refinance if the housing market is going up, right? If you don't have any equity in your home, you can't refinance. And that's exactly what happened as the housing market started to flatten out and then go down. These folks were locked into these mortgages.

[That was 2006, but even back in 2001 you were one of the first voices saying we need to do something about subprime mortgages.] Sometimes did you sort of feel that you were out in the dark shouting, and no one was listening to you?

Well, there were a lot of others. [The late economist and former Federal Reserve Governor] Ned Gramlich I think was really more vocal than I was, and he actually got me interested. ... But certainly people didn't listen more broadly.

For years there were bills in Congress to try to address what they called predatory lending, perhaps that was a prejorative -- lax lending -- but it was bad lending, whatever type of adjective you want to put on it. And they just couldn't get the political momentum to get anything done. And I think that was because everybody was making money. Even borrowers were making money if they could keep refinancing.

I think the hidden fees and costs of these loans were, to some extent, hidden from borrowers, especially subprime borrowers, where you're dealing by definition with borrowers who have limited credit experience or have had a past of troubled credit experience. ... They were still refinancing, still putting a lot of cash up. ... And there wasn't a lot of hue and cry except primarily from the consumer groups at that point. I think that was the problem. It's very, very difficult in Washington to get political will to move anything when everybody's still making a profit out of it.

And nobody was holding onto the risk. That was the other problem with the securitization markets: These loans were being pooled and broken into securities and sold off to investors. The investors actually had the long-term risk on these mortgages. They were the ones that were going to be taking losses if the mortgages didn't keep performing.

But they didn't really look at the underlying mortgages, either. They relied on rating agencies, and they didn't really look at the underlying mortgages. They just relied on mathematical models and say: "Oh, well, it's overcollateralized by 30 percent. My gosh, we couldn't have 30 percent of the mortgages going bad here, so we're going to give it a AAA rating." So nobody really looked at the human faces behind these mortgages to see if they were actually affordable and sustainable.

How could this happen?

It was a breakdown at every step of the way, and regulators included. The majority of it was done outside of insured depository institutions. But there were some banks that were doing it, too. And I think that was more in response as they were losing market share to third-party originators who were the shadow banking system -- pretty much completely outside the regulatory system. They could get funding from Wall Street securitizations, and again, the risk was being passed on to investors who also weren't looking at the underlying mortgages. And borrowers, ... it was still working for them so long as the housing market was going up.

Everybody's compensation incentives, financial incentives, were short-term, not long-term. There are a lot of lessons to be learned to this, but if there's one, it's that the compensation structures, especially for the originators, needs to be tied to the long-term performance of the loan. If they can just get paid up front, sell it off, and nobody else is looking at the risk, that doesn't work. And that's really where the market breakdown occurred. ...

When [Alan] Greenspan, [Federal Reserve chairman, 1987-2006], left, Congress sort of anointed him "the Oracle" ... Do you remember when he left, that view, and was it ignoring what was to come?

I think there had been a very, very long run of very strong economic growth and prosperity, so I think it was certainly understandable that he would receive a lot of accolades. And I don't think you can take all of that away from him. There's some very good things that had happened during his tenure at the Fed.

But what we know now is that there was too much liquidity. There was too much money chasing too few assets, and so they were looking for leverage to juice up their returns, and that led to a significant deterioration in credit quality standards. I do think there was one thing that the Fed should have done, [which] was acted much earlier. … Congress did not have the momentum to pass lending standards that applied across the board, but the Fed did have the power under HOPA [Homeowners Protection Act] to do that. And that was something that Ned [Gramlich] had really advocated for, and they did not do that. ...

Going back, I think, to 2000, there had been a HUD-Treasury joint study recommending to the Fed that they use their HOPA authority to apply lending standards across the board because of the regulatory arbitrage occurring and the deterioration you could see even back then, outside the banking sector. And, you know, hindsight is always 20/20, but that was clearly one mistake that had been made. ... It could have changed things. I think it could have helped. Whether it could have avoided all of it, I don't know, but it certainly could have helped.

And you had been asking for that yourself?

We had, yes. That was Treasury's view. ... And then when I came back to the FDIC and became re-engaged in this issue again, that was definitely something that we supported.

And Chairman Bernanke did as well. He got the job done. We do have much stronger standards now. The kind of unaffordable mortgage lending that you used to see, you shouldn't be seeing anymore. It's not legal anymore. There's still an issue with Congress in terms of enforcement. Again, you have a very elaborate regulatory apparatus to enforce these standards on banks, but the enforcement mechanism for non-banks is not as robust as it could be, and I think that's something else Congress is going to be looking at.

And what do you take away from when Mr. Greenspan came back to Congress recently and made his statements? ...

I was astonished. I really was, because he's not the type of personality to do a lot of mea culpas. ... I think it's a tribute to him that he had some hindsight. There was some things that should have been done differently. ... I'm probably more regulatory than he is, particularly on the consumer side, but he's a very smart person, and I think whatever he did, I think it was truly what he believed to be in the best interest of the economy. And if there were mistakes, I think they were mistakes that a lot of people made. A lot of people didn't see this was coming. ...

[Bear Stearns, as an investment bank, wasn't under your jurisdiction. But when it starts falling apart, were you worried that the contagion could spread into the banking system?]

With Bear Stearns, there was not an immediate impact on the banking system. And the fact that there was an arrangement to keep it going, it was not forced into bankruptcy, I think insulated the financial shock, the repercussions that you later saw with Lehman Brothers.

So actually from our perspective, we kind of knew that there was a lot of risk outside of the banks in the investment banks. They were much more highly leveraged, for one thing. One thing that is near and dear to the FDIC's heart is to have high capital standards and constraints on leverage for insured depository institutions. Excess leverage is always a vehicle for a lot of bad financial consequences. Because we want to keep banks healthy, because we insure their deposits, we are very strong advocates for high capital levels. ...

[The weekend of Sept. 13 to 14, 2008, Lehman Brothers is going under.] Tell me a little bit about what your involvement was or was not at that point and the debate that was going on. ...

... With the failure, we saw a lot of decreased confidence in all financial institutions, including banks, and we saw a lot of volatility in deposits. And that was creating an additional instability with some institutions. Some were weak and were not going to be able to survive the situation; others were stronger. ...

There were two cycles. Actually, after Freddie Mac [Federal Home Mortgage Corp.] had been closed, which was earlier in July, we'd seen steep deposit outflows in that situation and had been very concerned about it. And then, after the Lehman Brothers failure, we saw another extreme liquidity situation, which ultimately led to their primary regulator, the OTS -- Office of Thrift Supervision -- having to close them, and they were also sold to JPMorgan Chase. Fortunately for us, we were able to resolve it at a zero cost to the Deposit Insurance Fund [DIF]. But then later we had Wachovia, and again, this was a severe liquidity situation with them. ...

The FDIC, the reason we were created is to provide stability [so] people don't pull their deposits out. But there's still a lot of uninsured [money] out there, and that was being pulled out, especially with these business transaction accounts. Typically business transaction accounts will exceed, the payroll accounts will exceed the insured deposit limits. Also, counterparties were concerned about whether they were going to be able to roll their debt. That was a much larger institution, and it was more diversified. And at that point, that was actually the first time we decided to invoke our systemic risk exception with the Fed and the Treasury, which is an extraordinary measure, to provide some support on an open-bank basis to try to stabilize that situation.

But the Lehman Brothers bankruptcy, ... it was interesting that the confidence shocks were truly systemic, even though that was an investment bank. Everybody started pulling back, including the more sophisticated banks, didn't want to lend to each other. These were other institutions that surely had some sophistication, acumen to analyze the balance sheet of their counterparties to make some valuation of their strength. Everybody was just frozen in place. Nobody wanted to take a risk anymore. And we'd really been dealing with that situation. We continue to deal with that situation. ...

Should Lehman Brothers have been saved? ... Why wasn't it saved?

Hindsight is always 20/20. ... It's difficult to know when to pull the trigger and then how the resolution should occur. We're fortunate that we have a statutory process to use for resolution. Ordinarily, we follow least cost, and there's a very strict statutory regimen that shareholders and unsecured debt holders need to take losses before the FDIC takes losses, and that uninsured depositors take losses with us. Of course, insured depositors never take losses.

But there's a process in place for doing this. We have a receivership and resolution staff that are expert in how to close institutions, how to do that in an orderly way so people don't get scared or upset, and it's always better to try to sell it off to another institution to keep it running, as opposed to putting it into some type of a bridge bank [temporary] situation, which is what we had to do with Freddie Mac, or we're selling it off in pieces. We try to avoid that. …

So the Lehman Brothers bankruptcy did create a lot of disruptions in public confidence. On the other hand, I don't think we should go so far back in the other way now [and] just guarantee everybody. ... Somebody has to take the losses, whether it's the taxpayer, whether it's the Deposit Insurance Fund, whether it's investors and debt holders. ... I think a process going forward that does still ensure that some of the private investors do have to absorb some of the cost of these failed institutions is key. But I think we can do that in a way that mitigates the pain, that spreads it out to those who truly were assuming that type of risk, and doesn't cause these disruptions that we saw after Lehman.

... Was Lehman Brothers a symptom or a cause of the meltdown that followed?

Boy, that's a good question. Probably a little bit of both. Even if Lehman had been not allowed to fail, there still was a deteriorating situation. The economy is obviously having increasing problems. That was going to be feeding into public confidence in the system.

So it may have been more of a catalyst or accelerating event versus an actual cause. Then again, though, I think there are certain aspects of -- especially for some of the counterparty relationships with Lehman, ... maybe if those had been stabilized but others had been haircut, that could have been handled in a smoother way. But I think we're all learning as we go on here.

And again, for non-banks, [there] just is no process. So the Fed and the Treasury have pretty much had to use an ad hoc process, because there's nothing in the statute to provide guidance as to how to do it. ...

... FDIC was established and did so well with banks over these 75 years, while this whole additional shadow banking system grew up with no regulation.

It is amazing. Or the kind of regulation -- for instance, with the investment banks, they're heavily regulated from an investor-protection standpoint, but from a prudential standpoint, they're not. So the quality of the loans that they're securitizing and selling off, there's really no structure for potential oversight of investment banks. And I think regulatory arbitrage for certain types of business going to the least regulated environment has been a profound factor driving a lot of this.

That should be issue number one for Congress next year, to create a level playing field, equal lending standards. Whoever is originating or funding the mortgage, there should be basic [requirements]: got to document income; got to make sure they can pay the loan over the long-term period of the loan, not just for the first couple of years. Those are just basic rules that need to apply across the board. ... [Also,] constraints on leverage across the board. I think that's going to be hard to do, but I think that's really key. ...

[How should we look at the AIG bailout, relative to what you're saying about regulation?]

... The political repercussions of the AIG situation, I think, would argue for greater public articulation of the reasons for the government support and why it's necessary; ... also a public articulation of what the true taxpayer exposure is there. ... We're in extraordinary times, unprecedented times, really. You have to go a long time back before you would find an economically stressed situation on a parallel for what we're dealing with now.

So it's unavoidable; there are going to be losses. I think the public can understand that. But I think we need to articulate why it was necessary for the government to come in, why this stabilized more broadly the financial sector. I've talked to my fellow regulators about this, and I think everybody agrees. We've had to react to the moment, and I support all the measures that have been taken. But if we can come up with more generic, transparent approaches ... and say, "OK, if a bank or if a large financial institution gets into trouble, this is what's going to happen; this is the process we're going to follow," I think it would get away from this sense that it's inconsistent, it's ad hoc, somebody's getting a better deal than somebody else. That troubles me. ...

So not only in the financial world, in investment banks and such, but also in government?

I think that's right. ... I think to the extent that assistance is going to be provided, there are always issues of fairness. So yes, trying to have some basic principles of who gets help, who doesn't, under what conditions, what will be the government and taxpayer protections -- I think having some general rules that apply across the board would be good.

... You keep saying, "This really is not where we're involved." Do you think you are going to be involved [in these areas of the economy from now on]?

We are getting more involved. ... The securitization markets are pretty much gone now, so deposit funding is really the place to get funding to extend credit. The investment banks have all become bank holding companies. They've acquired banks or more banks, or they're trying to grow their deposit base. The market has decided that the bank structure is really the place to be right now, so that does put us more in the middle of things. So the more there are, the interrelationships and the spillover effects come into the banking system -- yes, we will be getting more involved. ...

... How do we get to TARP [Troubled Asset Relief Program]? What's the debate, your involvement, and Congress being brought in?

... I think TARP was really designed to address the financial system more broadly, including non-bank entities.

Where we did get in toward the end -- and actually, we were involved with helping them get their 12 votes or so that they needed to pass it -- was that we were asked our views on increasing the deposit insurance limit to $250,000. We thought that would have been a good thing to do, just from a public confidence standpoint. So they did do that. That was our key role.

We were also involved with -- the Senate Banking Committee had reached out to us in terms of foreclosure-prevention provisions. ... But the decision to go ask for the TARP money, we were not involved in that. ...

How did it come to that, though?

... I think the original sense was that there were a lot of troubled assets on financial institution balance sheets that the market was very concerned about, and unless there was a mechanism to get those assets off of the balance sheets, we were going to be freeing up room for them to do more lending. And we were also going to be having trouble with investors donating private capital or investing private capital in these banks with the uncertainties involved with these troubled assets on the bank books or on other financial institution books.

So I think that was the original intention. I think then, when it came to implementation, the issues of the difficulties of actually buying these assets, selling them off and then buying some more in this distressed market were quite profound. So I think the Treasury decided to take a different approach. And this was actually part of the G7 meetings that occurred soon after that, because the European countries decided to instead go with capital investments and temporary liquidity guarantees. ... There were others in Congress at that time, and they gave them authority to use the money for capital investments as opposed to buying assets. So I think there was some later thinking [about] trying to address some of the administrative issues of buying troubled assets.

We can sympathize with that, because that's what we do. When we take over a failed bank, we have to sell off the assets. And it's very difficult in this kind of market -- too many assets, people wanting to sell at too-low prices. ...

As you said, we were greatly influenced by the decision of the Europeans.

We absolutely were. There needed to be a coordinated, concerted action, one that sent a uniform message to the markets. ... I wouldn't call it deference to the Europeans, but I think there was a coming together of how to approach this in a way that at least, again, to tackle this with additional capital infusions sent to the major financial institutions, and then providing some temporary guarantees against their debt so they could roll their paper, because there was, as you know, a severe disruption in the interbank lending market. And that was creating two problems: one, very high funding costs for banks, and very short-term funding. So they had to keep rolling it. They could only go [about] 30 days out, which is not a situation you want to be in.

[How were the capital infusions meant to help banks?]

The capital infusions that Treasury decided to make, the $250 billion of the TARP funds, were for the viable institutions. In that sense, we're trying to stabilize and expand their ability to lend, to try to counter the cyclical impact that you have where, if you get into a credit crunch and then when you have deterioration of loan qualities, the banks have to pull back, increase their loan loss reserves. They can't lend as much, and then that fosters a deteriorating economic situation. So the thought was, by putting significant capital infusions into the viable banks, this would increase their capacity to lend, or at least not contract as much. ...

We also thought it was very important to have all banks, large and small, be able to participate in these new capital investments. Some don't want it because they're frankly so very, very strong, they're not having these issues. ... But others can be assisted through it and strengthen their ability to lend and serve their communities.

So that was really the underlying theory of the investments, and also, as a way to let folks know that the government was behind the financial sector. We were going to keep it strong and stable so it could continue to lend.

In really simple terms, how did the contagion ... spread to the banking side from the shadow banking system? What happened?

There are a couple things going on here. Some banks did do some of these high-risk loans. Some of the larger ones did. So there's a stress there. They did not do them [in] as great a number, and they have more diversified balance sheets. So there is distress there.

Some banks also invested in securities, even if others originated them. They invested in these securities and some of these complex CDOs [collateralized debt obligations]. Some of them are just synthetic CDOs, so there's not even actually any real mortgages ultimately behind them. They're just derivative of a pool of mortgages somewhere and how it's performing. And that's created a whole other set of issues. So there have been mortgage-related losses for banks. ... But again, the bulk of that has been outside the banking [sector], not inside the banking sector.

What you're seeing now, though, is the economy becomes more and more difficult. Now, I know we've been in a recession all year. You get into the traditional credit distress. People lose their jobs, get their hours cut back, lose their commissions, [it's] harder for them to make their mortgage payment or their car payment or their student loan payment. And so that's just more the traditional credit distress that any bank will face in an economic downturn. So that's really the big unknown that we're facing now and why we're really trying to bolster banks to make sure that they can weather this.

And fortunately, they were going into this fairly strong, with strong capital and many years of record earnings. But we need to keep them stable and strong and keep them lending, because where there are good, creditworthy loans to be made, we want those loans to be made. We cannot afford to have a credit contraction to withhold credit from healthy economic activity.

Another problem -- the TARP and a lot of the moves that have been made so far have not seemed to get the banks lending again. ... What's the problem there, and why?

I hear conflicting things about this. ... We want healthy lending, but we want them to not just look at bad loans; we want to make sure that the good loan applications are being favorably acted upon as well.

A lot of banks will tell you that people aren't applying. And then others, I hear complaints from small businesses and sometimes the mortgage borrowers that they can't get the loans. So probably the truth lies somewhere in the middle somewhere.

I think people do need to understand that lending standards needed to be tightened. We don't want to do these payment shock mortgages or these no-doc [no-documentation] mortgages. Those are a thing of the past. And you need to have a down payment, and you need to be able to show you have income to support the loan, the mortgage for the longer term, not just during some artificially low introductory period. ...

All I can tell you is that I think it's in banks' economic interest to lend. We have asked. We've made it very clear we want them to lend. That's a whole reason we're providing these supports. We've asked our examiners to monitor it, look at it when they go out and do their examinations. And I hope with the combination of tools that we will get to that place.

It's also -- and this is more difficult to quantify -- part of the reason for these supports. We'd like if you can expand lending, prudent lending. That would be good. But just to mitigate the severity of the pullback was also something we were trying to accomplish through this.

There seems to be a very large carrot here, billions of dollars given out. Is there possibly not a stick to come?

We have said that if the money is not used to support prudent lending, then that will impact their supervisory rating. We have CAMELS supervisory ratings, and the M in the CAMELS is management. So if management is sitting on all this capital as opposed to lending to it, that's going to impact their supervisory rating, their M. It might also impact their asset quality, the A in the CAMELS.

So we've been pretty specific about, we're going to be looking at this, and yes, it could impact the rating that we provide you, which then in turn can impact what their insurance premiums are and their ability to access a variety of deposit funding sources like broker deposits. ...

The meeting with the nine banks that you were involved in ... take me to that meeting. ...

We didn't convene the meeting. The meeting was at Treasury. We were a participant, obviously. ... I seriously doubt if any details were given, because a meeting like that, you don't want the information leaked out before you actually have the men in to make the presentation. So it wouldn't surprise me if Treasury was holding it close as to what they wanted to talk about at the meeting. ...

The banks are alphabetically lined up. Tell me a little bit of how it was set up, what the feeling of that meeting was.

It was serious. It was somber. And the government did most of the talking. I was there to explain our [Temporary] Liquidity Guarantee Program; we did not really weigh in on the capital infusion. That discussion was really led by Treasury and the Fed. I think some of the banks were surprised. Some were immediately supportive. Others really pushed back, and: "We don't need this money. We don't want the money. We don't want all the conditions." And I think Treasury was very firm that they wanted it and they wanted it to apply. They wanted them all to take it, because they needed to have a healthy understanding of the challenges that may be coming ahead. And everybody needed to bolster their balance sheet.

It was a private meeting, so I didn't really get into a lot of details. But I think that the government was very assertive. Treasury was very assertive on why the program was there, why they needed to take it with all the conditions that it would entail. I know there have been criticisms later that there weren't enough conditions, and I think Treasury was trying to strike a balance between getting all the banks to take it versus, if you made it too punitive, then some of the stronger ones might feel that they didn't want it, shouldn't have to take it. And I think Treasury felt that it was important that this core group all needed to have their balance sheets bolstered to strengthen them for what may come and make sure they could keep lending.

But the bottom line was, this was not a request; this was a demand.

It was very clearly expressed expectation, yes. I think that's right. ...

The way it's been described is that during the meeting, some of the bankers at the very beginning were not very happy about it. ... [But] once the plan was fully defined, they could understand how beneficial it really was.

I think that's right. They talked through the public policy reasons why it was important to get this capital into these banks. I think the ones who really were pushing back were definitely in the minority, so there may have been some peer pressure there as well. But yes, Secretary Paulson and Treasury and the Fed were leading the discussion, and I think there was some dissuasion that needed to occur. And you're right: They were won over.

Did you ever imagine that you'd be sitting in a meeting where $250 billion of bank stocks would be purchased by the government?

That was $125 billion for those, and the rest was for the smaller institutions. Yes, it's truly extraordinary. And there are obviously trade-offs on that with government ownership, even minority ownership, non-voting ownership. ...

My view is, we supported it as an initiative to stabilize banks, to bolster their balance sheet. Those are very positive things. But there needs to be an exit strategy. And if banks can, down the road, demonstrate that they're really in a position to get the government out, then I think that's something that should be facilitated. We need an exit strategy for all of this, because we don't want government support to become a crutch. We'll have larger problems with our economy for a much longer period of time if that is the case.

Secretary Paulson called it objectionable but unavoidable. Do you agree?

Yeah, that's a good quote. Yes, definitely.

You don't have another one to give?

Surreal, maybe. ...

... What did you think when TARP did not pass in Congress?

I was concerned, because that's the kind of thing, once you start it and ask for it and create a market expectation [that] they're going to have a major program like that, and then it looks like you don't have a major program, it's almost bad that you never started it to begin with, right?

So I think it was quite problematic that they ran into that roadblock. And again, that's why we worked closely with them with the deposit insurance increase, because I think that with all these kind of programs, ... it is so important for us in the financial services policy-making realm to publicly articulate why this is necessary and why it helps the broader economy, why it helps Main Street. That message just was not getting across.

And I think one of the attractions of raising the deposit insurance limit ... was just [to] show Main Street, too, that this was something that could benefit them. So I think that did help bring the votes together, to get the legislation passed. ...

... What comes next? The government role in the financial markets surely is going to change dramatically. ...

There's one area where we need less government intervention and others where we need more. I think, again, having an exit strategy for all these government supports now, we need to make sure whatever decisions we make, there's a way to get out, and it doesn't become a multiple-years process. We need to get out as quickly as we can.

On the regulatory side, I think we need smarter regulation. We need more effective enforcement of our regulation. A lot of this, it's not rocket science. Making loans people can repay, documenting their income, what's hard about that? Having compensation structures that reward long-term performance, that's not hard either; having leverage constraints that apply across the board. And again, it will be difficult to craft those, but I think the basic principle is not a difficult one to grasp. And actually, I think if we could just move forward in those areas, 90, 95 percent of this probably has been addressed.

So I think there's always a tendency sometimes to overreact and go too far in the other direction when you get this type of a situation. We can't micromanage the economy. We can't be too prescriptive in terms of what we tell financial institutions they can or cannot do. Innovation still remains a strength of our culture, of our economy.

But there needs to be some basic, common-sense rules of the road, and they need to be enforced. And we need regulators who will be independent, who will enforce them.

What do you fear most at this point?

I fear most that we get into a self-reinforcing cycle of additional credit distress and then losses leading to greater severity on the financial system, with the system pulling back and not providing credit, and it just keeps feeding on itself. That's really what we're all struggling to nip in the bud, to stop, to stabilize. That's really what all these supports are about.

And I think the subset of that, the housing sector, absolutely needs to be addressed. We are in the self-reinforcing cycle of foreclosures leading to further home-price declines, leading to more foreclosures. The housing market did have to correct. There will be more foreclosures. But I truly believe, based on all of our research and what we've seen at Freddie Mac and other servicers and going out to foreclosure-prevention efforts and working with the consumer groups, there are a lot of unnecessary foreclosures going on. There are a lot of people in their homes [who] want to stay in their homes, can't make the current mortgage payment, but could make a modified mortgage payment.

It's not in anybody's interest to put those people out on the street. So getting a better handle on that, more aggressive foreclosure prevention, I really think it's a key part of our broader efforts.

... [You're calling] for taking some of the TARP money and using it for these purposes. That's [what] the debate [has] been with Secretary Paulson on those issues?

... We think it will cost about $24 billion. We've made our assumptions very transparent. We stand by those cost projections.

But it will cost money. This is not an investment that you might have a chance to get back later on. It's going to cost money. I think his concern was that he had told Congress that these would just be investments where there would be a chance for recouping the investment later on. Interestingly, I'm not sure that's how Congress saw it. I think Congress, a lot of the votes that were delivered were based on the understanding that there would be foreclosure prevention as part of the way these funds were expended.

We have a great working relationship, and I think he's still looking at different avenues for this. Chairman Bernanke said some very helpful things. There's certainly the new administration. The president-elect himself has said some very strong things about doing more in foreclosure prevention. So if we can't get it done now, I'm hopeful that at least early next year.

But it can't be too soon. We're behind the curve already. There are probably going to be 2.25 million foreclosures this year. That's well above what's usually 100,000 to a million foreclosures at most. ...

... [You've talked about the] need to protect against going from irrational exuberance to irrational despair. Can you explain what you mean?

I think [the danger] is just that, for institutions and those who invest in institutions and use an institution, it's just [to] pull back and say: We've got to go hunker down and hide, and we're not going to take any risk. We're not going to do any lending; we're not going to do any investing. We're all just going to pull back and freeze in place. I think that is not what needs to be done. ...

You have to take some risk. That's what capitalism is all about, and that's what our economy is about. ... People just need to remember the basics of how you used to do risk. You would analyze your investment, get back to basics instead of trying to make a quick buck, look at the institution or company you want to invest in, look at the fundamentals, what their prospects might be, and invest the money. Or same [with] banks, you know? If you've got a good customer [who] wants to expand their business, lend to them. ...

I think just pulling back and wanting the government to guarantee everything is not going to work. We have a lot of good things about our economy. We're a strong culture. We're a strong nation. We're hard workers. We're innovators. And we can get out of this if we look to the long term and look to find the light at the end of the tunnel, as opposed to just hiding. ...