Bernanke, Paulson, Bair testify on bailout

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke, U.S. Treasury Secretary Henry Paulson and Federal Deposit Insurance Corp Chairman Sheila Bair testified on Tuesday to the House Financial Services Committee on the Troubled Asset Relief Program.

Following are highlights from the hearing:

PAULSON ON DIFFERENCES BETWEEN PROGRAMS

"I know what the downside was, the downside was the collapse of the financial system, which would have wreaked huge havoc on this economy for many years. Part of the issue we have in answering the question precisely is that these programs are different. For instance the $250 billion bank and capital plan: That is not an expenditure, it's an investment. I think it would be extraordinarily unusual if the government did not get that money back and more. So that gets accounted for as an expenditure against a deficit that will be coming back.

"Fannie and Freddie: the government is standing up there for the credit of those entities and making good on what I believed our responsibilities were. The liquidity programs by the Fed are not expenditures, but they are impacting on the market. For instance this year we will issue roughly $1.5 trillion of Treasuries, roughly three times more than we have ever had before. Right now there is huge demand for those securities. There is huge demand around the world, but that is to fund liquidity programs that are shorter in duration."

PAULSON ON AUTOMAKERS, FED LIQUIDITY FACILITY

"There is broad powers under the TARP to make captive finance companies eligible ... Under the current plan we've outlined, the only capital plan we have in place, they're not eligible. If we were to implement the program we're working on with the Fed -- where we put a small amount of money into a Fed liquidity facility -- that facility could provide support for triple-A auto paper."

BERNANKE ON THE U.S. DOLLAR

"I don't think the dollar system is dead. The dollar remains the premier international currency. We have seen a vivid appreciation in the dollar recently during the crisis precisely because there has been a lot of interest in the safe haven and liquidity in dollar markets and the Federal Reserve has been engaged in swap agreements to make sure there is enough dollar liquidity in other countries because the need for dollars is so strong. I think the dollar system remains quite strong."

BERNANKE ON CURRENT ACCOUNT DEFICIT

"The current account imbalances have proved to be a very serious problem. It was, in fact, the large capital inflows from those current accounts which created a lot of the financial imbalances we saw and have led to some of the problems we're seeing. One of the silver linings in this huge gray cloud is that we're seeing some improvement and greater balance in our current account deficit."

BERNANKE ON FDIC'S FORECLOSURE MITIGATION PLAN

"I agree that we need to do a lot more on foreclosure prevention. It's very important for communities, it's important for the economy, for our financial system, so I very much commend Chairman Bair and the FDIC for the work they've done and I think we need to build on these ideas.

"I think a very strong point of the FDIC program is it's simple and it's run by the servicers rather than the government. That's a plus certainly. There are a couple design issues ... Just in general I want to say this is a very promising approach, and I think there's lots of interesting things to talk about here."

REP. MAXINE WATERS, DEMOCRAT, CALIFORNIA

"The fact that you, Mr. Paulson, took it upon yourself to absolutely ignore the authority and the direction that this Congress had given you just amazes me.

"I just could not believe when I heard that somehow you have abandoned the whole foreclosure mitigation effort."

PAULSON ON FORECLOSURES

"I have not said 'no' to doing something here in the TARP aimed at foreclosure mitigation. We did not buy illiquid assets for a good reason."

BERNANKE ON FED FUNDS RATE

"The size of the balance sheet has affected to some extent the amount of reserves in the banking system, which makes it more difficult to control the federal funds rate ... The same bill we're discussing included the right of the Federal Reserve to pay interest on reserves to banks, which has been helpful in keeping the federal funds rate closer to the target than it would otherwise be. But that is still an issue that we're working on."

BERNANKE ON CREDIT RATING RISK

"I see no significant credit risk in what we are doing and I don't think it will have any effect one way or another on the U.S. credit rating."

PAULSON ON THE FINANCIAL SYSTEM TURNING THE CORNER

"I was very careful when I said what turning the corner meant. I said I believe that that meant that we have stabilized the financial system and prevented a collapse. I was also very careful in saying that we have a lot of work ahead of us, and the recovery of the financial system is a lot of work to get the markets going again."

REP. BARNEY FRANK, DEMOCRAT, MASSACHUSETTS

"Public confidence in what we have done so far is lower than anyone would want it to be."

"The fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction.

"There, I believe, is an overwhelmingly and powerful set of reasons why some of the TARP money must be used for mortgage foreclosure (mitigation)."

"The bill is replete with authorization to you, not simply to buy up mortgages, but in effect to do some spending, because we are talking about writing them down. So, the argument that -- frankly of all the changes that have come in the program, this wouldn't be a change -- this was the program."

"The argument that this is not part of the program simply doesn't work."