"Disaster" for the Middle Class; "Bad Bank" for Toxic Assets
WOLF BLITZER, CNN ANCHOR: And to our viewers, you're in THE SITUATION ROOM. Happening now, President Obama wants GOP support on the economy. And despite getting the cold shoulder from House Republicans, he's planning an unusual weekend charm offensive. The U.S. economy on a dangerous tightrope -- already in a deep recession, could we be facing disastrous hyperinflation? Two economic experts are standing by. Plus, President Obama and the Alaska Governor Sarah Palin -- they will be having dinner here in Washington this weekend. Will someone need to break the ice? We'll tell you what's going on. Paul Begala and Bay Buchanan, they're standing by live to tackle this and more. I'm Wolf Blitzer. You're in THE SITUATION ROOM. Another staggering round of grim economic news today -- another punch to the gut of America's middle class. Here's how President Obama put it today.</s>BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Today, we learned that our economy shrank in the last three months of 2008 by 3.8 percent. That's the worst contraction in close to three decades. This isn't just an economic concept, this is a continuing disaster for America's working families. As worrying as these numbers are, it's what they mean for the American people that really matters and that's so alarming -- families making fewer purchases, businesses making fewer investments, employers sustaining fewer jobs.</s>BLITZER: And you're going to be hearing at length from President Obama later on what he has in mind. But let's go over to our senior White House correspondent, Ed Henry -- Ed, you're picking up more of what the president is planning for next week.</s>ED HENRY, CNN SENIOR WHITE HOUSE CORRESPONDENT: Well, that's right, Wolf. We've heard so much about him pushing this economic stimulus plan -- over $800 billion. But he's also talked a lot about a three-legged stool and that there's more than just this one bill. And what we're hearing from senior officials is that next week we can expect him to start rolling out sort of a broader financial reform package. It could be dealing with foreclosures -- trying to stave those off. It could be dealing with more regulations -- more cops on the beat, if you will, to deal with what went wrong on Wall Street, but also those bonuses on Wall Street that he ripped into yesterday. We're hearing specifically that there will be provisions dealing with executive compensation, bonuses, making sure people who received government bailouts are not then using some of that money to hand out these bonuses. You'll remember, back in the fall when the so-called TARP -- the large $700 billion bailout passed, lawmakers in both parties insisted there would be those kinds of tough provisions. It didn't turn out. There are a lot of loopholes. One thing the administration is going to try to do is to tighten all that up -- Wolf.</s>BLITZER: And he's continuing his charm offensive this weekend to try to bring in some Senate Republicans. He got nada from House Republicans. What's the latest?</s>HENRY: Yes. He's going to use the Super Bowl to do it. He's having a party on Sunday night here around the Super Bowl. And the White House, just in the last few minutes, has released the guest list. It's mostly Democrats, I should point out. But there are some Republicans on it, including Republican Arlen Specter of Pennsylvania. Of course, the Pittsburgh Steelers from Pennsylvania are in the big game. My colleague, Gloria Borger, reminding me, as well, that Arlen Specter this week indicated that he'll be supporting Eric Holder for attorney general after some doubt, maybe a little political payback, as well, there. And then if you look at the House members, there are about 11 House members coming -- eight Democrats, three Republicans. The point is that this president continues the charm offensive we saw earlier this week -- having a cocktail reception with leaders in both parties even after no Republicans voted for a stimulus bill. The point is, moving forward, he's still trying to build those bridges to the Hill -- Wolf.</s>BLITZER: And he can be very charming.</s>HENRY: He can.</s>BLITZER: We'll see if it pays off politically.</s>HENRY: We'll see.</s>BLITZER: All right, Ed, thanks very much. Key members of the Obama economic team huddling today on ways to fix the $825 billion bailout program and to improve oversight of the overall financial system. One possible approach -- setting up a so- called "bad bank" to quarantine and clean up the toxic assets, as they're called, of those struggling institutions. Brian Todd is working this story for us -- all right, what's the latest -- Brian?</s>BRIAN TODD, CNN CORRESPONDENT: Well, Wolf, some experts say that this is a proven way to turn failing banks around. But just the name "bad banks" gets a lot of people out there nervous. So we broke it down.</s>HENRY (voice-over): Its name sounds like the last thing we'd need at a time like this -- an idea that's been debated in Washington to help failing banks since the very beginning of the financial crisis.</s>TIMOTHY GEITHNER, U.S. TREASURY SECRETARY: "Good bank-bad bank" type solutions have been present at the solution to most financial crises around the world.</s>HENRY: Treasury Secretary Tim Geithner said the so-called "bad bank" concept is very complicated and Treasury officials still say they're not committed to it. The idea is for the government to buy only the bad assets from failing banks and create a holding facility -- called a "bad bank" -- to manage those bad assets separately. Later, the government would hopefully sell those assets as the economy improves. What kind of assets are they?</s>SHAWN TULLY, "FORTUNE" MAGAZINE: We're talking about subprime mortgages, commercial mortgage-backed securities, leverage loans -- all of the troubled assets called "toxic" assets that we've been talking about that are still on the books of a lot of these big investment banks.</s>TODD: The positive aspects of "bad banks?" The investment banks would unload their bad investments and be paid for them, so they'd have more capital. The investment banks could then attract more investors who had been scared off by the bad assets. And...</s>PROF. JOSEPH STIGLITZ, NOBEL LAUREATE, COLUMBIA UNIVERSITY: The existing banks can go on doing what you hope they should have been doing in the past, which is making good loans.</s>TODD: Sweden did that in the 1990s and turned its financial crisis around. But that was part of a complete nationalization of its system, which experts say won't fly in the</s>U.S. WILLIAM SEIDMAN, FORMER FDIC CHAIRMAN: We have, you know, a couple of hundred big banks and thousands of small banks. And obviously the government doesn't want to take all of those over.</s>TODD: Other negatives of the "bad bank" idea -- it's tough for the government to figure out how much to pay the banks for their bad investments and it would likely have to overpay just to keep those banks solvent. And the taxpayers would be paying for all of this until they get some money back when those bad assets are eventually sold. And there's no guarantee that they'll get any money back at all -- Wolf. It's risky for the taxpayers.</s>BLITZER: Very risky. But how much would it cost? Any good estimates?</s>TODD: Experts who are familiar with this put the cost at between $2 trillion and $4 trillion -- much bigger than the stimulus, the bailout and everything. And that's why it's gotten so many people nervous. But because this is a way to immediately turn around failing banks, it's got to be considered.</s>BLITZER: Wow! All right. Thanks very much. We're going to continue this conversation. But let's check in with Jack Cafferty right now for "The Cafferty File" -- Jack.</s>JACK CAFFERTY, CNN ANCHOR: An article by the group Truth Out sheds some light on a true national tragedy. The Department of Defense and the Department of Veterans Affairs report that battlefield injuries and deaths from Iraq and Afghanistan are up -- way up. According to data obtained through the Freedom of Information Act by the group Veterans for Common Sense, the number of veteran patients now stands at more than 400,000, up from 263,900 in December of 2007, a little over a year ago. Mental illness, mainly Post-Traumatic Stress Disorder, is the diagnosis for 45 percent of these. Lawmakers have helped out some. The Dignity for Warriors Act was passed. That gives veterans up to five years of free health care for military-related conditions. But getting adequate health care and compensation is still a problem, according to Truth Out. Bob Filner, who is chairman of the House Veterans Affairs Committee, released a statement asking for veterans to be considered in a stimulus package. It's a request that is way beyond reasonable. He said, "We can invigorate the economy by modernizing the 153 existing V.A. medical facilities, repairing veterans cemeteries, constructing new V.A. hospitals, addressing the claims backlog and investing in vocational rehabilitation for our returning combat veterans." According to Filner, the House version of the stimulus package includes $1 billion for veterans out of $850 billion. The Senate allots $3.94 billion for veterans. We'll see what passes in the end. Here's the question: Why doesn't this country do a better job of taking care of its veterans? Go to CNN.com/caffertyfile and post a comment on my blog.</s>BLITZER: Jack, thanks very much. It's a good question, indeed -- a very important issue. I want to remind our viewers, THE SITUATION ROOM is now on six days a week, Saturday nights, 6:00 p.m. Eastern. THE SITUATION ROOM continues tomorrow. We have a strong show planned for you then. We hope you'll enjoy it. President Obama will be having dinner with Sarah Palin. Yes, you heard me right. We have details of the event where the two of them will be dining together this weekend. Also, week two of the Obama presidency, with a razor sharp focus on the economy. So how is the new president doing? Plus, suits and ties, button-down days apparently over at the White House -- President Obama bringing a little bit more casual style to the White House. Stay with us. You're in THE SITUATION ROOM.