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STATE OF THE UNION WITH JOHN KING

State of the Union: Interview With Governor Arnold Schwarzenegger, Housing Secretary Shaun Donovan

Aired February 22, 2009 - 20:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


JOHN KING, HOST: I'm John King, and this is our STATE OF THE UNION report for this Sunday, February 22nd.

The punishing recession is setting more sad records. Lows on Wall Street, new highs in the number of Americans asking for unemployment benefits.

California governor Arnold Schwarzenegger will tell us how things look for the nation's most populous state.

President Obama unveils a new plan to help struggling homeowners. But how many of those who need the help will get it?

We'll get answers from the housing secretary, Shaun Donovan.

And an up-close look at struggling General Motors. New cars aren't selling and autoworkers say your tax dollars might be the only to keep them from joining the unemployment line.

That's all ahead on STATE OF THE UNION.

With the eighth-largest economy in the world, California, is considered a trendsetter for the rest of the country. These days, that trend isn't good.

California has the fourth-highest unemployment rate in the country. More than 1.7 million people on its jobless rolls. It also the nation's second-highest home foreclosure rate.

And the state's new $130 billion budget bill, a bill our next guest signed just on Friday, calls for sales tax and income tax hikes, and deep spending cuts.

Joining us is the governor of California, Arnold Schwarzenegger.

Governor, thank you for joining us on the program.

GOV. ARNOLD SCHWARZENEGGER (R), CALIFORNIA: Absolutely.

KING: You have just been through this in your state. It is a very tough time. Let's start with the threshold question that I know most Californians want to know about, and all Americans want to know about.

Is it going to get worse before it gets better, or have we turned a corner? SCHWARZENEGGER: I don't think that we've turned a corner yet, but I think that beginning of next year, we will turn the corner. And I think that it is important that we are now to stay fiscally disciplined and that's why it was very important for us in California to solve this budget crisis and to get rid of this $42 billion deficit that we had with a combination of spending cuts.

There are some severe cuts, and also some revenue increases, and also some reforms within government to make government run more efficiently, and also an economic stimulus package that was always considered kind of the four-legged stool.

And so I think that we were very successful, and the key thing of the whole negotiations was to get the kind of budget reform that we needed, which is to give the rainy day fund and also the cap so that we don't always spend more money than we take in.

KING: I want to come back to more specifically about the California problem, but I want your national view. The Obama administration says with this new national stimulus plan, you will get a lot of money in California. It believes this plan will create 400,000 jobs in the state of California.

We try to ask everybody in a position of power to be accountable. Do you believe that number? Is 400,000 the right barometer to see if this plan is a success in California?

SCHWARZENEGGER: Well, you know that you never know exactly. I mean, you can only estimate. Like, for instance, with infrastructure, we know that every billion dollars that you spend in building roads or classrooms or any kind of infrastructure, it creates 18,000 to 25,000 new jobs.

So I think that it could create this kind of amount of jobs and we welcome this economic stimulus package. I think it's terrific. It will help us, but only with the budget, but it will help us also with roads and infrastructure, in general, with health care, education, and so many other areas.

So there is around $80 billion of value there. And with some also, you know, for tax breaks around $35 billion. So we were happy even though there's a lot of people complaining. It's not exactly what they envisioned, but what is? I mean, you know, you can ask, as they say, they were always 1,000 people, and the 1,000 people would give you 1,000 different answers what is the ideal stimulus package.

So I think that it was Obama that got elected. He -- his team put this stimulus package together, so let's support it and not be political about this whole thing.

KING: It was Obama that got elected and his team, this is not the team, of course, you wanted to win the election. We talked just after the election. You were very gracious saying you wanted to work with this new president. You were among the governors who sent a letter, saying, we need the help and I will take the money. I want to ask your thoughts about the administration more broadly. Almost $1 trillion in stimulus spending. You know all the billions of dollars, $700 billion with more to come going out to the financial industry.

Now this foreclosure plan, that's going to cost more money. And there's talk that General Motors and Chrysler want more than $20 billion more, and that might only be still the beginning or the middle. They might want more.

I want you to discuss that in the context of something you said late in the campaign when you were out with Senator McCain saying that President -- a President Obama troubled you. Let's listen.

(BEGIN VIDEO CLIP)

SCHWARZENEGGER: America cannot afford the economic proposals of Senator Obama. I tell you something, I left Europe four decades ago because of socialism has killed opportunities there.

(END VIDEO CLIP)

KING: You like the stimulus plan and you need the money, but more broadly, when you look at this new administration, are you worried about the point you made during the campaign, about too much role of government, too heavy the hand of government?

SCHWARZENEGGER: Well, first of all, there's always a big difference between before an election and after the election. Because after the election, I'm a big believer that whoever wins, both parties have to come together, first and foremost, as Americans, not as Republicans or Democrats, but as Americans, and to do what is best for the country.

So I think it is very important that now we support President Obama in this mission to bring the economy back, to bring the financial markets back, to bring the banks back, to bring the housing back and all of those things.

If you have a team where half of it splits off, if it's a basketball team or a football team, you would never win a game. And so I think it is very important and I urge the Republicans and Democrats to work together, and for the Obama administration to reach out and to be inclusive as much as possible, and to think only about America rather than the party politics.

KING: You say, think only about America, not the party politics. Many of your fellow Republican governors say there are parts of this bill that tie their hands. They say if you take the unemployment benefits in the short-term, then the people will expect those benefits to continue, and when the federal money dries up, they will have to raise taxes. You're all here in Washington this week.

SCHWARZENEGGER: Well, first of all, I think that partially they're right. If you go and promise the people that this money will come in next year and the year after that, and the year after that, yes, then you're right, you will have a major problem. But if you use that money only for one-time spending, and you say, OK, in this financial crisis, while our revenues are down, considerably down, like in California, our revenues are down by 15 percent, eventually those revenues will come back, and then we don't have to rely on this federal money.

But right now, while we are down, I think that to use $1 billion or $2 billion in your budget cannot hurt. And I think it is good because the most important thing is that we don't have to cut so much in education and in health care, and some of these other services and create employment.

I think that the stimulus package that Obama has put out is great because it creates jobs also and infrastructure in so many other areas. And we've got to put people back to work. And the next most important thing that they're working on is the housing crisis.

I think that you have to keep people in their homes. It is a shame to see all of those foreclosures out there, especially in California, we got hit very hard. We were very lucky that we worked out a deal, so to speak, with our lenders and banks to do some kind of an adjustment when it comes to the interest rate and also to amortize it over a longer period of time, and to do some loan modification which helped hundreds of thousands of people in California.

KING: But is it fair for someone who is scraping by, maybe telling the kids, we can't take a vacation, or we can't go to the movies, or we can't even go to McDonald's, who is making his payments to essentially subsidize somebody who maybe two years ago when the banks were lending this money and encouraging people to borrow it, maybe bought a house a little too big for their bank account.

SCHWARZENEGGER: Look, this is America. You help each other. You reach out. If someone is in trouble, if someone has a house and that person has lost their job, I mean, why would he -- why would we want to see them lose his house because of that?

It's because of the economic crisis that he lost his job. So let's help that person, let's have him be able to work something out with the bank for the next half year so he doesn't have to make those high payments so he can stay in that home, the family can stay in that home.

And then when the economy comes back and the person gets a job again, then you can start -- continue paying. There's nothing wrong with helping people. We do it with unemployment, when people are unemployed. They can stand in the unemployment line. They can go get their checks, their money.

When people are falling through the cracks in health care, so we pick up and help them. I think we have got to help people. This is the bottom line. We cannot just go and have this kind of brutal philosophy, well, I didn't get any help, so therefore he shouldn't get any help either.

That's not the way America is. America, people help each other. KING: You just talked a moment ago about how important bipartisanship is after the election. Your friend and the candidate you supported, Senator McCain, was on this program last week. And he speaks just like you most of the time. He says he wants to work with the new president.

But he said in the stimulus bill, that the president and the Democrats did not genuinely reach out. Let's listen to Senator McCain.

(BEGIN VIDEO CLIP)

SEN. JOHN MCCAIN (R), ARIZONA: It was a bad beginning. It was a bad beginning because it wasn't what we promised the American people, what President Obama promised the American people, that we would sit down together.

(END VIDEO CLIP)

KING: Now the White House says they did reach out.

Who's right, Senator McCain or President Obama?

SCHWARZENEGGER: Well, first of all, I was not there. I did not do an interview with all of the different legislators, the Republicans, to see if there was -- who is right here. One thing I know for sure and that is that I've learned being governor of the state of California that the only way you get things done is if you reach out and you have -- if you're inclusive -- as inclusive as possible.

I have seen situations where I've failed with my initiatives in 2005 because I was not inclusive enough. It was my mistake -- the ideas were good, but it was my mistake not to reach out and to cross the aisle and to bring every one in.

Now, and for instance, in the budget negotiations, the reason why we have reached this great, great kind of reforms and -- budget reforms and the open primaries and all of those things is because I reached across the aisle.

We brought Democrats and Republicans together and both of them voted for the budget and we solved this $42 billion problem.

KING: And rate our president as a leader. You just talked about the problems you had to deal with in California. When you see the president, the stimulus plan, the housing crisis, troops to Afghanistan, the auto bailout, and more and more and more, is he trying to do too much at once or is he doing it right?

SCHWARZENEGGER: Look, he is in office -- he's been in office now for one month. People expect that all the problems will be solved in one month. It can't be. So he has to take one thing at a time and to tackle those things.

These are huge challenges, challenges that don't just affect the state, but the whole country and the whole world. So it has to be very well thought through and I think the most important thing is to reach out and have both parties work together and not to make those things political because you need to be a team. That is the most important thing.

We are solving our problems in California by Democrats and Republicans working together, and those that are not looking at in a political way, just as a public servant serving the people, that we will be successful as long as we keep that in mind.

KING: Much more to discuss with Governor Arnold Schwarzenegger of California. When we come back, I'll ask the governor about his political future and just how a Republican gets along in a family of famous Democrats.

And later this hour, we take you up close on a GM assembly line where workers live in constant fear their job is in jeopardy and they say middle class America is fading.

(COMMERCIAL BREAK)

KING: We're back now with California Republican Governor Arnold Schwarzenegger.

Governor, you mentioned the tough choices you had to make to close your $42 billion budget gap. Your new budget has tax hikes, about $12.4 billion in the next fiscal year. And there's an $8.6 billion cut from education over the next two years.

I want you to explain how you could do that when back when you were running for governor in August 2003, you said this.

(BEGIN VIDEO CLIP)

SCHWARZENEGGER: We must immediately attack the operating deficit head on. Now does this mean that you're going to make cuts? Yes. Does this mean education is on the table? No. Does this mean I'm willing to raise taxes? No.

Additional taxes are the last burden that we need to put on the backs of the citizens and businesses of California.

(END VIDEO CLIP)

KING: Tough for a politician, but you flatly said no to cutting education and no to raising taxes. You didn't say in that speech there, maybe if something bad happens.

SCHWARZENEGGER: Well, first of all, I made it also very clear that I would never sign a pledge like so many Republicans have. That that would not increase taxes, because I also made it clear that there could be an emergency where we need to increase taxes, if there's a natural disaster or like in this case, it's a fiscal emergency and they declared a fiscal emergency in California. And the rules changed.

When you have a $42 billion deficit, it is more important to solve the problem than to stay with ideology. And I think there are some people that stick with ideology, but I wanted as a public service to do what is best for the state of California. There is no way that you can solve this problem, $42 billion in deficit, with just spending cuts.

And we have worked together with the education coalition, we have worked together with everybody and explained to them and I think everyone is in sync with that. There's only so much money around and that's all the money we have. It's as simple as that.

KING: You first made your name in this country as a bodybuilder. And during that career, you have acknowledged since that you sometimes used steroids.

I want your sense of what it means to the country and what it means to young Americans who are going into sports, we both have young children. When they see Alex Rodriguez come out this week and say, I use steroids. Help a young person out there watching who might say, well, Arnold Schwarzenegger used steroids one time and A-Rod used steroids and he could possibly break all the homerun records -- is the only way to succeed to cheat?

SCHWARZENEGGER: Well, first of all, I think it's important to get the message out that we should not use drugs, because I think we have a certain obligation as athletes to inspire young people.

I mean when someone wins an Olympic championship or a boxing championship, whatever it may be, you're not only a champion, but you're also an inspirational vehicle for young kids and for people in general to stay fit, to lose weight and all of this.

And I think that the message of not using drugs, not using alcohol, all of those things, always out there and inspire young kids. So I think that there are some athletes go in that direction because there's so much competition. I think they need to come out, and be clean, and say look, I used that, but I made a mistake, or whatever it is and the sports ought to be without drugs. That's the important thing.

KING: You are a member, by marriage, of a famous political family. I just saw your wife and your children out in Phoenix last weekend at the NBA all-star game. If we look at the front page of the "Boston Globe," Ted Kennedy, who has become a close friend of yours, just celebrated his 76th birthday.

And depending on who you ask, Governor, you know, he had the brain cancer, he's been hospitalized, he has come back for some key votes, but he's missed some of those key votes, and there's a great drama about how sick is he? It's a tough question.

You know this family very well. How's Teddy doing?

SCHWARZENEGGER: Well, first of all, you know, the "New York Times" today has a whole story on the front page about him, how he said that not so quickly with the eulogies and with all the awards, all the stuff, lifetime achievement awards, and all of this.

And I think it is very clear that he is saying, that look, I'm here, yes, going through treatments, but I'm going to continue working. I'm very passionate about this job. And I think he's very much involved in really reforming the health care system in America.

This is going to be a tremendous help to the Obama administration because that's his passion, that's what he wants to work on. That's what he's doing.

So he's a terrific guy and he's -- you know, got a great sense of humor. And he's always optimistic and upbeat. And every member of the family loves him and of course, there's millions and millions of people in this country that love him and millions more around the world that love him.

So we hope...

KING: Do they have any sense...

SCHWARZENEGGER: ... that he's going to stay around for the next 50 years because we need him. He's a great public servant.

KING: That's an optimistic view there.

Americans knew you first, as I noted, as a bodybuilder, then you were an action hero in the movies. Now, you're the governor of the nation's most populous state. What's next for Arnold Schwarzenegger? Your term runs out in two years, and a lot of people saying you cannot, because of your nation of birth, you cannot run for president unless we change the Constitution. What's the next chapter?

SCHWARZENEGGER: Well, changing the Constitution, I think I'll leave up to you and a lot of others. I don't get involved in that. But I can tell you one thing, that all of the things that you just mentioned, it was body building, being a businessman, the movie business, or becoming governor, only in America.

I mean, America is the greatest country in the world and I would have never had those kinds of opportunities if I would have been anywhere else. Maybe 10 percent of the opportunities, but much as it is.

I have no idea what I'm going to do in the future, but I'm concentrating right now to reform the system in California to make the state come back again, to create employment, to create more revenues, bring businesses, and the economy back.

California is one of the greatest places in the world without any doubt. America is the best country in the world and even though we are in a financial crisis, America will be back because there's one thing that is certain. With all of the uncertainties, that is that you always come back and we always will be stronger because of it, and that we always outshine any other nation in the world.

KING: And what about the future of your Republican Party? If you pick up a conservative newspaper or go to a conservative blog, they're counting the days until you leave because you have made decisions including raising taxes. In part, because you support embryonic stem cell research. They -- you can see the conservatives saying good riddance, Governor, we'll be glad to have you go. My understanding is you will not go to your state Republican convention. There are a whole lot of would-be presidents from the Republican Party coming there.

Give a message to the Republican Party as you enter the final half of your term, where you think the national party has gone wrong.

SCHWARZENEGGER: Well, first of all, in all fairness, I'm here in Washington, not at the Republican convention in Sacramento that's going on right now. So I can't be in two places at the same time. In the movies, I was doing that, but not in real life I can't do that. So (INAUDIBLE), otherwise I would be at the convention.

Second of all, I think it is very important to say that I have promised the people of California to be their servant, not to be a party servant, not to be a Republican servant, but to serve all people of California. So I pay attention to that, and I do what is right for the whole state and of course, that is not always good for politics. It's not always good for the party.

The parties want to have you kind of lock in to their ideology. I try to break through that. That's why we have open primary reform. We want to have open primaries in the future that will be on the ballot so we can get rid of this kind of infighting all the time between the two parties.

And what is happening right now is the parties are moving further and further apart and therefore they cannot come to an agreement on anything. And the action is in the middle. It's like Eisenhower said, politics is like the road, the center is drivable and the left and the right represent the gutter. And that's exactly the way I see it.

KING: From what you've seen so far of the debate here in Washington, has your party tried to get to the middle, or is it off in the gutter?

SCHWARZENEGGER: No, no. I think both parties are going to the extreme, left and right. And I think that it is important for them to come together and to create a system, like with open primaries and with redistricting.

Redistricting has already won, which was terrific. And now we have to open primaries to open up this and to bring people to the center so they work together even though having different philosophies, but work together as a team because, first and foremost, we are Americans and we have to solve the problems in America.

KING: We're about out of time. I want to close on a personal note and I hope a humorous note. When we met just after the election out in California, you talked about the strain in the family. You were for Senator McCain. Your wife was for Senator Obama, and when Obama won, you shared a moment.

I want to play to our viewers what you told me just after the election. (BEGIN VIDEO CLIP)

SCHWARZENEGGER: I think that Maria is gloating now for these last few days and it's been very tough for me because she's running around the house with a cut-out, a life-size cut out of Obama, and we won, we won, Obama won, Obama -- all of those kinds of things. So then luckily, I can get back into the bedroom, so that's the big advantage.

(END VIDEO CLIP)

KING: How's that going?

SCHWARZENEGGER: Terrific. Lot of action, lot of action. But we still have the Obama cut-out in our dining room. It's never left. I think as soon as he makes the first mistake, then probably the kids would carry him out of the room or something. But I mean, you know, it's been part of our -- part of the family now.

KING: You give us a call when she moves the cut-out out. We will know then that the Obama support is beginning to trickle down.

SCHWARZENEGGER: Absolutely. I just want to say quickly that Maria is doing a terrific job. She was yesterday the first time, the first lady addressed the governor's conference. She's with this whole thing of reconnect to help poor people that are suffering right now with programs, connect programs of -- you know, income tax credit, helping with food stamps, and all kinds of banks in California, various different programs. So she's just been very, very successful with all of those things.

KING: Governor, we thank you for coming in. We applaud your wife's effort as well. Thank you so much.

SCHWARZENEGGER: Thank you.

KING: The Obama administration coming to the aid of home owners in trouble, but who gets the help and who won't? We'll get the details from the housing secretary when STATE OF THE UNION returns.

(COMMERCIAL BREAK)

DON LEMON, CNN ANCHOR: I'm Don Lemon at the CNN world headquarters. More "STATE OF THE UNION" with John King in just a moment. But first, we want to give you some headlines.

Egyptian police have at least two people in custody after a blast leaves one person dead and another 21 wounded. It happened today at a popular bazaar area near a mosque in the capital Cairo. Most of the victims were foreign tourists. Security officials say they found another bomb that did not go off. So it could have been much worse.

Secretary of State Hillary Clinton is back in Washington after wrapping up her week-long, four-nation tour of Asia. It was her first official trip in her new role as America's top diplomat. The new secretary of state can forget any thoughts of jet lag, though. She hosts Pakistan's foreign minister and his delegation tomorrow. An administration source says President Barack Obama will seek to cut the federal deficit in half to $533 billion by the end of his first term. The official says most of the savings will come from spending less in Iraq and raising taxes on people who make more than $250,000 a year. The president is expected to unveil his plan in Washington next week.

The nation's governors are focusing on money headed to their states from President Obama's economic stimulus plan. They're discussing the deal at an annual meeting in Washington. But some Republicans say they may turn down parts of the money, calling the plan bloated. Others say they sorely need the financial package.

I'm Don Lemon. I'll see you right back here tonight at 10:00 p.m. Eastern. Want to get back to "STATE OF THE UNION" now with John King.

KING: The collapse of the housing bubble and the resulting mortgage crisis is at the heart of what's gone wrong with the American economy. Three million people have lost their homes in the last few years, with as many as 6,000 foreclosures occurring in a single day.

This past week, President Obama unveiled a $75 billion plan to help as many as nine million homeowners avoid foreclosure, but the plan is already being criticized by some who think it is unfair.

Here to talk about it and explain what it means for you, the Housing Secretary Shaun Donovan.

Sir, thanks for coming in on STATE OF THE UNION.

It's great being with you.

KING: Let's deal with the fairness argument. I'm going to show you the first the front page of the "Boston Sunday Globe." "Bailout lament: what about me?" This is a homeowner who is scraping to pay his bills, who thinks that some of this money is going to go to maybe the guy up the street who maybe two years ago bought a house he couldn't really afford.

And before I have you address it, here's something else that came in. We get -- viewers send in their comments. Shaun -- Scott, I mean, posted this on CNN.com: "This is garbage. I work two jobs to support my family and to make sure my credit remains spotless. I will still have to work two jobs because it is the delinquents and irresponsible homeowners who will get help with the taxes collected on the two jobs that I work."

Are those people right? Are those who play by the rules and, maybe, cancel a family vacation so they can pay the mortgage -- are they subsidizing somebody who might have bought a house that was too big?

SHAUN DONOVAN, HOUSING & URBAN DEVELOPMENT SECY.: Absolutely not, John. And when the president announced this plan in Phoenix on Wednesday, he made absolutely clear this plan is directed at responsible homeowners. None of us wants our tax dollars going to people who have been irresponsible. Let me tell you why. First of all, there are no flippers, investor- owners, scammers that are eligible for this program. And we're not going to accept these -- you know, you remember the old liar loans? We're going check everybody's income when they come into this program.

We're going to make sure that people are paying their bills. And, more than anything, we're targeting the folks who are playing by the rules. There are three parts to the program.

First of all, there's $200 billion that's going to be directed at making sure mortgage rates stay at the historic lows that we're seeing today. That benefits everybody who has good credit and can get a loan. It's not available to folks who have bad credit and can't get a loan.

Second of all, we're going to provide refinancing for millions of families across the country, four to five million, who, through no fault of their own, have seen their house value go down, and they're now under water. And it's only available, that part, to people who are current on their mortgages.

And then, third -- the third part of the plan is the refinancing piece that you talked about. And I want to be very clear, that, if you go around this country -- you were sitting at a diner table, and with a family -- with a gentleman who's talking about all his friends who are losing their jobs.

We have millions of families who are having a tough time paying for their mortgages because they lost their jobs. That's no fault of their own. So we've got to help these folks get out of the situation they're in, while not -- not allowing people who are not playing by the rules or who are irresponsible, to participate.

KING: So where is the disconnect in what people believe is in here? Because there are people who think this.

I want to read you an editorial from The Wall Street Journal on Thursday, "The Dukes of Moral Hazard." They say, under your program, "No effort will be made to verify that recipients of aid were truthful on their original mortgage applications. Given that mortgage fraud skyrocketed during the housing boom, and that the Obama administration intends to assist up to nine million troubled homeowners, we can say with certainty that the unscrupulous will be along those rescued."

Can you say that's flatly wrong?

DONOVAN: That is wrong. We are going to make sure that every servicer who is helping people to participate in this plan verifies incomes, makes sure that they have that documentation before we will provide any funding to that.

And again, let's be clear. The majority of the funding under this plan is directed at keeping mortgage rates low for people who are current or helping people who are current but under water, through no fault of their own, refinance. So it's absolutely critical. You know, there's one other thing I would say, too, that we've got to make clear, here, that a foreclosure hurts every American. Our estimate is that, based on a recent study in Chicago, that there's an up to 9 percent loss in value in a house sitting next to a house that's under foreclosure. Forty-five percent of all home sales in December were distress sales.

We've got to do something to limit the number of foreclosures. This plan will help save $6,000 of value in every single house in America, whether you're current or not. So this plan benefits everyone.

KING: I want to ask a question. You're -- to restore confidence in the economy, we need to restore the housing market, without a doubt.

DONOVAN: Absolutely.

KING: And yet, if you look at major benchmarks so far, in a very young administration, the financial markets have not responded with confidence.

I want to show our viewers. On Inauguration Day, the Dow dropped more than 300 points. The day Secretary Geithner announced his new plan for the financial industry bailout money, the Dow dropped nearly 400 points. And on the day the president signed the stimulus bill, the Dow dropped nearly 300 points.

And you know this housing plan was not greeted very well on Wall Street, either.

Why is the administration failing, so far, to win the confidence of the markets?

DONOVAN: Well, as the president has said consistently, we are in a really difficult economic crisis. And, unfortunately, there was not action on the housing front under the last administration.

Had we acted a year or more ago to try to stop some of these problems in the housing market, we wouldn't be where we are today. We need to take action and we're doing that, decisively.

And, frankly, I think the real measure of success in this plan is not Wall Street but Main Street. This plan's going to go into effect on March 4th, and I think what you'll see is a response on Main Street that foreclosures will go down and that we'll see more modifications happening.

And that's the real measure, I think, of the success of this plan, what's happening to the average American family, not what's happening on Wall Street.

KING: I want to ask you, Mr. Secretary, to come with me over to the map for a minute, because I want to look at the country.

This is the political map. I want to make the political map go away and show you -- it's a heat map, essentially. As we look in here, these are foreclosures per 5,000 in January 2009. The hotter the state -- this is Nevada; you see it's hot -- the higher the foreclosure rate. So if a state -- the lighter a state is, the more serious the problem.

Out in this part of the country, out here, as you well know, some property values have dropped 20, 30, 40 percent. You have what's called a 105 percent rule that you -- if you're under water, it means your house is worth less than your mortgage. But you can only get money if you're within 105 percent.

What happens to the homeowner out there who may have taken out a $600,000 mortgage, whose house is now worth $400,000 -- they're not eligible?

DONOVAN: Well, John, first of all, there are two answers to that. One is that people who took out mortgages in these areas where prices have dropped dramatically, our refinancing program will help the vast majority of those.

There's only less than 10 percent of outstanding mortgages that are above 105 percent LTV. So the vast majority will be helped. If somebody bought a house in that area with an 80 percent loan-to-value, the chances are they're still under 105 percent LTV, and that's what the numbers show.

But the people who are really deep underwater, they're going to need more help than just the refinancing. That's why our modification plan is really targeted at those borrowers. That can go up as high as 150 percent loan-to-value and is really more aimed at getting the mortgages to a point where they're affordable for those families.

So it really does help both groups, in the plan.

KING: We're about out of time, but I just want to show you one thing, down here. I know you're part of the president's effort to help the Gulf Coast. After Katrina, still nearly 7,000 people in trailers and mobile homes, 318 families still living in hotels or motels.

What can this administration do, in the short term, to make these -- I would call them embarrassing numbers go away?

DONOVAN: You know, John, this is one of the things that I've been most disturbed about, to see the lack of progress in the Gulf. That's why, on Friday, the president announced that we were going to make permanent housing assistance available to a large number of families in New Orleans and a temporary plan that helps transition higher- income families instead of cutting them off on March 1st, as would have happened.

He also announced that Secretary Napolitano and I are going to go to the Gulf on March 5th and see what's happening on the ground, for ourselves, and make sure that we can speed up progress. Because what's happened so far, frankly, as you know, is not acceptable.

KING: Mr. Secretary, we thank you for your time. We'll have you back on this issue and the broader housing market. Thank you for your time. And, up next, the Republican Senate leader, Mitch McConnell, tells us why he's skeptical about President Obama's plan to reduce the federal deficit. A lot more STATE OF THE UNION just after this break.

(COMMERCIAL BREAK)

KING: As President Obama prepares for his first address to Congress, his administration is putting together its first budget to present to lawmakers. That's where my conversation began with the Senate Republican leader, Mitch McConnell.

(BEGIN VIDEOTAPE)

KING: Senator, thanks for joining us on STATE OF THE UNION.

SEN. MITCH MCCONNELL (R), MINORITY LEADER: A pleasure to be with you.

KING: I'll get to the auto question in a bit. But I want to start with the president's budget and this promise we're hearing this morning to cut the federal budget deficit in half by the end of the first term.

To do that, the Obama administration says it will, as he promised during the campaign, let the Bush tax cuts go away for Americans who make more than $250,000 a year. There are some other, what you would call, I assume, tax increases involved in that as well.

Let's start with that basic premise. The Democrats have the votes in the House, but they need some Republicans in the Senate, as we learned in the stimulus battle. Will that fly and do you think it's the right approach given the state of the economy?

MCCONNELL: Well, I don't think raising taxes is a great idea. And when our good friends on the other side of a aisle say raising the taxes on the wealthy, what they're really talking about is small business. A vast majority of American small businesses pay taxes as individual taxpayers.

So we've got to ask ourselves whether increasing capital gains taxes, dividend taxes, and taxes on small business is a great thing to do in the middle of a deep recession. I think most of my members will think that that's not a smart move.

KING: Another question for the government is the continuing financial institutions bailout. And even though the first installment began under President Bush, you helped broker that compromise. I know many of your members aren't happy with the way that money has been spent.

Now there are some talk because the banks, even though they're getting this money, their bottom lines keep getting worse and worse and worse. The administration says it does not want to nationalize the banks in the United States.

But your colleague on the Democratic side, Chris Dodd, who is the chairman of the Banking Committee, said this to Bloomberg Television on Friday, "I don't welcome that at all," meaning nationalizing the banking industry, "but I could see how it's possible, it may happen. I'm concerned we may end up having to do that, at least for a short time."

Have we come to that, sir?

MCCONNELL: I agree with the administration. I think nationalizing the banks is exactly the wrong thing to do. And we certainly shouldn't go in that direction.

We have been on an incredible spending spree though. We've spent, in this new administration, 32 days, $36 billion a day. You add all of that up, that's as much as the previous administration spent over seven years on both the war on terror and the recovery for Katrina.

So I think it's timely that the president is having meeting at the White House tomorrow to talk about the deficit because we're spending money at a very, very rapid pace, far beyond anything in history.

(END VIDEOTAPE)

KING: Senator Mitch McConnell there.

And up next, this weekend, this man had some choice words for a famous fellow governor, Sarah Palin. When we come back, Governor Brian Schweitzer of Montana gets "The Last Word."

Much more of STATE OF THE UNION just ahead.

(COMMERCIAL BREAK)

KING: Thirty-two newsmakers, analysts, and reporters hit the Sunday morning talk show circuit this week, but only one gets "The Last Word." That honor goes to Democratic governor of Montana, Brian Schweitzer.

Governor, thanks for being with us. I want to start with the front page in your home state. Here's the "Sunday Chronicle in Bozeman," "President switches to fiscal restraint." The president this week will say he will cut the budget deficit in half by the end of his first term.

As you know, many of your Republican friends who are here for the big governors meeting, think that the president is on a reckless path when it comes to spending.

I want you to listen to Tim Pawlenty of Minnesota a little bit earlier today.

(BEGIN VIDEO CLIP FROM "FOX NEWS SUNDAY")

GOV. TIM PAWLENTY (R), MINNESOTA. You asked earlier why don't the markets like President Obama's plans, and you outlined the series of bailouts he has unveiled? Wait until you see the markets' reaction to what he unveils later this week, which is increasing taxes on the -- in the middle of a deep, deep recession.

(END VIDEO CLIP)

KING: To balance the budget, or to make progress toward balancing the budget or cutting the deficit in half, the president will raise taxes.

GOV. BRIAN SCHWEITZER (D), MONTANA: Well, it does sound strange to hear any governor complaining about the stimulus dollars, because the fact that the -- when the stimulus dollars come in, it keeps the governor from having to raise state taxes, because people get thrown off of health care, you have to raise taxes if you're going to pay for it.

And so this stimulus package is actually good for governors so they don't have to raise taxes.

KING: When I was out in your state just before the election, it was right when the -- Washington was trying to pass the big financial industry bailout. And people in your state were peeved. They thought, this is not how capitalism is supposed to work, my tax dollars should not be going to bail out rich guys on Wall Street, I think is how you put it to me in an interview.

What is the sense now of all of this spending in Washington? More financial bailout money maybe to the automakers. It's a big bill in this stimulus plan. I know you think it's necessary. But is there a mood out in your state now saying, you know, what are those guys in Washington doing?

SCHWEITZER: Well, people don't really understand what's going on right now. And what they know in Montana is that if you -- if you skin a skunk, you're going get a little smell on you. So this isn't perfect, but we know that there's work to be done, and in part, Washington, D.C., is doing it, and the other work is being done in the states.

KING: You are the vice chairman of a key committee for the National Governors Association, your chairman -- or your chairwoman is not here this week, and you're not all thrilled about that. Explain.

SCHWEITZER: Oh, well, we actually just rotate these things back and forth, Republican one year, Democrat the next year. And now this means that since she won't be chairing it...

KING: She is?

SCHWEITZER: Sarah Palin -- she won't chair it. So a couple of things are happening. Fewer TV cameras are going to be in our committee hearing.

(LAUGHTER)

SCHWEITZER: And the second thing is, is that I have to stay all the way to the end to report out from the committee, so I wish she was here.

KING: And why isn't she here? SCHWEITZER: Well, governors have to balance their job. You know, you've got a legislature back home. You've got work back home. And, you know, these governors meetings, they are important, but in some ways, we come here and we restate the obvious. We pontificate about the past and staff takes notes.

KING: Yes. You became a household name across America with your big speech at the Democratic Convention. You have a president in your party and he's going to be in office and then he's going to run for re-election.

But at that meeting you're at right now, you mentioned the cameras Sarah Palin would bring in to the room. Talk about the drama that goes on when you all get together, everybody in the room thinks they should be president.

SCHWEITZER: I'm not so sure that's true, but what I can tell you is when governors get together, both Republicans and Democrats and we close the door, we have the same concerns. We have to deliver in our states.

In Washington, D.C., they debate, governors deliver. And so whether it's dealing with the legislature, or whether it's balancing our budgets or fixing our highways or keeping bad guys locked up, we have the same kinds of concerns. And so you tend to find governors at the 50-yard line, not at the extremes of the 20s.

KING: Well, to that point, I know you support this president, but when you see the huge federal budget deficits and the more spending and the more spending, is there an alarm bell going off somewhere?

SCHWEITZER: Well, there's been an alarm bell going off in my mind for the last eight years. During the last eight years, we actually spent money like drunken sailors. I have nothing against drunks or sailors, but this stimulus package is to get America working again. They built up those budget deficits during the good times.

So this is a stimulus that's going to get America back to work, make us more efficient and get us making our own energy, designed by American engineers, and built by American workers.

KING: As you have watched in the 30 seconds we have left, the early debates here in Washington, it doesn't look different. Barack Obama promised to make Washington different, but we've had the Democrats and the Republicans essentially across that same divide. Give us a piece of advice.

SCHWEITZER: I think that what you've got to do is you've got to take some of these members of Congress and you've got to knock their heads together. Maybe they ought to come in and watch how we governors work. We sit down, we work on problems, we have solutions and then we agree as a group.

I think there's just way too much partisanship here in Washington, D.C., and that smell is kind of spreading out across the country and that's why they have about a 20 percent job approval in Congress. KING: The last word to Brian Schweitzer. Governor, thank you very much for joining us.

And up next, we'll go to Lansing, Michigan, and hear why some residents think their towns' better days are behind.

Thank you very much. That's the fastest four minutes in television, but you got a lot done.

(COMMERCIAL BREAK)

KING: Michigan is known as the home of the American auto industry. And more recently, as the state hardest hit by this punishing recession. Let's take a look.

If you look in the state of Michigan, you see an unemployment rate, 10.6 percent. That's the highest in the country, nearly 600,000 jobs lost in the past eight years. And 13 in every 5,000 homes in Michigan had a foreclosure in last month in January.

The big issue of the moment is whether General Motors and Chrysler will get more bailout money from Washington, meaning more of your tax dollars. It's the company executives asking for the money, but it's the factory workers and the middle class communities they live in, places like Lansing, Michigan, that have the most at stake.

(BEGIN VIDEOTAPE)

KING (voice-over): The Lansing Grand River assembly line -- modern, clean and efficient. These Cadillacs, among GM's best-selling models, and yet this plant is down from two shifts to one. New cars just aren't selling. Thousands already let go. Many on this line will be out of work in just a few weeks.

Twelve-year seniority protects Fred Efaw for now.

FRED EFAW, LANSING AUTOWORKER: I'm married, I have two daughters. And -- you know, they want to do things and you can't commit to those things not knowing if you're going to have a full income, you know, in the next months or weeks ahead. So it is hard. You've got to explain to your kids, it may not be the way it's always been for you.

KING: Just one shift here and just one at another GM plant across town. Mike Huerta remembers when it ran around the clock. He'll be out of work in a few more weeks.

MIKE HUERTA, LANSING AUTOWORKER: We haven't gone to see movies. You know, we eat at home. I pack lunches, those types of things. You know you don't really spend anything you don't have to.

KING: Huerta says the taxpayer funded GM bailout is his only hope of being called back someday and he fumes at those in Washington saying the company should take its lumps.

HUERTA: We had some senators from down South in particular with -- you know, that have a lot of Nissan or Honda or Toyota plants basically come out and say that we should go bankrupt. They're not talking about somebody that you can't see. That means me. That takes away my family's livelihood.

KING: The pain is shared beyond the factory floor. This is one of two Saturn dealerships owned by Sherrill Freeborough.

SHERRILL FREEBOROUGH, OWNER, SATURN DEALERSHIPS: This is the biggest vehicle we've ever had.

KING: This SUV is made right here in Lansing. But GM is shedding the brand in three years as part of its restructuring. Saturn dealers like Freeborough are determined to stay in business, are now exploring partnerships with Indians and Chinese automakers.

(On camera): So it's risky.

FREEBOROUGH: It's very risky.

KING (voice-over): But a risk Freeborough says she has to take for her employees and for herself.

FREEBOROUGH: I'm a small business owner. Everything I have, I've put into the dealership. My home, everything is in the company. My husband still can't breathe. I can't have a bad day and go home and tell him because everything we have is wrapped up in this company.

KING: To listen and to look around is to hear and see a way of life fading.

FREEBOROUGH: My dad was an electrician for Ford Motor Company when I was growing up. I mean, I don't think there are any people in Michigan who don't have some sort of automotive touch to their lives.

KING: GM's roots in Lansing go back more than 100 years. Generous Motors was the favorite nickname when Brad Fredline was growing up. Both grandfathers retired from GM and his father, too.

BRAD FREDLINE, PRES., UAW 602: You graduated on a Friday and by Monday, you were working at the factory. You knew you had a rock solid job for 30 years, you buy a little place up north and you retire. Those days are gone, I'm afraid. There's no consumer confidence. There's no hope for the future. And that affects our communities, our homes and our families. There's a lot of despair out there in Michigan.

(END VIDEOTAPE)

KING: A lot of despair that lock on a lock where once stood a GM factory. We saw it first hand this weekend and we appreciate the time of all those workers struggling to get by at this troubled time in the economy.

We'll be here again next Sunday and every Sunday at 9 a.m. Eastern for the first and last word in Sunday talk. And don't forget to join us online this Tuesday at noon as the best political team on television will preview the president's speech to Congress. Reserve your spot, go to Facebook.com/CNN and join the conversation.

Again that's Tuesday at noon. Until then, I'm John King in Washington. Take care.

"LARRY KING WEEKEND" begins right now.

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