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S. HRG. 111–903

HEARING WITH TREASURY SECRETARY GEITHNER

HEARING
BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION

HEARING HELD IN WASHINGTON, DC, DECEMBER 16, 2010

Printed for the use of the Congressional Oversight Panel

(

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Available on the Internet:
http://www.gpoaccess.gov/congress/house/administration/index.html

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HEARING WITH TREASURY SECRETARY GEITHNER

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S. HRG. 111–903

HEARING WITH TREASURY SECRETARY GEITHNER

HEARING
BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION

HEARING HELD IN WASHINGTON, DC, DECEMBER 16, 2010

Printed for the use of the Congressional Oversight Panel

(
Available on the Internet:
http://www.gpoaccess.gov/congress/house/administration/index.html

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

65–082

:

2011

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For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800
Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

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CONGRESSIONAL OVERSIGHT PANEL
PANEL MEMBERS
THE HONORABLE TED KAUFMAN, Chair
KENNETH TROSKE
J. MARK MCWATTERS
RICHARD H. NEIMAN

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DAMON SILVERS

(II)

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CONTENTS
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Statement of:
Opening statement of Hon. Ted Kaufman, U.S. Senator from Delaware ....
Statement of J. Mark McWatters, Attorney and Certified Public Accountant ..................................................................................................................
Statement of Damon Silvers, Director of Policy and Special Counsel,
AFL–CIO .......................................................................................................
Statement of Kenneth Troske, William B. Sturgill Professor of Economics,
University of Kentucky .................................................................................
Statement of Richard Neiman, Superintendent of Banks, New York State
Banking Department ....................................................................................
Statement of Hon. Timothy Geithner, Secretary, U.S. Department of
Treasury .........................................................................................................

(III)

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HEARING WITH TREASURY SECRETARY
GEITHNER

THURSDAY, DECEMBER 16, 2010

U.S. CONGRESS,
CONGRESSIONAL OVERSIGHT PANEL,
Washington, DC.
The Panel met, pursuant to notice, at 10:05 a.m. in Room SD–
538, Dirksen Senate Office Building, Senator Ted Kaufman, Chairman of the Panel, presiding.
Present: Senator Ted Kaufman [presiding], Richard H. Neiman,
Damon Silvers, J. Mark McWatters, and Kenneth R. Troske.
Index: Senator Ted Kaufman [presiding], Richard H. Neiman,
Damon Silvers, J. Mark McWatters, and Kenneth R. Troske.

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OPENING STATEMENT OF HON. TED KAUFMAN, U.S. SENATOR
FROM DELAWARE

The CHAIRMAN. Good morning, Mr. Secretary. We appreciate
your willingness to come down here and help us.
It’s easy today to forget the sense of panic that overwhelmed our
economy in late 2008. Stock market was plummeting, employment
was plummeting, home values were plummeting. I can remember
turning on the television and flipping between news channels and
seeing anchor after anchor looking scared and frightened and confused. The American financial system, the envy of the world, was
never supposed to collapse in that way.
Today, we know that the panic ended, and you played a key role
in that turnaround. As the Panel has stated in the past, the Troubled Asset Relief Program provided critical support to the financial
markets at a time when market confidence was in freefall. Combined with the Recovery Act, this restored a degree of stability to
our markets and to our economy. The Congressional Budget Office
recently estimated that, at the end of the day, the TARP will cost
about $25 billion. And I notice you use the same thing in your
opening statement. And it’s an astronomical sum, to be sure, but
far less than anyone expected even 6 months ago.
As Treasury has conducted its work to repair the banking system, governments and business and private citizens across the
country have done their part to help build the road to recovery.
Thanks to their shared efforts, the economy is in a tremendously
better place today than it was when the TARP was enacted. But—
and it’s a big ‘‘but’’—we must not forget the pain that continues to
plague so many Americans.
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Fifteen million Americans still cannot find a job. As many as 13
million families will lose their homes in foreclosure in the next few
years. The panic of 2008 has subsided, but it has been replaced by
the gnawing pain of countless men and women who can’t find work,
who can’t keep their homes, and who don’t know whether their economic story will ever end in recovery.
The TARP was never intended to be a complete solution to these
problems. But, even now, your authority to make major changes to
the TARP, even though your authority has changed, you still can
make steps to help strengthen the broader economy.
For example, the Panel’s report this week on foreclosure prevention laid out a series of steps the Treasury can take to help more
Americans keep their homes. You could make it easier for homeowners to receive a loan modification by allowing borrowers to
apply online; you could focus on helping each and every homeowner
who received a loan modification to avoid sliding backward into
foreclosure.
These steps will only make a modest difference in Treasury’s efforts to prevent foreclosures, but they illustrate a larger point, that
although TARP’s broad legacy may already have been determined,
the details remain to be decided, and these are important details.
In fact, Mr. Secretary, you will decide them. You continue to manage $54 billion in the auto industry, $50 billion at a variety of
banks, $48 billion at AIG, and $30 billion in authority to prevent
foreclosures. That is a weighty obligation, and I look forward to
hearing you describe how you will handle it.
I really do hope we can use today’s hearings to focus on the remaining opportunities to reshape the TARP to strengthen the economy for all Americans.
Before we proceed, I’m looking forward to other panelists’ comment. And we’ll start with Mr. McWatters.

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STATEMENT OF J. MARK MCWATTERS, ATTORNEY AND
CERTIFIED PUBLIC ACCOUNTANT

Mr. MCWATTERS. Thank you, Senator.
And welcome, Mr. Secretary.
Although the Congressional Budget Office has recently revised
its estimated subsidy cost of the TARP downward to ‘‘only’’ $25 billion, such metrics should not serve as the sole determinant of the
success or failure of the program. We should remain mindful that
the TARP’s overall contribution to the rescue of the U.S. economy
was relatively modest when compared along with a multi-hundredbillion-dollar bailout of Fannie Mae and Freddie Mac, the multitrillion-dollar interventions of the Federal Reserve and FDIC, as
well as the incalculable efforts of private-sector capital-market participants.
It is particularly difficult to label the TARP, or any other government-sponsored program aimed at securing financial security, an
unqualified success when the unemployment rate nears 10 percent,
the combined unemployment and underemployment rate equals l7
percent, and millions of American families are struggling to modify
their mortgage loans so as to avoid foreclosure. It is cold comfort
to these individuals and families that the ‘‘too big to fail’’ financial
institutions, aided by the TARP and other government-sponsored
programs, are recording near-record earnings.
In order to better assess the TARP, I offer the following recap of
certain issues raised by the Panel and its individual members over
the past year:
Professor Troske and I noted, in our Additional Views to the Panel’s September 2010 Oversight Report, that the repayment by
TARP recipients of advances received under the program is a misleading measure of the effectiveness of the TARP and therefore
should not serve as the standard by which the TARP is judged. The
unlimited bailout of Fannie Mae and Freddie Mac by Treasury, and
the purchase of $1.25 trillion of GSE-guaranteed mortgage-backed
securities in the secondary market by the Federal Reserve under
its first quantitative easing program, no doubt materially benefited
TARP recipients and other financial institutions. These institutions
were not—were not, however, required to share any of the costs incurred in the bailout of the GSEs.
In effect, the bailout of Fannie Mae and Freddie Mac permitted
TARP recipients to monetize their GSE-guaranteed MBSs at prices
above what they would have received without the GSE guarantees
and use the proceeds to repay their obligations outstanding under
the TARP, thereby arguably shifting a greater portion of the cost
of the TARP from the TARP recipients themselves to the taxpayers.
Costs such as this should be thoughtfully considered when evaluating the TARP.
With respect to the bailout of AIG, the Panel offered the following observations in its June 2010 report, and I quote, ‘‘The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace. By providing a complete rescue that called
for no shared sacrifice among AIG’s creditors, the Federal Reserve
and Treasury fundamentally changed the relationship between the
government and the country’s most sophisticated financial players.
The AIG rescue demonstrated that Treasury and the Federal Re-

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serve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America’s largest financial institutions and to assure repayment to the creditors doing business with
them. So long as this remains the case, the worst effects of AIG’s
rescue in the marketplace will linger.’’
With respect to the robo-signing and other mortgage loan irregularities, the Panel offered the following observations in its November 2010 report, again quoting, ‘‘Treasury has claimed that, based
upon evidence to date, mortgage-related problems currently pose no
danger to the financial system, but in light of the extensive uncertainties in the market today, Treasury’s assertions appear premature. Treasury should explain why it sees no danger.’’
With respect to the HAMP and Treasury’s other foreclosure mitigation programs, the Panel offered the following observations in
the December 2010 report, which was released 2 days ago, again
quoting, ‘‘While HAMP most—while HAMP’s most dramatic shortcoming has been its poor results in preventing foreclosures, the
program has other significant flaws. For example, despite repeated
urgings from the Panel, Treasury has failed to collect and analyze
data that would explain HAMP’s shortcomings, and it does not
even have a way to collect data for many of HAMP’s add-on programs. Further, Treasury has refused to specify meaningful goals
by which the—to measure HAMP’s progress, while the program’s
sole initial goal, to prevent 3 to 4 million foreclosures, has been repeatedly redefined and watered down. Treasury has also failed to
hold loan servicers accountable when they have repeatedly lost borrower paperwork or refused to perform loan modifications.
In concluding, it is critical to note that, although the TARP has
played a meaningful role in the rescue of the United States economy during the closing days of 2008, its enduring legacy may be
to have all but codified the implicit guarantee of the ‘‘too big to fail’’
financial institutions, notwithstanding the profound moral hazard
risk arising from such action.
Thank you and I look forward to our discussion.
[The prepared statement of Mr. McWatters follows:]

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The CHAIRMAN. Thank you.
Mr. Silvers.

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STATEMENT OF DAMON SILVERS, DIRECTOR OF POLICY AND
SPECIAL COUNSEL, AFL-CIO

Mr. SILVERS. Thank you, Mr. Chairman.
Good morning. I would like to begin by thanking Secretary
Geithner for appearing once again before our Panel. And I would
like to also note that I, in general, appreciate and concur with my
colleague Mr. McWatters’ comments and summary of some of the
issue that we have been concerned about.
The story of the Troubled Asset Relief Program over the last 2
years is one that has two faces:
On the one hand, looked at purely from the perspective of how
much TARP will cost the American public, and the effect of TARP
on the acute crisis, and severe crisis, we faced in 2008, the news
keeps getting better and better.
Recently, as my fellow panelists have noted, the Congressional
Budget Office estimated that the total cost of TARP will be approximately $25 billion, less than a tenth of the original estimates.
Certain individual investments, which were entered into on terms
that were clearly unfavorable to taxpayers, in light of the risks involved, such as the preferred stock purchases and asset guarantees
at Citigroup, have been skillfully managed by Treasury to produce
significant profits.
And I would like to commend you, Mr. Secretary, for—and your
colleagues, the TARP directors, Herb Allison and Tim Massad—for
what you have done to protect and recover the public’s money in
this regard.
But, there is another and, frankly, more important way of looking at TARP. TARP cannot be held solely accountable for the state
of the U.S. or the global economy. But, oversight of TARP requires
that we look at two critical areas of our economy that TARP was
designed to address: the availability of credit to the real economy,
and the state of the foreclosure crisis. Frankly, on both fronts the
news is grim. Witnesses have testified before our panel, in recent
hearings, that we can expect between 8 and 13 million families to
face foreclosure before the crisis is over; millions more than we
have experienced already. Under the pressure of hundreds of thousands of foreclosures a month, housing prices have resumed their
downward slide.
On the credit to the real economy side of things, mortgage financing is available today, but entirely through the assistance of
government-backed vehicles, like, but not limited to, the GSEs; but
business lending remains hard to come by, other than for those
companies that can access the public credit markets.
Bank holding companies have over $1 trillion on deposit with the
Federal Reserve System, while business lending remains stagnant
by banks, at crisis levels.
Unemployment levels today are above those projected as the
worst-case scenario in the TARP bank stress tests undertaken in
the spring of 2009.
Asset deflation, banks that won’t take normal banking risk—
these are the signs of a financial system that remains unhealthy.

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I continue to believe that we made a fundamental mistake in our
management of the financial crisis by not restructuring the major
banks. By not following our own Nation’s approach to similar crises
in the past, we started down the path Japan took in the 1990s, and
we are reaping the same outcomes: a sluggish and uncertain recovery, banks that can’t restructure bad loans and won’t lend to business to create jobs. But, because our financial crisis involves home
mortgages, the decision to make preserving the banks’ capital
structure our highest policy goal has meant not just a weak economy, but the unprecedented human tragedy of millions of foreclosures. In the end, at worst, bank stockholders got diluted. Millions upon millions of American families have been dispossessed.
And there is a difference.
I hope today we will be able to explore the question of TARP and
the mortgage crisis with Secretary Geithner and that—and the—
and explore the intersection of the mortgage crisis with issues of
systemic risk and the overall health of our economy. I very much
look forward to the Secretary’s testimony.
And, once again, thank you for appearing before us.
[The prepared statement of Mr. Silvers follows:]

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The CHAIRMAN. Thank you, Mr. Silvers.
Dr. Troske.

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STATEMENT OF KENNETH TROSKE, WILLIAM B. STURGILL
PROFESSOR OF ECONOMICS, UNIVERSITY OF KENTUCKY

Dr. TROSKE. Thank you, Senator Kaufman.
Mr. Secretary, I would like to thank you for agreeing to appear
again before this Panel. I know your previous testimony has been
quite helpful to us as we carry out our oversight responsibilities,
and I am confident that this trend will continue.
During my time on the Panel, I have become more and more concerned about the public’s perception of TARP and the impact this
perception has on the government’s ability to adopt similar measures during any future financial crisis.
As we indicated in our September report, the consensus among
the academic economists and other experts that we consulted was
that TARP played an important role in helping to end the financial
crisis, a view I largely share. Yet, despite this consensus among the
experts, I think it’s fair to say that, to the general public, TARP
remains one of the most vilified pieces of legislation ever enacted,
viewed largely as an effort on the part of former Wall Street executives to bail out current Wall Street executives.
I would argue that a large part of the public’s disdain for TARP
can be traced back to the original way it was proposed, a 3-page
bill submitted to Congress asking for the authority to spend $700
billion with almost no oversight, as well as how it was implemented, changing the focus of the program from one designed to
purchase toxic assets to one where Treasury began to purchase equity in private-sector for-profit firms. I would argue also—I would
also argue that previous—that the previous administration’s decision to classify General Motors and Chrysler as financial firms in
order to use TARP money to bail out these firms increased public
skepticism even further.
Let me be clear: I am not questioning the wisdom of these decisions; instead, I am focusing on the public’s perception of these actions.
I recognize—in short, I recognize that, in trying to overcome the
public’s hatred of TARP, you are forced to deal with these past actions. However, I think that there are a number of actions that
Treasury could and should be taking right now to try and help turn
public perception.
One important way that any government can show its programs
are effective is to periodically have independent researchers conduct thorough and rigorous evaluations of its programs. This is
true whether the program is designed to retrain displaced workers,
to rescue banks in financial crisis, or to assist struggling homeowners. When performing this type of analysis, a government
needs to collect comprehensive data on both program participants
and nonparticipants in order to have a meaningful comparison
group. Yet, despite the Panel’s repeated urging in various reports
for Treasury to expand—significantly expand its data collection efforts, it does not appear that Treasury has made comprehensive
data collection for TARP programs a priority. I would again urge
you to do so, and I would also urge you to make these data available to outside researchers. Only by taking these key steps will we

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obtain the credible, independent research that is so vital in evaluating a program and convincing the public that TARP achieved the
desired outcomes in a cost-effective manner.
I would also suggest that we begin to recognize that there are
two parts of TARP: one, the set of programs, designed to assist financial institutions in the midst of the financial crisis, the other,
programs that were largely directed at stimulating the economy.
As our September report makes clear, there is a much broader
consensus about the effectiveness of the former than the latter programs. As part of this effort, I suggest that we need to take a careful look at how much money should have been initially allocated to
TARP. Changes to TARP in the Dodd-Frank legislation indicate
that Congress felt, in retrospect, that we could have gotten by with
450 billion instead of the original 700 billion allocated. But, I am
guessing that a more careful analysis would reveal that some of the
programs not directly aimed at stemming the financial crisis may
have been better part of alternative legislation. In my opinion,
making this distinction would help generate more support for what
I consider the more key components of TARP that we would certainly like to have at our disposal during future crises.
Finally, as economist Kenneth Rogoff pointed out in written comments to the Panel for our September report, ‘‘A proper cost-benefit
analysis thus needs to price the risk taxpayers took during the financial crisis. Ex-post accounting—How much did the government
actually earn or lose after the fact?—can yield an extremely misguided measure of the true cost of the bailout, especially as a guide
to future policy responses.’’ I would add to Professor Rogoff’s statement that focusing on ex-post accounting of this single program
also fails to take into account the myriad of other costly government programs which provided significant assistance to major
banks and financial institutions.
Again, I’m not questioning the wisdom of these programs; it is
clear—but, I believe, it is clear that, by providing additional support to large financial institutions that received TARP funds, these
programs made it possible for the institutions to repay their TARP
funds and allowed some of the costs of TARP to be shifted to other
less scrutinized government programs. I believe that, at an intuitive level, the American people recognize the costs of putting so
much money at risk and the ability to shift costs across programs;
therefore, the public remains justifiably skeptical of the claims that
TARP was a success because of—most of the money will be paid
back. That is why I believe we need a more comprehensive evaluation of the true costs of TARP and the overall financial bailout if
we are ever going to convince the American people that any part
of TARP can be considered a success.
Mr. Secretary, as this Panel wraps up our oversight responsibilities in the coming months, I believe that these are the issues we
are going to be grappling with the most: what parts of TARP were
successful, and how can we demonstrate their effectiveness? As I
indicated at the start of my comments, I am confident that your
testimony today, and any future testimony you provide, will be of
great assistance in our efforts. I look forward to your comments
today, and I thank you again for appearing before us.
[The prepared statement of Dr. Troske follows:]

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The CHAIRMAN. Thank you, Dr. Troske.
Superintendent Neiman.

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STATEMENT OF RICHARD NEIMAN, SUPERINTENDENT OF
BANKS, NEW YORK STATE BANKING DEPARTMENT

Mr. NEIMAN. Thank you.
Mr. Secretary, when you last testified before this Panel in June,
the major regulatory reforms that might have avoided the need for
a TARP had not yet passed Congress. Additionally, a small business lending fund was not established, and well over $100 billion
of losses were expected for the TARP program.
In the past 6 months, however, a Dodd-Frank regulatory regime
is being implemented, and a new small business lending fund has
congressional approval. The expected cost of TARP is much lower,
with the CBO’s projection of TARP’s cost of $25 billion.
Given these developments, and that TARP successfully prevented
a depression-like crisis, it might be fair to expect the public perception of TARP would be—have improved, and for the administration
to get due credit for its management of the program it inherited.
But, public perception remains negative, perhaps because first
impressions continue to linger. The reason probably has more deeprooted element. Many people simply feel their lives have not gotten
better during this period, even as the financial system has stabilized and banks have returned to profitability. The government
must continue to work to finally fill TARP’s unchecked boxes;
namely, to encourage bank lending and prevent needless foreclosures.
It is my hope to discuss these two areas today. Specifically with
regards to foreclosures, we must hold mortgage services fully accountable for the non-HAMP mortgage modifications they put
homeowners into. These mortgage modifications must truly be
helpful to homeowners, and sustainable. Non-HAMP modifications
now outnumber HAMP modifications by about three to one.
More importantly, looking forward, I believe Dodd-Frank’s vision
of an effective CFPB must be realized in the foreclosure area. In
order to protect homeowners and promote future financial stability,
the CFPB has been specifically empowered to write mortgage rules.
This must include national standards for mortgage servicers, who
are critical players in the foreclosure crisis. No such national
standards exist today.
Some States, like New York, have comprehensive servicer regulations in place that can serve as a model at the Federal level. Regardless, the CFPB cannot tackle mortgage servicing alone. The
new agency will need the cooperation of the States and the Federal
banking regulators to enforce any new rules, hopefully together in
a new era of cooperative federalism.
With regards to small business lending, the public wants and
needs the small business lending fund to be successful. But, loan
supply is not the only reason bank lending is down. Other reasons
must be integrated into our collective solutions, such as loan demand, underwriting standards, regulation, and uncertainties.
Finally, I think, nearly 2 years after the establishment of this
oversight body, it should be highlighted that you have been a valuable—and available to this panel. We have an important oversight

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job on behalf of Congress and the American public. You have appeared before us five times publicly and several times privately.
Your openness has helped us to do our job better, and the public
is better off as a result.
I thank you. And I look forward to our discussion this morning.
[The prepared statement of Mr. Neiman follows:]

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27
The CHAIRMAN. Thank you, Superintendent Neiman.
I have to comment that each five panelists made up their remarks separately.
[Laughter.]
The CHAIRMAN. I mean, as—I was just sitting here thinking
about how incredible it is that five people come up with testimony
that’s so similar. Really, we all say the same thing.
Thank you, Secretary Geithner, for coming today, and we’re interested in your opening statement.

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STATEMENT OF HON. TIMOTHY GEITHNER, SECRETARY,
U.S. DEPARTMENT OF TREASURY

Secretary GEITHNER. Thank you, Mr. Chairman, and all of you.
I agree with much of what you’ve said in your opening remarks,
not all of what you said, but I hope we have a chance to talk about
the concerns you still raise ahead, and I’ll be open with you about
the things that I think are the challenges we face going forward.
I want to provide, as you suggested, a broad overview of the impact of these programs on our economy and our financial system,
and the challenges we face ahead.
I think it’s also very important to recognize at the beginning that
it’s very hard to separate the impact of TARP itself on the economy
and the financial system from the combined impact of the broad
strategy this government embraced. And, of course, as you know,
that strategy included a very creative, powerful set of programs by
the Federal Reserve, a set of very powerful actions by the FDIC,
the substantial support, in terms of tax incentives and investments, that came in the Recovery Act, the support for Fannie and
Freddie that was required to avoid a collapse alongside the TARP
programs. None of them would have been as effective without the
overall package. Monetary policy doesn’t work without a functioning financial system. TARP would not have been nearly as effective without those other instruments. That’s an important thing
to recognize.
I think it’s important to recognize that the shock that caused this
great recession, that caused this crisis, was larger and more powerful and more dangerous, in the view of economic historians, than
the shock that precipitated the Great Depression. And yet, despite
that, 2 years after the peak of the crisis, and 2 years after TARP
was first passed by the Congress, the economy has now been growing for 18 months; we’ve had roughly 1.2 million jobs created by
the private sector, more and more quickly than for the last two recessions; household wealth has improved very, very substantially
over this period of time.
The tax package that was approved by the Senate yesterday and,
based on the comments made by the House leadership—both Republicans and Democrats—that’s likely to pass the House this
afternoon, provides a very powerful package of support for middleclass families, for working families, for the unemployed, and a very
powerful package of incentives for businesses, which we believe,
and I think most economists believe, will add substantially to our
prospect for getting the economy growing more rapidly and more
people back to work in the coming 2 years.

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28
I think it’s fair to say that the worst part, the most dangerous
part, of this financial storm has passed us, but the crisis has left
a huge amount of damage in its wake. Millions and millions of
Americans are still out of work, at risk of losing their homes. Unemployment remains, on average nationally, at 10 percent, but
much higher in many parts of the country. And it’s going to take
years, not months—it’s going to take years to fully repair the damage caused by this crisis.
Now, the government’s financial programs, including TARP, but
not limited to TARP, were not designed to and cannot solve all
those problems, and cannot, on their own, solve all the damage
caused by the crisis. But, these programs did what they had to do,
what they were designed to do—which was to protect the value of
America’s savings, to restore a measure of stability to a financial
system at the edge of collapse, to reopen access to credit, and to
restart economic growth. And these programs did so much more
powerfully, much more effectively, much more cheaply, much more
quickly than I think really anyone, including the architects,
thought was possible 2 years ago.
Now, you can see independent evidence of that conclusion—support of that conclusion from a range of different sources, including
the work of the Panel. Mark Zandi and Alan Blinder published, I
think, the most definitive independent study of the effects of these
programs over the course of the summer. And, as you know, they
concluded that, without these programs, the economy would have
fallen by another 3 and a half percent, would still be declining; unemployment would be above 16 percent; we’d be at risk of a downward spiral of deflation.
No one knows for sure how bad it would have been. But, as I
said, if you look at the magnitude of the shock that caused the
Great Depression and how that crisis turned out for this country,
against the evidence of what these policies have provided in this
brief period of time, I think it’s a very good record so far. Acknowledging that, as I said, the damage caused by this crisis is overwhelming, still, and it’s going to take years—years to repair the
damage.
Now, let me just review some of the other basic estimates we
used to judge where we are today. As many of you pointed out,
these programs achieved their objectives at a fraction of the cost
that almost any observer predicted, even as recently as 3, 6, 9, or
12 months ago. The CBO estimates, which we all rely on because
they’re independent, initially estimated TARP would cost—TARP,
itself, would cost $350 billion. Those estimates are now around $25
billion. They are too high, in my judgment. Ultimately, they’ll be
lower.
The most important thing to point out, it is that the investment
programs in TARP means the combined investments we’ve put in
banks, in AIG, to support credit markets, in the automobile industry—those investments together will show a positive return. The
losses will be limited to the amount we spend in our housing programs. The investment programs in TARP will show a positive return, not a negative return. The taxpayers will earn a positive return on those investments.

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29
Now, if you look more broadly, as many of you suggested, at the
combined costs of everything the Fed did, everything the FDIC did,
the losses we still face because of what Fannie and Freddie did before the crisis, and TARP, together, on reasonable estimates about
the future, those total costs are likely to be less than 1 percent of
GDP, which is less than one-third of the cost of the savings and
loan crisis, which, as you know, was a much milder, much more
limited financial crisis. And if you look at the costs of crises across
many countries over time, the direct financial costs of these programs, all in, including the GFCs, the Fed, FDIC, and these programs, is likely to be a small fraction of what we have seen almost
anywhere in history over this period of time.
Now, we are moving very, very aggressively to exit from the government’s investments, from the guarantee programs, from the
emergency crisis response as quickly as possible. And we are way
ahead of schedule in achieving that objective.
We’ve recovered a very substantial fraction of the investments in
banks. When I came into office, the government had invested—and
they needed to do it, it was a necessary thing to do—it had invested in banks that represented about three-quarters of the entire
American banking system. Our remaining investments today are in
banks that represent only 10 percent of the American banking system. That’s happened in just over 20 months. As you know, we’re—
and I’m happy to go through these in more detail—we’re substantially far along the road to definitive exit from the automobile industry, from AIG, and, of course, all the Nation’s banks.
Now, as many of you said, a key test of crisis response is: Are
you leaving the system stronger than it existed before the crisis?
And, in contrast to what you said, Mr. Silvers, the American financial system today is in a much stronger position than it was before
the crisis. There’s been a very dramatic restructuring of our financial system. The weakest parts of the system no longer exist today.
The remaining institutions had to pass a very rigorous test for
market viability. They have much stronger capital positions than
they had before the crisis, and they are much higher capital positions than is true for their international competitors.
And the Dodd-Frank bill gives us tools for oversight, for crisis
prevention, for crisis resolution, to limit moral hazard risk, that I
believe will be the model for the world going forward, and address
the critical weaknesses that helped cause this crisis.
So, for those reasons, because the system is in a much strong position today, if economic growth in the future proves weaker than
we would hope, it will not be because of the remaining challenges
in the financial system; it’ll be because this was a crisis caused by
millions and millions of people taking on too much debt, and it
takes time to grow out of this crisis. It will not be because the financial system is providing a constraint on access to credit on a
scale that would limit future growth.
And, Mr. Chairman, you—could I just make a few final remarks
then——
The CHAIRMAN. Sure.
Secretary GEITHNER [continuing]. I’ll move into——
The CHAIRMAN. We’d like—questions and then——
Secretary GEITHNER [continuing]. I’ll move into conclusion.

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The CHAIRMAN. Yeah.
Secretary GEITHNER. Now, we face a lot of challenges ahead, and
we’re going to go through those. I just want to list what those are,
in my perspective.
Obviously, there are housing; small banks; access to credit, for
small businesses in particular; the challenge you referred to, Mr.
Chairman, of winding down prudently, carefully, protect the taxpayers’ interest in what’s a—still very complicated set of investments in the remaining financials in the system; implementing
Dodd-Frank; and laying out a broad reform for the GSEs and the
housing finance system. That is a lot of work.
Overwhelmingly, though, the biggest challenge facing the country is how to get the economy growing at a more rapid rate so we
can bring down the unemployment rate as fast as possible. That’s
the most important thing we can do for housing, for small banks,
for access to credit more generally, and that’s going to have to be
the principal focus of the administration and the Congress’s efforts.
I want to just conclude briefly with two final remarks. I think it’s
very important that—you have been very gracious, but it’s important to step back and give credit to my predecessor, Secretary of
the Treasury Henry Paulson, to the Federal Reserve Board and
staff, to the men and women of the New York Federal Reserve
Board, and to Chairman Sheila Bair, and the architects of these
programs at the Treasury, including—and I want to list them for
you, principally—they are Lee Sachs, Herb Allison, Tim Massad,
and Matt Kabaker. They designed a very complicated set of programs in a very short period of time, for which there had been no
precedent, in modern financial history, which, as you have acknowledged, have been much more successful than almost anybody
expected. And, of course, they did the necessary thing.
And I want to conclude by just acknowledging how important the
work of this panel and the other oversight bodies that were established to look at what we were doing.
I think one of the great strengths of our country is that we subject the judgments of public officials to very difficult, rigorous, independent oversight. I don’t agree with all the judgments that you
have made or the judgments that the other oversight bodies have
made, but you have—you play a necessary function. It’s part of rebuilding confidence in public institutions of the United States. And
we have been very careful, where you’ve made recommendations
that we were confident would improve our programs, we have
adopted those recommendations, and, of course, will continue to do
that as we go forward.
I welcome a chance to talk about these things with you. And I
look forward to being able to respond to some of the other observations you made in your opening remarks.
[The prepared statement of Secretary Geithner follows:]

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37
The CHAIRMAN. Thank you, Mr. Secretary. In your written testimony—and member of the panels have said this—discussing the
CBO $25 billion number—are you comfortable with that number as
being the total cost for——
Secretary GEITHNER. I think it’ll——
The Chairman [continuing]. TARP?
Secretary GEITHNER [continuing]. Be a little high. You know,
these things are very uncertain. It depends hugely on what happens to the overall economy and to financial markets. But, based
on the things you can observe today, where there’s a market price
for an investment, and based on what’s reasonable to expect, I
think, about the trajectory of our housing programs, I suspect the
number will be high.
The CHAIRMAN. You’ve talked in panels too, about how well
things are doing right now in the financial system and corporations
and things like that. What—you know, and the main reason for
this hearing is kind of figure out, What do we do to finish this out
and do the best we can, realizing October 3rd, limited modifications
we can make? What’s your thoughts on what you can do, in the
rest of TARP, to get the banks to start lending more money?
Secretary GEITHNER. TARP’s contribution to the financial—to the
remaining challenges in our finances, is largely over. We have authority, still, to continue this set of housing programs to make sure
they reach as many people as we can. Beyond that, TARP’s contribution will be very limited. The principal thing we can do to help
small banks manage through this, is to make sure that we’re doing
as much as we can to reopen access for small businesses to credit.
The burden for that is going to fall on the small business lending
facility that Congress passed in September of last year.
The CHAIRMAN. So, just—I mean, you basically feel that, under
TARP, there’s—the fact that banks are—have all this—trillions of
dollars on hand, and not loaning, is something that has to be dealt
with in a different way, other than under your TARP.
Secretary GEITHNER. Yes. I think this is a really important thing
to look at. What matters in crisis response is to get credit flowing
again, because it’s the oxygen that economies require to recover.
How should you measure how effective these programs were in
this context? The only real measure you can look at is what happens to the price of credit—how much it costs for somebody to borrow, a business to borrow, for a person to send their kid to college,
for a municipal government to borrow to finance critical services,
the costs of a mortgage. And all those measures of the costs of credit, as you know, were at panic levels in the——
The CHAIRMAN. Sure.
Secretary GEITHNER [continuing]. Fall of ’08. And were at panic
levels in early ’09——
The CHAIRMAN. Right.
Secretary GEITHNER [continuing]. And then have come down dramatically. If you look at how much banks are actually lending,
lending volumes are lower than they were before the crisis.
The CHAIRMAN. Yeah.
Secretary GEITHNER [continuing]. But, that is no surprise, because this was a crisis brought on by the reality that people had
borrowed too much. And when the economy shrinks, the actual out-

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standing volume of loans is going to fall. But, the test of whether
credit is more available or not——
The CHAIRMAN. Right.
Secretary GEITHNER [continuing]. Has to be measured in the
price of credit.
The CHAIRMAN. I got it. And I understand. And that’s a major
objective of TARP. But, I think—a number of panels talked about
perceptions, and I think one of the real problem—when I travel
around, I talk to people that go to banks and people—not just in
the home-building market; small business people, everyone—it’s
like, ‘‘The banks won’t lend me the money.’’ Now, again, they,
many times, say it’s the regulators. I don’t—and many times I don’t
believe it is the regulators. I think they just don’t want to loan the
money. And so, I’m just saying—and I understand everything that
you said—we—I may agree—I agree with most of it, I may not
agree with all of it. But, in the next—you know, with the rest of
the TARP—for the balance of the TARP, you do not feel there’s
anything really——
Secretary GEITHNER. Not through TARP.
The CHAIRMAN [continuing]. Under that——
Secretary GEITHNER. Again, the——
The CHAIRMAN That’s a good enough answer.
Secretary GEITHNER. Right.
The CHAIRMAN. That’s good enough.
Now, how about—now, the other problem we have—again, it’s
not a perception, though; it’s a real problem. People are out there
not having jobs. And corporations have—earnings are up, Dow
Jones is doing great. You know, you—and you have corporations
with trillions of dollars on their balance sheet, in cash, and they’re
sitting there. And some corporations are going to the point of actually, you know, buying back their stock. And you’re sitting there
saying, ‘‘Hey, man. This is like, ‘let ’em eat cake.’ ’’
So, my point is, is there anything you can do, under TARP? And
I—and the reason I raise this is because everyone here, all six of
us, have talked about TARP successes, credit, all those things, but
we’ve all said the same thing, and that is that the problem we have
out there now is, people don’t have jobs and people can’t borrow
money to get their house or to get their companies going. So, that’s
why I’m zeroing in on this.
There may be—a perfectly okay answer is ‘‘no,’’ but I’m just saying, when you look at the corporations and where they’re structured, is there anything you can think of that we can do? Because
it’s so important.
Secretary GEITHNER. Well, I think the—again, the most important thing for the government, in terms of economic policy now, is
to put in place things that’ll help raise the rate of economic growth
and speed the path of getting more Americans back to work. TARP
itself now has done what it had to do——
The CHAIRMAN. Right.
Secretary GEITHNER [continuing]. Which is to get the markets to
reopen for credit. But, the burden for achieving a more rapid pace
of growth, getting more investment back to work in the United
States today, is going to have to come through other policy instruments.

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The CHAIRMAN. Oh, to Mr. McWatters. I’m sorry.
Mr. MCWATTERS. Thank you, Senator.
Mr. Secretary, when you consider the potential legal and economic consequences of the following five things, and I’ll read them:
One is the foreclosure documentation irregularities; the robosigning problem; the failure of some securitization trusts and others to obtain properly endorsed mortgage loan notes and properly
assigned mortgages and deeds of trust, as required by local law;
the challenges presented by the Mortgage Electronic Registration,
or MERS, System; the exercise of put, or repurchase, rights by
securitization trusts, as well; number five is the filing of wrongful
foreclosure suits and other legal actions.
Are you concerned that any of the largest financial institutions
will experience a solvency, liquidity, or capital crisis as a result of
these items?
Secretary GEITHNER. No. I think they pose very substantial challenges to the system, still. And I should be careful to acknowledge
that, because of the seriousness of these problems we have a task
force, chaired by myself and Sean Donovan, that includes 11 Federal agencies, bank supervisors, FHFA, the FHA, the Department
of Justice, the FTC, that is undertaking a very careful, comprehensive look at all those concerns so we can get a better handle on
their potential risk, but, more importantly, so that we can fix them
and make sure that people who were disadvantaged by the mess
are provided some relief, to make sure that, looking forward, homeowners still at risk are given a better chance of staying in a home
they can afford, and to make sure we fix the system for the future.
Very substantial challenges, still. That task force is likely to be in
a better position to provide an evaluation of where we are, what’s
next, sometime in the first quarter; I hope early in the first quarter.
Mr. MCWATTERS. But, do you foresee having to implement a program to purchase distressed RMBS or trouble loans from the financial institutions themselves?
Secretary GEITHNER. I do not.
Mr. MCWATTERS. Okay. So, as far as you can tell now, no TARP–
2.
Secretary GEITHNER. No.
Mr. MCWATTERS. Okay.
What about rating agencies? Do you believe that rating agencies
themselves may take a different perspective? And once these, particularly, put-rights are exercised and a judgment or two comes
down—and the judgments may very well be large—do you think
the rating agencies will react properly, overreact, downgrade the
stock?
Secretary GEITHNER. I would never want to predict that rating
agencies will react appropriately. Rating agencies, by their nature,
because the future is uncertain and these are complicated, are—
you know, not to be unfair—react slow and late on these things.
So, I wouldn’t make any judgment on whether they’re going to be
prescient or wise or early or late on those things.
Mr. MCWATTERS. Okay. So, to recap, there may be some systemic
consequences, but they do not rise to the level of needing a TARP–
2 or needing an across-the-board repurchase program.

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Secretary GEITHNER. No. I didn’t use the word ‘‘systemic.’’ I just
said they would—they’re going to present—these are going to
present serious challenges to the system, as they have for a long
time. You know, we’re not in the first inning of this housing crisis.
This started and peaked at the end of 2006. And it’s going to take
some time, still, for investors, for rating agencies, for creditors to
fully evaluate the financial implications of this for individual institutions. The market is finding its way now to feel a little more
comfortable about how to dimension the potential risk, but it’s
going to take—that’s going to take a little more time.
Mr. MCWATTERS. Do you anticipate that the Federal Reserve
may use part of the funds in QE2 to purchase some of these distressed assets off the books of these financial institutions, much as
the Fed did in QE1?
Secretary GEITHNER. You know, I’m very careful not to talk
about monetary policy anymore. I respect the basic tradition that
the Secretary of Treasury should never talk about monetary policy.
So, you should direct that to them. But, I would not—well, I
shouldn’t go further. You should direct that question to them.
Mr. MCWATTERS. Okay, because my concern is, what I said in my
opening remarks, that the reason the Fed was able to purchase a
trillion-250-billion dollars of government-backed–mortgage-backed
securities was because of the bailout of Fannie Mae and Freddie
Mac. If that had not—if Fannie Mae and Freddie Mac had been left
to fail, then the Fed could have still done QE1, but it would have
purchased at a market price, which would have been below face.
So——
Secretary GEITHNER. Well, can I—could I respond to that? Because I think——
Mr. MCWATTERS. Sure.
Secretary GEITHNER [continuing]. That, without talking about
the Fed, I—because I’m not sure they understand your suggestion.
I believe—and just because I believe it doesn’t mean it’s true—but,
I don’t think there was any plausible argument to suggest that the
U.S. economy could have withstood, or could withstand today, the
effects of letting those institutions, with $5 trillion in guarantees
and portfolio outstanding, default on those obligations.
And that is why a conservative Republican President decided it
was in the interest of the Nation, and Congress gave him the authority to intervene to prevent that outcome, and to allow those institutions to be managed down more gradually over time. And to
suggest—and maybe you’re not suggesting this—that we would
have been better off, as a country, financially, economically, if we
had chose an alternative path, I think, is not a credible argument.
And the idea that the overall cost to the economy and to the taxpayer would have been less because of that is not a judgment I
would support.
Mr. MCWATTERS. No, that is not the point I’m making. The point
I’m making is that the bailout of Fannie Mae and Freddie Mac
should be considered when we judge the TARP program.
Secretary GEITHNER. Yeah, that I totally agree with you.
Mr. MCWATTERS. Right.
Secretary GEITHNER. And that’s why I said it as I did. And I
think this is very important to recognize. When you look at the

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overall cost of this crisis, you have to look at two things. One is
the direct financial costs of all these programs—FED, FDIC,
Fannie/Freddie, TARP, Money Market guarantee fund, et cetera.
Now, you have to look at the economic costs, too, and the overall
fiscal costs of lost revenues, the cost of unemployment insurance,
things like that. But, on that broad measure of direct financial
costs, including the interventions in Fannie and Freddie, the overall costs will be incredibly small in comparison to almost any experience we can look at, in the United States or around the world,
even in much milder, much less damaging crises. And that’s because of the effectiveness of the overall response.
Mr. MCWATTERS. Okay. I agree, all factors should be considered,
but sometimes those factors are not mentioned in the sound bites.
That’s all.
The CHAIRMAN. Thank you, Mr. McWatters.
Mr. Silvers.
Mr. SILVERS. Thank you, Mr. Chairman.
And before I—Mr. Secretary, before I ask my first question, I
think you mischaracterized my opening remarks, to make me more
of a critic of your work than I am.
Secretary GEITHNER. Didn’t mean to.
Mr. SILVERS. I don’t think the financial system is weaker today
than it was in 2007 or 2008. I think it’s clearly stronger. I think
it’s, nonetheless, weak.
Now, Mr. Secretary, at our last hearing, your colleague Phyllis
Caldwell appeared before us. And it gave me some concern about
the administration’s policy around foreclosures. I think I perhaps
took that concern out on her more than perhaps was warranted,
given that you—it may be more warranted to be taken out on you.
Secretary GEITHNER. I would welcome that. And she’s really excellent at what she’s doing. And—but, she can take it, too.
[Laughter.]
Mr. SILVERS. Well, Mr. Secretary, I concur with your judgment
on Phyllis. And I—but I wanted to make—to raise these matters
with you directly.
In her testimony, Ms. Caldwell stated in—that slowing down
foreclosures—and this is in the context of the debate about a foreclosure moratorium—slowing down foreclosures, quote, ‘‘May exert
downward pressure on overall housing prices both in the short- and
longrun.’’ Now, Mr. Secretary, I would like you to respond to the
question, a very simple question, which is: In the view of the administration, do more foreclosures equal lower housing prices or
higher housing prices?
Secretary GEITHNER. Could I ask you a question first?
Mr. SILVERS. Sure.
Secretary GEITHNER. Just for context. Do you support a compulsory national moratorium?
Mr. SILVERS. Do I? I personally support a moratorium as part of
a larger solution. I think, by itself—and here, we may agree—I
think, by itself, a moratorium is not an answer. Like any kind of
delay, for instance, it doesn’t get you where you need to go. I have
felt, for years, going back to 2007, since you mentioned 2007, that
a moratorium would be a helpful incentive to the parties to reach
private solutions.

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But, Mr. Secretary, the question is—I’m happy to answer your
question, but——
Secretary GEITHNER. No, I—that’s——
Mr. SILVERS [continuing[. This is my turn to ask questions.
Which way—more foreclosures—which way do housing prices go,
up or down?
Secretary GEITHNER. Well, I don’t think that’s quite the——
Mr. SILVERS. All other things being equal.
Secretary GEITHNER. I don’t think that’s quite the way to think
about it. You’re absolutely right; if you could prevent—if you can
slow the pace of avoidable foreclosures, as we did, effectively,
through these programs, that was one factor that contributed to
bringing a measure of stability to house prices at a time when
house—most people thought house prices were going to fall another
20 to 30 percent.
But, that’s not really the right question to ask, in terms of this
debate right now. The right question to ask now is: Would a broad,
comprehensive, compulsory moratorium——
Mr. SILVERS. No, Mr. Secretary, that’s not the question I asked.
Because, actually, I don’t see that—I don’t see the moratorium as
the—the moratorium is a subset of a basic question that I think
the administration’s statements over the last few months have
clouded, which is: Are foreclosures good for our country, or not?
Secretary GEITHNER. No, foreclosures are not good for the country, but——
Mr. SILVERS. And are they not good for the country because they
lower or raise housing prices?
Secretary GEITHNER. Well, again, I’m not trying to really—let
me—well, maybe try it this way. If you were to stop foreclosures
from happening and suspend the process nationally for an indefinite period of time, what would that do to house prices? It could
hurt house prices, because it would—it might mean that demand
for housing slowed, people are unwilling to buy, and people sitting
in neighborhoods in homes where—at the epicenter of the foreclosure prices, might see their house prices fall further because the
markets would recognize that it was going to take a much longer
time to work through this process. So, there’s a reasonable economic——
Mr. SILVERS. Mr. Secretary, isn’t that only true if you assume
that, in the end of the day, everyone gets foreclosed on?
Secretary GEITHNER. No. I don’t think that’s true at all. No, I
think that—well, let me say what I think the right approach is to
this. I think that—and we have made this very clear, and I think
we will be successful in achieving this. We do not believe that
banks should move to initiate a foreclosure process, or continue it,
if they cannot be certain that they have the legal basis for doing
so, and if they have not given that homeowner every opportunity
to participate in a mortgage modification program.
Mr. SILVERS. Right.
Secretary GEITHNER. Now, that approach will——
Mr. SILVERS. But, Mr. Secretary——
Secretary GEITHNER [continuing]. Slow the pace of foreclosures——

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Mr. SILVERS. But, Mr. Secretary, that approach—it would appear
to me, perhaps naively, that approach would appear to be founded
on a belief that foreclosures—all other things being equal, more
foreclosures are bad for our society and bad for our economy. I
don’t understand why the answer isn’t simply yes, that they’re bad.
And one of the reasons that they’re bad is because they lower housing prices. And if I were—might refer to Phyllis Caldwell’s testimony again, in her testimony she said that 25 percent of current
home sales are out of foreclosure. That would appear to be a potent
downward force on housing prices. Do you disagree?
Secretary GEITHNER. I disagree with your assessment of the impacts on it and the merits of that approach as an alternative. Yes,
I do disagree with that.
Mr. SILVERS. Well, you disagree with the notion that 25 percent
of the total sales in the housing market being forced sales under
foreclosure——
Secretary GEITHNER. I don’t think that’s the——
Mr. SILVERS [continuing]. Forces the prices——
Secretary GEITHNER. I don’t think that’s——
Mr. SILVERS [continuing]. Housing prices down? How can you
possibly disagree with that?
Secretary GEITHNER. I don’t think that’s right way to think about
it. Look, the——
Mr. SILVERS. I don’t understand why this administration can’t
answer the simple question of whether or not foreclosures drive
housing prices up or down. It seems to me that you’re covering for
something.
Secretary GEITHNER. [Laughing.]
Mr. SILVERS. And my time is expired.
Secretary GEITHNER. Mr. Chairman, may I just offer one thing?
The CHAIRMAN. Finish, absolutely.
Secretary GEITHNER. You know, Mr. Silvers, you’re asking a interesting economic financial question. It’s a question for economists. You know both sides of that argument. I think it’s pretty
good on one side. But, I understand your position on it. But, I think
that’s not really the question we face. The question we face is,
What is the most effective, responsible thing we can do, as a country, to make sure that people who are at risk of losing their home,
but have a chance of staying in their home, have that chance to
do so? That is our basic objective. Now, we have a lot of other
things to worry about, too, because we have to worry how to clean
up this mess for the future, make sure we don’t get into this kind
of mess in the future again. But, our overwhelming preoccupation
now is, What can we do to make sure that we’re helping people
stay in their homes, who can afford to, and make sure we get
through the damage remaining at least risk to the innocent people
that have suffered so much in this crisis?
Mr. SILVERS. We’ll take that up in the next round.
The CHAIRMAN. Thank you, Mr. Silvers.
Dr. Troske.
Dr. TROSKE. Mr. Secretary, so in my opening statements I read
a quote from Professor Kenneth Rogoff about how a proper costbenefit analysis would be conducted and that ex post accounting

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can—that it’s important to take—that needs to price the risk taxpayers took during the financial crisis.
So, given that, I guess I’d like to get your thoughts on what Professor Rogoff said, the importance of understanding—we put a lot
of—the entire financial—you know, all of the financial risk—you
put a lot of taxpayer money at risk. And how do we assess that and
think about that as a cost?
Secretary GEITHNER. Well, I have a huge amount of respect for
Professor Rogoff; I’ve worked with him in the past. And, of course,
what he says is fundamentally right; you have to measure—as any
investor would do, you have to measure return against risk. And
there’s a very thoughtful set of questions you—one should ask
about whether we price these investments appropriately. And looking just at the financial return, independent of that, is not a fair
way to evaluate whether we got that balance exactly right. But, I
believe we did.
And let me tell you the basic theory of the approach we offered,
and some evidence for that suggestion. And this is not—this is
oversimplifying a little bit, but in a financial panic—in a financial
crisis,—what you want to do, where you have to make emergency
assistance available, you have to price it below the cost of credit
in the market at that time. Because credit is not available—or is
at a prohibitive cost—this would be below that—but it has to be
more expensive than credit would cost in normal conditions. And
the virtue of doing it that way is, as things normalize, you’re more
easily able to wean the dependence of the market from those programs, because your credit—your investments will then become expensive, relative to the market.
Now, there’s no perfect place between those two things. But, you
can’t say, ‘‘Because we’ve priced our investments below the cost of
credit that was available in the market, in a time of a financial
panic, that we underpriced those investments.’’ That would not be
a fair way to evaluate it or a sensible way to run a financial emergency. In that case, I think we passed what, you know, the central
bankers would call a classic ‘‘lender of the last resort’’ classic doctrine. And the best test of that is how quickly we’ve been able to
get out of these investments; how quickly, for example, the Fed’s
emergency credit programs were wound down; how quickly we were
able to get out of the other emergency guarantee programs. They
were—they proved to be expensive, as growth started recovering
and credit markets started to reopen.
Dr. TROSKE. Next, I—I certainly—I guess I agree with you—I
certainly agree with you, that the Zandi-Blinder study is the most
comprehensive study out there on the impact of the financial crisis.
I guess my own reaction is, I consider that to be very disappointing, given that I would—I feel that it’s a fairly cursory
study, a fairly short 9-page paper. I usually make students write
much longer papers. It’s hard to see how, in 9 pages, you could do
a fair job evaluating, you know, this complex situation. I think
it’s—they provide very little documentation of the methods that
they use, make some fairly strong assumptions, and consider what
I feel to be a fairly faulty methodology.
And so, in my opinion, we need a much more comprehensive—
we need—we still are—we’re looking for much more comprehensive

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studies. And again, I think that part of that is going to be function
of the information that’s out there that is made available.
In my opening statements, and as we’ve said a number of times,
we’ve pushed Treasury to provide more data and more data, and
collect more data. The most recent report does—continues that.
I guess, you know, give me your thoughts about the—your efforts
to do that, and to do a comprehensive—or to allow a comprehensive
analysis of the financial situation to be done.
Secretary GEITHNER. First, I completely agree that a necessary
condition for people to evaluate is better data. You know, we’ve
been very transparent with all the financial terms of our programs.
You can judge their market impact very easily. And I’m happy to
continue to look at ways to get more data out there. The financial
reform legislation does establish, within the Treasury, the Office of
Financial Research, with very broad authority to improve the overall data available to markets, going forward. And again, I’m happy
to look at other ways we can get better data out there.
I think we’ve—there’s much more out there than was there before we came in, on all these programs; that provides a rich body
of evidence for you to evaluate their effectiveness, but I am happy
to try to do better.
Dr. TROSKE. My time is up.
The CHAIRMAN. Thank you, Dr. Troske.
Superintendent Neiman.
Mr. NEIMAN. Thank you.
Mr. Secretary, as you could tell in my opening statement, I spend
a lot of time focusing on the non-HAMP modifications, those proprietary mods performed by banks and servicers outside of the HAMP
program. In fact, 6 months ago, when you were here, we discussed
the same topic and you agreed this was an important part. And I
think, because of the additional information that the Treasury has
shared since that time, we now know it’s even more important. In
fact, 70 percent of the modifications are now in non-HAMP mods,
really three to one.
What is—do you agree that—what’s your assessment? Are these
the way forward? Are they sustainable? And what’s your assessment on these proprietary modifications?
Secretary GEITHNER. I’ve actually spent quite a bit of time, in
preparation for this hearing, asking this—very similar questions.
How much do we know about those modifications? And the quality
of debate is not so great, so far. But, I think the general sense of
my colleagues is that the majority of those modifications are lowering monthly payments quite substantially. And the—one of the
most valuable things we did, in setting an industry standard for
modifications, was set a bar that people could strive to. But, I
would like more data on that. And we’re going to look at ways to
do that.
Mr. NEIMAN. So, because—and you’re right, I think the information that’s coming out about the reduction in modification payments is out there, generally, with respect to non-HAMP mods.
But, isn’t the heart of the issue the sustainability and the length
of those modifications? Under HAMP, those modifications are 5
years; and then reset to the historic low rates of today, we don’t
know the information, with respect to the non-HAMP mods.

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Secretary GEITHNER. I agree. I think that the three measures
you want to look at are: What is the magnitude of the payment reduction? How long is it in place? And what is left, in terms of the
remaining balance of obligations, after the modification period expires. And, as I said, we’re—we’ll look for ways we get better information out there to assess those programs.
Mr. NEIMAN. And the HAMP monthly reports have really been
improving month over month, and have, now, greater information
distinguishing the performance by servicer. Last week, in the New
York Times, in a big story focused on large servicers, non-HAMP
modifications, and highlighting the differences. So, in the cases of
borrowers who were denied a HAMP modification, only 14 percent,
for example, received a non-HAMP mod at B of A, but over 40 percent received a non-HAMP mod at Wells Fargo. How do we explain
these differences?
Secretary GEITHNER. I don’t actually know. I think—but, it’s a
very good question. And again, I’m happy to pursue that with my
colleagues and see if we can give you a better sense.
Mr. NEIMAN. Yeah. I—to the extent that this type of data—and
we had the same discussion with Phyllis Caldwell. She said a lot
of this data is held by supervisors. And when we talk to the supervisors, it’s supervisory material. So, to the same extent that this
data has been voluntarily provided, with respect to the HAMP
modifies, I think the information, with respect to the non-HAMP
mods, would be extremely important to assessing the program.
Secretary GEITHNER. Yes, I agree. And again, we’re happy to
take suggestions. As you noted, one of the things we have done—
and we did it early, in successive waves—is put out very detailed
metrics of performance by individual servicers on modifications
under HAMP, but also on a whole range of other measures of customer service, which, as you know, has been abysmal. And if there
are other ways we can improve the quality of information out
there, that would be good. And it’s valuable, not just because it
gives a chance for people to look at it, it’s valuable because it
changes behavior.
Mr. NEIMAN. Yeah.
Secretary GEITHNER. It’s a—it serves as a form of conscience.
Mr. NEIMAN. Because I think even the data that I cited, with respect to the Times article, may be misinterpreted. It doesn’t necessarily mean that Wells is three times better than B of A. The
portfolio itself may have characteristics that drive those. So, I
think—we’ve talked about, in the past, also the need for a mortgage performance data system, similar to what we have on the
origination side, under HMDA. Do you have a—you know, a view
as to the need at this point? Do these types of data needs demonstrate the need for a—national reporting requirements for performance data?
Secretary GEITHNER. Well, I completely agree that we can do a
much better job of having much better data out there for the world
at large. And again, I’m happy to look for ways we can do that.
Mr. NEIMAN. Thank you.
The CHAIRMAN. Thank you, Superintendent Neiman.
Looking forward and, you know, trying to figure out what we can
do in the remaining days. In your written testimony, I was inter-

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ested that you talked about both the second lien program and the
unemployment program. The second lien program is something
that I have become more and more convinced is a major, major
problem, especially where you have a servicer that has a second
lien and the bank has a first lien and the servicer doesn’t want to
make a modification. And so, I think the second lien’s a program,
but it’s been around for a while now, and it’s kind of, you know,
based on the data we see, not as—not what we’d all like to see—
and I think I can say all—everybody.
So, do you have any thoughts about how we can get the second
lien program up and running and funded and moving and——
Secretary GEITHNER. It took a very long time to get up and running. It’s only been in place for a very short period of time. But,
I think it’s very promising, in the sense that it achieves the simple
imperative: If the first lien is modified, the second has to be modified.
The CHAIRMAN. Right.
Secretary GEITHNER. We now have the capacity to do that, we
have better incentives to do that. And so, I think it’s very promising, but it’s going to take a little more time to evaluate the full
extent of it.
The CHAIRMAN. Do you have any idea how much money you’re
going to be able to spend on that program—be able to invest in the
program?
Secretary GEITHNER. I thought you might ask me about new estimates of——
The CHAIRMAN. Yeah.
Secretary GEITHNER [continuing]. How much we spend, and——
The CHAIRMAN. Only because I’m trying to get—you know, is
this—I mean, I really look at this as a way—and I think the panel
does, if you look at the report—this is a big problem.
Secretary GEITHNER. Right.
The CHAIRMAN. And so, the extent that we can get—and I
know—and I also realize this is an incredibly complex problem, so
getting up to speed’s going to take a long time.
Secretary GEITHNER. Yeah.
The CHAIRMAN. And I’m just trying to get a feeling, Is there anything we can do, or you can do, or anybody, to get this program
to be all that it can be?
Secretary GEITHNER. We’re doing everything we can. I really—we
have a tremendously talented group of people, who know a lot
about the financial markets and about housing, who are on this all
the time. And so, we’ll do everything we can to do that. We’d like
the reinforcement. And again, the more we can shine a light on relative performance of servicers, the better we can do.
On the cost estimate, I don’t know how much we’ll end up spending on this. And, you know, we’re in the process of looking at doing
another reevaluation of how much we expect to spend across these
programs. We probably won’t be in a position to reveal that until
the budget. But, you’ll have a chance, at that point, to look at the
estimates.
The CHAIRMAN. Good. And the unemployed program, too. While
the—you know, right now it’s not budgeted for any money, because
there are no incentives.

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Secretary GEITHNER. Right.
The CHAIRMAN. But—yet clearly we start out on the HAMP program, we weren’t going to have any unemployed. And now—I
mean, it just shows the difficulty of the problem. So, now we have
some—when you look at the debt-to-income ratio on many of these
people that need modifications, the reason is because they’re unemployed. So, an unemployed program, like a second lien program, is
really key to making this whole thing work. So, what are your
thoughts about the unemployed program?
Secretary GEITHNER. I totally agree. And, you know, under our
programs, servicers are required to provide a period of 3 months
forbearance. Usually, that comes later in the unemployment period
of an individual; it comes, you know, probably months 5 to 8 in
their period of unemployment. So, it has more value than people
think, when they just think about 3 months. The other program we
have, of course, is our program with a variety of State housing finance agencies; we’re providing resources to help them run programs that help the unemployed.
And you made the central point, which is that the principal factor which is driving foreclosures today is not what was at the heart
of foreclosures at the beginning of the crisis, which was, as you
know, a set of broader lending practices. Now it’s really about unemployment. And that’s why I think it’s very important to emphasize that the most important thing that’s going to affect the trajectory of house prices, the overall number of foreclosures, ability of
people to stay in their home, is what the government is able to do
to get the unemployment rate down much more quickly.
The CHAIRMAN. And a remaining question: Since now HAMP is
the—TARP’s ramping down, HAMP’s ramping down—do you have
any thoughts about programs—I mean, this is such an important
issue and so much has been learned and—on this—is there some
suggestions that you could come forward—don’t have to do it right
here at the table, but—I think, more and more, that this should be
the subject of legislation, that, you know, a new program funded—
this is still going to be a problem. You said it, and I agree, that
this is a program that’s—years out. This is absolutely key to the
recovery and, you know, we’ve earned a lot in the TARP program.
But, now we’re stymied, in that you can’t make any modifications.
So, if you would think about—if you have any thoughts, I’d like to
have those, but also some kind of a statement on paper.
[The information referred to follows on p. 77]
Secretary GEITHNER. I would be happy to think about that and
come back to you, and I’m sure my colleagues would be happy to
talk about that in more detail. But, could I just make one point in
response——
The CHAIRMAN. Sure.
Secretary GEITHNER [continuing]. To that? Because I think it’s
important to recognize. There have been a lot of people, very capable people, that spend a lot of time looking at different strategies
to address the housing crisis. And there are people in this room
and people around the country who have suggested much more dramatic departures of approach in the past. Of course those would all
require legislation, and some would require substantial additional
resources.

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But, I think the fundamental question really is a different question, which is: How many people do you think you can reach? And
the principal gap between the roughly 5 million Americans today
that are delinquent in their loans and the number of people that
are likely to get a modification ultimately is really about the following. And, let’s just look at those numbers in broad terms. Of
that 5 million, roughly 2 million are now potentially eligible for
HAMP and the FHA modifications programs. The other 3 million
Americans that are currently delinquent on their loans fall into a
bunch of different categories, but many of them are individuals
who took out loans for houses that are really quite expensive,
above $625,000, or whose mortgage burden today is below 31 percent of income, meaning they can afford to stay in their house, or
were investors, or who had a second home. Now, that’s not all the
3 million. Some of that 3 million are loans with servicers who
aren’t—don’t participate in our program. Some it is people who—
there’s no economic case for helping them stay in their home, it’s
better to help them, in other ways.
But, if you’re going to think about a more dramatic change in approach, that would reach millions more Americans, you have to
fundamentally decide whether you want to extend the benefits of
these programs, using taxpayers’ money, to those classes of Americans that fall into those categories. And that’s something we looked
at very carefully. We did not think that was a reasonable public
policy choice, not a good use of taxpayers’ money, because, again,
a very substantial fraction of those people were investors who had
a second home, bought an expensive home, or who can clearly afford to meet their payments.
The CHAIRMAN. But, there’s still—and I’ll just touch base for a
second—there’s still—you talk about 3 million people out there who
are not in that situation, who need help, who we’ve learned a lot
about how to deal with them, we’ve learned about the servicers and
the problem——
Secretary GEITHNER. Right.
The CHAIRMAN [continuing]. With servicers, we’ve learned about
second liens; we’ve learned about the unemployed; we’ve learned
about all these things to kind of get those 3 million. And they are
extremely important to whether we’re going to deal with what everybody on the panel and you have said, and that is: How are we
going to get out of this thing? We’ve stabilized things. How do we
move to the next step? And if housing doesn’t start being more productive, we—we’re in deep trouble.
So, you’ve got a combination here of people that—the kind of
moral obligation to help people that were not subprime people, people that—exactly what you said, people that did it right, they were
in the thing, now they’ve been unemployed, through no fault of
their own, and they’re about to go belly-up. We have an obligation
to help those people, morally. But, what really makes it binding is,
we also have an obligation to do it economically, to get the economy
moving, so all of us can move on and move on to the next step.
So, that’s why it’s going to be—no one’s—you know, my mother
used to have a saying, ‘‘Nothing in life that’s worthwhile is easy.’’
This is very, very, very, very, very difficult, but it’s also very, very,
very important.

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Secretary GEITHNER. I agree with that. And I think that, as I
said, our work is not done.
The CHAIRMAN. Right.
Secretary GEITHNER. We’re—the government is not done. The
damage is still profound and tragic in its dimensions. And it’s going
to take a long period of time. And again, the most important thing
for governments to understand in financial crises is that you have
to keep at it, you have to keep working on it, you can’t stop——
The CHAIRMAN. Right.
Secretary GEITHNER [continuing]. Too early. And, as you know,
just in looking at the foreclosures at risk still, and unemployment
at 10 percent, we got a lot of work to do as a country.
The CHAIRMAN. That’s right. And I—but I think the thing is,
what we’re going to do—and one of the things to do in the next 3
months is put it together so that next time this happens, God forbid, there’s a much—and, as Dr. Troske said, you know, some
way—and as you said—some way to approach the—to deal with the
whole thing. But, in the interim, you know, we’re still here, as you
said, and we——
Secretary GEITHNER. Right.
The CHAIRMAN [continuing]. We’re in a deep hole.
Secretary GEITHNER. Exactly.
The CHAIRMAN. And, you know, anything that we can use, from
what you’ve learned and what your people have learned from
HAMP, we shouldn’t just, you know, say, ‘‘Okay, it’s now April 3rd,
goodbye,’’ in terms of anything.
Secretary GEITHNER. No, no. We’re going to be at this, in HAMP,
for a much longer period of time than that.
The CHAIRMAN. But, I think we’re going to need something
more—as you said, there’s lots of things that HAMP is not going
to be able to do——
Secretary GEITHNER. Right.
The CHAIRMAN [continuing]. Based on the way it’s presently
structured. And I am sorry for taking so much time.
Mr. McWatters.
Mr. MCWATTERS. Thank you, Senator.
Mr. Secretary, in your opening statements, you said that the financial institutions are basically stronger today than they were a
few years ago; that they have stockpiled around a trillion dollars,
at the Fed and excess reserves, earning 25 basis points. So, when
we approach the question of lending, when it’s not a really question
of insufficiency of supply, there’s a trillion dollars they can loan tomorrow, if they wanted to, so there has to be a problem with demand.
Why is there a problem with demand? I mean, from my perspective, over the last 2 years there’s been a great amount of uncertainty interjected into the economy; to people, who sit around their
offices, drinking bad coffee out of Styrofoam cups, who really make
decisions on hiring one person or two people at a time, have simply
said, ‘‘You know, I think we’ll hold off on that decision.’’ What’s
going to change in that perspective over, say, the next 6 months
to a year?
Secretary GEITHNER. I think the principal source of uncertainty
remaining is uncertainty about what is going to be the pace of

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growth and demand for someone’s products. That is principally a
question about, How fast is our economy and the global economy
going to grow?
There is more uncertainty about that than is typical because of
the scale of the damage caused by the crisis and the basic shock
provided to confidence in the depths of the panic. And the scars of
that panic last a long time; I mean, it’s just understandable. People
are much more—are still more economically insecure or uncertain
today than they were, really, anytime in generations in this country, because the crisis was so severe. That’s going to take some
time to heal, but it is healing.
Now, the best measure of whether this is getting better again is
what’s happening to the underlying pace of demand, what’s happening to the forecasts for demand. And those show gradual healing. And if you look at how companies are behaving, it also suggests a little bit of growing confidence and optimism. I’ll just give
you one—a couple measures of that:
As I said, the private-sector job growth is faster, stronger than
happened in the last two recoveries. And business investment
spending in equipment and in software ran at a rate of about 20
percent, the first 6 months of this year; about 12, 15 percent in the
third quarter; and still looks quite strong. So, businesses are
spending again, because they want to make sure they have the
ability to participate in the recovery that’s coming. And that’s encouraging.
And again, that’s going to take a little bit of time to heal, still.
But, I’d say the best thing to say is: gradual healing, gradual improvement in confidence. But, ultimately what’s going to generate
more confidence is just the reality of growth getting gradually
stronger.
Mr. MCWATTERS. Okay. Thank you.
November 17th, the Federal Reserve announced another round of
stress tests, but, for reasons which I’m not sure if I fully understand, these stress tests will be kept secret, they will not be disclosed. I doubt if you made that decision, but can you comment on
it?
I mean, I guess I’m troubled that, somehow, transparency in this
is not complete.
Secretary GEITHNER. Well, I think, as you know, I am a very
strong advocate and, of course, was the principal architect of the
decision, back in early ’09, to force our major institutions to go
through the stress test, and to disclose the results in enough detail
so investors could assess on their own whether they were realistic
and appropriately conservative. And that was a remarkably effective approach, because it allowed these firms to go out and raise
a lot of capital much earlier.
And if you contrast that experience with what Europe is still
going through, you can see the benefits of having a very detailed
level of disclosure on conservative assumptions about potential
losses. It’s a very good strategy. And I am very confident that a
regular part of risk management and supervision in the future for
our system will be regular public disclosure of stress tests by major
institutions. I can’t speak to any of the specific things about what
the Fed announced recently, but I’m very confident that, looking

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forward, we, as a country, will go through regular publicly disclosed stress tests of our major institutions.
Mr. MCWATTERS. Yes. I know, though, but every day we read in
the papers about putback rights, lawsuits, MERS, robo-signing,
and a lot of these stress tests, I think, were initiated based upon
that. So, I think it would be helpful to disclose.
Let me ask one other quick question. Do you believe that Fannie
Mae and Freddie Mac should ride down the principal of a large
number of their underwater mortgages through participation in the
FHA’s short refinance program?
Secretary GEITHNER. There are—you know, we have a principal
reduction program in our—Treasury’s housing programs. And we—
and the FHA’s—what’s called, in shorthand, their ‘‘short Refi’’ program—both those things, we think, have a lot of benefits. And we
think there’s a pretty good economic case for Fannie and Freddie
to participate in those programs. And we’re in the process of talking to the FHA about those—about the merits of those programs,
about their concerns. And I can’t say, at this point, whether I think
they’re likely to adopt them, or not. Again, we’re trying to make
sure we understand their concerns, and they’ve got a different set
of objectives; in some ways, different constraints. But, I’m hopeful
that they’re going to find a way to participate in many of these programs as possible.
Mr. MCWATTERS. Okay. I need to finish up here.
But, if you are successful in encouraging them—and I think some
news reports have said, the Treasury’s actually ‘‘pressuring’’—
that’s not my word—what’s your projected cost of doing this, riding
down those loans?
Secretary GEITHNER. Well, the—you—there’s two ways to think
about the costs in this. You remember the—Fannie and Freddie
and the government own all this risk today. So, if you do things
that improve the odds that house prices will be higher in the future, that defaults will be lower in the future, then you’re going to
improve the overall quality of the portfolio of these entities of government, and reduce the overall losses to the taxpayer. So, we have
to link it—look at the financial implications of these programs
through that broader prism, which is what we do, of course, and
we want to encourage the individual agencies to do, as well.
Mr. MCWATTERS. Okay. My time’s up. Thank you.
The CHAIRMAN. Thank you, Mr. McWatters.
Mr. Silvers.
Mr. SILVERS. Mr. Secretary, first let me say, I appreciated very
much your answers to Mr. McWatters’ questions. I thought—on
both the macro part and your final answer about the FHA/GSE
issues, I think you’re spot on.
I’d like to follow up some more on the question of—that my colleague, Superintendent Neiman, raised about non-HARP—nonHAMP modifications.
But, first let me ask you this. The CBO, in the—as part of their
$25-billion number, is projecting a—only a $12-billion expenditure
out of a potential 75. Do you agree with that projection? And do
you think that—is that good news or bad news?
Secretary GEITHNER. I think it’s bad news, but I think it’s a little
low, based on what we know today. I think it’s too low, too pessi-

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53
mistic. What we set aside was more like 45 or 50. They expect we
will spend only 12. I think it’s too low. But, as I said, we’re going
through a comprehensive assessment now of what we think we’re
likely to spend in these programs. And we’ll probably be able to
share that with you sometime in the first quarter.
Mr. SILVERS. So, you’re not satisfied with the type of overall impact that that projection would sort of—it would appear to presume.
Secretary GEITHNER. Look, my obligation is to make sure that
these programs reach as many people as possible. And the more
people we reach, the more we will be spending. I think it’s a good
use of the limited resources we have as a country, because the returns, in helping the country through this housing crisis, are very
high, overall.
Can I just say one quick thing, Mr. Silvers? I want to say one
thing in response to the question about how you evaluate risk and
return on these things. And I think this is straightforward. You
have to look at, not just whether you got a—you know, we got a
20-percent return on some of these programs. You could ask, ‘‘Relative to what risk?’’ But, you know, we’re the government, we’re
not a investor, we’re not a hedge fund, we’re not a vulture fund.
And the impact of these programs should be judged by, What did
you do to overall economic growth, access to credit, as a whole? So,
when you think about the return to the taxpayer, the most important return is not the financial return to the Treasury and investments, it’s about the broad impact of these programs.
Sorry, Mr. Silvers.
Mr. SILVERS. No, in fact, Mr. Secretary, that—your remark is
very helpful to me, because I wanted to ask you about precisely
that issue, in relationship to your—the—a term you used several
times, around foreclosure—around mortgage modifications, which
is the question of what the homeowner can afford.
What exactly do you mean by that term? Do you mean what the
homeowner can afford—consistent with what? Because, if the—to
try to be more precise about this, the—we know what the homeowner can—it may be that there’s a gap between what the homeowner can afford—all right?—and what a financial institution
views as the point at which they would start to lose money on the
mod.
Secretary GEITHNER. Well, I——
Mr. SILVERS. Why don’t we think about that gap, in light of what
you just said about the larger negative externalities of foreclosures,
which is what I was trying to get at in my earlier questions.
Secretary GEITHNER. Right. Well, the—no perfect answer to
this—the standard we’ve used in our programs is to say that we
want people’s payments to be reduced to 31 percent of income.
Mr. SILVERS. Right.
Secretary GEITHNER. Why 31 percent of income? Because, on a
bunch of evidence, that’s something that suggests that people can
sustain over time——
Mr. SILVERS. But, Mr. Secretary, that’s not what I’m asking. I
mean, I know what the number is. But, when that number supports a payment that’s ‘‘here’’—right?—and the NPV model, which
is essentially a model of the economics to the banks, supports a

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payments that’s ‘‘here,’’ that the homeowner can’t afford—right?—
but—so then there’s a gap between what’s in the bank’s interest
and what’s in the homeowners’ interest.
If that gap—right?—means that you go to foreclosure, then all
that negative stuff that comes down on our economy, you were describing earlier, happens. Now, if—in order to close that gap, you’ve
got to hit—you’ve got to take a hit to principal—all right?—and the
bank takes a hit, which they don’t like—all right?—which—is that
a—it seems like we’re basically saying—when that gap opens up,
we, basically, let the bank make the call. Am I right about that,
or—and why does that make sense? Why shouldn’t we be asking—
and I think Mr. McWatters sort of gets at this a number of different ways, as well—Why should we be asking the banks to take
something of a hit, so we get more of a—across a whole real estate
market, better outcomes?
Secretary GEITHNER. It’s a very good question. And, you’re right
that part of the difference between the number of people we’ve
reached through permanent modifications and those we haven’t is
where there’s a—but it’s a relatively small number of people—are
where the—to use the technical term, ‘‘the NPV return is negative.’’
But, let’s think about the implications of what you’re suggesting.
I think to decide that we’re going to take the taxpayers’ money so
that people can afford to stay in a home that is really beyond their
capacity to afford, because we want to avoid the broader negative
consequences, collateral damage of more foreclosures, is asking,
really, Is that a fair use of the taxpayers’ money? And how do you
feel about——
Mr. SILVERS. But, Mr. Secretary, I wasn’t asking about the taxpayers’ money. I’m asking about the banks’ money.
Secretary GEITHNER. Well, you—I think, as you know—but,
again, this is a broader question that goes to the question that your
Chairman raised earlier, is—we do not have the legal authority to
compel certain types of performance by banks in this stuff. Now,
Congress could decide to give it to us; I suspect they would not.
They could. But, that option is not an option available to us at this
time. It was not available when we designed the programs themselves.
Mr. SILVERS. But, then—Mr. Secretary, can I just—I mean, I disagree with your characterization of the leverage you have around
this question, because I—which I think is implied by your statement about not having legal authority. I think the web of relationships that exist with the GSEs, with the Fed, and the like, give
you, I think, a fair amount of ability to open that question up.
But, I want to take you to one last place, with the Chairman’s
permission. Given this—given the fact that this is a difficult problem, and given, I think, the—what is clearly, as a matter of numbers, the increasing reliance on non-HAMP mods across the market, to drive the mods, I am puzzled by what I read—and maybe
I read incorrectly—to be Treasury’s opposition to having the State
agencies, among the uses of the money that they’ve gotten from
HAMP, use that money to help homeowners get counsel so that
they can then have a better shot at negotiating mods. I——
Secretary GEITHNER. Are you referring to——
Mr. SILVERS [continuing]. I think I’d like to——

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Secretary GEITHNER [continuing]. Legal aid?
Mr. SILVERS [continuing]. Understand that——
Secretary GEITHNER. Are you——
Mr. SILVERS. Yeah, legal aid. Yeah.
Secretary GEITHNER. It’s a good question. We’ve looked—we’ve
spent a lot of time looking at this. And, of course, we do provide
resources to help homeowners determine eligibility for the program
and participate in the programs. The specific question a number of
Members of Congress have raised is, Can we use these this authority to help provide more financial assistance to legal aid itself? And
the way the laws of the land are written, we cannot legally use
TARP or HAMP resources for that purpose. There’s some amendments pending before the Congress—there’s some laws—legislation
pending that would change that——
Mr. SILVERS. How did you come to that conclusion, that——
Secretary GEITHNER. Very carefully——
Mr. SILVERS. No, I meant specifically under whose advice?
Secretary GEITHNER. Oh, we consulted with, of course, a broad
range of lawyers across the government. And I’m very confident
their judgment is right. And I think that’s recognized in the fact
that some Members of Congress have proposed to——
Mr. SILVERS. The press reports that you relied on outside counsel
with significant conflicts. Is that——
Secretary GEITHNER. No.
Mr. SILVERS [continuing]. True?
Secretary GEITHNER. No, absolutely not. We—well, first, we
would never do that. We have, like, plenty of lawyers at the Treasury and in the Justice Department to make those judgments.
Mr. SILVERS. So, you did not ask—it’s a false report that you
asked a particular law firm—if you give me a moment, find the
name of it. It’s a—it’s just false that you asked——
[Pause.]
Secretary GEITHNER. I think I can help you.
Mr. SILVERS. Yeah, you can help me. What’s the name of the firm
that I’m trying to find?
Secretary GEITHNER. I have no idea. I’m sure we asked people for
advice across the—as you expect us to do——
Mr. SILVERS. Right.
Secretary GEITHNER [continuing]. But we don’t rely on judgment—we—the judgment we rely on is the judgment of the responsible people in executive branch. And I think that legal judgment
is the correct judgment, although I’m not a lawyer.
Mr. SILVERS. The letter from your counsel says that, ‘‘Legal aid
services are not necessary or essential to the implementation of the
loan modification program.’’ Is that the core of your finding?
Secretary GEITHNER. No. And I don’t think you were quoting the
letter in full. And again,——
Mr. SILVERS. No, I’m not.
Secretary GEITHNER [continuing]. I’d——
Mr. SILVERS. If I read it in full, it would take a long time.
Secretary GEITHNER. I’d have to go back and read the letter
again. But, I think it’s a—can I make a more simple legal argument, which I think——
Mr. SILVERS. Well——

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Secretary GEITHNER [continuing]. I’m not going to do——
Mr. SILVERS [continuing]. I’d like you to address why—I mean,
we know——
Secretary GEITHNER. If Congress, by statute, authorizes and provides funding for a particular function of government, then the general judgment of lawyers is: we cannot use another source of funds
to supplement or enhance those—that separate——
Mr. SILVERS. But, isn’t——
Secretary GEITHNER [continuing]. Authorization. This is an understandable judgment by lawyers.
Mr. SILVERS. But, wasn’t that particular authorization passed
after the initial decision not to fund?
Secretary GEITHNER. I don’t believe that’s——
Mr. SILVERS. Not to allow funding?
Secretary GEITHNER. I don’t believe that’s the case. But, in any
case, Mr. Silvers, I’d be happy to respond in writing to any more
questions about the legal basis for it.
[The information referred to follows.]

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Secretary GEITHNER. I want to say that I think you were right
that there’s a very good public policy case for using resources to
help people take advantage of government programs, manage
through a very complicated, difficult modification process. There’s
a very good case for doing that. And I have been, personally, very,
very supportive of more government resources for counseling, for
legal aid, generally. And, where we had a legal authority to do
that, we have made TARP funds and HAMP funds available to
help reinforce that objective, for the reasons you support. But,
there’s a legal constraint on the amount—our ability to use TARP
for legal aid directly, that law would have to be changed to rely on.
Mr. SILVERS. Mr. Secretary, it puzzles me that when hedge funds
get TARP money, under PPIP, I believe they get to pay for lawyers.
And it puzzles me that a vast amount of TARP money has been expended on legal counsel for the benefit, obviously, of the government. It seems as though lawyers are understood to be a necessary
and essential component of all the transactions that TARP—that
HAMP and TARP under—that TARP undertakes, except when
homeowners need the lawyers. It——
Secretary GEITHNER. It puzzled——
Mr. SILVERS [continuing]. Troubles me.
Secretary GEITHNER [continuing]. Me and troubled me, too, when
I first was confirmed. And I spent quite a lot of time trying to figure out how we could fix it, but I’m very confident that the legal
judgment our lawyers and Justice made is the right one. And we’ll
figure out—see if we fix that through legislation.
Mr. SILVERS. Well, I appreciate your engagement with me on
that. Thank you.
The CHAIRMAN. Dr. Troske.
Dr. TROSKE. Mr. Secretary, I—I think I’m going to switch gears
here a little bit. I mean—and we’ll maybe talk about cars for a little bit.
So, as you’re aware, in December of 2008 the decision was made
to use TARP funds to provide financial support to the—General
Motors and Chrysler. Would you have done that? Would you have
made—reached the same decision, if you had been Secretary at the
time?
Secretary GEITHNER. It was not my decision to make, as you implied. But, I was aware of the—the merits of the choice at the time.
And I thought what my predecessor did was the right thing.
Dr. TROSKE. So, I guess—I mean, and essentially this was for
them to avoid going into bankruptcy, with—I think that was the
alternative at the time. In—and you made the—you alluded to the
estimate that a million jobs would have been lost through bankruptcy. So, firms as large, if not larger than General Motors and
Chrysler, such as Texaco, United Airlines, Delta, American, and
Polaroid have gone through bankruptcy, as did Lehman Brothers,
and our economy survived. So, would the world really—would the
world today really have looked much different, had General Motors
and Chrysler gone through bankruptcy in December of 2008? How
different would the unemployment picture be? And so—and tell me
why—whether you think that’s true, and what you based that decision on. You know, what are your thoughts on why it would look
different? What’s different?

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Secretary GEITHNER. Look, market economies require failure.
They don’t work unless you allow firms to be—to fail when they
cannot make things people want to buy. And, in normal recessions
even, not just in normal expansions, bankruptcy is a central part
of the functioning of a market economy. But, everything is different
when you’re in a financial crisis like what we faced in the Great
Depression or what we faced in this basic crisis. And, in those circumstances, bankruptcy itself cannot provide an effective way to
protect the economy from the collateral damage of, for example, the
failure of major financial institutions, or in—even in the auto case,
the failure of a concentrated number of major providers. And I
think that—so you have to think about those two different worlds.
In a crisis, you have to do things you would never do in a normal
recession, and certainly would do in an expansion. And I think that
bankruptcy never works, of course, without there being a source of
lending that is in a position with financing to help facilitate a reorganization, because companies need funding to go through that.
And in a financial crisis, there will be no source of Debtor-in-Possession financing on significant scale. And so, in some cases, the
government has to step in to provide that temporary financing.
But, what matters most—and this is true in the auto case—is, if
you do that, you have to do it on the condition that you bring about
a restructuring that will allow the firm to emerge profitable without government assistance. And that’s what the auto piece of our
strategy was able to achieve. And I think there’s no doubt that unemployment would have been much higher, there would have been
millions more jobs lost, if we hadn’t gone through that. And I
thought that was a very well-designed use of government resources
in an acute crisis.
Dr. TROSKE. Let’s talk about GMAC a bit, and the exit plan. The
government’s relatively speedy exit from General Motors contrasts
with the lack of clear exit strategy from the government stake in
GMAC. The GMAC management team has discussed publicly the
idea of a 2011 IPO. Given that the company has reported three
consecutive quarters of profits, what is the current thinking on a
timetable for an IPO?
Secretary GEITHNER. As quickly as we can do it. I think you—
if you look at what we’ve done across the board, and if you—again,
we’re way ahead of anybody’s expectations—we are going to move
as quickly as we can to replace the government’s investments with
private capital, take those firms public, figure out a way to exit as
quickly as we can. And we’re working very hard with the management and board of GMAC to achieve that outcome. I don’t quite—
I don’t know how quickly, but it’s going to be much sooner than we
thought 6 months ago.
Dr. TROSKE. To change subjects again and talk about executive
compensation a bit, when Mr. Feinberg testified before our panel,
he stated that if the culture of pay on Wall Street is not changed
in the wake of the TARP, then I think our work has not been successful and it’s not being—and, if it’s not being followed, it is a
problem. Do you agree with him?
Secretary GEITHNER. I would agree with that. If that were the
case, I would completely agree with that.
Dr. TROSKE. And do you think that’s not the case?

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Secretary GEITHNER. Very good question, and a good time to be
asking that question. And I guess I would say the following:
We did two things over the last 6 months or so, one in the DoddFrank Reform Act and one in a set of standards that the Fed is
responsible for enacting—for enforcing, to try to bring about very
substantial changes in compensation practice, looking forward. The
first was a requirement for disclosure and to give shareholders the
right to vote on compensation packages. That’s the SEC’s responsibility. And the second is a set of standards on the design of compensation incentives that that Federal Reserve and the bank supervisors are responsible for enforcing. And we’ll know more about the
results of both those things on behavior in the early part of next
year.
To date, what you can say is, there’s been a substantial shift in
compensation. So, there’s less in cash, more in equity. It vests over
time. It’s more at risk of being clawed back if firms don’t end up
performing as well as people had hoped. That’s very good. But, I
would say, you cannot say today—I would not claim that we have
seen enough change yet in the structure of compensation. And
that’s a very important thing for us to achieve, because, as you
know, those incentives were so skewed to encouraging risktaking
that they played a material role, I think, in what caused the crisis
itself.
The CHAIRMAN. Thank you, Dr. Troske.
Superintendent Neiman.
Mr. NEIMAN. Thank you.
Mr. Secretary, I think you may have anticipated my questioning
around servicer performance, because you may have preempted me
by characterizing servicer performance as ‘‘dismal’’ during our last
exchange. But, I do believe, you know, it deserves further discussion.
In fact, Speaker Pelosi, who appointed me to this panel, made
public a letter that she sent, along with other members of the delegation, to the Department of Justice, to the Fed, and to the OCC,
a letter that describes, in 20 pages, excruciating detail of examples
of real stories from homeowners in dealing with servicers. It demonstrates their frustrations and clearly, despite good-faith efforts
on the part of the homeowners, failures of—by the servicers. You
know, it highlights areas of failures to respond in a timely manner;
the timeliness of proceeding with foreclosures while at the same
time proceeding with modifications; as well as a continual evidence
of losing and misplacing documentations.
Do we need national standards for mortgage loan servicers?
Secretary GEITHNER. I think we do.
Mr. NEIMAN. Do you—you know, there are a number of States,
including New York, that have models out there. We, over 2 years
ago, have put in place, not only a registration of mortgage loan
servicers, but one of the most comprehensive in the country, that
imposes ‘‘duties of care,’’ specific conduct of business rules around
fair dealing with customers, with homeowners, in requiring modification, requiring trained personnel, and requiring data reporting
requirements. Is this something that could serve as a model at the
Federal level?

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Secretary GEITHNER. I think it could. I’m not familiar, in detail,
with what you’ve done in New York, although I know a number of
people think very highly of it. But, we’ll look at that model and others. But, I think you’re making the right point.
Mr. NEIMAN. In the—in your efforts to stand up the CFPB, do
you see this as an early priority, this as one of the mortgage areas,
one of the mandated statutory responsibilities for rulemaking?
Secretary GEITHNER. I’m not quite sure how early that will come,
realistically. And, of course, as you know, right now we’re focused,
overwhelmingly, on trying to make sure we’re fixing the existing
problems in servicer performance and making sure enough people—that we reach as many people as we can, in terms of modification programs. But, it’ll be a very important priority. You know, as
you know, we have a whole set of complicated work on defining
new underwriting standards, defining what’s a qualified residential
mortgage, what should be the basic future of the housing finance
system, more generally. You have to look at these things all together. Not that we want to take too much time to do them, because it’s so consequential, but we have some time. This is—we got
this terribly wrong, as a country; we want to make sure we get it
right; and we’re going to do everything we can to make sure we
have a durable set of fixes.
Mr. NEIMAN. So, how do we proceed with national standards to
avoid 50 States proceeding down the road, requesting data from
servicers in 50 different formats? Does not this have to be a priority? If not——
Secretary GEITHNER. Oh, it will be a priority. I just don’t know
yet—I can’t be honest with you and tell you whether it’s something
where we’ll have a proposal in 6 months or 12 months. Just can’t
tell you. But, it’s absolutely very important. And again, we’ll look
to the model in New York and other States to see what’s the best
way to proceed.
Mr. NEIMAN. With respect to the CFPB, do you see a new era of
cooperation? My reference to a cooperative federalism, particularly
between States and the agencies——
Secretary GEITHNER. I——
Mr. NEIMAN [continuing]. Particularly the CFPB?
Secretary GEITHNER. I think we do. And, you know, we’re going
to have a test of that in the—in how we deal with this broad—
these broad set of mortgage documentation problems that have
been the subject of many of your earlier comments, where we have
a broad task force of agencies looking at this and working very
closely with the State AGs. We’ve got a standing mechanism we
call the ‘‘financial fraud task force,’’ that works very closely with
the State AGs. The council, that the Congress established by law
to look at financial stability, gives a seat at the table to representatives of State securities regulators, insurance regulators, and banking regulators. You know, we’re a country, and we have a national
financial system, and so, if we’re going to do a better job, in the
future, of preventing future crises, we have to make sure that these
entities are working much more closely together.
Mr. NEIMAN. Well—thank you, my time is expired.
The CHAIRMAN. Thank you, Superintendent Neiman.

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Just a big question. What’s the current systemic risk from troubled assets remaining in banks? Do you think it’s just—how do you
see it?
Secretary GEITHNER. I believe that the U.S. banking system has
very substantial capital on their books today, in the form of common equity against the assets they hold and the risks they’re taking. And I am much more confident today that we made the right
judgments in forcing enough—that much capital into the system
earlier, and that that’ll give us a—very reasonable prospect of coming out of this stronger. So, I think that what matters is the capital, relative to the potential exposure still. But, firms are working
down those assets. And most measures you see of performance of
those assets now are improving, have been improving for some
time, even in mortgages.
The CHAIRMAN. The financial system may be stronger, but we
still have more concentration, in terms of the banking system.
What are your feelings today on, you know, Dodd-Frank, resolution
of authority, if in fact one of—because what’s happening more and
more is people are just saying—discussions—what—in our hearings
here and everything else, it’s like it’s just assumed we’d be in big
trouble if one of these bank fail. So, what’s your feeling, right now,
based on the increasing concentration of the big banks?
Secretary GEITHNER. Of course, you’re right that the system is
more concentrated today than it was before the crisis. And that’s
sort of an unavoidable consequence——
The CHAIRMAN. Right, exactly.
Secretary GEITHNER [continuing]. In a financial crisis. But, I—
we’re much less concentrated than anything other major economy,
in the banking system. You know, we still have roughly 8,000,
9,000 banks, and that’s a great strength to our system; we want
to preserve that. But——
The CHAIRMAN. But the vast—you—we’ve got a few banks that
are just extremely big.
Secretary GEITHNER. We do, but they—again, not to underestimate——
The CHAIRMAN. Yeah.
Secretary GEITHNER [continuing]. The consequences of this stuff,
but they are much smaller, as a share of our economy, than is true
for any other country, too. So, if you look at the comparison—you
look at Canada, the U.K., Western Europe, Japan—even our largest banks are much smaller, relative to the size of our economy,
than is true for them, as a whole. If you look at a list of top 50
financial institutions in the world, in terms of overall size today,
the U.S. banks are not distinguished on that list, in terms of their
relative size. So—now, that’s not to say that it’s not a big problem
for——
The CHAIRMAN. But——
Secretary GEITHNER [continuing]. The system——
The CHAIRMAN [continuing]. In many of these countries, the
banks and the government are so closely aligned. I mean, we did
have—like the Scotland Bank—we did have a——
Secretary GEITHNER. We would not want to be like them.
The CHAIRMAN. Right.
Secretary GEITHNER. I agree with you.

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The CHAIRMAN. Exactly.
Secretary GEITHNER. Yeah.
The CHAIRMAN. So, I mean, just—under the resolution authority,
these are still——
Secretary GEITHNER. They are, but——
The CHAIRMAN [continuing]. Banks.
Secretary GEITHNER [continuing]. The—you know, the most important things——
The CHAIRMAN. Right.
Secretary GEITHNER [continuing]. That Dodd-Frank did were to
give us the authority——
The CHAIRMAN. Right.
Secretary GEITHNER [continuing]. To force these large institutions to hold much more capital, recognizing——
The CHAIRMAN. Right.
Secretary GEITHNER [continuing]. The significant risk they pose
to the system as a whole—we have achieved that; to give us the
authority to apply those requirements for capital, those constraints
on leverage, to institutions that are banks, even if they don’t look
like banks, like AIG or investment banks or a range of other institutions that were not regulated as banks before; and, as you said,
resolution authority, which is like a bankruptcy authority for
banks, so that, in the event, in the future, a bank like that makes
mistakes that cause it to fail, the government can step in and unwind them, put them out of their misery, break them up, without
the risk of collateral damage to the taxpayer or to the rest of the
economy as a whole. So, I think we’re going to be in a much better
position in the future to prevent crises of these magnitude, and to
manage them more carefully. We will have crises in the future, but
the reform bill, to the credit of the architects in Congress today,
will help us fix the fundamental failures that caused this crisis.
The CHAIRMAN. But, as you said earlier, when you’re in a situation of a financial crisis, bankruptcy or anything like bankruptcy
is something you really want to avoid.
Secretary GEITHNER. You cannot—you can’t have liquidation be
a solution to a financial panic; it just doesn’t work.
The CHAIRMAN. So, it’s better to do it when it’s not.
Secretary GEITHNER. Yeah, that’s right.
The CHAIRMAN. Thank you.
Mr. McWatters.
Mr. MCWATTERS. Thank you. I’ll keep this short, because I know
time is fleeting.
To follow with what the Senator said, there’s a trillion dollars of
distressed mortgages on banks’ balance sheets today. If those mortgages were mark-to-market and the losses booked and the capital
impaired, would we have a systemic problem? And, if so, is this
thing being—basically being held together today by accounting convention?
Secretary GEITHNER. No. That’s what the stress test did. The
stress test—what the stress test did was to disclose to the market
the scale of potential losses that banks might face in the event we
had a much worse recession then we ultimately did, and to force
those institutions to hold capital against those potential losses. And
because of that, because we brought a level of disclosure and re-

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ality to those balance sheets, those firms, on balance, were able to
go raise a very substantial amount of capital from private investors. And that’s the best measure of the risks banks face, looking
forward.
Mr. MCWATTERS. So, if those assets are mark-to-market, the
losses were booked, there would not be a systemic problem.
Secretary GEITHNER. The major banks in this country have the
capacity to manage the remaining risks they face on their balance
sheets that they took on in the crisis.
Mr. MCWATTERS. Okay. Fair enough.
That’s all for me.
The CHAIRMAN. Thank you, Mr. McWatters.
Mr. Silvers.
Mr. SILVERS. Just briefly.
The firm I was looking for on the foreclosure issue, on the legal
aid issue, is Squire Sanders and Dempsey. You did not ask their
advice?
Secretary GEITHNER. I have no idea who they are. But, I’m sure
we’ve asked lots of people for advice, as we do all the time. But,
that’s not really the relevant question. The question is: On whose
judgment and what quality of judgment do we make those decisions? And the judgments are—of course, I’m accountable for those
judgments, but they’re made by the government’s lawyers.
Mr. SILVERS. Mr. Secretary, I’d—I would appreciate knowing
whether or not you asked that firm for advice. Not now——
Secretary GEITHNER. I’ll be happy to——
Mr. SILVERS [continuing]. Obviously, but if you could——
Secretary GEITHNER [continuing]. Get that to you.
Mr. SILVERS [continuing]. Pursue that.
Now, secondly—and this is, I think, much in vein of the Chair
and the prior—and Mr. McWatters’ question—there’s a lot of numbers in our banking system. I watch one of them, because I feel like
I understand it. And that is the value of second mortgages on the
books with Wells Fargo. And there’s about $100 billion on the—on
its books, and that number hasn’t changed very much over the last
2 years. That makes me wonder a lot about (a)—the fact that that
number’s there and the size of Wells’s service—first mortgage servicing portfolio makes me wonder about two things.
One is, Does that number bear any relationship to economic reality, per Mr. McWatters’s question? And, more broadly, do similar
numbers on the balance sheets of the other major four banks bear
any relation to economy reality? And (b), if you take that number
and the putback risk number, and the continuing inability of at
least this panel to understand what the underlying holdings in
toxic first-mortgage assets are—going back to our August 2009 Report—take those three things and add them up. They seem to represent a threat to the capital levels of the four large banks. You
seem to be quite confident they don’t. Can you explain why? And
I don’t mean with respect to Wells, in particular, but with respect
to the picture as a whole.
Secretary GEITHNER. I mean, there’s no certainty about judgments. And they’re all a probabilistic judgment, and they depend
a lot on what is going to be the path of the economy in the future.
But, we helped—what we helped do—and this is a necessary thing

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for any system to function—is put enough disclosure in the market
about the composition of those assets, their quality, the losses you
may face on them, how they’re performing, so individuals across
our financial marketplace, credit agencies or creditors, can judge
for themselves whether the capital the banks hold is sufficient
against those losses. And again, I would say the judgment I’m reflecting is the broad judgment of most people, that these banks all
hold very substantial amounts of capital against the risks they still
hold, they took on in the crisis. But, you can look at extraordinary
detail every quarter, if not more frequently, about how that stuff
is performing and make your own judgments about how it’s likely
to perform in the future.
Mr. SILVERS. If I might be allowed one final comment, Mr. Chairman.
Do you then feel—do you disagree with—the thing that haunts
me about those numbers in relation to the question of the strength
of our banks is that when you then take that and connect it to
mortgage modifications—and while the—and there seems to be just
a very fundamental question there, which is: Are we in a zero-sum
game between the strength of those banks—all right?—and our
ability to modify mortgages, and thus, both the well-being of the
American public and the strength of our housing markets? And I
know you—and I can clearly tell, by your gestures, that you don’t
believe we’re in a zero-sum game. But, the evidence that I—that
comes before this panel strongly suggests we are. Can you explain
why you think we’re not?
Secretary GEITHNER. It would require a little more time than I
have. And I think it’s a fundamental question, I agree. And I think
there is a broad perception, you share, that the principal barrier
to reaching people we should be able to reach through modifications is weakness, in some ways, among the Nation’s major banks.
And——
Mr. SILVERS. Can I just say——
Secretary GEITHNER [continuing]. I know, Mr. Silvers——
Mr. SILVERS [continuing]. I’m sorry.
Secretary GEITHNER [continuing]. But the——
Mr. SILVERS. My Chair is——
Secretary GEITHNER [continuing]. Can I——
Mr. SILVERS. I——
Secretary GEITHNER. Maybe we should pursue this in more detail
subsequently. But, you have to come back and look at, What’s the
source of the difference between people who are being reached
through modifications today and those who are not? And, as I said
earlier, it’s principally about how we define eligibility, not about
the incentives problem banks face.
The CHAIRMAN. Thank you.
Thank you, Mr. Silvers.
Dr. Troske.
Dr. TROSKE. Mr. Secretary, I want to return to a comment you
made, or, you know, expand a little, get you—push you a little on
a comment you made earlier about executive compensation and
risktaking. And I guess I would argue that a major part of the excessive risktaking was the result of a perception of ‘‘too big too
fail,’’ which, you know, after a certain point, firms simply didn’t

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worry about what the left tail of the distribution looked like. And
so, I guess I’d like to—do you think we’ve fixed—have we put situations in place that are pushing firms—that are going to require
firms to actually start thinking about what the left tail of the—you
know, the likelihood of an extremely bad loss?
Secretary GEITHNER. I think you’re exactly right, which is that
the two sources of financial crises, classically, are moral hazard,
the perception the government will insulate you from the consequence of your mistakes, and a fundamental uncertainty or excessive optimism about how dark the future might be, how you—
using the technical term, how adverse the tail is in the extreme
event.
I think, in this crisis, both were at work. Of course, moral hazard
was the central part of what happened, what went wrong in the
GSEs.
But, the failures across the system, in my view, were not principally about moral hazard, they were a much more systematic failure of people to anticipate what might happen in the event we had
a deep recession, where house prices actually fell very substantially, because that was not in the memory of most people alive
today. Most people ran their banks, their businesses, their personal
finances on an expectation that house prices would not fall. House
prices fell dramatically, as you saw; and that failure to anticipate
and plan for the potential adverse risk was fundamental to that.
In parts of the system, moral hazard made that worse, like the
GSEs; but the failures were much more systemic from that.
Now, have we fixed that? We’ll never fix that completely. But,
what the Dodd-Frank bill does is allow us to constrain risktaking
with constraints on leverage to offset moral hazard risk and set up
a system where, in the event these large institutions are at the risk
of failure again, we cannot save them, all we can do is dismember
them safely, break them up with less collateral damage. And that
will help reduce the expectation in the market, that is pervasive in
any financial system, that in the future, when there’s a risk of failure, the government will insulate the firm from the consequence.
And so, you can’t correct it completely, but we’re in a much better
position to reduce that risk, going forward.
Dr. TROSKE. So, let me—I mean, just—and so, one final question,
just building on that. Until that actually happens—I mean, until
we see that situation and we see—firms, businesses see how the
government’s going to deal with that, do you think that—I mean,
do we need to see that before they start believing that that’s the
case? Or do you think that they actually have started responding
to it with just—on the belief that, okay, now——
Secretary GEITHNER. We’re——
Dr. TROSKE [continuing]. All the—everything’s changed?
Secretary GEITHNER. Remember, you can’t run the system on the
hope that they behave or market discipline works that way. You
have to be—you have to do two things. You have to constrain
risktaking, force firms to hold more capital against the risk of a
very deep shock. That’s a function of government; the government
failed to do that. You have to do that, as well as make sure you
have the ability to let firms fail without causing collateral damage.
The reform bill gives us those two authorities. That’s fundamental.

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Now, again, we’re going to have crises in the future, and how
they are managed in the future will depend on the overall cost of
them, but we’re in a much better position to prevent them being
this severe than we were before.
The CHAIRMAN. Thank you, Dr. Troske.
You also have to anticipate where problems may develop with
particular firms, right? I mean, that’s the——
Secretary GEITHNER. That’s really important.
The CHAIRMAN [continuing]. The third part of the——
Secretary GEITHNER. Right. And I think that obviously, you want
people running the institutions, running the central bank, running
supervision, that have that capacity to anticipate. But, you have to
recognize the reality that we don’t know what the future is——
The CHAIRMAN. But, it——
Secretary GEITHNER [continuing]. And that——
The CHAIRMAN [continuing]. It is one of the three things——
Secretary GEITHNER. It’s one of the key things. But, fundamentally, you have to make sure your system is strong enough to compensate for the failures of individuals to anticipate. Because that
will happen. And that’s why capital is so fundamental.
The CHAIRMAN. I know. But, I—it’s a three legged stool.
Secretary GEITHNER. Yeah.
The CHAIRMAN. If you don’t anticipate—because, as you said,
when you get to a bankruptcy, it’s a totally different deal if you’re
in the middle of a crisis than it is if they’re not.
Secretary GEITHNER. That’s right.
The CHAIRMAN. Right.
Thank you, Dr. Troske.
Superintendent Neiman.
Mr. NEIMAN. Two quick questions. Mr. Secretary, we both mentioned, in our opening statements, the unfinished work in bank
lending, particularly by smaller banks. Over 50 percent of the loans
to small businesses are made by banks under 10 billion, even
though those banks only hold 20 percent of all bank assets. Could
you give us an update on the status of the implementation of the
Small Business Lending Fund?
Secretary GEITHNER. We are working very hard to put out a term
sheet in public very quickly so that we can get capital to banks on
a large scale as quickly as we can. And we’re very close to being
able to do that.
Mr. NEIMAN. Very close. Will you—be any more specific?
Secretary GEITHNER. Soon.
[Laughter.]
Mr. NEIMAN. Soon.
Secretary GEITHNER. As soon as possible.
Mr. NEIMAN. And then, finally, you know, in June, when you
were here and talking about the fund, you were relatively optimistic about bank participation. What’s your assessment today on
bank participation? Will it—will the structure of that program, as
you envision it, overcome the TARP stigma that was of concern?
Secretary GEITHNER. I hope so, but I can’t tell for sure. There’s
two types of deterrents—discouragement for banks to participate.
One is the stigma that it’s a sign of weakness.
Mr. NEIMAN. Okay.

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Secretary GEITHNER. It’s hard to correct, because, you know, people aren’t going—getting capital from the government. The other
source of deterrence was the fear of conditions, actual perspectives,
that would make the assistance uneconomic or not attractive. That
was the principal reason why a relatively small amount of the Capital Purchase Program went to small banks; why hundreds of
banks withdrew their applications. I think we’ve probably fixed
that problem. I can’t be sure we fixed the other problem.
Mr. NEIMAN. And I think that’s the concern we’re hearing. And,
you know, I think of it in two buckets: those that are currently in—
those 600 or some banks that are already in the TARP and—will
they view this as a Refi?—or the banks who are not in the TARP
program. And I think the question they have—and I’d appreciate
your assessment—it—will that loan demand be there for them to
utilize that capital?
Secretary GEITHNER. The—you know, the question of what’s
going to happen in loan demand is an excellent question. I think
it’s worth—it is worth noting that, if you look at the balance sheets
of the American private sector, nonfinancial corporate sector, it’s
not just the big firms; people have a lot of cash. Now, that’s not—
the averages mask a lot of differences and, of course, lots of small
businesses are not sitting on a lot of cash. But, what happens to
the loan demand will depend on, not just how quickly the economy
recovers, but how quickly people start to work through those balances of cash that they accumulated before the crisis, and built
up—many of them built up, even in the early stage of recovery.
Mr. NEIMAN. Thank you.
The CHAIRMAN. Mr. Secretary, thank you for coming today.
I just want to say that, you know, we have 4 months more to go.
And, in light of the problem out there—the problems out there,
which you talked about and every panel member, we are—we were
looking forward to working for you for the last 4 months, right up
to the very end, to do what we can to see if we can get one more
person employed and one more person into a house without a foreclosure.
So, I want to thank you for your service. And I want to thank
you for your testimony here today.
The record of the hearing will be open for 1 week so that the
panel may submit questions for the record.
This hearing is adjourned.
[Whereupon, at 12:02 p.m., the hearing was adjourned.]

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