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S. HRG. 111–72 TREASURY SECRETARY TIMOTHY F. GEITHNER HEARING BEFORE THE CONGRESSIONAL OVERSIGHT PANEL ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION APRIL 21, 2009 Printed for the use of the Congressional Oversight Panel cprice-sewell on DSK89S0YB1PROD with HEARING ( VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00001 Fmt 6011 Sfmt 6011 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00002 Fmt 6019 Sfmt 6019 E:\HR\OC\A602.XXX TREASURY SECRETARY TIMOTHY F. GEITHNER A602 S. HRG. 111–72 TREASURY SECRETARY TIMOTHY F. GEITHNER HEARING BEFORE THE CONGRESSIONAL OVERSIGHT PANEL ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION APRIL 21, 2009 Printed for the use of the Congressional Oversight Panel ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON cprice-sewell on DSK89S0YB1PROD with HEARING 51–602 : 2009 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 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00003 Fmt 5011 Sfmt 5011 E:\HR\OC\A602.XXX A602 CONGRESSIONAL OVERSIGHT PANEL PANEL MEMBERS ELIZABETH WARREN, Chair SEN. JOHN SUNUNU REP. JEB HENSARLING RICHARD H. NEIMAN cprice-sewell on DSK89S0YB1PROD with HEARING DAMON SILVERS (II) VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 E:\HR\OC\A602.XXX A602 CONTENTS Page cprice-sewell on DSK89S0YB1PROD with HEARING Opening Statement of Elizabeth Warren, Chair, Congressional Oversight Panel ..................................................................................................................... Statement of Hon. Jeb Hensarling, Member, Congressional Oversight Panel ... Statement of Damon Silvers, Deputy Chair, Congressional Oversight Panel .... Statement of Hon. John E. Sununu, Member, Congressional Oversight Panel . Statement of Richard H. Neiman, Member, Congressional Oversight Panel ..... Statement of Hon. Timothy F. Geithner, U.S. Secretary of the Treasury .......... (III) VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00005 Fmt 5904 Sfmt 0483 E:\HR\OC\A602.XXX A602 1 5 6 11 12 16 cprice-sewell on DSK89S0YB1PROD with HEARING VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00006 Fmt 5904 Sfmt 0483 E:\HR\OC\A602.XXX A602 TREASURY SECRETARY TIMOTHY F. GEITHNER TUESDAY, APRIL 21, 2009 U.S. CONGRESS, CONGRESSIONAL OVERSIGHT PANEL, Washington, DC. The Panel met, pursuant to notice, at 10:05 a.m. in Room SD– 628, Dirksen Senate Office Building, Elizabeth Warren, Chairman of the Panel, presiding. Attendance: Elizabeth Warren [presiding], Timothy F. Geithner, Jeb Hensarling, Richard H. Neiman, Damon Silvers, and John E. Sununu. cprice-sewell on DSK89S0YB1PROD with HEARING OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT PANEL The CHAIR: This hearing is now called to order. Mr. Secretary, thank you for coming. We know your time is valuable. And with the hope of setting an example, I am going to be brief, short on formalities here. I also will begin by apologizing for my voice and my hacking. I am afraid I am not at the top of my game right now. We have spent nearly six months, both at the direction of Congress and by our appointments, reviewing the response of two administrations to an unprecedented financial crisis. Today, we have an opportunity to speak directly to the American people about how their $590 billion has been invested in a financial system, an investment that eventually must profit them and not just people on Wall Street. When the financial meltdown began, there was a strong sense of fear and uncertainty among the American people, and who can blame them? Every month since October more than half a million jobs have been lost. The net worth of American families has plummeted more than 20 percent in 18 months. The sense of fear and uncertainty has not gone away, but it has been joined by a new sense of anger and frustration. People are angry that even if they have consistently paid their bills on time and never missed a payment, their TARP-assisted banks are unilaterally raising their interest rates or slashing their credit lines. People are angry that small businesses are threatened with closure because they can’t get financing from their TARP-assisted banks. People are angry that when they read the headlines of record foreclosures, even if they aren’t personally affected, they see their own property worth less, and they see their communities declining as a result of the foreclosures around them. (1) VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 E:\HR\OC\A602.XXX A602 2 cprice-sewell on DSK89S0YB1PROD with HEARING People are angry because they are paying for programs that haven’t been fully explained and have no apparent benefit for their families or for the economy as a whole, but that seem to leave enough cash in the system for lavish bonuses or golf outings. None of this seems fair. I appreciate your repeated statements about your commitment to transparency and to accountability, and I appreciate the important steps that you have taken in this direction, Mr. Secretary. But we both know that more needs to be done. People need to understand why you are making the choices that you are making. People want to see action described in terms that makes sense to them. They want to see that taxpayer funds aren’t being used to shield financial institutions from the consequences of their own behavior. They want to see that money, taxpayer money, is used to advance the public interest and not just the interests of Wall Street. They also want to see that their Government is moving to reform the regulatory system so that the economy will not veer into the ditch again, to see reforms that will prevent the financial system from taking huge and reckless risks with other people’s money in the quest for short-term profits. In measuring progress, as well as in assessing the current state of the economy and institutions, we shouldn’t be afraid of facts. There may be initial pain as the market reacts and reprices, but the short-term pain is better than the problems we face with ongoing uncertainty and mistrust. In a crisis, transparency, accountability, and a coherent plan with clear goals are essential to maintain the confidence of the public and capital markets. Sophisticated metrics to measure the success and failure of program initiatives is also crucial. One final note—Congress formed this panel in large part to ask difficult questions and to provide an outside perspective. We all share a strong desire to help the economy recover and to protect taxpayers. I hope that the reports from this panel have been useful to you and to your team at Treasury, and I appreciate your offer to have your staff meet with our staff on a weekly basis. I hope this is the beginning of an ongoing dialogue between the two of us. With trillions of dollars of taxpayer money at stake and the fate of the American economy in the balance, we need to work together to find the most effective strategies for restoring confidence, stabilizing our economy, and restoring prosperity for all Americans. [The prepared statement of Ms. Warren follows:] VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 E:\HR\OC\A602.XXX A602 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 E:\HR\OC\A602.XXX A602 Insert offset folio 11 here 51602A.001 cprice-sewell on DSK89S0YB1PROD with HEARING 3 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 E:\HR\OC\A602.XXX A602 Insert offset folio 12 here 51602A.002 cprice-sewell on DSK89S0YB1PROD with HEARING 4 5 Thank you for coming here today. Congressman Hensarling. cprice-sewell on DSK89S0YB1PROD with HEARING STATEMENT OF HON. JEB HENSARLING, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Mr. HENSARLING. Thank you, Madam Chair. Mr. Secretary, welcome. We are very happy to see you here. We note that this is the first appearance, I believe, of any Treasury personnel, much less the Secretary, before the Congressional Oversight Panel. We certainly hope it is not your last. I believe that this panel cannot effectively fulfill its congressional role without having unfettered access to Treasury personnel, having the receipt of prompt and accurate answers to our queries, and ultimately to have yourself and senior members of your team appear in public hearings as this. And I hope, Mr. Secretary, that you feel that it is commensurate with your duties under Section 2—Subsection 2(d) of the act that provides for public accountability of your actions under the TARP program. I fear that without this level of access that the Congressional Oversight Panel could potentially evolve into yet another congressional advisory committee, unfortunately leaving the task of effective oversight perhaps to others. Now, as a member of Congress, I voted against the original EESA, or as it has become known, the TARP bill. I respect those who voted for it. I understand their reasons. I personally, though, had a fear that we were looking at $700 billion in search of a program. I was concerned that once bailouts began, I am not sure how one bails out on the bailout program. I was concerned that the program eventually may lead to the Federal Government being able to control the behavior of those who received the money and lead us to a partial nationalization of key sectors of our financial services industry. Finally, I was concerned that the program might create a level of moral hazard that could create even greater economic turmoil down the road. I fear that many of my fears may actually prove well founded. Nevertheless, TARP is the law of the land. And as a member of Congress and as a member of this Congressional Oversight Panel, I plan to do everything in my power to ensure that the program meets its intended goals and that it has proper oversight. I look forward to your testimony in which I hope several key areas will be touched upon. Number one is a greater understanding by this panel and the general public of what the overarching strategy is for the program. The public and this panel have a right to know how Treasury defines success and what the measurements of the success of the various initiatives that you are undertaking under EESA are. For many, it is difficult to discern success. For many, it is difficult to discern cause and effect. Next, the public has a right to know what is the approach of Treasury with regard to assisting failing companies and firms. Is there any firm that is beyond the reach for taxpayer bailout assistance? VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 6 What started out as a program to shore up the financial system has now been used to aid automakers, which leads to the question ‘‘who is next?’’ The airline industry? The trucking industry? At what point does Starbucks get in line for some type of bailout? Now besides being on the hook for $700 billion under EESA, the taxpayer is facing an incredible amount of increased liability, much of it outside of EESA. We have had a $1.13 trillion stimulus plan, costing the average American household $9,810; a $410 billion omnibus plan, costing the average American household $3,534. Bloomberg has recently stated that the actions of Treasury, combined with those of the Federal Reserve—I am sure you have seen the reports, Mr. Secretary—that the total taxpayer liability under various bailout, economic recovery initiatives now totals $12.8 trillion, or over $110,000 per American household. Now I, for one, don’t believe that the ultimate exposure will be anywhere near that figure. But for those who maintain that the taxpayer will actually make money on this deal, number one, I hope you are right. And number two, as history is my guide, I severely doubt it. I believe that also, given that taxpayer protection is the numberone item that you are to consider under your programs, there are legitimate questions to be asked about press reports that say a number of the TARP recipients are interested in repaying the taxpayer, but apparently Treasury is not interested in receiving that money. In addition, there are serious concerns on whether or not the funding is being used as, again, a road to partial nationalization as preferred stock is converted to common stock. And I hope, Mr. Secretary, that you will address these issues in your testimony, since many people have not been overly impressed with the management of AIG, much less Fannie and Freddie. Again, Mr. Secretary, we appreciate you being here. We know these are tough times. We know that you are doing what you think is best in the Nation’s interest, and I look forward to hearing your testimony. And I yield back, Madam Chair. The CHAIR. Thank you, Congressman. Mr. Silvers. cprice-sewell on DSK89S0YB1PROD with HEARING STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL OVERSIGHT PANEL Mr. SILVERS. Thank you, Madam Chair. Good morning, Mr. Secretary, and welcome. Like my fellow panelists, I am very pleased that you are able to join us here at the Congressional Oversight Panel. And as my colleague Jeb Hensarling notes, this hearing does mark the first public appearance of a Treasury official before our panel, and we are honored by your presence. I think every member of the panel recognizes the gigantic task that faced the new team at Treasury upon their arrival in January and the challenges that the transition represented to you, Mr. Secretary, in terms of staffing changes, policy review and formulation. In that context, this hearing seems to come at the right time. Our task this morning is to learn where Treasury thinks we stand VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 7 as a Nation in addressing the financial crisis and, in particular, what Treasury’s strategy is in relation to the job of stabilizing our financial system and reviving the underlying economy. The Obama administration inherited from the Bush administration a number of programs under the Emergency Economic Stabilization Act of 2008, the EESA that Jeb referred to, and you have announced a number of initiatives of your own. We may not be able to cover every aspect of this effort today, and we may also not have the opportunity to fully address the administration’s plans in the area of regulatory reform. So let me just commend the administration’s announced plans for regulatory reform for their general direction and urge the Treasury Department to make a close study of this panel’s regulatory reform report. I would like to use what remains of my time to address those areas where I think, Mr. Secretary, that your team and the Obama administration has made significant progress and then to summarize what I see as the fundamental strategic issue facing the administration and the Nation. Then I hope to return to this set of— the strategic issue in the question period. First, the Treasury Department’s commitment to address the roots of the financial crisis and the fate of American families facing home foreclosure is an extremely positive step. The program could be more robust, particularly around principal reduction. But the basic design is thoughtful. The commitment to getting lender and servicer involvement is real, and the percentage of income targets—the key number in any such program—those targets are the right ones. Mr. Secretary, you deserve real credit for your leadership in this area, and I am happy to extend it, at least on my own behalf, this morning. Second, when you came into office, you told our panel you were committed to greater transparency. I have been very pleased to see that the Treasury Department has turned a corner under your guidance. I understand that Treasury has produced 10,000 documents to the panel staff yesterday in response to a letter sent to you on March 24, 2009, asking for materials related to AIG. This progress is certainly encouraging, and I hope it is indicative of a change in the way that the Treasury Department plans to handle future requests. In the past, our document requests have sadly been answered by prolonged silence. Hopefully, you can provide some reassurance today that those days are over. Third and finally, I view the stress tests and a variety of the statements you and your colleagues have made as acknowledgments that not all large banks are equally healthy. This is a departure from the approach of the prior administration, which tried to treat all large banks as though they were in the same financial condition, resulting, according to our February report, in a $78 billion taxpayer subsidy to the banks in the course of the Capital Purchase Program and SSFI transactions. I commend you on that change. Candor is a good thing, and I hope that the stress tests are conducted and the results made public in a continuing spirit of candor. VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 8 cprice-sewell on DSK89S0YB1PROD with HEARING However, now you and your team face a fundamental strategic choice as to how to manage the problem of undercapitalized large banks, the so-called ‘‘zombie banks.’’ I note that the four largest banks in our system control more than 50 percent of bank assets. In our April report, we looked at the history of bank crises in the United States and abroad. We found a pattern that started with President Roosevelt and President Hoover’s Reconstruction Finance Corporation. Successful policy approaches to bank crises across time and place seem to all have three steps, and the order in which those steps are taken is important. Step one is to have bank management that can be trusted to give an honest accounting of the state of bank balance sheets. In this regard, it can be a problem to ask the people who made the mess to tell you how big the mess is. Step two is to get a realistic measure of the whole in bank balance sheets. This can be done by marking to market, and it also can be done by a hard valuation of expected cash flows by experienced and independent financial professionals. It cannot be done by asking the people who invested in the bad assets in the first place to tell the Government what those assets are worth. Step three is to restructure bank finances—and ‘‘restructure’’ is the key word here—in the first instance, by requiring investors, particularly stockholders, to bear the losses. That is what capitalism is about. Exactly who bears the losses and in what proportion must be determined carefully, balancing systemic risk considerations with taxpayer protection. Only then and only if necessary should public funds be involved. And finally, with public money has to come a proportionate upside for the public. It is the only way to keep the cost to the taxpayer my colleague Congressman Hensarling was talking about— it is the only way to keep that cost at the end of the day at a bearable level. I hope in this hearing we can compare this how-to manual that history provides us with the Treasury Department’s thinking and its announced programs. And in conclusion, let me express my gratitude to you, Mr. Secretary, for joining us and my sympathy to you for taking on, on all of our behalf, the giant challenge of repairing the damage a mistaken deregulatory philosophy has done to our financial system, our economy, and, most of all, to America’s working families. [The prepared statement of Mr. Silvers follows:] VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert graphic folio 24 here 51602A.003 cprice-sewell on DSK89S0YB1PROD with HEARING 9 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert graphic folio 25 here 51602A.004 cprice-sewell on DSK89S0YB1PROD with HEARING 10 11 The CHAIR. Thank you, Mr. Silvers. Senator Sununu. cprice-sewell on DSK89S0YB1PROD with HEARING STATEMENT OF HON. JOHN E. SUNUNU, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Senator SUNUNU. Thank you, Madam Chair. Thank you, Secretary Geithner, for being here today. And without question, your attendance here is extremely important, but it is also extremely valuable. I think you understand that, but it is worth emphasizing because it is fair to say there has been some reluctance on the part of the Treasury staff to appear or to schedule a hearing in public with the oversight panel. I think the value is that this is the best possible forum for you to describe the characteristics, the proposals, the ideas behind each of the different programs created under the TARP. And of course, it is the best possible way for the oversight panel to get clear and accurate information that we will act on in preparing our monthly oversight reports. I view our role as looking carefully at the structure of the different TARP programs, their operation, and their performance. Some of these programs are relatively straightforward. Some of them are very complex. But our job is to look hard at those details, present them clearly to Congress and to the public, and the importance of that role is twofold. First, we want good information in the hands of the public because their confidence in the operation of the programs, their confidence in Treasury and in the Government and being able to deal with the current financial crisis is going to depend on the clarity of that information and, of course, the way they interpret that information. And then, second, the information that is provided by the panel and that is provided by the Treasury with regard to the structure and performance and operation of these programs is going to affect the way markets behave. Markets will react and respond based on whether they think these programs are well designed, effective, and whether they think the burden and the cost of the program is being shared fairly, as Damon Silvers just described. And unless that information is provided to the public, our markets won’t strengthen. They won’t operate efficiently. Credit won’t be available to the families and small businesses that we want to see it made available. So I think that is a central role of the panel. I think it serves the interest of Treasury, and I think it should be easier to establish this kind of a forum. It is also particularly important because, in my opinion, over the last few weeks, as Treasury has put out various statements regarding the different programs, you have left more questions unanswered than answered. On the stress tests, it is unclear what the motivation is behind making information public, what information is going to be made public, and how does Treasury expect both the general public and the markets to react to that. On the TALF program, why is it that participation in the TALF wasn’t as great as Treasury expected? On the new capital access program, under what conditions is Treasury and the Government VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 12 going to ask for conversion into common stock? What would be the criteria? Will there be objective criteria, or will they be subjective criteria? And along that same vein, on the prepayment issue that Congressman Hensarling brought up, are we going to operate under the existing term sheets and conditions under which banks originally received funding through the CPP, or is Treasury now going to come up with a new list of subjective criteria that banks have to meet in order to be allowed to repay taxpayer funds? Those are significant questions in that they create uncertainty in the mind of the public, and they also create a good deal of uncertainty in the marketplace. And the marketplace won’t operate efficiently, the financial markets won’t operate effectively for consumers or small businesses and the other credit services we need unless they feel they are getting good, clear, consistent information not just from Treasury, but from Congress as well. We need more of this interaction, not less. I think it is in your interest. I think it will help the panel to do a better job, and I look forward to both your testimony and the questions today. Thank you, Madam Chair. The CHAIR. Thank you, Senator. Mr. Neiman. cprice-sewell on DSK89S0YB1PROD with HEARING STATEMENT OF RICHARD H. NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Mr. NEIMAN. Thank you. Good morning, Mr. Secretary. And I am also very pleased that you are here today with us to share your perspective. This is a unique opportunity not just for our panel, but for the American people watching us today. I believe it is critically important for us to have this dialogue now, early in your term, to facilitate our working relationship going forward and to inform the American public about your efforts. Speaker Nancy Pelosi asked me to serve on this panel in part to be a voice for the States and their residents. I am also, as you know, the New York State superintendent of banks, and in that capacity, I feel my job is about more than just overseeing banks. It is also about helping people in financial distress. Under New York Governor David Patterson, we have taken aggressive actions at the State level in response to the crisis, from borrower outreach and increased enforcement to one of the most comprehensive legislative actions regarding mortgage reform in the country. But the fact is that States cannot bring an end to the foreclosure crisis or get us out of this recession without a Federal partner. However, people across the country aren’t sure if the Treasury efforts are working, which makes your job even harder at the Federal level. I hope to use this hearing to ask you some tough questions, but to also give you a chance to demonstrate that Treasury’s plan can work. You may be aware that I placed a blog post on a prominent Web site yesterday that asked people to submit questions to you. I placed it on the Huffington Post because that blog reaches over 10 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 13 million readers per month, thus representing a good, but imperfect cross-section of American opinion. Literally, within hours of the posting, there were hundreds of responses that expressed deep concerns and even skepticism about the program, many accompanied by deeply personal stories. I read these questions on the train ride down to Washington last night, and it made me think a lot. It gave me a better sense of people’s views, but it also made me really wonder why aren’t people seeing progress in the Treasury’s plan? Perhaps it is because it is hard to see results in 1, 2, or 3 months. But perhaps it is because things are not working out as well as we would like. So it seems to me that what is needed is a better system for measuring success that Treasury could provide to inform the American taxpayer. For instance, how should we measure whether the financial system is stabilizing? Should we be looking at credit default spreads or tangible capital ratios or some other metrics? How will we know that we are making progress? How do we measure if the program has increased the amount of bank lending to consumers, to small businesses, to corporations? What is the impact of the decline in borrower demand versus a tightening of underwriting standards by banks? Mr. Secretary, does Treasury have its own metrics for determining success in reaching its goals? And if so, can they be shared with the American public and be posted on your Web site so that all citizens can see how your plan is measuring up? My worry is that if you do not, one of the most common questions I encounter when I hear from people about your plan will remain unanswered. One person put it quite bluntly on the blog, stating, ‘‘When are those banks going to stop sitting on all that money and start lending again?’’ That question is undoubtedly a common question. And yet the recent snapshots from Treasury shows banks are making progress and attempting to be responsive in meeting credit needs. However, additional information is clearly needed to get to the bottom of this. Metrics would help, and our panel will be issuing a report on this question in May that will specifically look at credit availability and small business and consumer lending, including your programs to restart the securitization market. It is my personal view that although disagreement exists among some very smart people in this country, including Nobel Prize winners on both sides of the issues, you have a plan that can work. But it can only work with the support of the American people. And to support it, people need to understand it, and they need to feel that they can adequately judge it. So I see this hearing as an important contribution to an inclusive process, and my questions today will reflect comments and concerns that I have received from a broad range of Americans. I hope today is only the beginning of a more collaborative relationship, and I look forward to your remarks. Thank you very much. [The prepared statement of Mr. Neiman follows:] VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert graphic folio 36 51602A.005 cprice-sewell on DSK89S0YB1PROD with HEARING 14 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert graphic folio 37 51602A.006 cprice-sewell on DSK89S0YB1PROD with HEARING 15 16 The CHAIR. Thank you, Mr. Neiman. Secretary Geithner, we will enter your formal testimony in the record, of course, but we encourage or welcome your oral remarks. If you could hold them to 5 minutes so that we could go to the questioning, I would appreciate it. cprice-sewell on DSK89S0YB1PROD with HEARING STATEMENT OF HON. TIMOTHY F. GEITHNER, U.S. SECRETARY OF THE TREASURY Secretary GEITHNER. Thank you, Chairwoman Warren, Representative Hensarling, members Neiman and Silvers, and Senator Sununu, for the chance to come before you today. Those were very thoughtful opening statements, very sensible questions and concerns, and I look forward to the chance to begin to address those as we continue a process of dialogue and engagement. And I want to start by applauding the work of the panel to date. These are very complicated questions. You have done a very nice job in helping to frame the most important questions for the American people. I respect and admire what you have done, what you are trying to do, and it is a very important part of the framework of oversight that Congress set up to monitor use of these programs. The United States and the world economy are still in the midst of a very severe financial crisis, the worst in generations. And as you know, no crisis like this has a single or simple cause. But to state it simply, countries around the world borrowed too much, and allowed the financial system to take on irresponsible levels of risk. And as in any crisis, the damage has been brutally indiscriminate, causing damage on Main Streets across the Nation. Ordinary Americans and small businesses who did the right thing, who played by the rules, who were prudent and careful in their financial decisions, are suffering from the actions of those who took on too much debt, took on too much risk. I want to outline today the steps taken by this administration to restore the flow of credit, to help get our economy back on track. And I want to start by just saying at the time the administration took office, there had already been very substantial actions by the Government, using the authority provided by the Congress, to help stabilize the financial system. And those actions were critical, and they were very effective in helping avert a systemic financial crisis. But the very sharp decline in growth, both here and around the world, that continued over the fourth quarter of last year was placing additional pressure, acute pressure on the financial system, on banks in this country and countries around the world. Issuance of securities, which had been a principal source of credit to the economy as a whole, had fallen to virtually nothing. Lending terms and conditions were tightening. The cost of many forms of credit remained extremely high. Banks were unable to raise equity. Now that was the situation when we came into office. And leaving that situation, that challenge, unaddressed would have risked, in our judgment, a deeper recession, more damage to the productive capacity of the American economy. It would have resulted in higher unemployment, more business failures, greater damage to VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 17 our future growth and productivity, and, as a result, higher longterm budget deficits. Without action to strengthen the capacity of the financial system to provide credit, the substantial spending and tax incentives in the American Reinvestment and Recovery Act would have been less effective, far less effective. Now, in response to these challenges, we outlined a broad new strategy to repair the financial system and strengthen its capacity to support recovery. We started with a series of reforms to improve transparency, accountability, and oversight. We published the detailed terms of financial assistance provided to individual banks. We put in place new protections for determining eligibility for assistance. We required financial institutions to report monthly on details about what is happening to lending activity. We outlined new conditions on assistance to protect the taxpayer, and the President outlined a set of broad reforms to compensation practices to help ensure that taxpayer assistance was used to support lending rather than excessive compensation for executives. Alongside these reforms, we launched a program of initiatives to address four challenges that were at the heart of this financial crisis, and I want to review briefly each of those challenges and our response to those challenges. First, falling home prices and rising unemployment were making it difficult—are still making it difficult for many responsible borrowers to meet their mortgage payments and stay in their homes. Rising foreclosures risk contributing to further declines in house prices, a further pullback in credit, and further job losses. So, in response, this administration established a program we call the Making Home Affordable Program to help keep mortgage interest rates low, to help responsible homeowners refinance into affordable mortgages, and to modify at-risk loans in order to help millions of Americans lower their monthly mortgage payments and stay in their homes. Second, concern about future losses has led many banks to pull back on lending. So, in response, we outlined a new program to ensure that the Nation’s major banks have a sufficient buffer of capital to provide credit for recovery. As part of this effort, the Federal banking agencies, led by the Fed, are completing a forward-looking assessment of the capital needs of the 19 largest banks in the country to determine which banks may need to raise additional capital. Those banks that need more capital will have an opportunity to raise that capital from the private markets or to request capital from the Treasury in the form of a convertible preferred security. It is important to recognize a dollar of capital generates between $8 and $12 of lending capacity. Third, the breakdown of key markets for new securities has constrained the ability of even credit-worthy small borrowers—businesses, families—to get the loans they need. Securities markets in our financial system typically account for 40 to 50 percent of the credit provided to the economy, and the crisis caused issuance of new securities to grind to a halt. So, as a complement to our program to bring more capital into banks, we launched the Consumer and Business Lending Initiative, VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 18 which expanded dramatically a program with the Federal Reserve called the Term Asset-Backed Securities Loan Facility. And these programs, as you know, provide financing to help catalyze issuance of securities backed by student loans, credit cards, small business loans, auto loans, corporate and commercial real estate loans. Treasury has also put in place a program to provide direct support to small business loans through SBA supported programs. And these programs have had some effect—I will come to this at the end—in helping to promote new flows of credit through the issuance of securities and to help reduce rates in those markets. The CHAIR. Mr. Secretary, could I ask you just to wrap up? Secretary GEITHNER. Yes, but this is very important for me to do. The CHAIR. Of course, it is. Secretary GEITHNER. Because you have asked me to lay out our broad strategy and progress, and this is my first chance to do it. I will take just a few more minutes, but I will leave time for questions. The fourth key challenge we addressed in our program was the challenge reflected in the fact that a range of legacy assets—these are mostly real estate-related loans made during the height of the boom—remain on the books of major banks, limiting their ability to extend credit and to raise new equity. So, in response, the administration created an innovative new program to provide a market for those assets. Under this program, private investors, such as pension fund managers, will compete for the right to access capital from the Treasury and financing from the Federal Reserve and the FDIC to purchase these real estaterelated loans and securities. Private investors will set the purchase price, protecting the Government from the risk of paying too much. The Government will share in the returns on those investments. Professionals will manage the assets, and together, this will help reduce the risk of loss to the taxpayer over time. Now these four programs are critical. They are designed to work together. Each will reinforce the effectiveness of the other. We may have to adapt and expand them over time, but they represent the foundation of any credible strategy to help ensure that this financial system is working for rather than against recovery. Now, Chairman, I was going to summarize briefly our priorities on regulatory reform. I am going to leave that for a subsequent discussion. But I want to conclude by talking about some of the measurements of effectiveness of these programs. The CHAIR. Mr. Secretary, I appreciate how many pages you are turning there. But if we could wrap up, I know we want some questions, too? Secretary GEITHNER. So let me just conclude with a few observations on the impact of these programs on the availability and cost of credit. These are the most important measures of the state of the system, and to date, frankly, the evidence is mixed. Now it is important to note that evaluating the impact of these programs is difficult because it is impossible to judge how the financial markets, how banks would have operated in the absence of these actions. In normal recessions, demand for credit falls. In re- VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 19 cessions that follow long periods of substantial borrowing, demand for credit falls more sharply. This is such a moment. There is no past experience that provides a good guide as to what one could have expected to have occurred in our financial markets absent the policy actions that have taken place already. Indicators on interbank lending, on corporate issuance, and credit spreads suggest some improvement in confidence in both the stability of the system and some thawing in credit markets over the last several weeks and months. Just to cite a few examples. The 3-month LIBOR–OIS spread, which is an indicator of the cost of unsecured lending or borrowing among banks, has fallen to about 90 basis points from a peak of about 365 in October. Nonfinancial corporate bond issuance was up sharply in the first quarter of 2009 after falling sharply at the end—in the second half of 2008. Issuance of asset-backed securities rose in March after grinding to a halt in October and November, but it still remains at about half the level that occurred in the first half of 2008. Despite these improvements, and these are material improvements, the cost of credit is still very high. Reports on bank lending show significant declines in lendings for consumer loans, for commercial and industrial loans, although mortgage refinancings have picked up considerably. Now we are looking carefully at how to improve measurement, as you are, of what is happening in credit markets and tie those directly to the impact of these programs, and we look forward to working with you on how to do that. And I just want to end by saying that our central objective, our obligation, is to ensure that the financial system is stable and it is able to provide the credit necessary for economic recovery. But stability itself is not enough. We need a financial system that is not deepening or lengthening the recession. And once the conditions for recovery are in place, we need a financial system that is able to provide credit on a scale that a growing economy requires. Meeting this obligation requires actions by the Government. It requires the Government to take risks. The lesson of financial crises throughout history is that early action, forceful action, sustained action to repair financial systems to promote the flow of credit is essential to limit the damage recessions cause and to make it possible to bring recovery about at least cost to the taxpayer over time. Now we need a financial system to support sustainable economic growth, and we need to put in place a comprehensive set of regulatory reforms to deter fraud and abuse, to protect American families when they buy a home or get a credit card, to reward innovation and tie pay to performance, and to end these past cycles of boom and bust. This is our commitment, and we have a lot to do. Thank you for having me here, and I look forward to our conversation this morning. [The prepared statement of Secretary Geithner follows:] VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 49 here 51602A.007 cprice-sewell on DSK89S0YB1PROD with HEARING 20 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 50 here 51602A.008 cprice-sewell on DSK89S0YB1PROD with HEARING 21 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 51 here 51602A.009 cprice-sewell on DSK89S0YB1PROD with HEARING 22 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 52 here 51602A.010 cprice-sewell on DSK89S0YB1PROD with HEARING 23 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 53 here 51602A.011 cprice-sewell on DSK89S0YB1PROD with HEARING 24 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 54 here 51602A.012 cprice-sewell on DSK89S0YB1PROD with HEARING 25 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 55 here 51602A.013 cprice-sewell on DSK89S0YB1PROD with HEARING 26 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 56 here 51602A.014 cprice-sewell on DSK89S0YB1PROD with HEARING 27 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 57 here 51602A.015 cprice-sewell on DSK89S0YB1PROD with HEARING 28 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 58 here 51602A.016 cprice-sewell on DSK89S0YB1PROD with HEARING 29 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 59 here 51602A.017 cprice-sewell on DSK89S0YB1PROD with HEARING 30 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 60 here 51602A.018 cprice-sewell on DSK89S0YB1PROD with HEARING 31 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 61 here 51602A.019 cprice-sewell on DSK89S0YB1PROD with HEARING 32 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 62 here 51602A.020 cprice-sewell on DSK89S0YB1PROD with HEARING 33 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 63 here 51602A.021 cprice-sewell on DSK89S0YB1PROD with HEARING 34 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 64 here 51602A.022 cprice-sewell on DSK89S0YB1PROD with HEARING 35 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 65 here 51602A.023 cprice-sewell on DSK89S0YB1PROD with HEARING 36 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 66 here 51602A.024 cprice-sewell on DSK89S0YB1PROD with HEARING 37 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 67 here 51602A.025 cprice-sewell on DSK89S0YB1PROD with HEARING 38 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 68 here 51602A.026 cprice-sewell on DSK89S0YB1PROD with HEARING 39 cprice-sewell on DSK89S0YB1PROD with HEARING 40 The CHAIR. Good. Thank you, Mr. Secretary. Mr. Secretary, I am going to start the questions this morning with accountability, a theme that this panel has talked about repeatedly, and clarity in government policy. So here is the question I want to start with. The auto industry has received taxpayer money, but it has been linked to changes in management, changes in business practices, breaking labor contracts, and causing bondholders to take losses at a minimum. The banks have received 10 times more money than the auto industry, and yet they seem to be receiving very different treatment. So the question I have is why the different treatment, and in particular, do you think that the banks are better managed than the auto companies were? Secretary GEITHNER. A very important question and reasonable question. Let me say a few things in response. First of all, everything we are trying to do to get the financial system working again is important to the success of the restructuring and rehabilitation of our automobile industry. It is true for the economy as a whole and the industry of the United States, without a financial system that is working to provide credit, you are going to see much more damage, much more challenge, much greater head winds for businesses across the country. Second basic point: If you step back, you know, we are five quarters into this recession, and we are at least that long into a very substantial, dramatic adjustment we saw following this unprecedented financial boom. So there has been very, very dramatic restructuring already across the financial system. If you just look at the largest institutions in the world that existed 2 years ago and look at how many exist today, there has been a very dramatic restructuring. Third point, as your colleague said at the beginning, in assessing what was necessary going forward to solve the problems that we inherited, we made it clear that where we are going to provide capital in the future, we want to target it to where it is necessary. We want to do it on a differentiated basis. We want to do it with conditions—not unconditionally, but with conditions not just to help protect the taxpayer, but to try to help ensure that the system emerges stronger, not weaker. That is a very important principle. And we have said, the President has said publicly, that where we provide exceptional assistance, because that is necessary to make sure there is capital in the system, it will come with conditions to make sure there is restructuring, accountability, to make sure these firms emerge stronger in the future. Now—— The CHAIR. So let me just make sure I am understanding you to this point. I just want to be sure that I am following here. Secretary GEITHNER. Sure. The CHAIR. Are you saying that the difference in treatment between how the banks were treated and how the auto industry has been treated is effectively one of timing and that, going forward, the banks will be treated with the same kind of accountability at a minimum that has been demanded from the auto industry? VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 41 Secretary GEITHNER. Well, I am trying to be candid. They are different challenges. They require different solutions. But there is less difference than your question suggests. Just to cite a couple of examples, if you look at where the Government had to act early in substantial force, in some of the largest and weakest parts of the system, in that context—both in the context of Fannie and Freddie and in the context of AIG—we were very clear that the conditions in that context came with changes in board and management for exactly the reasons you said. Now there has also been—— The CHAIR. I am sorry. I just want to make sure I am following. You are saying that there have been changes in management at financial institutions—— Secretary GEITHNER. Where the Government acted—absolutely. The CHAIR [continuing]. That have received TARP funds? Secretary GEITHNER. Well, as I said, in the context of the interventions taken in Fannie and Freddie and AIG, just to cite three examples—— The CHAIR. I am asking about the financial institutions. Secretary GEITHNER. Well, those are financial institutions. The CHAIR. I am asking about the banks. Secretary GEITHNER. But the principle is important in this case. And as I said, the President has said this publicly. I have said it publicly. Going forward, where institutions need exceptional levels of assistance, we will make sure that assistance comes with conditions that provide for the necessary degree of accountability to help ensure these firms emerge stronger rather than weaker. And that is an important principle. We are committed to do it. Now what is necessary in each specific case is a judgment we are going to have to make, but I think that is a very important principle. It is at the core of our program. The CHAIR. Good. Thank you, Mr. Secretary. I have a second question on accountability. In the last few weeks, banks have been announcing—a few banks—that they have quarterly profits. But there has also been a renewed acceleration of home mortgage foreclosures and new examples of raising fees on customers who have met all of their contract terms and raising interest rates, even for consumers paying on time. So I want to ask, do you think that banks receiving TARP funds should be engaging in these practices? Secretary GEITHNER. I just wanted to underscore our commitment, the administration’s commitment to doing everything we can to help mitigate the damage homeowners are facing across the country. The CHAIR. I understand. Secretary GEITHNER. Now if you look at the programs we have put in place, they are very comprehensive, very aggressive, very dramatic programs to make sure that people are getting relief where they need it. And just to point out how powerful these are already, if you look at the programs we have put in place they have made it possible for already hundreds of thousands of Americans to refinance and take advantage of lower interest rates. That is a core part of our program now. VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 42 And you are right that we are also moving quickly to put in place these programs to help prevent foreclosures, and allow modifications. And we are making a lot of progress in that area. As a condition for Government assistance, banks have to agree to participate in these loan modification programs, and we are going to make sure that they are doing so and that the American people are going to see data on performance, on modifications, and have a better chance to judge for themselves what is happening on the modification front. The CHAIR. Good. I will return to the question about changing interest rates, but my time is up. Congressman Hensarling. Mr. HENSARLING. Thank you, Madam Chair. Mr. Secretary, as you can tell, all members of this panel very much welcome your appearance here today. So let me ask you first a process question since, again, this is the first time we have had a member of Treasury appear before us in almost six months of existence. If this panel chose to have a monthly oversight hearing, would you make either yourself available or I believe Mr. Allison is up for confirmation to head, I believe, the Office of Financial Stability? Would either—assuming he is confirmed, would you make yourself or him available for such? Secretary GEITHNER. Congressman, I want to—let me say it this way, okay, and you can hold me to this. I believe in the importance of transparency, accountability, oversight. I think it is critical to our credibility, I respect what you are doing in this context. I will commit to make sure that we have as effective a working relationship as possible so that you have the information you need and an intensity of interaction with us to help you do your jobs. That is in our interest because if you can’t understand what we are trying to do and have a chance to assess it, then it is going to be harder for us to do what we want to do, just as you said at the beginning. Now we have made it clear we are willing to meet weekly with the panel and the panel’s staff, and I am prepared to examine any proposal, consider any proposal to have more formal meetings like this on a more frequent basis. But what I would like to do is when I have a confirmed team in place of senior officials at the Treasury, come back and we can work out something we can commit to, and adhere to. What I don’t want to do is commit to a frequency of interaction at the senior level that I am not going to be able to live up to because, as you know, we are doing a lot of things, have a lot to do. But if you give me a chance, once we have a confirmed team in place, I will—— Mr. HENSARLING. I appreciate that, Mr. Secretary. Do we at least have a commitment that this will not be your last appearance before this panel? Secretary GEITHNER. Yes. Mr. HENSARLING. Thank you. Thank you, Mr. Secretary. In today’s Wall Street Journal—you frequently appear in the Wall Street Journal—it doesn’t have a quote from you, but it characterizes something you said as ‘‘Treasury Secretary Timothy VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 43 Geithner indicated that the health of individual banks won’t be the sole criterion for whether financial firms will be allowed to repay bailout funds.’’ Again, if there are firms that wish to repay taxpayers their money, if the taxpayer money is at risk, if their relevant regulator certifies that commensurate with safety and soundness of the financial institution, they can return that capital, if this is an accurate assessment of your position, why wouldn’t you take the money back? Secretary GEITHNER. In those conditions, we would welcome it. It would be very helpful, help differentiate, help show progress. It helps underscore the basic point that the institutions of our financial system are in very different circumstances. But I just want to underscore what is really important. And I said this at the end of my testimony, but I want to underscore it again. My basic obligation and our responsibility is to make sure that the system as a whole, as a whole, has the ability to provide the credit that recovery requires. And so, we need to make a careful judgment about what policies are going to best promote that objective. Under the laws and conditions established in the Recovery Act, the judgment about when institutions can repay is a judgment that the Federal banking agencies have to make, and they are in the process of looking now at what set of standards and principles should guide repayment. Ultimately, though, we have to look at two things. One is do the institutions themselves have enough capital to be able to lend, and does the system as a whole, is it working for the American people for recovery? And that is the standard we are going to look at. But, of course, nothing would make me happier than for that—— Mr. HENSARLING. I am sorry, Mr. Secretary. My time is limited at the moment. But just to understand then, there will be other considerations besides the individual institution’s financial stability? I am a little confused on what—— Secretary GEITHNER. Well, I am not sure I would say it that way, and as I said, this is a judgment that I don’t make. It is a judgment that the Federal banking agencies make under the conditions that were established in the Recovery Act. And they are in the process now, the Fed and the other agencies, are in the process of working through how to make these judgments. But again, the critical thing we care about is whether the system as a whole is in a position where it has the capacity to support the credit the recovery requires. That is the ultimate test. Mr. HENSARLING. Mr. Secretary, my time is running short here. One more question, and that is there is great concern among many on an apparent plan to convert the preferred stock positions in many of the financial institutions to common stock, thus having essentially converting Uncle Sam into a control shareholder of many of our largest financial institutions. Is that the plan, and why? Secretary GEITHNER. That risk worries me, too. So let me just say a few things about what our objectives are. Again, what we want to make sure is that there is the capital the system requires and that it is targeted to where it is needed. VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 44 So the process we put in place that the Fed is running now to do an assessment of capital needs in a potentially deeper recession is designed to make sure that there is more clarity, more transparency on bank balance sheets, that those institutions that may need additional capital are identified. They have the opportunity to raise that. Now they will have a variety of different ways where they can raise that capital. They will have the choice to raise it in the market. They will have the choice to do a range of conversions, or they will have the choice to take it from the Government. And they will be examining those options in cooperation with their Federal regulator over the next few weeks. The CHAIR. Thank you, Mr. Secretary. Thank you, Congressman. Mr. Silvers. Mr. SILVERS. Mr. Secretary, we have spent a fair amount of time this morning on the question of the banks and what happens after the stress tests and capital. This panel’s statutory mandate, as I think has been referenced by a number of my fellow panelists, is to oversee the effectiveness of the—in part is to oversee the effectiveness of the program from the standpoint of minimizing longterm cost to the taxpayers and maximizing the benefits for the taxpayers. And I am quoting from the statute. Now we have a case study, a precedent under the act for dealing with a sick bank, and that precedent is Citigroup. Citigroup has come to the Treasury for additional funding in circumstances that I think everyone recognized as dire in November. As a result of that second funding, plus its initial funding under the Capital Purchase Program, if you look at Citigroup’s capital structure on a mark-to-market basis, the cash we have put in is the majority of the capital of Citigroup today. Some would say that we have crossed the nationalization line already, and this chart represents that. This chart underestimates— this puts it nicely. This chart underestimates the extent of public investment in Citigroup and public funds at risk because it doesn’t account for an asset guarantee of $300 billion, of which $270 billion is Government money. If you put that in there—it is hard to price. If you put that in there, it would shift things very dramatically. Now in contrast to capital at risk, public money at risk in Citigroup, the upside that we have today in Citigroup—and this is all, of course, as a result of transactions before January 20th. The upside in Citigroup is 7.6 percent, according to our staff. And again, this underestimates the degree of disparity because the warrants that we have in Citigroup are not priced at the current common stock price. So the price of Citigroup could go up 400 percent, and a lot of our warrants wouldn’t kick in at all yet. And as it has been mentioned before in this conversation, we have the downside of ownership. We have a tiny bit of the upside of ownership, and we have none of the control of ownership. Now, obviously, there are going to be some changes here. They haven’t happened today, but there are going to be some changes. Those changes seem to point in two different directions at once. They would appear to increase the upside from the current 7.6 per- VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 45 cent, according to Citigroup’s Web site, to about 35 percent. Still not commensurate with the risk. But on the other hand, they would give away our senior position, as we move from preferred to common. Unlike, for example, Warren Buffett, who holds his senior position as preferred and takes his upside as warrants. Now, Mr. Secretary, my question to you about this is do you believe this is the right way to go? Is this the model for what we are going to do for the next sick bank? And secondly, what are we going to do about this, all right? Is this the appropriate way to treat the taxpayer? And I recognize that in certain respects you are making changes, and I would hope you would address those in that context. Secretary GEITHNER. Mr. Silvers, I am not sure this is going to satisfy you, but I want to just say a couple of things. It is very difficult for me to talk about any individual institution ever, given my responsibilities for the system, and I think you understand that. And as you said, you are describing a state of play that existed on January 20th, I believe. Mr. SILVERS. Well, Mr. Secretary, it exists today as a legal matter. This is the state of affairs today. Secretary GEITHNER. It does. But as you said, it is in the process of changing. So I guess I want to step back a little bit and make some broader points. But of course, you will have a chance to judge us by what we do going forward, and this is one way to evaluate the tradeoffs and judgments we are making. But let me just underscore one important point. We are not a private investor. We are the Government of the United States. When we act to provide assistance for banks, we don’t do it for the benefit of those banks. The cost benefit returns to the American economy you cannot evaluate by looking at the narrow financial terms of that particular transaction. You have to look at the action through the prism of what motivates it, which is how to make sure we have a financial system that is stable, able to lend, and support recovery. And that is important because, as you know and as you said nicely in your opening statement, that is sort of an essential precondition for limiting damage for recession and recovery. Now, just because you can’t look at the economic case for how taxpayer dollars are being used and structure the conditions through the narrow prism in which the transaction itself occupies. You have to look at the transaction in the context of the broader benefit it creates relative to the alternatives. And this is true for any action we take. Mr. SILVERS. Mr. Secretary, I have 10 seconds. How does protecting Citi’s common shareholders at the expense of taxpayers benefit our economy? Secretary GEITHNER. Well, let me do it in a slightly different way again. But it requires us to go back a little bit. If you look at the last 4 months of 2008, you can see catastrophic damage caused by judgments about the level of failure you can tolerate throughout a financial system. And as I said, the damage caused by those actions and judgments were brutal, indiscriminate, and catastrophic. VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 46 They affected—as you said, Chair Warren, at the beginning of the hearing—they affected the fortunes and lives of millions of Americans here and around the world. They helped precipitate the deepest loss in economic activity that the world has seen in a generation. Now, so you have to think about these choices through that broader prism, not through the narrow confines of the specific investment. The CHAIR. Okay. Thank you. Thank you, Mr. Silvers. Senator Sununu. Senator SUNUNU. Mr. Secretary, explain the process that will be used to determine whether or not Treasury requests the conversion of preferred shares under the CPP into common. Secretary GEITHNER. Again, this is something that the primary supervisor is in the process of thinking through and designing strategy on, but I want to say it simply again. This capital assessment they are undertaking will reach a judgment about whether and to what extent individual banks could use an additional buffer of capital to make sure they can withstand deeper losses—— Senator SUNUNU. Let me stop you there. You are using phrases like ‘‘could use.’’ I am sure every bank could use a little bit better capital buffer. Secretary GEITHNER. All right. Let me say—— Senator SUNUNU. So we need to be specific about whether or not it is required and whether there is an objective measurement of the requirement. Secretary GEITHNER. Right. So the measurement—and again, you are going to see the details of the parameters laid out by the Federal Reserve in the coming days that will help you decide that. But that will be a defined measure of what additional capital, I will use your word, should be required. Now banks will have a range of different options for meeting that capital requirement. And as the Fed has already said directly, what is important is not just the overall level of capital, but the quality of capital, including the amount of tangible common equity or Tier 1 common equity in the system. Banks will have a range of different ways to meet those tests. They will be able to work out with their supervisor how they are going to meet that test. And as I said, in simple terms, their ability is to take—raise more capital from the market or take capital from the Government. Senator SUNUNU. So what you describe there is a relatively objective process with clear criteria where sort of subjective measurements either don’t enter in or enter in to a very limited degree. In other words, it will be an objective process that people can easily understand. Fair enough? Secretary GEITHNER. Well, I won’t say there won’t be judgment in it. But that will be judgment that the supervisors work out and judgments carefully informed by other independent measures of risk, losses, earnings potential, those things. Senator SUNUNU. I think it is important that it be as objective as possible. Secretary GEITHNER. I agree with you. VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00052 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 47 Senator SUNUNU. And I think this also applies to the question raised by Congressman Hensarling with regard to repayment. You indicated that there would be a relatively objective approach based on whether they have met the requirements under the regulator. But then you alluded to the question that would be asked of is the credit system working? Then finally, you said but that is going to be asked at the regulatory level. But I would suggest it is not really the job of regulators at the OCC or OTS or at the State level to make subjective determinations about whether our credit system is working and whether a particular institution is playing their role in that credit system and, therefore, conclude that we are not going to let them repay, even though they met all of the objective regulatory criteria. So I will ask what level of subjectivity is going to come into play on the repayment question? Secretary GEITHNER. I actually wasn’t trying to reinforce your concern or Representative Hensarling’s concern. I was just trying to state it cleanly, which is that they are going to have to make that judgment. That is the way the law is written. Senator SUNUNU. Who is going to have to make it? Secretary GEITHNER. The relevant Federal banking agency will have to make that judgment, and they are going to have to look at—— Senator SUNUNU. You are going to expect and ask the regulators to make a subjective judgment about whether or not our national system of credit and lending is working? Secretary GEITHNER. No, I don’t—I didn’t mean to imply it that way. They are going to have to make a judgment of whether it is tenable, makes sense for that individual institution. I was just trying to underscore the fact that the basic objective that is guiding what we do is to make sure the system is working as a whole. But I understand your concern, and everybody wants clarity, objectivity. Because they are working through this now, I can’t tell you today whether they are going to fully meet that test, but you will know that relatively soon. Senator SUNUNU. I simply underscore objectivity in this regard is absolutely essential. Otherwise, you are going to be creating more uncertainty than you intend, and you will be potentially doing more harm than good along these same veins, agreed? Secretary GEITHNER. Can I say that I agree with that? And as I said, we would welcome, okay, capital coming back to the Treasury and the taxpayer as a result of the effectiveness of these programs. Senator SUNUNU. Excellent. Ah, releasing stress test results. You indicated that you were going to release some results. Then Treasury pulled back in the sense that you haven’t been clear about what information you are going to release or in what context it will be released. First question is why release data publicly at all? It certainly isn’t typical for bank examiners to release specific information about the institutions they examine. So why release that information? And to the best that you can describe here, what will be released? VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 48 Secretary GEITHNER. Well, again, it’s awkward because of the timing of this hearing. But those are questions that the Fed and their counterparts are working through right now. But I want to underscore again that I do believe it is valuable, and this is the core of the objective of this process that we worked out with the Fed, to bring more transparency, more disclosure to potential losses on bank balance sheets. Without that, it is harder for banks to raise capital. Without that, they are going to live with a deeper cloud of uncertainty over their financial health than they need to. Transparency will be helpful in resolving that, and they are in the process of working through now what is going to be sensible. But I agree with your concerns. I understand your concerns about this. But they are careful, thoughtful, pragmatic people, and they will get it right. The CHAIR. Thank you, Mr. Secretary. Thank you, Senator. Mr. Neiman. Mr. NEIMAN. Thank you. I would like to come back to the foreclosure efforts and give you a little more opportunity to expand on those. I agree and we all have focused on the fact that housing created this problem and has to be solved if we are going to get out of it. As you know, our March report focused on foreclosure efforts. It looked at the drivers to delinquency, the interaction between affordability and negative equity, and set out a lot of the impediments to a successful mitigation program. We also made an initial assessment of your program that was announced on March 4th and how it addressed many, but not all of the impediments that we identified. In my role in leading the State’s Foreclosure Prevention Task Force, in talking to a lot of housing counselors, what we are hearing back is there is still a sense of uncertainty as to when and the timing around servicers and lenders signing on to those programs. Can you give me and the panel a sense of the degree of industry participation that you expect and a sense of the timing? Secretary GEITHNER. We are moving very quickly. I think Treasury is now—I think that the majority of servicers in the country have signed onto the new standards, and we are moving quickly to put that in place and lay out the additional details in public. But I think it is going to take a little time for us to be able to judge what is actually happening. You know, this program provides very substantial economic incentives for participation and for modifications. And that was based on a set of judgments that we made about what was going to be necessary. But we won’t know really until we see the pattern of modifications going forward, and until we see how those work for a time, we won’t know how successful they are in helping economically viable homeowners remain in their home. But we are moving, and I think reasonably quickly, given the pressure and challenges we are facing. Mr. NEIMAN. Do you see any other potential impediments that will need to be addressed or the program tweaked or changed? VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 49 Secretary GEITHNER. We can’t tell now. But it is a very complicated program, as you know, and it is a complicated set of incentives we are trying to change. But we are going to be pragmatic about this. Where we see problems and opportunities, we will adapt the program. It is a challenge because, as many of your colleagues said, you want clarity quickly. You want people to hold to those basic lines. But if there are things around design or practical impediments to better participation, we will try to fix those. Mr. NEIMAN. Being last on the questioners, there is never confidence of whether it will come around to me again. So I do want to bring us back to regulatory reform, which you did not get a chance to in your opening, particularly from the role of the States and the role that States play in consumer protection. As you know, Secretary Paulson’s blueprint in establishing a regulatory framework eliminated the role of the States in consumer protection and safety and sound supervision. I would like to get your thinking as to where do the drivers for consumer protection fall out in your regulatory proposal? Secretary GEITHNER. We are going to be outlining in the next couple of weeks a set of detailed proposals for how to change the basic framework of consumer protection in the credit area in particular, both on credit cards, on mortgages, and other credit products. And you will see, following that, we will lay out the broader changes to the oversight framework that we think are necessary to make these new rules of the game work. I would expect States to have an important role going forward still, but the precise nature of that role you will see laid out in the suggestions we make about what should happen at the Federal level. I just want to say, though, that I want to just say it starkly: We had systematic failures in consumer protection. They caused enormous damage not just to the people who were taken advantage of, but to the stability of the entire financial system. And it is going to require very, very substantial changes to fix that. Mr. NEIMAN. Great. All right. Thank you very much. My time has expired. The CHAIR. Actually, it hasn’t. Mr. NEIMAN. Oh, okay. The CHAIR. But you are welcome to—— Mr. NEIMAN. Fifty seconds left, I think I will pass. Thank you. The CHAIR. Okay, that is fine. Thank you. Actually, Mr. Secretary, I want to go back to the point about foreclosures, and I must ask is an amendment to the bankruptcy laws to deal with underwater mortgages a central element of your foreclosure mitigation plan? Secretary GEITHNER. As you know, the President has supported and we are supportive of changes, the carefully designed changes to the bankruptcy plan. We think you can do it in a way that would help reduce these problems. That process is now working through the Congress. We are working closely, of course, as part of that process. The CHAIR. If—— VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 50 Secretary GEITHNER. It is a difficult balance to get right, as you know. But the President is supportive of this, and we are—and we would like to work to see if we can find a good balance. The CHAIR. If those changes are not made, what happens in States like Nevada, Arizona, California, Florida, Illinois, where the number of underwater mortgages is high, where we know that this is related not only to the initial foreclosure but to redefault when we try to do workouts. Are there any other proposals for dealing with underwater mortgages when they are a great deal underwater? Secretary GEITHNER. Well, let me just say two things in that context. One is the President has proposed and there is a lot of support in Congress for substantial changes to the Hope for Homeowners Program. And that program is designed to be somewhat more responsive to that set of specific challenges. But the President’s program also does provide meaningful payment relief to families that have very high loan-to-value ratios. The CHAIR. Right. Secretary GEITHNER. And does provide very substantial incentives for those payments to come down through reductions in interest and principal payments. But our program is not going to solve all of these problems. It is designed to target those homeowners that were relatively responsible in the amount of debt they took on, but you will have to look at them in the context of the full range of other programs that Congress has authorized and the President is proposing to help mitigate the damage caused by the recession across the American economy. The CHAIR. Thank you. I want to ask one other question as long as we are talking about structure here. In our most recent report, we talked about three ways to deal with troubled institutions—liquidation, reorganization, or subsidization. And in the report, we discussed the fact that Treasury seems mostly focused on subsidization and that—— Secretary GEITHNER. Treasury present or Treasury past? The CHAIR. Well, I will let you address that question. And so, the question is, because I think that is the right way to put it, the extent to which all of the tools in the toolbox are on the table and the circumstances under which liquidation of failing financial institutions or reorganization in place of failing banks would be considered. Could you address that? Secretary GEITHNER. That is a very sensitive, very important question. Again, what we have to do is we have to balance the critical objective of making sure our system is working better. That requires that the core institutions in our country, the largest institutions in our country are able to fund and meet their commitments. That is a central part of this process. It requires that they have enough capital even to withstand a deeper downturn. And it requires that they have a board and management and that will earn the confidence of markets, not just their primary supervisor in the Government. Now we want to protect the taxpayer. We want to achieve these things at least cost to taxpayers as a whole. But again, the system requires, the recovery requires, the economy requires small busi- VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 51 nesses, families across the country, they depend on it and require a better functioning financial system. And so, we will look at all actions we think are necessary against those two basic objectives. One is get the system working better. Protect the taxpayer. Do that at least cost to the taxpayer. And what will be necessary will be different in particular cases. It is going to require adaptation and evolution. But those are the objectives we are going to balance. And it is very hard, Chairwoman Warren, to tell you today what exact mix of conditions will require. What I can tell you for sure is—— The CHAIR. Fair enough, Mr. Secretary. I will stop with ‘‘all actions.’’ You had me at ‘‘all actions.’’ Let me—— Secretary GEITHNER. I don’t want to mislead you, okay? Because, again, we have got a very careful balance, and I think anybody who lived through—like we all did, lived through the second half of last year, particularly the fourth quarter of last year, should be somewhat chastened and somewhat careful and cautious in thinking about how we get that balance right. And our action will be shaped by that experience, not just by the core of the obligation we have, to try to make sure we are using the taxpayers’ money wisely with appropriate conditions so that the system emerges stronger. The CHAIR. Well, I think the question, though, started with the focus on are all the tools on the table—liquidation, reorganization, and subsidization? Am I hearing you say yes? Secretary GEITHNER. Well, we will take all sensible actions that are consistent with those obligations we have to the American people. And again, the determination about what is least costly and most effective will require a careful balance in these areas. But Chairwoman, we will be careful and pragmatic and as effective as we can in reducing the ultimate cost to the taxpayer, trying to get the system back to recovering at least risk to the overall economy, at greatest benefit to the economy as a whole. The CHAIR. I must set a better example and stop with my time. So, Congressman Hensarling. Mr. HENSARLING. Thank you, Madam Chair. Mr. Secretary, I take some comfort in your testimony that we share a number of goals. I would take a little less comfort that there are policies in place to necessarily achieve some of those goals. With respect to both taxpayer protection and preventing the nationalization of key segments of our financial services industry, let me revisit again the plan of the conversion of preferred stock to common. At the end of the day, the financial institution after that conversion has no new capital in a practical definition. It has no new capital. So it is a bookkeeping entry. And yet, what has happened, is the taxpayer clearly is at greater risk, and I would assume you would agree with the position of common stock, than the taxpayer was with the preferred stock. And then, in addition, you have got a much stronger mechanism for Government control of that institution when we are already seeing the prospect of essentially the President of the United States hiring and firing CEOs of Fortune 500 companies, determining compensation levels, the prospect of some of my colleagues in Con- VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00057 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 52 gress telling Detroit what kind of automobiles they need to produce to become profitable. Many of us don’t want to go down that road, and I am having a lot of trouble here seeing the upside to any strategy for the conversion. So could you further elaborate on what you would be trying to achieve? And again, going to Senator Sununu’s point, what is the most objective criteria that can be applied to that decisionmaking process? Secretary GEITHNER. Congressman, they are thoughtful questions. And as you can see from the diversity of views on your panel, there are very different views about how we balance these different objectives and constraints. I am concerned about the potential damage you do to franchise value and expectations across the financial system. If you have this expectation of creeping, long-term Government involvement, Government ownership, I agree with you that can cause damage. We have seen one compelling example of that today, and that is something that troubles me. On the other hand, it is important that we get a better capitalized financial system. And you are right that a conversion itself doesn’t add to the overall level of regulatory capital. It does change the composition in ways that actually could be helpful to a bunch of the objectives that firms face. So let me just underscore this basic principle. At the conclusion of this process that the Fed is undertaking to assess the potential, the capital needs of banks going forward, where there is a need for additional capital, total capital and common capital, then those banks will have a series of options for how they meet that need. And they will work out with their primary supervisors what is the best mix of those options. And they will be balancing lots of different considerations, including the ones you described in that context, but I can’t tell you today exactly where they are going to come in that context. That is a process they are going to have to undertake, and it is going to require a fair amount of care and effort. And they will make different choices, I suspect. Different firms will make different choices, and they will have different judgments about what they want to do to the composition of capital. Mr. HENSARLING. Related to that, Mr. Secretary, let me segue into AIG since, clearly, it is easier to invest in these companies than it is to divest. We have now had, I believe, four different infusions of taxpayer capital—two by the Fed, two by Treasury under TARP. I believe we are at roughly $180 billion of taxpayer liability exposure and counting. I believe the Federal Reserve Chairman recently testified before the House Financial Services Committee that had he had the ability to place AIG into receivership late last year, he would have done it. One can question whether or not he had the ability to do that, as Chairman of the Federal Reserve. But I assume either you or he, as the taxpayer representative, owning 80 percent of AIG, certainly you have the ability to do that today. What is the exit strategy from AIG? Secretary GEITHNER. The United States Government came into this financial crisis without a legal framework that allowed it to in- VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00058 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 53 tervene and manage more effectively the risk posed by institutions like AIG. It was a tragic failure of the country. A lot of the trauma we faced in the course of the fall was the result of that basic failure. We still do not have that authority today. Mr. HENSARLING. Not as majority shareholder? Secretary GEITHNER. No. We do not now have the ability nor the tools that were designed in the wake of the financial crises of the last decades that were given to the FDIC for individual banks and thrifts to allow the Government to intervene more quickly, earlier and more effectively to protect against the damage posed by weakness of these institutions. And we would like to work with Congress to legislate authority over the coming weeks and months. But even with that authority, we would face very difficult judgments again, because in that context you are dealing with the potential risks to financial stability more generally, to other institutions, to insurance companies around the United States from the potential failure of a large firm like that. But that imperative of getting better authority in place is a centerpiece of what the President is trying to work with Congress to achieve now. The CHAIR. Thank you. Thank you, Congressman. Mr. Silvers. Mr. SILVERS. Mr. Secretary, before I come to my question, let me just say that I very much welcome and appreciate your comments about the value of transparency earlier in response to Senator Sununu’s question. I appreciate your comments about the centrality of consumer protection, and I very much support and agree with the notion that there needs to be a broader resolution authority. Now I want to return to the theme of my first questions, but now turning to the public-private investment partnerships. I take at face value the representation that these partnerships are not designed to be a covert method of subsidizing the banks, that they are designed to get fair prices for the assets that are being purchased. My concern, which I wish you to address, is that again, as in the case of Citigroup, there seems to be a profound and inexplicable imbalance between public risk and public capital, taxpayer money, and private capital and private gain. And it ranges from—in the investment partnerships from the legacy securities program option one, where we have the fantastic amount of 33 percent of the capital coming from the private sector and 50 percent of the gain going to the private sector. To add its far extreme, option two is only 25 percent private capital. And over in the legacy loans program, where there may be the greatest risk because loans have been less marked down than securities, the amount of private capital is 7 percent, but the gain to the private sector is 50 percent. And even that 7 percent of private capital could be obtained through the TALF at taxpayer risk. Now I just don’t get it, Mr. Secretary, how this represents protecting the taxpayer. And I would like you to explain why it does. VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 54 Secretary GEITHNER. Mr. Silvers, this is an important question, and the virtue of these programs is they are going to come with a level of transparency to allow everybody to evaluate what the economics are for the investor in the Government. And as you see the terms of these things refined in public, you will have a better basis for making that assessment. Now, very important to underscore again, you can’t measure the returns to the taxpayer through this narrow prism. It doesn’t provide a full measure of it. And you are counting as capital—I haven’t had a chance to look at these carefully. You were counting as capital in the left-hand panels of your charts, the financing the Government is providing at a price against a bunch of collateral with haircuts against that collateral. And that is not capital in the same sense that you are looking at—— Mr. SILVERS. Can I just stop you there? Secretary GEITHNER. That is financing against collateral at a price. Mr. SILVERS. But can I stop you there? Secretary GEITHNER. Yes. Mr. SILVERS. What I am measuring here is money at risk, right? If it turns out—— Secretary GEITHNER. But the—— Mr. SILVERS. Mr. Secretary, if it turns out that the assets that these partnerships buy are not worth the price paid—not because of anything terrible, but because of just risk, all right? And if we eat through the equity in those partnerships, is it not the case that the FDIC and the Fed are on the hook? Secretary GEITHNER. Absolutely. This is secured lending against collateral at an interest rate with pricing designed to help protect the Fed and the FDIC from that risk. But what I am saying is you are equating capital, which is fully at risk, with financing against collateral. Now really the critical thing, as you know from our previous conversations, is compared to what? And the alternative programs that many have advocated for dealing with these legacy assets—— Mr. SILVERS. Well—— Secretary GEITHNER. It is important to let me finish this. The alternative programs have the Government taking on all the risk, taking on all the risk and mispricing the assets, taking all the downside risk and having all that protection. Now they would get in return all the potential upside in this case. But that tradeoff is a bad tradeoff for the Government because the Government is highly unlikely to be in a position to be able to get the valuation right and will be at great risk for overpaying for those assets and having a much worse risk reward. Mr. SILVERS. All right. Let me stop you right there. What I don’t get—and I practice law, and you have been in banking—is a deal where—— Secretary GEITHNER. Actually—I have never actually been in banking. I have only been in public service. Mr. SILVERS. Well, a long time ago. A long time. Secretary GEITHNER. Actually never. Mr. SILVERS. Investment banking I meant. VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 55 Secretary GEITHNER. Never investment banking. Spent my entire life in public service in the Treasury and at the Federal Reserve. Mr. SILVERS. Well, all right. Very well then. Secretary GEITHNER. But I would be happy to—— Mr. SILVERS. But 7 percent on the one hand, 50 percent on the other. What prevents us from hiring the very same bond managers that we are going to hire, work for the public, and get 100 percent of the gain for the public? I don’t understand what the 7 percent— what is so important about the 7 percent—— Secretary GEITHNER. Let me try—— Mr. SILVERS [continuing]. That we give them 50 percent of the upside. Secretary GEITHNER. Let me try and do it simply again. The left panels of your chart are not an accurate description of the risks to the taxpayer in the financing they have at risk. I would be happy to try and give you a better alternative measure of it, but it will require that you do a full assessment—— Mr. SILVERS. Is it mistaken in the legacy loan program that the private capital is 7 percent max? Secretary GEITHNER. It is—just to say you are mixing capital with financing in a way that doesn’t do justice to the economics of it. But the critical thing again is—— Mr. SILVERS. Mr. Secretary, I asked you a different question. Is it not 7 percent? Secretary GEITHNER. It is not the right—you are mixing two different types of economic risk. Mr. SILVERS. I think I understand 7 percent and 50 percent, and I don’t—— Secretary GEITHNER. Again, I am not trying to be—it is just a—— Mr. SILVERS. My time has expired. The CHAIR. Gentlemen? Secretary GEITHNER. It is not an accurate representation. But can I answer this one question about the—— The CHAIR. Ten seconds. Secretary GEITHNER. Okay. Mr. Silvers, in the alternative model where the Government sets the price for the assets, regardless of who manages, who it hires to manage, the Government will be at acute risk of overpaying, providing the subsidy you want to avoid, and having a tradeoff where the taxpayer is taking on at the outset a much greater share of the losses across the financial system. That is what we are trying to avoid because we don’t believe that is in the best interest of the taxpayer. The CHAIR. All right. Mr. Silvers, will you continue? Mr. SILVERS. No, we are done. The CHAIR. Senator Sununu. Senator SUNUNU. Thank you, Madam Chair. Mr. Secretary, just for the record, I would never mistake you for an investment banker. [Laughter.] Secretary GEITHNER. I don’t think he meant that as a compliment, but I will take that as a compliment. The CHAIR. I am not sure that makes me feel better. Senator SUNUNU. In the first 3 weeks of April, there were two TALF auctions. The first one I would describe as modestly success- VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 56 ful, the second one as marginally successful. I think I am being very generous in using that description. The first one yielded, I think, $4.7 billion in financing, the second one $1.7 billion in financing. To what do you attribute the relative lack of interest, and has Treasury, in working with the Federal Reserve Bank of New York that is, I think, managing these auctions, recommended or undertaken any changes in their structure? Secretary GEITHNER. Let me just say one thing about the facts. Actually, my sense is that it was relatively good for an early program. The amount of issuance of securities that came in those first two auctions is about five times the level, substantially above the level in the previous 5 months, and you have already seen a material reduction in the price of credit raised in auto receivables, et cetera. So I actually think that it is pretty good in terms of impact initially, but it is early days. The principal explanation that people say in the markets about why participation was lower than expected is concern about the conditions that come with the assistance in the program, the range of different conditions, uncertainty about whether they may change in the future, and that underscores an important point. If we are going to get out of this crisis at less cost, ultimate risk to the taxpayer, we need the markets to be taking risk again. We went for a long period where they took too much risk. The risk now is they take too little. For them to be willing to take risk alongside the Government, they need to have some confidence in the rules of the game going forward, and that is going to be an important challenge we face together working with the Congress as we clarify these conditions. Senator SUNUNU. Well, let us try to clarify because there are members of Congress now talking about applying the executive compensation limits to the public-private investment partnerships. Damon Silvers raises some concerns about the structure of those, but this is separate from that. This is an issue of changing the rules after the fact or changing the rules in a way that would discourage participation. What is the administration and the Treasury Department’s position on applying rules for compensation or other rules to the public-private investment partnerships? Secretary GEITHNER. We are in the process now of concluding, completing a draft of a rule for applying those conditions. We are going to apply the law. We are going to put out in the public domain for comment a draft rule. That will give everyone the chance you here on the Hill are—— Senator SUNUNU. When will that be put out? Secretary GEITHNER. It will hopefully be written in the next couple of weeks, relatively quickly. We are moving—— Senator SUNUNU. You are soliciting people to request participation as one of the lead partners or investors at the same time. Correct? Secretary GEITHNER. Yes. You can’t feel more strongly than me about the need for clarity early. But we need to go through a process to put out a draft rule for comments, solicit comment. But our obligation is to apply the law, and we are going to do so in a way VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 57 that is consistent with the requirements of the law and does as good a job as we can at making these programs work. Senator SUNUNU. So there will be a rule forthcoming, and what is the Treasury’s position on application of the executive compensation limits that are in law today to those partnerships? Secretary GEITHNER. Well, you will see in the rule how we propose to strike that balance. But it is my judgment that those compensation restrictions do not need to apply to the programs you referred to. Senator SUNUNU. The insurance guarantee programs. The insurance guarantees have been provided or portfolio insurance has been provided to Citigroup and to Bank of America. I believe at the end of March, there was an assessment done—the value of the portfolio, losses incurred in the portfolio. Will there be a public disclosure of that assessment, and what can you tell us about the relative value of those portfolios relative to the book values that were insured? Secretary GEITHNER. Senator, I am not sure I know the answer to that, but let me—I would be happy to talk to my colleagues at the Fed and have them report separately on that question. My sense is, though, that the results of the stress test will give you some indication, give the market some indication about that question. But I should talk to my colleagues at the Fed and the banking supervisors and ask them to respond to your question directly. Senator SUNUNU. Thank you, Madam Chair. Thank you, Mr. Secretary. The CHAIR. Thank you. And our last round of questions here, Mr. Neiman. Mr. NEIMAN. Thank you. The greatest criticism that we read about and where there seems to be the greatest debate is over the viability of the Treasury’s plan, particularly the program to purchase troubled assets. And it is around the assumption in the plan that the critics would assert that the values of those assets do represent the fundamental values. And the underlying assumption in your plan is that they do reflect a significant liquidity discount. My question really goes around to understanding the interplay between the credit and the liquidity as the drivers of those asset prices because this really does underline the assumptions and the viability of that plan. Secretary GEITHNER. That’s an extraordinarily difficult, complicated question. Hard to know. You are right that the price of any security in the markets reflects not just a view of credit losses over time, but it reflects a judgment of illiquidity and a whole set of other risk premia that are about uncertainty. It is very hard to decompose those things. But the markets where you can tell—where you can say with complete confidence today that these markets are not working in part because of the absence of financing available to those markets. So just to use the simple example, if you had to sell your house tomorrow in a market where no one could get a mortgage, and you had to sell tomorrow or the next week or 2 weeks, the value of your house would be substantially less than what you think it might be VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 58 worth if you were able to hold it over time or choose the timing, and there was a market for mortgages available. So to help get these markets started again, it is necessary for there to be an alternative source of financing appropriately priced from the Government for a temporary period of time. And that will help establish a market and help separate out what is about credit losses, what is about liquidity risk premia. And underlying your question is a thing that is uncertain, which is, is this going to prove attractive enough for it to actually work? Or is it going to be less valuable to potential investors and banks on both sides of the equation? And as Mr. Silvers’s charts indicate, there is a wide divergence of views at the moment about whether the financing is going to be provided in a way that is too attractive or not attractive enough. Mr. NEIMAN. And the private-public partnership, what is the basis for why you think that is the mechanism to identify the appropriate pricing? Secretary GEITHNER. Again, it is better than the alternatives. In that context, people with money at risk will make the judgments about what the risk is and what the values are. And they have to compete for the right to put up that capital. They are going to hire professional asset managers to do it. In our judgment, that is a better model than having the Government itself come in and independently try to value these things. This is an, as you know, enormously complicated set of problems. The assets are enormously complicated. There is no precedent for what we are going through in this context, and the amount of uncertainty that you see in markets today is a reflection of that. So we just made the judgment that it is better for the taxpayer to use the incentive of an investor that is going to put capital at risk to help solve that valuation pricing problem. Mr. NEIMAN. I would like to come back to your opening remarks where you talked about recognizing that 40 percent of consumer lending has historically come from the secondary markets and securitization. And this is the key point for us all to remember, how so much of consumer and small business lending is supported by the capital markets, and the TALF is designed to unfreeze those markets. How should we be evaluating bank lending levels in light of the role of the security market and securitization, particularly in recycling capital? Secretary GEITHNER. Very hard to do. You know, you can’t expect banks to be able to fully compensate for the reduction in securitization activity, it is not tenable in a short period of time. That is why we are trying to move on both those channels of credit flows, make sure banks are able to provide enough credit and try to get these markets for securities working again. But it is hard to know what the new system is going to look like in that context. And what we are trying to do is, again, make sure that the assistance we provide is priced so that as conditions normalize, demand for Government financing, for exceptional support will fade and—as you already see happening across some of the Fed’s facilities. VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 cprice-sewell on DSK89S0YB1PROD with HEARING 59 Mr. NEIMAN. So in terms of my original questioning around metrics and even on the front page of the Wall Street Journal yesterday in terms of the diversity in interpreting this data, have you given more thought as to more appropriate metrics or greater clarity? Secretary GEITHNER. I think the best thing is to be simple about it, and the best thing to do is to ask what is happening to bank lending by category of type of credit exposure like our new reports require? What is happening to the issuance of securities, assetbacked securities and other securities, and what is happening to the price of both bank lending and securities issuance? Those three things capture what you need to do to measure it. Now it still doesn’t tell you fully what is happening to demand for credit from economically viable borrowers, but that is a good place to start. One more thing, the Fed’s senior loan officer lending survey is another good qualitative measure of terms and conditions and that, if you look at it, showed it rising to very, very adverse peaks and starting to gradually improve. Those are four examples of things you can look at. Mr. NEIMAN. And even though my time is out, I would like to reclaim my 40 seconds that I had put away in my first round. The CHAIR. Forty seconds, you are using it up. Go. Mr. NEIMAN. What I would like to do is in recognition of the fact that I have received hundreds of emails, both to my personal email and to the COP Web site as well as to the posting, I would like to categorize them, provide them to your staff—— Secretary GEITHNER. Send them to us. Mr. NEIMAN [continuing]. And work on answers that we can respond and post publicly. So I appreciate that. The CHAIR. Thank you. Thank you, Mr. Secretary. I understand that you need to leave to meet with the President and that we are going to end now. We are going to hold the record open for 1 week so that panelists may submit additional questions in writing so that you will have the opportunity to respond on the record. I just want to say that I am very sorry that you had to turn through the pages on regulatory reform. It is a critically important issue, and I am sorry that our time is so constrained that we couldn’t spend more time on it, particularly both the long time and the nearer term on regulatory reform, which I hope is going to address the consumer issues and in particular the question about repricing interest rates for small businesses and consumers who are paying their bills on time. Also to address the systemic issues, very important. I think it is clear we have lots of questions. So I hope we will make this a regular meeting. Thank you. Secretary GEITHNER. Thank you for having me. A pleasure talking to you all. Excellent questions, as I said. Very thoughtful concerns. And we are trying to balance a lot of different considerations, and I know you will do what we do, which is look at these programs against the alternatives. The CHAIR. Yes. Thank you. VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 60 cprice-sewell on DSK89S0YB1PROD with HEARING Secretary GEITHNER. You can’t judge anything except against the alternatives, and I know you will help us do that. The CHAIR. Thank you, Mr. Secretary. This hearing is adjourned. [Whereupon, at 11:37 a.m., the hearing was adjourned.] VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 125 here 51602A.033 cprice-sewell on DSK89S0YB1PROD with HEARING 61 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 126 here 51602A.034 cprice-sewell on DSK89S0YB1PROD with HEARING 62 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 127 here 51602A.035 cprice-sewell on DSK89S0YB1PROD with HEARING 63 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 128 here 51602A.036 cprice-sewell on DSK89S0YB1PROD with HEARING 64 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00071 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 129 here 51602A.037 cprice-sewell on DSK89S0YB1PROD with HEARING 65 VerDate Nov 24 2008 08:22 Aug 25, 2009 Jkt 051602 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 E:\HR\OC\A602.XXX A602 Insert offset folio 130 here 51602A.038 cprice-sewell on DSK89S0YB1PROD with HEARING 66