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S. HRG. 111–146 TREASURY SECRETARY TIMOTHY F. GEITHNER HEARING BEFORE THE CONGRESSIONAL OVERSIGHT PANEL ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION SEPTEMBER 10, 2009 Printed for the use of the Congressional Oversight Panel tjames on DSKG8SOYB1PROD with HEARING ( VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00001 Fmt 6011 Sfmt 6011 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00002 Fmt 6019 Sfmt 6019 E:\HR\OC\C177A.XXX TREASURY SECRETARY TIMOTHY F. GEITHNER C177A S. HRG. 111–146 TREASURY SECRETARY TIMOTHY F. GEITHNER HEARING BEFORE THE CONGRESSIONAL OVERSIGHT PANEL ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION SEPTEMBER 10, 2009 Printed for the use of the Congressional Oversight Panel ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON 53–177 : 2009 tjames on DSKG8SOYB1PROD with HEARING 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 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00003 Fmt 5011 Sfmt 5011 E:\HR\OC\C177A.XXX C177A CONGRESSIONAL OVERSIGHT PANEL PANEL MEMBERS ELIZABETH WARREN, Chair REP. JEB HENSARLING PAUL S. ATKINS RICHARD H. NEIMAN tjames on DSKG8SOYB1PROD with HEARING DAMON SILVERS (II) VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 E:\HR\OC\C177A.XXX C177A CONTENTS Page tjames on DSKG8SOYB1PROD with HEARING Opening Statement of Elizabeth Warren, Chair, Congressional Oversight Panel ..................................................................................................................... Statement of Hon. Jeb Hensarling, Member, Congressional Oversight Panel, U.S. Representative from Texas ......................................................................... Statement of Damon Silvers, Member, Congressional Oversight Panel ............. Statement of Paul Atkins, Member, Congressional Oversight Panel .................. Statement of Richard Neiman, Member, Congressional Oversight Panel .......... Statement of Hon. Timothy F. Geithner, U.S. Secretary of the Treasury .......... (III) VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 E:\HR\OC\C177A.XXX C177A 1 4 5 9 13 15 tjames on DSKG8SOYB1PROD with HEARING VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 E:\HR\OC\C177A.XXX C177A HEARING WITH TREASURY SECRETARY TIMOTHY GEITHNER THURSDAY, SEPTEMBER 10, 2009 U.S. CONGRESS, CONGRESSIONAL OVERSIGHT PANEL, Washington, DC. The Panel met, pursuant to notice, at 1:23 p.m. in Room SD–419, Dirksen Senate Office Building, Elizabeth Warren, Chair of the Panel, presiding. Present: Elizabeth Warren, Representative Jeb Hensarling, Richard Neiman, Paul Atkins, and Damon Silvers. tjames on DSKG8SOYB1PROD with HEARING OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT PANEL Chair WARREN. This hearing is called to order. Thank you for being here today, Mr. Secretary. I also want to welcome Paul Atkins, who is the newest member of the Congressional Oversight Panel, and we are glad to have you with us here today. Thank you. I also want to say, as we get started here, the panel has agreed to keep their opening statements very short so that we can focus on the questions, and we appreciate that you have agreed to do the same, Mr. Secretary. So, thank you for being here. This hearing offers an important opportunity to hear directly from you about the $700 billion investment that taxpayers have made in the financial system. Almost exactly a year ago, Secretary Paulson told Congress that the country was in a dire state. Americans were alarmed. To restore confidence, Congress quickly passed the laws that created the Troubled Asset Relief Program, TARP. Since that time, public fear has turned into anger. Savings have evaporated, jobs have disappeared, and mortgage foreclosures are now measured in the millions of families and the billions of dollars. Taxpayers question what TARP accomplished when, on an individual level, their financial circumstances seem more precarious than ever. They feel like they got stuck with the bill for this bailout, but they didn’t get the benefits. In granting Treasury such enormous discretion with TARP money, Congress expected an equal measure of transparency and accountability. Taxpayers have a right to understand clearly what Treasury is doing and why it is doing it. Each month, the Congressional Oversight Panel has issued a detailed report. In June, we evaluated the stress tests. In July, we examined the repayment of TARP funds. And after we reported that the first 11 banks had repurchased their warrants from Treas(1) VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 E:\HR\OC\C177A.XXX C177A 2 tjames on DSKG8SOYB1PROD with HEARING ury at a price that we believed was only 66 percent of their estimated value, the next round of banks repurchased their warrants at prices that were much closer to our estimated value. In August, the panel examined the impact of the decision to leave troubled assets on the books of the banks and how much risk that leaves in the banking system. Yesterday, the panel released a report examining the use of TARP funds in the domestic auto industry and recommended that taxpayers, who now own substantial amounts of both Chrysler and GM, might be better protected if Treasury would put its shares in a trust so that someone not in Government could actively manage them and make decisions about the best time to sell. Of course, taxpayers are now stakeholders in hundreds of financial institutions as well. Taxpayers still want to know how their money has been used and what difference their enormous investment has made. Have these companies been cleansed of toxic assets—the reason TARP was passed? Are these companies better run today than they were a year ago? Do they treat consumers better now than they did last year? And the fear that no one wants to have to think about—what are the chances these financial institutions will stumble again? Or to put it more directly, are we going to change the rules that got us into this mess before it happens again? [The prepared statement of Chair Warren follows:] VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 E:\HR\OC\C177A.XXX C177A VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 E:\HR\OC\C177A.XXX C177A Insert graphic folio 10 53177A.001 tjames on DSKG8SOYB1PROD with HEARING 3 4 Again, thank you for coming, Mr. Secretary. We look forward to hearing from you. Congressman Hensarling. tjames on DSKG8SOYB1PROD with HEARING STATEMENT OF HON. JEB HENSARLING, MEMBER, CONGRESSIONAL OVERSIGHT PANEL, U.S. REPRESENTATIVE FROM TEXAS Mr. HENSARLING. Thank you, Madam Chair. On occasion, I suspect we will disagree in the future, but I do want to thank you for your public service at a time of great challenge in our Nation’s history. I would note that this is your second appearance before the Congressional Oversight Panel since the President was sworn in in January. It is now September. I believe you have agreed now to appear before this panel at least on a quarterly basis. I would ask you once again to potentially reconsider appearing on a monthly basis. Given that the President has made a commitment that his administration would be the most transparent and accountable administration ever, I would think that would comport with that goal a little better. We are clearly coming up on the 1-year anniversary of the EESA legislation. TARP has never really been as advertised. As we know, a toxic asset removal program became a capital infusion program. I am not here at this point to continue the debate on whether or not it was wise legislation at the time. I think there are smart people on both sides of that debate. Historians will one day record it. But I must admit almost 1 year later, I continue to be concerned and am curious as to what TARP has evolved into as of today. I think that many Americans share a fear that I have that an emergency piece of legislation that was meant for economic stability has now morphed into essentially a $700 billion revolving bailout fund for the administration. I am concerned that the previous administration crossed a line in investing in GM and Chrysler, something that this administration continued to do. I fear that this administration crossed another statutory line in favoring members of the UAW in those reorganizations over similarly situated creditors and secured creditors. I feel like the administration crossed another statutory line in giving Fiat 20 percent of Chrysler, up to 35 percent—a company that I understand was not owed one dime—and they will receive this if they produce a car capable of making 40 miles per gallon. I am having trouble somehow rectifying this with the charge of taxpayer protection and of financial stability. I continue to be concerned about the issue of taxpayer protection, although certainly not all of it. I need not tell you that we have the first trillion-dollar deficit in our Nation’s history. I need not tell you that recently OMB had to change their debt outlook. They missed their figure by about a third. They were looking at $7 trillion of debt instead of $9 trillion. Part of this is TARP. Recently, the CBO came out with their report that they expect $40 billion more of loss in the Chrysler and GM programs. So that continues to be a concern, and I look forward to hearing from you, Mr. Secretary, particularly after the President announced last night that your administration has saved VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A 5 us from the brink of economic ruin—and I paraphrase. I don’t have the quote in front of me. If that is true, why do we continue to need this TARP statute that many of us believe is no longer about financial stability? So I look forward to hearing your testimony. I yield back, Madam Chair. Chair WARREN. Thank you, Congressman. Mr. Silvers. tjames on DSKG8SOYB1PROD with HEARING STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL OVERSIGHT PANEL Mr. SILVERS. Yes, thank you, Madam Chair. Good afternoon, Mr. Secretary. Like my colleagues, I very much appreciate your presence here with us today. As was noted, this is the second time you have appeared, and we are grateful. I also wish to express my appreciation to you for the support you have given to Herb Allison as head of the Office of Financial Stability. Mr. Allison is an outstanding business leader, and it has been a pleasure to work with him these last few months. I believe Congress and the American people should ask really three basic questions about the Troubled Asset Relief Program. First, is TARP and the associated programs of the Fed and the FDIC preventing and/or calming acute crises in our financial markets? Secondly, is TARP leading to the private financial system once again playing its appropriate role as provider of capital to the real economy? And finally, is the public, as provider of funds to the financial system through TARP and these other programs, receiving fair terms? When you last appeared before us, I focused on the question of whether the public was being treated fairly. I remain deeply concerned about whether inappropriate subsidies are being extended in areas such as transactions with weak banks such as Citigroup, credit enhancements in the PPIP, and the repurchases of warrants from banks that have repaid Capital Purchase Plan investments. However, I believe that you and Mr. Allison have made progress in these areas around the issue of fairness, as evidenced, for example, by the price Treasury ultimately received for Goldman Sach’s warrants, a price very close to this panel’s estimate of their value in our July report. Today, I hope to discuss with you the question of whether TARP strategy is leading to the revival of the private credit system with particular reference to the continued weakness of three of our four largest banks, a subject addressed in some detail in this panel’s August report. This question is tied to the important question of what Treasury, the Fed, and the FDIC strategy is for ultimately withdrawing public support for the financial system. And you addressed these matters in some detail in your written testimony today. Looming over this conversation is the precedent of Japan’s lost decade, in which you are quite expert, and the current talk of Wand L-shaped recoveries. Despite optimistic statements of the kind that we saw from the regional Fed banks yesterday, the numbers that we see tell a tale of rising unemployment, of rising foreclosures, a growing crisis in commercial real estate, which has been VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A 6 tjames on DSKG8SOYB1PROD with HEARING addressed in this panel’s earlier reports, rising small bank failures, and falling bank business lending. Together, this data warns of the danger of a vicious circle that could overwhelm both the stimulus and Treasury’s apparent strategy of hoping the banks earn themselves back to health. I believe the Treasury, the Federal Reserve, and the FDIC, under this administration and the prior administration, can take credit for calming the acute crisis of last fall, another matter you address in your written remarks. I also believe that the decision to infuse capital rather than to buy troubled assets that Secretary Paulson made, and which I think you have largely carried forward, was the correct decision and has borne substantial fruit for our country and the world. I also believe the stimulus package is a critical part of the recovery plan that is intertwined with these matters, although it is not really proper subject for today. The question now is, are we addressing the fundamental financial weakness in our banking system? Or are we hoping that if we close our eyes, it will go away? I look forward to your thoughts on these matters. Thank you. [The prepared statement of Mr. Silvers follows:] VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 19 here 53177A.002 tjames on DSKG8SOYB1PROD with HEARING 7 VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 20 here 53177A.003 tjames on DSKG8SOYB1PROD with HEARING 8 9 Chair WARREN. Thank you. Commissioner Atkins. tjames on DSKG8SOYB1PROD with HEARING STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL Mr. ATKINS. Thank you, Madam Chairman. Good afternoon, and I join my colleagues on the panel in welcoming Secretary Geithner, and it is a privilege to be here today. And thank you very much for appearing today in what I understand is the meeting for the third quarter of 2009. It is a privilege for me to be here today to serve the American taxpayers on this panel in our oversight role over the Troubled Asset Relief Program. In the context of the current Federal budget and the talk today in Washington of programs costing trillions of dollars, TARP’s size of $700 billion seems almost quaint. Since we are in the building named after him, I am reminded of Senator Everett Dirksen’s famous tongue-in-cheek line about the Federal Government’s spending habits. ‘‘A billion here and a billion there, and pretty soon you are talking about real money.’’ TARP is large. And frankly, the slush fund aspect of it invites potential problems. Thus, Congress has set up this robust oversight framework with a special inspector general, a separate audit under GAAP and GAAS, not Government accounting rules, and of course, this panel. I take this accountability and transparency mandate from Congress very seriously. Press reports indicate that you and Mr. Barofsky have resolved any ambiguities in his reporting relationship to the Treasury in favor of independence. I think that is an appropriate result of the unusual nature of the program. I also understand that the information-sharing relationship between Treasury and this panel has been problematic in the past and perhaps can be improved. There is now a special liaison, I understand, in Treasury assigned to work with this panel. So I look forward very much to working with you all and experiencing for myself the state of interaction. We are approaching the 1-year anniversary of the passage of the EESA, as Representative Hensarling said, that set up TARP. Since its passage, Treasury has created an alphabet soup of programs under TARP, and that does not include the other programs of the Fed, the FDIC, and other banking agencies. Several questions arise. How effective has each of these programs been? Have some been more effective than others? Has TARP achieved its original purpose and mission? What are the costs, not just in terms of out-of-pocket expenses, but also of the real, if latent, costs such as moral hazard? The authority under EESA expires on the 31st of this year. The Treasury Secretary, of course, has the authority under EESA to extend TARP until October of 2010. Will TARP be extended? Has that decision already been made? If not, what criteria will be used in making the decision? What are the conditions under which you might make the decision? The statute provides only vague guidelines. For example, it requires a quantification of the expected cost to taxpayers of an extension, and that cost cannot be quantified without a rigorous eco- VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A 10 tjames on DSKG8SOYB1PROD with HEARING nomic analysis, including direct and indirect costs. And that includes the moral hazard that I mentioned. So, with that, Madam Chairman, I yield my time, and I look forward to the testimony of the Secretary. [The prepared statement of Mr. Atkins follows:] VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 25 here 53177A.004 tjames on DSKG8SOYB1PROD with HEARING 11 VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 26 here 53177A.005 tjames on DSKG8SOYB1PROD with HEARING 12 13 Chair WARREN. Thank you, Commissioner Atkins. Now, Superintendent of Banking for the State of New York, Superintendent Neiman. STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT PANEL tjames on DSKG8SOYB1PROD with HEARING Mr. NEIMAN. Thank you, Madam Chair. Mr. Secretary, thank you very much for being here today. And I will keep my comments brief as well to maximize the time for questions. First, I do want to acknowledge Treasury’s responsiveness to the panel’s inquiries on behalf of taxpayers. When we first met with you 5 months ago, you pledged that you and your staff would be available to us and maintain open lines of communication. From our public hearings over the summer with Ron Bloom and Herb Allison, to the many conference calls and face-to-face meetings we have had with other members of your staff, I thank you for your level of cooperation and for supporting our oversight work. You also responded to nearly 30 questions that I put to you directly from members of the public, some of which were very tough and candid. These questions and responses are now posted on the Internet to serve as a resource for all concerned Americans. Second, although financial stability has not yet been fully achieved, you deserve credit for making substantial progress. We are by no means out of the crisis, but there are positive signs, such as decreasing credit spreads and the revival in areas of the securitization markets. Nevertheless, our gains in financial stability remain fragile. Addressing the millions of homeowners facing foreclosures is key to breaking the downward cycle and achieving sustainable results. The Home Affordable Modification Program is integral to this effort, but initial results have been mixed. I intend to explore several of these issues with you during my time here, including issues around delays in servicer participation and uneven servicer performance, borrower frustrations around eligibility standards and access to account information, and the need to complement the HAM program with additional initiatives to address foreclosures stemming from job loss and recession. Finally, with Congress returning this week, it is widely expected that your regulatory reform proposals will experience significant movement and debate. I will be asking about your vision for developing a regulatory architecture that best supports consumer protection and long-term financial stability. I look forward to your testimony. [The prepared statement of Mr. Neiman follows:] VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 30 here 53177A.006 tjames on DSKG8SOYB1PROD with HEARING 14 15 Chair WARREN. Thank you, Commissioner. Mr. Secretary, we received your remarks this morning. Thank you very much. They will, of course, be part of the record. So that we will have more time to be able to question you and hear your answers, I am going to ask that you keep your oral remarks to five minutes. Of course, anything else that you wish may be entered in the record. Mr. Secretary. tjames on DSKG8SOYB1PROD with HEARING STATEMENT OF HON. TIMOTHY F. GEITHNER, U.S. SECRETARY OF THE TREASURY Secretary GEITHNER. It is a pleasure to be here again. Let me just begin by saying this is my 16th time testifying before the Congress of the United States and the oversight panel this year. Glad to hear you still want to see more of me. Happy to come and try to do it again, and I think this is an important part of the process. And Congress, when it acted last fall, didn’t just give the executive branch unprecedented authority to try to resolve this crisis, it created an unprecedented level of oversight not just with the Congressional Oversight Panel, but with the establishment of the SIGTARP and, of course, giving the GAO its usual mandate for oversight. We take that process very seriously. We have examined carefully everything you have written, recommendations you have made, adopted many, many of the recommendations of the oversight panels, and I think they have made our programs more effective than they would have been. So I welcome that role and compliment you for the thoughtfulness and seriousness of your approach. I also want to thank you particularly, Mr. Silvers, for what you said about Herb Allison and just say that I have the privilege of working with just exceptionally talented, dedicated people at the Treasury. It is a good thing about our country that people are willing to come, work in Government at a time of crisis, and bring great expertise and talent. You want to have working for the American people, people with the greatest sophistication about financial markets and these things, so that they can drive a hard bargain in the interest of the taxpayer. And I think that the team at Treasury is doing a good job of that. Just a few initial remarks. Last September, of course, we faced the risk of catastrophic financial failure and the risk of a great depression. And today, I believe because of comprehensive policy actions put in place since then, we are back from the edge of the abyss. The consensus among private forecasters now is that the U.S. economy is now growing again. The financial system is showing very important signs of repair. Cost of credit has fallen dramatically not just for homeowners, for households, but for businesses as well. Because of these signs of progress, we are now in a position to start to adjust our strategy, moving from crisis response, from the emergency response to recovery, from rescuing the economy to repairing and rebuilding the financial system, to repairing and rebuilding the foundations for future growth. And as we enter this new phase, we have to begin winding down in programs that are VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 16 no longer necessary and that, by design, are less needed, less important as the economy recovers. Let me just highlight a few things that underscore this transition we are in the midst of now. Earlier this year, we put a reserve fund in the President’s budget, recognizing the possibility we might need additional $750 billion of authority to fix this problem. Today, we believe that money is unlikely to be necessary. We have removed it from the budget projections. We are borrowing less already than we expected to resolve this crisis. Later this month, the Treasury’s money market guarantee fund will be allowed to expire, earning more than $1 billion in income, no cost to the taxpayer. The FDIC’s program to guarantee senior debt, which has generated more than $9 billion in fees, has seen very, very dramatic declines in usage. The suite of facilities the Federal Reserve put in place to provide liquidity to markets, to provide broad support to credit markets, have seen dramatic reduction in usage. So we are now at a point where reliance on these facilities is down 80 to 90 percent from their peak, from swap lines for foreign central banks to a backstop for the commercial paper market, et cetera. The details are in my testimony. When I took this job, the Government had outstanding commitments in terms of capital to the U.S. banking system in the range of $240 billion. Today, we have $180 billion outstanding. So that is a dramatic reduction in the scale of our exposure, direct exposure in terms of capital to the financial system, due in large part, to the success of our efforts to force a greater level of disclosure and to make it more possible for private capital to come in and recapitalize this damaged financial system. The dividends paid on those investments and the warrants you have received now total $12 billion. And for the 23 banks that have fully repaid, Treasury has earned an annualized average return of roughly 17 percent. Now, all these steps underscore our commitment to unwind these extraordinary programs put in place during the crisis as soon as conditions permit. At the same time, though, we have to recognize that we have to continue to reinforce this process of repair and recovery until it is truly self-sustaining, led by private demand. The classic errors of policy during crises once that governments not only act too late with insufficient force, but they put on the brakes too early. We are not going to repeat those mistakes because to do so would increase the ultimate cost of this crisis not just to taxpayers directly, but in terms of the damage it causes to the fabric of the American economy. Now, millions of Americans are still suffering deeply from this crisis, still facing probably the most challenging economic and financial environment we have seen in generations. Unemployment is still unacceptably high. The mortgage market, outside what is supported directly by Fannie, Freddie, FHA, is still significantly impaired. Commercial real estate financing remains strained. Small businesses, in part because they are more dependent on banks, have less options to access credit in this difficult environment. And of course, among—— Chair WARREN. Mr. Secretary, we are at 5 minutes. So—— VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A 17 tjames on DSKG8SOYB1PROD with HEARING Secretary GEITHNER. I am winding it up. And foreclosures are rising significantly because of the high rate of unemployment we are seeing as a country. Because of those challenges, we need to make it clear that we are going to keep those programs that are necessary for recovery as long as conditions require. There is a lot of concern that as things have improved, that we are going to let the market go back to the conditions it enjoyed before the crisis, and we are not going to let that happen. We have seen dramatic restructuring in our financial system already. If you look at the list of the top 20 firms in the country 2 years ago, a substantial fraction of those firms no longer exist today as independent entities. The financial system is going to be smaller, but it is going to be stronger, and that is a fundamentally healthy, desirable thing for our economy. But for that to happen, the Congress of the United States need to come join with us in passing comprehensive financial reforms so we have much stronger rules of the road and constraints in place to prevent this from ever happening again. I look forward to your questions. [The prepared statement of Secretary Geithner follows:] VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 38 here 53177A.007 tjames on DSKG8SOYB1PROD with HEARING 18 VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 39 here 53177A.008 tjames on DSKG8SOYB1PROD with HEARING 19 VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 40 here 53177A.009 tjames on DSKG8SOYB1PROD with HEARING 20 VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 41 here 53177A.010 tjames on DSKG8SOYB1PROD with HEARING 21 VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 42 here 53177A.011 tjames on DSKG8SOYB1PROD with HEARING 22 VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A Insert offset folio 43 here 53177A.012 tjames on DSKG8SOYB1PROD with HEARING 23 tjames on DSKG8SOYB1PROD with HEARING 24 Chair WARREN. Thank you, Mr. Secretary. Secretary GEITHNER. I was only about 6 minutes. Chair WARREN. And 19 seconds. [Laughter.] Chair WARREN. A year ago, Secretary Paulson told us that we were in a financial crisis because of toxic assets on the banks’ books. In fact, he came to Congress and explained that Congress needed to give $700 billion to the Treasury Department to deploy in order to remove those toxic assets, and we have had a year to get rid of them. Does Treasury know how many toxic assets remain on the books of the banks? Do you have a dollar figure for that? Secretary GEITHNER. Given the stress tests we put the U.S. banking system through, you now have an unprecedented level of disclosure for the 20 largest banks in the country about exactly what loans and securities they hold, with a pretty careful estimate of the potential losses on those exposures you might face in a worse economic environment. That gives a much better picture today. But the critical thing to recognize is and the reason we care about these toxic assets and their losses is because they require capital. And we came into this crisis with a banking system that did not have enough capital to cover losses in a deep recession, and that is what helped produce the worst financial crisis in generations. Because we put the system through this incredibly exacting set of stress tests with much more disclosure, the banking system today has much more capital in it, and that makes it much less likely that the financial system is going to be a source of headwinds, a constraint on future recovery. Chair WARREN. I understand—— Secretary GEITHNER. Now, if they had not been able to raise private capital, if they were still left with too little capital against potential losses, then we would be facing a much greater challenge. But the problems posed by those assets are substantially addressed by the dramatic improvement in capitalization of the financial system. Chair WARREN. So let me see if I can just pin this down, though. You say for the 20 largest banks for which we have stress tests, you believe we have a sense of how much is left in the way of toxic assets on their books? Secretary GEITHNER. Absolutely. Chair WARREN. Do we have a dollar figure for that? Secretary GEITHNER. Well, again, I would be happy to—— Chair WARREN. For the 20? Secretary GEITHNER [continuing]. Summarize for you or have the Fed summarize for you. They put out a lot of detail on exactly very detailed composition of exposures by those banks. Chair WARREN. And for all the banks for which a stress test was not run, do we have any sense of how much remains in the way of toxic assets in the banks, in these books? Secretary GEITHNER. My compliments to you for highlighting this question. We are a country of 9,000 banks, not just 20 banks. Chair WARREN. Yes. That is right, although fewer every day. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 25 Secretary GEITHNER. Fewer every day, but that is sort of a necessary process of repair and restructuring that we are going through. But many of those banks came into this crisis with more capital than the big banks held, but many of them also had more concentrated exposure to commercial real estate, other real estate investments. So there are challenges ahead for the financial system as a whole. Now, we decided not to put the rest of the U.S. banking system through the kind of exacting stress tests that we applied to the biggest institutions. A lot of complicated judgments went into that, and so you are right to point out that we are left today with somewhat less disclosure of that. But the supervisors of the country are spending a lot of care and attention looking at those risks in those institutions, helping them work through that. But you are right to highlight this is a significant challenge ahead. Chair WARREN. Okay. So when—— Secretary GEITHNER. But it is important to recognize that those remaining 9,000 banks together account for between a quarter and a third of the U.S. banking system. Chair WARREN. All right. Secretary GEITHNER. Or a much smaller share. So we are probably likely as a country to be able to manage and withstand those remaining pressures, and we can do so with much greater confidence because of the actions we took to stabilize the rest of the system. Chair WARREN. So when the Washington Post this morning summarized yesterday’s Federal Reserve report, the Beige Book, they summarized it by saying the banking sector remains a mess. Would you take issue with that characterization? Secretary GEITHNER. I guess I would say it this way. I think the U.S. financial system today is in substantially stronger shape than it was 3 months ago, 6 months ago, 9 months ago, and on the eve of this recession. There is, again, more capital, greater recognition of losses, and we are in a better position to get through this. But remember, this is just the first quarter. We are just starting to see signs of growth. It is very early, and we did a lot of damage to the financial system of this country, and it is going to take a while to get through this. And it is going to take longer to do it because we are going to do it right. So I would not want anyone to be left with the impression that we are not still facing really substantial challenges throughout the U.S. financial system. And where there has been improvement, it has been dramatic, much more than I would have expected at this stage in the crisis. But a lot of that has come through the direct effects of policies—to put capital in banks and to provide support for the markets that were most damaged. We do not have a mortgage market today except for that directly supported by the Government, and that sort of underscores the basic fact that we have got a lot of challenges ahead. Chair WARREN. Okay. Thank you, Mr. Secretary. Congressman Hensarling. Mr. HENSARLING. Thank you, Madam Chair. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 26 Mr. Secretary, under the EESA statute, how do you define financial institution? Secretary GEITHNER. I was looking forward to this discussion, and I think I understand where you are going. The statute was written, as you implied in your opening statement, really quite broadly. And as you also said in your opening statement, my predecessor—the previous administration—made a judgment not just that it was in the economic interest of the country to provide support for the automobile industry, but that it was legal and appropriate to do so using the EESA legislation. Mr. HENSARLING. And you concurred in that opinion? Secretary GEITHNER. And obviously, we would not have spent a penny of taxpayers’ money using that authority if we did not concur in both those judgments. Mr. HENSARLING. If you concur, then clearly, you believe that Chrysler and GM are financial institutions. Is AT&T a financial institution? Secretary GEITHNER. If you look at the plain facts of what I inherited in terms of judgments like this, I understand why it might be hard to explain why an automobile industry is a financial institution. But again, that was the judgment made by my predecessor and under—— Mr. HENSARLING. I understand that, Mr. Secretary. But you voluntarily chose to continue the practice—— Secretary GEITHNER. Only—— Mr. HENSARLING [continuing]. And I am still trying to figure out your legal interpretation of the EESA statute. And so, clearly, I assume you don’t believe you are breaking the law. So you believe that Chrysler and GM meet the statutory definition of a financial institution. So we have a number of—— Secretary GEITHNER. As the law was written. Mr. HENSARLING. Well, of course. So, again, the question is, is AT&T a financial institution? Is American Airlines a financial institution? Is Walmart—— Secretary GEITHNER. No and no. Mr. HENSARLING. No and no. Secretary GEITHNER. But Congressman, I think it is important to recognize two important things. One is that I did not design this statute. I was not in office when it was written into legislation. Mr. HENSARLING. I assure you I didn’t either, Mr. Secretary. Secretary GEITHNER. But it did what was necessary for the country, which is to give the executive branch of the United States broad authority and discretion to fix this. And the fact that we waited so long to make that authority available made this crisis more damaging and worse. One important fact—In a crisis of this severity, a recession this deep, we have things that we would never want to do. Mr. HENSARLING. Mr. Secretary, I understand that. As you well know, Congress had—the House had legislation that dealt specifically with the automotive industry. So there were at least some members of the House who clearly did not believe that Chrysler and GM came within that statutory limit. So what I hear is Chrysler and GM, yes, are financial institutions. AT&T, American Airlines—happen to be two Dallas-based VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 27 companies—are not. So, is there any additional clarity—and I believe one of the things the markets continue to demand is clarity of public policy. Who will you bail out? Who will you not bail out? And so, I again ask you for some clarity on what is a financial institution? Secretary GEITHNER. Congressman, I don’t think we are going to be able to take this further. Mr. HENSARLING. Okay. Secretary GEITHNER. But I want to revise slightly how I responded to your question about AT&T and American Airlines. I would say it slightly differently, which is I do not believe you can read the statute today to justify action beyond the scope of the actions we have taken in this context. Mr. HENSARLING. Well, I personally—— Secretary GEITHNER. Now, things might change in that case. Mr. HENSARLING [continuing]. Hope, Mr. Secretary, that the legal interpretation of a statute doesn’t change with the passage of a handful of months. In the remaining time I have on this question—— Secretary GEITHNER. No. That is clarity in the sense that we have to pass two tests to use this authority. One test is does the law give us the authority to act? And the other is, are those actions necessary and prudent in the interest of fixing this mess, restoring financial stability? It is not the simple test of what—— Mr. HENSARLING. Mr. Secretary, forgive me. Unfortunately, our time is constrained, and I may have time for one more question here. Leaving the question of the definition of a financial institution, there are roughly, I don’t know, six, eight major programs under TARP now. And I am curious, having been serving on this panel for almost a year, I think with perhaps one exception, I am having trouble discovering where Treasury has identified any particular metrics of success beyond financial stability—— Secretary GEITHNER. I would be happy to help you on that. Mr. HENSARLING. Well, I look at the Capital Purchase Program. Its purpose is to stabilize the financial system, the automotive program, prevent significant disruption of the automobile industry that could pose systemic risk to the financial market stability—— Chair WARREN. I am going to have to stop—I am going to have to stop you there, Congressman. I am going to be disciplined about time. Secretary GEITHNER. But could I say I think that—— Chair WARREN. I will give you 20 seconds. Secretary GEITHNER. Okay. You can look at each of these programs, and this is the great virtue of the markets, and you can see almost day-to-day evidence of whether they are having an effect in lowering borrowing costs, improving confidence in the stability of the system. For example, you can look at the cost of borrowing for businesses and families, the cost of mortgages, confidence in financial institutions, price advantage. Those things are a good day-to-day indication of where these programs are having effect, and you can see a big impact—— Chair WARREN. Thank you, Mr. Secretary. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 28 Mr. Silvers. Mr. SILVERS. Yes, Mr. Secretary, I want to pick up, I think, on the threads of your testimony, which I think flow very nicely into the real issues facing the country right now, which do include the question of the unemployment rate. A couple of weeks ago, in two parallel stories in the Washington Post, the following statement was made on the front page. The wounded U.S. economy, and I quote, ‘‘has shown signs of improvement in recent weeks, but many economists are accentuating the negative, bracing for headwinds’’—you mentioned headwinds— ‘‘that could cause the recovery to be weak. Huge swaths of the financial system have been damaged, which could lock consumers and businesses out of loans for years to come.’’ Next to that story was another story about Asia. You are smiling. You probably read the same papers I do. And that story says the Asian recovery was—I won’t quote it, but to the effect of the Asian recovery has been far more robust than ours, and a key factor in that has been the relative strength of Asian banks. Now, do you agree with this characterization that appeared in The Post of the circumstances we find ourselves in? Secretary GEITHNER. There are several important points to start with. In the best of times, we grow roughly an average of 2.5 percent a year. For an emerging market economy, in China, India, Brazil, Mexico—— Mr. SILVERS. Mr. Secretary, I think Japan was the—Japan was the comparative here. Secretary GEITHNER. Yes, I doubt that you are going to see a more robust recovery there than here. But I would say, again, you need to think about that relative comparison. I think that we are in a position where it is much less likely today that weakness in the banking system or in the rest of the financial sector proves to be a substantial constraint on the pace of recovery here. The dominant constraint on pace of recovery here is the basic reality that as a country we borrow too much, save too little, live within our means, and the process of correcting that pattern of behavior is going to necessarily produce a slower recovery for the United States. Mr. SILVERS. Mr. Secretary, why is it, in your view, that the weakness of the banking system, and particularly the three out of the four largest banks, whom you are, I believe, correctly not allowing to repay TARP money—in light of your comments about the fact that, to take an example, the mortgage market is a creature right now of your efforts, and secondly, as you noted in your written testimony that business lending—not just small business lending, but business lending by banks is going the wrong direction quite seriously, why is that not a problem? Secretary GEITHNER. I think it is a problem, and I said we are in a much better position today than we have been and we could have expected to be. So it is much less likely today that it will be a constraint. But just a few observations. Bank lending, as you point out correctly, is declining, but it’s declining much, much less than it has in past recessions and much less than the decline in economic activity in part because we have been, again, relatively effective in VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 29 restoring some confidence and stability. The decline in bank lending has been more than offset by the increase in borrowing in the securities markets. So, overall, what we are seeing is a reduction in demand for credit. Again, as people improve their balance sheets, save more, spend less, there is less evidence of a substantial contraction in the supply of credit. But it is still early. Largely because of the forceful actions we took and the support we will continue to provide, it would not be appropriate or prudent for us to infer from that sign of progress that we are at the point where we can wind it back completely. Mr. SILVERS. Just to come back to that one sentence in your written testimony, which I found by far the most interesting—no offense to the rest of it—is that is it really a good thing that essentially credit provision has moved away from the banking system to the extent that it is going on, particularly with respect to the fact that most employers, most creators of jobs, can’t access the bond market? Secretary GEITHNER. It is an interesting question. But remember, our banking system took on too much leverage. Mr. SILVERS. Unquestionably. Secretary GEITHNER. So, inevitably, the banking system leverage was going to have to come down. That was a necessary. The consequence is that you are going to see less growth in lending by banks. I think it is important to the future stability of our system, that there are alternatives to banks in the capital markets that actually work. So if there is weakness in banks, there is an offsetting source of strength, and vice versa. So part of the reform process we are all committed to is not just to make sure there is stronger capital in banks, much stronger shock absorbers in banks, much better capacity to absorb future risk, but that the securities markets, asset backed and others, have a stronger, more robust framework because that will make our system more stable in the future. Mr. SILVERS. My time has expired. I will come back to you next round. Chair WARREN. Thank you. Commissioner Atkins. Mr. ATKINS. Thank you, Madam Chair. I wanted to start out by looking ahead, I guess, if we could. Because as I said before, the authority under EESA expires at the end of this year, and you have the authority to certify that it should be extended with appropriate justifications under the statute. And no one would be happier than I to see it meet its end. But according to the statute, your certification should include a justification why the extension is necessary to assist American families and stabilize financial markets, as well as the expected cost to the taxpayers for such an extension. So I guess my first question is, have you made a decision yet one way or the other? Secretary GEITHNER. No. I have not yet decided. We are going to think through that carefully. Mr. ATKINS. Well, and that is what I wanted to explore because this is rather for a statute—no offense to the congressman here who didn’t vote for it anyway—but it is very squishy, and it is real- VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 30 ly questionable to me what it means, for example, to stabilize financial markets. You just said that you have been relatively effective in restoring stability. So when you determine that the markets have been stabilized, are you comparing it to a year ago, in which case they are much more stable; 3 years ago, in which case they might not be? What kind of markets would you look at—U.S. stock market, commodities, international markets, the dollar? I mean, I think all of these things need to be carefully looked at, but I don’t know if you have started this process. Secretary GEITHNER. I completely agree with you, and I think you listed a range of important factors. You want to look at, again, what is the capacity of the financial system to live on its own now without these exceptional supports? How likely is it that you are going to see enough repair and strength in the securities markets, not just in the banking system, for us to withdraw that support? I think that some of these programs realistically are going to take a longer time for them to work. For example, the expected path of foreclosures in the United States is going to last for a long time. So it is very, very unlikely that we are going to be at the point in the next few months to have said that the housing market is at a point where we can be confident that we can withdraw these exceptional actions. There are parts of the credit markets in asset-backed securities where there has been very substantial improvement, but a lot of that has come on the strength of the basic backstop we have provided. So we want to look at a broad set of measures of basic health in the system, and we want to make sure that people are confident that we are going to get the economy on a strong foundation before we withdraw it. Because as I said, again, I think the classic mistake people make is that they declare victory too soon. They put on the brakes too early. They withdraw support and then the system has to go back and build more insurance against the risk of a bad outcome, which could intensify the recession or reignite—— Mr. ATKINS. Well, but contrary wise, too, you can also make a mistake of leaving the crutch on too long, and the patient then gets too dependent on that. Secretary GEITHNER. You are exactly right. Mr. ATKINS. And we are talking about moral hazard, which I hope that as you all do your cost analysis here, you have to take that into account because I think that is a huge usually undermining factor of our financial system. Secretary GEITHNER. I completely agree with you, and I think you said it exactly right. But let me just point out one thing that is helpful on that front. Largely, these programs are designed so that they will be expensive when things normalize. And that is why you have seen use of these programs dramatically decline as conditions have improved. This helps mitigate the risk that people rely on these programs too long. Mr. ATKINS. But I think you could argue that, for example, the warrants are, even now, relatively under priced. I mean, sure, the taxpayer is making a nominal profit. But query whether or not in VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 31 relationship to the humongous risk that the taxpayer took a year ago, is that recoupment commensurate with the risk that was taken? Secretary GEITHNER. I like the way you frame it. I think we need to look at two things in measuring the effectiveness of these programs. One is what was the direct measured benefit to the taxpayer in terms of the return on the risk we took? But that is not sufficient. The best way to measure the effect of these programs is to take a broader view of what you did to help get this economy out of crisis into recovery. And that is a harder thing to measure. Mr. ATKINS. Right. Secretary GEITHNER. But still, if you look at almost any measure of cost of credit—confidence in the financial system, availability of credit, concern about risk—all of those measures are dramatically lower, and that is the fair way to capture the return on these investments, not just the 18 percent return on average we have gotten on our investments and warrants. Mr. ATKINS. So that argues in a way for ending the program—— Secretary GEITHNER. No, I don’t think it does because, again, I think the art of this—and there is no science to it. The art in this is if you commit to do enough and you make that credible to people, you are not going to be behind always chasing a crisis, and you are more likely to solve it at lower cost. If you prematurely pull it back, you are going to live with too much risk. It is going to be more expensive in the future. That is the basic central design of effective strategy in financial crises. Chair WARREN. Thank you, Mr. Secretary. Superintendent Neiman. Mr. NEIMAN. Thank you. Mr. Secretary, the new Treasury servicer report on mortgage modifications represents, I think, an important step in data access and accountability. But it also confirms in the report just issued this week that there are wide disparities among the rates of modifications. Some firms, as you well know, have not started any trial modifications, while many more firms have started rates in the low single digits. You held an important meeting with servicers on July 28th to discuss these very issues. I was also encouraged yesterday to hear Assistant Secretary Barr’s House testimony with respect to new commitments that have been made in key areas such as the speed of implementation, data collection, and borrower outreach. Now the report that was just issued shows that there are trial modifications started, and the number is around 360,000. These would indicate only about 12 percent of estimated eligible borrowers. Secretary Barr indicated that servicers have committed to increase that number to a total of around 500,000 trial modifications by November 1. Based on that, your benchmark of reaching 3 million to 4 million homeowners who are at risk, are you satisfied we are on that track? Have we set realistic expectations? And even more importantly, is the real risk and challenge in converting those trial mods to permanent sustainable modification? VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 32 Secretary GEITHNER. You describe the facts and the progress and the challenges absolutely right. It is not enough just to have sent out $1.8 million of solicitations to participate in modification, which is the numbers we have approached now, or almost that level. It is not enough that you have close to 500,000 offers extended, it is not enough that you have more than 350,000 households now benefiting from substantial reductions in mortgage interest rates. You need to make sure these modifications are going to work over time, and we are very focused on making sure this program reaches as many eligible homeowners as possible. Two important points. It is very helpful to put in the public domain every month detailed numbers that allow the American people to see the number of people these banks are reaching. And I am quite confident that will produce much, much faster modifications much more quickly because institutions do not want to live with the consequences of being so far behind the curve of what is possible in helping families get through this exceptional set of problems. We also want to make sure that we are going in after the fact and looking at whether people are denying eligible homeowners access to modification. So there is a so-called second look program. That is a softer form of what it actually is, which is a program of auditing to make sure that they are not denying eligible homeowners the chance to participate. So I think this is going to reach a substantial share of people that are eligible. But it is important to recognize that this was just one part of a set of actions we took to help stabilize the housing market, to bring down mortgage interest rates. And those actions when viewed in total, have helped bring down mortgage interest rates to very low levels, and it helped bring a measure of stability to housing markets, housing prices, housing activity faster than many economists had forecasted. And it is that broader measure that should be the ultimate test of this program. Mr. NEIMAN. I think I would be interested in your comments about the continued obstacles to effective and increasing the effectiveness of servicer participation. I will do that in a follow-up QFR. But what we are hearing in talking to servicers is there is still concern about outreach, getting documentation back from servicers. Some creative approaches that I have heard from servicers are, because people are not responding, to going out physically and visit. I would like your thoughts on other creative approaches. I have suggested in the past possibly even letters from yourself or ideally, the President of the United States to assure that people are opening their mail, realizing that this is not just another creditor notification, but a real response and involvement from the Government. Secretary GEITHNER. We welcome those suggestions. And of course, we are very pragmatic. We want this to work, and we will take and act on any reasonable suggestion. I think you are right to point out for this to work, people need to take some initiative, to ensure they get help. But, 350,000 families today have seen a dramatic reduction in the cost of carrying VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 33 their mortgage, there is more money in their hands at a time when they are going through an enormous challenge. Chair WARREN. That is our time. Mr. NEIMAN. In my 10 seconds I have left, I just want to—we will be holding a hearing on September 24th in Philadelphia on this very issue, and we would look for support from your office to assure that we have representatives from the Treasury and Fannie Mae and Freddie to go over those very programs that you reference, particularly the second look. Chair WARREN. A good use of your extra 20 seconds there. Mr. NEIMAN. Thank you. Chair WARREN. Thank you, Superintendent Neiman. So I would like to return, Secretary Geithner, to a point you raised, and that is that the stress tests are effectively the tool by which we have measured the strength of the 20 largest financial institutions, and that is what gives you confidence both that we understand the risk of exposure on the toxic assets and the overall projections on how stable these institutions are. But the worst-case scenario under the stress test for 2009 projected average unemployment for the year at 8.9 percent. As you know, the current unemployment rate is 9.7 percent. The average for the year has now reached 8.9 percent. So the panel has recommended that under those circumstances, the stress tests be repeated for these financial institutions. Does Treasury plan to do that? Secretary GEITHNER. It is important to start determining whether this was a conservative enough stress test, and the measure of the forecast for growth in employment that was framed as part of that scenario is not significant. The most important thing to observe was the loss rates that were assumed in the worst-case scenario. And if you look carefully, as you have done, at what the Fed designed and produced, the loss rates that were assumed in the stress scenario were worse than peak losses experienced by this country in the Great Depression. So they assumed roughly loss rates in the stress test could rise as much as 9 percent. We are now more in the 2 to 3 percent range. Over the last quarter, losses are running well below that level and in earnings are running substantially above the assumptions. So—— Chair WARREN. Mr. Secretary, I am sorry. Let me stop there because you are the one who put out what the appropriate details were in the stress test. Secretary GEITHNER. Actually, the Fed designed it, as you would expect, and they are the ones who put it out. Chair WARREN. That is right. The Fed designed. But you are the one who advanced it and said we could rely on it. And one of the featured elements was unemployment, and we all know that unemployment relates very closely to the level of foreclosures, which, in turn, relates very closely to the value of the toxic asset, the declining value. Secretary GEITHNER. But the framing constraint in the stress test was the loss estimates that were applied and the earning estimates that were constrained. Those did not relate to the unemployment forecast. So, again, what matters—— VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 34 Chair WARREN. Is not what you advertise? Secretary GEITHNER. No, we put in the public domain for everyone to see and assess for themselves what the loss rates were. Chair WARREN. You know, Mr. Secretary—— Secretary GEITHNER. So people can judge on their own. Chair WARREN [continuing]. That raises the question. We would like to be able to rerun the stress tests, and I understood from conversations with you that we would have enough information about how the stress test is composed that reasonable people could sit down, build in other assumptions, and see how the stress test would come out with these major banks. And in fact, we don’t have the risk model, and we don’t have the data inputs—— Secretary GEITHNER. Again, I would be happy to—— Chair WARREN [continuing]. That make it necessary to repeat them. Secretary GEITHNER. I would be happy to remedy that. And I would be happy to spend as much time as you would like going through this. Chair WARREN. That is—I will take yes for an answer. Secretary GEITHNER. But I need to slightly change the way you framed it. These were an important improvement in the market’s capacity to assess risk in these institutions. And on the strength of that improved capacity, you have seen a substantial amount of private capital come into the U.S. financial system. Now, we never said it was sufficient. There is no certainty in life. Things could change going forward. But I think we have a basis for people to independently assess whether these assumptions were rigorous enough and whether they need to be revisited. Chair WARREN. And so, let me ask the other half of that, and that is we also asked the question about expanding the stress test to mid-size banks and perhaps even smaller banks in a somewhat modified form. Is Treasury willing to do that? Secretary GEITHNER. Well, as I said, we said publicly—and I am not going to change this view—at the time of the stress test results that were not going to conduct a similar exercise, bank by bank, across the 9,000 other banks in the country. But what supervisors have done—— Chair WARREN. How about the next 100? Secretary GEITHNER. Well, again, let me explain what the supervisors have done because this is their job. What they have done is apply a carefully structured framework through the supervisory process to the rest of those institutions. Then, we can have a better sense for making judgments about the rest of the strength of the remaining system. But it is not realistic or feasible for the Fed and the supervisors to conduct the level of detailed assessment required for this to be credible for a banking system that has 9,000 additional banks. Chair WARREN. Thank you, Mr. Secretary. Congressman Hensarling. Mr. HENSARLING. Thank you, Madam Chair. Mr. Secretary, I don’t want to replow the old ground on financial institutions. I agree with you we have probably made about as much headway between ourselves as we are going to make on that. Secretary GEITHNER. We could try. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 35 Mr. HENSARLING. But I certainly think it is reasonable for anyone to conclude that there is a fair amount of subjective power that is assumed by Treasury in deciding who will receive bailout or economic recovery funds under EESA. I do want to start replowing some old ground in my earlier line of questioning because I am concerned the American people need to know what are we getting for our $700 billion today? And again, having been on this panel, I started reading from Treasury’s Website on the purpose of these programs. And frankly, with the exception of the Foreclosure Mitigation Program, where you offer the goal of assisting 7 million to 9 million homeowners— I think today we stand at roughly 350,000, if my records are correct—I can find no demonstrable metric of success by the administration. So can you enlighten me as you—— Secretary GEITHNER. Again, I would be happy to walk you through, like I do a Murton testimony and the substantial reports the Fed and the Financial Stability Oversight Board have provided. But I just don’t think what you are saying is fair. With these programs, you can see directly not just how much money we are spending, where we are spending it, but what is actually happening to borrowing conditions in those markets because—I will give you an example. One of the most important things we did with the Fed was this program called the Term Asset-Backed Lending Facility, which was designed to provide a backstop of support to the lending markets critical for small businesses, for auto finance, for student loan finance, for credit card receivables, et cetera. And you can see in detail how much issuance has come with this program, what has happened to the cost of issuance, how much has been directly funded by these programs rather than indirectly supported by it. In the banking—— Mr. HENSARLING. Mr. Secretary, what you are asking us to do, though, is draw, in essence, the cause and effect. Happy to look at the statistics in the economy, but again, coming from an oversight panel here, it is hard not to conclude that essentially you have the subjective power to invest $700 billion on a revolving basis on any institution you deem is a financial institution and that any program will be judged as a success if you deem it a success after the fact. All I am saying is that—— Secretary GEITHNER. No, I don’t agree with that. Mr. HENSARLING [continuing]. I can’t find—— Secretary GEITHNER. And I would never claim that. I would just remind you of two things. The Congress of the United States designed the authority Treasury was provided. We are using that authority—— Mr. HENSARLING. And Mr. Secretary, you have the ability under the programs that you design to say here are the metrics for success. Secretary GEITHNER. Right. However, the great virtue of this program is that you can see not just the return we are getting when people repay, the price we are getting relative to the market, but you can see directly, program by program, what is happening to credit conditions, which is the ultimate test of what we are trying to do. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 36 In fact, you can do better than that—— Mr. HENSARLING. Well, Mr. Secretary, let me ask, if what is happening in the credit markets is the ultimate test—and again, we can question cause and effect—clearly, the LIBOR–OIS spreads 1 month were incredible back in the crisis in September of ’08. By the time your administration took office, they went down from 300 basis points to 20 basis points. Now since your administration has come into power, apparently they are down to 10 basis points. So, certainly, that is an improvement. But it sounds like a lot of this happened on the previous watch. Secretary GEITHNER. Well, hold on. Mr. HENSARLING. And again, I don’t know what the cause and effect relationship is. Secretary GEITHNER. Cause and effect is difficult in economics and finance, but it is much easier and more clear in these programs than in these markets where we try to measure the effects of economic policy. And you are right to point out that the actions taken by my predecessor, which, of course, I was part of, did have an important effect in breaking the panic in the fall of 2008. But it is also true that almost any measure of financial health for this country, in January of this year, was still in signs of emergency. And—— Mr. HENSARLING. But Mr. Secretary, again, the question is what is the taxpayer getting for their money today? We can debate what purpose it served a year ago. Secretary GEITHNER. I will tell you what the taxpayer is getting. You have a financial system that is more stable. Credit is more available. People can borrow at much lower cost. And the taxpayer of the United States can observe the returns in the investments we have made in the banking system in terms of actual billions of dollars. Mr. HENSARLING. Well—— Secretary GEITHNER. There is no better measure than the return of these programs, and I would be happy to—— Mr. HENSARLING. How about an additional 2.5 million jobs lost, the highest unemployment rate that we have seen in 25 years, mortgage delinquencies and foreclosures up? Mr. Secretary, it is a mixed report card at best. I see my time is up. Secretary GEITHNER. But Congressman, no one is going to—— Chair WARREN. Our time is up. Secretary GEITHNER. I was very clear in my statement. It is only now we are seeing positive growth for the first time. Unemployment is still very high and could stay high for some period of time. We are not close to being through this. But on the clearest, direct measures of the program we were tasked with executing, we have made more progress than I think people reasonably expected. Not enough yet, though. And we are going to keep at it. Chair WARREN. Thank you, Mr. Secretary. Mr. Silvers. Mr. SILVERS. Mr. Secretary, I want to take this up from a sort of different angle. I think one of your achievements—clearly yours, not the prior administration’s—in the stress tests was to put an VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 37 end to the fiction that all banks were equally healthy. I understand why that fiction was indulged originally. I don’t think it was done out of bad faith or for anything other than the best of reasons, but it was important to put an end to it. However, I think many of the characterizations of success that you have just indulged in with my colleague are due to unwinding funds that were given to strong banks. And when they paid them back, they paid them back at a profit, and that was never where the risk was embedded anyway. I mean, there was always some risk, but the big risks were not there. So I want to turn to weak banks. And I hope you will indulge me in what may seem a little peculiar sort of questioning. Can you explain to me and to the listening public what is a ‘‘zombie bank,’’ and why is it so dangerous? Secretary GEITHNER. I don’t ever use that term myself because I don’t think it helps anything. I think the risk in any financial crisis is if you have a banking system that doesn’t have enough capital, they will have to reduce lending. And viable businesses or families will not have access to credit, and therefore, they will be forced to shrink or go out of business or delay a college education for their children. That is why the health of the banking system matters, and that is why it is a good use of policy and financial resources to try to make sure you bring capital in. So you are not living with a set of institutions that are too weak to lend. Mr. SILVERS. Too weak to lend. Is it fair to say that those people who like the term ‘‘zombie bank’’ mean by it the walking dead, meaning an institution that is not in receivership or insolvent, but is too weak to lend? Is that a fair characterization of that term? Secretary GEITHNER. I think I just said it. Again, I don’t—— Mr. SILVERS. You know—— Secretary GEITHNER. I am being less graphic than you, but I think you have got the right concept. Mr. SILVERS. Okay. Secretary GEITHNER. Where are you going with this? Mr. SILVERS. Well, I thought I got to ask the questions. [Laughter.] Mr. SILVERS. Where I am going with this is whether or not you like graphic terms, graphic terms sometimes have the ability to clarify things that otherwise seem very mysterious. Whether or not you like graphic terms and whether you use the terms I just used or the terms you used, in your view, is Citigroup such an institution today? Secretary GEITHNER. No. Mr. SILVERS. Why? Secretary GEITHNER. This won’t satisfy you, Mr. Silvers. I can’t talk in this context, and I will never talk in this context about the detailed outlook for individual institutions in our country, no matter which they are in this case. So I want to return to where I began, which is that the best test of whether these programs are working is whether you are seeing private investors in this country and around the world willing to come in and provide capital to those institutions, to provide funding for them. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 38 And one of the great virtues of the stress test was it gave them a chance to make that choice, and they basically voted with—— Mr. SILVERS. Mr. Secretary, how can you be sure? And I recognize the cause and effect issues that you mentioned earlier are real in these areas. But how can you be certain that what you didn’t really do in the stress test was signal that you, the Treasury Department and the Fed, were not going to further hammer the capital structures of these banks and that they could be invested in because there was an implicit guarantee behind them, even though they remain at their core not really functioning institutions or, to use the graphic term, zombies? Secretary GEITHNER. Again, you are right to point out that we did a range of other things besides just making it possible for private capital to come into these banks. Part of that included the set of guarantees, liquidity facilities that the Government and the Fed provided together. Those were important and necessary and have been helpful in restoring confidence. But again, I think, by any measure, you have the system that we have today, which is in a smaller, but stronger capacity to support the economy going forward. That is the ultimate test of what we are trying to do. Mr. SILVERS. Mr. Secretary, I am going to refrain because I think folks at Citigroup may feel I am picking on them. I was going to ask you about Bank of America and Wells in order. I am not going to spend the time doing that because you are not going to answer, and I appreciate why you feel it would be inappropriate for you to be specific with respect to particular institutions. Those three institutions are a macroeconomic problem, right? And they go directly to jobs. As this panel has gone through the country talking to people who are trying to create jobs, we hear over and over again that in various ways—whether it is agriculture or with commercial real estate or large firms or small firms—we hear over and over again that the system is weak, and the large institutions are not stepping up. Chair WARREN. Mr. Silvers, that is our time. Mr. SILVERS. I am done. Chair WARREN. Commissioner Atkins. Mr. ATKINS. Thank you, Madam Chairman. I wanted to go back to the statute a bit because one of the other provisions of the statute regarding TARP is that the Government Accountability Office is to do an audit, and I think, significantly, it is not under Government accounting rules, but under GAAP and GAAS, which will be, I think, interesting. So they are going to have to get to some of these issues if they are going to do a balance sheet and a P&L statement and all that sort of thing. They are going to have to look at cost and what not. So I guess my question is, first of all, has this been scoped out yet as far as the audit goes? Where does that stand? Secretary GEITHNER. I don’t think I can do adequate justice to that today, but I would be happy to get back to you in writing with exactly where that process stands. Mr. ATKINS. Okay. Secretary GEITHNER. I know that we have a response to put out in terms of a broad financial statement of the Government, which VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 39 will include some estimates of those measures. But in terms of the GAO process itself, I don’t know the details of that right now. Mr. ATKINS. Okay. So as far as when it might be public? Secretary GEITHNER. I just can’t tell you, but I would be happy to have them get back to you or we can do it ourselves directly. Mr. ATKINS. Okay. Another issue, and you brought this up in your opening statement, is regulatory changes that you all have proposed to Congress. And I guess having come from an independent agency, I value that sort of tradition of independence from the administration. And earlier this year, there were reports in the press about I guess I would term it as maybe excessive pressure from the administration, especially the Treasury Secretary, with respect to your colleagues on the President’s working group and elsewhere. So I wonder where that stands as far as you are concerned, as far as dealing with others as independent agencies that are not part of the administration, of course, and how you view your interaction? Secretary GEITHNER. I actually believe that, just by what you read, that there is a lot of agreement across those agencies on the core things we try to achieve. And I think on the broad structure— that is, the framework for protection of derivatives and on resolution authority for dealing with failed institutions in the future. This is evident by the core provisions on capital you heard us outline a couple of weeks ago. There is a broad base of agreement across those agencies on the core parts of reforms. There are some areas, though, where they would prefer that we leave the existing authority they have. And so, the focus of their concerns have been on taking authority from them and putting it in a different place, most conspicuously in the area of consumer credit protection, where I think by any measure, it failed. And our belief is to put in place a stronger system. You had to put in a single entity, both the authority to write rules and to enforce them. But that is, I think, where there is still disagreement across these institutions. And you would expect to have disagreement. There is nothing surprising in that. Mr. ATKINS. Well, people have vested interests and everything else. But I guess we can—we will have another chance to talk about these particulars later on. With respect to the programs under TARP, do you have any expectation of expanding the list that you have now? Secretary GEITHNER. Again, what we tried to do earlier in the year was to lay out a broad framework to recapitalize the system and to provide targeted support for the credit markets that are necessary for recovery. And as many of you said, we put out a broad framework of programs in that area. It was our best judgment at the time. We want to have some capacity to modify and adapt those over time to make sure they are doing what they need to do and to wind them down and redeploy capital as necessary. At this stage, we don’t have any specific plans to substantially expand the scope of the entities into areas we would target, but it is possible that—— Mr. ATKINS. Well, if—— VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 40 Secretary GEITHNER [continuing]. Looking at the damage in the system remaining, we might make that judgment. But we would want to set a very high bar for doing so because we want to be able to demonstrate an appropriate use of taxpayers’ money, measured by returns we are going to get. Mr. ATKINS. Well, speaking of which, one of the issues I think that is still in question is whether or not TARP is a revolving type of arrangement, whether the monies that are paid back are then available for the future? Do you have any legal analysis of this? Secretary GEITHNER. Yes, in previous testimony, we provided extensive responses to the Congress on how that authority was drafted. And I actually think there is broad acceptance in the Congress by the architects of that legislation that the process works as follows: If a dollar comes back—and, of course, as I said, billions of dollars have come back to the Treasury from the financial system— that goes directly to the general fund to reduce debt outstanding. Chair WARREN. I am sorry—— Secretary GEITHNER. But the law is designed—— Chair WARREN. Mr. Secretary. Secretary GEITHNER [continuing]. To still give us the authority to use that if we think we need to do it to help protect the system. Mr. ATKINS. Well, I guess I would like to see the legal analysis. Secretary GEITHNER. Happy to do that. Chair WARREN. Thank you. Superintendent Neiman. Mr. NEIMAN. Thank you. A major aspect of regulatory reform is the streamlining and modernizing of our regulatory structure. Your proposal includes merger of the OCC and the OTS, and I support that change. Some, including our Nation’s largest banks, however, propose going further to create a single monolithic Federal bank regulator, which raises, in my opinion, serious concerns. Creating a single regulator as a means of improving financial regulation relies, in my opinion, on the faulty assumption that regulatory consolidation leads to a stronger and safer banking system in itself. In my opinion, the opposite is true. Such a proposal would increase the fragility of the system by increasing industry consolidation, by eliminating needed checks and balances, and subordinating the interests of the consumer to the business goals of a handful of mega banks. In my experience, multiple regulators yield better results for consumers and for financial stability, much like multiple judges are used in the Olympics to arrive at the right score. What are your concerns about the proposals to create a single monolithic regulator? And how important was it for you, in drafting your proposals, that the FDIC and the Federal Reserve retain examination authority to better inform their respective missions of deposit insurance and lender of last resort? Secretary GEITHNER. Thank you for raising that question, and I think you have framed the choices thoughtfully. One of the most important things we decided that we had to do was to eliminate the weakest parts of supervision in the system and eliminate the opportunity for people to take advantage of VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 41 weaker supervision by flipping their charter or shifting risk to those parts of the system. One of the principal examples of that, unfortunately, was in the difference between the standards applied to thrifts and applied to banks. So we thought eliminating that was a necessary, essential condition for reform. If you look beyond that, there is less evidence that having two entities responsible for different types of State-chartered banks alongside a single Federal supervisor, would create really meaningful risk of arbitrage in the future. In fact, if you look at the standards applied by our bank supervisors, in general, they were more evenly applied and more effectively enforced. So we don’t think it was necessary or desirable to try to force all of that into one new entity, partly because of the concerns about concentrated power and partly because we are asking the Congress to do a lot in a very short period of time. And a guiding principle that affected our choices was to say we want to make sure they are focusing on the things that are essential to do. It should not be on those that might be desirable to some people, but would not offer a benefit that was proportionate to the political difficulty or the practical difficulty of doing it. Further dramatic consolidation of bank supervisors we didn’t think met that test. But of course, we are open to suggestions, and if there is the desire in the Congress and the interest in going further in terms of consolidation, we would, of course, be happy to support that. But I think you have to balance the factors that you laid out in your comments. Mr. NEIMAN. And you would share my concerns over the role of the checks and balances that I often use as an example, the role of the independent FDIC in raising issues of the importance of the leverage ratio—is it an important check and balance in the regulatory scheme? Secretary GEITHNER. I think you are right that there is virtue in multiple pairs of eyes looking at these institutions. But on the other hand, competition across regulators creates risk, too. We didn’t get that balance right. We thought we had to propose how to fix the weakest parts of the problem, the greatest opportunities for evasion of arbitrage. But of course, we will be open to suggestions about how to get that balanced better. Mr. NEIMAN. Thank you. I yield my time. I am going to pick up regulatory reform in the next round. Chair WARREN. Thank you. Mr. NEIMAN. Assuming we are going to have a next round? Chair WARREN. I hope so. Mr. NEIMAN. Right. Chair WARREN. Thank you. So AIG has received about $70 billion in TARP money, about $100 billion in loans from the Fed. Do you know where the money went? Secretary GEITHNER. Absolutely. I am happy to provide any detail that you would like to see on this. The money helped prevent default and helped to stabilize a very damaged institution that VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00047 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 42 would have posed, we think, very substantial risk of systemic failure—— Chair WARREN. Well, maybe I should ask it with more specificity. Was Treasury aware of who the counterparties were that were going to receive payment in full on the credit default swaps when $170 billion went to AIG? Secretary GEITHNER. They have hundreds, maybe thousands of counterparties. I am sure that the supervisor is involved and the Fed would have access to detailed information. Chair WARREN. So they knew who was going to get the money, the counterparties? Secretary GEITHNER. Well, I think they could have known. Now, whether they knew at the time, I am not sure they knew. But of course, they would have access to that. Chair WARREN. Do you know if they spoke with any of the counterparties? Secretary GEITHNER. In what sense? Chair WARREN. In any sense. Secretary GEITHNER. About what? Chair WARREN. About the fact that they were—— Secretary GEITHNER. Remember, many of the counterparties are institutions that are supervised all the time. So I suspect they were talking at all times. Chair WARREN. They were holding pieces of paper from an entity that was clearly insolvent, and the question of the Government infusion of dollars there was going to make the difference between whether they got paid off in full or they ended up with nothing. Secretary GEITHNER. Right. But maybe I should let you finish. So where are you going? What would you like to know? Chair WARREN. I just want to know. Secretary GEITHNER. What? Chair WARREN. Did Treasury have conversations with any of the counterparties—— Secretary GEITHNER. And I don’t—— Chair WARREN [continuing]. Who ultimately profited from this infusion of cash? Secretary GEITHNER. I was not Secretary of the Treasury at that time of the initial investment, but I was the president of the New York Fed. And of course, I was central to the basic judgment we reached together to prevent default by AIG. I am sure that was the right judgment at the time. You are right to point out that that action did help make the system more salient and did have broad benefits to the stability of the system, including the counterparties. But more importantly, the reason why AIG posed systemic risk was not principally because of the direct exposure of those institutions, those counterparties. The biggest risk to the system was in the damage it would have done to both retail people who bought insurance protection, saving protections from AIG and systemic risk. So it was a more complicated picture—— Chair WARREN. So let me then follow up. I understand your point and the distinction you are drawing. We just finished our auto report, and Chrysler and GM, insolvent company. AIG, insolvent company. Chrysler and GM have bondholders, unsecured creditors, secured creditors, and employees, and they all took big haircuts. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 43 AIG had people holding credit default swaps, and they took no haircut at all. Secretary GEITHNER. AIG had—— Chair WARREN. They ended up with money from the Federal Government 100 cents on the dollar, and I am trying to understand why those two are different from each other. Secretary GEITHNER. This is the tragic failure about the regime we came in with because we did not have the legal capacity to manage the orderly unwinding of a large, complex financial institution. We do have the capability to unwind small banks and thrifts, but did not have it for an entity like AIG. And that forced us to do things that we would not ever want to do. But as an—— Chair WARREN. Are you saying that you couldn’t find a way to pay less than 100 cents on the dollar there, but since you could find a way in the auto industry, you did? Secretary GEITHNER. Of course not. I mean, we would have done that immediately if we could have done that. But in deciding that a default by AIG would have presented the risk of further systemic damage to a very fragile system, we made the judgment to prevent this. By preventing default, we helped AIG meet its financial obligations not just to people that bought insurance protection, savings protection products, but to its broad counterparties. That is the consequence of that decision. And if you think through—— Chair WARREN. But not the same for the auto industry? Secretary GEITHNER. Completely different situation, you are right. But if you think through what happens when you let default happen, consider the trauma caused by Lehman’s default to get a sense of the damage that can result. And then, again, that is why we moved so quickly to propose broad resolution authority to give us better tools for dealing with these in the future. Chair WARREN. And I appreciate that. Let me ask one quick question, if I can slip it in before we run out of time, and that is a year ago, we were worried about banks that were too big to fail. But in the last year, big banks have gotten bigger, while 84 small banks have been allowed to fail. And some experts are estimating that 1,000 smaller and mid-size banks could disappear before this crisis is over. I just want to know, are we more at risk on the question of concentration than we were a year ago? Secretary GEITHNER. You know, I don’t think so. But it depends largely on what Congress ultimately decides to do in terms of financial reform. The only way to deal effectively with the moral hazard risk created by the consequences of this crisis and by the too big to fail problem is to make sure there is a set of reforms in place that make us better able to withstand the failure of large institutions so we don’t have to intervene to put taxpayers’ money at risk to prevent them from or to provide for more orderly resolution. And that requires resolution authority, stronger capital, better derivatives protection, a whole set of cushions and safeguards to limit the risk of contagion spreading, and that is why, again, reform is so important. And that is the only way, I think, to make the system safer—— Chair WARREN. Thank you, Mr. Secretary. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 44 Secretary GEITHNER [continuing]. From future failure. Chair WARREN. Thank you. Congressman Hensarling. Mr. HENSARLING. Thank you, Madam Chair. Mr. Secretary, I continue to be concerned over the precedent being set for the taxpayer and our financial markets with the Chrysler and GM intervention. You are well acquainted with the facts since it was your team that helped put together the reorganizations. And GM bondholders were asked to swap $27 billion in debt for initially 10 percent common equity. The UAW agreed to swap $20 billion for 17.5 percent of common equity, $9 billion in preferred stock, and the UAW, through their VEBA, ended up with 55 percent of Chrysler. They ended up with 17.5 percent of GM. When you talk about the success of your administration in stabilizing the financial markets, I am just very concerned about how when senior secured bondholders are treated less equally than those who are unsecured and equally unsecured creditors, still we see the UAW receives preferential treatment. Warren Buffett, perhaps the most famous investor in America, has said, ‘‘If priorities don’t mean anything, that is going to disrupt lending practices. Abandoning that principle would have a whole lot of consequences.’’ The Wall Street Journal, some would say I guess the investor journal, wrote an op-ed back in May. ‘‘By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created 1,000 new failing businesses. That is businesses that might have received financing before, but now will not since lenders face the potential of future Government confiscation.’’ Investors Business Daily. ‘‘This undermines the reason for buying a bond at all. Accepting the lower returns in exchange for legal guarantees, that, in turn, will reduce the willingness to buy bonds.’’ Now I must admit it is somewhat anecdotal, but when I speak to investors, I believe there are hundreds of billions of dollars that are sitting on the sidelines because investors are concerned about what the Government policy is, concerned about the potential to confiscate their investment. I have small businesses, at least throughout the 5th District of Texas, that tell me they can’t get lines of credit. So I know there was a huge stabilization by the time your administration took office. I am not sure I have seen a lot of improvement since then. And I simply question what precedent have you set, and what is the impact for financial stability in treating the UAW so differently than senior creditors of those who are equal? Secretary GEITHNER. Panel members had a lot of time to look at this carefully. Your report provides a pretty thoughtful discussion of the choices we faced in that context and the outcomes. I know you have had testimony on this before. And I understand the concerns you are raising. As you said, many people have raised those concerns for some time. But this was a process overseen by a bankruptcy judge. That bankruptcy judge looked at the terms of the agreement and reached a judgment about whether that was acceptable. That is a great strength of our system, and that really is the ultimate test—— VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 45 Mr. HENSARLING. Well, it was a plan, though. It was a plan financed with taxpayer money under TARP. Secretary GEITHNER. Yes, it was, and I think you know—you don’t agree with it. You opposed this action, which I understand, for thoughtful, principled reasons. But we took this action because we thought it was important and effective to do in the face of this crisis and recession. And I think this will be judged as an exceptionally well-designed, dramatic restructuring. The scale of the restructuring designed and approved through this process went well beyond what is contemplated by many people in this Congress, including on your side of the aisle—— Mr. HENSARLING. Well, and in the time I have remaining, Mr. Secretary—I am sorry. We have limited time here. But another aspect of this that I simply don’t understand is how Fiat is brought into the deal—20 percent, I believe, of Chrysler. Up to 35 percent if they produce cars that receive 40 miles per the gallon. I know the President and the administration is passionate about their global warming agenda. We can have that debate. But under EESA, I am having trouble finding out why Fiat, who wasn’t owed a dime, who I don’t believe put a dime into the deal, what having them use TARP money—U.S. taxpayer money to produce these cars sometime in the future has anything to do with taxpayer protection or financial stability. I just don’t get it. Secretary GEITHNER. Congressman, again, I don’t think I am going to talk you out of your concern, and I respect why you have opposed what we did and what my predecessor did in the automobile industry. But we made a set of judgments that we thought was in the interest of the country, and I think we are much better off today because those companies were not forced to go into liquidation. And I think that was a prudent, sensible use of the authority that Congress gave us. Chair WARREN. Thank you, Mr. Secretary. Mr. Silvers. Mr. SILVERS. Mr. Secretary, my colleague seems to be under the misapprehension that you are a bankruptcy judge. Are you a bankruptcy judge? Secretary GEITHNER. Last time you asked me if I was an investment banker, and I said no then. But I have also never been a bankruptcy judge. You are right. Mr. SILVERS. Although I did recall after our previous exchange about your resume that the term ‘‘banker’’ does seem to apply to the Federal Reserve Bank of New York when last I—— Secretary GEITHNER. That would be stretching the definition. Mr. SILVERS. It is not a bank? [Laughter.] Mr. SILVERS. Anyway, but you are not a bankruptcy judge, are you? Secretary GEITHNER. No. Mr. SILVERS. And the role of the TARP in respect to any bankrupt entity is as a provider of debtor-in-possession financing, is it not? Secretary GEITHNER. In that context, yes. Mr. SILVERS. And then a provider of such financing makes strategic decisions about how they want their money to be used, right? VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 46 Mr. Buffett would, if he was a debtor-in-possession financer. I assume the Treasury would as well. Secretary GEITHNER. We did. And we did so on what we thought were the best financial terms for the taxpayer and for the country. But again, those judgments were overseen by a bankruptcy judge. Mr. SILVERS. All right. Let me move on. You have made some references in your testimony to regulatory reform. One criticism of a program, which I personally believe is a pretty serious and positive program that the administration has put out, is the criticism that it doesn’t really deal with what structurally went wrong in our banking system and financial markets in that it doesn’t deal with the combination and risks associated with investment banking, in particular proprietary trading combined with commercial banking and insured deposits. I am particularly concerned about this problem because of, to go back to my prior questioning, essentially the zombie bank problem. If you have very weak financial institutions, particularly ones that think they have an explicit or implicit guarantee, they have not been resolved. They are really very weak. The temptation to gamble is almost irresistible. Can you comment on your views as to how this problem should be addressed and will be addressed under the administration’s program? Secretary GEITHNER. Again, most important is to make sure the institutions hold more capital and a higher quality form of capital against the risks they might face in the future. You know, capital is sort of like a rainy day fund. It is the resources they can draw on if things don’t turn out so well. It is probably the most important protection we have against the risk of future crisis. While constraining future leverage and risk taking, it will make the system better able to withstand the stress that might come if one institution faces the risk of failure, and that is the centerpiece of reform. We laid out, last week, a comprehensive set of proposals for reforming capital standards. The banks would be required to hold more capital against the risk they take in whatever form. It is probably the most important thing we can do against the risk you are framing. Now if we had adopted a strategy, Mr. Silvers, of just simply guaranteeing the liabilities of the financial system, not forcing recapitalization, not conditioning our assistance on the kind of pretty dramatic restructuring, then I would be more worried about the risks that you refer to. But that is not the strategy that we adopted. Mr. SILVERS. Is it your view, that allowing an aggressive proprietary trading desk as part of a holding company that has significant insured deposits is a wise form of public policy? Secretary GEITHNER. I think it is very important to make sure that institutions will hold a lot of capital against all the risks they take. Now if you look at this crisis—and of course, we will be looking at this for a long time—most of the losses that were material, for both the weak and strong institutions, did not come from those activities. They came overwhelmingly from what I think you can fairly describe as classic extensions of credit, particularly where they are backed by real estate. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00052 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 47 And those basic choices, which are classic banking types of decisions—is the sort of the tragedy of this crisis—— Mr. SILVERS. Well, Mr. Secretary, I am not so sure about that. I think if you look at where the big holes came in the major commercial banks, they were substantially—I give one example. I had this very interesting conversation with one large bank where they said, you know, ‘‘We didn’t make any subprime loans.’’ And so, I said, ‘‘Well, how did you get into so much trouble?’’ And they said, ‘‘We had something called a capital markets desk.’’ And they were in the business of repackaging other people’s subprime loans and putting them in off balance sheet vehicles. Do you disagree with that as a characterization of how we got here? Secretary GEITHNER. Maybe we are agreeing rather than disagreeing. Mr. SILVERS. Right. Secretary GEITHNER. And what you may call trading, I would call the extension of credit. And these were extensions of credit. But in any case, the basic point I agree with is that—— Mr. SILVERS. Underwriting—— Secretary GEITHNER [continuing]. You want to make sure that if firms aren’t forced to hold capital against the risky things they do, we will be vulnerable again to a repetition of this crisis, and we are not going to let that happen. Chair WARREN. Thank you, Mr. Secretary. Mr. SILVERS. Thank you. Chair WARREN. Commissioner Atkins. Mr. ATKINS. Mr. Secretary, I am glad that you have a lot of confidence in capital, but I think even the capital levels that you are talking about would not have prevented what went on last year. And so, some of it is a bit of flying by the seat of the pants, I think, ultimately. Secretary GEITHNER. Well, no, I think you are right. It is necessary, but not sufficient. Mr. ATKINS. Exactly. Secretary GEITHNER. But it is central. Mr. ATKINS. And one of the central things is really predictability because as you were talking with the chair about AIG, I think if you go back last year—and this is a debate for another time. But when you track Fannie Mae, Freddie Mac, and then what happened there, and then allowing Lehman to go, but then turning around with AIG, I think that freezes up the marketplace more because people were uncertain than anything else. But I wanted to get to PPIP, the Public-Private Investment Program, to find out where that stands. There are two basic programs under it—the legacy securities program, of course, and then the loan program. The legacy securities program is the only one that is really up and going, and I was wondering where that stands, how many purchases have been made? Do you view these as viable in this grand, great scheme of instruments that are out there? Secretary GEITHNER. I think at the end of this month, you are going to see the asset managers we selected to raise capital to help launch these programs close on their capital raising. All indications are that they are raising a lot of capital. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 48 Soon after that happens, they will be in the market buying securities. But when the details of the program were announced, there was a pretty significant effect on prices in those securities since the prospect of financing capital coming in did help restore and improve liquidity in those markets. So you are seeing some positive effect. As I have said many times before in public, we expect there to be less demand for these facilities than was initially expected in part because liquidity has improved and partly because more capital came into the financial system. But I still think that they are valuable enough, worth going ahead with. And if we think there is a high return to the taxpayer and to the overall economy from expanding them, we will be open to expanding them further. Mr. ATKINS. Okay. Well, I think we can probably save that for another day. I know your time is short. I wanted to give Mr. Neiman an opportunity as well. Chair WARREN. Thank you, Commissioner Atkins. Secretary GEITHNER. Madam Chair, could I just very briefly? Chair WARREN. Of course. Secretary GEITHNER. You are very right to say that if you look back over the arc of this crisis, one thing that was very damaging to confidence was the lack of clarity about whether the Government was going to step in and decisively stabilize the system. But just to be fair to my predecessors and the other people who have been living with this crisis, that was—— Mr. ATKINS. We were there, too. Secretary GEITHNER. Largely, that was the consequence of the fact that until Congress acted to pass the EESA, the Government of the United States did not have the authority to step in and provide capital, and it was only with that authority and the subsequent actions by the Congress and the President to make sure the additional resources were available that we really had the broad set of tools that were necessary to help stabilize this financial crisis. But I think you are right to say that clarity about strategy, matched by resources in authority, is central to confidence. And this crisis was more damaging, more prolonged in part because of the absence of authority and the constraints that were put on the capacity of the Government to escalate, and that is something we have to fix. We can’t put the country in the position where we enter the next crisis with a limited set of tools. That is why resolution authority is so important. Mr. ATKINS. Well, then I will take back my time a little bit just to respond. I am not sure that your proposals will do that, actually, and I think they also raise other very dangerous issues, especially with this systemic type of regulator and what not. So we can debate the authority issue from last year another time. But anyway, I will yield my time. Secretary GEITHNER. Again, we welcome a chance to talk about this in more detail, and we don’t claim to have a monopoly of wisdom on these things. We expect our proposals to be refined and improved as they work their way through the Congress. But it is important to recognize that we can’t let the system or the country go VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 49 back to where things were with that much risk and so few tools to help contain the damage. Chair WARREN. Mr. Secretary, we are down to our last questions. Superintendent Neiman. Mr. NEIMAN. Thank you. Mr. Secretary, I applaud the administration for taking the long overdue steps to make consumer protection a national priority with respect to financial services. I share this commitment to consumer protection and have seen firsthand the impact of predatory lending. And I strongly agree with your proposal to empower States and consumer protection, particularly by guaranteeing that any Federal standards would serve as a floor and not a ceiling. Yet I have some serious reservations about another aspect of the proposal. First, I have a fundamental concern about any agency restructuring that separates consumer protection from safety and soundness. These are not conflicting missions. Isn’t one of the primary lessons learned from the current crisis that a loan that is unfair to consumers when made is not a safe and sound loan? Doesn’t that lesson argue for greater integration of the two disciplines into a holistic approach to supervision rather than further segregation? So I would also question whether it is absolutely necessary to create a new and separate agency with all the start-up and unintended consequences it would bring or whether expanding the mission of an existing agency like the Federal Trade Commission, which has a strong consumer protection track record, may have a better ability to achieve the goals of regulatory reform without creating new bureaucracies, inefficiencies, and cost? So my question to you is what thought, if any, was given to alternatives such as expanding the mission of the Federal Reserve Board or increasing the jurisdiction of an agency like the FTC that may better protect consumers and not create a new bureaucracy? Secretary GEITHNER. We looked at a lot of models and thought carefully through the concerns, many of which you expressed. But let me just say it starkly. We have been living as a country with a system where we gave bank supervisors primary responsibility for writing rules and enforcing those rules for consumer protection. And how did that turn out for the country? It did not serve us well enough. It is not a system that worked. It failed in its most basic mission. The reasons for that failure were complicated, but I think we had a test of the viability of the model that combined the authority for prudential supervision and consumer protection. And the judgment we reached was based on that record of experience over many decades, several recessions, past crises. That is, you need to put rule-writing authority and primary enforcement authority in a single place with the resources and expertise necessary to do that job well. Now, by clarifying where enforcement authority is, we are not going to be adding to the overall burden of the system. FTC does a great job. They have a lot to do, and the specific challenges of getting consumer protection right, particularly in credit, is, as we have seen, very, very hard. So, again, this represents in our view, looking at a range of alternatives, what we thought was the best path forward. But I understand why many supervisors look at the prospect of a different VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A tjames on DSKG8SOYB1PROD with HEARING 50 model, and many banks are uncomfortable with the implications of that change. But I think separating rule writing from enforcement would not be a sensible strategy. I think the rules would be at risk of being poorly written. And if you—— Mr. NEIMAN. Would you not, though, acknowledge that the Federal Reserve, though late to the game, did take strong action with respect to mortgages and credit card issues? Secretary GEITHNER. I completely agree with you, and they provided a set of reforms and regulation that became the body of important credit card and mortgage legislation passed by Congress. But you asked when did those rules come? Mr. NEIMAN. But if Federal Reserve was directed to, statutorily, report to Congress, to have a governor on the board with consumer responsibilities and experience, would that not be an alternative? Secretary GEITHNER. There are many alternatives, but we have to make a judgment together with the Congress about what is going to be most effective. And again, we have had a painful experience about the limits of effectiveness of the system we had, which gave those entities responsibility for the rules and the enforcement. And the system failed. Now, some of the most damaging things have happened outside banks. The standards were worse outside banks, and part of the failure of the system was not to provide greater protections in place for nonbanks, and that is a centerpiece of what we are proposing. That should be helpful for banks, not just bank supervisors. Mr. NEIMAN. Let me move on to another area that has arguably not gotten as much attention as the creation of a new agency to protect consumers, and that is product suitability and effective disclosures. Consumers and investors need effective disclosures, not just more pages of print. For example, it may be a suggestion of a nationally recognized rating system could clearly communicate product safety and complexity, perhaps along with a one-page or two-page summary of key terms. I often compare this rating system to the rating system used on ski slopes. I am a poor skier. When I get up to the top of a mountain, I could not imagine skiing without a green, red, or double diamond. Don’t consumers deserve the same level of protection? Is this something that you would consider? Secretary GEITHNER. I agree with you. Better disclosure, that kind of differentiation is central to the basic strategy recommendations we made, and of course we are open to suggestions about how to get it better. Mr. NEIMAN. And then my last question—— Chair WARREN. Excuse me. We are out of time. Mr. NEIMAN [continuing]. I did not get an agreement with our September 24th hearing. Secretary GEITHNER. We will try to respond appropriately. Mr. NEIMAN. So your cooperation with respect to participation of Treasury and Fannie and Freddie would be very, very welcome. Secretary GEITHNER. We will do as much as we can to make sure you have good representation there. Mr. NEIMAN. Thank you. VerDate Nov 24 2008 03:51 Nov 20, 2009 Jkt 053177 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 E:\HR\OC\C177A.XXX C177A 51 tjames on DSKG8SOYB1PROD with HEARING Chair WARREN. Thank you very much, Mr. Secretary. We appreciate your being here. We appreciate your very detailed answers to our questions, and we look forward to seeing you again soon. Secretary GEITHNER. Happy to do so again. Thank you. Chair WARREN. This hearing is concluded. 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