[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF FINANCIAL SERVICES: EXPLORING
SOLUTIONS FOR THE MARKET CRISIS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 24, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-141
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois KENNY MARCHANT, Texas
ANDRE CARSON, Indiana THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana DEAN HELLER, Nevada
TRAVIS CHILDERS, Mississippi
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
September 24, 2008........................................... 1
Appendix:
September 24, 2008........................................... 63
WITNESSES
Wednesday, September 24, 2008
Barrett, Hon. J. Gresham, a Representative in Congress from the
State of South Carolina........................................ 11
Bernanke, Hon. Ben S., Chairman, Board of Governors, Federal
Reserve System................................................. 29
Carson, Hon. Andre, a Representative in Congress from the State
of Indiana..................................................... 15
Cleaver, Hon. Emanuel, a Representative in Congress from the
State of Missouri.............................................. 12
Crowley, Hon. Joseph, a Representative in Congress from the State
of New York.................................................... 21
Davis, Hon. David, a Representative in Congress from the State of
Tennessee...................................................... 16
Foster, Hon. Bill, a Representative in Congress from the State of
Illinois....................................................... 20
Garrett, Hon. Scott, a Representative in Congress from the State
of New Jersey.................................................. 6
Green, Hon. Al, a Representative in Congress from the State of
Texas.......................................................... 9
Hensarling, Hon. Jeb, a Representative in Congress from the State
of Texas....................................................... 3
Klein, Hon. Ron, a Representative in Congress from the State of
Florida........................................................ 14
Moore, Hon. Dennis, a Representative in Congress from the State
of Kansas...................................................... 8
Paulson, Hon. Henry M., Jr., Secretary, U.S. Department of the
Treasury....................................................... 26
Perlmutter, Hon. Ed, a Representative in Congress from the State
of Colorado.................................................... 18
Sherman, Hon. Brad, a Representative in Congress from the State
of California.................................................. 1
Watt, Hon. Melvin L., a Representative in Congress from the State
of North Carolina.............................................. 5
APPENDIX
Prepared statements:
Baca, Hon. Joe............................................... 64
Bachmann, Hon. Michele....................................... 66
Green, Hon. Al............................................... 69
Hodes, Hon. Paul............................................. 70
Kanjorski, Hon. Paul E....................................... 72
Mahoney, Hon. Tim............................................ 73
Manzullo, Hon. Donald........................................ 75
Paul, Hon. Ron............................................... 76
Perlmutter, Hon. Ed.......................................... 77
Price, Hon. Tom.............................................. 79
Bernanke, Hon. Ben S......................................... 82
Paulson, Hon. Henry M., Jr................................... 87
THE FUTURE OF FINANCIAL SERVICES:
EXPLORING SOLUTIONS FOR
THE MARKET CRISIS
----------
Wednesday, September 24, 2008
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 12:17 p.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Gutierrez, Velazquez, Watt, Ackerman, Sherman, Meeks,
Moore of Kansas, Capuano, Hinojosa, Clay, McCarthy, Baca,
Lynch, Miller of North Carolina, Scott, Green, Cleaver, Bean,
Moore of Wisconsin, Davis of Tennessee, Hodes, Ellison, Klein,
Mahoney, Wilson, Perlmutter, Murphy, Donnelly, Foster, Carson,
Speier, Cazayoux, Childers; Bachus, Pryce, Castle, King, Royce,
Lucas, Paul, LaTourette, Manzullo, Jones, Biggert, Shays,
Miller of California, Capito, Feeney, Hensarling, Garett,
Brown-Waite, Barrett, Gerlach, Pearce, Neugebauer, Price, Davis
of Kentucky, McHenry, Campbell, Putnam, Bachmann, Roskam,
Marchant, McCotter, McCarthy, and Heller.
Also present: Representative Crowley.
The Chairman. The hearing will come to order; it will
consist of two parts. At the Democratic Caucus the other day
the Members expressed, legitimately, the question about whether
or not they would have a chance to speak out in this forum, as
they do in others. That seemed to be reasonable. We will have
the Secretary of the Treasury and the Chairman of the Federal
Reserve later. They are currently testifying, as previously
scheduled, before the Joint Economic Committee.
So we will begin now. I will ask Congressman Sherman and
Congressman Hensarling--two members of the committee who wanted
to testify--to please come forward. We will begin with Mr.
Sherman. We will go under the normal 5-minute rule for
testimony.
STATEMENT OF THE HONORABLE BRAD SHERMAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Sherman. Mr. Chairman, thank you for your hard work in
this time of crisis. Thank you for the opportunity.
The Chairman. Your microphone is not working. Pull it
closer.
Mr. Sherman. Mr. Chairman, thanks for your hard work in
this time of crisis. Thanks for expanding your workload by
letting us testify, and thanks for including some of my smaller
ideas in the legislation.
There are two approaches that we are not taking in this
bill. One is the AIG approach, which is if you have a few toxic
assets and you can handle them, just handle them and stop
whining. If you have too many toxic assets in your institution
to be able to handle, fine. Give us 80 percent of your company.
That is the AIG approach.
Wall Street wealth absolutely rejects that approach because
they want our money, they do not want to give us 80 percent of
the upside, and they don't want to give us control of the
company.
We also rejected the idea of paying for this. At least as
far as I know, we have rejected that. I know that is outside
the scope of a Financial Services Committee markup, but this
bill is not being marked up in Financial Services; it is the
Speaker's bill, a Rules Committee bill. We ought to at least
consider including those revenue measures that have increased
revenue that have passed the House and died in the Senate. We
ought to be looking at other revenue as well.
Keep in mind that this is not a bill that is limited to
$700 billion of investment. It is $700 billion of losses. So we
give Secretary Paulson $700 billion, and he goes to Wall Street
and buys whatever assets he wants at whatever price he wants.
He can deliberately overpay for an asset if he thinks that the
institution getting the money is made up of really great guys
who need some extra money.
He takes those assets that he buys for $700 billion, and he
can sell them for $500 billion. Then he can take the $500
billion in proceeds, go back to Wall Street, buy $500 billion
of toxic assets, and sell those for $300 billion, and take the
$300 billion in proceeds, invest that on more toxic assets and
then come to us and ask for more cash. This is an opportunity
to lose $700 billion and more.
The chief problem I have with this bill is the lack of
supervision of the Secretary of the Treasury. He gets to make
all the decisions. Now there is discussion of having a review
board, but that is an after-action review board and these
transactions are so complicated that any transaction he makes
he can defend, the Control Board can criticize, but the money
is gone. And even if he loses the PR battle, the money is
gone--$50 billion for some toxic assets that turn out to be
worth $10 billion, gone. What we need is a co-signer, somebody
sitting there saying you can or cannot engage in that
transaction.
We ought to be looking at phased authorization. A bill for
$200 billion now, then we can fine tune that bill and provide
more money later. Otherwise, once the Bush Administration has
the money, they are not going to sign into law any further
congressional action.
Finally, we ought to look at executive compensation. This
bill provides some limits on executive compensation, but it
does not deal with plain vanilla excess executive compensation.
If someone is earning $1 million a month at a company that has
made bad decisions and needs a bailout, they can keep earning
$1 million a month at that company. And if the company
increases the salary to a million and a half, they can do that
as well. So if a company is particularly good at getting cash
from Washington, they will have the cash necessary to increase
their regular salaries. In the absence of fraud, they are
allowed to do that.
I also think that we need Fast Track in this bill. I talked
to Senator Reid about it. But it ought to be deep and long and
broad. This committee is going to want to pass a lot of
regulatory and corporate governance reform. It will take only
41 Senators, not to defeat good reform, but to delay and then
dilute reform.
If instead, the majority leader in the Senate is able to
pull up any reform bill in the whole area of corporate
governance and financial services governance and get an up-or-
down vote after limited debate, then and only then are we going
to be able to pass real, meaningful reform.
I look forward to working with the chairman and others to
create a bill that I can vote for, and I have put at every desk
a copy of a letter that reflects the thoughts of many of us
dealing with these issues. Points 1, 3, 6, and 11 are
particularly important; some of the other points the chairman
has already dealt with in his bill.
I yield back.
The Chairman. Mr. Hensarling.
STATEMENT OF THE HONORABLE JEB HENSARLING, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Hensarling. Thank you, Mr. Chairman. I now have more
sympathy for the people who sit here and can't figure out how
to turn on the microphone.
I certainly appreciate you, Mr. Chairman, for allowing
members to speak out on what for many of us may be one of the
most important votes that we are asked to cast in our
congressional careers.
On the one hand, we may have financial peril. On the other
hand, we may have taxpayer bankruptcy for the next generation
and many of us view a slippery slope to socialism, where the
fundamental role of the Federal Government in a free enterprise
economy is irrevocably changed.
People who thought that such a profound decision would be
made in 72 hours were simply naive. I believe there is at least
broad agreement on both sides of the aisle that, although we
hear the term ``crisis'' on a daily basis in this institution,
this one is for real. Inaction is not an option.
However, the Paulson plan is not the only option that
should be on the table. Now, I feel quite confident that the
leaders of our party and the President of the United States,
the two presidential nominees, can go to the American public
and say that Members of Congress will work this out. It is not
a matter that has to be undertaken in a matter of hours. It is
a matter that does need to be taken up in a matter of days to
weeks.
I believe, Mr. Chairman, that there are a number of options
that should be considered by this committee and by other
committees and we should certainly look to history as our
guide. Some say that the taxpayer may actually gain in this
transaction. And you know what, Mr. Chairman? That may be true.
I can put a gun to my neighbor's head, take his college fund
for his children, place a bet on a roulette table in Las Vegas
and maybe--maybe I will triple his money. But, Mr. Chairman,
that is not a risk that my neighbor voluntarily undertook. This
is not a risk that the taxpayer wishes to voluntarily
undertake.
Now, it is not a perfect parallel, Mr. Chairman, but when
we look at the model of the Resolution Trust Corporation and
the S&L debacle of the 1980's, I just had a conversation in the
Budget Committee with CBO Director Orszag and he said that it
did cost the taxpayer $150 billion to $200 billion. So the most
recent historic precedent says that we could have quite a
challenge.
I think there are two main challenges that we are facing as
we see our credit market seething. And I will say that anybody
who tells you they have the answer today is probably either
naive or disingenuous. But on a bipartisan basis we better find
it and find it fast. I do think that there is a huge
psychological component to the panic in our markets and a huge
challenge in having illiquid markets as well.
House conservatives have put forth alternatives that we
believe should be debated, that we believe should be on the
table. We are not naive about who controls the institution. But
we believe that if you would have a temporary suspension of the
capital gains tax, that you would have as much as a trillion
dollars of liquidity that could come into the market and help
supply needed funds for our financial institutions and, more
importantly, to help struggling homeowners stay in their homes.
In addition, Mr. Chairman, again not necessarily within the
purview of this committee, but many view the mark-to-market
rule that was imposed, I believe, in 1993 that serves us well
in normal times has a pro-cyclical tendency to lead us to
perhaps the irrational exuberance of the dot-com bubble, but
can also lead to a credit crunch death spiral that we are
seeing today. And House conservatives have called for a
suspension of the mark-to-market rule as well. We believe that
other options have to be looked at.
I know this committee will debate it. Many of us believe if
you peel away the layers of the onion, that none of this would
have happened but for Fannie Mae and Freddie Mac. And until you
deal with the root cause of the problem, you have not dealt
with the problem. So I have legislation that I have introduced
that ultimately will take away the monopoly powers of Fannie
and Freddie.
And certainly, last not but least and I will wrap up, Mr.
Chairman, there are options that would have secured loans by
the taxpayers that I believe is probably a preferable option
that needs to be explored as well.
My final comment, since I would like to have on the record
the few times that I might actually agree with my friend from
California, I would like to say that House conservatives are in
total agreement that if the taxpayer is going to be asked to
bail out these Wall Street firms, compensation limits
absolutely, positively, unequivocally have to be a part of the
equation.
With that, Mr. Chairman, I appreciate your giving me this
opportunity and I yield back.
The Chairman. Let me invite the other Members who are here
now to come to the table and replace these members.
I wanted to say to Mr. Hensarling that my understanding is
that the procedures for debating this in this case will be
totally bipartisan. This is not going to be unilaterally done
by the Speaker. This is something that the Speaker and the
Republican leader will be working out.
Will the other Members--Mr. Carson, Mr. Cleaver, Mr. Watt,
Mr. Klein, Mr. Moore, and Mr. Green--please come forward. Do we
have enough chairs? Bring a chair with you if you don't have
one.
Representative Green, you are from Texas. You are used to
moving seats around. Mr. Carson, come on over there. Let's
begin with Mr. Watt.
STATEMENT OF THE HONORABLE MELVIN L. WATT, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NORTH CAROLINA
Mr. Watt. I was hoping you would go by seniority, Mr.
Chairman, since I have to leave. It is a lot more intimidating
being on this side of the microphone than it is being on the
other side.
I wanted to address two issues: The first is why; and the
second is how? Because the concerns that I am hearing expressed
from my constituents deal a lot more with the ``why'' than they
do the ``how.''
The ``why'' was established for the leadership of Congress
on Thursday of last week in an urgent meeting, but that ``why''
has not been communicated to the public. There are a lot of
people out there who still don't understand why it is that it
is necessary to do anything. And I think it is first and
foremost incumbent on this Administration to be as honest as it
can and transparent as it can with the public about the ``why''
so that we can do our job as Members of Congress to deal with
the ``how.''
There are two problems with the ``why'' and why I think the
Administration has not been transparent with the public. First
of all, is a political problem, because I think if the
Administration goes out and tells the public the truth, they
will have to say that this Administration has driven the
economy off the cliff, and that would be politically
embarrassing.
But there is also a legitimate reason that they have not
done it, because it could also--telling the public the truth
could create a frenzy in the market that could be
counterproductive to what we are trying to accomplish. I
understand both of those things, but the American people don't
understand those things, and I think the President has to tell
the American people enough to justify why we are doing
anything.
Then we can turn our attention to ``how.'' And I started
that because I jumped across the ``why'' threshold on Thursday
or Friday of last week because the Administration told us
enough facts that the economy is in a dismal situation. But
then they sent us a proposal about how to solve the problem
that made the Secretary of Treasury the king of the world,
answerable to nobody, accountable to nobody, having to explain
to nobody, having no legal liability, and having no regard for
homeowners.
I would like to read to my constituents the exact wording
that came with the proposal so that they understand the
interests of this Administration. On Saturday afternoon when we
got the proposal, the proposal said that there were two
concerns that they were worried about: Number one, the markets
and the big fellows; and number two, the taxpayers. Nowhere was
mentioned the homeowners and how we can protect them in this
process.
So when we went back to them they have acknowledged and we
actually have done a tremendous amount of work to resolve the
how problem, but my constituents are still out there asking me
not how are you going to do this, but why are you going to do
this? And I think we have to call on this Administration to be
honest with the public, that they have messed up the economy so
bad that this has become an imperative to do something in order
to justify anything that we do. We can solve the how we do it,
but they have to be honest with the American people about the
why we are doing it.
I yield back.
The Chairman. The gentleman from New Jersey--we will
alternate. Mr. Garrett.
STATEMENT OF THE HONORABLE SCOTT GARRETT, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW JERSEY
Mr. Garrett. Thank you, Mr. Chairman, and Ranking Member
Bachus, for allowing the Members to share their views on this
very important topic.
My hesitancy to support this proposal outright should not
be taken as a lack of understanding about the dire straits of
the American taxpayer or the credit crunch on Wall Street.
People in the Fifth District of New Jersey are suffering, as
are people of the chairman's Fourth District of Massachusetts,
because of this right now. And it is the aim of all parties
involved to help American families; we simply disagree on the
best course of action to accomplish this.
My worry is that we are being rushed to take action because
the so-called bazooka misfired and the outcome of such a
frantic pace will be more questionable legislation. We need
only to look back to Sarbanes-Oxley and how it came about as a
staggering example of troubling legislation that results from
congressional speed.
The Constitution created Congress as a deliberative body,
and in this instance we are being given no chance to
deliberate. Certainly Congress must be speedy in sending a
message to Wall Street that we intend to give this situation
careful consideration. The assurance of action is a step in the
right direction.
Next, we must enter into a thorough and vigorous debate
designed to yield the framework to rework the financial service
regulation. We need to develop a deeper understanding of what
caused this problem and how we can effectively act to provide a
resolution.
The bailout is being framed, however, as the only option to
save our economy, as if all other ideas have been exhausted. We
must not progress in this debate wearing blinders to
alternatives.
Since the Treasury Secretary released this proposal on
Friday, many economists and interested experts have all put up
different ideas for features to supplement an economic rescue
plan. Some of them are more viable than others. But we can make
that determination to review them. The RFC has proposed one,
the Financial Services Committee is looking at them. The Policy
Committee in our party has come up with solutions as well. They
should all have a hearing.
I am pleased we are having this hearing entitled, ``The
Future of Financial Services: Exploring Solutions For the
Market Crisis.'' But unfortunately, this is really the first
hearing this committee has held with a direct focus on recent
market conditions following the bailout of Bear Stearns in
March of this year. I would like to remind my colleagues,
especially those on the other side of the aisle who are
complaining about the bailout today, that 16 of my Republican
colleagues and I sent a letter to the distinguished chairman
all the way back on April 7th asking him to hold a hearing
after the government bailed out Bear Stearns. And in the
chairman's letter of reply he said, ``I do not think that it is
necessary that we have the hearing on the soonest possible
date.'' It was not until July 10th that the chairman scheduled
a hearing entitled, ``Systemic Risk in the Financial Markets.''
What hearings came in between? We dealt with such matters
as green sources for efficient energy, the Insurance
Information Act, the Extractive Industries Transparency Act,
and a multilateral clean technology fund.
Now, it is not my goal to impugn the importance of any of
those issues discussed in those hearings, but I find it hard to
understand why one of them could not have been postponed in
order to allow for a more timely formal discussion of the
actions that precipitated the crisis in which we currently find
ourselves.
By the time we finally held our first hearing, Fannie and
Freddie stocks were already in a free fall and the rest is now
recent history. One would have to think if we hadn't waited so
long to discuss the safety of the financial markets after Bear
Stearns, maybe we wouldn't be sitting here today. Maybe we
would not have three more companies bailed out. Maybe we would
not be here asking for $700 billion. Maybe we would not be told
that there are no other solutions.
Since the Department of the Treasury submitted their
proposal on Saturday, I spent much time reviewing it and the
chairman's first discussion draft. As I said, I had a number of
discussions with a number of noted economists around the
country and studied some of their proposals. Yesterday, I sent
a bipartisan letter with a number of my colleagues to the
President asking for more information still to be supplied to
us with regard to that proposal and a list of alternatives and
the deliberative process as to why they were rejected.
I have also introduced bipartisan legislation with
Representative Marcy Kaptur to establish a select committee to
investigate all the actions that have led to these government
bailouts and now to make recommendations to address them today.
As elected representatives of the people, it is truly our
obligation to be fully informed of the Administration's
decision-making process before $700 billion is added to our
Nation's debt. The health and vitality of our economy is a top
priority of all Americans, but we must also look to the long-
term impact of government bailouts on our society. Our children
and our grandchildren will ultimately be the ones who will pay
for this program that we institute today.
Once again, as I began, I thank the chairman and the
ranking member for us beginning that process. Thank you.
The Chairman. I will go back in Democratic seniority. I
believe the gentleman from Kansas will be next and I have been
asked to go meet with Senator Dodd. So I will ask the
gentlewoman from California to preside.
STATEMENT OF THE HONORABLE DENNIS MOORE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF KANSAS
Mr. Moore of Kansas. Mr. Chairman, thank you for giving me
the opportunity to express my views on the economic crisis
facing our country. In the last year, the housing credit crisis
which occurred primarily due to lax oversight and questionable
borrowing practices by borrowers and lenders alike has steadily
worsened, threatening not only the housing market but other
sectors of our economy as well.
Despite efforts over the past year by the Federal Reserve,
the Treasury, and Congress to stem the crisis, global financial
markets remain under extreme stress. As we all know, experts
are working around the clock to deal with this situation and
forestall a complete meltdown of the world's financial markets.
I want to thank the chairman and his staff for the nonstop
work dedicated to this process since we received the Treasury
Department's 2\1/2\ page legislative proposal on Saturday
morning. I know that work was done by the chairman and his
staff throughout the weekend to reach the point in the
negotiations where we are today.
The current crisis is the result of a combination of
irresponsible financiers pushing the limits of the marketplace
and the Administration that failed to properly regulate the
financiers' actions in the public interest. Until 2007,
Congress did not provide effective oversight of these
regulators or of this marketplace. In the long term, we must
uncover those who failed in their responsibilities and hold
them accountable. Any package approved by Congress must include
aggressive, informed, impartial oversight of the rescue
programs both by Congress and the Judiciary.
It is imperative that we keep several things in mind as we
continue to deal with this crisis. Any program we implement
must be designed to take effect immediately and be substantial
enough to restore market confidence as quickly as possible. But
it is crucial that any undertaking protects the American people
to the greatest extent possible.
Every American whose personal life or business involves the
use of credit will suffer the consequences of this financial
crisis. The choking off of credit will increase the cost and
difficulties for anyone who borrows to pay a mortgage, buy a
car, purchase property, purchase inventory for a small
business, or invest for retirement.
Our people must be our first priority as we develop a
solution to this looming disaster. Additionally, we must do
everything possible to protect the interests of the taxpayers
in this process, including securing warrants in these troubled
firms so that when the market recovers, these equity stakes
will ensure that taxpayers are paid back with a share of new
profits generated by these firms.
It is appropriate, too, Madam Chairwoman, that the FBI is
investigating whether any one of the firms at the center of the
crisis committed corporate fraud or broke laws. But I am also
concerned that executives of troubled financial institutions
may receive large bonuses as part of the bailout package if
this package becomes law in fact.
We must do all that we can to ensure that CEOs of failing
financial institutions are not permitted to leave with their
golden parachutes paid for by taxpayers.
Like many of my colleagues, I have heard from many of my
constituents over the past few days who are concerned about the
financial market crisis and are skeptical about the details of
any kind of plan to buy illiquid assets from financial
institutions in order to create liquidity in the markets. I
share their concerns and believe that when so many of the
American people speak out so strongly and so loudly we are wise
to listen.
This is not the time for partisan politics. We should put
``Republican'' and ``Democrat'' aside and work on this
together. We must work quickly and efficiently in a bipartisan
basis to restore confidence in our shaken financial markets and
stabilize our economy.
This rescue package is the most important legislation that
many Members of Congress will consider in their entire careers.
It is important to move expeditiously, but it is more important
that we get this right and work out the details. Both parties
in both Houses of Congress must work together to produce a
measure that can win overwhelming support of both parties in
both Houses.
For this reason, we should not adjourn this session of
Congress. We should stay in this session of Congress until we
have completed our work and resolved this issue. The stakes are
too high to go home.
I look forward to hearing testimony from Secretary Paulson
and Chairman Bernanke and working with them to address this
crisis.
I would also like to note that President Bush has kind of
been missing in action for about the last 2 weeks, and I would
like to see the President come on television and talk to the
American people about this and talk to Members of Congress
about some solution here to bring Republicans and Democrats
together for the benefit of our Nation.
Thank you very much.
Ms. Waters. [presiding] Thank you very much. The gentleman
from Texas, Mr. Green.
STATEMENT OF THE HONORABLE AL GREEN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Al Green of Texas. Thank you, Madam Chairwoman, and I
thank the ranking member and chair of the full committee.
Madam Chairwoman, we live in a world where it is not enough
for things to be right; they must also look right. And it does
not look right for us to find ourselves supporting what is
being called a bailout of Wall Street when we did not support
$200 million to fund ending homelessness for our veterans. It
does not look right when we can have some $700 billion for Wall
Street and not fund $10 billion for SCHIP.
This is the ``why'' that Representative Watt was talking
about earlier. Someone has to explain to the American people
why we are doing this.
I understand the why of the why, because these things have
happened here in Congress and people are anxious to know why we
have allowed so many other things that are absolutely necessary
to go undone and why we are taking immediate action to take
care of what appears to be a Wall Street situation.
I want to thank the chairman for moving us to a point where
we can at least take a serious look at a piece of legislation
as opposed to what was sent to us initially, but I think it
bears reading the actual language of what came to us initially,
because this will give people who have not had the opportunity
to peruse this a better understanding of why so many Members
have great consternation about what is being done.
The actual language reads: ``Authority to purchase. The
Secretary is authorized to purchase and to make and fund
commitments to purchase on such items and conditions as
determined by the Secretary. Mortgage-related assets from
financial institutions having its headquarters in the United
States.'' That is by the Secretary. The Secretary was going to
have sole authority, no oversight, no review.
``Necessary action. The Secretary is authorized to take
such actions as the Secretary deems necessary to carry out the
authorities in this act.'' Again, the Secretary is being given
an unusual amount of authority.
Well, I am pleased to say that the chairman of the full
committee, working with others, we have put things in here that
are going to at least give us some reason to give serious
consideration to the legislation. What was proposed to us
initially was absolutely unacceptable. There was just no way in
my opinion we could support this.
But some of the things that have been added do give some
reasons to take a look at legislation. The judicial opportunity
to restructure loans is important. It is important to people in
my district to give those persons who have one home the same
opportunities as persons who have two homes. We have people who
have vacation homes and if they go into bankruptcy, they can
get the loans on these homes restructured. If you have one home
and you go into bankruptcy, you can't get that one home
restructured unless it happens to be some farm property.
So we have to make sure that provision is as tight as it
can be, so that people who are on the streets--on Home Street,
not on Wall Street, not on Main Street, but on Home Street--
these people have the opportunity to have their loans
restructured the same as those who can afford two homes. As I
understand it, there are some people who can afford seven or
more homes, and I am happy to know that they all can be
restructured. But for those who can only afford one home, I
think they ought to have an opportunity to have some
restructuring done.
And the final comment that I will make in terms of why the
chairman has done an outstanding job in trying to give us
something to seriously consider is this: Oversight is
important. As it was presented to us, there was little
oversight--no oversight. We have some oversight now. I am
hoping that we can tighten up the oversight provisions and make
sure that we just don't give a blank check to anyone. Not
just--this has nothing to do with the person who happens to be
the current Secretary. It has to do with the notion that we
just can't give that kind of unchecked authority to anyone. And
we ought to make sure that we protect everyone. The homeowners
have to benefit from this and the taxpayers have to know that
those who have created the problem are not going to be rewarded
as they go out the door. No golden parachutes. If you have to
jump out of this plane, you have to take your chances and hope
that you will have a soft landing. But no golden parachutes.
I thank you for the opportunity to speak.
Ms. Waters. Thank you very much. Next, we will have the
gentleman from South Carolina, Representative Barrett.
STATEMENT OF THE HONORABLE J. GRESHAM BARRETT, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF SOUTH CAROLINA
Mr. Barrett. Thank you, Madam Chairwoman. Thank you,
Ranking Member Bachus. I firmly subscribe to the belief that
Main Street and Wall Street are inextricably linked.
Instability in the financial markets leads to instability in
taxpayers' retirement accounts, pension funds, and people who
are concerned about if and how their jobs, student loans, and
car loans will be affected. The caliber that flows through our
financial markets is vital to the continued success of our
businesses large and small.
We should all agree that a failure of our credit markets
could and would be catastrophic. However, I am not convinced
that the Treasury's plan to purchase $700 billion worth of
illiquid assets is the solution. And I am not sure that this
proposal gets to the root of the problem. I fear that it will
only treat the immediate symptoms. While I understand that
these are symptoms, and the symptoms that would shut down the
credit markets are potentially disastrous, I worry if we go
forward with this plan we will have to come back again and
again with more and more money to treat symptoms that may pop
up.
We instead need to treat the cause of the problem which may
be long and possibly painful. The whole crisis started around a
type of credit, subprime mortgages, and it still resolves
around this debt. Mortgage-backed securities and other debt
instruments are the root of this problem. We need to do
something to restore access to credit, which means more debt.
But the proposal brought to us involves even more debt, the
government borrowing another $700 billion.
Consumers, like the government, have borrowed too much. We
must cut government spending. We must also institute pro-growth
policies to help our economy grow so that Americans and their
government can get out of debt. It makes sense that when people
have good jobs they do not need to borrow as much, whether to
buy a mortgage, a home, credit card, pay for school supplies,
or even gasoline.
Too much of our recent economic growth has been built on
debt. We see that businesses have been massively overleveraged
as American consumers have. If debt was at a safe level, we
would never have been in this fix in the first place. When
consumer spending makes up 70 percent of GDP, I think that
indicates an unsustainable form of economic growth, especially
when it is financed by credit card debt and increasingly
unaffordable mortgages.
We need to start producing, whether that is energy,
computers, or intellectual property. I think the road map to
get us there is pretty clear. We must shore up our balance
sheet, we need to reduce our capital gains taxes to spur
investment, we need to reduce our corporate taxes which are
among the highest in the world, and we must move toward energy
independence as high energy prices are increasingly a dangerous
drag on this economy.
We should take this opportunity to do the right thing and
help America grow in the long run. I appreciate that there is a
panic in the market, but policies derived from panic are never
sound. I strongly believe in the superiority of the free market
and the ability of the markets to correct themselves. However,
the government does not and has not always had a role in
ensuring the market's function to correctly and efficiently
make sure that we are free of fraud and malfeasance to minimize
market failures.
For example, we are all familiar with the important role
that the FDIC plays in insuring bank accounts. I think that we
should be more actively exploring other options where the
government can take a role in helping the credit markets find
order, but allow the free market to do most of the heavy
lifting and provide more capital.
One option that should be explored in greater detail is to
allow the private entities, private equity, hedge funds, and
other partnerships to participate in a competitive bidding
process for the distressed assets that will be off-loaded by
banks and other financial institutions rather than having the
Treasury as the only potential buyer. This proposal should
include a traditional auction which might include the
government as well as other qualified buyers, with the assets
going to the highest bidder.
There is no doubt that we find ourselves in a precarious
situation, but like many of my colleagues, I think it would be
a mistake to rush into a huge new expenditure. Just as the
markets are now panicking, the government does not need to do
so, too.
Thank you, Madam Chairwoman. I yield back.
Ms. Waters. Thank you. The gentleman from Missouri, Mr.
Cleaver.
STATEMENT OF THE HONORABLE EMANUEL CLEAVER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MISSOURI
Mr. Cleaver. Thank you, Madam Chairwoman. On October 24,
1929, the stock market crushed. By the 29th of October, the New
York Stock Exchange saw about $30 billion in stock values
disappearing. In March, 3.2 million Americans were unemployed.
The President of the United States, according to news accounts,
remained optimistic, however stating that, and I quote, ``All
the evidence indicates that the worst effects of the crash upon
unemployment will have passed during the next 60 days.''
By January 1932, things had fallen apart to the point where
unemployed workers had marched on Ford Motor Company, Congress
had established the Reconstruction Finance Corporation, the
RFC, and by April, 750,000 men and women living in New York
City were living on New York City. By November 1932, Franklin
Delano Roosevelt was elected President in a landslide election.
For 3 years, there was no address given to the American
public about the crisis facing the American public.
One of my concerns is with 100 percent of my phone calls
and e-mails asking me to oppose this legislation, I took a walk
down history's lane, to see what happened when we had a crisis
that is not dramatically unlike what we are looking at today,
what was happening, what did Congress do, and what did the
President do.
For 2 years, 2\1/2\ years, the President never even spoke
to the Nation about it. When Franklin Delano Roosevelt came
into office, he began doing his fireside chats. He first talked
about this in the State of the Union. We are all familiar with
his words: ``The only thing we have to fear is fear itself.''
And then he began a series of fireside chats as a part of the
recovery program, realizing that the American public had to be
brought along. This was not something independent of the
recovery program; this was an inextricable part of the recovery
program. And so he began to move the Nation toward accepting
the reality of the crisis.
And then finally, in one of his radio fireside chats, he
said, and I quote, ``When Andrew Jackson, Old Hickory, died
someone asked would he go to heaven?'' And the answer was, ``He
will if he wants to.'' If I am asked whether the American
people will put themselves out of this Depression, I answer,
``They will if they want to.''
And he goes on to pump up the spirit of the Nation so that
everyone would step up and cooperate with a recovery that would
very well determine whether or not the United States as a
nation would survive.
Where I am, Mr. Chairman, is that with my community saying
100 percent based on their responses they do not want me to
support this--and many of my calls are coming from the business
community as well--I am in a situation where I have to have a
lot more to work on if I am going to support this legislation.
And by that, I mean the President of the United States needs to
address a Joint Session of Congress. He needs to tell us the
crisis is great. He needs to tell us why. He needs to tell us
why we need to approve the legislation, and he needs to tell
the Nation what will happen if this legislation is not
approved.
I grew up in Texas not far from Mr. Hensarling's district,
just to the south of his district, in Waxahachie, and my
grandparents had animals that had to survive. One lesson that I
learned that I think is applicable to this situation is this:
If you feed pigs a great deal, they will become hogs. I am
looking at us about to feed some pigs, and down the road, I
believe and feel that they will become hogs coming back to the
trough. And then they will need more, more, more, and more.
And so I am having a great deal of difficulty wanting to
support this legislation, realizing that this President of the
United States in what is being described as the greatest
financial crisis since 1929 will not address the American
public, will not address Congress. And the history is that he
is following the path of someone who is now almost in infamy
because he did not do it. I appreciate the opportunity to
share.
The Chairman. I thank the gentleman. Next, the gentleman
from Florida, Mr. Klein.
STATEMENT OF THE HONORABLE RON KLEIN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. Klein. Thank you very much, Mr. Chairman. Thanks,
Ranking Member Bachus, for holding this hearing today. Today
marks a critical moment in our national conversation about how
we respond to this Nation's financial difficulties, and the
American people must have a voice in this discussion.
We have all heard from our constituents. They are very
concerned, they are interested, they want us to do the right
thing in a timely manner. I have heard from some of my
constituents this week: An 84-year-old man living off of his
retirement savings who is unsure, based on the market, how
stable his future income may be; a small business owner who
does not have access to credit currently and doesn't know if he
can afford to pay his employees next month; and a local
resident who can't get a loan for the purchase of an
automobile.
There are many cases. We have all heard them in the last
number of days. Though the debate is still ongoing and the
details of this rescue plan have yet to be finalized, we must
consider these hard working people on our road to recovery.
For the last 8 years, our financial markets have been under
the watch of regulators who have been limited in their
regulatory responsibilities by the Administration or in some
cases don't even believe in regulation. I think we all
understand you don't overregulate. You have appropriate amounts
of regulation and responsible oversight. We know that this
problem has been compounded by a lack of personal
responsibility and people making individual decisions on
borrowing, and also by borrowers and sellers in sophisticated
financial instruments. And now every American is feeling the
consequences of this lack of regulatory action.
And now after months of telling us not to worry, that the
``market will fix itself,'' the Administration is asking
ordinary Americans to pay the debt of those who made bad
investment decisions.
Secretary Paulson's 2-page plan to spend $700 billion, at
least in my opinion, with no real details on how the money will
be spent and no oversight to keep the system in check is
unacceptable, and I appreciate the leadership of this body
looking at various alternatives and ways to fix that.
Instead of just accepting this massive plan, Congress'
financial recovery must have robust taxpayer protection and
safeguards as well as ample oversight.
Secretary Paulson stresses that this plan must boost market
confidence. I believe that the American taxpayers' confidence
is equally important. Any plan that is considered by this
Congress must include at least four points: Number one,
independent oversight about how this money is being spent so we
can avoid a future financial crisis.
Number two, the plan must include limits on executive
compensation. The same people who drove these companies into
the ground should not in any way whatsoever benefit from
taxpayer money.
Number three, taxpayers cannot just be asked to invest in
bad assets. It is simply unfair. Taxpayers must get some upside
participation and they should get stock or warrants in the
companies that are participating in getting the benefit so that
down the road, if these companies survive and prosper, the
American taxpayer will also benefit.
Number four, I believe as this plan progresses that we need
to look at this as a phased-in funding approach. This notion of
$700 billion is a pronouncement to Wall Street that we are
serious. We are dead serious. Everyone in this Congress is
serious. Every American is serious. But we shouldn't just throw
out a number and say, well, Wall Street is going to look at
that as a serious number. We are going to make sure that we do
the right thing, but it has to be done the right way.
I would suggest that we phase in, start with some amount of
money that is necessary and immediate to give confidence in
whatever format and structure we have in terms of recovery fits
that number. If we have to go back, Congress can always come
back and tweak that and look at more if the process is working.
And if not, we won't be putting any more taxpayer money at
risk.
The plan must also be accompanied by long-term regulatory
reform so we can ensure this crisis never happens again. Our
current framework is outdated and duplicative. We need a system
that works and keeps up-to-date with the financial markets.
Smarter regulation does not mean burdening business.
Rather, our economy will be stronger with efficient oversight.
We must encourage competition among financial institutions
so that consumers have more options. One of the reasons that we
are in this mess is that our institutions were too big to fail.
I don't like that notion. I think it is totally unacceptable.
It is dangerous for our economy to rely too much on too few
institutions. We want competition.
Finally, Mr. Chairman, we know that we are going to have to
have a long-term discussion. I appreciate the chairman's
discussions so far on how we are going to work together to make
sure that we bring up-to-date our financial oversight in the
future.
I thank the chairman and all the Members of this Congress
and the American people for coming up with good ideas. Let's do
it right, let's do it timely, and let's protect the American
taxpayer.
The Chairman. Next, we have Mr. Carson, and then we will go
by seniority to Mr. Davis, Mr. Perlmutter, and Mr. Foster.
STATEMENT OF THE HONORABLE ANDRE CARSON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF INDIANA
Mr. Carson. Thank you, Mr. Chairman. First, let me salute
you for your bold, courageous, and visionary leadership with
regards to this matter. I come to this hearing on behalf of
hardworking American taxpayers, not greedy corporate CEOs. It
is taxpayer funding that we are using as collateral for this
rescue package, not CEO bonuses, not investment bank revenues,
but taxpayer funding.
So if hard working American taxpayers are going to front
the bill, then we better ensure that they reap the benefits.
Tax subsidized corporate welfare must end. It is unbecoming,
unjust, and unpatriotic.
The American people are skeptical of this rescue package
and with good reason. For years, they have seen Wall Street get
bailed out while they were sold out. Over the last decade,
deregulation rewarded the recklessly rich and penalized the
pension dependent poor. Proponents of deregulation would have
us believe that it is more important to reach out to America's
struggling millionaires and billionaires, because according to
them, they are the ones who have been left behind, not our
small businesses, not our unemployed, and not our working
families.
The greed of Wall Street that flourished under these
deregulation policies have now brought our economy to her
knees. Leading financial institutions have collapsed. Home
values have plummeted and thousands of Americans' jobs are at
risk.
So while it is important that we act, I urge that we
proceed cautiously and responsibly. A knee-jerk reaction to a
complex problem will only prolong the instability in our
markets, not curtail it.
Again, thank you for your bold leadership in this matter,
Mr. Chairman. I yield back the balance of my time.
The Chairman. Mr. Davis of Tennessee.
STATEMENT OF THE HONORABLE DAVID DAVIS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TENNESSEE
Mr. David Davis of Tennessee. Mr. Chairman, I listened to
my friend from Missouri talk about raising animals to make a
living. Our comment always was that pigs get fed and hogs get
slaughtered. Since the early 1980's, we have seen an effort to
transfer wealth up to the wealthiest with tax cuts and
borrowing money to pay for those tax cuts. Starting in 1980, on
January 20th, we owed $1 trillion in this country. And by the
end of the first Bush Administration, we owed $4.2 trillion, $3
trillion in transfer upward in borrowed money that has had in
my opinion a tremendous negative impact on every small family,
every small farmer, and every small businessman in this
country.
And then we saw through the 1990's, 1993 to about 2000, we
saw at least a receding in those debts to where the budget was
not only balanced but surplus for 4 years in a row. And then we
saw the roller coaster ride again when we started transferring
wealth back up the ladder in borrowed money to the wealthiest
individuals in this country, the top 8 or 10 percent in this
country. Transferring wealth. And what have they done with that
wealth? Pigs get fed; hogs get slaughtered. They have used
those dollars to invest in risky business, risky investments,
and now they are asking us to bail them out.
Let me read you the resume of two individuals whom we will
hear later, we hope. The first one was Staff Assistant to the
Secretary of Defense from 1970 to 1972. His next job, President
Richard Nixon's Administrative Assistant to John Ehrlichman
from 1972 to 1973. Goldman Sachs from 1974 to 2006; Treasury
Secretary from July 10, 2006, to present. Net worth, estimated
over $700 million. Most made through the nineties and at the
turn of the century.
The second we are going to be listening to was professor of
economics from 1983 to 1985, an assistant professor of
economics from 1979 to 1983, at the Graduate School of Business
at Stanford University. Pretty good school. Visiting professor
of economics at New York University and MIT. Visiting scholar
at the Federal Reserve Banks of Philadelphia, Boston, New York
from 1989 to 1994 and 1996. Professor of economics and public
affairs at Princeton University from 1985 to 2002. Member of
the Academic Advisory Panel at the Federal Reserve Bank of New
York, 1990 to 2002; member of the Board of Governors of the
Federal Reserve System from 2002 to 2005; Chairman of the
President's Council of Economic Advisors from 2005 to 2006,
Chairman of the Fed from February 1, 2006, to present.
Those are pretty impressive resumes. And they started
telling us Thursday that we are in bad economic straits in this
country? We just got this message on Thursday? These folks have
been investors, they have known what has been going for years
in the financial markets, and we are being told now: Bail us
out.
Let me tell you something. I had a young fellow who came to
an open meeting in Tennessee, and told me this: ``16 years ago,
I was working at a bakery. I lost my job because they closed,
and I then started a small business. For several years, I was
able to keep insurance for those employees and for myself. I
didn't realize when I canceled my insurance, because I had to
keep my company going, that some day I would wake up in the
hospital, as I did about 3 weeks ago, and was told I owed
almost $500,000 before I could leave the hospital. I am losing
my business now.''
In essence, we are saying the market ought to work in
health care, the market ought to work for our energy policies.
We shouldn't have to worry about the Federal Government getting
involved, either in health care or energy. But all of a sudden,
the pigs who got fed and are now ready to go to slaughter are
asking us to be sure we bail them out.
I don't know about you, or the rest of those on this
committee, but folks back home who talk to me, including my
local banks, are worried about this bailout. They are worried
about what is going to happen to them. When I talk to those
folks and they tell me the preferred stock they had in Fannie
and in Freddie, that they are going to charge it off to their
capital assets, now just as regular loss, our folks back home
are worried about this.
So my proposal, or my question to these two individuals,
who are supposed to know it all, if we don't do this bailout,
we will have an economic collapse? And if we do have the
bailout, who do we help? The ones who have gotten fat off of
transferring the wealth into their wallets, or will it be the
poor working folks in my district, who work at minimum wage.
I yield back the balance of my time.
The Chairman. The gentleman from Illinois.
Mr. Bachus. To the gentleman from Tennessee, I also heard
from my local bankers about the preferred stock and Freddie and
Fannie.
The Chairman. Many of us are now trying to see if we can
get the Ways and Means Committee and the Finance Committee to
provide at least some tax relief, immediate tax relief for
those banks--it would be for any individual, but particularly
relevant to the banks--who were especially heavy in the
preferred. I think it is likely there will be at least some
ability to do a much quicker write-off.
Mr. David Davis of Tennessee. My local banker this morning
told me, ``We didn't borrow the $800,000 so we could increase
our capital, we bought it because it was a profit item for us.
It is a profit and loss for us.''
Mr. Bachus. What you are talking about, Main Street, this
would be something that I think--
The Chairman. I have to say I am for the tax relief. But
being from a more urban district, and I consulted my colleague
for Los Angeles, and she was no help, whether this is pigs or
hogs, or whatever other animal, we are not too good on that
stuff. But we do get the tax relief.
Mr. David Davis of Tennessee. If you eat bacon, you know
what I am talking about.
The Chairman. Now we are getting into religious matters.
I'm sorry; the gentleman from Colorado came first. I
apologize to the gentleman from Illinois.
STATEMENT OF THE HONORABLE ED PERLMUTTER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF COLORADO
Mr. Perlmutter. Thank you, Mr. Chairman, and thank you to
the ranking member. I just want to applaud both of you for
really jumping into the fray to try to do something in a very
difficult time in America. This is going to take a bipartisan
effort, whatever it is that we achieve.
I found myself in agreement with a number of the remarks by
Mr. Barrett as well as by Mr. Garrett. I think that ultimately
there is a way for this country to stabilize itself, to become
strong again, and to become that beacon of light that the rest
of the world looks to for confidence.
For me, there are three things that have to be proven
before I will support any of this because, Mr. Davis is
correct, people in Colorado don't want to bail out folks who
have been making a fortune while they have been barely hanging
on.
And so there are three pieces. One, there has to be proof
that this really will stabilize the financial markets; the
financial markets not being the economy, but being the
lubricant for the economy. Two, there have to be protections
for the taxpayers. If we are going to come in and as a Nation
subsidize this, try to resolve this, there better be plenty of
protections.
And I know, Mr. Chairman, and you, Mr. Ranking Member, that
has been something that has been critical as you have been
negotiating with the Administration, who are going to give us
no protections in their initial rendition of the bill.
The third piece, and I think it is the critical piece, but
it is the long-term piece, is to rebuild the economy.
Let's go back to how this all started. This started with us
sending lots of money overseas; to China, because we buy we so
much from them; to the Middle East, because we buy their oil,
and then money coming back to the United States because it is a
secure investment, and real estate prices only go up. So even
if people can't pay their mortgages, you are going to be secure
because real estate just goes up. So a lot of investment from
overseas, a lot of investment locally.
Well, in Colorado we went through a more or less depression
back in the 1980's, and we know that real estate prices don't
always go up. But what was going on here is more and more
exotic products were being presented to less and less
creditworthy customers. Ultimately, that house of cards came
tumbling down.
Now I did an op ed, and I am going to read from it just a
little bit. Financial markets can be a fragile things. At their
root, they are based upon the confidence of everyday people in
Colorado, in Wyoming, New York, in California. And in this day
and age, it is also based on the confidence of leaders in China
and sheiks in Saudi Arabia and businessmen and women in
Brussels and Brazil.
What creates this confidence is a question philosophers and
economists have asked for centuries. From the outset, the
confidence in America's markets was built upon the values of
sacrifice and thrift, investment and innovation, opportunity
for anyone who wished to put their training, talent, and best
effort to work, and a sense of community. That we are in this
together.
But recently, these values have been eclipsed by a
philosophy that greed is good, immediate gratification is
better; borrowing the norm, investment the exception; and every
man for himself, and a giant payoff for a select few while most
people are barely breaking even. The last time this philosophy
took hold was the Roaring Twenties.
A recent commercial touting the need for bling was
reminiscent of the party atmosphere of the 1920's. The crash of
1929 was a stark reminder that the party cannot go on forever,
and the hangover of the Great Depression resulted in misery for
millions of Americans.
As a consequence of that crash, steps were taken by the
Roosevelt Administration to place safeguards and restraints
within the financial markets to rebuild confidence in them, and
at the same time, Americans of every creed and color returned
to the basic values of thrift, sacrifice, investment,
opportunity for all, and community, and the result was a
creation of wealth on a national scale never before seen in the
history of the world.
We are at a place now where we can take this crisis that
has been presented to us, although John McCain and others say
the fundamentals of the economy are sound. Obviously, we are
going to hear from Mr. Paulson and Mr. Bernanke that they are
not.
I believe this is an opportunity to set this country on
stable footing, but proof has to be made that this is going to
stabilize the markets, this is going to protect the taxpayer,
and help us to rebuild this economy.
With that, I yield back my time.
The Chairman. We have Mr. Crowley and Mr. Foster. We can
accommodate both of them before we go.
Let me say at this point we are going to go to vote, come
back and reconvene, so any further Member testimony can be
submitted for the record, if there is no objection, and I hear
none.
Mr. Foster.
STATEMENT OF THE HONORABLE BILL FOSTER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Foster. Mr. Chairman, fellow members of the committee,
as a freshman member of this panel, thank you for letting me
testify. As a scientist and businessman and also one of the
newest Members of Congress, I hope to provide some useful
comments that may help us solve our problems and find
solutions.
First, I accept the need for speed and overpowering force
in this situation. With the credit system locked, small and
large businesses are being told to prepare contingency plans
for what to do if their operating lines of credit are not
extended. Banks are refusing to lend each other at normal
rates, or not at all. If nothing is done, and the situation
persists for even a few weeks, we are facing an economic
downturn unprecedented in our lifetimes.
This is not a situation where we need long and thoughtful
congressional deliberations. We have no choice other than to
act, and to act quickly. This is also not the time for
ideological fighting about class warfare from the left or blind
adherence to the principles of unfettered free marked and zero
government regulation from the right. This is the time for
serious people from both parties to work fast, work smart, and
map a way out of this crisis.
The second point I want to make is that there are two
routes mapped out of this crisis by the legislation that we
will be considering: The so-called auction route and the so-
called equity route. I wish to express my strong preference for
the equity route, and I believe that the American taxpayer and
business owner will agree.
In the auction route, the taxpayer funds are used to buy
off toxic assets left over from bad loans at a price well above
anything you can get in the current market. Financial firms are
bailed out and life pretty well goes on as usual for these
firms, with the exception that they have learned that whenever
they make a whole batch of bad loans, that they can pretty much
count on the U.S. taxpayer to at least partially come and bail
them out. The government is left with the mess of managing,
administering, and liquidating these toxic assets.
In the equity route, also allowed by the proposed
legislation, the firms are bailed out, but at the price of
government getting a big share in the companies. I believe that
this is a far better deal for the taxpayer. The companies will
be required to write down the value of their toxic assets,
essentially admitting that their worthless paper is worthless,
and in exchange the government injects cash by buying a large
fraction of these banks. This is not dissimilar to the recent
AIG bailout. And over time, as the market recovers, then the
banks are sold back to private investors.
The equity route has a number of advantages. First, the
government does not end up owning and managing the bank's bad
assets. The government is simply a more or less passive owner
in a bank that is now adequately capitalized. Nobody gets fired
on the day after a government equity injection, and financial
life goes on.
The equity route also depends somewhat less on getting an
exact evaluation for the toxic assets. If it turns out, for
example, that the assets are worth a lot more than anyone
thought at the time of the bailout, that is okay; the taxpayer
still owns most of the bank and most of the profits as the
bank's assets appreciate.
Finally, the equity route has been tried before, and it
works. In the 1990's, Sweden faced an almost identical crisis,
bad real estate debt and banks accounting for about 4 percent
of GDP, and successfully used the equity route to work their
way out of the crisis at a relatively small cost to taxpayers.
This process is described in Tuesday's New York Times, and I
urge everyone to read these articles.
The next point I wish to make regards financial
compensations for CEOs. One issue that is often mentioned is
the overall scope of compensation, and while this concerns me,
an equally important issue is the misalignment of incentives
between CEO pay and shareholder interest. This is at the route
of the crisis.
If you are the CEO of an investment bank that makes $1
billion a year for 5 years, and is wiped out in the 6th year,
the shareholders are also wiped out, but the CEO is left
personally very well off. This is a fundamental misalignment of
incentives that encourages extreme risk-taking behavior.
As a former small businessman, I carried an unlimited
personal guarantee for the success of my business. If my
business went under, I lost my house, and I guarantee you that
I paid very, very careful attention to the debt situation of
our company. So demanding both up-side and down-side
compensation incentives for CEOs is a crucial element of any
reform.
Finally, I believe that more of an effort needs to be made
to secure foreign assistance with this program. Given the fact
that the tentacles spread globally and given the fact that
foreign firms could receive assistance under proposals floating
around and given the fact that foreign governments have an
overwhelming interest in the stable and prosperous American
economy, it is vital we do more to ensure they aid us in this
effort, and share the burden.
Thank you. I yield back the balance of my time.
The Chairman. Thank you. We will break and come back at
2:30. I will keep the room open. If people want to sit here,
they can, but we can't have people saving seats. If people
leave, the seat will be up for grabs. There is a line of
people. If people want to sit here, they can sit here, but we
can't get in a situation of seats being saved. That is a
choice. I understand the issues.
We will open the hearing room again--well, we will keep it
open and start to let people in from the line to take their
seats, with the understanding that they have to stay here.
The gentleman from New York.
STATEMENT OF THE HONORABLE JOSEPH CROWLEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK
Mr. Crowley. Thank you, Mr. Chairman. Let me first thank
you for asking me to testify today. I want to testify that,
although from New York, not necessarily from the perspective of
Wall Street, but from the perspective of 65th in Woodside,
Queens as well.
I served on this committee for 6 years, and I learned a
tremendous amount about our Nation's financial services sector,
but I do not begin to claim I know exactly how to fix the
problems in our financial market. What I do know, however, is
that the problem on Wall Street stands to affect every
American.
As a New Yorker, that is where the problems will and are
hitting first. The cause and effect of what happens on Wall
Street and what happens to the services provided by the City
and the State are directly related. That is because almost one-
third of New York City's and 20 percent of New York State's tax
base comes from Wall Street.
So just as jobs are being cut on the street, State and
City-supported senior centers, health services, and public
programs are being cut as well. Just today, Mayor Bloomberg
announced cuts of $1.5 billion in this year's City budget
alone.
But, my colleagues, the reverberations of the downturn in
our financial markets are not limited to New York. So what is
at stake for hardworking Americans? First, their pension plans.
Whether we like it or not, our Nation is moving away from the
traditional defined benefit pension plan, where an employer
guarantees an employee a fixed income for life, towards a new
hybrid of a defined contribution system, highlighted by the
401K plan, which is routed in the activity of the stock markets
and investments.
That means the retirement savings of millions of workers
are held in the balance every day by Wall Street. So when the
market goes up, retirement plans make money. But, if it goes
down, we all lose a part of our nest eggs.
Second, credit is becoming harder and harder to obtain. We
are already seeing a credit crunch where even creditworthy
Americans are not being able to obtain a mortgage to purchase a
home or the ability to refinance out of an adjustable rate
mortgage or subprime loan. This is just the beginning.
What is potentially next? Student loans. We are seeing a
massive tightening in the student loan industry. At the moment,
student loan lenders have a direct call on the Treasury to keep
these important loan available for parents and students, but as
tough times get tougher, it can mean that going to college
pursuing a higher education will be even more difficult for
families on a budget because student loans will not be
available.
Auto loans. It is feared the next market to tighten up will
be the auto loan market, and if Americans cannot afford to buy
a car, what will happen to Chrysler, Ford, GM, and thousands of
UAW employees.
Finally, salaries and jobs are at risk. Employers, if they
cannot obtain credit to grow and expand their businesses, or
even to meet their payroll, we are looking at massive layoffs.
So, yes, Wall Street and Main Street are linked. Do I know
if the Bush-Treasury package is the right answer? I don't, and
neither does anyone else. But I don't have a fear of doing
something; I do, however, have a fear of doing nothing. Our
markets are based on confidence, and I believe steps must be
taken to provide confidence to our markets. I think that must
include an injection or liquidity or, simply put, cash to
grease our economy.
So where do we go from here? I do not believe we should
accept the Treasury's package as it was drafted by the White
House, but I do believe support is needed for our financial
services sector so it can, in turn, go back to allowing
Americans to safely invest their savings.
What Congress and the President must remember throughout
this process is that the $700 billion we are talking about
today is the taxpayers' money. The White House and Republican
Leader Boehner have argued for straight passage of the
President's Treasury plan, but that is not going to happen.
Democrats are building in a number of protections for the
taxpayer. We are demanding both civil and criminal
accountability for Wall Street executives, we will require
oversight of the Treasury Department, and will ensure that
there is a financial return to the taxpayer so this does not
add to the $5 trillion-plus debt, which we have right now,
which was added by the Bush Administration and the former
Republican majority of the Congress, many of whom are,
ironically, still arguing for further deregulation.
Chairman Frank, his staff, and members of the committee
have spent this past week inserting into the package much-
needed limits on executive compensation because we cannot
provide support to our Nation's financial institutions without
appropriate and tough measures to ensure that corporate
executives are not enriching themselves at taxpayer expense.
This bill will require those who seek help from the
Treasury to limit their pay and their benefits. Executives,
like all employees, should be rewarded for success and not for
failure. Chairman Frank has also demanded would swift action by
the Federal regulators and the FBI to investigate if fraud was
perpetrated against taxpayers during this crisis. The
government should be giving out metal bracelets and not golden
parachutes.
These actions are a solid start to ending the era of Cowboy
Capitalism. Chairman Frank and his committee have included in
its package important oversight protections to ensure the
Treasury Department adequately and appropriately executes the
program, as well as new oversight over our markets.
This new oversight is necessary, and I won't go into
details on what happened during the 1930's, but we know if we
don't do something, we are heading in that same direction. My
colleagues, no one is happy to be in this predicament, but we
are here and we need to address before it comes a cancer to our
entire economy.
So I understand pollsters are asking our constituents if
they think it is the right thing to do for the government to
potentially invest billions to keep financial institutions and
markets secure. The answer is: Do we have a choice? Or is the
consequence of inaction a far, far worse choice.
I thank the committee for allowing me to testify, and I
would be happy to answer any questions.
The Chairman. I thank all the Members who testified. We
will reconvene at 2:30 to hear Mr. Paulson and Mr. Bernanke.
[Recess]
The hearing will come to order. We have two men who have
spent a lot of time, doing a lot of work, including testifying
to us. We are going to move this quickly. We will hold strictly
to the 5-minute rule. People will take their seats. There will
be no disruptions. We will now proceed under the rules of the
committee when Cabinet level officers are here. We have two 5-
minute statements from the Chair and ranking member and two 3-
minute statements from the Chair and ranking member of the
subcommittee. At this point, I do not think the world is in
desperate need of hearing anymore on me from this subject. I
therefore waive my 5 minutes and recognize the ranking member,
who is not here. So I will recognize the ranking member of the
subcommittee.
Ms. Pryce. Thank you very much, Mr. Chairman. Gentlemen,
thank you. I know this is a very tiresome process for you for
the last 2 days. We appreciate your being among us. I am here
today, as are many of my colleagues, to listen and to learn. I
am not here to pontificate or grandstand or to play any blame
games or partisan politics. I am not even worried about my own
political future because I am not standing for election. I am
worried about the Nation's economy as you are. Like my
constituents, I am seeking answers to two fundamental
questions, why this and why now. We have all read by now why
Paulson is wrong.
What we need to hear today is why Paulson is right. One
thing we as politicians know, you can't make a move this large
without the consent of the American people. And we don't have
it yet. Part of your job is to help educate them. I want you to
put yourself in a classroom, teaching one of my constituents in
Columbus, Ohio, say, an Econ 101 student at the Ohio State
University. Explain to her why Congress needs to appropriate
$700 billion to stop the seizure of our credit markets. Explain
to her what this complete unwinding of leverage means to Main
Street. Explain to her what not acting means for pensions and
payrolls. Explain to her how this is not a bailout of Wall
Street executives and their golden parachutes. Give her
historical context. Have we done this before? Could the
taxpayers make money under this scenario; and if they do, what
will happen to it?
Beyond all the hyperbole and posturing, the question we as
lawmakers must ask ourselves is, are we better off following
your advice, some other expert's advice, or letting the free
market work its own will? What is the worst case scenario? Is
it a deep and uncomfortable recession or could it be far worse?
And while you are preparing for that class, you might want to
prepare for an advanced level macroeconomics class too because
you must be aware by now that there are many able and renowned
economists who don't agree with you either. They need to know
why Paulson and Bernanke are right as well.
Right now, what we have before us, is a trust-me proposal.
Our jobs as representatives is to do the people's will, and so
far you are a far cry from having the people on your side. We
can't say to them trust me, trust the Fed, trust the Treasury,
because they already feel that trust has been breached. I want
to make the case--I want you to make the case to me today so I
can make the case to my constituents. Yours is a sales job,
gentlemen. I want you to make the case to the worlds'
economists so they don't undermine us on this as well. I am not
sold, but yet I am here with open ears and open heart to do the
right thing. Thank you, Mr. Chairman.
The Chairman. The gentleman from Pennsylvania, the chairman
of the Subcommittee on Capital Markets.
Mr. Kanjorski. Good afternoon, Mr. Chairman. In this
hearing room, in the halls of Congress, and all across
Washington, the $700 billion Treasury proposal is a subject of
much debate, but the American taxpayers remain in the dark. The
Administration has only told them in general terms that our
economy has reached a tipping point and that the Executive
Branch needs unprecedented powers and a blank check to fix the
situation. In my view, the current dire circumstances require
that the American people receive more information rather than
less.
The President must also deliver a national address to
explain why the largest government intervention since the Great
Depression is needed. If our markets and capitalism itself are
truly on the line, then the President must speak openly,
frankly, and publicly about these problems. Once the
Administration establishes the predicate for emergency action,
only then should the Congress consider passing this package of
truly massive proportions. And if we do decide that the
Treasury plan is the proper course, we must revise it to
protect taxpayers. Their interests must trump those of
corporate fat cats and cowboy capitalists. As we proceed on
these matters, we must also put partisanship aside. Bipartisan
is a two-way street. The American people want cooperation and
leadership by government in tough times. As my fellow
Pennsylvanian, Ben Franklin, said at the founding of our
Nation, ``We must all hang together or we shall surely all hang
separately.''
Unfortunately, the initial Treasury plan would have the
taxpayer picking up the tab for a Wall Street party to which
they were not even invited. It would also have taxpayers
playing the role of venture capitalists without a share of
profits in the long run. Americans are tired of enabling
corporate excess. Therefore, once the Administration makes its
case and the Congress decides to act, the legislation we write
must meet many conditions. We must protect taxpayers and limit
the Treasury's power. We must prevent those who contributed the
most to this crisis from further profiting.
We must establish strong oversight with a permanent in-
house watchdog and a robust external congressional monitor. We
must also control the program's costs and seek ways to pay for
its intervention, including surcharges on millionaire's incomes
and fees on securities transactions. Finally, we must help
families with troubled loans to remain in their homes.
Moreover, every one of these debates must commit to significant
regulatory reform of the financial system in the next Congress.
The era of deregulation is over. As many of us on this side of
the aisle have long believed, only regulation can save
capitalism from its own excess. In sum, the economy is a man-
made construct. Man made it and man can fix it. I am committed
to doing just that.
The Chairman. The gentleman from Alabama is now recognized.
As ranking member, he is entitled to 5 minutes.
Mr. Bachus. Thank you, Mr. Chairman. Members of the
committee--and I would say this to all Americans, we can't kill
the messenger. Secretary Paulson and Chairman Bernanke are
alerting us to serious problems in our economy, the threat of a
systemic meltdown. And oddly enough, some tend to blame them as
messengers, but they are both very capable public servants.
They are in their positions because of their expertise and
their knowledge. And ironically--and I think they know this,
but I am not sure the American people do--they arrived in those
positions long after the problems which bring us here today
originated--overleveraging, overextension of credit, risk
taking.
And really for the last year, they have advocated a
systemic regulator, a modernization of our financial structure,
which we all failed to do for 30 or 40 years. We are all
reaping the consequences of that failure. We can pile on
criticisms of them, but I think it is far more constructive if
you don't like their plan to work with them, to fashion an
alternative or to amend their plan. That is what I am doing.
The American people, if they knew the situation we were in,
they would want us to stay here until we found a solution. And
if we are going to find a solution, we are going to do it as
Americans, not as Democrats or Republicans, not as the
Executive Branch versus the Legislative Branch. There will be
plenty of time in the next few years, believe you me, and
plenty of time spent on blaming people and finding out what was
wrong and preventing it from happening again. But right now, we
need our total resources in working with the American people
and working with our regulators to address this serious
situation and in protecting the taxpayers. And I am convinced
that these two witnesses and this body, that our main concern
here is the American citizen, middle class America, Main
Street, the taxpayers. Thank you, Mr. Chairman.
The Chairman. We will now proceed with statements in
order--anybody in the line of succession to the Presidency goes
first. Secretary Paulson.
STATEMENT OF THE HONORABLE HENRY M. PAULSON, JR., SECRETARY,
U.S. DEPARTMENT OF THE TREASURY
Secretary Paulson. Okay. Mr. Chairman, I thank you. A note
of levity always helps. First of all, thank you very much.
Thank you, Congressman Bachus, and members of the committee.
Thank you for the opportunity to appear here today. I
appreciate that we are here to discuss an unprecedented
program, but these are unprecedented times for the American
people and for our economy. I also appreciate that the Congress
and the Administration are working closely together and we have
been for a number of days now so that we can help the American
people by quickly enacting a program to stabilize our financial
system.
We must do so in order to avoid a continuing serial of
financial institution failures and frozen credit markets that
threaten American families' financial wellbeing, the viability
of businesses both small and large, and the very health of our
economy. The events leading us here began many years ago,
starting with bad lending practices by banks and financial
institutions and by borrowers taking out mortgages they
couldn't afford.
We have seen the results on homeowners, higher foreclosure
rates affecting individuals and neighborhoods, and now we are
seeing the impact on financial institutions. These bad loans
have created a chain reaction, and last week our credit markets
froze up. Even some Main Street nonfinancial companies had
trouble financing their normal business operations. If that
situation were to persist, it would threaten all parts of our
economy. Every business in America relies on money flowing
through the financial system smoothly every day, not only to
borrow, expand, and create jobs, but to finance their normal
business operations and preserve existing jobs. Since the
housing correction began last summer, the Treasury has examined
many proposals as potential remedies for the turmoil that the
correction has caused to the banking system.
At the Federal Reserve, we have sought to address financial
market stresses with as minimal exposure for the U.S. taxpayer
as possible. This Federal Reserve took bold steps to increase
liquidity in the markets and we have worked together on a case-
by-case basis addressing problems at Fannie Mae and Freddie
Mac, working with market participants to prepare for the
failure of Lehman Brothers and lending to AIG so it can sell
some of its assets in an orderly manner. We have also taken a
number of powerful tactical steps to increase confidence in the
system, including a temporary guarantee program for the U.S.
money market mutual fund industry.
These steps have all been necessary but not sufficient.
More is needed. We saw the financial market turmoil reach a new
level last week and spill over into the rest of the economy. We
must now take further decisive action to fundamentally and
comprehensively address the root cause of the turmoil. And that
root cause is the housing correction which has resulted in
illiquid mortgage related assets that are choking off the flow
of credit which is so vitally important to our economy.
We must address this underlying problem and restore
confidence in our financial markets and financial institutions
so that they can perform their mission of supporting future
prosperity and growth. We have proposed a program to remove
troubled assets from the system, a program we analyzed
internally for many months and had hoped would never, ever be
necessary. Under our proposal, we would use market mechanisms
available to small banks, credit unions and thrifts, large
banks, and financial institutions of all size across the
country.
These mechanisms will help set values of complex illiquid
mortgage and mortgage-related securities to unclog our credit
and capital markets and make it easier for private investors to
purchase these securities and for financial institutions to
then raise more capital. This troubled asset purchase program
has to be properly designed for immediate implementation and be
sufficiently large to have maximum impact and restore market
confidence. It must also protect the taxpayer to the maximum
extent possible, include provisions that ensure transparency
and oversight while ensuring the program can be implemented
quickly and run effectively as it needs to get the job done.
The American people are angry about executive compensation and
rightfully so.
Many of you cite this as a serious problem and I agree. We
must find a way to address this in the legislation, but without
undermining the effectiveness of this program. I understand the
view that I have heard from many of you on both sides of the
aisle urging that the taxpayer should share in the benefits of
this program to our financial system. Let me make clear this
entire proposal is about benefiting the American people because
today's fragile financial system puts their economic wellbeing
at risk.
When local banks and thrifts aren't able to function as
they should, Americans' personal savings and the ability of
consumers and businesses to finance spending, investment, and
job creation are threatened. The ultimate taxpayer protection
will be stabilizing our system so that all Americans can turn
to financial institutions to meet their needs financing a home
improvement or a car or a college education, building
retirement savings, or starting a new business.
The $700 billion program we have proposed is not a spending
program. It is an asset purchase program. And the assets which
are bought and held will ultimately be resold with the proceeds
coming back to the government. Depending on the rate at which
our housing market and economy recover, the loss to the
taxpayer should be minimal, and a number of experts believe the
government should actually break even on this program. I am
convinced that this bold approach will cost American families
far less than the alternative, a continuing series of financial
institution failures and frozen credit markets unable to fund
day needs and economic expansion.
As you can imagine, I have been talking a lot lately and
sometimes the words don't--they never do come out that smoothly
for me, but it has been a long couple of days. But anyway, I
understand this is an extraordinary thing to ask, but these are
extraordinary times. I am encouraged by bipartisan consensus
for an urgent legislative solution. We need to enact this bill
quickly and cleanly and avoid slowing it down with unrelated
provisions or provisions that don't have broad support.
This troubled asset purchase program on its own is the
single most effective thing we can do to help homeowners, the
American people, and to stimulate our economy. Earlier this
year, Congress and the Administration came together quickly and
effectively to enact a stimulus package that has helped hard
working Americans and boosted our economy. We acted
cooperatively and faster than anyone thought possible. Today we
face a much, much more challenging situation that requires
bipartisan discipline and urgency.
When we get through this difficult period, which we will,
our next task must be to address the problems in our financial
system through a reform program that fixes our outdated
financial regulatory structure and provides strong measures to
address other flaws and excesses. I have already put forward my
recommendations on this subject. Many of you here also have
strong views. And we must have that critical debate, but we
must get through this period first. Right now, all of us are
focused on the immediate need to stabilize our financial system
and I believe we share the conviction that this is in the best
interest of all Americans. Now, let us work together and get it
done. Thank you.
[The prepared statement of Secretary Paulson can be found
on page 87 of the appendix.]
The Chairman. Thank you, Mr. Secretary. Now, the Chairman
of the Federal Reserve. Before you begin, Mr. Chairman, I just
want to express my agreement with the remarks of my colleague
about the hard work that you gentlemen have done. And I would
only amend one thing. He did say that you arrived after the
problems had manifested themselves. I think, in fact, they got
the worst of both worlds. They arrived after the problems had
been smoldering, but before they manifested themselves. They
got kind of caught, perhaps without fair warning. Mr. Chairman.
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you, Chairman Frank, Ranking Member
Bachus, and members of the committee, I appreciate this
opportunity to discuss recent developments in financial markets
in the economy. As you know, the U.S. economy continues to
confront substantial challenges, including a weakening labor
market and elevated inflation. Notably, stresses in financial
markets have been high and have recently intensified
significantly. If financial conditions fail to improve for a
protracted period, the implications for the broader economy
could be quite adverse.
The downturn in the housing market has been a key factor
underlying both the strained condition of financial markets and
the slowdown of the broader economy. In the financial sphere,
falling home prices and rising mortgage delinquencies have led
to major losses at many financial institutions, losses only
partially replaced by the raising of new capital.
Investor concerns about financial institutions increased
over the summer as mortgage related assets deteriorated further
and economic activity weakened. Among the firms under the
greatest pressure were Fannie Mae and Freddie Mac, Lehman
Brothers, and more recently, American International Group (or
AIG). As investors lost confidence in them, these companies saw
their access to liquidity and capital markets increasingly
impaired and their stock prices drop sharply. The Federal
Reserve believes that whenever possible, such difficulty should
be addressed through private sector arrangements, for example,
by raising new equity capital, by negotiations leading to a
merger or acquisition, or by an orderly wind-down.
Government assistance should be given with the greatest of
reluctance and only when the stability of the financial system
and consequently the health of the broader economy is at risk.
In the cases of Fannie Mae and Freddie Mac however, capital
raises of sufficient size appeared infeasible and the size and
government sponsored status of the two companies precluded a
merger with or acquisition by another company. To avoid
unacceptably large dislocations in the financial sector, the
housing market, and the economy as a whole, the Federal Housing
Finance Agency placed Fannie Mae and Freddie Mac into
conservatorship and the Treasury used its authority granted by
the Congress in July to make available financial support to the
two firms.
The Federal Reserve, with which FHA consulted on the
conservatorship decision, as specified in the July legislation,
supported these steps as necessary and appropriate. We have
seen benefits of this action in the form of lower mortgage
rates, which should help the housing market. The Federal
Reserve and the Treasury attempted to identify private sector
approaches to avoid the imminent failures of AIG and Lehman
Brothers, but none was forthcoming.
In the case of AIG, the Federal Reserve, with the support
of the Treasury, provided an emergency credit line to
facilitate an orderly resolution. The Federal Reserve took this
action because it judged that in light of the prevailing market
conditions and the size and composition of AIG's obligations, a
disorderly failure of AIG would have severely threatened global
financial stability and consequently the performance of the
U.S. economy.
To mitigate concerns that this action would exacerbate
moral hazard and encourage inappropriate risk taking in the
future, the Federal Reserve ensured that the terms of the
credit extended to AIG imposed significant cost and constraints
on the firms' owners, managers, and creditors. The chief
executive officer has been replaced. The collateral for the
loan is the company itself, together with its subsidiaries.
Insurance policyholders and holders of AIG investment products
are, however, fully protected. Interest will accrue on the
outstanding balance of the loan at a rate of 3 month LIBOR plus
850 basis points, implying a current interest rate over 11
percent.
In addition, the U.S. Government will receive equity
participation rights corresponding to a 79.9 percent interest
in AIG and has the right to veto the payment of dividends to
common and preferred shareholders, among other things. In the
case of Lehman Brothers, a major investment bank, the Federal
Reserve and the Treasury declined to commit public funds to
support the institution. The failure of Lehman posed risks, but
the troubles at Lehman had been well known for some time and
investors clearly recognized as evidenced for example by the
high cost of insuring Lehman's debt in the market for credit
default swaps that the failure of the firm was a significant
possibility.
Thus, we judge that investors and counterparties had time
to take precautionary measures. While perhaps manageable in
itself, Lehman's default was combined with the unexpectedly
rapid collapse of AIG, which together contributed to the
development last week of extraordinarily turbulent conditions
in global financial markets. These conditions caused equity
prices to fall sharply, the cost of short-term credit, where
available, to spike upward, and the liquidity to dry up in many
markets. Losses at a large money market mutual fund sparked
extensive withdrawals from a number of such funds. A marked
increase in the demand for safe assets, a flight to quality,
sent the yield on Treasury bills down to a few hundredths of a
percent. By further reducing asset values and potentially
restricting the flow of credit to households and businesses,
these developments pose a direct threat to economic growth.
The Federal Reserve took a number of actions to increase
liquidity and stabilize markets. Notably, to address dollar
funding pressures worldwide, we announced the significant
expansion of reciprocal currency arrangements with foreign
central banks, including an approximate doubling of the
existing swap lines with the European Central Bank and the
Swiss National Bank and the authorization of new swap
facilities with the Bank of Japan, the Bank of England, and the
Bank of Canada.
We will continue to work closely with colleagues at other
central banks to address ongoing liquidity pressures. The
Federal Reserve also announced initiatives to assist money
market mutual funds facing heavy redemptions and to increase
liquidity in short-term credit markets. Despite the efforts of
the Federal Reserve, the Treasury, and other agencies, global
financial markets remain under extraordinary stress. Action by
the Congress is urgently required to stabilize the situation
and avert what otherwise could be very serious consequences for
our financial markets and for our economy.
In this regard, the Federal Reserve supports the Treasury's
proposal to buy illiquid assets from financial institutions.
Purchasing impaired assets will create liquidity and promote
price discovery in the markets for these assets while reducing
investor uncertainty about the current value and prospects of
financial institutions. More generally, removing these assets
from institutions' balance sheets will help to restore
confidence in our financial markets and enable banks and other
institutions to raise capital and to expand credit to support
economic growth. At this juncture, in light of the fast moving
developments in financial markets, it is essential to deal with
the crisis at hand.
Certainly, the shortcomings and weaknesses of our financial
markets and regulatory system must be addressed if we are to
avoid a repetition of what has transpired in our financial
markets over the past year. However, the development of a
comprehensive proposal for reform will require a careful and
extensive analysis that would be difficult to compress into the
short legislative timeframe now available. Looking forward, the
Federal Reserve is committed to working closely with the
Congress, the Administration, Federal regulators, and other
stakeholders in developing a stronger, more resilient, and
better regulated financial system. Thank you, Mr. Chairman.
[The prepared statement of Chairman Bernanke can be found
on page 82 of the appendix.]
The Chairman. Thank you. First, a request for working
together. As we look at every method unfolded, there is a
danger that community banks will be victimized when they are
among the least guilty of any of the misdeeds. These are the
people who didn't make bad subprime loans. As you know--we have
talked about this--held preferred stock in Fannie Mae and
Freddie Mac and they are at risk of losing that or not at risk
of losing that. I would hope--off the subject here--and we have
been talking to the people in the tax committees--that we could
get an agreement to give them--all those who held preferred
stock appropriate tax relief. I think that would be fair. The
government caused a loss to them and I think that we ought to
at least allow for some pretty quick deduction. Mr. Chairman?
Mr. Bernanke. Mr. Chairman, the Federal Reserve, together
with the other Federal regulators, is looking at ways to ease
that problem.
The Chairman. I appreciate that. You can do it in a
regulatory way, but there is also the dollars--it does seem to
me that being able to recognize the full impact of that loss
right away since we caused it is what--we have been talking
about tax--secondly, they have some concerns that they will get
lost in this shuffle if we enact this, that one--they didn't do
any--the fewer bad loans you made, the less likely you are to
be eligible for this program.
They are worried that with the insecurity people may feel
about the system, some correctly, some incorrectly, that there
will be a flight away from them because of the perception that
they are only good at 100, but the others might be good at--I
am going to ask you to work with us. We are going to work on
the legislation as we go forward to do something that--I was
glad that you mentioned them, Mr. Secretary. They have to be
given some consideration in this program because again they
were the least ones who made the problem. We can't make them
the victims. Mr. Secretary?
Secretary Paulson. Yes, I would, Mr. Chairman, explain
this--and Chairman Bernanke I think will say something about it
too. I think this is something that we haven't communicated
maybe as clearly as we should have about the program.
The Chairman. There is a lot of that going around, Mr.
Secretary.
Secretary Paulson. As we have dealt with some of the other
situations and we have dealt with them and we have gone over
them on a case-by-case basis and we dealt with failure either
to prevent failure or to deal with failure. And what we want to
do here is deal with it systemically and get ahead. And so this
program that we are proposing is not one that is aimed just at
big financial institutions. We could--you could design programs
that would come in and deal with big financial institutions and
take a lot of assets off their balance sheets at prices that
were very helpful and, of course, when you do that, then you
have other measures that go with it.
But what we are looking at doing here and which we think is
very important is to get price discovery and transparency and
price discovery with very complex mortgage and mortgage related
assets. And we think the way to do that is design a process
where you get hundreds, even thousands of institutions for some
of these asset classes and mortgage represented securities to
participate. And there are different programs that will be
used. There are reverse auctions. There are different--
The Chairman. So in other words--I am glad to hear this.
You really are giving the assurance that the community banks
will be among those who will participate and the assets that
they have will get a full eligibility here.
Secretary Paulson. Absolutely. And S&Ls and credit unions.
They will benefit two ways. They will benefit also by
stabilizing the system because through no fault of their own,
if there are problems in the system, it will rain down on them.
But also our intent is to approach this trying to establish
value with various of the mortgage securities.
The Chairman. Let me just say, because I am going to have
to finish up, I would add to this--again, not the subject
here--the House has, on a couple of occasions, tried to raise
the deposit insurance limit and I say this because getting
support for this program is important. If the community banks
feel further threatened and they have been somewhat unfairly
treated by things that weren't aimed at them but they were the
unintended consequence, that jeopardizes it. And I do believe
that the too-big-to-fail thing, they are feeling I think with
some rectitude that they may be at a further disadvantage in
the competition for deposit funds.
So I do intend, if I am still chairman next year, to again
raise the issue of increasing the deposit limit for the FDIC,
which I think is an important thing for them. Mr. Chairman, do
you have a brief word?
Mr. Bernanke. I was just going to comment that they did not
make subprime loans, but they do have residential loans and
commercial real estate loans, and I think that there will be
issues there.
The Chairman. Thank you. The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman. Secretary Paulson, I
am going to quote from David Leonhardt in today's New York
Times. He said, ``The first thing to understand is that a
bailout plan doesn't have to cost anywhere close to $700
billion, so long as it is designed well. The $700 billion
number that you see everywhere is an estimate of how much the
government would spend to buy deteriorating assets now held by
the banks. Eventually the government will turn around and sell
these assets for a price almost certain to be greater than
zero. So you are buying $700 billion worth of assets, but you
are going to sell those at a later date.'' I know the fire sale
prices today are for a much greater amount. But first do you
agree with that statement? And how do you ensure, what have you
built into this program to protect the taxpayers to ensure that
money will be recovered when there is a sale of those assets?
Secretary Paulson. Well, thank you very much, Congressman
Bachus. As you have rightfully said, this is not an expenditure
in a traditional sense. It is not an outlay. It is purchasing
assets. And we believe that when those assets are sold, the
money comes back to the government, to the taxpayer. And I
think the best way we can protect the taxpayer is, first of
all, that the American people will benefit by having the credit
they need, the fact that we won't have a negative impact on
their retirement savings, they will see their investments in
retirement savings plans, will be protected.
We won't have a series of negative things that are apt to
happen if we don't do this. So we are protecting the taxpayer
who is already on the hook unfortunately for this, I am sorry
to say. But then additionally, as you said, we are buying
assets and if we do this properly and as the economy and
housing market recovers, then those assets will be sold and
there is no way that the cost should be anything like the
amount of money spent on the assets.
And as I said in my testimony, I think the costs will be
minimal. There have been a number of experts who have been
asking me to say that the taxpayer can make money on this and I
am just not going to say that because I don't know. But I do
know that it is not fair to say that this is an expenditure
because we are buying assets.
Mr. Bachus. Chairman Bernanke, let me ask you the same
question. How do you structure this program or how is it
structured to ensure that the taxpayers are protected? I know
that Chairman Frank and I have been working on some assurances
or guidelines in the legislation to make sure that either by
auction or covenant or some mechanism, that that price is
pretty much guaranteed. And I know it is hard to guarantee, but
you have also mentioned the difference between a fire sale
price and a hold to maturity price. Would you go into that?
Mr. Bernanke. Certainly, Congressman. Thank you. Just to
reiterate the Secretary's point, this is working capital, if
you will. It is for purchasing these assets. It is a very large
amount of money, but the risk to the taxpayer, although not
trivial, is far less than the amount of money that is the
purchase amount. With respect to protecting the taxpayer, I
think that we should be using whatever possible market
mechanisms that reveal the true value to the extent we can of
those assets. One of the objectives of the program is to try to
figure out what these things are worth.
I think there is really a win-win situation possible here
in that bringing the demand from the government into these
markets will raise the price above the rock bottom fire sale
distressed price that is currently prevailing from any of these
assets, and yet that the taxpayer pays could still be well
below what these assets would be worth in a normal market as
the economy recovers. So I am not advocating that the taxpayer
overpay. I think the prices should be determined by competitive
market mechanisms--the more participation, the better.
But I do believe that bringing liquidity into this market
will help to clarify the prices and will bring the prices up
from these rock bottom fire sale prices.
The Chairman. The gentleman from Pennsylvania.
Mr. Kanjorski. Thank you, Mr. Chairman. Mr. Secretary and
Mr. Chairman, from the onset of this problem, when the Congress
was notified this past Thursday, I have had the opportunity to
work with the chairman and the leader of the minority and other
members of the committee and the leadership and we are working
on a 2-track basis, if you will. That is what I really want to
call to your attention. We are quite far ahead on the
legislation, as the chairman may have indicated to you. On
Monday and Tuesday, we have taken a piece of legislation the
Treasury sent up on Saturday and have now folded it into a very
comprehensive proposal with revisions that does primarily what
you are asking it do, but with the protections the public has
been asking for. It is now in excess of 42 pages, and I am sure
it will be longer than that before it works itself through the
Senate.
Our problem is that on Monday, after having watched all the
programs and participated in many of the conference calls with
you gentlemen and with members of the prior Administration, I
became acutely aware that those of us inside the Beltway, those
of us inside the Congress who are familiar with this problem,
were way ahead of the general public, and quite frankly, on
Monday morning, when I was talking to people in my district and
districts across the country, I became acutely aware that the
sun came up that day and a lot of people went to work and a lot
of people couldn't understand what this panic was in Washington
to adopt and pass a bill in a matter of days, granting $700
billion into the hands of the Secretary of the Treasury to take
care of something that the people could not observe.
And I thought that second track, it was necessary for the
President to join you all in setting the predicate of what the
problem is. I know it is difficult, but let me say, Mr.
Secretary, many of us are taxed for how to describe something.
You are so involved and immersed in this, you have to back up
and think about average American people. They really want to
know what is meant by far less than the alternative. And you
have to tell us. You have to tell the American people, I think
many of the members of this committee know and that is why we
are working and moved considerably on this legislation.
But the average American people don't really know what you
are talking about when you say it is going to cost us far less
than the alternative. And I point out that maybe we can find
some concrete examples. I was talking to someone, one of my
friends on Wall Street today, asking him to verify the money
market run. It was anonymously reported in some of the New York
papers, and I think I have evidence of it in some of our
conversations, whether it was with you or with other experts
that between 11:00 and 11:30 on Thursday last, the money
markets in the United States were hit by a run that amounted to
about $500 billion of $4 trillion in accounts and that as I
understand it, it was essential for the Federal Reserve to pump
$105 billion into the system and to suspend operations or the
money market accounts of the country would have, in fact,
failed.
One, you should tell us that. And then the ramifications if
that were to happen so that average Americans understand that a
run--an electronic run on money market Social Security is no
different today than a run on banks in 1929; the catastrophic
results are very similar or the same. You have not said that.
The President has not said that. So when I talk to average
Americans in my district and across this country, the sun came
up today, they went to work today, they stopped and picked up
gas today, and they are wondering what all the hullabaloo is
about.
Now, Mr. Secretary, let me give you the opportunity to tell
us. This $700 billion figure that is needed to solve this
problem, that is right, billion, trillion, million. What is a
far lasting alternative and what is that alternative?
Secretary Paulson. Okay. Well, first of all, I thank you
for your comment and I agree with your comment. And let me say
that although the chairman and I and many others have been
thinking through alternatives for a long time if we needed
them, we hoped we didn't need them and we were confronted with
a situation that unfolded very quickly. We had people staying
up all night for a couple of nights and so we weren't able to
exactly roll this out the way we would have liked to. We moved
it out very quickly. Now, I would say in terms of the money
markets, let me explain to you--
The Chairman. Mr. Secretary, I apologize. You weren't
allowed much time. But we have to keep to--we may have to
return to the question of what is the alternative later on. But
go into the money markets, and then do that one.
Secretary Paulson. I will do that very quickly. There is
$1.7 trillion of commercial paper even in the money markets.
Commercial paper is short-term lending for businesses and
businesses need this money to flow, to fund daily operations.
If they can't use that, it all goes back on the banks and it
creates a big problem. So what we did, and we did it in a way
in which it didn't disturb the level playing field, we
guaranteed all money market funds for a year. We used some
emergency powers, the exchange stabilization fund at the
Treasury.
But we did it--funds that were there, through September
19th. So we weren't going to create a problem with an unlevel
playing field going forward and then we are giving the money
markets a chance to decide to opt into this program and make
some payment. That was our action. There is a lot we all could
do to explain how this relates to ordinary Americans and we
need to do a better job of explaining that.
The Chairman. Thank you, Mr. Secretary. We are trying to
keep it to 5 minutes, so if you want a full answer, you have to
leave them some time. The gentlewoman from Ohio. Thank you.
Ms. Pryce. Thank you, Mr. Chairman. I mentioned the
article--I think it is even a blog now--of why Paulson is
wrong. So why don't you explain to us why Paulson is wrong and
why all the alternatives that are being propounded by other
economists don't really solve the problem. And let me be
specific. Zingales would have us believe that you have the
wrong end of the asset liability ledger and that a super
bankruptcy proposal would work better where the government
would step in and force a quick cram down on paper holders.
Robert Reich has echoed this with a call for a giant
workout of Wall Street. Then we have Charles Calomiris from
Columbia and AEI and he said instead of buying these toxic
assets, the government should buy preferred stock in ailing
banks and could raise matching private sector equity. Doug
Elmendorf at Brookings put forward a similar argument. Martin
Wolf, Tyler Cohen, and others have said that institutions
should just suspend dividend payments. And so why are these
proposals--and any others you have time to get to--wrong, and
you are right?
Secretary Paulson. Well, I can hardly do that in a few
minutes, but I am going to do it in just a minute or two, and
let Chairman Bernanke say something. There are a number of
tactical suggestions that people are dealing with, accounting
ideas, the mortgage cram down, the bankruptcy, which I believe
from a policy standpoint does the opposite of what we want to
do. We want to encourage lenders to lend for mortgages.
I think that is the opposite. But let me deal with the
basic one, which is preferreds putting in capital. There are a
number of plans that say let us go to the root of the problem,
let us just put capital into those institutions which we think
are troubled. And that is one about dealing with failure. Okay?
And when you put capital in, that is the Japanese solution,
they were in a very long recession for many years, but what
they did is they came in, put capital in the banks, and then
the government is essentially in many ways running them.
So you are sticking preferred stock in. What we are trying
to do, we are trying to take a different approach which is this
is a different situation than anything you can find
historically. What we are trying to do is have price discovery
on illiquid assets, and then that encourages private capital to
follow and it makes it possible for the banks to recapitalize
themselves because lenders right now are concerned about
putting capital in because they don't trust the balance sheets
and they have concerns about what these assets are worth. Mr.
Chairman?
Mr. Bernanke. I would just make the point, as the Secretary
did, that historically these situations have dealt with
institutions that have already failed or primarily close to
failing. In that case you take the assets off the balance
sheet, or you just put capital in them, and then you take all
the ownership and restore them to functioning. In this case, we
have two differences. One is that the banking system for the
most part is still an ongoing concern. It is not extending
credit to the extent we would like, but it is not failing.
If there are failing institutions, we can address those
individually. But more broadly, the problem is that with the
complexity of these securities and the difficulty of valuation,
nobody knows what the banks are worth and therefore, it is very
difficult for private capital to come in to create more balance
sheet capacity so banks can make loans. So it is a rather
different situation from past episodes. That being said there
is flexibility in this, and I think it is the intention of the
Secretary, and certainly I would advise him--under the
oversight of the oversight committee or whatever is set up to
watch over this process--to be flexible and respond to
conditions as they change. If this process is not working
effectively, there are other ways to use this money that will
again purchase assets or purchase capital and support the
banking system.
The Chairman. The gentlewoman from California.
Ms. Waters. Thank you very much, Mr. Chairman. I would like
to thank Secretary Paulson and Chairman Bernanke for their
presence here today. I also thank Secretary Paulson for his
responsiveness when I have called to talk to him about some of
these issues. And I would like to tell Mr. Bernanke that the
invitation to my district still stands, but now would not be a
good time to come, so maybe we can do that later on.
The Chairman. Let me say--if the gentlewoman would suspend,
stop the clock. We have some votes. I wish we didn't, but I
wish a lot of things that often don't happen. We will vote as
quickly as possible. We will go another 10 minutes, and we will
return as soon as we can. Our two witnesses have to leave at
5:15. I think that is reasonable, so we will return from the
votes as soon as we can. So we will go--if Members who weren't
now want to go--there are 3 votes. We will now go for another
10 minutes and we will come back as soon as we can. There is a
15-minute vote and two 5-minute votes.
Ms. Waters.
Ms. Waters. Thank you very much. I will try to shorten
this. Secretary Paulson, I am concerned about the servicers and
the lack of speed in loan modifications. It is just not good
enough. And even with what we are contemplating now, it does
not appear that there is a strategy by which to help these
servicers be able to pay the money out front that they have to
pay to the investors and really do loan modifications and keep
at-risk people in their homes. Quickly, will you entertain some
of the creative information and ideas that are coming to me and
Barney Frank about how to do this?
Secretary Paulson. Yes, Congresswoman Waters. That is
something we have talked about before with you. It is very,
very important figuring out how to deal with foreclosures. We
have had a number of programs for dealing with servicers and
both the Chairman and I believe that as the government owns
more of these securities, we should have more leverage, and be
able to be more creative and effective in dealing with the
servicers and getting quicker modifications. I think you are
focusing on a very important topic.
Ms. Waters. Thank you very much. We will certainly follow
up with you on that. I want to get quickly into an area that I
have been involved in practically all of my life and that is
opening up opportunities for small, minority- and women-owned
businesses. What strategies are you contemplating to ensure
that smaller community-based and minority- or women-owned
business firms are able to participate as vendors in this
massive undertaking? For example, there will be perhaps
trillions of dollars that will require what is known as
transition management by broker-dealers qualified to execute
the trades necessary to ship assets from government entity to
asset manager and from asset manager to the venture buyer of
the distressed assets.
I understand that smaller firms and minority firms just
don't get the opportunity to participate in this transition
management process in the current market. What are we going to
do about this lack of involvement in participation?
Secretary Paulson. Well, let me say there is a lot of work
that is going to have to be done on implementing this and
getting the right talent in to implement it. I am going to make
a point that I think everyone knows that by far, the most
important thing is that a program be successful, because if it
is not, those who are going to pay the biggest price are some
of the ones we all care about the most in some of the smaller
minority owned firms than others. So we need to have this
program worked and we will be very aware of your concerns and
interests as we work through this.
Ms. Waters. Well, I would like to interject here that we
have the database of qualified minorities and women who have
worked for many of these majority firms who stand ready to
participate, they just don't know how to get a foot in the
door. And it really does require more than even a willingness
to do it. It really does require real action to make this
happen. And for those of us and particularly minorities in this
country who are sitting around watching the rescue or the
bailout or however we want to term and watching the big banks
and institutions being made whole or to be helped out, we
really have to focus our attention on these smaller businesses,
these minority businesses, these women-owned businesses and we
really do want to see some aggressive action on both of your
parts to do that. I didn't hear you.
Secretary Paulson. I said I definitely hear you and we got
the message.
Mr. Bernanke. I am not part of the process for selecting
these managers, but I understand your concern.
Ms. Waters. Thank you very much.
The Chairman. The recorders are very good, but they are a
little weak on nods. The gentleman from New York.
Mr. King. Thank you, Mr. Chairman. I absolutely thank
Chairman Frank and Ranking Member Bachus for the bipartisan
spirit that they have shown and the seriousness they have shown
in dealing with this very, very vital manner. And I also want
to thank Secretary Paulson and Chairman Bernanke for the way
you have dedicated yourself to this and the public service you
are performing. I hope to be able to vote for the final
package.
I am convinced that the credit arteries are clogged and our
Nation would face a massive crisis, which would work its way
not just onto Wall Street but to Main Street and that is really
what we are addressing here today. And I know there are some
people, primarily on my side of the aisle, who want to talk
about how important it is to preserve free markets. We do need
free markets, but we don't need free-for-all markets, and I
don't think it is a situation we were in last week when you
intervened and took the measures you did with AIG and also by
announcing that you were proposing this plan.
My concern, Secretary Paulson, is that this plan, no matter
how it comes out, and I know that the chairman and the ranking
member are--and others are working on this is that it is going
to give the Secretary of the Treasury extraordinary power,
probably more extraordinary than any individual has ever had in
our country, and in some ways extraordinary power, not just
within the country, but throughout the world.
And all of us have--certainly I do have great faith in you,
but we are talking about individuals, we are talking about an
office that is going to another Administration and to another
Treasury Secretary. I would ask if you could assure us as to
what precautions you will build in, assuming we can pass
something this week, over the next several months, one, to
ensure that power cannot be abused, and two, do you intend to
be working soon with transition teams from both parties so we
are not stuck on January 20th with this gap. What can we do to
assure that what you begin now is not going to be continued in
the next Administration, whether Senator Obama or Senator
McCain?
Secretary Paulson. Excuse me. Let me say what I have said
several times before. I am not looking for extraordinary power.
When we came to congressional leaders on Thursday night, they
said, don't come to us with a fait accompli, give us your ideas
and let us work together. So we sent up several pages and then
everyone said, well, you don't want an oversight. We need and
want oversight transparency, and protection and we have to do
it in a way in which we can be effective and get this program
working and make it work.
Mr. King. Mr. Secretary, I don't doubt your intentions, and
I guess my point is that no matter how the final language is,
the reality is that there is going to be extraordinary power in
the Treasury. I think it is warranted. I am not questioning
that. I am saying if you can give us some assurances how you
think that--no matter who the Treasury Secretary is, it will be
used properly and what will be done during the transition to
make sure the next Administration hits the ground running.
Secretary Paulson. Ben Bernanke can talk about this also,
because as we work through, we have a number of very good
ideas, I believe, in how to execute this program, but nothing
like this has been done before. So we are going to need help
and advice and we are going to do some things better than
others and change a bit as we go along and clearly we will be
working with the next Administration and working carefully on a
transition.
This is something that all of us have to own. This is for
the United States of America and for the American people. And
the case we need to make better and I just think is essential
is to let people know what it means not to do this. I will make
that case hopefully better as we go through the hearing today,
is to make the case to the average American that if we don't do
something like this, what are the implications for them, what
is the implication for their retirement savings, what is the
implication for the small business not only to be able to
expand, but to just sustain their existing operations. What is
the case, you know, for the small farmer who needs a loan, the
small businessman, all of that.
So we have to understand why it is important and then we
have to understand clearly how we are going to make sure that
this is handled well in transition and before transition. But
we need to move quickly.
Mr. King. Thank you, Mr. Secretary. I do intend to vote for
the package. Thank you.
Mr. Bernanke. Yes. I think there ought to be some guiding
principles for this program, and I would suggest the following:
Number one, that it be an effective one to address in a
significant and important way the scale of the problem that we
face; number two, that taxpayers be protected to the maximum
extent possible; and number three, that there not be any
unjustifiable benefits to individuals or institutions coming
out of that.
I would take a mission statement like that and have an
oversight board or some other oversight mechanism. As I said
before, it is going to be very important to have the
flexibility to experiment, to learn, to change strategy, if
necessary, to the point made earlier, and therefore an expert
advisory board and oversight board are the kind of things that
would help this work better.
The Chairman. Thank you. We will reconvene as soon as we
can. As soon as it is possible to vote on the third vote, I
will be back here and I will start right away.
[Recess]
The Chairman. The hearing will reconvene. People will take
their seats. Our next Member will be the gentleman from North
Carolina, Mr. Watt, unless the gentlewoman is ready.
The gentlewoman from New York, Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Secretary Paulson, I would like to ask you if this proposal
will limit Treasury's authority to solely purchase housing and
real estate-related assets, or would it give Treasury broad
authority to purchase any type of asset it would like to?
Secretary Paulson. What we said, Madam Congresswoman, was
that the focus should be largely, and that is a major focus, on
mortgage and mortgage-related assets. But we asked for broader
authority because no one is sure entirely what might be
necessary. But the focus and the intent is not to say, let's
have this be a Christmas tree, and every lobby group say, why
don't you purchase this asset or that asset. The focus is
stability in the financial system, and the only reason we want
the broader authority is to be able to deal with that.
Ms. Velazquez. Thank you. Chairman Bernanke, delinquency
rates of commercial and industrial loans, as reported by the
Federal Reserve, are at their highest level since the 4th
quarter of 2004. To what degree is this impairing liquidity in
the commercial lending market?
Mr. Bernanke. Well, we really had two stages in this credit
cycle. The first stage was the write-downs of subprime and CDOs
and those kind of complex instruments. We are now in the stage,
with the economy slowing down, where we are seeing increased
losses in a variety of things, ranging from car loans and
credit cards, to business loans and so on. And that is going to
put additional pressure on banks. It is another reason why they
are pulling back, building up their reserves, building up their
capital, de-leveraging their balance sheets, and that is going
to prevent them from providing as much credit as our economy
needs.
Ms. Velazquez. Thank you.
Secretary Paulson, we are hearing about small business
loans being called in, and up to a third may have a callable
provision and not be delinquent. Lenders are also reducing
credit to entrepreneurs, and we are aware that the Federal
Reserve reported that 65 percent of lending institutions
tightened their lending standards on commercial and industrial
loans to small firms.
Given these challenging conditions, how will the current
proposal specifically address the challenges facing small
business? Before, you said in your intervention how this is
going to help small businesses. Well, they too are victims now
of the financial market mess that we are in.
Secretary Paulson. Madam, really our whole focus is not on
the big financial institutions; the focus is on the victims,
the focus is on the people. What I have been trying to
communicate is if these severe stresses continue or get worse,
and we don't have financial flows in our systems, then the
problems are going to be very big problems with small
businesses. It is not just going to be their inability to get
loans to grow, it is going to be their inability to sustain
themselves. It is going to impact jobs.
So the biggest protection we can get is having a program
that works. I am just saying that over and over again. And I
know it is hard for people to grasp. The biggest thing we can
do is have a program that works and stabilizes the system. Then
there are a number of other things we can do.
Ms. Velazquez. What you are saying is supposition based on
the hope that the proposal will work and then have the trickle-
down effect to other types of lending. The stakes, Mr.
Secretary, are too high, and the challenges are too great to
rely on this sort of loose logic. Those small businesses that
are the ones creating jobs in this country are suffering today,
not because of their own fault but because of the financial
markets mess.
Secretary Paulson. It is not the trickle-down theory. What
I am trying to do is keep the spigot from being cut off. The
first thing we need to do is make sure that it is trickling
down, in your words, and then the next thing we need to do is
address some of the things you would like to address.
Ms. Velazquez. Thank you.
The Chairman. The gentleman from South Carolina.
Mr. Barrett. Over here, guys, to your far left. However, I
am not on the far left, trust me. Thank you for coming here
this morning. I want to ask you a question a little different
than anything you have been asked so far. With this plan, this
$700 billion, plus the other, talking a trillion dollars, do we
fundamentally change the free market as we know it. Is it
changed forever?
Mr. Bernanke. This plan is an emergency plan to put out a
fire, to resolve a serious crisis which has real Main Street
implications. The Congresswoman really made the point for us,
it has direct bearing on small businesses, job creation, auto
loans, and production; all aspects of the real economy out
there. And that is the real connection. I think what we have
learned here though, as part of this process, is if we are
going to put out the fire, we have to take a look at the fire
code. We have to come back and see why it happened. Are there
regulatory issues and gaps, overlaps, deficiencies; are there
problems in the way our markets are structured that can be
improved?
So I think what we want to do is come out of this with a
much stronger, more resilient, market-based financial system.
That is really critical to do. But of course I don't think it
is really possible to do in a few days.
Mr. Barrett. Mr. Secretary.
Secretary Paulson. I have nothing to add. He is right on.
Mr. Barrett. My fear is if there is no fear of failure, I
think we do change that. When you are borrowing $700 billion--
my daddy said you can't borrow your way out of debt. If you are
borrowing to pay off borrowed money, what happens to our
balance sheet, or imbalance sheet? What happens to the dollar?
If this plan comes through, am I going to wake up January 1st
and all of a sudden somebody tells me that, starting tomorrow,
the world standard is going to be the euro because the dollar
is worthless? Can you elaborate on that?
Mr. Bernanke. This is a very difficult situation. It
obviously has fiscal consequences, although much smaller than
the $700 billion headline number, for reasons we have already
discussed. Again, it is a question of what is the alternative.
I would like to say that I think if these issues are not
addressed, then the U.S. economy will be much weaker.
The secret to having a strong dollar is to have an economy
that is growing and is an attractive place to invest. People
are not going to want to invest where the financial system is
unstable and the economy is not growing. So I think this is the
best strategy in the medium term for getting a stronger dollar
and the best strategy for helping our economy grow and recover.
I do not think this economy can recover when the financial
markets are in such dire straits.
Secretary Paulson. I agree with that, and again to your
free market; we let a system grow up where it is out of
balance. For markets to work, you need regulation, but you also
need market discipline. Institutions need to be able to fail.
Too big to fail is a serious problem. But we can't deal with
this until we, as the Chairman said, put out the fire, and then
there are authorities we need that we don't have, there are
problems that need to be cleaned up, there are wind-down
authorities and ways to let institutions with Federal deposit
insurance to protect the depositors and wind down banks,
without causing the havoc that you have with non-bank financial
institutions that go through bankruptcy.
There are huge issues that need to be dealt with to get the
system back in balance. It is going to take years to have that
happen, but it can happen. We can learn from the lessons. But
first we need to deal with the consequences of the past and
stabilize the financial markets.
Mr. Barrett. Very quickly, dealing with those issues, and I
know both of you guys have been talking about structural
change, with this plan going forward, doesn't it make sense to
try to do a little bit of that, maybe injecting some free
market processes like suspending the capital gains for 2 years
or indefinitely until we get back on our feet? Wouldn't that
make sense to kind of spur some of this conversation on,
gentlemen?
Mr. Bernanke. Well, those are some questions for Congress
to answer, but I think we need a very powerful, strong plan to
address the size of this problem. I don't think changes in the
Tax Code by themselves would be sufficient to address the
issue.
Secretary Paulson. I would say this is an economic process
and is a political process, and I would respectfully say that I
think it is very difficult to make that sale to the American
people right now, given everything else that is going on. So
what we are looking forward to is to have a program to deal
first with protecting the economy and the capital markets and
then deal with some of the other issues that have to be dealt
with.
Mr. Barrett. Thank you, gentlemen. Thank you, Mr. Chairman.
The Chairman. Thank you. America will now be treated to 700
pictures of you drinking from your bottle, Mr. Chairman. I hope
that will be of some comfort to them in this time of trouble.
And now the gentlewoman from New York.
Mrs. Maloney. Thank you very much. I want to express my
support for the concern that you have expressed, and I also
have to act quickly and do what is best for the economy as a
whole. Earlier this morning, Chairman Bernanke testified that
this $700 billion of taxpayer funds is only a small percentage
of the overall mortgage debt in the United States. But what
happens if the government pays this artificial hold-to-maturity
price? There would possibly be a mad rush to the $700 billion.
But what happens when that money is gone? Not only would the
taxpayer see no upside, no one in the private sector will pay
what they know is an artificial rather than a market price, and
we could be right back here with a trillion liquid assets
clogging the system.
But my two most important goals or concerns are getting new
credit into the market and making sure that the taxpayers are
not taking an undue hit. I think the present proposal could be
improved in both of these fronts.
On the first point, rather than buying bad assets and
hoping banks will then make credit available, some have
suggested that we need to directly support new credit to a
greater extent into our economy. The Administration's rationale
for spending $700 billion taking bad assets off banks is that
we need to help provide liquidity to these institutions. But
what is the incentive for banks not to just sit on this
infusion of cash, as they did in Japan during the Japanese
crisis? Or they could take this money and invest it
internationally. There is no guarantee that they will take this
money and put it directly back into the markets as credit.
Separately from all of the efforts before us now, the GSEs
are buying MBSs. But why isn't the $700 billion rescue plan
itself focused on getting new credit into the market if lack of
credit is the crisis? Many of my constituents have raised this
point to me.
On the second point, that of protecting taxpayers' dollars,
my constituents have expressed their deepest concern over the
distinction between the so-called fire sale asset prices as
valued by the market, or market rate prices, and the hold-to-
maturity, or intrinsic value, which might be higher. If the
intrinsic value of these assets really is greater than the
market value, then why are people not snapping them up? There
are many people who would buy these assets if they believed
they had value to them.
On the other hand, if the market value is reflective of the
intrinsic value and yet the Treasury buys these assets at a
premium that is higher than the market value, doesn't that
represent a multi-hundred billion-dollar taxpayer gift to the
management of these firms, even a fraction of which could be
used directly to help millions of Americans avoid foreclosure?
Many of my constituents have suggested that we would be
better off buying preferred stock. They have noted that there
is a historical model for this type of situation, the
Restructuring Finance Corporation, and acquiring a preferred
equity interest would avoid this enormous moral question of
pricing.
The chairman was just quoting to me a statement by Warren
Buffett that he never buys something that he doesn't understand
the price. And I am getting many letters and phone calls saying
they don't understand how you are going to have this new
pricing hold-to-maturity price. Everyone understands market
value, but who is going to determine it, what is it going to
be, and they would feel better if taxpayers could take a share
in the companies that they are helping. There has been a pretty
good track record in this approach.
I have noted from some of the testimony earlier from Mr.
Bernanke, who does not support this approach, that the
institutions that we are helping are not yet bankrupt, but
presumably the reason for the rescue is that requiring them to
mark these assets to market now could produce very bad balance
sheets, and that is why some say we can't just finance new
credit or buy what the market is now, but would have to provide
liquidity. So if the government took preferred stock--
The Chairman. The gentlewoman's time is expiring.
Mrs. Maloney. So banks could still raise capital. And,
basically, why should taxpayers, who didn't invest in these
companies, bail the management out?
The Chairman. The gentlewoman's time has expired.
The gentleman from Ohio.
Mr. LaTourette. Thank you for your service to the country
and thank you for being here today. I saw what you went through
in the Senate, and thank you for doing that yesterday.
I am going to try and ask this question in 1 minute so you
have 4 minutes to answer it. I really hope that you answer it
because we have sort of nibbled around the edges here with Mr.
Kanjorski and Mrs. Pryce when they were asking this question.
In about an hour, there is going to be a guy in Cleveland,
Ohio, who comes home from work and sits on his couch, and he is
mad. And he is mad because the Browns are 0-3. He is mad
because his daughter wants to have her nose pierced, and he
doesn't know what to do about it. He is mad because it cost him
$80 to fill up his gas tank to go drive to and from work. And
he is mad because his boss chewed on him all day. And he is
scared. He is scared because he represents potentially the
first generation of Americans who can't pass on the American
Dream to that daughter and leave her in a better financial
situation than he got from his parents. In order to accept this
plan that you all are talking about, he needs to be more scared
of what you have called the worst thing that is going to happen
if we don't do this.
So rather than talking about this morning, Mr. Secretary--
and you are a lot brighter than I am--when this question was
posed, you talked about business to business lending. My guy on
the couch, he doesn't understand that. If we don't do this, is
he going to have a job, can he buy a car? If he goes to the
ATM, is his credit card going to work? The time has come. Over
the weekend, all the leadership left the White House, they were
all ashen faced and using words like Armageddon. I haven't
heard Armageddon.
I need you to tell that guy on his couch when he watches
the 6 o'clock news what happens to him, not to the markets, not
to the guys on Wall Street; to him. Is he going to be out of a
job, is his daughter not going to college, and is he going to
drive the car he is driving now for the next 20 years?
The Chairman. Maybe you can give the Browns tips on Hail
Mary passes.
Mr. Bernanke. Thank you, Mr. Chairman. Excellent point that
Mr. Kanjorski asked about before. It is all esoteric Wall
Street stuff. It doesn't have any meaning to people on Main
Street, but it connects directly to their lives.
Credit is the life blood of the economy. If the credit
system isn't working, then firms cannot finance themselves,
people cannot borrow to buy a car, to send a student to
college, to buy a house. That is not just an inconvenience.
Because if that is true generally, it is going to cause the
economy to slow markedly. We have already seen the effects of
that.
A lot of the slowdown in the economy we have seen over the
last 6 months to a year comes from the credit crunch, which is
affecting all parts of the market.
Mr. LaTourette. Mr. Chairman, if I can just interrupt. I
get that, but the guy at home, he says, ``The market is
something that my neighbor with the swimming pool has dabbled
in; I just go and work in a factory today.''
Mr. Bernanke. Let me say that if the financial situation
stays where it is, or doesn't improve, that we are going to see
higher unemployment, fewer jobs, slower growth, more
foreclosures, fewer people able to buy houses and cars, and a
much slower economy.
If you look at other countries, Japan had a decade of slow
growth. We see other countries with very severe downturns. This
is going to have real effects on people at the lunch bucket
level because it is going to affect the way the economy and
jobs can grow in this country.
Secretary Paulson. I would just say that he should be angry
and he should be scared. I think right now he is more angry
than he is scared. It puts us in a difficult position because
no one likes to be painting an overly dire picture and scaring
people. But the fact is that if the financial markets are not
stabilized, the situation can be very severe as it relates to
not just his current situation, but keeping his job, his
retirement account, investment in equities and securities, his
ability to borrow. So this is a serious situation, and it is
one he should be concerned about, and we need to figure out how
to communicate better.
Mr. LaTourette. Right before I get the red right, I have to
tell you I get that he should be concerned, and I know you
don't want to scare people, but somebody has to say, you may
not have a job, your kids are not going to college.
Mr. Bernanke. You just said it. We agree with you.
Secretary Paulson. I think we already said it.
Mr. LaTourette. I said it twice. But go ahead, say it.
Thank you.
The Chairman. The gentleman from Illinois.
Mr. Gutierrez. Thank very much, Secretary Paulson and
Chairman Bernanke, for being here.
Secretary Paulson said that this is an economic process and
a political process. I agree with you. Right here is part of
the political process as we deal with the economic process. So
I was happy to hear, and I would like the Secretary to
elaborate on executive compensation because, listen, I didn't
get an MBA, but I could have taken Merrill Lynch and run it
down so that Bank of America could have bought it. I would have
done that job if I knew I was going to get $90 million at the
end of it. That is just the fact of what happens.
Lehman Brothers and all of these poor people that we are so
worried about gave themselves hundreds of millions of dollars
in bonuses last year as they knew their very company was
crashing, and this is not a small story. Now we are going to
take and give $25 billion to the auto industry while they are
taking away health care benefits and pensions away from the
workers who work so tirelessly.
So please explain to me what we are going to do about these
executive compensations, given the fact that we are asking the
American taxpayers to sacrifice and put $700 billion out there
when other people have been lining their pockets and are
continuing to line their pockets today. I want to make sure it
doesn't happen tomorrow, because politically that is very
embarrassing to me.
Secretary Paulson. It should be embarrassing politically
and substantively and any other way. People in this country
understand pay-for-performance for success. That is the
American Dream. No one understands pay-for-failure. No.
Mr. Gutierrez. What are we going to do?
Secretary Paulson. In terms of what we are going to do, as
I have said, I believe we need to figure out some way to
incorporate that in this plan, but there has to be a way to
incorporate it so the plan can still be effective. One of our
big objectives here in the plan and what I think it takes to
make this plan work is to, as opposed to some other plan, but
to make this plan work, we need broad participation from not
just big institutions, but small.
Mr. Gutierrez. What are we going to do so people don't
continue to reap enormous incomes out of failure, from failure?
Secretary Paulson. As the Chairman has said, when there
have been issues, whether it is Fannie or Freddie or AIG, and
the government has come in, there has been major change. And we
need to figure out how to incorporate that in this plan and let
it still be effective and get broad participation from
institutions.
Mr. Gutierrez. It is obvious we are not going to get an
answer to that question specifically at this point, but I think
it is rather important. Let me just make another point because
I think it is very, very important.
You suggested earlier, Secretary Paulson, that it was the
financial institutions, the banks, the mortgage companies, and
it was those that borrowed money, that somehow they were
equally responsible. You said that initially.
Secretary Paulson. I didn't say equal.
Mr. Gutierrez. You lumped them together. I have heard that
time and time again. You know, financial institutions, and we
have had hearings here, and Chairman Bernanke has come before
us to talk about subprime lending, we have had numerous
hearings here about the crisis that was looming because of
subprime lending. The victims are in neighborhoods across this
country because people decided--I mean, we cannot put somebody
who wanted to own a home and be part of the American Dream
equally with investment bankers on Wall Street who were
bundling these securities and selling them out on the market
and making a lot of money because today they still made their
profits, they still made their bonuses. But you know what that
homeowner has because of his risk? Nothing. As a matter of
fact, he has a home that he paid a certain amount for. So what
are we going to do to kind of balance the $700 billion to kind
of balance those things out?
Secretary Paulson. Two things here. First of all, no way I
put them equal. No way do I. But you are talking about the
victims. I think the American people also know there have been
those who borrow--
Mr. Gutierrez. Let me just end by saying this. Look, this
mark to market should come. It was the rule. We put it in
place. And pay somebody something to its maturity date, while
today millions of people in their 401Ks are losing money
because they are selling it because of what it is worth today.
If they would hold it to maturity, maybe they would have more.
I think they should also risk something in all of this. And to
pay somebody something for what it might be worth 7, 8, 9, or
10 years ago, when today you are calling it toxic, I think
would be wrong.
Secretary Paulson. I am angry, too. There a lot of things
that need to be done and have to be done. All of us should be
angry. All of us as Americans should be angry. There are a lot
of reforms, actions that need to be taken, and it is going to
be hard to take those in a few days or week or whatever is
going to be required to get this done. We need to do this
quickly and to stabilize the system and then proceed with the
actions you believe have to be taken.
The Chairman. I think we can all resolve that we will stay
mad at least until February.
The gentleman from North Carolina.
Mr. Jones. I want to read a statement. This was sent to me
by a constituent. Then I will get to a question. Bear Stearns,
$29 billion; Fannie Mae, Freddie Mac, up to $200 billion; AIG,
$85 billion. And what we are talking about is writing the
mother of the bailouts; $700 billion. These are the statements
I want to read very quickly.
These bailouts should be about as welcome as malaria. I
have read the Constitution. Nowhere does it say that taxpayers
are the default dumping ground for mortgages made to people who
cannot afford them. Nowhere does it say that government shall
back all derivatives of ventures gone astray. Nowhere in the
Bill of Rights does it say you have to have the right to be
left holding the bag.
We take an oath every year, new year of a Congress, and
this is the frustration, and you have answered this. You
gentlemen have done a great job. Let me be frank about it. But
yet to that taxpayer in eastern North Carolina that I
represent, who is out there making about $40,000 gross, with a
wife and a child or two children at home, they do not see why
we have to be bailing out those people whose greed, quite
frankly, got them into trouble, not all but many into trouble.
And then you look, on the other hand, we are what is called
a debtor nation. Pat Buchanan wrote the book, ``Day of
Reckoning,'' and in that book he says very clearly that any
nation that has to borrow money to pay its bills from other
nations will not long be a great nation.
And why in the world could not this Congress take 2 to 3
weeks and really come forward with something that would help
this situation, this crisis that you say, and I don't discount
what you are saying, to help this market; why do we have to be
asked to do this in 7 days?
If you would answer that, I would have one more comment.
Then my time would be about up anyway. Why does it have to
happen now? Why can't it happen 3 weeks from now or 4 weeks
from now, and if it was 4 weeks from now, what would happen?
Secretary Paulson. Let me say, first of all, you can take 3
weeks, you can take 4 weeks, you could take a month, and you
are not going to solve the issues you want to solve, which you
are talking about fundamental issues that have to do with major
fundamental reforms.
In terms of this issue, I would only say to you that we
have dealt with a series of very significant problems and dealt
with them, we believe, effectively. We need to move quickly and
take a systemic approach to put out this fire, and I don't
believe that the situation is such that it is appropriate or
that it will work to take 3 or 4 weeks to deal with this
situation. I think the situation is such with what is going on
in the markets that we need a quicker answer.
Mr. Bernanke. I think part of the issue is, again,
communication. People are saying, ``Wall Street, what does it
have to do with me?'' That is the way they are thinking about
it. Unfortunately, it has a lot to do with them. It will affect
their company, it will affect their job, it will affect their
economy. That affects their own lives, affects their ability to
borrow and to save and to save for retirement and so on.
So it is really a question of saying, there is a hole in
the boat, you did it. Why should I help you? Well, there is a
hole in the boat, we need to fix it, and figure out how it
doesn't happen again.
Mr. Jones. I have a few more minutes. Two, maybe. You
talked about where we are going to get the $700 billion. We
can't print it because the dollar will have no value at all. So
we go to these other countries. What is that going to do to the
next Administration, whether McCain or Obama, when we have just
obligated this country to another $700 billion?
Mr. Bernanke. First of all, our credit seems to be good.
The 10-year interest rate is below 4 percent. But putting that
aside, this is much less than $700 billion. Our point is that
if we don't do it, the fiscal cost is going to be greater
because of the implications for the economy and for tax
revenues. It is a bad situation. I thank Chairman Frank for
saying, ``Don't shoot the messenger.'' We didn't do it. But we
are telling you that it is very, very important to address
these problems.
Mr. Jones. Thank you.
The Chairman. It was Mr. Bachus who said, ``Don't shoot the
messenger,'' but I would agree.
Mr. Ackerman.
Mr. Ackerman. I always love it in a play when Daddy
Warbucks comes out and saves Little Orphan Annie and her little
dog Mac from the poorhouse while they sing, ``The Sun Will Come
Out Tomorrow.'' I am a fan of yours. I want you to succeed. I
want to believe. I can't really sing.
But I have a question. How do we in the 110th, this
Congress, if we could speak to the people in the Congress 220
or so years ago and tell them that we are willing now to cede
more power to one person, without oversight, without written
rules or laws, without judicial review, without all of the
protections that we put in, and to cede more power than they
ever took away from King George. And they too, as you pointed
out we do, lived in perilous times. Their times were equally as
perilous, yet they found the time to put this all in
documentation, and protections for all the American people that
we still rely upon today. How would we explain that?
Another question that I have is if this is such a good
idea, and I read the 2\1/2\ pages that you sent down, I don't
see in it any protection to stop us from having this problem
again. Where is that part? They took the time to put those
parts in there. Shouldn't we? And if it is such a good idea and
it is such a good gamble, and maybe it is the only bet in town
and we are probably going to have to make it eventually one way
or another, why don't we require Wall Street, that gambles so
well and so smartly, to be 10 percent partners? Why don't we
require them to put up at least $70 billion, if we are going to
put up the balance. Make them 10 percent partners if they think
this is a good bet, and let them share in the profits as well,
if they are there. They put up 10 percent, we put up 90
percent--buck for buck; ten to one; don't sing.
Secretary Paulson. Congressman, I am not going to sing.
Let me say to you that I have answered this question
several times before, I will answer it again, that this plan
was sent to Congress after having met with the congressional
leaders, and they said, ``Don't give us a fait accompli. Let's
work together.''
What we are asking for here is all of the appropriate
oversight protections, the transparency, the things you are
looking for.
Mr. Ackerman. Are you willing to put in the congressional
oversight, the judicial review, the balance of powers; all
those things?
Secretary Paulson. I would say we need to get the right
balance because it is going to have to work and be effective.
So that is going to be something we are going to have to arrive
at together. We are here. This is not something that is being
done by fiat, this is something being done by Congress, and you
all are going to be part of it. The decisions you make or don't
make are going to be momentous. So this is about accountability
on my part and on your part and on the Administration's part.
And so what we have to come up with has to be workable.
Now you asked about why don't we ask the big institutions
or Wall Street to put in 10 percent. One of the things that we
both worked on are a series of private sector initiatives. But
it is pretty hard to get the private sector to put much money
in when things are as fragile as they are right now.
Mr. Ackerman. Last question: Why would you allow rating
companies to rate products that are new and creative, with no
history and no way at all to experientially give them a rating
as to how successful they have been because they were never
tried before, and to package that in with AAA-rated products.
Mr. Bernanke. There have been a number of reviews and
studies of all the issues that contributed to the crisis, and
that is one of the issues that was identified. You are right;
it was a problem. They are working to fix it now. But it was
one of the contributors to this crisis.
But this goes to your previous point, why not have reform
all in this bill? There are many, many components to it, and it
is a complex process to achieve. We need to do it. We will do
it. Certainly, the Federal Reserve will do everything it can to
support it. But it can't be done in a few days.
Mr. Ackerman. Finally, on the uptick rule: Many people
suspect and sincerely believe that the changing and suspending
and taking away of the uptick rule is allowing companies to fix
the market. Why can't we restore that permanently?
Secretary Paulson. That is a topic that the SEC has
addressed. They have addressed it. We have consulted with them
on the actions they have taken. They have taken some pretty
strong actions recently. This is something that they are
reviewing and again they have taken, and I think if Chairman
Chris Cox were here, he would tell you that he thinks he has
acted pretty quickly and decisively during this period.
The Chairman. The gentleman from Florida.
Mr. Feeney. I want to thank both of you for being here. I
know these are difficult times. I actually liked Mr. Ackerman's
analogy. But for all too many Americans, this looks like it
turns the play on its head. It is Little Orphan Annie who is
being taxed to prop up Big Daddy Warbucks. And the average
American out there believes very much that is what they are
being forced to participate in as part of this proposal.
But I want to look at a bigger picture. We have some huge
expertise here, and I am going to mention two dirty words, the
Great Depression. Virtually every major market crisis in 100-
some years in America has been caused by easy credit, a bubble
bursting, and then a credit tightening crisis. That is exactly
what we are facing now.
There were the Roaring Twenties with easy money. And for
the last 6 or 8 years, we have had not only very easy money,
there is plenty of blame to go around. It has been the United
States Congress that passed the Community Reinvestment Act and
browbeat every lender they could into making risky loans and
then turned around and accused the lenders of being greedy. It
is almost amazing, but that is what we do here, unfortunately,
almost all too often.
Congress also refused to reform Fannie and Freddie, despite
the urging of many of us, and Secretary Paulson, for example,
you have huge expertise in what happened after the October 29th
stock market crash. In this case, we had a subprime lending
bubble that started the crisis. But in 1929, the reaction to
that was very real, and it wasn't just a failure to provide
liquidity. Credit tightened by some 33 percent. The money
supply shrank in America. And I know we are trying to fight
that. I don't necessarily agree with your proposal. I know what
you are trying to do. But simultaneously, Herbert Hoover raised
marginal tax rates from 25 percent to 63 percent. This Congress
just passed an impending largest tax increase in history.
Hoover signed into law the largest anti-free trade act in
history, Smoot-Hawley. This Congress has sat on free trade
bills, sending a horrible message to our trading partners.
There were huge regulatory increases that started in the
aftermath of the 1929 market bubble that, in my view,
contributed to taking a short-term, 18-month, 2-year recession,
and turned it into a 15-year depression before the stock market
fully recovered. I believe that the failure to pass an energy
bill here is huge.
So I would ask you gentlemen, in addition to dealing with
the liquidity crisis, as we turn over these enormous regulatory
powers and socialize much of the lending industry, even though
we have already socialized Fannie and Freddie for all intents
and purposes, how do you intend on these other huge issues, tax
increases, huge new spending increases which accompanied the
aftermath of the 1929 market crash, how do you in the name of
fighting demagoguery explain to the average American that what
really needs to be done here? This was not, in my view, a huge
failure of the marketplace. This was bad policy by the Fed,
easy credit, and Congress browbeating people into making
terrible loans. Just like investors speculated with other
peoples' money in the 1929 market crash, and bet on margin, it
is exactly what happened in our subprime crisis.
And so my view is that it was horrible government policy,
anti-capitalist policy, that largely led to this crisis. I
would like you to address as historians and economists, how we
can avoid all of these other things, big tax increases,
fighting free trade, huge regulatory burdens, socializing much
of the market. Back then, it was utilities and other areas.
Today, of course, it is the AIG, it is the banking lenders. And
I would like you to address the broader picture. How do we
avoid taking an 18-month market recession and turning it into a
15-year Great Depression?
Mr. Bernanke. Well, first, I am not comparing the current
situation with the Great Depression, but a lot of what you
said, there is some relevance. In particular, the Great
Depression was triggered by a series of financial crises. Stock
market crash, collapse of the banks, and the effects on credit
and on money were a very big part of what happened then.
Now we have a very, very different financial system. It is
much more sophisticated and complicated, it is much more
global. We also have a much bigger and more diversified
economy. But what that episode illustrates, as do many other
episodes in history, is that when the financial system becomes
dysfunctional, the effects on the real economy are very
palpable.
Now you point to other things, like preventing free trade
and excessive regulation, etc. Those things also have adverse
effects on the economy. But I would say that the financial
crisis was fairly central in that Depression episode. It is not
a question of abandoning free markets. I think right now we
have to deal with the fact that mistakes were made by both the
private and public sectors. We need to put that fire out. Going
forward, we need to figure out a good balance between market
forces that allows for innovation and growth, but with an
appropriate balance and market-disciplined regulatory structure
that is appropriate and will work to avoid these kind of
situations arising in the future.
The Chairman. I recognize the gentleman from California and
ask him to yield me 30 seconds.
Mr. Sherman. I yield 30 seconds to the Chair.
The Chairman. George Bush became President in 2001. Until
2006, he was dealing with a Republican House and, for all but a
few months of that, a Republican Senate. It is true that during
that period, no action was taken on Fannie and Freddie. I
became chairman of this committee under a Democratic majority
in early 2007. Within a couple of months, we passed a bill that
gave regulatory powers, and that was a bipartisan bill, but it
gave the regulatory powers to Fannie and Freddie.
I then, in January of 2008, approached the Secretary to see
if we could put in the stimulus. It didn't work out for a
variety of reasons, but we were trying to do it. Finally, after
some delay, it was passed in the Senate in July.
So it is true that for the first 6 years of President
Bush's term, under a Republican-controlled Congress, no action
was taken to reform Fannie and Freddie. It is true that in
2005, Mr. Oxley up there tried. He blames the Administration.
That is an intra-Republican fight I can't referee. But as of
January 1, 2007, when this committee was organized under us, we
moved, and it was one of the first things we did, and it passed
the House and it passed the Congress.
I thank the gentleman from California.
Mr. Sherman. Thank you, Mr. Chairman.
Mr. Paulson, just a couple of things I want to confirm as
to how you will interpret the bill if we pass it. Under your
interpretation of either your bill or the House committee
draft, could the Secretary of the Treasury purchase mortgage-
related assets from a pension plan?
Secretary Paulson. I am not prepared at this time to be
discussing the details of the plan without specificity. But I
would say to you that what we are looking to do is to purchase
from a broad range of institutions, regulated institutions.
Mr. Sherman. If the bill says you can purchase from any
financial institution, would you interpret that as including a
pension plan?
Secretary Paulson. If it says that in any financial
institution, then we may interpret it that way. But the
question is, what are we going to do? The focus is going to be
on mortgage and mortgage-related, and on banks, S&Ls--
The Chairman. The rules have to be that the Members get to
say it. We only have 5 minutes. I apologize for that, but we
have to do that.
Mr. Sherman. Let me understand that your proposal, with the
$700 billion limit, assume that you invest the full $700
billion, then you sell $100 billion worth of assets and receive
$100 billion worth of proceeds. Are you then free to reinvest
that $100 billion of proceeds in assets?
Secretary Paulson. I sure did not interpret it that way. I
believe that this is to invest up to $700 billion. It would, in
my judgment, take some time to get there, and it is to invest,
to hold, to sell. The money comes back to the taxpayer.
Mr. Sherman. So $700 billion is the upper limit of all
investments. I hope the bill is drafted to be clear on that.
This bill represents the largest transfer of power to an
already imperial presidency and the largest transfer of wealth
to a still fabulously rich Wall Street.
The ranking member has asked us to be constructively
engaged to put forward our ideas. I have done that. I thank the
chairman for including in the bill some of my smaller ideas.
When it comes to some of the larger ones, our leadership
says, Secretary Paulson, that the word they get back is the
President won't sign the bill if we do that. This creates a
little cognitive dissidence because you are telling us, my God,
it's urgent. And then our leadership is saying you are, in
effect, threatening to veto a bill rather than sign a bill into
law that includes some major provisions you disagree with.
Now I know that these are ideas that you don't agree with,
so I just want to ask you whether or not you would recommend to
the President that he veto the bill if it has this in it. I
hope you wouldn't take my time to tell why you think it is a
bad idea, because we have all listened to you very carefully,
and I know these are ideas that you think are bad.
The first one is whether those entities that receive
bailout cash are free to pay unlimited, what I will call plain
vanilla executive compensation. Now I am putting aside esoteric
bonuses, golden parachutes that could be limited. I am just
talking about a circumstance where somebody is earning over a
million dollars a year in regular salary. Would you urge a veto
if the bill said that any entity selling assets to the Treasury
under this bill could not pay over a million dollars a year in
regular, plain vanilla salary to the executives that are
staying with the company?
Secretary Paulson. We are not talking about vetoes here, we
are talking about working together to come up with something
that will be effective and will work, and we are working with
Congress.
Mr. Sherman. You are not working with me. You may be
working with the leadership.
The Chairman. Will the gentleman yield? Because the
gentleman is mischaracterizing at least what I have told him, I
don't know who else he has spoken to, and a number of the
things the gentleman put forward I told him, I disagreed with
him.
Mr. Sherman. I am not referring to you; I am referring to a
conversation with another leader of our party.
The Chairman. I didn't know there was another leader on
this issue.
Secretary Paulson. All I can say is I believe we are
working constructively toward a solution. I don't hear anybody
talking about vetoes.
Mr. Sherman. But if the bill contained that provision,
would you urge a veto or are you saying you want to work with
Congress but you don't want to respond to the questions of
Congress?
Secretary Paulson. What I am saying, sir, is we are not
going to negotiate a bill here, you and I. What we need is to
get something that works, and it has to work, and I am
supporting a process that leads to something that will be
effective and will work.
Mr. Sherman. If you think it won't work, will you urge a
veto?
Secretary Paulson. If I believe it won't work, I am going
to urge you to consider coming up with something that will
work.
Mr. Sherman. Would you under any circumstances urge a veto?
Secretary Paulson. Sir, I think you are persisting with a
line of questioning that isn't constructive and isn't fruitful
and not working toward a process where we all want to come to a
successful conclusion.
Mr. Sherman. I understand that those of us who do not bow
down to whatever the Administration wants are the reason why
the economy is in trouble.
Mr. Garrett. Regular order.
The Chairman. I took some extra time from the gentleman, so
I am giving him extra time. I would think in the interest of
cooperation, we could give the gentleman a few more seconds.
Mr. Sherman. Finally, we have all talked about the need for
reform to be passed next year. I think we all understand that
in the Senate it takes only 41 Senators not to defeat good
reform, but to delay it and then dilute it. So we should not
expect anything but undiluted reform unless we have some very
strong fast track language in this bill.
I yield back.
The Chairman. The gentlewoman from Florida.
Ms. Brown-Waite. Thank you, Mr. Chairman. I thank the
Secretary and the Chairman for being here. Back in 1991, when
Mrs. Capito and I graduated from high school, Congress passed
the Federal Deposit Insurance Corporation Improvement Act that
limited FDIC's ability to provide assistance to struggling but
insolvent banks, something that the FDIC had the power to do
previously. However, the law does grant an exception when there
is a risk to the entire financial system. In that case, the
President, the Treasury Secretary, and two-thirds of the
Federal Reserve Board can authorize open bank aid. Had you
considered this at all?
Mr. Bernanke. Let me just take that. First of all, in the
general plan we are trying to strengthen the whole banking
system, not just banks that are in trouble. If we deal with
banks in trouble, that is a different issue. The FIDICIA law
applies to that.
One of the big problems here we have been confronting over
the last year is while there is a well-designed set of
principles for dealing with banks in trouble, for nonbanks,
whether they be investment banks or insurance companies, or
what have you, we don't have those rules.
Ms. Brown-Waite. But did you apply it to the banks?
Mr. Bernanke. In the case of the banks, I am sure we follow
the FIDICIA laws. The Treasury Secretary has the program. But I
think those laws are very constructive. They may be things the
Congress wants to look at at some point, but it is good to have
a framework and a structure for dealing with banks in trouble.
Ms. Brown-Waite. This wasn't even included at all in the
options that you all put forth. This is the last week of
Congress. We obviously have our backs against the wall, and
this option was not even pursued. So to give us a solution that
some could say is really further angering the already
overstressed public, our constituents, to give us one solution
without having pursued other ones first, I am not sure makes us
feel warm and fuzzy about this program.
Secretary Paulson. I would suggest to you that no one feels
warm and fuzzy about this program. I know the Chairman doesn't.
I know I don't. We believe it is better by a lot than the
alternative.
Ms. Brown-Waite. But, sir, I gave you one of the
alternatives.
Secretary Paulson. But I would just say that we got to the
point where we both believed that the only approach became one
where we had to deal with it systemically. We couldn't deal
with it. We have dealt with it in parts. There are a lot of
things we have done. There is a lot of tactical steps, but this
is a broad-based systemic approach to deal with the root cause,
which is the housing decline having led to illiquid mortgage
and mortgage-related securities in the financial system and
taking illiquid assets off the balance sheet. I know there are
a lot of other ideas out there and we respect those ideas. We
have looked at a lot of them, but this was a time we thought
for a broad based systemic approach--I am sorry that it has
come upon us all so suddenly, but it became very clear that
last week we needed to act very quickly.
Ms. Brown-Waite. Mr. Chairman, many have said Fannie,
Freddie, AIG. What is in your opinion, gentlemen, the next
crisis? I am hearing it is credit cards. And I know you have
been asked this question before and I never have heard a
straight answer. Could we have a straight answer on this? What
is the next financial crisis?
Mr. Bernanke. I don't know, but I know the system is quite
fragile and therefore very vulnerable when shocks occur. I
think we need to stabilize it and make it stronger so that it
can support the economy to recover. Going back to your previous
question, the idea about FIDICIA, that only applies to failing
banks. And again we are not dealing with the Japanese situation
where banks are either insolvent or practically insolvent. We
are dealing with one where there is insufficient capital
lending capacity, they are bringing back credit, and that is
hurting our economy.
Ms. Brown-Waite. Well, if you actually read the 1991
statute, it says it does grant an exception for when there is a
risk to the entire financial system. So maybe if the banks had
been dealt with using the 1991 law, we wouldn't--if it had been
done earlier, maybe we wouldn't be here with a $700 billion
bailout.
My next question is, does it have to be $700 billion? Could
we do this in installments, see how it goes, how it works?
Secretary Paulson. To get to your last question--
The Chairman. We are not hearing you, Mr. Secretary.
Secretary Paulson. I am sorry. To get to your last
question, as we work this through, we felt that something of
this size, $700 billion, was necessary to deal with the market
confidence and provide stability to the financial system. Now
clearly this is going to be used over a period of time to buy
assets and it is going to take us a good deal--it is going to
take us time to begin implementing it and we are going to learn
as we go along. So this will be something that will be staged
over a period of time, but we believe that $700 billion is the
right number. We thought about it a lot, and we think that is
what is necessary.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman. Thank you both for being
here. I am up here if you can't find me. I just want to deal
with two quick issues. First of all, I want to applaud the fact
that I understand the President is going on national television
tonight to explain the extent of this crisis. I hope that is
what he is going to do to the American people because I have
been saying for the last several days that as much as I know
Secretary Paulson and Chairwoman Bernanke and the chairman of
my committee, even myself and as vain as we are, the message
leader of the country is the President of the United States.
Whether we believe him or not, he has to deliver the message.
And while we were delivering the message as Members of Congress
last Thursday, the American people still have not understood
the urgency of this situation as it was explained to us and
therefore, have not accepted that it is imperative to do
anything. Almost all of my calls are, why are we doing
anything, as Representative Kanjorski said. They got up Friday
morning, they went to work, everything was good, nothing has
come tumbling down this week. So somebody has to explain the
urgency of this to the American people, and I hope you are
writing the speech, Secretary Paulson.
That is my comment. The second thing was that while I was
out I have been talking to a number of bankers, small bankers
in particular who apparently don't understand the urgency of
this thing either. They think things are going pretty well.
They think this is--you guys being big Wall Street guys and,
you know, big other kinds of bankers and it hadn't triggered in
with them about the urgency, they think simply some kind of
aggressive push for people to go and buy up this inventory of
houses that are being foreclosed would stabilize this and put
it back in the other direction.
What is your response to that? Not to the fact that some
banker called you a Wall Street guy.
Secretary Paulson. Let me direct to your first comment and
then ask the Chairman to get to your second. Let me just say I
have consulted regularly with the President through this. He
has given me clear direction to work with Members of Congress
to come up with a proposal to stabilize the markets and so we
take your comment and as he said, he will be addressing the
Nation tonight.
Mr. Bernanke. The small and community banks are a very good
shock absorber because, in some cases, they can come in and
make credit available where other banks are not able to. And
you are right, in some communities that is true. But there are
also a lot of small banks that are feeling a lot of stress. We
know, for example, that small banks are very dependent on
commercial real estate and that is an area that has gotten
extremely stressed right now and there is a lot of concern
about it. Residential real estate is another thing that small
banks do; small businesses, which they lend to, will come under
increasing pressure as the economy remains slow. So I think
that many small banks will face a good bit of pressure, and
Secretary Paulson mentioned these. They will be eligible to
participate in the auctions or other types of asset purchase
programs.
Mr. Watt. Can I just ask one other quick question, a
question asked earlier by Ms. Velazquez? Did I understand you
all to say that the problem right now is in mortgages, but you
are as a precautionary measure including commercial loans?
Would it be disastrous not to include commercial loans at this
point?
Mr. Bernanke. I think the heart of the program, as I
understand it, has been commercial and residential mortgages.
That is the heart of the program. There has been some
discussion about whether additional things need to be added on
the margin, but that is the central part of the program.
Mr. Watt. Thank you, Mr. Chairman. My time is almost
expired.
The Chairman. That is very precise. The gentleman from
California, Mr. Royce.
Mr. Royce. Let me ask a question of Secretary Paulson. And
one of the concerns I have is some of the potential add-ons to
this bill as it moves that are discussed. Before we left here
in August for the recess, Congress passed and the President
signed legislation that creates an FHA program to provide as
much as $300 billion in guaranteed mortgages in exchange for
write-downs in the principal of the loan by the lender. And we
have a proposal that has been discussed, and I would like your
view of this, that would allow bankruptcy judges to rewrite
contracts. This would be an attempt, I guess, to stem the
foreclosure tide.
But it has often been noted that authorizing write-downs of
mortgages by bankruptcy judges would increase the risk of
mortgage lending and therefore the consumer would presumably be
the loser, the consumer basically would have the cost of credit
increased, you know, some economists say by 2 percent for the
loan. The loan may not be available. We are in a bit of a
credit crunch right now, it would seem to me, that would really
compound the problem of access to credit if that were included.
And I think also much of the past success of our country's
economic model is based on the sanctity of contracts and the
rule of law. Hernando de Soto had that great book, ``The
Mystery of Capital,'' why it succeeds in the West and fails
everywhere else, and part of the concept here is that the
contract, you know, it is upheld to the United States.
So, Secretary Paulson, considering the FHA program that was
authorized in July does not go into effect until October, and
considering the potential impact that this--as it is called,
cram-down provision--cram-down bankruptcy provision, could have
on future home buyers, as well as the future treatment of
contract in our country, should this provision in your view be
included in legislation intended to address the turmoil
experienced by our financial institutions?
Secretary Paulson. The answer is no. We oppose it on policy
grounds and believe it is inconsistent with what we are trying
to do here, which is increase the flow of funds to homeowners
and for housing.
Mr. Royce. I also ask Chairman Bernanke, too, for his
thoughts on that, if I could.
Mr. Bernanke. Well, as you point out, there are risks to it
and others have positive things to say about it. The Federal
Reserve has not taken a position on this, so I prefer not to
comment on it.
Mr. Royce. Thank you, Chairman Bernanke.
Going over to the issue of private equity, Secretary
Paulson, as you know, the current 25 percent limit on private
equity stake in banking institutions has arguably, I guess,
minimized the involvement of these private equity firms in the
current turmoil, and I was going to ask you, you know, should
this cap on private equity investment be lifted considering the
amount of capital that it could provide to our banking system?
Secretary Paulson. I defer to the Chairman there who has
been working very constructively to reduce constraints and
bring private equity here.
Mr. Bernanke. We announced just a couple of days ago that
we worked our 1982 policy on private equity to provide more
flexibility for private equity to come into banks, consistent
with the spirit of the Bank Holding Company Act, which does
require that owners of banks meet certain standards of
financial strength and commitment to the banking organization.
But we recognize the need for more capital to come in and we
have tried to facilitate that.
Mr. Royce. Chairman Bernanke, I wanted to thank you. I
wanted to thank you for the support of the Federal Reserve for
my efforts with my legislation to have Fannie and Freddie--
basically have the GSEs regulated for systemic risk. And I had
an amendment on the Floor to do exactly that with the support
of the Fed that was opposed and it was defeated, but I hope
that when we work out a solution to this we will have the
regulators, have that ability to regulate for systemic risk,
because without it you did not have the ability to stop Fannie
and Freddie from taking the types of risky actions both with
their mortgage portfolios and some of the other activities that
they did that leveraged them to ratios that were so great and
put at risk the economy, as well as some of the other mistakes
that were made again for lack of a regulator with the power to
come in. And thank you for the support for the amendment and
the bill.
The Chairman. The remaining minutes will go to the
gentleman from New York. We have promised you a 5:15 departure.
Maybe we can stretch it a minute or two. The gentleman from New
York.
Mr. Meeks. Thank you, Mr. Chairman. Let me just quickly
first bring to your attention--I know that Chairman Bernanke
talked about Lehman Brothers and the bankruptcy, just something
that had taken place that I had been made aware of that as a
result of that is close to $600 billion of U.S. assets that
might be stuck in London. And I know there is a bankruptcy
process, but many of this--much of this money is pension plans
and endowments and foundations and losing value every day. And
so I would like to at some point to get to find out what the
Fed can do, if anything, in regard to that so that I can make
sure that constituents are not losing their dollars in London.
But since I am reduced, I just want to go back to something
else really quick also. Given the fact that you know--if you
don't know, you should know--that you have a credibility
problem, the Administration and you have a credibility problem
with the citizens of the United States of America. And as a
result of that, that is part of why people don't want to do
anything in this matter. So I am concerned--and let me ask you.
If we gave you $700 billion, I would assume what you want to do
with the $700 billion is immediately invest it back into the
market. It would go right back into the firm; is that correct?
Secretary Paulson. No, we don't want to immediately invest
all $700 billion. What we want to do is immediately begin
investing some of it to take illiquid assets and free up the
system so it can work.
Mr. Meeks. If you invested some of it, then that means
there has to be someone that is going to manage those assets.
Secretary Paulson. Right.
Mr. Meeks. Have you determined who would manage those
assets?
Secretary Paulson. We have not yet, but we are sure working
on it. We are looking at a number of asset managers with good
experience, very good experience and expertise from the private
sector.
Mr. Meeks. Now, wouldn't it also be wise since we seem to
have gotten caught into this situation because only a few
people, the large firms are the only ones that had all the
money, so therefore the risks were greater because of a few
firms? If we would then set it up so that we could diversify
the management of those to not only to the big firms, but to
some of the smaller and medium sized firms also, that would
diversify our risk management so that we don't have the danger
of a few people holding all the money, causing all the
problems.
Secretary Paulson. Yes. What we want to do is make sure we
do whatever is going to be most effective to get the very best
experts there are to deal with this significant problem. And to
get--and clearly there will have to be multiple--multiple
managers. But remember, the best way to protect the American
people is make sure this is done very--
Mr. Meeks. I wish I had more time. But let me just get my
last fear because I really wanted to get under that piece
because I think the diversity needs to be done. But my last
fear is this: What if the Treasury buys the loans off the
banks' books and the banks hold on to the reserve requirements
and work towards replacing lost shareholder value rather than
lend it out again? You know, then, right now most of the banks
have frozen all of their lending and those that are lending
have these stringent requirements.
So therefore my big fear is if that is the case, then again
we will be back in a few months with the same lack of consumer
confidence and lending confidence and there would be no
movement in the credit market, and therefore we would be back
to the same place again and would be having to put more money
into this thing. We don't have any guarantees that the banks
won't do that.
Secretary Paulson. Ben, do you want to answer that?
Mr. Bernanke. They are constrained now because they haven't
gotten capital, they don't have confidence and they don't have
trust. If they have the capital and the markets are functioning
more normally, it would be in their interest to make loans, and
that is their business. That is what they do.
May I also say on that first issue--about the Lehman
Brothers--you should talk to the SEC. They are on top of that
case.
Mr. Meeks. Okay. But again, why wouldn't they want to then
not replace the loss of shareholder value first before lending
out money? Since they lost it, why wouldn't they want to
replace their shareholder value first as opposed to lending out
money once they--
Mr. Bernanke. They maximize their shareholder value by
making good loans, and that is their business. That makes them
valuable.
Mr. Meeks. Let me--well, furthermore, then in that regard--
because when you have a situation where there is so much money
that is gone, the banks want to make sure that shareholders are
back, money is back in regards to the shareholders. Some are
saying that therefore lending right now is not the best way to
get back to their stability. They have to reinvest in
shareholders. So the $700 billion that we are talking about--
because many are telling me that is the low end and we are
really talking about over a trillion dollars here.
Secretary Paulson. What we are talking about here is market
confidence, investor confidence, and you need to begin by
restoring confidence in the system, in the financial
institutions, and we believe that this is by far the best way
to do it. But, you know, you are right. Right now we have a
system that is frozen to a large extent and the activities that
you want to take place aren't taking place.
The Chairman. The gentleman from California has a question.
Mr. Baca. Just a quick question. For the record, some of us
have some questions. Can we submit those for the record?
The Chairman. Yes. We will submit questions and we will
submit them to the Chairman and the Secretary and their staffs
will be thrilled to answer them, so we will accept them for the
record.
The gentleman from Texas, is it a request or what is the
request? If it is a substantive question, we can't do it.
Mr. Hinojosa. If it is a question, I can't ask it?
The Chairman. No. We have promised that they could leave at
5:15. I just want to make that procedural request.
I thank the Chairman and the Secretary. I hope neither will
take offense if I express the sincere wish after sometime in
the next few days not to speak to either of them again for some
time.
Secretary Paulson. Wish granted.
[Whereupon, at 5:20 p.m., the hearing was adjourned.]
A P P E N D I X
September 24, 2008
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