[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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