    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

                          REGULATORY RESTRUCTURING AND

                         REFORM OF THE FINANCIAL SYSTEM

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                OCTOBER 21, 2008

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 110-143

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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:
        October 21, 2008.............................................     1
    Appendix:
        October 21, 2008.............................................    89

                                   WITNESSES
                           Tuesday, October 21, 2008

    Bartlett, Hon. Steve, President and Chief Executive Officer, The
      Financial Services Roundtable..................................    48
    Johnson, Hon. Manuel H., Johnson Smick International, Inc........    20
    Rivlin, Hon. Alice M., Senior Fellow, Metropolitan Policy
      Program, Economic Studies, and Director, Greater Washington
      Research Project, Brookings Institution........................    12
    Ryan, T. Timothy, Jr., President and Chief Executive Officer,
      Securities Industry and Financial Markets Association (SIFMA)..    51
    Seligman, Joel, President, University of Rochester...............    18
    Stiglitz, Joseph E., Professor, Columbia University..............    15
    Washburn, Michael R., President and Chief Executive Officer, Red
      Mountain Bank, on behalf of the Independent Community Bankers
      of America (ICBA)..............................................    54
    Yingling, Edward L., President and Chief Executive Officer,
      American Bankers Association (ABA).............................    50

                                    APPENDIX

    Prepared statements:
        Bachmann, Hon. Michele.......................................    90
        Capuano, Hon. Michael........................................    92
        Kanjorski, Hon. Paul E.......................................    93
        King, Hon. Peter.............................................    94
        Klein, Hon. Ron..............................................    95
        Manzullo, Hon. Donald........................................    99
        Roskam, Hon. Peter...........................................   102
        Speier, Hon. Jackie..........................................   104
        Bartlett, Hon. Steve.........................................   106
        Johnson, Hon. Manuel H.......................................   121
        Rivlin, Hon. Alice M.........................................   123
        Ryan, T. Timothy, Jr.........................................   130
        Seligman, Joel...............................................   140
        Stiglitz, Joseph E...........................................   149
        Washburn, Michael R..........................................   168
        Yingling, Edward L...........................................   177

                  Additional Material Submitted for the Record

    Frank, Hon. Barney:
        Roll Call Votes from the Committe on Financial Services and
          on the Floor of the House..................................   247
        Excerpt from Mark Zandi's book entitled, ``Financial Shock''.   263
    Bachus, Hon. Spencer:
        Letter to Hon. Christopher Cox, Chairman, SEC, dated October
          14, 2008...................................................   198
    Garrett, Hon. Scott:
        Report of the American Enterprise Institute for Public Policy
          Research entitled, ``The Last Trillion-Dollar Commitment:
          The Destruction of Fannie Mae and Freddie Mac,'' dated
          September 2008.............................................   199
        Article from the New York Times entitled, ``Pressured to Take
          More Risk, Fannie Reached Tipping Point,'' dated October 5,
          2008.......................................................   209
        Article from The Wall Street Journal entitled, ``Obama Voted
          `Present' on Mortgage Reform,'' dated October 15, 2008.....   216
    Kanjorski, Hon. Paul E.:
        Letter from the National Association of Federal Credit Unions
          (NAFCU), dated October 20, 2008............................   242
        Written statement of the National Association of State Credit
          Union Supervisors (NASCUS), dated October 21, 2008.........   244
    LaTourette, Hon. Steven:
        Article from the Cleveland Plain Dealer entitled, ``Time to
          account for foreclosures,'' dated October 21, 2008.........   219
        Article from the New York Times entitled, ``Building Flawed
          American Dreams,'' dated October 19, 2008..................   220
        Letter from the Credit Union National Association (CUNA) to
          Hon. Christopher Dodd, Hon. Barney Frank, Hon. Richard
          Shelby, and Hon. Spencer Bachus, dated October 21, 2008....   239
    Price, Hon. Tom:
        Article from Investor's Business Daily entitled, ``Saddest
          Thing About This Mess: Congress Had Chance To Stop It,''
          dated September 26, 2008...................................   228
        Article from the National Journal entitled, ``When Fannie and
          Freddie Opened The Floodgates,'' dated October 18, 2008....   230
        Article from The Wall Street Journal entitled, ``Another
          `Deregulation' Myth,'' dated October 18, 2008..............   233
        Article from The Wall Street Journal entitled, ``Most Pundits
          Are Wrong About the Bubble,'' dated October 18, 2008.......   236

                          REGULATORY RESTRUCTURING AND

                         REFORM OF THE FINANCIAL SYSTEM

                                  ----------

                           Tuesday, October 21, 2008

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:05 a.m., in
    room 2128, Rayburn House Office Building, Hon. Barney Frank
    [chairman of the committee] presiding.
        Members present: Representatives Frank, Kanjorski, Maloney,
    Velazquez, Watt, Ackerman, Meeks, Moore of Kansas, Capuano,
    McCarthy of New York, Lynch, Scott, Green, Cleaver, Bean, Moore
    of Wisconsin, Ellison, Klein, Perlmutter, Donnelly, Foster,
    Speier; Bachus, LaTourette, Manzullo, Biggert, Garrett,
    Barrett, Neugebauer, Price, McCotter, and McCarthy of
    California.
        Also present: Representative Baird.
        The Chairman. The hearing will come to order.
        I want to express my appreciation to Members on both sides
    for joining us today. There is a great deal of interest in the
    country on what we plan to do next year. The purpose of this is
    to focus on where we go from here.
        We have two panels. The first panel consists of experts,
    many of whom have had responsibilities in the past but who do
    not now have governmental authority. That was a deliberate
    decision on my part so that we did not have to get clearances
    from various entities but could get the best thinking from
    thoughtful and experienced people. The second panel will
    consist of representatives of the financial institutions
    themselves.
        I have spoken with the Minority, and we have agreed to 15
    minutes on each side for opening statements to accommodate the
    members.
        With that, we will begin with the chairman of the
    Subcommittee on Capital Markets, the gentleman from
    Pennsylvania, Mr. Kanjorski.
        Mr. Kanjorski. Mr. Chairman, we have reached a crossroads.
    Because our current regulatory regime has failed, we now must
    design a robust, effective supervisory system for the future.
    In devising this plan, we each must accept that regulation is
    needed to prevent systemic collapse. Deregulation, along with
    the twin notions that markets solve everything while government
    solves nothing, should be viewed as ideological relics of a
    bygone era.
        We also need regulation to rein in the private sector's
    excesses. In this regard, I must rebuke the greed of some AIG
    executives and agents who spent freely at California spas and
    on English hunting trips after the company secured a $123
    billion taxpayer loan. Their behavior is shocking. The Federal
    Reserve must police AIG spending and impose executive pay
    limits. If it does not, I will do so legislatively. After all,
    the Federal Reserve's lending money to AIG is no different from
    the Treasury's investing capital in a bank.
        Returning to our hearing's main topic, I currently believe
    that the oversight system of the future must adhere to seven
    principles:
        First, regulators must have the resources and flexibility
    needed to respond to a rapidly evolving global economy full of
    complexity and innovation.
        Second, we must recognize the interconnectedness of our
    global economy when revamping our regulatory system. We must
    assure that the failure of one company, of one regulator or of
    one supervisory system does not produce disastrous, ricocheting
    effects elsewhere.
        Third, we need genuine transparency in the new regulatory
    regime. As products, participants, and markets become more
    complex, we need greater clarity. In this regard, hedge funds
    and private equity firms must disclose more about their
    activities. The markets for credit default swaps and for other
    derivatives must also operate more openly and under regulation.
        Fourth, we must maintain present firewalls, eliminate
    current loopholes, and prevent regulatory arbitrage in the new
    regulatory system. Banking and commerce must continue to remain
    separate. Financial institutions can neither choose their
    holding companies' regulators nor evade better regulation with
    a weaker charter. All financial institutions must also properly
    manage their risks, rather than shift items off balance sheet
    to circumvent capital rules.
        Fifth, we need to consolidate regulation in fewer agencies
    but maximize the number of cops on the beat to make sure that
    market participants follow the rules. We must additionally
    ensure that these agencies cooperate with one another, rather
    than to engage in turf battles.
        Sixth, we need to prioritize consumer and investor
    protection. We must safeguard the savings, homes, rights, and
    the financial security of average Americans. When done right,
    strong consumer protection can result in better regulation and
    more effective markets.
        Seventh, in focusing financial firms to behave responsibly,
    we must still foster an entrepreneurial spirit. This innovation
    goal requires a delicate but achievable balancing act.
        In sum, we have a challenging task ahead of us. Today's
    esteemed witnesses will help us to refine our seven regulatory
    principles and ultimately construct an effective regulatory
    foundation for the future. I look forward to their thoughts and
    to this important debate.
        Thank you, Mr. Chairman.
        The Chairman. The gentleman from Cleveland--from Ohio--is
    now recognized for 2 minutes. I do not want to get too picky
    here.
        Mr. LaTourette. Thank you very much, Mr. Chairman. Thank
    you for having this hearing. I am just a little east of
    Cleveland, thankfully. If I were from Cleveland, I would not be
    successful.
        The witnesses' statements today have a lot of references to
    things like socialism, Ms. Rivlin's testimony in particular. I
    think that word ``socialism'' is being bandied about quite a
    bit today. The notion that right before we left we handed over
    $700 billion to the Secretary of the Treasury was disconcerting
    to a lot of us. Some of us voted ``no,'' not once but twice, on
    that piece of legislation.
        I think the witnesses also talk about finger pointing as
    being not very productive, and I agree with that. I think that
    this hearing needs to look forward rather than back, but I
    think in order to look forward you do need to look back just a
    tad in that there are a lot of theories as to how we find
    ourselves in this situation.
        Some are indicating that the 1999 legislation, Gramm-Leach-
    Bliley, is somehow in default. If that is the case, I would
    hope our witnesses would chat with us about the changes that
    need to be made to that to prevent this from happening again.
        Many have indicated that the failure to put a tougher
    regulator instead of OHFEO over Fannie Mae and Freddie Mac saw
    the release of up to $1 trillion in subprime mortgages by those
    GSEs between 2005 and 2007. I think we should see if that is
    the problem.
        Credit swaps apparently have no regulators. I wish they
    would talk a little bit about that.
        Then, lastly, I did read the Washington Post editorial this
    morning that talks about mark-to-markets not being a problem.
    That does run counter to some of the things that people back in
    northeastern Ohio are indicating to me. I would wish that the
    witnesses would talk about that as well.
        Just two quick unanimous consent requests: There is an
    article appearing in today's Cleveland Plain Dealer that talks
    about an area called Slavic Village. I would ask unanimous
    consent that it be included in the record.
        On October the 19th, Sunday, there was an article in the
    New York Times called, ``Building Flawed American Dreams.'' I
    would also ask unanimous consent that it be included in the
    record as well.
        I yield back.
        The Chairman. Without objection, it is so ordered.
        I would ask unanimous consent that we give general leave
    for all members to insert into the record any material they
    wish.
        Is there any objection? Hearing none, general leave is now
    granted, and members may insert whatever they wish into the
    record. They can, of course, allude to it as well if they would
    like to.
        I will now yield 1 minute to the gentleman from New York,
    Mr. Ackerman.
        Mr. Ackerman. A major contributing factor to the economic
    crisis facing the country is that our financial regulatory
    system is broken and needs to be fixed.
        Without question, at least part of the blame for the
    seizure of our credit markets rests with the credit rating
    agencies. The credit ratings that were assigned to many
    mortgage-backed securities over the past 3 years were not based
    on sound historical data and for good reason. There was none.
    The types of securities that were bought and sold in the
    secondary market contain new subprime mortgage products that
    had no historical data on which to base any rating.
    Accordingly, the AAA ratings assigned to securities that
    contained subprime loans had absolutely no statistical basis
    whatsoever, but the pension fund managers and investors who
    placed their trust in the ratings took the credit rating
    agencies at their word and purchased these exotic products.
    That the credit rating agencies would rate these securities
    without any statistical data is bad enough, but continuing to
    do so is absolutely bewildering.
        Mr. Chairman, if we are to fix the cause of this crisis,
    that area surely needs to be addressed. Mr. Castle and I have
    introduced legislation that would require nationally rated
    statistical rating organizations, those who are registered with
    the SEC, to assign two classes of ratings. One class, SRO
    ratings, would be reserved solely for homogenous securities
    whose ratings are based on historical statistical data and
    whose ratings pension fund managers and risk adverse investors
    could rely on. The other class of ratings would permit the
    rating agencies to continue to rate heterogeneous riskier
    products that may not have data.
        The Chairman. The gentleman's time is expiring.
        Mr. Ackerman. I would place the rest of my statement in the
    record.
        The Chairman. Thank you.
        We do have a large turnout. Members have asked for 1
    minute, and we are going to have to ask that they stay very
    close to that.
        Next, the gentleman from Texas, Mr. Neugebauer, for 2
    minutes.
        Mr. Neugebauer. Thank you, Mr. Chairman.
        One thing we know about Congress is that we do not
    necessarily do our best work in a crisis environment. We get a
    lot of pressure to just do something and to do something
    quickly. As a result, Congress can tend to overreact.
        Our financial markets are not functioning normally, and our
    Federal Government has gone to some unprecedented steps to
    intervene in these markets. Certainly, we need to consider some
    regulatory improvements. This committee started regulatory
    hearings this year, and the industry and the Treasury and
    others have put forward regulatory proposals. Before Congress
    rushes to overhaul regulations, we need to do a complete
    autopsy of the current problems so that we know exactly what
    went wrong and what changes could help prevent this from
    happening again.
        We also need to understand the outcomes of these problems
    on the structure of our financial services sector. Much focus
    has been on institutions that are too big or too interconnected
    to fail, but now it seems that more institutions fall into
    these categories. Expanding regulation to new entities also
    brings expectations of future government help.
        Now, this debate isn't simply about having more regulation
    or about having less regulation; it is about having effective
    regulation. Effective regulation allows market discipline to
    drive decisionmaking, and it minimizes moral hazard. Effective
    regulation keeps the U.S. capital markets competitive with
    others around the world. Effective regulation protects
    investors and consumers and rewards innovation and responsible
    risk-taking.
        We must also look at how the Federal Government plans to
    work its way out of these interventions. While some of these
    interventions are still being implemented, at some point the
    Federal Government will need to pull back. We need a bona fide
    exit strategy. This strategy needs to be a part of our
    discussion as we talk about regulatory changes. Moving forward,
    we need to work together across this committee aisle to come up
    with the right solution so we can leave America's financial
    system and economy stronger.
        The Chairman. The gentleman from Massachusetts, Mr. Lynch,
    is recognized for 1 minute.
        Mr. Lynch. Thank you, Mr. Chairman.
        I want to thank the ranking member as well and the
    witnesses for helping the committee with its work.
        I want to associate myself with the remarks of the
    gentleman from Ohio, who said that the time for finger pointing
    is long past, and we really, within this committee structure,
    have to figure out where we need to go in the future and how to
    fix this regulatory system.
        I would like the economists and the industry participants
    who are before us today to really focus on the purpose of the
    regulatory regime that we put in place, which is to provide
    information to investors, not only in external transparency but
    also in internal transparency. Because what we have seen is
    that these companies themselves do not understand truly the
    value of some of these complex derivatives that they hold.
        So, again, I thank you for your attendance here today, but
    I would like to see the focus on transparency, after reading
    your remarks, and on the value that that would have in any
    system that we will devise going forward.
        Thank you. I yield back.
        The Chairman. The gentleman from Illinois, Mr. Manzullo, is
    recognized for 2 minutes.
        Mr. Manzullo. Thank you, Mr. Chairman, for holding this
    hearing today.
        This committee needs to examine ways to ameliorate the
    impact of this crisis while examining long-term solutions to
    ensure that a crisis of this magnitude never happens again.
        As we examine the underlying causes of this crisis, it is
    clear to me that Fannie Mae and Freddie Mac were right in the
    thick of things. Some of us in Congress have been fighting the
    unethical, illegal, and outright stupid underwriting practices
    at Fannie and Freddie for many years. Our efforts are a matter
    of public record, at least in the last 8 years, of going so far
    as to publicly confront Franklin Raines, who took $90 million
    in 6 years from Fannie Mae, and with regard to his fraudulent,
    unethical lobbying campaign in 2000 and in regard to the use of
    unethical accounting practices to inflate the bonuses of Fannie
    Mae's executives in 2004. In 2005, we finally got a bill to the
    Floor, a vote in favor of GSE reform, including the tough Royce
    amendment, to make even more difficult the types of practices
    to continue that we see have led to this crisis.
        Any solution to this crisis undoubtedly needs to include a
    serious reexamination of the role that these GSEs will play in
    any future housing market. It is obvious that new regulations
    are necessary both to ease this crisis and to ensure that it
    never happens again. One thing for sure is that these two
    organizations need to be dissected, ripped apart, and examined
    thoroughly. Because once we find out what happened there as the
    root cause of the problem, we will make sure it never occurs
    again.
        Thank you, Mr. Chairman.
        The Chairman. The gentleman from Georgia, Mr. Scott, is
    recognized for 1 minute.
        Mr. Scott. Thank you, Mr. Chairman. Thank you for the
    hearing.
        I think we have to realize that the damage has been done.
    We have to change our mindset from one of continuing to try to
    find blame; and, instead, we have to work on real solutions.
        The number one issue we have before us is that our system
    is vulnerable. It has been vulnerable because a small quantity
    of high-risk assets undermined the confidence of investors as
    well as other market participants across a much broader range;
    and the combined effect of these factors, without the necessary
    regulation, caused the system to be vulnerable to self-
    reinforcing asset price and credit cycles.
        The issue before us: What are the reforms that will be
    necessary to reduce the vulnerabilities in our economic system
    in the future? We have to press hard to make sure that we stop
    the blame game and understand that the American people are
    looking to us to provide real solutions.
        Thank you, Mr. Chairman.
        The Chairman. Mrs. Biggert of Illinois is recognized for 2
    minutes.
        Mrs. Biggert. Thank you, Mr. Chairman. Thank you for
    holding this hearing to overhaul our financial services
    regulatory system and to bring it into the 21st Century.
        During previous Congresses, this committee held about 100
    hearings on GSE reform and led the House to pass a reform bill
    to rein in Fannie Mae and Freddie Mac. I worked on it and
    supported it in 2005 and 2007 because we saw the handwriting on
    the wall. These mortgage giants were too big, their accounting
    was irregular, and capital was too low.
        We also produced legislation to reform the credit rating
    agencies, which we worked on, and that was signed into law in
    2006. The SEC was unacceptably slow in implementing any reform.
        Now more work needs to be done to ensure that agencies
    adequately evaluate credit risk. So our work to reform these
    regulations and many other reforms is by no means done nor will
    it ever be as the financial services industry is ever-evolving.
        Today's witnesses will touch on a litany of concerns that
    merit further review and serious consideration by this
    committee. I think that our ultimate goals should be to bolster
    integrity and confidence in the U.S. financial system, to
    invigorate U.S. competition, to enhance consumer protections,
    to arm consumers with financial education and information, and
    to never again have the taxpayers pay for Wall Street's
    mistakes.
        With that, I thank the witnesses for joining us today, and
    I look forward to hearing all of their ideas.
        I yield back.
        The Chairman. The gentleman from Missouri, Mr. Cleaver, is
    recognized for 1 minute.
        Mr. Cleaver. Mr. Chairman, I will reserve my comments for
    the question-and-answer period. Thank you.
        The Chairman. Well, then, we will go to the gentleman from
    Florida, Mr. Klein. I apologize. We will go next to the
    gentleman from Texas, Mr. Green. I was out of order here.
        Mr. Green. Thank you, Mr. Chairman. I will be brief.
        Mr. Chairman, I thank you for hosting this hearing, because
    the American people are angry. They are upset. They understand
    that and believe that we have within our power to change things
    to make a difference. They are upset about golden parachutes as
    companies crash. They are upset because people were allowed to
    have loans that they could not afford. They are upset because
    there are markets that are unregulated. They expect us to act.
    I think this is the genesis of the action that we have to take.
        I yield back.
        The Chairman. The gentleman from New Jersey, Mr. Garrett,
    for 2 minutes.
        Mr. Garrett. I thank the chairman and the ranking member,
    and I thank also the members of the panel for your testimony we
    are about to hear.
        As you all know, we are facing very challenging times in
    our Nation's financial services industry. It is important that
    we work in a bipartisan fashion to move forward to ensure that
    we put in place the proper regulatory framework to allow our
    economy to grow once again. But it has been said already:
    Before we are able to go forward with new and important changes
    to the overall regulatory structure for our financial services
    industry, I do believe that it is essential that we better
    understand just how we got into this problem.
        One of the main parts of the problem was poor regulation in
    the past, specifically in the area of Fannie and Freddie. Now
    in the past, I know that our distinguished chairman has noted
    that he and his party were the ones to finally get a new GSE
    regulator over the finish line, albeit a little bit too late.
    That is quite true. However, there is a distortion of the facts
    to allow them to claim the mantle of being a champion of reform
    with Fannie and Freddie.
        If you look back to the facts during the first committee
    markup of GSE regulation in 2005, it was I and some of my
    colleagues who have already spoken who offered a number of
    amendments to strengthen the regulatory controls and to reduce
    the overall risk that both companies posed to our Nation's
    economy. Each and every time, the chairman and everyone on the
    Democrat side of the aisle voted against these proposals,
    whether it was an amendment to raise the capital levels, to
    reduce the retained portfolios, to lower the conforming loan
    limits, or anything else. The other side of the aisle voted
    time and time again for what? Less regulation over these two
    companies. It was this lack of regulation that played a large
    part in getting us to where we are today.
        So I honestly think that we need to learn the lessons of
    the past if we are going to be successful in the future. To
    formulate a new regulatory scheme is a process that is going to
    take a lot of months, a lot of conversations, many hearings,
    and as much input from all parties as possible to ensure that
    we create really a solid system under which we can safely move
    forward. Creating these new regulation reforms is not a
    partisan project. It is really about making sure American
    families are protected in the future from the kind of financial
    crisis that we are experiencing now.
        Again, I thank the panel.
        The Chairman. The gentleman from Florida, Mr. Klein.
        Mr. Klein. Thank you, Mr. Chairman. I thank the ranking
    member as well for calling this hearing.
        We all understand that this financial crisis is deep. It is
    affecting people with their investments. It is affecting small
    businesses' access to capital. I think many people understand
    that it is due, in part, to a lack of regulation and oversight.
        Regulation does not have to be a burden. Smarter regulation
    will make our economy stronger, and I would definitely concur
    that we have to bring in, as we are doing today, some of the
    best and brightest people from all over our country to come up
    with some new ideas to have better regulation that will be
    effective in continuing to promote good ideas in the market and
    that will protect consumers and taxpayers.
        A couple of suggestions:
        One, when we talk about regulation, we have the SEC. We
    have the CFTC. There are ideas out there about a new financial
    product safety commission. It does not matter what we call it.
    I think the goals have to be the same, and that is to make sure
    that we are doing things to stimulate creative ideas. Again,
    the proper balance has to be in place.
        Also, I have great concern about the credit rating
    agencies. It seems to me that there is an inherent conflict of
    interest there. The way it is set up right now, huge fees are
    being paid. And how things could be rated AA and AAA, when
    people are looking at these investments, there is a problem
    there.
        Also, in encouraging competition among financial
    institutions, we have pretty much eliminated much of our
    antitrust law in the United States, and now we have more and
    more power consolidated with a few institutions in many
    different areas. This notion of ``too big to fail'' really
    bothers me. It is like continuing to build and build and build
    and being successful. When you make a number of bad decisions,
    I think you run out of that.
        So I think it is a question of we need to go back and look
    at all of these. Do it in a bipartisan way, but let's move.
    Where there is a will, there is a way. Let's get it done as
    quickly and as reasonably possible.
        The Chairman. The gentleman from Georgia is recognized for
    2 minutes.
        Mr. Price. Thank you, Mr. Chairman.
        I want to join with some on both sides of the aisle who
    have said that the same old politics, frankly, from both sides
    will not get us to a solution to our current challenges.
        There has been lots of excellent work done on attempting to
    identify the cause of our current financial challenge. I will
    be inserting a number of items into the record. One of them is
    an article entitled, ``Another Deregulation Myth: A Cautionary
    Tale about Financial Rules that Failed.''
        While the genesis of our current challenge is certainly
    multifactorial, what began on a microlevel with imprudent
    borrowers and irresponsible lenders became a full-scale
    financial crisis, fueled by the GSEs that were rapidly
    expanding their purchasing and securitization of subprime
    mortgages.
        Today, the resulting credit crunch is extended to every
    area of our economic system. What is taking place, though, is
    truly unprecedented: The direct Federal intervention in
    individual mortgages; a broad overreach by the Federal Reserve;
    an unlimited use of taxpayer dollars; and steps to nationalize
    banks. These actions are in their totality, I fear, an assault
    on American principles and on capitalism itself. It is a marked
    turn toward a nefarious ideal that problems can be solved by
    centralized decisionmaking here in Washington.
        To have a full understanding of the financial services'
    regulatory state, there must be an investigation of all facets
    of the sector. I look forward to working with the chairman for
    a more broad appreciation of that in our hearing process.
        Moving ahead, Congress must be sensible. The goals should
    be to eliminate previous destructive regulatory actions, not to
    eliminate all regulation but to have appropriate regulation,
    close the gaps in the regulatory framework, increase
    transparency, and enhance market integrity and innovation. The
    end result must promote economic growth and not stifle
    opportunity. I look forward to working with all who are of the
    same mind.
        Thank you.
        The Chairman. I will now recognize myself for our remaining
    time.
        The purpose of this hearing was to be forward-looking, and
    that is why the panel of witnesses, proposed by both sides, are
    people who, in their testimony--and I was pleased to see it--
    talked about going forward. The next panel is a panel of people
    from the financial industry, and I had hoped we could focus on
    that, but after the gentleman from New Jersey's comments in
    having decried partisanship, he then practiced it. It does seem
    to me to be important to set the record clearly before us.
        He alluded to a markup in 2005 in which the Democrats
    refused to support his amendments. The Democrats were, of
    course, in the Minority on the committee at that time. Had a
    Republican Majority been in favor of passing that bill, they
    would have done it.
        The facts are--and, again, the gentleman from New Jersey
    continues to return to this, so we have to lay the record out
    here--that from 1995 to 2006, the Republicans controlled the
    Congress, particularly the House. Now, he has claimed that it
    was we Democrats--myself included--who blocked things. The
    number of occasions on which either Newt Gingrich or Tom DeLay
    consulted me about the specifics of legislation are far fewer
    than the gentleman from New Jersey seems to think. In fact, the
    Republican Party was in control from 1997 to 2005, and it did
    not do anything.
        I now quote from the article that came out from the lead
    representative for FM Watch, which is the organization formed
    solely to restrain Fannie Mae and Freddie Mac and which is an
    organization, by the way, after the Congress finally passed the
    bill that came out of this committee in March of 2007, when
    Congress finally overcame some Republican filibusters that
    passed in 2008, that disbanded, saying that our bill had
    accomplished everything they had wanted.
        He says he was asked if any Democrats had been helpful.
    Well, Barney Frank of Massachusetts: ``The Senate Banking
    Committee produced a very good bill in 2004. It was S.190, and
    it never got to the Senate floor.'' The Senate was then, of
    course, controlled by the Republicans. ``Then the House
    introduced a bill which passed,'' the one the gentleman from
    New Jersey alluded to, ``but we could not get a bill to the
    floor of the Senate.''
        So here you have the documentation of the Republicans'
    failure to pass the bill.
        He goes on to say, ``After the 2006 election, when everyone
    thought FM policy focus issues would be tough sledding in their
    restrictions with Democrats in the majority, Barney Frank, as
    the new chairman, stepped up and said, `I am convinced we need
    to do something.' He sat down with Treasury Secretary Paulson,
    and upset people in the Senate and Republicans in the House,
    but they came up with a bill that was excellent, and it was a
    bill that largely became law.''
        So there is the history. I will acknowledge that, during
    the 12 years of Republican rule, I was unable to get that bill
    passed. I was unable to stop them from impeaching Bill Clinton.
    I was unable to stop them from interfering in Terri Schiavo's
    husband's affairs. I was unable to stop their irresponsible tax
    cuts with the war in Iraq and in the PATRIOT Act that did not
    include civil liberties.
        Along with the chairman of the committee, Mike Oxley, I was
    for a reasonable bill in 2005. Mr. Oxley told the Financial
    Times, of course, that he was pushing for that bill, the bill
    that's mentioned favorably by the advocate for FM Watch but
    that, unfortunately, all he could get from the Bush
    Administration was a ``one-finger salute,'' and that killed the
    bill. Now, I regret that we have to get into this. I do hope we
    will look forward.
        One other factor: There is a book out by Mark Zandi called,
    ``Financial Shock.'' Mr. Zandi is an adviser to John McCain.
    Here's what he says on page 151:
        ``President Bush readily took up the homeownership at the
    time of the start of his administration. To reinforce this
    effort, the Bush administration put substantial pressure on
    Fannie Mae and Freddie Mac to increase their funding of
    mortgage loans to lower income groups. They had been shown to
    have problems during the corporate accountingscandals and were
    willing to go along with any request from the administration.''
        This is Mr. Zandi, John McCain's economic adviser.
        ``OHFEO, the Bush-controlled operation, set aggressive
    goals for the two giant institutions, which they met, in part,
    by purchasing subprime mortgage securities. By the time of the
    subprime financial shock, both had become sizable buyers.''
        That is John McCain's economic adviser. That is the
    advocate for FM Watch.
        I will throw in one other factor, which notes, ``The
    Congress in 1994,'' the last year of Democratic control,
    ``passed the Homeowners' Equity Protection Act, giving the
    Federal Reserve the authority to regulate subprime mortgage.
    Mr. Greenspan refused to use it.'' As Mr. Zandi--again, John
    McCain's economic adviser--notes: ``Democrats in Congress were
    worried about increasing evidence of predatory lending, pushed
    for legislation, pushed the Fed. We were rejected.''
        I hope we can now go forward and try to deal with this
    situation. Yes, it is too bad that we did not do anything about
    subprime lending. I wish the bill that the Congress passed on
    Fannie and Freddie in 2007 and in this committee in 2008 had
    been passed earlier, and I wish I could eat more and not gain
    weight. Now let us get constructive about what we need to do in
    the future.
        The gentleman from Alabama is recognized for the final 3
    minutes.
        Mr. Bachus. Thank you, Mr. Chairman.
        Mr. Chairman, I have a real concern, and that concern is
    that we are going to repeat the mistakes of the past. Now, how
    did we get here? We did it by the overextension of credit. We
    did it by overleveraging. We did it by too much borrowing and
    by too much lending. Yet what are we talking about this week
    and last month? We are talking about how can we stimulate
    lending, about how can we stimulate consumption, about how can
    we stimulate spending.
        I believe that what we ought to be talking about is how we
    encourage people to save. How do we encourage people to live
    within their means? How do we encourage the government, not
    just American families but the government, to live within its
    means?
        Another concern--and I think it is wrapped up in this--is
    this propensity of Americans to borrow more than they can
    afford to repay and to spend excessively and to not live within
    their means and to intervene on behalf of those who do. You
    know, we have talked about the market. Well, the market has
    been brutally efficient in the past several months. If it is
    allowed to work--and there will be negative consequences for
    all of us, but it will penalize those who took excessive risk.
    It will penalize those who borrowed more than they could
    afford. It has penalized our investment banks. There are no
    more investment banks. They have overleveraged.
        The best way to discourage people from making bad loans is
    to let the market make them eat those losses. We need, I think,
    number one, to realize there are limits on what government can
    do to try to intervene in this market process.
        Over a year ago, I was interviewed by the New York Times,
    by one of their editorial boards. I said this is not going to
    be pretty. It is going to be painful, but to a certain extent--
    and it is not popular to say--it is cathartic. It has a certain
    cleansing ability in the market by doing this. But we are going
    to be right back here in 5 years or in 10 years or in 15 years
    if we, as a country, go out and we have a stimulus package
    where we encourage people to spend money, we encourage them to
    take on loans, to take on debt, as opposed to figuring out a
    way to encourage them to balance their budgets as families and
    as a government.
        If we are going to have an economic stimulus package, I
    have said it ought to be restricted to those things we have to
    do anyway, to those things we are going to do, like sewer
    projects and water projects, even tax policies, which encourage
    spending. We are here today because we borrowed excessively and
    because we did not live within our means.
        I have said this, and I will close with this: On this
    committee, Ron Paul in a debate said we are not a wealthy
    nation. We are a nation of debtors. We are in debt. When we are
    in debt, and if we take on more debt, we are actually going to
    restrict our ability to grow and to thrive economically. That
    is a negative. Lending excessively and borrowing excessively is
    not something we ought to encourage. We are going to probably
    inflate this economy. We are going to probably print a lot of
    money, and we are going to, in my mind, it appears that we are
    going to continue to go down a road that has brought us here
    today. And that is not living responsibly.
        Thank you, Mr. Chairman.
        The Chairman. I thank the gentleman.
        We will now begin with--the gentleman from Pennsylvania had
    a unanimous consent request he wanted to mention.
        Mr. Kanjorski. Mr. Chairman, I would ask unanimous consent
    to insert in the record at this point a communication from
    NAFCU regarding this hearing and the responsibility of the
    committee and other positions in the Congress and, also, a
    statement for the record from NASCUS of the State regulatory
    organization for credit unions on the same subject.
        The Chairman. I thank the gentleman.
        I would just take a second to note that both of them quite
    correctly pointed out that credit unions bear absolutely no
    responsibility for the bad lending practices, and I think they
    are entitled to that recognition.
        We will now begin with our witnesses. We will begin with
    Alice Rivlin, who is a senior fellow at the Metropolitan Policy
    Program, economic studies, and director at the Brookings
    Institution.
        Dr. Rivlin.

      STATEMENT OF THE HONORABLE ALICE M. RIVLIN, SENIOR FELLOW,
     METROPOLITAN POLICY PROGRAM, ECONOMIC STUDIES, AND DIRECTOR,
       GREATER WASHINGTON RESEARCH PROJECT, BROOKINGS INSTITUTION

        Ms. Rivlin. Thank you, Mr. Chairman, and members of the
    committee.
        Past weeks have witnessed historic convulsions in financial
    markets around the world. The freezing of credit markets and
    the failure of major financial institutions triggered massive
    interventions by governments and by central banks as they
    attempted to contain the fallout and to prevent total collapse.
    We are still in damage control mode. We do not yet know whether
    these enormous efforts will be successful in averting a
    meltdown, but this committee is right to begin thinking through
    how to prevent future financial collapses and how to make
    markets work more effectively.
        Now pundits and journalists have been asking apocalyptic
    questions: Is this the end of market capitalism? Are we headed
    down the road to socialism? Of course not. Market capitalism is
    far too powerful a tool for increasing human economic wellbeing
    to be given away because we used it carelessly. Besides, there
    is no viable alternative. Hardly anyone thinks we would be
    permanently better off if the government owned and operated
    financial institutions and decided how to allocate capital.
        But market capitalism is a dangerous tool. Like a machine
    gun or a chain saw or a nuclear reactor, it has to be inspected
    frequently to see if it is working properly and used with
    caution according to carefully thought-out rules. The task of
    this committee is to reexamine the rules.
        Getting financial market regulation right is a difficult
    and painstaking job. It is not a job for the lazy, the faint-
    hearted, or the ideologically rigid. Applicants for this job
    should check their slogans at the door. Too many attempts to
    rethink the regulation of financial markets in recent years
    have been derailed by ideologues shouting that regulation is
    always bad or, alternatively, that we just need more of it.
    This less versus more argument is not helpful. We do not need
    more or less regulation; we need smarter regulation.
        Moreover, writing the rules for financial markets must be a
    continuous process of fine-tuning. In recent years, we have
    failed to modernize the rules as markets globalized, as trading
    speed accelerated, as volume escalated, and as increasingly
    complex financial products exploded on the scene. The authors
    of the financial market rule books have a lot of catching up to
    do, but they also have to recognize that they will never get it
    right or will be able to call it quits. Markets evolve rapidly,
    and smart market participants will always invent new ways to
    get around the rules.
        It is tempting in mid-catastrophe to point fingers at a few
    malefactors or to identify a couple of weak links in a larger
    system and say those are the culprits and that if we punish
    them the rest of us will be off the hook, but the breakdown of
    financial markets had many causes of which malfeasance and even
    regulatory failure played a relatively small role.
        Americans have been living beyond their means individually
    and collectively for a long time. We have been spending too
    much, have been saving too little, and have been borrowing
    without concern for the future from whomever would support our
    overconsumption habit--the mortgage company, the new credit
    card, the Chinese Government, whatever. We indulged ourselves
    in the collective delusion that housing prices would continue
    to rise. The collective delusion affected the judgment of
    buyers and sellers, of lenders and borrowers and of builders
    and developers. For a while, the collective delusion was a
    self-fulfilling prophesy. House prices kept rising, and all of
    the building and borrowing looked justifiable and profitable.
    Then, like all bubbles, it collapsed as housing prices leveled
    off and started down.
        Now bubbles are an ancient phenomenon and will recur no
    matter what regulatory rules are put in place. A housing bubble
    has particularly disastrous consequences because housing is
    such a fundamental part of our everyday life with more
    pervasive consequences than a bubble in, say, dot com stocks.
        More importantly, the explosion of securitization and
    increasingly complex derivatives had erected a huge new
    superstructure on top of the values of the underlying housing
    assets. Interrelations among those products, institutions, and
    markets were not well-understood even by the participants. But
    it is too easy to blame complexity, as in risk models failed in
    the face of new complexity. Actually, people failed to ask
    commonsense questions: What will happen to the value of these
    mortgage-backed securities when housing prices stop rising?
    They did not ask because they were profiting hugely from the
    collective delusion and did not want to hear the answers.
        Nevertheless, the bubbles and the crash were exacerbated by
    clear regulatory lapses. Perverse incentives had crept into the
    system, and there were instances where regulated entities, even
    the Federal Reserve, were being asked to pursue conflicting
    objectives at the same time.
        These failures present a formidable list of questions that
    the committee needs to think through before it rewrites the
    rule book. Here are my offers for that list:
        We did have regulatory gaps. The most obvious regulatory
    gap is the easiest to fill. We failed to regulate new types of
    mortgages--not just subprime but Alt-A and no doc and all the
    rest of it--and the lax, sometimes predatory lending standards
    that went with them. Giving people with less than sterling
    credit access to homeownership at higher interest rates is
    actually, basically, a good idea, but it got out of control.
    Most of the excesses were not perpetrated by federally
    regulated banks, but the Federal authorities should have gotten
    on the case, as the chairman has pointed out, and should have
    imposed a set of minimum standards that applied to all mortgage
    lending. We could argue what those standards should be. They
    certainly should include minimum downpayments, the proof of
    ability to pay, and evidence that the borrower understands the
    terms of the loan. Personally, I would get rid of teaser rates,
    of penalties for prepayment and interest-only mortgages. We may
    not need a national mortgage lender regulator, but we need to
    be sure that all mortgage lenders have the same minimum
    standards and that these are enforced.
        Another obvious gap is how to regulate derivatives. We can
    come back to that. But much of the crisis stemmed from complex
    derivatives, and we have a choice going forward. Do we regulate
    the leverage with which those products are traded or the
    products themselves?
        The Chairman. Doctor, you will need to wind this up soon.
        Ms. Rivlin. Okay. Then, if you would prefer, I can submit
    the rest of the statement for the record.
        The Chairman. It will be in the record, and we will have
    plenty of time for questions.
        [The prepared statement of Ms. Rivlin can be found on page
    123 of the appendix.]
        The Chairman. In fairness to the members who have made a
    special trip, what I am going to do is, as we do the
    questioning, when we finish the questioning on our side of the
    first panel and when we have the second panel, I will begin the
    questioning with where we left off in the first panel so that
    every member will get a chance to question at least one set of
    witnesses before any member questions again. I will defer my
    own questioning, because I do appreciate members coming. So we
    will have the questioning in regular order for the first panel,
    and then we will pick up where we left off at that first panel
    for the second panel.
        Secondly, we do not have any government officials here
    today, which means that the front row, which is usually
    reserved for their entourages, is available. So if people would
    like to sit in those seats, please feel free. There are people
    standing up. I do not think we will have any deputy assistant,
    executive whatever whispering in anybody's ear today, so the
    rest of you should feel free to sit there, and you can look
    bureaucratic if you think you will fit in better.
        Dr. Stiglitz.

    STATEMENT OF JOSEPH E. STIGLITZ, PROFESSOR, COLUMBIA UNIVERSITY

        Mr. Stiglitz. Mr. Chairman and members of the committee,
    first let me thank you for holding these hearings. The subject
    could not have been more timely.
        Our financial system has failed us. A well-functioning
    financial system is essential for a well-functioning economy.
    Our financial system has not functioned well, and we are all
    bearing the consequences. There is virtual unanimity that part
    of the reason that it has performed so poorly is due to
    inadequate regulations and due to inadequate regulatory
    structures.
        I want to associate my views with Dr. Rivlin's in that it
    is not just a question of too much or too little; it is the
    right regulatory design.
        Some have argued that we should wait to address these
    problems. We have a boat with holes, and we must fix those
    holes now. Later, there will be time to address these longer-
    run regulatory problems. We know the boat has a faulty steering
    mechanism and is being steered by captains who do not know how
    to steer, least of all in these stormy waters. Unless we fix
    both, there is a risk that the boat will go crashing on some
    rocky shoals before reaching port. The time to fix the
    regulatory problems is, thus, now.
        Everybody agrees that part of the problem is a lack of
    confidence in our financial system, but we have changed neither
    the regulatory structures, the incentive systems nor even those
    who are running these institutions. As we taxpayers are pouring
    money into these banks, we have even allowed them to pour out
    moneys to their shareholders.
        This morning, I want to describe briefly the principal
    objectives and instruments of a 21st Century regulatory
    structure. Before doing so, I want to make two other prefatory
    remarks.
        The first is that the reform of financial regulation must
    begin with the broader reform of corporate governance. Why is
    it that so many banks have employed incentive structures that
    have served stakeholders, other than the executives, so poorly?
        The second remark is to renew the call to do something
    about the homeowners who are losing their homes and about our
    economy which is going deeper into recession. We cannot rely on
    trickle-down economics--throwing even trillions of dollars at
    financial markets is not enough to save our economy. We need a
    package simply to stop these things from getting worse and a
    package to begin the recovery. We are giving a massive blood
    transfusion to a patient who is hemorrhaging from internal
    bleeding, but we are doing almost nothing to stop that internal
    bleeding.
        Let me begin with some general principles. It is hard to
    have a well-functioning, modern economy without a good
    financial system. However, financial markets are not an end in
    themselves but a means. They are supposed to mobilize savings,
    to allocate capital, and to manage risk, transferring it from
    those less able to bear it to those more able. Our financial
    system encourages spendthrift patterns, leading to near zero
    savings. They have misallocated capital; and instead of
    managing risk, they have created it, leaving huge risks with
    ordinary Americans who are now bearing the huge costs because
    of these failures.
        These problems have occurred repeatedly and are pervasive.
    This is only the latest and the biggest of the bailouts that
    have become a regular feature of our peculiar kind of
    capitalism. The problems are systemic and systematic. These
    systems, in turn, are related to three more fundamental
    problems.
        The first is incentives. Markets only work well when
    private rewards are aligned with social returns, but, as we
    have seen, that has not been the case. The problem is not only
    with incentive structures and it is not just the level, but it
    is also the form, which is designed to encourage excessive
    risk-taking and to have shortsighted behavior.
        Transparency. The success of a market economy requires not
    just good incentive systems but good information. Markets fail
    to produce sufficient outcomes when information is imperfect or
    asymmetric. Problems of lack of transparency are pervasive in
    financial markets. Nontransparency is a key part of the credit
    crisis that we have experienced in recent weeks. Those in
    financial markets have resisted improvements such as more
    transparent disclosure of the cost of stock options, which
    provide incentives for bad accounting. They put liabilities off
    balance sheets, making it difficult to assess accurately their
    net worth.
        There is a third element of well-functioning markets--
    competition. There are a number of institutions that are so
    large that they are too big to fail. They are provided an
    incentive to engage in excessively risky practices. It was a
    ``heads I win,'' where they walk off with the profits, and a
    ``tails you lose,'' where we, the taxpayers, assume the losses.
        Markets often fail; and financial markets have, as we have
    seen, failed in ways that have large systemic consequences. The
    deregulatory philosophy that has prevailed during the past
    quarter century has no grounding in economic theory nor
    historical experience. Quite the contrary, modern economic
    theory explains why the government must take an active role,
    especially in regulating financial markets. Regulations are
    required to ensure the safety and soundness of individual
    financial institutions and of the financial system as a whole
    to protect consumers, to maintain competition, to ensure access
    to finance for all, and to maintain overall economic stability.
        In my remarks, I want to focus on the outlines of the
    regulatory structure, focusing on the safety and the soundness
    of our institutions and on the systematic stability of our
    system. In thinking about a new regulatory structure for the
    21st Century, we need to begin by observing that there are
    important distinctions between financial institutions that are
    central to the functioning of the economic system whose
    failures would jeopardize the economy, those who are entrusted
    with the care of ordinary citizens' money, and those who prove
    investment services to the very wealthy.
        The former include commercial banks and pension funds.
    These institutions must be heavily regulated in order to
    protect our economic system and to protect the individuals
    whose money they are supposed to be taking care of. There needs
    to be strong ring-fencing of these core financial institutions.
    We have seen the danger of allowing them to trade with risky,
    unregulated parties, but we have even forgotten basic
    principles. Those who managed others' money inside commercial
    banks were supposed to do so with caution.
        Glass-Steagall was designed to separate more conservative
    commercial banking concerned with managing the funds of
    ordinary Americans with the more risky activities of investment
    banks aimed at upper income Americans. The repeal of Glass-
    Steagall not only ushered in a new era of conflicts of interest
    but also a new culture of risk-taking in what are supposed to
    be conservatively managed financial institutions.
        We need more transparency. A retreat from mark-to-market
    would be a serious mistake. We need to ensure that incentive
    structures do not encourage excessively risky, shortsighted
    behavior, and we need to reduce the scope of conflicts of
    interest, including at the rating agencies, conflicts of
    interest which our financial markets are rife with.
        Securitization for all of the virtues in diversification
    has introduced new asymmetries of information. We need to deal
    with the consequences.
        Derivatives and similar financial products should neither
    be purchased nor produced by highly regulated financial
    entities unless they have been approved for specific uses by a
    financial product safety commission and unless their uses
    conform to the guidelines established by that commission.
        Regulators should encourage the move to standardized
    products. We need countercyclical capital adequacy and
    provisionary requirements and speed limits. We need to
    proscribe excessively risky and exploitive lending practices,
    including predatory lending. Many of our problems are a result
    of lending that was both exploitive and risky. As I have said,
    we need a financial product safety commission, and we need a
    financial system stability commission to assess the overall
    stability of the system.
        Part of the problem has been our regulatory structures. If
    government appoints as regulators those who do not believe in
    regulation, one is not likely to get strong enforcement. The
    regulatory system needs to be comprehensive. Otherwise, funds
    will flow through the least regulated part.
        Transparency requirements in part of the system may help
    ensure the safety and soundness of that part of the system but
    will provide little information about systemic risks. This has
    become particularly important as different institutions have
    begun to perform similar functions.
        Anyone looking at our overall financial system should have
    recognized not only the problems posed by systemic leverage but
    also the problems posed by distorted incentives. Incentives
    also play a role in failed enforcement and help explain why
    self-regulation does not work. Those in financial markets had
    incentives to believe in their models. They seemed to be doing
    very well. That is why it is absolutely necessary that those
    who are likely to lose from failed regulation--retirees who
    lose their pensions, homeowners who lose their homes, ordinary
    investors who lose their life savings, workers who lose their
    jobs--have a far larger voice in regulation. Fortunately, there
    are competent experts who are committed to representing those
    interests.
        It is not surprising that the Fed failed in its job. The
    Fed is too closely connected with financial markets to be the
    sole regulator. This analysis should also make it clear why
    self-regulation will not work or at least will not suffice.
        Mr. Kanjorski. [presiding] Doctor, please wrap up.
        Mr. Stiglitz. I noted that there has to be an alignment of
    private rewards and social returns. I think it is imperative
    that we make those who have contributed to the problem, the
    financial sector, now pay for the cleanup.
        Financial behavior is also affected by many other parts of
    our tax and legal structures. Financial market reform cannot be
    fully separated from reform in these other laws. For instance,
    our tax laws, particularly the preferential treatment of
    capital gains--
        The Chairman. Joe, he's nicer than me, so you have to stop
    it.
        Mr. Stiglitz. Okay. Let me just say that there is also an
    international dimension, that we can redesign our financial
    system to actually encourage innovation. We have had bad
    innovation. The agenda for regulatory reform is large. It will
    not be completed overnight. But we will not begin to restore
    confidence in our financial system until and unless we begin
    serious reform.
        Let me submit my whole statement for the record.
        The Chairman. Yes, we are going to have a lot of questions.
    There will be elaboration and a chance to elaborate with
    questions.
        [The prepared statement of Mr. Stiglitz can be found on
    page 149 of the appendix.]
        The Chairman. Dr. Seligman.

     STATEMENT OF JOEL SELIGMAN, PRESIDENT, UNIVERSITY OF ROCHESTER

        Mr. Seligman. Mr. Chairman, we have reached a moment of
    discontinuity in our Federal and State systems of financial
    regulation that will require a comprehensive reorganization.
    Not since the 1929-1933 period, has there been a period of such
    crisis and such need for a fundamentally new approach to
    financial regulation.
        Now, this need is only based, in part, on the economic
    emergency. Quite aside from the current emergency, finance has
    fundamentally changed in recent decades while financial
    regulation has moved far more slowly.
        First, in the New Deal period, most finance was atomized
    into separate investment banking, commercial banking, or
    insurance firms. Today, finance is dominated by financial
    holding companies which operate in each of these and cognate
    areas such as commodities.
        Second, in the New Deal period, the challenge of regulation
    was essentially domestic. Increasingly, our fundamental
    challenge in financial regulation is international.
        Third, in 1930, approximately 1.5 percent of the American
    people directly owned stock on the New York Stock Exchange.
    Today, a substantial majority of Americans own stock directly
    or indirectly through pension plans or mutual funds. A dramatic
    deterioration in stock prices affects the retirement plans and
    sometimes the livelihoods of millions of Americans.
        Fourth, in the New Deal period, the choice of financial
    investments was largely limited to stock, debt, and to bank
    accounts. Today, we live in an age of increasingly complex
    derivative instruments, some of which, as recent experience has
    painfully shown, are not well-understood by investors and, on
    some occasions, by issuers or counterparties.
        Fifth, and most significantly, we have learned that our
    system of finance is more fragile than we earlier had believed.
    The web of interdependency that is the hallmark of
    sophisticated trading today means when a major firm such as
    Lehman Brothers is bankrupt, cascading impacts can have
    powerful effects on an entire economy.
        Against this backdrop, what lessons does history suggest
    for the committee to consider as it begins to address the
    potential restructuring of our system of financial regulation?
        First, make a fundamental distinction between emergency
    rescue legislation, which must be adopted under intense time
    pressure, and the restructuring of our financial regulatory
    order, which will be best done after systematic hearings and
    which will operate best when far more evidence is available.
        The creation of the Securities and Exchange Commission, for
    example, and the adoption of six Federal securities laws
    between 1933 and 1940 was preceded by the Stock Exchange
    Practices hearings of the Senate Banking Committee and
    counterpart hearings in the House between 1932 and 1934.
    Second, I would strongly urge each House of Congress to create
    a select committee similar to that employed after September
    11th to provide a focused and less contentious review of what
    should be done. The most difficult issues in discussing
    appropriate reform of our regulatory system become far more
    difficult when multiple congressional committees with
    conflicting jurisdictions address overlapping concerns.
        Third, the scope of any systematic review of financial
    regulation should be comprehensive. This not only means that
    obvious areas of omission today such as credit default swaps
    and hedge funds need to be part of the analysis, but it also
    means, for example, our historic system of State insurance
    regulation should be reexamined. In a world in which financial
    holding companies can move resources internally with
    breathtaking speed a partial system of Federal oversight runs
    an unacceptable risk of failure. Fourth, a particularly
    difficult issue to address will be the appropriate balance
    between the need for a single agency to address systemic risk
    and the advantages of expert specialized agencies. There is
    today an obvious and cogent case for the Federal Reserve System
    and the Department of the Treasury to serve as a crisis manager
    to address issues of systemic risk, including those related to
    firm capital and liquidity. But to create a single clear crisis
    manager only begins analysis of what appropriate structure for
    Federal regulation should be. Subsequently, there must be
    considerable thought as to how best to harmonize the risk
    management powers with the role of specialized financial
    regulatory agencies that continue to exist.
        Existing financial regulatory agencies, for example, often
    have dramatically different purposes and scopes. Bank
    regulation, for example, has long been focused on safety
    insolvency, securities regulation on investor protection.
        Similarly, these differences and purposes in scope in turn
    are based on different patterns of investors, retail versus
    institutional for example, different degrees of
    internationalization and different risk of intermediation in
    specific financial industries. The political structure of our
    existing agencies is also strikingly different. The Department
    of the Treasury, of course, is part of the Executive Branch.
    The Federal Reserve System and the SEC, in contrast, are
    independent regulatory agencies. But, the SEC's independence
    itself as a practical reality is quite different from the
    Federal Reserve System with a form of self-funding than for the
    SEC and most independent regulatory agencies whose budgets are
    presented as part of the Administration's budget. Underlying
    any potential financial regulatory reorganization are pivotal
    questions I urge this committee to consider, such as what
    should be the fundamental purpose of new legislation, should
    Congress seek a system that effectively addresses systemic
    risk, safety insolvency, investor consumer protection, or other
    overarching objectives.
        How should Congress address such topics as coordination of
    inspection examination, conduct or trading rules enforcement of
    private rules of action? Should new financial regulators be
    part of the Executive Branch or independent regulatory
    agencies? Should the emphasis in the new financial regulatory
    order be on command and control to best avoid economic
    emergency or on politicization to ensure that all relevant
    views are considered by financial regulators before decisions
    are made? How do we analyze the potentialities of new
    regulatory norms in the increasingly global economy? What role
    should self-regulatory organizations such as FINRA have in a
    new system of financial regulations? These and similar
    questions should inform the most consequential debate over
    financial regulation that we have experienced since the new
    deal period.
        [The prepared statement of Mr. Seligman can be found on
    page 140 of the appendix.]
        The Chairman. And finally, Manuel Johnson, Mr. Johnson.

      STATEMENT OF THE HONORABLE MANUEL H. JOHNSON, JOHNSON SMICK
                          INTERNATIONAL, INC.

        Mr. Johnson. Thank you, Mr. Chairman. The current state of
    the U.S. financial regulatory system is a result of an extreme
    breakdown in confidence by the credit markets in this country
    and elsewhere so that U.S. regulatory authorities have
    determined it necessary to practically underwrite the entire
    process of credit provision to private borrowers. All
    significant U.S. financial institutions that provide credit
    have some form of access to Federal Reserve liquidity
    facilities at this time. All institutional borrowers through
    the commercial paper market are now supported by the Federal
    Reserve System.
        Many of the major institutional players in the U.S.
    financial system have recently been partially or fully
    nationalized. While it appears that the Federal Reserve, along
    with other central banks, have successfully addressed the fear
    factor regarding access to liquidity, there are lingering fears
    in the markets about the economic viability of many financial
    firms due to the poor asset quality of their balance sheets.
    All of these measures to restore confidence are the result of
    huge structural and behavioral flaws in the U.S. financial
    system that led to excessive expansion in subprime mortgage
    lending and other credit related derivative products.
        Because these structural problems have encouraged distorted
    behavior over a long period of time, it will take some time to
    completely restore confidence in these credit markets. However,
    over time, as failed financial institutions are resolved
    through private market mergers or asset acquisitions and
    government takeovers and restructurings, confidence in the U.S.
    credit system should be gradually restored. Unfortunately, this
    will likely be very costly to U.S. taxpayers. Over the longer
    term, the public, I think, should be very concerned about the
    implications of the legislative and regulatory efforts to deal
    with this crisis of confidence.
        From my perspective, permanent government control over the
    credit allocation process is economically inefficient and
    potentially even more unstable. One of the major reasons why
    excesses developed in housing finance was a failure of Federal
    regulators to adequately supervise the behavior of bank holding
    companies. Specifically, the emergence of structured investment
    vehicles (SIVs), an off-balance sheet innovation by bank
    holding companies to avoid the capital requirements
    administered by the Federal Reserve, set in motion a virtual
    explosion of toxic mortgage financings.
        While the overall structure of bank capital reserve
    requirements was sound relative to bank balance sheets,
    supervisors were simply oblivious to bank exposures off the
    balance sheet. If bank supervisors could not police the
    previous and much less pervasive regulatory structure, you can
    imagine the impossibility of policing a vastly more extensive
    and complicated structure. Again, while bank capital
    requirements are reasonably well-designed today, it is
    supervision that is a problem. The U.S. financial system has
    been the envy of the world. Its ability to innovate and
    disburse capital to create wealth in the United States and
    around the globe is unprecedented. A new book by my colleague,
    David Smick, entitled, ``The World is Curved,'' documents the
    astonishing benefits the U.S. financial system has provided in
    the process of globalization. The book also clearly describes
    the dangers presented by regulatory and structural weaknesses
    today.
        It would be a mistake to roll back the clock on the gains
    made in U.S. finance over the last several decades. As the
    current crisis of confidence subsides and stability is
    restored, U.S. regulators should develop clear transition plans
    to exit from direct investments in private financial
    institutions and attempt to roll back extended guarantees to
    credit markets beyond the U.S. banking system. Successfully
    supervising the entire U.S. credit allocation process is simply
    impossible without dramatically contracting the system. More
    resources and effort should be put into supervision of bank
    holding companies. Financial regulators should focus on the
    full transparency of securitization development and clearing
    systems. Accurate disclosure of risk is the key to effective
    and sound private sector credit allocation. Reforms following
    these type principles should help maintain U.S. prominence in
    global finance and enhance living standards both domestically
    and internationally. Thank you, Mr. Chairman.
        [The prepared statement of Mr. Johnson can be found on page
    121 of the appendix.]
        The Chairman. Thank you.
        We will begin the questioning with Mr. Kanjorski. I remind
    members on the Democratic side that if we have to cut this off
    we will begin--if we have to stop at some point to let these
    witnesses go, we will begin questioning with those members who
    did not get a chance to question in the first panel. So you
    might decide if you want to talk to them or the next group. It
    is your choice. The gentleman from Pennsylvania.
        Mr. Kanjorski. Thank you very much, Mr. Chairman.
    Gentlemen, there have been suggestions out there from various
    members of the panel that we create some sort of commission or
    select committee. And I assume that is so that we could get to
    the basis of what the cause of the present economic situation
    is and where there is a failure or a weakness in the existing
    system. I guess my question to you is, one, is this ever
    attainable or is it not only an economic problem but also a
    political problem? I notice of late and even occurring here
    today that there is a constant argument about who is at fault.
        I have heard a lot of my colleagues question that it is
    truly a problem of the Clinton Administration. And then someone
    said no, it is really a problem of the Buchanan Administration.
    And going all the way back, I am not sure whose fault it is.
    Maybe it is the fault of George Washington; if we didn't have
    the country, we wouldn't have the problem. But before we can
    get to a clean-up situation, would you recommend that almost
    immediately we take steps to create either a commission
    empowered for 90 or 180 days to report back to the Congress to
    get some equilibrium as to cause so that we can then decide
    legislatively how to approach this? And particularly, before I
    turn it over to you all for answers, I was impressed in
    listening to you that if you remember just 3 years ago, the
    country was in the throes of almost a 50/50 argument that
    Social Security should be privatized.
        And at that time, the argument was being made that, look,
    if we did that, how much greater that would be to the
    assistance of people having a better retirement. And I didn't
    hear a lot of people raise objections to the risk. It was like,
    great idea, let us do it. And I just keep thinking as I meet
    with my constituents today how, thank God, 3, 3\1/2\ years ago,
    this country didn't fall into that terrible trap or we would
    really have a disaster on our hands in terms of all of the
    Social Security funds that probably would have been lost by
    this time.
        So what I am sort of asking you for is, if you can, give us
    an outline of how we would start this--a commission, a select
    committee, whether or not then we should go to the regular
    order of the Congress, how to act, and can we do it without
    establishing some basic foundation, if I may? Dr. Seligman.
        Mr. Seligman. I think there are two different fundamental
    needs. First, you need some mechanism for investigating the
    relevant facts. And a challenge you have is because so many of
    the financial regulators were involved in regulation which has
    been called somewhat into question, how to create an
    independent mechanism. In 1987, after the stock market crashed
    then there were a number of reports. Some came from Congress.
    There was a particularly good one in that case that came from
    the Department of the Treasury. But one of the first things you
    should do is see if through Congress or otherwise you want to
    stimulate some sort of special study on a timeline which will
    be able to present to you a comprehensive report on what has
    happened.
        Second, and the point I stressed in my testimony, select
    committees, I think, are important for a different reason.
    Different congressional committees have different jurisdiction.
    To give you an illustration, this committee has a very broad
    ambit but it does not, for example, have within its scope the
    Commodities Futures Trading Commission, which reports to a
    separate committee. Given the urgency with which you should
    address financial futures and credit derivatives which have
    been not clearly allocated in our current regulatory scheme, a
    select committee would be a mechanism to a more comprehensive
    review. You could have everybody at the table hearing the same
    evidence and hopefully get to the appropriate resolution.
        Mr. Kanjorski. Very good. Dr. Stiglitz.
        Mr. Stiglitz. I agree that one needs to approach this
    comprehensively. I think that looking at the past and what has
    caused this problem is only part of what needs to be done,
    because there are all kinds of crises we could have had and
    that we will have in the future. We are looking at this in a
    way parochially as Americans. This has been a global crisis.
    Countries that didn't have our particular institutions have
    also had problems. And so I think we really need to think about
    this looking forward, taking into account the changes in the
    financial markets that have occurred, what are the risks, and
    how do we manage those risks. And I guess a final point, I
    think one of the real difficulties is the very large role of
    the special interest at play in shaping our current financial
    structures, regulatory structures, the failures of the current
    financial regulators are going to make it very difficult to go
    forward. That is something you just have to take into account,
    that they are going to try to shape the regulations to allow
    them to keep doing what they did in the past because it worked
    for them.
        The Chairman. Mr. Neugebauer.
        Mr. Neugebauer. Thank you, Mr. Chairman. Mr. Johnson, in
    your testimony you said regulators should develop a clear
    transition plan to exit from the direct government investments
    and credit backstops moving forward. And quite honestly, I
    agree that we need an exit strategy. One of the reasons that I
    voted against the plan, not once, but twice, was that nobody
    was really ever able to articulate a clear exit strategy of
    this major market intervention by the Federal Government. Can
    you elaborate a little bit more on when, in your estimation, it
    becomes appropriate to begin that transition where we begin to
    back the elephant out of the room, so to speak, and let these
    markets, you know, return to an environment where the
    government is not intervening?
        Mr. Johnson. Yes, Congressman. Well, I agree with some of
    the other comments here that something like a select committee
    could be organized to look at this problem in a comprehensive
    way. I don't really have much input on the best organization to
    deal with this issue because there are many oversight
    organizations that have been set up over the years to cover
    almost all aspects of the regulatory sector. But I do strongly
    believe that once financial markets are stabilized and
    confidence is restored, we should have a transition plan and an
    exit strategy. A specific exit date is important even if that
    date is somewhat arbitrary.
        I am not a believer in central government control over the
    entire credit allocation process. I am a believer in strong
    supervision and regulation over those aspects of the financial
    system that are underwritten by the U.S. taxpayer such as the
    banking sector. But what worries me now is we have spread the
    U.S. Federal safety net over the entire financial system, the
    entire credit allocation process today. And I think we must
    determine an exit from that. The risk reward structure is what
    drives this economy and we have failed miserably to supervise
    the safety net and keep it more narrowly focused.
        We have allowed excessive risk-taking with no
    accountability and no transparency in the risk process. And
    therefore, today we are afraid to let anyone fail because we
    don't know what the systemic damage of this might be. Failure
    is a critical part of this system. Yes, there must be rewards
    for risk-taking. But if you can't fail when you make bad
    mistakes, the system is broken and you might as well just go to
    total control.
        So I would say that once a comprehensive review has been
    undertaken, you should rationalize the regulatory structure, in
    my opinion, as narrowly as possible to limit the safety net.
    But, I wouldn't favor doing that unless people were accountable
    for their risk-taking. And so--but I would favor shrinking this
    back to the bank holding company structure and of course having
    as much disclosure and transparency as possible in the
    securitization process so that risk takers know what risks they
    are taking. And I can't say the exact moment at which that
    should be done, but it should be done when you have
    rationalized in a comprehensive way and feel strongly that you
    understand what has happened and that the supervisory structure
    is adequate. But I think the sooner the better that you can get
    on with that I would favor.
        Mr. Neugebauer. Well, you did a great job. I had two more
    questions for you and you answered both of those. And so I
    appreciate that. Just a lightning round here. One of the
    concerns I have is there has been a lot of talk about systemic
    risk. And I think, Mr. Stiglitz, you mentioned ``too big to
    fail.'' Yet part of the plan here is that we are encouraging a
    massive consolidation of entities here, and are we, in fact,
    continuing to add to the systemic risk in the marketplace.
        Mr. Stiglitz. I actually remarked on that. I think it is a
    very serious problem, and I think part of a general failure to
    enforce antitrust laws in the last few years. And so one of the
    things I think is part of your exit strategy is that we have to
    think about breaking up some of the big banks and realizing
    that actually the economies of scale are not as big. And one of
    the things that I think has facilitated this growth has been
    the recognition that they are too big to fail and will put our
    money there because the government implicitly or explicitly is
    going to guarantee them.
        The Chairman. Thank you.
        Mr. Seligman. Let me just make a quick--
        The Chairman. Very quickly, Mr. Seligman.
        Mr. Seligman. There is another aspect of systemic risk, and
    that is counterparties. That is with derivative instruments.
    That is regardless of the size of the institution if it is
    linked to other institutions through transactions where the
    failure of one can set in a cascading effect. That is what the
    real risk with Lehman Brothers turned out to be.
        The Chairman. I recognize the gentleman from New York and
    ask you to give me 15 seconds. It occurs to me that what we
    should be looking for as an offset to the doctrine of ``too big
    to fail,'' we should have a rule of ``too failing to be big,''
    and that is the job of regulation. The gentlewoman from New
    York.
        Mrs. Maloney. Thank you, Mr. Chairman. I would like to
    welcome all the panelists and mention to Dr. Stiglitz that I
    have enjoyed your books, particularly the latest one, ``The $3
    Trillion War.'' And I would like to reference your written
    comments where you said that America's financial markets have
    engaged in anticompetitive practices, especially in the area of
    credit cards. And you go further on to say, and I quote, ``the
    huge fees have helped absorb the losses from their bad lending
    practices, but the fact that the profits are so huge should be
    a signal that the market has not been working well.'' I do want
    to note that the Federal Reserve has also called credit
    practices and credit cards unfair deceptive and anticompetitive
    and this committee and this House passed in a bipartisan way
    reform legislation in this area, so we are acting in that area.
        You also mentioned that one of the problems is the lack of
    transparency. I would like to hear your ideas on a master super
    counterparty netting system. The idea of the system would be to
    provide a complete and transparent view of the entire financial
    system which would require every dealer to download all
    transactions every night, including all international. This
    would be in one place, an international area that would have a
    transparency so that we could track what is happening in the
    system. We know that derivatives are a huge part of it. But to
    date, the credit derivatives have been what we have focused on,
    yet they are only 10 percent of the global derivatives volume,
    so we may have an even larger problem that we have no idea how
    wide it is, and with such a super counterparty netting system,
    add more transparency, and help us move forward towards a
    better knowledge about our markets.
        Mr. Stiglitz. I think that would help. One of the things I
    commented on in my remarks was the need for standardization of
    these products. Because one of the problems is that if they are
    very complex, it is hard to know what is being netted. And so
    part of what needs to be done is moving towards more
    standardization which would allow greater transparency in the
    products themselves and greater competition in the market. When
    you have highly differentiated products it is more likely that
    they will be less transparent and that markets will be less
    competitive.
        Mrs. Maloney. Thank you. What I am hearing from my
    constituents is they are not getting access to credit still,
    even though it was reported Monday that the credit markets are
    easing. And these are established businesses, small and large,
    that are paying their loans on time, yet some banks are pulling
    their loans. This could be a downward spiral forcing them into
    bankruptcy, hurting our economy. So I would like to ask Ms.
    Rivlin, would one approach to help the stability in the credit
    markets be that at the very least, we could guarantee the
    loaning between the banks and have a blanket guarantee of new
    short-term loans to one another by the central banks? Would
    that be helpful in this regard? We have seen, so far, a
    piecemeal approach, as has been mentioned by the panelists, and
    not only in America, but in Europe and Asia as well. This
    obviously requires a high degree of international cooperation.
    I welcome your remarks and other panelists on this idea. Would
    that ease the credit? Would that help us get the credit out to
    the substantial businesses that are employing paying taxes part
    of our economy?
        Ms. Rivlin. I am sorry, a guarantee of interbank lending?
    Well, that has been discussed. I think we may not need that. It
    does look as though interbank lending is coming back. And the
    international cooperation doing the same thing in different
    financial markets has been actually I think quite impressive
    that the central banks and treasuries have been working
    together. So I am not sure that we actually need at this point
    a guarantee of interbank lending. The interbank lending rates
    are coming down and the capital injection, it seems to me, is
    probably going to be enough to do that.
        Mrs. Maloney. Mr. Stiglitz.
        Mr. Stiglitz. I am not sure that the capital injection is
    going to be enough. But I do feel nervous about guaranteeing
    individual loans. I think guaranteeing interbank lending again
    would facilitate that market. But that itself, again, is not
    going to suffice. The real problem and the reason that we want
    to have a good financial system is that credit is the life
    blood of an economy. And when there is the degree of
    uncertainty going into an economic downturn, the fundamental
    problem, the hemorrhaging at the bottom, the foreclosures are
    going to continue because house prices are going to fall. If we
    aren't doing anything about either the stimulus, the
    stimulating economy, or about the foreclosure, banks are going
    to be more conservative. And so I think it was necessary to
    recapitalize the banks but it is not going to be sufficient to
    address our problems.
        The Chairman. Mr. LaTourette.
        Mr. LaTourette. Thank you, Mr. Chairman. Dr. Stiglitz, I
    want to thank you for your testimony. I want to thank everybody
    for your testimony. But Dr. Stiglitz, your testimony hit on all
    the points that I think I was attempting to make in my opening
    remarks. The first question I have for you is, I am over here,
    Dr. Stiglitz. I am one of the few guys with a beard in the room
    besides you. You made the observation during your truncated
    opening remarks that there was a feeling at least on your part
    and I think it is one that is shared by a lot of people that
    the people who made the mess should clean up the mess. And in
    my part of the world in Ohio, people believe that not only
    includes paying in dollars, but some people think people should
    go to prison. I agree with that if you have broken the rules
    and cost people their life savings. But I think I would ask
    you, what do you mean, and how would you envision that the
    people who have made the mess pay for the mess, clean up the
    mess?
        Mr. Stiglitz. In my more extended remarks, I gave the
    analogy that in environmental economics, we have a principle
    called ``pollute or pay.'' And financial markets have polluted
    our economy with toxic mortgages and they need, ought to pay
    for the clean-up. The fact is that we are providing now capital
    to the financial sector taking advantage of the low cost of
    funds that the government has. And the criteria that we have
    set is that we just get paid back that low cost funds. I think
    that what I had in mind is that if it turns out that we don't
    make a good return on the money that we have put into the
    financial system, and I mean not a zero return, but above the
    zero because we bore a risk, that there be some form of
    taxation of the financial institutions that have made use of
    these funds. For instance, a tax on excessive capital gains
    imposed on these financial institutions.
        Mr. LaTourette. I agree with you. I think that is why some
    of us weren't so crazy about the bailout of $700 billion,
    because it didn't have one that guaranteed. And it seemed that
    rather than finding different ways to take care of this, we
    just gave $700 billion to folks and said, we hope that these
    toxic assets have a market value some day in the future, which
    is a big ``if'' for a lot of money.
        The other observation you made was about a transfusion, the
    $700 billion being a transfusion given to a hemorrhaging
    patient, I think were your words. And that--did it have to be
    just from your observation a publicly financed bailout? There
    was a proposal for instance for repatriation of offshore funds
    held by American corporations to buy these toxic assets who
    then obviously would receive something in the form of a capital
    gains treatment if they bought them, created a market for them,
    and held them. Do you think--I mean, a lot of people, we talk
    about greed, we talk about lack of regulation or poor
    regulation, we talk about people overborrowing, buying houses
    they had no business buying. But doesn't it offend your
    sensibility, I guess, that all this bailout has to come from
    the public sector at this moment in time?
        Mr. Stiglitz. It does offend my sensibilities, but I don't
    think there was any alternative. In earlier crises in 1997 and
    1998, the global financial crisis, there was a lot of talk of
    what they called bailing on the private sector. But individual
    private investors are not going to go into the morass of our
    financial markets where there was so little transparency. Those
    who went in at the beginning got burned. And so I think there
    were--and the magnitudes involved required were just too large
    to be able to get that from the private sector. So one had to
    do something. But it could not have been done in a much worse
    way than the way it was done in terms of protecting American
    taxpayers.
        Mr. LaTourette. And the last observation that you made, you
    said the retreat from mark to market would be not a good thing.
    And, at least from my observation, I have been told that about
    $5 trillion in liquidity has been taken out of the market just
    by the mark to market principles. And so rather than coming up
    with another bad regulation on mark to market or retreating
    from it, since there is no market for some of these assets, and
    that is creating the double whammy: One, you are marking down
    your portfolio; and two, you have to store away more cash for
    safety and soundness, could we replace mark to market with
    something else such as intrinsic value so that we could create
    a level of value for an asset.
        Mr. Stiglitz. Well, I think that it is imperative to
    continue with mark to market. When there is no market, as is
    the case in some assets, obviously you can't mark to market,
    you have to use some other principle. The issue is what you do
    with mark to market. I had a very brief reference to
    countercyclical provisioning which takes into account what
    happens in these kinds of situations to market values. What I
    find very interesting is that those who have criticized mark to
    market didn't criticize it when they overestimated the prices
    in the bubble and haven't offered to give back the bonuses that
    were based on those over excessive prices when the market was
    excessively exuberant. They want an asymmetry where when it is
    too low, they will get the market up, when it is too high, they
    will leave it up to high. I think we have to stay with a
    transparent system but think very carefully about how we use
    that information in regulatory processes.
        Mr. LaTourette. Thank you. Mr. Chairman, Mr. Seligman is
    practically jumping out of his chair to comment on the mark to
    market.
        Mr. Seligman. I don't mean to be jumping out of my chair,
    Congressman.
        The Chairman. We worry about jumping out of our chairs all
    the time, or falling out.
        Mr. Seligman. If there is a market, not to use it runs the
    risk of deluding yourself. I mean, it is the essence of
    capitalism that we rely on markets. To suggest there is some
    other intrinsic value other than the markets can lead to
    excessive ebullience in ways that can mislead you terribly.
        The Chairman. Thank you, Mr. Seligman. I am going to
    recognize Ms. Velazquez and take 15 seconds to say that I think
    what we intend to pursue, or what I hope we will pursue, is
    what Mr. Stiglitz said, namely that mark to market is one
    thing, the automatic consequences that result from that are a
    separate thing, and that it is possible to leave mark to market
    in place, but then to make sure that all these negative
    consequences, as the gentleman said, put more cash aside, which
    have a procyclical effect.
        And my own view was that there is a consensus forming about
    a two-step process in which you have mark to market, but which
    you then get flexibility on the consequences. And that will
    be--the ranking member had asked that this be particularly part
    of this hearing. That will be part of our agenda next year. The
    gentlewoman from New York.
        Ms. Velazquez. Thank you, Mr. Chairman. If I may, Ms.
    Rivlin, I would like to address my first question to you. In
    the recent economic crisis, several of our Nation's largest
    financial firms received unprecedented levels of Federal
    resources because regulators believed that they were too big to
    fail. At the same time, many community banks and credit unions
    who did nothing to contribute to our current situation are
    equally affected by the crisis but have been largely left out
    of the Treasury's rescue plans. Given this reality, how will
    this affect consumers in those areas that rely upon community
    banks and credit unions for the credit needs, especially small
    businesses? Every day that we read the news, newspapers, there
    are different stories across the Nation where it is very
    difficult for small businesses to access credit.
        Ms. Rivlin. I think this is a very real problem. The hope
    was that at least stabilizing the major institutions first
    would get credit flowing and that it would help with the rest
    of the system. How to intervene at the community bank and
    credit union level is another question. Part of it, I think,
    goes to intervention in the mortgage markets themselves and to
    finding better ways and with larger amounts of money behind
    them to buy up the mortgages and renegotiate them so that you
    can keep the homeowner in the house where possible or re-sell
    it or re-rent it to somebody else. That strikes me, and Dr.
    Stiglitz mentioned this, as a really important part of this
    puzzle.
        Ms. Velazquez. So let me ask you, Dr. Stiglitz, should a
    revised regulatory framework eliminate this dichotomy where
    some firms are too big to fail and others are too small to
    save?
        Mr. Stiglitz. As I said before, I think we do need to deal
    with the problem of the big banks and have effective antitrust
    enforcement. One of the things that I mentioned about the
    objectives of regulation should be access to finance, access to
    credit. I didn't have time to talk about that, but that is
    really very important. The community banks and the credit
    unions play a very important part in that. And I worry a little
    bit that in the rush to save the stability of our financial
    system, we are not focusing on in the long run, what is the
    most important, is access to finance. I think it would be very
    important to create a monitoring of where the finance is going,
    who is getting it, making sure that there is finance to small
    businesses. And that may necessitate giving some more help to
    the small--to the community banks, local banks, regional banks,
    and credit unions.
        Ms. Velazquez. Ms. Rivlin, even before recent mergers and
    takeovers, the 3 largest banks in the United States control
    more than 40 percent of the industry's total assets. Should
    working families who have watched as their retirement accounts
    dwindled be concerned about this increased level of
    consolidation and what do we as policymakers need to consider
    going forward in an era of increased industry consolidation?
        Ms. Rivlin. I think we do need to worry about it. I think
    it is very hard to figure out exactly how to fix it. And I
    wouldn't want to be the antitrust judge trying this case
    because I don't think we know what the rules are. There was
    reference to Gramm-Leach-Bliley earlier; was that a mistake. I
    don't think so. I don't think we can go back to a world in
    which we separate different kinds of financial services and say
    these lines cannot be crossed. That wasn't working very well,
    nor was our older prohibition under Glass-Steagall of
    interstate banking. You are not old enough to remember that.
    But we can't go back to those days. We have to figure out how
    to go forward. But I think the consolidation of these huge
    financial behemoths is a problem.
        Ms. Velazquez. But the present days are not working either.
        The Chairman. Mrs. Biggert.
        Mrs. Biggert. Thank you, Mr. Chairman. I thank you all for
    your testimony. And like some of you, I want to see a Federal
    entity that supervises and ensures the safety and soundness of
    larger hybrid financial institutions like AIG. Second, that we
    need the FEC to regulate the credit default swaps market,
    revise mark to market accounting, enhance the credibility of
    credit rating agencies, reign in hedge funds, as well as market
    manipulations like the short selling. And third, it is
    essential, I think, that we work towards modernizing mortgage
    and credit product regulations like RESPA, TILA, UDAP and
    determining the fate of Fannie and Freddie. And I will assume
    that you all have read Paulson's Blueprint for a modernized
    financial regulatory structure. The model proposes that instead
    of the functional regulations that we create the three primary
    financial services regulations to focus on market stability
    across the entire financial system and then safety and
    soundness of financial institutions with government guarantee;
    and then third is the business conduct regulations that
    investors and consumers--that gives the investors and consumers
    protection. So I would like to know, in your opinion, is this a
    silver bullet structure that you can paint a picture for us as
    to what the ideal financial services regulatory structure would
    look like? Maybe Mr. Seligman. You talked a lot about the--
        Mr. Seligman. The Department of Treasury Blueprint started
    a conversation and it deserves credit for that. But in spite of
    the fact it was a reasonably long document, it did not seem to
    have the detailed understanding of the purposes of the separate
    regulatory agencies that do exist, understand their advantages,
    and understand their institutional context. I think that is
    important as you consider how to go forward. I thought the
    first tier of recommendations made more sense with respect to
    market stabilization. I call it a crisis manager. There are
    other terms. And clearly the notion that you need to have one
    hand firmly on the till makes sense. I thought scrapping the
    SEC and some of the other initiatives in the second and third
    tier were quite question-begging.
        I was struck by a starkly ideological tone. The notion that
    in effect, the core principles articulated by the Commodities
    Futures Trading Commission, were necessarily the wisest
    approach to address issues like market manipulation is quite
    question-begging. The history of addressing market manipulation
    require statutes, rules, and case determinations. It is quite
    case-specific. Having said that, the point that was useful in
    that exercise, and it was like an academic exercise, was it did
    focus us on the fact that we are not just dealing with an
    immediate economic emergency, we are dealing with a fundamental
    changes in the dynamics that actuate regulation at the Federal
    level. When the underlying markets change, regulation must
    change in constructive ways to address it.
        Mrs. Biggert. Thank you. Ms. Rivlin.
        Ms. Rivlin. I did read the Treasury Blueprint and I didn't
    think it was anything like a silver bullet. And particularly
    because I think as long as we do have big financial
    institutions, maybe they are too big, but we are going to have
    big financial institutions, it is very hard to separate market
    stability from the safety and soundness of those institutions.
    So they were giving one institution the market stability job,
    and another institution the safety and soundness job. They are
    very hard to separate. They would have to work together. I
    don't think it is a cure for the duplication. There were some
    other things in it that were better.
        Mrs. Biggert. Do you think that since we are looking at
    systematic risk which has been such a big problem, then how do
    we fit that into a regulatory structure?
        Mr. Seligman. I would like to suggest that just as in say a
    national security emergency in the White House, you have one
    person definitively in charge of command and control under some
    circumstances. In an economic emergency and to prevent an
    economic emergency, you need someone who is unequivocally or
    some institution that is unequivocally in charge. And it could
    be the Federal Reserve System, it might be the Department of
    the Treasury. But it is not sufficient for it just to be
    reactive to a crisis. The question is, how do you provide
    sufficient information flow, examination, and inspection so we
    can avoid a crisis. The purpose of regulation is not to clean
    up messes but to prevent them. And in that sense one of the, I
    think, pivotal decisions this committee or some committee is
    going to have to wrestle with is, how do we make permanent a
    system of risk avoidance or crisis avoidance? The second
    ordered question, which I touched on briefly in my testimony is
    however that just begins the analysis. The specialized expert
    knowledge that some regulatory agencies have specific
    industries cannot easily be addressed by the crisis manager.
        The Chairman. Thank you. It did strike me as we talked
    about silver bullets that it would have been very appropriate
    to have given it to the Chairman of the Federal Reserve who
    played the role last year of the ``Lone Ranger,'' so he might
    have been appropriately armed. The gentleman from North
    Carolina.
        Mr. Watt. Thank you, Mr. Chairman. It may be fortuitous
    that I am following Mrs. Biggert in asking questions because I
    want to actually go down the same line. It seems to me that in
    the 16 years I have been on this committee, most of our time
    has been spent trying to decide what we legislate and what we
    punt to some regulator to regulate. And this may be the first
    time that we are called on to try to address a different
    question that we started maybe to try to address when we were
    trying to set up the parameters of the regulation of OFHEO, but
    we started with the assumption that there would be an OFHEO.
        This time, we have to figure out what the appropriate
    regulatory structure is. It seems to me that the question we
    have to ask is, how many regulators do we have? And the
    Blueprint that Paulson came out with at least started that
    discussion, I agree. You all have picked his proposal apart, so
    I guess my question to you is, if you picked his proposal
    apart, you didn't like it, how many regulators would you have
    and what jurisdiction or what regulatory oversight, who would
    you put under their jurisdiction or what would you put under
    their jurisdiction? And if I could get each of the four of you
    to address those quickly within my 5 minutes, that would be
    great.
        Ms. Rivlin, I will start with you.
        Ms. Rivlin. I don't think I have a full answer to that yet.
    I think the number of regulators should be less than we have
    now. We clearly have quite a lot of duplication. I think the
    idea of combining the responsibilities of the--
        Mr. Watt. How many and what would they regulate?
        Ms. Rivlin. Well, I am not prepared to give you a number
    like 5 or 3; what I am saying is we can combine some of the
    ones we have to a smaller number. I do think we need a
    regulator of financial behemoths sometimes known as bank
    holding companies that is responsible for making sure that they
    are adequately understanding and not monitoring their own risk.
    I think that is the biggest thing. We have not had that in this
    crisis.
        Mr. Watt. Okay. We have one, one bank holding company
    regulator. Dr. Stiglitz, do you have one?
        Mr. Stiglitz. First, let me just begin by saying I think
    the issue isn't so much the number of regulators.
        Mr. Watt. Well, tell me what they would regulate then? If
    you don't want to tell me a number, tell me in what areas we
    ought to be regulating.
        Mr. Stiglitz. Part of the problem is that we have had
    regulatory capture. So I worry that if we had one regulator
    like the Federal Reserve, it would be captured by the
    investment community.
        Mr. Watt. I worry about that too, but that is a different
    issue. I want to know what--if you didn't have that problem,
    you were setting up an ideal world, there were going to be no
    regulatory capture, what would you--how would you organize
    this? That is the question I keep asking.
        Mr. Stiglitz. I think we need--let me just say, I think the
    cost of duplication is low compared to the cost of failure. So
    we need a system that checks and balances. I think duplication
    is fine. Overall, I think the general problem is you need to
    have somebody sitting on top looking at the whole system, the
    performance of the system. And then underneath that.
        Mr. Watt. All right. We have a system regulator and we have
    a bank holding company regulator.
        Mr. Stiglitz. Underneath that, you have to have somebody
    who understands each of the parts very deeply. And those are
    two separate issues that can be coordinated.
        Mr. Seligman. The system has to be comprehensive. That
    means it has to address some gaping holes such as right now
    like credit default swaps. Second, there has to be some sort of
    risk avoidance or crisis manager at the top. This could be the
    same agency that would address things like financial holding
    companies. Third, you have to have sufficient expert knowledge
    to address a series of specialized industries including
    securities and investment banks, insurance, and commodities.
        Mr. Watt. Those are separate regulators you are describing.
        Mr. Seligman. Well, I think the issue as to whether they
    will ultimately be separate or consolidated should be carefully
    explored. We have five depository institution regulators today.
    I think a case can be made that we don't need that many. You
    then have a separate issue which you haven't touched upon,
    which is we also have State regulation of insurance and we have
    State regulation of banking. How are you going to coordinate
    what you do at the Federal level with the States? Then you have
    yet another issue, which is terribly complex, and that is
    increasingly financial products are sold internationally. How
    do you coordinate what we are doing in this country with what
    is being done abroad?
        So I think you have the right questions, but I think more
    evidence has to come in to flush out the answers.
        Mr. Watt. I think I ran out of time.
        Mr. Johnson. I will be brief. Since I believe that the
    financial regulatory system should be consolidated around bank
    holding companies, I think you need one bank holding company
    regulator. I think the Federal Reserve is already doing that.
    It should continue to be the regulator there. I think that
    their resources are inadequate and their expertise in
    supervision is weak and we need to concentrate on that much
    more. For securitization, which covers a lot of finance, you
    have the SEC.
        Transparency, securitization, and supervising the rules of
    running a clearing system should be an SEC-like function. You
    already have one. I think it could be strengthened. But there
    needs to be coordination between a bank holding company
    regulator and someone overseeing the securities markets. There
    should be mandated coordination to avoid turf battles.
        Mr. Watt. Thank you, Mr. Chairman.
        Mr. Kanjorski. Thank you. Mr. Barrett.
        Mr. Barrett. Thank you, Mr. Chairman. Panel, thank you for
    being here today. I love the idea about the select committee
    and I think that is a great way to start. But Mr. Johnson,
    let's start with you. I am sitting on the select committee and
    you are giving me advice today. The goal of the Federal
    regulation should be what, stability and growth, or to ensure
    that fraud and malfeasance are punished? And of the current
    situation, how much has been caused by lack of enforcement or
    lack of effective regulations?
        Mr. Johnson. Well, certainly, I think punishing malfeasance
    and maintaining the safety and soundness of the market go hand-
    in-hand with growth and prosperity. So I think that those are
    one and the same thing. But in my opinion, supervisory failures
    have been one of the primary factors in this crisis of
    confidence we have had. And even though our regulatory system
    is overlapping and somewhat antiquated, the resources are there
    and the lines of supervision are there to prevent this. We
    didn't prevent it because we failed to detect systemic risk.
    That is one of the reasons why I argue that if you try to
    create a pervasive financial regulatory system, it can't be
    policed by the public sector because we are already failing
    now. So we ought to focus our regulatory and supervisory
    efforts narrowly and pour in all the resources necessary along
    with strong accountability to make it work. We can't control
    everything. And it would be a miserable failure if we tried.
        Mr. Barrett. Mr. Seligman.
        Mr. Seligman. I agree with Mr. Johnson that there have to
    be multiple objectives, and clearly law enforcement would be
    one of them. I think that when you look at the recent failures,
    the reality is the failure of inspection, examination, and
    supervision is a pivotal part. The Office of Inspector General
    of the Securities and Exchange Commission recently did a report
    on Bear Stearns. And it noted that among other apparent causes
    of the failure, there were rules that didn't adequately address
    liquidity, the Commission did not have sufficient staff to
    engage in sufficient examinations, and it did not respond to
    red flags in a meaningful way.
        Apparently someone on the staff changed the requirement
    that was in the so-called consolidated supervised entity
    structure of the SEC that you use outside auditors to internal
    and that didn't rise to the Commission's level for review.
    There wasn't a sense as you saw the Bear Stearns devastation in
    the spring that you almost needed to say what is going on here,
    how systemic is this, this is a crisis, we have to look much
    harder and change rules much faster than we would otherwise.
        There were a lot of different causes. Sometimes regulatory
    agencies have the right rules, sometimes even the right people,
    but don't have the right sense of urgency. Too often, though,
    what you find is they are understaffed, they are underbudgeted
    and they get stuck in a kind of rut of doing the same things
    over and over again and don't respond effectively to changes in
    fundamental dynamics.
        Mr. Barrett. That is a great point. And Dr. Stiglitz, I
    want to ask you, following up on that, do you think our
    regulators have enough discretion to make decisions to modify
    these rules? I mean, is that part of the problem, they feel
    like they are locked in and they can't make some decisions if
    the rules change, if all of a sudden the environment changes
    are they afraid to make decisions?
        Mr. Stiglitz. Well, I think part of the problem in the past
    has been that we have had regulators who didn't believe in
    regulation. So that for instance, it was noted earlier that the
    Fed had authority, more authority to impose regulations than it
    used. And it wasn't until Bernanke became the Governor that
    additional regulations were imposed but it was like closing the
    barn door after the horse was out. So they had more authority
    than they used. And that is why I keep coming back to the issue
    of the incentive of the regulators. And it also comes back to
    the design to the rules. The rules need to be, I think, simple
    enough that there is, and transparent, so that everybody,
    including Congress, can see on an ongoing basis whether there
    is enforcement. And that means for instance restricting in the
    core part of our financial system the commercial banks the
    engagement, the use of some of the derivatives, particularly
    the nonstandardized derivatives so you can't see what is going
    on.
        Mr. Barrett. Thank you, sir. I think my time is up. Thank
    you, Mr. Chairman.
        The Chairman. I thank the gentleman. The gentleman from New
    York.
        Let me say we have talked to the witnesses, and we do want
    to hear from industry people. We are going to break this panel
    at 12:30. A couple of the witnesses have time constraints. We
    will immediately go into the next panel, and we will begin the
    questioning where we left off.
        I would also advise members if you could find any place in
    this area in the building that is serving lunch, on our side at
    least, if members want to go and come back, no one will lose
    his or her place because of that. We do want to try to
    accommodate people in that regard.
        The gentleman from New York is now recognized.
        Mr. Ackerman. Thank you, Mr. Chairman.
        Damon Runyon, less famous for being born in Manhattan,
    Kansas, than writing about Manhattan, New York, didn't write
    about or create characters on either Main Street or Wall
    Street, but more on 42nd Street for plays like Guys and Dolls.
    He created characters that included street hustlers, gamblers,
    and book makers. If he could create a character here who was
    looking at this subprime mess that we are in, he would probably
    create one who wanted to ask a question that went something
    like: How can you make book on a horse that ain't never run
    before?
        And I guess I would ask that question, because there is no
    other character here.
        The Chairman. Does the song follow this?
        Mr. Ackerman. Thankfully, no.
        The Chairman. Okay.
        Mr. Johnson. I will comment on that. I think you are making
    the point that well, okay, if somebody creates a new security
    that has never really been used before so you don't know how it
    might perform--
        Mr. Ackerman. My gosh, you have it.
        Mr. Johnson. --how do you know that it is safe and sound
    and will not add instability to the system? The truth is, you
    don't. But the key to that is transparency. When you register a
    security, you should be required to reveal every aspect of that
    security. The over-the-counter markets in debt securities lack
    in transparency.
        Mr. Ackerman. Should you be putting a credit rating on a
    product that is not rateable because it has no history?
        Mr. Johnson. I don't believe in the credit rating agencies'
    ability to get it right. I think the market can determine those
    things.
        Mr. Ackerman. But you can't bet on a horse unless you look
    at the morning line and see what the odds are.
        Mr. Johnson. Yes. I just think full disclosure is the best
    policy.
        Mr. Ackerman. Okay.
        Mr. Johnson. If a horse has never run, you still don't
    know, but an informed investor can decide for himself. Rating
    agencies have been miserable failures as forecasters.
        Mr. Ackerman. But if an investor is told the odds are 5 to
    1 or 2 to 2 or whatever the odds might be--or the odds are
    AAA--
        Mr. Johnson. Well, you can have rating agencies that want
    to put out ratings and you can read them if you want. But
    mandating reliance on ratings is a mistake.
        Mr. Ackerman. Volunteer rating agencies. Okay.
        Mr. Johnson. Okay.
        Mr. Seligman. Let me just say a kind word for credit rating
    agencies. I don't think anyone does anymore. But to the extent
    they are independent of internal management, even with all the
    conflicts of interest, they give you a fresh set of eyes.
        Mr. Ackerman. Should the owner of the horse pay the bookie
    to rate the horse?
        Mr. Seligman. You are out of my area of expertise. I know
    about securities, but I don't know about bookies.
        Mr. Ackerman. Should a company that is creating securities
    pay for their own rating?
        Mr. Seligman. It happens, currently.
        Mr. Ackerman. I didn't ask you if it happens currently. We
    all know who is paying to get a AAA.
        Mr. Seligman. I appreciate that. But the question is, if
    you eliminate it, how do you evaluate quality?
        Mr. Ackerman. How about if we created a system where you
    can only rate things--if you are a recognized rating agency,
    you can only rate things that are rateable and have an
    experience rating? And not to stifle creativity, you can
    package it, do whatever else you want to structure up by saying
    these products have never run before, they don't have a rating,
    they are three-legged horses; if you want to bet on them,
    buddy, you are on your own.
        Mr. Seligman. Clearly, there are different ways you can
    structure access to the credit rating agency, create different
    rules. All I am suggesting is the headlong rush right now to in
    effect eliminate that as a vehicle for giving some
    independence--not great, but some independence--and a separate
    set of eyes is something we may regret if we move too quickly.
        Mr. Ackerman. Okay. Ms. Rivlin?
        Ms. Rivlin. Two points. I think we should have rating
    agencies paid by the buyer, not the seller. The buy side, not
    the sell side. I think that would be fairly simple. It
    wouldn't--
        Mr. Ackerman. An independent sheet?
        Ms. Rivlin. Pardon? You would have the major investment
    funds pay a small fee to support rating agencies rather than
    the sellers of securities.
        But another point. You said earlier that there was no
    record on the mortgage-backed securities backed by subprime.
    Actually, there was, and the record was pretty good. As long as
    prices were going up, defaults on subprime were minimal. So the
    rating agencies weren't absolutely wrong in using the past. It
    just wasn't--
        Mr. Ackerman. What if there was no past?
        Ms. Rivlin. Well, no, there was a past. Subprime mortgages
    didn't start in 2006. There was a history. Ned Gramlich has set
    this out rather nicely in his book. But the problem was as long
    as prices were going up, housing prices, there were relatively
    small defaults on subprime. So using that history--and there
    was a history--was misleading. As soon as we got to the top of
    the housing market, all the rules changed.
        Mr. Ackerman. As long as all the horses are winning, you
    don't care what you are betting on. That is the market going
    up.
        The Chairman. It is post time for the next race. The
    gentleman from Georgia.
        Mr. Price. Thank you, Mr. Chairman.
        I am not sure how my running shoes are these days, but I
    will give it a try. I want to thank each of you for your
    comments. And I want to have you speak specifically about the
    issue of regulation, deregulation. Each of you mentioned in
    varying degrees of certitude that the issue wasn't whether or
    not we had more regulation or less regulation; it was that we
    had the right regulation.
        There seemed to be some, however, who still hold to the
    notion that there was this fanciful groundswell of deregulation
    that was the cause and genesis of our current situation. I have
    heard that the situation regarding the lack of regulation, or
    appropriate regulation, was due to resources, personnel, sense
    of urgency, lack of flexibility, all those kinds of things.
        I wonder if each of you would comment very briefly about
    this notion that it was deregulation that was the cause of
    where we are right now. Ms. Rivlin?
        Ms. Rivlin. I don't think it was so much deregulation as
    failure to recognize that the markets were changing very
    rapidly and that we needed new kinds of regulation.
        Mr. Price. The nimbleness and flexibility.
        Ms. Rivlin. That certainly is mortgage markets' story,
    derivatives' story.
        Mr. Price. Correct.
        Ms. Rivlin. And we didn't do that. There were people who
    might have done that who were opposed to it, like my former
    colleague Alan Greenspan.
        Mr. Price. Right. Dr. Stiglitz, would you?
        Mr. Stiglitz. I think I agree. It was the deregulation
    philosophy. And that led them not to use all the regulatory
    authority that they had. There was a need, probably, for more
    regulation in certain areas; for instance, the mortgage market
    that we have been talking about.
        Mr. Price. Could it have been accomplished under the
    current structure with the right individuals?
        Mr. Stiglitz. Probably, under the current structure. But if
    you had an attentive regulator, if he didn't have that
    authority--
        Mr. Price. Right.
        Mr. Stiglitz. --he would have gone to Congress and said,
    look, these things are dangerous. And in terms of the question
    that was asked before--
        Mr. Price. I want to run down the panel.
        Mr. Stiglitz. Dangerous--what I want to say is you have to
    ask about not only the recent experience, but knowing the fact
    that house prices can go up, but they can also go down. And you
    have to ask not only what has happened in the last 5 years, or
    even 10 years, but what would happen if the prices returned
    to--or say the price-income ratio returned to a more normal
    level--
        Mr. Price. Right.
        Mr. Stiglitz. --what would happen?
        Mr. Price. Mr. Seligman?
        Mr. Seligman. I think when you look, for example, at the
    Bear Stearns report prepared by the Office of Inspector
    General, a legitimate question can be asked whether or not the
    people who were in charge of enforcement there actually
    believed in it. That is a question of a deregulatory
    philosophy. And it may not be--
        Mr. Price. But it is a deregulatory philosophy, not the act
    of deregulating it. Would you agree with that?
        Mr. Seligman. In that specific instance, yes. More broadly,
    though, when you look at much more serious issues such as the
    loopholes for credit default swaps, and the lack of coverage of
    hedge funds, these are areas where a broader deregulatory
    approach may not have served us particularly well.
        Mr. Price. Thank you. Mr. Johnson?
        Mr. Johnson. Yes, I don't believe the mentality of
    deregulation was the cause, but if you are going to have a
    Federal safety net and protect deposits, then you have to
    regulate and supervise the banking system, and you have to do
    it very well.
        Mr. Price. And--
        Mr. Johnson. Because the taxpayer is extremely exposed. My
    view is that the safety net ought to be as narrow as you can
    make it to allow the market to work, but the market only works
    if failure is part of that process.
        Mr. Price. Right. Thank you. I think we all are interested
    in appropriate regulation, not an absolute unregulated system.
        I want to touch, in my remaining few moments, on a concern
    that I have that much of the criticism of what has gone on I
    believe to be an attack on the capitalist system of markets and
    the ability to take risk and realize reward.
        I wonder if you might comment briefly on whether or not
    financial regulators should try to reduce systemic risk by
    setting limits on private risk-taking. Ms. Rivlin?
        Ms. Rivlin. I think we need limits of various kinds on
    leveraging. I think we were overleveraged in many respects. And
    in respect to the derivatives, I think--or even the credit
    default swaps--was the basic problem that we had credit default
    swaps or was it the people who were trading them were way
    overleveraged? And I would worry about the overleveraging.
        Mr. Price. Dr. Stiglitz, private risk-taking?
        Mr. Stiglitz. I think the core point is that at the center
    of the financial system, the commercial banks, our credit
    system, pension funds, people who are using other people's
    money they don't have--that has to be ring fenced. Outside of
    that, if you can ring-fence that core part, if people want to
    engage in gambling, and we allow them to fail because it won't
    have systemic consequences, that is fine. Let them gamble. But
    in that center part, we do have to restrict risk-taking,
    because we will pick up the pieces when it fails, as we have
    seen.
        Mr. Price. Thank you. Mr. Seligman?
        Mr. Seligman. I think the whole purpose of a Federal
    financial regulatory system in part should be to fortify
    capitalism, to make it more effective. It is not an attack on
    capitalism. It is, rather, a way for it to work most
    effectively.
        Mr. Price. Mr. Johnson.
        Mr. Johnson. Yes, I don't have anything to add. I agree
    with that.
        Mr. Price. Thank you very much. Thank you, Mr. Chairman.
        The Chairman. Thank you. Next we have Mr. Meeks.
        Mr. Meeks. Thank you, Mr. Chairman.
        I don't want to resume the horseracing, but let me just try
    to follow up some on the end of what Mr. Ackerman--I believe
    what he was driving at. And you know, I know that in New York,
    for example, our attorney general has begun an investigation
    into this issue called short selling. It seems as though, you
    know, one can get an unfair advantage--and I think that is
    where Mr. Ackerman was going--in races if you have the spread
    of false information going out. And it seems as though in short
    selling it can, because of false information, even though it is
    an illegal act, affect the price of stock. And you can indeed
    have a manipulation of the market in that regard.
        So my question then is--and I know Mr. Ackerman has a bill
    in this nature--that as a possible response to the
    possibility--or to market manipulation through short-sell
    misinformation, should the Federal Government reinstitute the
    uptick rule and evaluate calling in all the outstanding shorts
    on financial stocks to get a true cash price discovery at this
    time?
        Mr. Seligman. You know, the short-sale rules were adopted
    by the Securities and Exchange Commission in its earlier
    financial emergency in the 1930's, and initially included the
    uptick rule. And it should be reexamined.
        But I think the current debate with respect to short
    selling has focused exactly on the point you just raised, the
    notion that false rumors and short sellers were driving down
    financial institutions. What I don't think is fully apparent
    yet is a number of investigations have been launched by the
    Securities and Exchange Commission, and, I suspect, by the
    Justice Department as well. False information is fraud. It is
    criminally wrong today. It is civilly wrong today.
        In the next few months, we will see whether or not existing
    Federal laws will provide a strong enough deterrent so we are
    less likely to see the dissemination of false rumors in the
    future. I do not think, though, that the uptick rule is a
    silver bullet or a magic wand. It is a regulatory device. It
    may or may not be appropriate. But it is not the real issue
    here. It was the belief that financial institution stocks were
    being pounded down in an inappropriate way. And at the time,
    the enforcement mechanisms were too slow to act.
        Mr. Meeks. So you don't believe that the uptick rule would
    at least--because what happens is the speculation or the
    thought that maybe it was--and I agree, the investigations have
    to go on, and we have to find out what did or did not take
    place. But the confidence in the market or the thought and the
    rumors that go out that it is being manipulated, if we can
    prevent that, because all of the markets are based upon
    confidence. And if the confidence--if the uptick rule helps
    restore confidence, does that help further stabilize, you know,
    stabilize the markets as a regulatory tool?
        Mr. Seligman. The uptick rule will slow market declines. It
    won't prevent them. And when we have seen the securities
    markets overwhelmed with sales recently and driven down
    hundreds of points in a day, I am very skeptical the uptick
    rule would have made much difference.
        Mr. Meeks. Yes, ma'am.
        Ms. Rivlin. I agree with Mr. Seligman. But I think probably
    the uptick rule would have helped, and we ought to put it back.
        Mr. Johnson. I agree with Mr. Seligman that the uptick rule
    might slow things, but it won't stop the fundamentals. The key
    to avoiding manipulated short selling, or for that matter,
    manipulated long purchases as well, is transparency. If
    investors really knew what was on the balance sheets of the
    organizations that were being traded, and you had financial
    statements that accurately portrayed this on a regular basis,
    it would be very difficult for false rumors to develop. And so
    I would just encourage better preparation of accounting,
    financial statements, and maybe more regular disclosure.
        Mr. Meeks. Let me ask this last question, because my time
    is running out. You know, my Governor, David Paterson from New
    York, last week he said would begin regulating credit default
    swaps. And he said that regulation is going to take effect on
    January 1st. But he asked me, he said, ``Hey, what about the
    Federal Government? Will it take steps on its own to oversee
    the credit default swaps?''
        And so the question that I would like to ask you really
    quick is whether or not the Federal Government should follow
    the lead of New York and, specifically, should we regulate them
    as insurance products under a Federal insurance regulatory--
        The Chairman. I am going to ask for very quick answers.
    When members ask questions at the timeline, you really can't
    expect an answer. If one wants to give an answer, the others
    can answer in writing if they would, in fairness to members.
    Does anyone want to take a shot?
        Mr. Seligman. Credit default swaps should be regulated at
    the Federal level. But I think we need to work through the
    appropriate regulatory agency to address them.
        The Chairman. Thank you. Now, the ranking member has asked
    me--there are a number of members who wanted to talk to this
    panel--he has agreed he has four members left who will take 3
    minutes each. I won't cut our people off, but that way we can
    probably--I know somebody had to leave at 12:30--if we can stay
    until 12:40, we can finish, if that is all right.
        Mr. Bachus. Mr. Chairman, I know Mr. Manzullo is
    protesting. My alternative would be to let--
        The Chairman. We lose time by discussing it.
        Mr. Bachus. --one person do 5 minutes and then it would be
    over. Or I can let three of you do 3 minutes.
        Mr. Manzullo. I am asking for 10 minutes.
        The Chairman. I just ask the gentleman to give me--I mean
    this has to be settled on your side. The witnesses do have to
    leave.
        Mr. Bachus. We will let Mr. Garrett have 5 minutes, and we
    will close out our hearing.
        The Chairman. The gentleman from New Jersey. We can go
    until 12:40, so if the gentleman from New Jersey wants to go--
    we are eating up the time by arguing about the time.
        Mr. Manzullo. Mr. Chairman? With all deference, if we are
    given 5 minutes here, I don't think it will take that much
    longer.
        The Chairman. Well, the gentleman, there are three before,
    it would take another 40 minutes or so before we reached the
    gentleman. And that is over the time that we would be keeping
    people.
        Mr. Bachus. I have proposed that all our members who are
    here have 3 minutes, Mr. Manzullo, and you wouldn't--under this
    proposal, you would get 3 minutes. Under the original proposal,
    you would get zero.
        Mr. Manzullo. Okay. That is fine.
        The Chairman. What is the verdict?
        Mr. Bachus. We are at 3 minutes apiece.
        The Chairman. Mr. Garrett for 3 minutes.
        Mr. Garrett. I will talk really fast. My first point is, I
    appreciate your comment with regard to a select committee. I
    should point out the fact, and Mr. Barrett raised that issue as
    well, the benefit of that--Marcy Kaptur, the gentlelady from
    Ohio, a former member of this committee, has a bill to that
    effect, and I have supported that as well. I appreciate your
    opinion at the end as far as going on that.
        Secondly, I do have several documents that I will put into
    the record and won't go through them all now. Most important,
    though, is from the American Enterprise Institute by Peter
    Wallison, ``The Last Trillion-Dollar Commitment: The
    Destruction of Fannie Mae and Freddie Mac,'' in which he says--
    and I will put that in for the record--the government takeover
    of Fannie and Freddie was necessary because of the massive
    loans of more than a trillion dollars of subprime, all of which
    was added during the 2000 and 2005 period.
        He goes on to say Congress did not adopt strong government-
    sponsored enterprise, GSE, reform until the Republicans
    demanded it as a price for Senate passage of the housing bill
    in July of 2008. It led invariably to the government takeover
    and the enormous junk loan losses to this point.
        And three other points from the Wall Street Journal and the
    New York Times, which, without objection, I will enter those
    into the record.
        Finally, on this point of entering information into the
    record, I go back to the opening comment by the chairman. And I
    do want to make sure that the record is clear where we all were
    on this issue going forward. In committee markup on May 25,
    2005, I offered an amendment to direct the new regulator to
    establish limits on the GSE portfolios in the case of any
    issues of safety and soundness or possible systemic risk. That
    was opposed by the chairman. At the same committee markup on
    that day, Representative Paul offered an amendment, 1-H, to cut
    off the Fannie and Freddie $2 billion Treasury line. The
    chairman opposed that amendment for reform.
        Floor action was then taken October 26, 2005. Amendment was
    offered to strike language in the bill that would raise
    conforming loan limits to allow GSEs to purchase more
    expensive, riskier homes. Again that amendment failed, and the
    chairman opposed it.
        Floor action on the same day by Representative Leach
    offered an amendment to give the newly created regulator
    greater authority to impose capital strictures on GSEs. Again,
    the chairman opposed that reform.
        Floor action on the same day by Representative Royce, who
    was here earlier, amendment 600 to authorize a regulator--this
    is important--to require one or more of the GSEs to dispose or
    acquire assets or liabilities if the regulator deems these
    assets or liabilities to be potential systemic risk--in other
    words, all those toxic risks we are talking about--to the
    housing or capital markets. The gentleman, the chairman opposed
    that reform.
        Floor action on the same day by Representative Paul,
    offered amendment 601 to eliminate the ability of Fannie and
    Freddie and the Federal Home Loan Bank to borrow from the
    Treasury. The amendment failed. The chairman opposed.
        I do want to give credit where credit is due. Just this
    past week, a gentleman from the other side of the aisle said,
    ``Like a lot of my Democrat colleagues, I was too slow to
    appreciate the recklessness of Fannie and Freddie. I defended
    their efforts to encourage affordable homeownership. In
    retrospect, I should have heeded the concerns raised by the
    regulator in 2004. Frankly, I wish my Democratic colleagues
    would admit it, when it came to Fannie and Freddie we were
    wrong.''
        This was stated by Representative Davis from Alabama. I
    appreciate his sign of intellectual honesty as to where we came
    from and how we got here.
        The Chairman. I now recognize myself for 5 minutes. The
    gentleman's 3 minutes has expired. And let's talk about
    intellectual honesty. The gentleman said that he offered an
    amendment. I have the roll calls here. I am going to put them
    in the record, the list. He offered an amendment in committee.
    It was withdrawn. It never went to a vote. There were two
    amendments offered by Republicans in 2005 that went to a vote.
    They were both defeated, with a majority of Republicans voting
    against them. He kept saying ``the chairman.'' I don't know if
    he meant Mr. Oxley or me, but we voted pretty much the same
    there. So the fact is the gentleman from New Jersey did offer
    an amendment. He said earlier he offered amendment after
    amendment. In his head, maybe, but on the Floor, he offered
    one, which was withdrawn. Mr. Royce had one that was defeated
    53-17. There were 30-some odd--37 Republicans on the committee.
    Then we had one from Mr. Paul that was defeated 14 to 56.
        The gentleman from New Jersey just mentioned the amendment
    offered by Mr. Leach on the Floor. That was defeated. And the
    point was he said the Democrats stopped it. This is a serial
    violator writing on the mirror, ``Stop me before I don't
    legislate again.''
        Here is the vote on the Leach amendment. He said I opposed
    it. I did. So did 377 other Democrats and 190 Republicans. The
    vote on the Leach amendment, now you want to talk about
    intellectual honesty, blaming the Democrats for defeating an
    amendment that lost 378 to 36, with 190 Republicans voting
    against it, does not seem to be accurate.
        He then talks about the amendment he offered on the
    conforming loan limits. On the conforming loan limits, on
    agreeing to the Garrett amendment, it failed 358 to 57. There
    were over 220 Republicans in the House; he got 57 of them.
        Now I know it is a bad feeling not to be able to get your
    own party to be with you. I understand the gentleman's distress
    that he couldn't get a majority of his own party, and on a
    couple of these amendments was thoroughly repudiated. The
    majorities aren't always right, but they are who they are.
        So this fantasy that the Democrats stopped it is simply
    untrue. I am going to put these into the record as well. They
    are the roll call votes from the committee and on the Floor.
    And the fact is in committee in 2005--now the committee did
    vote the bill to the Floor 65 to 5. It is a bill mentioned
    favorably by the people from FM Watch. The gentleman from New
    Jersey was one of the five. But a great majority of the
    Republicans voted against him. It is legitimate to talk about
    this. But saying it was the Democrats that did it and the
    Democratic--excuse me, the Democrat Party that did it, when in
    fact it was a bipartisan majority that repudiated all the
    gentleman's efforts, does not give a fair presentation. So we
    will put these in the record: 378 to 36; 357 to 58.
        In committee, to correct what the gentleman said, he did
    not push his amendment to a vote. Apparently, it was withdrawn.
    I guess the gentleman, he said I opposed it. So when I opposed
    the amendment, he withdrew it. I had not thought the member
    from New Jersey to be a man of such delicacy that the mere
    opposition by me would lead him to withdraw the amendment. I
    wasn't the chairman. I think it was the fact that he knew this
    would be another one where he might get only 7 or 8 votes and
    be somewhat embarrassed by it. But I will put all these in the
    record.
        There are zero cases--we are talking 2005 now--zero cases
    on either the Floor of the House or in committee where an
    amendment offered by a Republican was defeated even though it
    had a majority of Republican votes. Yes, Democrats voted
    against them, in almost every case joined by 90 percent of the
    Republicans, sometimes only by 60 percent of the Republicans.
        And then came 2007, when the bill was passed that the FM
    Watch said worked. And the gentleman had quoted someone as
    saying, ``Well, it didn't pass until July, when the
    Republicans--the Democrats agreed to do it for some reason.''
    Here are the numbers. This committee organized under a
    Democratic Majority on January 31, 2007. On March 28th, we
    passed a very strong bill, supported by the Administration, and
    approved by FM Watch. We then asked the Secretary of the
    Treasury to put it in the stimulus package because we were
    afraid of Republican and Democratic inaction in the Senate, a
    bipartisan problem. The Secretary felt he couldn't do that. We
    then pushed for it to be adopted in the bill. Senator Dodd was
    pushing for it. It was held up for a couple of months by
    filibusters by Senator DeMint and Senator Ensign on unrelated
    matters, but it finally passed in July.
        So the fundamental point is, yes, it is legitimate to talk
    about differences, but this portrayal that the gentleman was
    valiantly trying to rein in Fannie Mae and Freddie Mac in 2005,
    and he was frustrated by the Democrats is, of course,
    implausible because we are talking about the House run by Mr.
    DeLay, which was hardly one where the Democrats were able to
    stop Republicans from doing what they wanted. But the record
    clearly goes in the opposite direction. These amendments he
    talked about, and which he sort of implied that the Democrats
    had blocked these Republican efforts, are fantasies. They don't
    exist.
        Mr. Bachus. Mr. Chairman?
        The Chairman. Yes. The gentleman is asking me to yield? I
    don't yield. I am using my time. Oh, my time has expired. My
    time has expired.
        The gentleman from Illinois is recognized for 3 minutes.
        Mr. Manzullo. I thank the chairman. In 2000, this
    committee, through the efforts of Richard Baker, began a more
    intensive focus on the potential systemic risk posed by Fannie
    and Freddie. In an effort to lobby against Mr. Baker's bill,
    Fannie Mae engineered over 2,000 letters from my constituents
    in my district concerned about the ``inside the Beltway''
    regulatory reform bill. That was a reform bill in 2000. The
    problem was the letter campaign was a fraud. My constituents
    did not agree to send those letters. And what ensued was a
    confrontation with Mr. Raines in which he arrogantly claimed
    Fannie did nothing wrong in stealing the identities of 2,000 of
    my constituents. At that point, I threw the Fannie Mae
    lobbyists out of my office and said, ``You are not welcome to
    come back.'' That was 8 years ago.
        Then again in 2004, there was a confrontation between
    myself and the head of OFHEO over the fraudulent accounting
    motivated by executive greed and Mr. Raines, who took away $90
    million. That led to a lawsuit, and he unfortunately had to
    give back only $27 million of that. And I cosponsored the
    reform bills in 2000 and 2004, and again--2003 and 2005.
        Dr. Rivlin, I have been one of your biggest fans, even
    though you don't know that, because you make astounding
    statements such as on page 3, ``Americans have been living
    beyond our means individually and collectively.'' You talk
    about personal responsibility. You also talk about commonsense
    regulations, that you should not be allowed to take out a
    mortgage unless you have the ability to pay for it and have
    proof of your earnings.
        My question to you today is, as we discuss restructuring
    and reform, what kind of changes or curbs should be placed upon
    GSEs in your opinion?
        Ms. Rivlin. I think you have a really hard problem with the
    GSEs, because the problem was that they were structured in such
    a way that they had very conflicting missions. They were told
    they were private corporations, owned by stockholders,
    responsible to those stockholders to make money, and they were
    also told that they had public responsibilities to support
    affordable housing. And they interpreted those--they came late
    to the party on subprime, but they came, as you pointed out, in
    a very big way. And that turned out to be part of fueling the
    collective delusion. And then they got caught in a really big
    way when the market--when the crash happened.
        I think the real problem going forward is how to unwind
    this untenable situation. Either you have to have Fannie and
    Freddie being truly private institutions with no government
    guarantee, in which case they have to be a lot smaller--that
    would take a long time to accomplish, but it is one model--or
    they have to be fully regulated, with the rules clear what they
    are to do in the mortgage markets, and that they should lean
    against the wind when a bubble seems to be getting out of hand.
    That is another possible model. But the thing that isn't
    possible is this combination of conflicting incentives.
        The Chairman. If the gentleman wants to ask one last
    question, I will give him the time.
        Mr. Manzullo. That is fine.
        The Chairman. Okay. The gentleman from Kansas.
        Mr. Moore of Kansas. Thank you, Mr. Chairman.
        Ms. Rivlin and others on the panel who would care to
    comment, my question is this: The events of the last few weeks
    have resulted in extraordinary intervention by government,
    designed to stem the growing crisis. But there is still
    pessimism, and questions about whether what we have done will
    work. Are there further actions that can and should be taken by
    the Federal Government to restore confidence in our financial
    markets and institutions?
        Ms. Rivlin. I think part of it is not in the jurisdiction
    of this committee, it is stimulating the economy itself. You
    are going to need a stimulus package. I think it should be
    quick, it should be temporary, it should be targeted, but it
    should be big to get this economy turned around.
        Mr. Moore of Kansas. How big?
        Ms. Rivlin. How big? Oh, I don't know, $2-, or $3 billion.
    Big stuff, but carefully crafted. And you also need to go to
    the problem of the homeowners themselves, and getting as many
    people to stay in their homes, if they can pay, as possible. I
    think those are the bigger things than fixing the regulatory
    mechanism right now.
        Mr. Stiglitz. I think there are four things. The first is
    the stimulus, and it has to be large, I think 2 or 3 percent of
    GDP. It has to be carefully crafted. But given the mountain of
    debt that we have inherited, that means we have to focus on
    things with big bang for the buck. Preferably automatic
    stabilizers, at least a large part, to recognize the fact that
    there is some uncertainty. So aid to States and localities,
    absolutely essential to fill in the gap in their revenues.
    Extended unemployment insurance. But I also think a strong
    infrastructure.
        Second, I think we need to do something about the
    foreclosure problem. I think that needs to be done quickly
    because prices are going to continue to fall, and there are
    going to be more foreclosures, the hemorrhaging I talked about
    before. And that needs a comprehensive approach.
        We need, I think, aid to lower-income people like we have
    had aid to--we pay 50 percent through our tax system, many
    States, for the housing costs of upper-income Americans. We
    contribute nothing to lower-income Americans. We need a
    bankruptcy reform; what I call it, a homeowners' Chapter 11.
    And we may need, and I think we probably do, government
    participation taking over some of the mortgages to help--and
    passing on the low-cost interest that the government has access
    to to help homeowners.
        Third, as I said, I don't think we are going to restore
    confidence unless we begin the regulatory reforms. Because why
    should anybody believe that the financial system that has
    failed so badly change their behavior without more fundamental
    reforms?
        And fourth, I think that we need to more comprehensively
    address the problems of our financial system that we have been
    talking about. That is necessary to restore confidence.
        Mr. Moore of Kansas. Thank you. Any other comments? If
    there is time. If there is not--
        The Chairman. The gentleman has a minute and 15 seconds. I
    am sorry.
        Mr. Johnson. I am not as big on a stimulus package. I think
    a lot of short-term, targeted stimulus would have a very short-
    term effect, and is wasted money. If I were going to do
    anything on the fiscal side, I would enact permanent across-
    the-board tax rate reductions to all classes. But I think that
    the better thing to do right now is to focus on resolving this
    crisis of confidence through the regulatory measures we are
    talking about today.
        I think the Federal Reserve has already stopped the
    bleeding regarding the risks of deposit runs. And so I think
    that issue is pretty much covered.
        There are still a lot of issues about the uncertainty of
    balance sheets of the financial institutions. Those need to be
    resolved as fast as possible through restructuring,
    acquisitions, and even failures.
        I am in favor of those who made failed investment decisions
    being resolved through having their good assets merged and
    acquired by others. There are trillions of dollars still on the
    sidelines not willing to take a risk now but looking for an
    opportunity to be new participants in the financial markets.
    Give them a chance. Why work with the institutions that have
    failed and are sitting around with toxic assets on their
    balance sheets and can't make a move? You know, I understand
    the point about getting those assets off the balance sheet, but
    take the good assets and give them to someone who can put them
    to use.
        Mr. Moore of Kansas. Thank you. Thank you, Mr. Chairman.
        The Chairman. The gentleman from Alabama will be our last
    witness, the last one to question this panel.
        Mr. Bachus. Thank you, Mr. Chairman.
        Mr. Chairman, I do want to say this. And I have--and I am
    not going to depart from this. I have not tried to pin blame or
    engage in partisan politics. I do want to say this: Whatever
    else was said about the gentleman from New Jersey, Mr. Scott
    Garrett, he did vote right. His vote was right. Had the
    majority of members followed his lead, we could have avoided
    some of the problems we had today. Now--
        The Chairman. Would the gentleman yield?
        Mr. Bachus. Yes.
        The Chairman. That is very generous of the gentleman, since
    he was one of the ones who voted with us and against the
    gentleman. So I appreciate--
        Mr. Bachus. I am just saying that his votes, they were not
    only right on the amendment where he voted with you, he was
    right on final passage where he voted differently than you did.
    But I am just saying that I compliment him.
        Now, let me ask this question. Professor Stiglitz, back
    when we were doing the Fannie and Freddie Mac bailout, you were
    very opposed to that. You called it an outrageous and old form
    of corporatism passed off as free enterprise. Further, you
    warned the amount of potential liability that we undertook when
    we passed the blank check we just don't know. You said it was
    the worst kind of public irresponsibility. You said that we are
    in the worst of all possible worlds right now. And I and most
    of my Republican colleagues in the House agreed with you, and
    we opposed that bailout.
        Do you still hold the same view that it was a mistake,
    which was our view?
        Mr. Stiglitz. Well, let me make clear we had a gun pointed
    at our head. And the question was--
        Mr. Bachus. No, I agree. I have used that very term, that
    we had a gun to our head on that one and on the one 2 weeks
    ago.
        Mr. Stiglitz. Exactly. So the point I was trying to raise
    is there were other ways of handling the problem that I was
    encouraging Congress and the Administration to think about. And
    that--
        Mr. Bachus. What should we have done? And okay, I am
    agreeing with you. What should we have done as opposed to that?
        Mr. Stiglitz. For instance, on some of these there was the
    possibility of a debt-for-equity swap so that if you--you know,
    we bailed out the debt holders, the bond holders, as well as--
    even when the equity owners took a beating. There were huge
    amounts of increases in the value of the debt. And I was also
    concerned at the terms at which the money was being provided.
    And you can see one piece of evidence that we got--two pieces--
    three pieces of evidence that we got a very bad deal in the way
    it was administered by our Secretary of the Treasury is the
    fact that most of the companies, when it was announced they
    were going to get an equity injection, their share price went
    way up.
        Second, you compare the terms that we got versus the terms
    that Warren Buffett got, there is absolutely no comparison.
        Third, you look at the terms that we got versus the terms
    that the U.K. Government got, there is no comparison. So I was
    concerned--
        Mr. Bachus. Well, now, are you aware that I proposed
    capital injections with covered bonds or lending or, you know,
    backup private equity? But we did get a 5 percent rate of
    return that goes to 9 percent.
        Mr. Stiglitz. Yes. But Warren Buffett, on equity injection
    to arguably one of the better capitalized and best capitalized
    investment banks, got 10 percent. And his warrants were far
    better than the warrants that we got.
        Mr. Bachus. And I agree that, you know--I agree. But I
    think at least in this bill we got a better deal than what we
    were going to get in buying the worst of the assets.
        The Chairman. I do have to remind the gentleman the 3-
    minute deal was his deal.
        Mr. Bachus. So we are through.
        The Chairman. We are way over it. I thank the panel. The
    panel is excused.
        The next panel will check in. We will begin the questioning
    with--all right. Can we move quickly, please? Have the
    conversations outside. Would the witnesses and our staff please
    talk outside? Would the witnesses please leave? Members who
    want to talk to them, do it outside. I thank the members of the
    second panel for waiting. It is very important that we have the
    testimony from industry representatives going forward. We have
    heard and will hear in the past from consumer representatives.
    We will hear from people who are in the physical parts of the
    economy. We will hear from organized labor.
        The witnesses properly said, I think, and I want to say I
    thought the gentleman from Georgia, Mr. Price, raised very
    important philosophical questions that we have to deal with. We
    are here talking about some of the most important basic
    principles in government, about how in a free enterprise
    economy you do or don't regulate. And I look forward to a
    serious debate in this country, beginning when we come back, on
    the appropriate economic philosophical principles. I think the
    old discipline of political economy is going to come back as we
    talk about these. And we will be very careful.
        These are historic decisions that are being made. And you
    know, we have a silver lining to the cloud. The cloud, of
    course, is the terrible shutdown of economic activity. The
    silver lining is that nobody is doing any good things or bad
    things right now. So that the notion that we have to rush, I
    think, has been alleviated by the fact that not much is
    happening, and that gives us time to do this right. It is as
    important a set of economic decisions as I think this country
    will be making since the Depression, and I am determined, and I
    know the Minority is as well, that we will work together to do
    this.
        With that, we will begin with our former colleague and
    member of this committee. Fortunately, he wasn't around at any
    of the times we are fighting about, so he can stay above the
    battle.
        Our former colleague from Texas, on behalf of the Financial
    Services Roundtable, Mr. Bartlett.

    STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF
          EXECUTIVE OFFICER, THE FINANCIAL SERVICES ROUNDTABLE

        Mr. Bartlett. Thank you, Mr. Chairman, and Ranking Member
    Bachus. I provided in my written testimony a description of the
    size and scope and some examples of the problem of the
    regulatory system as it now stands. Suffice it to say that in
    summary it is a lack of coordination, a lack of uniformity,
    huge gaps in the system in which literally hundreds of agencies
    are not even authorized to talk with one another about their
    regulatory structure or regulatory conclusions, much less to
    engage in a consistent regulatory coordination. As you noted,
    Mr. Chairman, that will be entered into the record.
        The current crisis has erupted. And when the current crisis
    erupted, literally no coordinating body was clearly
    responsible, and so it was an ad hoc response that required all
    the agencies, and including Congress.
        So today we bring ourselves--and Mr. Chairman, I commend
    you and the members of the committee. This is an extraordinary
    hearing, with an extraordinary turnout. It may be the first
    that I can recall during this time, this season, in which this
    many members of the committee would come on a legislative
    effort such as this.
        The hearing is timely. It is urgent. And I think it
    requires some relatively rapid action. I propose today, Mr.
    Chairman, I would share with you five near-term regulations the
    Financial Services Roundtable have. These are--I call them ``no
    regret moves'' in that they won't stand in the way of long-term
    solutions. And I believe that the committee and the Congress
    will consider and adopt long-term solutions in short order. But
    on the near-term, and these near-term solutions should lead to
    those longer term restructuring, I would cite five.
        First, is market stabilization. Reduce the potential for
    systemic risk by giving the Federal Reserve Board overarching
    supervisory authority over systemically significant financial
    services firms that seek access to the discount window. And
    provide that statutory authority in advance of the crisis, not
    after the crisis.
        Second, interagency coordination. Our proposal in the short
    term is to expand the membership and mission of the President's
    Working Group by statute to make it more forward looking. The
    fact is the President's Working Group is the only authority at
    all with any coordinating authority. They have no statutory
    authority. And on that group is not the OCC, the OTS, the
    PCAOB, or any insurance regulatory agency.
        Third, adopt principle-based regulation. The principles
    should be adopted by statute by Congress. Enact those
    principles to serve as a common point of reference for all
    regulatory agencies as encompassed.
        Fourth, is prudential supervision. Encourage the early
    identification of potential risk by the application of
    prudential supervision by all financial regulators for all
    financial services forms.
        And fifth, is adopt financial insurance supervision. The
    fact is that the State-by-State system of insurance regulation
    is the last vestige of 19th Century regulation. It is time to
    move into the 20th Century.
        We would have you implement those recommendations--we would
    not--I would not contend that the implementation of those
    regulations would have prevented this current crisis entirely.
    But I do believe they would have helped regulators and the
    financial services industry to better and much earlier
    appreciate the market developments, and would have
    significantly reduced the scope and the severity of the crisis.
        We do recommend, Mr. Chairman, three additional actions to
    take in the near term.
        First, is fair value accounting. We advocate the use of a
    clear-minded system to determine the true value of assets in
    distressed and illiquid markets. The current application of
    fair value accounting is neither clear-minded nor fair. It is
    causing significant damage to individual institutions, but way
    more importantly, to the economy as a whole. The SEC and the
    Public Company Accounting Oversight Board has the authority to
    act. We urge them to provide auditors the flexibility in the
    application to apply fair value accounting.
        Second, credit default swaps. We think that the first step
    is to--the first step will lead to regulation. We think the
    first step is to establish a clearinghouse for credit default
    swaps. We do think it requires a Federal regulator. We
    recommend either the CFTC or the Federal Reserve.
        And then, third, is mortgage interest rates, Mr. Chairman.
    We believe that at this point this sort of mystical thing in
    London called the LIBOR has declined 6 days in a row--that is
    some kind of a record--to lead us out of the crisis, but it has
    not led to a reduction of mortgage interest rates. And until
    that happens, the economy will continue to be in jeopardy and
    getting worse. So if mortgage rates do not fall, then we urge
    Congress, the Treasury, and the Federal regulatory agencies to
    consider additional appropriate actions.
        Lastly, Mr. Chairman, we do believe that sitting here on
    October the 21st, it is not clear at this point whether an
    additional fiscal stimulus should be adopted. But Congress
    should consider that if in the next few weeks the measures that
    have already been taken do not result in the beginning of a
    recovery, then we think the Congress should consider a stimulus
    package. That stimulus package, in our view, should have 3
    points: Housing; job creation; and capital investment.
        Mr. Chairman, we urge neither more regulation nor less
    regulation, but better, more effective regulation. Thank you.
        [The prepared statement of Mr. Bartlett can be found on
    page 106 of the appendix]
        Mr. Watt. [presiding] I thank the gentleman for his
    testimony.
        Mr. Yingling.

      STATEMENT OF EDWARD YINGLING, PRESIDENT AND CHIEF EXECUTIVE
              OFFICER, AMERICAN BANKERS ASSOCIATION (ABA)

        Mr. Yingling. Thank you for the opportunity to present the
    views of the ABA on regulatory reform.
        Mr. Watt. I am not sure your microphone is on.
        Mr. Bachus. And pull your microphone a lot closer.
        Mr. Yingling. Thank you for the opportunity to present the
    views of the ABA on regulatory reform. Clearly, changes are
    needed. The recent turmoil needs to be addressed through better
    supervision and regulation in parts of our financial services
    industry. The biggest failures of the current system have not
    been in the regulated banking system, but in the unregulated or
    weakly regulated sectors.
        Indeed, while the system for regulating banks has been
    strained in recent months, it has shown resilience. In spite of
    the difficulties of this weak economy, I want to assure you
    that the vast majority of banks continue to be strongly
    capitalized, and are opening their doors every day to meet the
    credit and savings needs of their customers. As the chairman
    has noted many times, it has been the unregulated and less
    regulated firms that have created problems.
        Given this, there has been a logical move to begin applying
    more bank-like regulation to the less regulated parts of the
    financial system. For example, when certain securities firms
    were granted access to the discount window, they were subjected
    to bank-like leverage and capital requirements. The marketplace
    has also pointed toward the banking model. The biggest example,
    of course, is the fact that Goldman Sachs and Morgan Stanley
    have moved to the Federal Reserve for holding company
    regulation. Ironically, while both the regulatory model and the
    business model moved toward traditional banking, bankers
    themselves are extremely worried that the regulatory and
    accounting policies could make traditional banking unworkable.
    Time after time, bankers have seen regulatory changes aimed at
    others result in massive new regulations for banks. Now,
    thousands of banks of all sizes are afraid that their already
    crushing regulatory burdens will increase dramatically by
    regulations aimed at less-regulated companies.
        We appreciate the sensitivity of this committee and the
    leadership of this committee toward this issue of regulatory
    burden. As you contemplate changes in regulation to address
    critical gaps, ABA urges you to ask this simple question: How
    will this change impact those thousands of banks that are
    making the loans needed to get our economy moving again?
        There are gaps in the current regulatory structure. First,
    although the Federal Reserve generally looks over the entire
    economy, it does not have explicit authority to look for
    problems and take action to address them. A systemic oversight
    regulator is clearly needed.
        The second type of gap relates to holes in the regulatory
    scheme where entities escape effective regulation. It is now
    apparent to everyone that the lack of regulation of independent
    mortgage brokers was a critical gap, with costly consequences.
    There are also gaps with respect to credit derivatives, hedge
    funds, and others.
        Finally, I wish to emphasize the critical importance of
    accounting policy. It is now clear that accounting standards
    are not only measurements designed for accurate reporting; they
    also have a profound impact on the financial system. So
    profound that they must now be part of any systemic risk
    calculation.
        Today, accounting standards are made with little
    accountability to anyone outside the Financial Accounting
    Standards Board. No systemic regulator can do its job if it
    cannot have input into accounting standards, standards that
    have the potential to undermine any action from a systemic
    regulator. The Congress cannot address regulatory reform in a
    comprehensive fashion if it does not include accounting
    policymaking.
        ABA therefore calls on Congress to establish an accounting
    oversight board, chaired by the chairman of the systemic
    regulator. The SEC Chairman could also sit on this board. The
    board could still delegate basic accounting standards-making to
    a private sector body, but the oversight process would be more
    formal, transparent, and robust. I believe this approach would
    accomplish the goal that the chairman mentioned a few minutes
    ago in his comments about separating mark to market from the
    consequences of mark to market.
        And I appreciate your recent letter, Congressman Bachus, on
    this subject. That is a good goal. But I don't think that that
    goal can be accomplished if you have the current regulatory
    situation on accounting. Clearly, it is time to make changes in
    the financial regulatory structure. We look forward to working
    with Congress to address needed changes in a timely fashion,
    while maintaining the critical role of our Nation's banks.
    Thank you.
        [The prepared statement of Mr. Yingling can be found on
    page 177 of the appendix.]
        Mr. Watt. Thank you, Mr. Yingling.
        Mr. Ryan.

        STATEMENT OF T. TIMOTHY RYAN, JR., PRESIDENT AND CHIEF
     EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL MARKETS
                          ASSOCIATION (SIFMA)

        Mr. Ryan. Chairman Watt, Ranking Member Bachus, and members
    of the committee--
        Mr. Bachus. Tim, pull that microphone a lot closer to you.
        Mr. Ryan. Thank you. My name is Tim Ryan, and I am
    president of the Securities Industry and Financial Markets
    Association. I want to thank the committee for holding this
    hearing. It is a good time to do this. It is an important
    subject. I have a few brief remarks. I would like to have my
    full testimony entered into the record.
        Mr. Watt. Without objection, the full text of all testimony
    will be put into the record.
        Mr. Ryan. I am speaking on behalf of the Securities and
    Financial Markets today, but from 1990 to 1993, I was the
    Director of OTS. I also was one of the principal managers of
    the savings and loan cleanup. And from 1993 until April of this
    year, I was a senior executive at J.P. Morgan. So I would like
    to have my comments here reflect that background.
        As you all know, the debt and equity markets across the
    globe have experienced serious dislocations in the last few
    months. Congress has aggressively responded to this by passing
    the Emergency Economic Stabilization Act, and granted the
    Treasury Department extraordinary responsibility to promote the
    confidence in the financial system. We fervently hope that the
    steps being taken will unfreeze the credit markets and restore
    calm to the equity markets.
        Serious weaknesses, however, exist in our current
    regulatory model for financial services. And without reform, we
    risk repeating today's serious dislocation.
        I commend this committee for beginning the process of
    reexamining our regulatory structure, with a view toward
    effective and meaningful improvements. We in the securities
    industry and financial markets stand ready to be a constructive
    voice in this critical, important public policy dialogue.
        I have just a few specific comments on recommendations.
    One, which has been really a part of the comments all morning
    here, the need for a financial market stability regulator. As
    you know, our Nation's financial regulatory structure dates
    back to the Depression. That regulatory structure assumed, and
    even mandated to some extent, a financial system where
    commercial banks, broker dealers, and insurance companies
    engaged in separate businesses, offered separate products,
    largely within local and domestic borders.
        Financial institutions no longer operate in single product
    or business silo or in purely domestic or local markets.
    Instead, they compete across many lines of business and in many
    markets that are largely global.
        The financial regulatory structure remains siloed at both
    the State and Federal levels. No single regulator currently has
    access to sufficient information or the practical and legal
    tools and authority necessary to protect the financial system
    as a whole against systemic risk. Thus, we believe Congress
    should consider the need for a financial markets stability
    regulator that has access to information about financial
    institutions of all kinds that may be systemically important,
    including banks, broker dealers, insurance companies, hedge
    funds, private equity funds, and others.
        This regulator should have the authority to use the
    information it gathers to determine which financial
    institutions actually are systemically important, meaning that
    would likely have serious adverse effects on economic
    conditions or the financial stability or other entities that
    were allowed to fail. We believe this is a relatively small
    number of financial institutions.
        We think it is important that a stability regulator have
    information gathered through coordination with other regulators
    to avoid duplication of oversight and unnecessary regulatory
    burdens and provide confidentiality.
        If Congress takes the approach of creating a markets
    stability regulator, it would be important to ensure that it
    not become an additional layer of regulation. Rather, Congress
    should consider the stability regulator in the context of the
    overall streamlining of financial regulatory system.
        Second, additional steps are necessary to improve the
    efficiency and effectiveness of regulation. In general,
    financial services regulation has not kept up withinnovation or
    risk. Modernizing financial regulation should be a priority for
    regulatory reform by Congress. In general, financial regulation
    should encourage institutions to behave prudently, and
    incentivize them to implement robust risk management programs.
        We also believe Congress should consider how financial
    regulation can be streamlined to be more effective. Duplicative
    Federal and State regulation is one area of review. Another is
    the separate regulation of securities and futures. We believe
    that the United States should merge the SEC and the CFTC in the
    interests of regulatory efficiency. Combining their
    jurisdiction would be consistent with the approach taken in
    other financial markets around the world.
        Congress should also consider merging the Office of Thrift
    Supervision into the Office of the Comptroller of the Currency
    in order to achieve greater efficiency in the operation of
    Federal bank regulatory agencies.
        One comment on structured products and derivatives:
    Innovation has generated many new financial products in recent
    decades that have the basic purpose of managing risk. For
    example, over the last 2 years alone, the credit default swap
    market has grown exponentially. CDSs are an important tool for
    managing credit risk, but they also increase systemic risk if
    key counterparties fail to manage their own risk exposures
    properly.
        SIFMA recognizes the risk inherent in this market and will
    continue to work closely with ISDA, with the Futures Industry
    Association and with other stakeholders in an effort to create
    a clearing facility for CDS that will reduce operational and
    counterparty risk.
        Mr. Watt. Mr. Ryan, can I encourage you to wrap up as soon
    as you can?
        Mr. Ryan. Thank you, Mr. Chairman. I can wrap up right now.
    I am ready for your questions.
        [The prepared statement of Mr. Ryan can be found on page
    130 of the appendix.]
        Mr. Watt. Thank you for your testimony.
        I understand that Mr. Washburn is from the ranking member's
    congressional district, so I will recognize him for a brief
    introduction.
        Mr. Bachus. Thank you, Mr. Chairman.
        Mike Washburn, his wife Marian, and his daughter Allie, are
    constituents of mine. In fact, his 12-year-old daughter Allie
    and about 1,000 other folks have announced their intention to
    run against me if I do not get my act together in the next
    election. He is the CEO of Red Mountain Bank, which is a very
    progressive community bank, with three locations in Birmingham
    and one in Tennessee. Far more importantly, he is on several
    ICBA boards.
        His bank has received a prestigious national award for
    their community service, and it has also received 3 awards over
    the past 3 years as one of the best places to work in Alabama.
    So it is a good place to work. It is a successful bank.
        They have avoided the problems that bring us here together
    today. That is why I think there ought to be a representative
    from Main Street here, and I think he is very capable in that
    regard.
        So welcome to Washington, Mike. I look forward to some Main
    Street wisdom.
        Mr. Watt. Mr. Washburn, you are recognized.

    STATEMENT OF MICHAEL R. WASHBURN, PRESIDENT AND CHIEF EXECUTIVE
       OFFICER, RED MOUNTAIN BANK, ON BEHALF OF THE INDEPENDENT
                  COMMUNITY BANKERS OF AMERICA (ICBA)

        Mr. Washburn. Thank you, Congressman. You took my first
    paragraph away.
        My name is Mike Washburn. I am here from Red Mountain Bank;
    I am president and CEO of that bank. We are a $351 million
    community bank in Hoover, Alabama. I am here to testify today
    on behalf of the Independent Community Bankers of America. I
    appreciate the opportunity to share the views of our Nation's
    community banks on the issue of financial restructuring and
    reform.
        Even though we are in the midst of very uncertain financial
    times, and there are many signs that we are headed for a
    recession, I am pleased to report that the community banking
    industry is sound. Community banks are strong. We are
    commonsense, small-business people who have stayed the course
    with sound underwriting that has worked well for us for many
    years. We have not participated in the practices that have
    caused the current crisis, but our doors are open to helping
    resolve it through prudent lending and restructuring.
        As we examine the roots of the current problems, one thing
    stands out: Our financial system has become too concentrated.
    As a result of the Federal Reserve and Treasury action, the
    four largest banking companies in the United States today now
    control more than 40 percent of the Nation's deposits and more
    than 50 percent of the Nation's assets. This is simply
    overwhelming. Congress should seriously consider whether it is
    prudent to put so much economic power and wealth into the hands
    of so few.
        Our current system of banking regulation has served this
    Nation well for decades. It should not be suddenly scrapped in
    the zeal for reform.
        Perhaps the most important point I would like to make to
    you today is the importance of deliberation and contemplation.
    Government and the private sector need to work together to get
    this right. We would like to make the following suggestions:
        Number 1: Preserve the system of multiple Federal
    regulators who provide checks and balances and who promote best
    practices among these agencies.
        Number 2: Protect the dual banking system, which ensures
    community banks have a choice of charters and of supervisory
    authority.
        Number 3: Address the inequity between the uninsured
    depositors at too-big-to-fail banks, which have 100 percent
    deposit protection, versus uninsured depositors at the too-
    small-to-save banks that could lose money, giving the too-big-
    to-fail banks a tremendous competitive advantage in attracting
    deposits.
        Number 4: Maintain the 10 percent deposit cap. There is a
    dangerous overconcentration of financial resources in too few
    hands.
        Number 5: Preserve the thrift charter and its regulator,
    the OTS.
        Number 6: Maintain GSEs in a viable manner to provide
    valuable liquidity and a secondary market outlet for mortgage
    loans.
        Number 7: Maintain the separation of banking and commerce
    and close the ILC loophole. Think how much worse this crisis
    would have been if the regulators had to unwind commercial
    affiliates as well as the financial firms.
        We also believe Congress should consider the following:
        Number 1: Unregulated institutions must be subject to
    Federal supervision. Like banks, these firms should pay for
    this supervision to reduce the risk of future failure.
        Number 2: Systemic risk institutions should be reduced in
    size. Allowing four companies to control the bulk of our
    Nation's financial resources invites future disasters. These
    huge firms should be either split up or be required to divest
    assets so they no longer pose a systemic risk.
        Number 3: There should be a tiered regulatory system that
    subjects large, complex institutions to a more thorough
    regulatory system, and they should pay a risk premium for the
    possible future hazard they pose to taxpayers.
        Number 4: Finally, mark-to-market and fair value accounting
    rules should be suspended.
        Mr. Chairman and members of the committee, thank you for
    inviting ICBA to present our views. Red Mountain Bank and the
    other 8,000 community banks in this country look forward to
    working with you as you address the regulatory and supervisory
    issues facing the financial services industry today.
        Thank you.
        [The prepared statement of Mr. Washburn can be found on
    page 168 of the appendix.]
        Mr. Watt. Thank you.
        Thank you to all of the witnesses for their testimony.
        I believe Mrs. McCarthy is the first to be recognized in
    this round.
        Mrs. McCarthy of New York. Thank you, Mr. Chairman. Again,
    thank you for your testimony.
        You know, when this all started, the first thing that came
    to my head was Enron. One of the things I was thinking about
    with Enron was, where is the moral guide in our financial
    system nowadays? I happen to think that an awful lot of
    innocent people are community bankers, are independent bankers,
    are credit union guys. They did not make any of these loans,
    yet they are still out there trying to help inside the
    community.
        I know there was a story going back a while ago that one of
    the larger financial institutions on Wall Street had been told
    by their risk management guy that they were overloaded and that
    they should stop buying an awful lot of these pieces of
    commercial paper out there. He was fired. He did go to another
    large company that actually took his advice, and that was one
    of the larger companies that came out of this risk free.
        We cannot legislate morality. Whether it was banking, or
    whether it was Wall Street, they have lost their way.
    Reputation on Wall Street was the most important thing, and
    that is what their customers counted on. We cannot do that.
    That has to come from within the system.
        I guess what I need to know is, what are the lessons that
    we can learn from other countries? They got involved. They
    bought our paper. Everybody wanted to be part of that bubble.
    Have they done anything that we have done differently where we
    could look to them to see if there are some sort of
    regulations? They always complained about our having too many
    regulations. Now they are saying that we should actually be
    more regulated. So is there a balance in there? That is going
    to be the biggest problem, as far as this committee goes, in
    trying to find a balance. I do not think there is anybody here
    who really wants to overregulate. We want the system to run
    smoothly.
        I would look forward to hearing any of your comments on
    that.
        Mr. Bartlett. Congresswoman, there is one lesson that we
    have studied a lot in the last 3 years from Europe and from
    FSA, the Financial Supervisory Authority, and that was to use
    guiding principles or principles for regulation in order to
    write your regulations. This does not eliminate regulations.
    The regulations are still there, but it is to create some
    uniform principles.
        When we looked at the roundtable, it is like the weather in
    Texas. Everybody wants to complain about it, but nobody wants
    to do anything about it. So everybody wants to talk about
    principles, and nobody wants to write them down. We wrote them
    down, and I will enter them into the record.
        Our conclusion was that there should be six, by statute,
    that this Congress should adopt as the guiding principles for
    regulations. They would include fair treatment for customers,
    stable and secure financial markets, competitive and innovative
    financial markets, proportionate risk-based regulation,
    prudential supervision, and responsible and accountable
    management.
        I would offer that had those been in place for the recent
    round prior to the crisis, things would have been a lot
    different and a lot better.
        Mr. Yingling. I am not sure every foreign country has done
    all that well in terms of their regulation, but one thing we
    really do need and that, I think, there is a consensus on here
    is that we need an oversight regulator who really looks over
    the economy and who looks at gaps and who looks at trends.
        I must say that about a year ago, I asked our economics
    department to give me the information on what had happened with
    some of these mortgages, and they brought me some charts that
    really made me gasp. These were charts about no-down-payment
    loans and how they had grown in 2004 and in 2005 and in 2006.
    That graph went like that. How you could have graphs like that
    and not have somebody in our government say, ``Wait a minute.
    We have to really look into this very hard,'' is somewhat
    beyond me, because I gasped. I said, ``How could this be?''
        I think the problem is that nobody has really been assigned
    to do that. In some ways, the Fed was supposed to do it, but we
    have not assigned anybody in our government to look at
    potentially big problems. Why didn't we have somebody looking
    at the growth of these SIVs? Why didn't we have somebody look
    at and see the growth of the securitizations of these mortgage
    products? It fell between the gaps.
        So I think one thing we need is a systemic overview
    regulator who has the explicit role of saying, ``I am going to
    look for big problems.'' Any time you have a chart that goes
    like that, you had better look at it. We do not. It falls
    between the gaps.
        The Chairman. The gentleman from Michigan.
        Mr. McCotter. Thank you, Mr. Chairman. Thank you for
    holding this hearing.
        We heard from the previous panel. From yourselves, I gather
    that in many ways this was not a failure of deregulation or a
    philosophy of deregulation. It seems that in many ways the
    entrepreneurial spirit of the free market had transcended
    regulation, and that it was a failure then to intelligently,
    proactively and accountably act as a government to step in, in
    instances of a failure of self-government on the part of market
    participants.
        What I would be very curious to hear, as we enter into this
    initial discussion of where we are going to head, is when you
    speak of principles, to me the fundamental principle
    undergirding a free market economy is the principle of personal
    responsibility and that appropriate regulation creates a
    framework in which people can self-govern through the concept
    of personal responsibility with guidelines that ensure that
    human nature does not always exceed the better angels of our
    nature.
        So, as we move forward, I would like to hear from the
    panelists as to what specifically we can try to do to encourage
    personal responsibility within a regulatory environment so that
    we will wind up with a proper framework as opposed to a
    governmental dictation to the market, which could have a very
    deleterious effect on the future prosperity of Americans.
        Mr. Ryan. I would like to address your comments and the
    question posed previously.
        As you can see from our opening comments--and I think we
    are all pretty consistent here--the financial markets are very
    global. We have considerable concentration globally in
    financial services, and they are interconnected. We have no
    real regulatory structure globally to address those major
    institutions, so that is work that is critical here. It is
    critical that it needs to be replicated without massive overlap
    in the European community and probably in other major
    countries, developed countries.
        We have many financial institutions that are much smaller
    than the type I am talking about that are subject to the
    financial market stability regulator. There it is easier to
    have personal responsibility within boards and within
    management. As you get into some of these larger institutions,
    clearly people take their jobs seriously. They work actively to
    manage risk, to manage their people. At times we need an
    oversight, and that is what the market stability regulator
    could do, integrate a lot of that information; provide
    integrated, aggregated information to the people who run these
    institutions so they can manage the risks.
        Mr. McCotter. On that point, I think it is a very accurate
    point, because one of the other problems that, I think, has
    become apparent is that it was a failure of government reform,
    a failure to reform the United States Government to the point
    where you could have intelligent, proactive, and accountable
    regulators in place that could try to keep up with the market
    in instances where there were failures to self-govern, because,
    as you know, even where there are some misdeeds amongst many
    good deeds, those some misdeeds can cause a lot of problems.
        You also referenced something that I find fascinating.
    Secretary Paulson also mentioned it previously, although not in
    front of this committee. He talked about how now the
    interdependence amongst American financial institutions was
    originally thought to be a guard against the very type of
    meltdown that we saw; that if we had linked them all together,
    and that if one were to fail, the new web of financial
    institutions would help support the overarching framework of
    the financial services sector. Yet the exact opposite has
    happened. Has that not been replicated on the global scale as
    you seem to indicate?
        So then what we have to look at is not only an internal
    reform of the United States Government to get more intelligent,
    proactive and accountable, but we will also have to start
    looking at our international institutions to guarantee that the
    interconnectivity between global financial institutions does
    not lead to what we seem to be on the brink of, which is a
    continued meltdown based upon some bad actors dragging everyone
    down with them on top of innocent people.
        Thank you.
        The Chairman. Any comments, gentlemen?
        I thank the gentleman.
        We now have the gentleman from Massachusetts, Mr. Lynch.
        Mr. Lynch. Thank you, Mr. Chairman.
        I thank the panel for their willingness to help the
    committee with its work.
        At a very basic level, I think there are a couple of things
    we have to admit to in going into this whole idea of reforming
    our regulatory system. One is that we cannot and should not try
    to prevent every single failure. That is not the purpose of our
    regulatory framework. On the other hand, I think it is
    enormously important that we should devise a system that allows
    investors and market participants to have accurate and timely
    information in order to defend themselves and in order to make
    prudent and well-informed decisions.
        There are a couple of examples out here that we have seen
    in this whole crisis. I want to point to one which is really
    illustrated best in an article by Gretchen Morgenson of the New
    York Times a while back. She was talking about Bear Stearns.
    The article is on Bear Stearns. She was talking about--this was
    at the very end--on their way down, based on their annual
    report, they reported that they had $46 billion in mortgages
    and in mortgage-backed securities and in complex derivatives
    based on mortgages; $29 billion of them were valued--and this
    is a quote--``using computer models derived from or supported
    by some kind of observable market data.''
        Then she goes on to say that the value of the remaining $17
    billion, according to Bear Stearns, is estimated based on
    ``internally developed models or methodologies, utilizing
    significant inputs that are generally less readily
    observable.'' In other words--and these are her words--``your
    guess is as good as mine.''
        We have another example in the Merrill Lynch situation
    where E. Stanley O'Neal, the CEO, went out on October 5th and
    said that the company had $4.5 billion in writedowns. On
    October 30th, 3 weeks later, he came out and said that they had
    $7.9 billion in writedowns. Then in November, he increased the
    amount to $11 billion.
        The bottom line here is that neither of these companies
    knew what was going on internally. They did not have internal
    transparency. Part of that reason is the complexity of these
    instruments, and with a system based on trust, it is extremely
    important. If we are ever going to get back to a system of
    normalcy, we have to have that type of transparency.
        Mr. Ryan, you mentioned earlier the clearinghouse and how
    we might deal with derivatives and how we might vet these
    things or have a clearinghouse to quantify the value of these.
    Is it not the case that we are going to have to bring these
    instruments that are outside the regulatory process into a
    tighter regulatory framework?
        Mr. Ryan. The answer is yes.
        One comment: Clearly, from our perspective, financial
    engineering was taken to a level of complexity that was
    unsustainable. We know that 2 years from now, you are not going
    to have hearings where you are talking about CDOs and some of
    the other things that Ed talked about--SIVs and different off-
    balance-sheet vehicles.
        Clearly, the industry and the country and, in fact, the
    financial market participants around the globe have seen that
    the complexity is just too much, so we are all focused on what
    we can do that makes sense. We are all focused on the critical
    element in financial markets, which is confidence. Right now
    people lack confidence. That is what is reflected in the
    volatility in the markets, and we need to fix that. So we are
    very, very focused globally within this industry on fixing it.
        Mr. Lynch. I am happy to hear you say that. I am just
    concerned that when this urgency goes away, that the folks over
    at MIT, whom I dearly love, will go back to designing these
    very complex models, and that we will be back into this same
    mess again. So I am hoping that we might fix this once and for
    all.
        I do not know if anyone else wishes to comment.
        Mr. Yingling. I happen to think all regulators and all Wall
    Street bankers ought to watch ``Jurassic Park,'' because it is
    kind of the same thing, a theory about how everything will
    work, but the reality is the animals will figure out a way
    around it.
        Mr. Ryan. I spent a lot of time in this hearing room from
    1989 to 1993 because we were closing seven institutions a week
    at that time, and we had all kinds of problems. So I certainly
    did not intend to come back here 15 or 16 years later. We are
    talking about different instruments and different problems,
    but, also, in the financial sector.
        So what I have learned is that things do repeat themselves.
    They are a little bit different. The most important thing is,
    because regulators are looking in rear-view mirrors
    principally, we need to set up a structure that actually can
    look forward and that can have the ability to understand what
    we are actually doing on a global basis. We need to have the
    right people. We need to have enough people, and we need to pay
    them enough so they can really maintain, keep, and attract the
    right people.
        Mr. Lynch. Thank you, Mr. Chairman.
        The Chairman. Thank you.
        The gentlewoman from Illinois.
        Mrs. Biggert. Thank you, Mr. Chairman.
        I would like to direct my first question to Mr. Washburn.
        I have been out and about in my district, talking to my
    local banks and credit unions. What they have been saying is
    that they are doing okay, that their mortgages were kept in
    house, and that they do not seem to have the lack of liquidity
    as much as the larger banks do.
        So I was wondering, Secretary Paulson is pushing a program
    under the capital purchase program that will capitalize banks,
    not just those in trouble, and that they should be included in
    this program. Would you agree with that for the smaller banks?
        Mr. Washburn. I would.
        In speaking for ICBA, there has been a lot of interest
    among our membership, again, of 8,000 banks participating. And
    speaking specifically about Red Mountain Bank, we would be
    interested in participating in the program. Capital is king,
    and we are in a great market. We are experiencing a tremendous
    loan demand because of what is going on around us. If we had
    additional capital to grow, it would be a great thing for our
    bank, for our economy, for job creation, and for all of the
    things that go along with that. So, indeed, we would be willing
    to participate, and we would be very excited about the
    possibility.
        Mrs. Biggert. In your testimony, you advocated that there
    be a tiered regulatory system with less stringent and less
    intrusive regulation of community banks.
        Do you think that the banks might then be willing to take
    more risk if they do not have the same regulations as do the
    larger banks?
        Mr. Washburn. Absolutely not. Community banks have been
    around forever, and we operate by a very simple business model.
    We lend money to people who pay us back. It is very simple. It
    has worked for years. We continue to want to do that going
    forward, so I do not see that changing whatever changes here.
        Mrs. Biggert. Do you think that one of the problems with
    the financial institutions in getting into this securitization
    was that they did not keep part of the assets within their own
    institution?
        Mr. Washburn. I agree. That is so true.
        You talk about covered bonds and things you see and you
    read about today. If those assets had remained on the balance
    sheet, and you had had responsibility and personal
    responsibility for those, and if it had been your money
    invested in your bank, it would be a new day for not only the
    people inside the bank, but for the shareholders and for the
    regulators as well.
        Mrs. Biggert. Thank you.
        Then the other thing we have heard is that the engine will
    start up again once the banks are willing to loan to each
    other. Is that a problem in the community banks?
        Mr. Washburn. No, ma'am.
        Mrs. Biggert. Maybe I will ask Mr. Yingling.
        Is that the big problem, this credit freeze between banks?
        Mr. Yingling. Well, it is really a problem with the larger
    banks in the international markets. As Mr. Washburn said, it is
    not really a problem with community banks. The great majority
    of community banks are in solid shape and are willing to lend.
    This new program can have a positive impact.
        One thing we have to watch is how many strings are
    attached, because these are banks that can do just fine by
    themselves, but they need capital to support growth in lending,
    and the capital markets to community banks right now are not
    functioning very well. So you could have a situation where a
    bank will take some of this capital for a very short period of
    time, and then when the capital markets open, they will replace
    it with private capital.
        Mrs. Biggert. Okay. I asked that question earlier about the
    Secretary's Blueprint. Do you agree with changing the
    regulators from the functional to the other types of regulators
    that he has proposed?
        Mr. Yingling. By and large, we have found some positive
    things in the Blueprint. We did not care for it. For one thing,
    we found that, in the end, the structure was more complicated
    for an individual bank than it had been to start with.
        Mrs. Biggert. Do you think that would help, though, the
    systemic risk problem that we seem to be having with the
    regulator?
        Mr. Yingling. It was not covered particularly in the
    Blueprint, but as I testified, I do think there is a real need
    for a regulator who looks over the economy. Now, that may be
    different than the regulator who actually regulates day-to-day,
    but we had not had somebody looking over the economy and
    identifying these incredible types of growth and these bubbles,
    such as the mortgage bubble and other bubbles. So we do need a
    regulator who has the charter to look across the economy and to
    identify problems before they occur.
        Mrs. Biggert. Thank you. I yield back.
        The Chairman. The gentleman from Georgia.
        Mr. Scott. Thank you, Mr. Chairman.
        It is good to have you all here. As bankers, you are right
    in the catbird's seat. You represent about 95 percent of the
    entire financial industry's assets; that comes to about $13
    trillion. That is everything, so it is critical that you stay
    healthy.
        As we go forward with this restructuring for reform and for
    regulatory reform, there are two types: There is the
    unregulated; and then there is the regulated part of your
    industry. We have to look at it in a way in which we come up
    with a delicate balance. Nowhere is the vulnerabilities. I
    talked earlier in my opening statement that we must zero in
    very quickly in the vulnerabilities, and that there is no
    greater vulnerability than what caused this problem, and that
    is bad mortgages and default.
        I know one thing: If we follow the scenario of what got us
    into this problem, and if we get the urgency quickly to resolve
    it, we are on our way, because the American people want some
    real solutions, and that is this: Home foreclosures and these
    bad deals that were made, first of all, we have mortgage
    brokers and loan originators who go in and make these loans
    based upon high risk because that is the way they are
    compensated. Somebody has to do something about that. Then they
    take these loans, and they securitize them. Once they are
    securitized, it immediately disconnects the loan servicer and
    the loan originator from the borrower. Then these security
    packages are packaged, and they are sold all around the place.
    So people are just in there; they make their money; they cut it
    up, sell it; and they are out of there. Then these mortgages
    are sold and packaged all around the world. That is how we got
    into this. So we have to move forthrightly in that respect, and
    I would like to get your comments on that.
        Secondly, I believe that we have to put an infusion of
    capital into helping homeowners stay in their homes. Now,
    Chairman Frank was kind enough when we were on the Floor with
    the $700 billion bailout to allow us to address that issue. One
    of the things that we need to do is to put in some
    capitalization. We tried to get 1 to 2 percent of the $700
    billion or to direct the Secretary to make sure we had that
    available. We do not have any incentives in here for the
    lenders and for the loan servicers to come in and to
    restructure these loans on a sustainable basis. We have an
    economic stimulus package coming. We could not get it in there
    because, as the chairman said, we would have to send the bill
    back to the Senate. Chairman Frank and I have instructed the
    Treasury Secretary to move in this regard, and we realize that
    there has to be some money set aside.
        I have talked with Barack Obama about it. He certainly was
    for this going forward, as you will recall, as a modified,
    different type. At least Senator McCain also addressed this
    issue. We need some money. Just as surely as we got it for Wall
    Street, we need some money set aside here so that we will be
    able to have money to help homeowners stay in their homes and
    to restructure these loans and to put some incentives in there
    for lenders to go and to restructure their homes.
        The Chairman. If the gentleman wants answers to the
    questions, there is only about 1 minute left.
        Mr. Scott. I would. We have the economic stimulus coming
    up. We might be able to address it here. Please do so. Thank
    you.
        Mr. Ryan. May I give an answer on securitization, please?
        Mr. Scott. Yes.
        Mr. Ryan. Thank you.
        Just to put this in perspective, globally, and by our
    estimate in 2007, about $2.5 trillion of consumer assets were
    securitized and distributed. This year, in 2008, we will be
    down very significantly at less than $1 trillion, probably at
    about $800 billion. This is principally mortgage, but also
    credit card, auto, and student loans.
        Without the securitization process that has developed over
    the last 20 years, many, many citizens would not have had
    access to this consumer financing. The financial system in the
    United States, which we all know well, does not have the
    capacity from a capital standpoint to support the consumer
    finance that I have just noted here without securitization.
        Now, we know we have had some issues with securitization. I
    am sure this committee has talked about some of the things that
    need to be done. We have been working very, very hard at
    reforming the credit rating agency process, at disclosure and
    transparency on underlying documentation and at valuations for
    securities. We are highly confident that we can roll out a
    process here that would make a lot of sense and that would
    still afford people the opportunity to pay for their homes, to
    buy cars, and to use credit cards.
        The Chairman. One quick answer if anybody has any other
    comment.
        Mr. Yingling. I just want to say your analysis of the cause
    of the problems was exactly right. One of the things that is
    not talked about much is when the unregulated side did these
    things--and this happens all the time--they ended up blowing up
    the regulated side. So this has had a very negative effect on
    good banks that did not do any of this.
        I would also say that it just seems to me that some part of
    the stimulus package ought to be devoted to what caused the
    problem. That is housing--keeping people in their houses and
    helping some of those homes be taken, perhaps, by entrepreneurs
    who would turn them into rental housing.
        The Chairman. The gentleman from Texas.
        Mr. Neugebauer. Thank you, Mr. Chairman.
        On one of the things I agree with Mr. Yingling and with Mr.
    Washburn, and it is that we need to make sure that we do not
    overreach and impact those financial institutions that did not
    do that. I kind of liken that to little Johnny misbehaved in
    class, and the whole class had to stay after school.
        What we have in our banking system today are our community
    banks. Some of them are small. Some of them are medium-sized.
    Some of them are large community banks. Then we have these very
    large banking financial institutions. There is going to be a
    lot of discussion over the next few months and years, probably
    in this committee, on systemic risk and on the size of an
    institution and on how you manage that risk.
        With a broad range of financial institutions, how do we
    develop a new regulatory pattern or institution that can
    regulate such a broad range? Because one of the things we hear
    folks say is that we need one regulator for, for example, the
    banking industry or that we need two regulators.
        Can one regulator do that? What would that new structure
    look like, if we were to change that structure, that could
    regulate such a wide variety of institutions?
        Mr. Washburn. I cannot imagine one regulator regulating the
    entire banking system as we know it. That is one reason we are
    calling for the divestiture of those larger institutions into a
    more manageable size. I think that is critical. We still
    maintain and we still believe that we need different regulatory
    bodies. There are two types of charters available to us. This
    creates some healthy competition among the regulators. As long
    as they maintain contact in interagency decisions, they will
    all be governed consistently across the board.
        Mr. Yingling. I would agree with that. In the dual banking
    system, the diversity of charters has been critical. It is one
    area where we differ from some other countries.
        One of the advantages of it is that there is much more
    lending and capital available to small businesses and to
    entrepreneurs in this country because we have such a diverse
    system.
        I think another thing--and this committee has worked hard
    on it--is to recognize that when you pass rules designed to
    solve a problem, that they quite often apply most heavily to
    your analogy that did not cause the problem. One of the really
    big problems for community banks, and it may be the biggest
    problem in competing today, is just the huge regulatory burden.
    There are great economies of scale in dealing with these
    regulations, and the small banks just cannot deal with that.
        Mr. Bartlett. Congressman, I might add that you are not
    going to get down to one regulator, nor should you, but there
    should be fewer regulators than there are now. More
    importantly, the system of regulation should be coordinated
    between one another. There are literally hundreds of regulators
    for financial services, and it is the gaps that cause the
    problem.
        One other admonition: I would hope that the committee and
    the Congress and the industry do not sort of fall into the
    traditional fights of large versus small. It is not large
    versus small; it is a continuum of size, just like every other
    industry. Nor should they pit one sector against another, the
    traditional thrift versus bank, insurance versus bank versus
    securities dealers.
        The fact is that it is an integrated financial services
    system that needs to be regulated as an integrated financial
    services system for safety, for soundness, for systemic
    regulation, and for business conduct. Therein lies the answer.
        Mr. Neugebauer. One of the issues that keeps coming up is
    ``too big to fail.'' So the question is: When we look at the
    factors of systemic risk, if size is a piece of it--and we
    heard Mr. Washburn say that he thinks that some of these
    entities are too large, if you do not break up these larger
    entities, is there a regulatory environment where you can
    manage systemic risk from the safety and soundness side rather
    than having to worry about the size of that institution?
        Mr. Bartlett. Well, first, I would just submit that there
    is no such thing as ``too big to fail'' from the perspective of
    the shareholders. There are shareholders all over America who
    have failed. The Federal Reserve and others have concluded, I
    think appropriately, that there is a certain size where the
    systemic risk to hundreds or to thousands of other companies
    and individuals is so great that allowing those assets to
    simply stop is worse for everyone, and so the assets and the
    liabilities go somewhere else, but the institution failed.
        Secondly, I think that it is not so much the size as it is
    the regulation, to make sure that it is regulated for the gaps
    so that each regulator talks to one another and coordinates
    with one another. I do not think it is the size overall. I
    think it is what the institutions do, not how large they are.
        The Chairman. Mr. Ryan, do you want to add something
    quickly?
        Mr. Ryan. My only comment here is that the issue before the
    globe, really, right now is not really ``too big to fail.'' It
    is the issue of interconnectedness and, when we see an
    interconnected entity that has problems, what the governments
    need to do about it. I think that is the major issue on the
    table going forward.
        The Chairman. The other gentleman from Texas.
        Mr. Green. Thank you, Mr. Chairman.
        Mr. Chairman, there are some things that the consumers are
    focusing on, and they are becoming more and more sophisticated.
    There are some things that they just cannot understand. They do
    not understand why a person with five homes can go into
    bankruptcy, where he can save four but cannot save his
    principal residence. They see something inherently unfair about
    a system that allows me to save my vacation home, but that will
    not allow me to save my residence. They do not really
    understand why there is something called a yield spread premium
    that allows the broker to qualify me for a loan at 5 percent,
    to accord me a loan at 8 percent, to get a lawful kickback, and
    to not have that made known to the consumer. They really do not
    understand how we can have naked short selling and not do
    something to try to curtail it. They do not understand how
    hedge funds that require sophisticated investors can have
    pension funds with money that belongs to pensioners who are not
    necessarily sophisticated investors. This is in the truest
    sense of what a sophisticated investor is, not based upon
    knowledge, but based upon capital as well as some degree of
    intellect. So the American public is starting to focus on these
    things, and they are becoming very concerned about them.
        My question to members of the panel would be, do we need to
    do something about some of these things? The bankruptcy law
    that allows for the vacation home to be saved in bankruptcy,
    but for my principal place of residence or for the consumer's
    principal place of residence not to be saved, is that law just
    fine as it is? If you think that it is just fine as it is,
    would you kindly raise your hand?
        All right. Mr. Bartlett, let us start with you.
        The Chairman. For the benefit of the reporter, I assume you
    got who raised their hands.
        Mr. Green. Mr. Bartlett and Mr. Yingling.
        The Chairman. I would just encourage Members to remember
    that the system of recordation was not made for pantomime.
        Mr. Green. Thank you. I appreciate that, Mr. Chairman. You
    are a much better lawyer.
        Let us just visit briefly--I think, Mr. Bartlett, you
    mentioned earlier that the next stimulus package should contain
    something with a reference to housing. What did you have in
    mind for housing?
        Mr. Bartlett. Congressman, it is very clear that it was
    housing that led us into the recession, and so I think the
    housing is going to be required to lead us out of the
    recession.
        Mr. Green. Because my time is going to be very short, I am
    going to have to interrupt. Please forgive me. I do not mean to
    be rude, crude, and unrefined, but I have 5 minutes, and there
    is much more that I need to do. So let me ask you this: With
    reference to bankruptcy, what do you see as the impediment to
    allowing persons who only have one home to save their one home
    when they are in bankruptcy?
        Mr. Bartlett. We think that person should be able to save
    that home if you can remodify the mortgage so that they can pay
    it.
        Mr. Green. That is what the bankruptcy laws do not permit.
    They do not permit the restructuring of the loan so that you
    can reduce principal and so that you can reduce interest. That
    is what the laws do not permit.
        So are you saying that you would now allow this?
        Mr. Bartlett. We do allow that. We do it all the time.
        Mr. Green. Would you allow the bankruptcy laws to be
    amended so that this can be done by a bankruptcy judge?
        Mr. Bartlett. Congressman, I suppose our disagreement would
    be that we do not agree that people should be required to go
    into bankruptcy in order to modify their mortgages.
        Mr. Green. Well, it is when you go into bankruptcy. It is
    not because you want to, but it is because you have to, because
    it is your last resort, and because your home is all you have
    left, and you are trying to protect your last good chance to
    start all over again in life with a home. That is what we are
    talking about.
        Should the bankruptcy laws allow a person to keep his home?
        Mr. Bartlett. Congressman, I suppose what I am trying to
    say is that we hope now the new Treasury proposal on a much
    faster pace is modifying mortgages and will be modifying
    mortgages without requiring people to go into bankruptcy.
        Mr. Green. I understand. Those who do have to go are the
    folks we are talking about, not the ones we would hope would
    never get there. Some do go into bankruptcy. Why not have that
    person afforded the opportunity as the person who has two
    homes? Senator McCain said he had seven homes, I think, or
    eight, I am not sure how many; he can save six of those homes.
    The person in bankruptcy with only one has a problem. He cannot
    save that one under the current law.
        Mr. Bartlett. It is hard for a Texan to disagree with
    another Texan. We are trying to get to the same place.
        Mr. Green. Well, we do it with a degree of love for each
    other. We are going to still be friends when this is all said
    and done, but some of us are concerned about the consumer who
    has to lose everything and who, maybe, should be afforded the
    opportunity to save his or her home.
        The Chairman. Let Mr. Yingling finish.
        Mr. Yingling. Just quickly, it is a trade-off because,
    right now, the interest rate on that second home is higher
    because of the bankruptcy rules. So, if you make the first home
    like the second home, it may help some people now, but it means
    that, marginally, interest rates are going to be higher on
    everybody else who gets a first mortgage going forward. That is
    the trade-off that Congress has dealt with.
        The Chairman. The gentleman from Missouri is yielding to
    the gentleman from Texas one of his minutes, I gather.
        Mr. Green. Yes, sir.
        My understanding is that same argument was made with
    reference to farm property, that the interest rates would go up
    on those farm loans. We find that, after a while, these things
    tend to find their own equilibrium in the economic order. At
    some point, the consumer ought to be given some preference in
    this process; $700 billion and we do not bail out the consumer?
    Something is wrong. People are not going to stand for it. I am
    telling you we have to focus on doing something for the
    consumer.
        With regard to the yield spread premium, really fast, what
    would you do about the yield spread premium?
        Mr. Yingling. Well, I think it is something that needs to
    be looked at.
        Mr. Green. We have looked at a lot of things. What do we do
    about it?
        Mr. Yingling. There are some ways in which it is
    justifiable, but it has clearly been abused. There is no doubt
    about it.
        Mr. Green. What about putting pension funds into hedge
    funds where you are required to be a sophisticated investor?
        Mr. Yingling. Well, you would have to talk to the pension
    fund people. I think they would tell you that they have made
    some money on it. Clearly that is another issue that needs to
    be looked at.
        The Chairman. We will go back now. The gentleman will get
    his 4 minutes after the gentleman from Ohio.
        Mr. LaTourette. Thank you, Mr. Chairman.
        To my friend from Texas, I would just share your pain and
    would indicate that when you have closed rules, nobody gets to
    make modifications to bills. You do not get cramdown. We do not
    get a repatriation of funds.
        Mr. Chairman, I want to ask unanimous consent to enter into
    the record an October 15, 2008, letter from CUNA to balance out
    Mr. Kanjorski's NASCUS letter.
        The Chairman. Yes, we have general leave.
        Mr. LaTourette. Thank you so much.
        Gentlemen, at the beginning of the hearing, I referenced
    two articles, one appearing over the weekend in the New York
    Times that dealt with a development down in Texas. In this
    morning's paper, in the Cleveland Plain Dealer, it talks a
    little bit about the same thing. The author of the Plain Dealer
    article is a guy named Phillip Morris.
        You, Mr. Bartlett, and you, Mr. Yingling, at least have
    talked about the unregulated side dragging down the regulated
    side. I just want to sort of focus on that for a second. There
    was a fellow just indicted in Ohio for turning a place called
    Slavic Village, a beautiful place, into a wasteland. The fellow
    who has been indicted was a mortgage broker from Cleveland
    Heights.
        Basically, the article indicates--and I am paraphrasing--
    that he could turn you into a real estate mogul on somebody
    else's dime. No credit, no problem. The guy would invent you
    some. No work history, no problem. He could create that, too.
    The example is a guy named Irvin Johnson, not the basketball
    player but another Irvin Johnson. He indicated that the FBI was
    sort of sniffing around because, between 2005 and 2006, he and
    his wife amassed nearly $2 million in residential property. By
    profession, he was a grass cutter who made no more than $10,000
    a year, and his wife was a nurse's aide. So it clearly goes
    through that probably this guy should not have been qualified
    for the six mortgages that he had.
        I think we would all agree that the unregulated side and
    the unscrupulous, in some cases, had willing victims, but his
    walk-off line is: The bankers who financed and who once greatly
    profited from the foreclosure epidemic remain in the shadows. I
    think what he is talking about is that the unregulated side may
    have originated the mortgages, but that the regulated side
    purchased the mortgages, and then they were securitized, as Mr.
    Ryan talks about.
        Either Mr. Bartlett or Mr. Yingling, if you could respond
    to sort of that walk-off line. We all know of these fly-by-
    night groups that came in and that wrote mortgages they were
    not supposed to write on the basis of a commission, but then
    somebody bought them. Somebody bought the paper.
        Mr. Bartlett.
        Mr. Bartlett. Congressman, you have it about right.
        During the crisis of subprime, 50 percent of all of the
    subprime mortgages were originated by a totally unregulated
    mortgage lender. Fifty-eight percent total were sold by
    mortgage brokers, but it is actually worse than that because
    then the other 50 percent that were originated by regulated
    lenders, regardless of the nature of those loans, were mostly
    then sold to Wall Street, to a different set of regulators,
    either lightly regulated or not regulated at all, that were
    then packaged up into another set of unregulated mortgage
    pools, that were then brought back to mortgage insurance, which
    was regulated by 50 State regulators, and that were all sort of
    certified by credit rating agencies that were not regulated at
    all.
        So, as to the system as a whole, you are right. Half of it
    originated was totally unregulated, but the rest of the system
    that was regulated was virtually unregulated at least with the
    gaps. So it is the system that needs to be reformed
    systemically.
        Mr. LaTourette. I would say where some of us had a
    disappointment or a dissatisfaction with the Treasury
    Department's proposal is that is where the $700 billion is
    going, to the other lightly regulated side, which was packaging
    and then moving these mortgages. It was not the traditional
    banks, right?
        Mr. Bartlett. Well, Congressman, I would not concur. I
    think the $700 billion is going to a whole series of places to
    put capital back into the system, including buying these
    mortgages. When that happens, the first step is to put capital
    into the financial institutions overall, not merely into banks
    as the statute provides.
        Mr. LaTourette. Let me just ask: Three of you mentioned
    mark to market. I asked the last panel about mark to market,
    and one fellow from Rochester said I was trying to go back to
    the 13th Century, I think.
        Mark to market, I am told, is really having a tremendous
    impact on the ability of the community banks--all banks--to
    have the capital necessary to loan. I would just ask you each
    to make that observation. If mark to market is not it, what
    should we put in place of mark to market, or what follow-up
    should we have on the chairman and Mr. Bachus' idea of looking
    at the ancillary impact of mark to market?
        Mr. Yingling.
        Mr. Yingling. Well, I think what the chairman said a little
    while earlier in the hearing makes a lot of sense. There are a
    lot of straw men in this debate. Nobody is talking about not
    disclosing everything.
        When you have mark-to-market accounting in a dysfunctional
    market--and I will just give you an example, the Bank for
    International Settlements, which is the premier international
    regulatory body, did a study a month or so ago that said the
    top tier of mortgage securities, the safest part of the
    mortgage securities, was being undervalued by the index that
    was used as the base for mark to market, undervalued by 60
    percent because that index is in a dysfunctional market. It is
    a very narrow index. It is an index that is based on dumping.
    It is an index that is run by bears, and that is what they
    said. So it may make sense to disclose that. What does not make
    sense is to have that drive issues relating to capital and to
    the ability of institutions to function.
        So I do think you need to have a system in which you can
    have disclosures, but the impact of mark to market has to be
    dealt with.
        The Chairman. We have to finish up here, Mr. Yingling.
        Mr. Yingling. Frankly, I think the current structure will
    not let you get there. I do not think the SEC's regulating FASB
    in the light way they have will let you get there. That is why
    we have put out a proposal that would have an oversight board,
    headed by the systemic regulator. I think that would help the
    chairman get to his proposal.
        The Chairman. Thank you.
        Now I have a request of the witnesses. Would all of you
    look around and see if you can find Joe Stiglitz's cell phone,
    which he left somewhere, and it is turned off? So, if you find
    his cell phone--
        Mr. Washburn. What is his number?
        The Chairman. Well, it is turned off. Nobody should sit at
    the witness table with his or her cell phone turned on.
        The gentleman from Missouri has 4 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman.
        Whenever we begin this discussion of regulation, it always
    creates ideological differences.
        Mr. Yingling and Mr. Washburn, I am wondering, since
    someone here on our committee made a comment before the break
    that the CRA and minorities were responsible for the subprime
    mortgage debacle, I would like to find out from you, from the
    banking industry, do you believe that the CRA is a regulatory
    burden?
        Mr. Yingling or Mr. Washburn.
        The Chairman. I am sorry. Let us not have anybody standing
    in the way of the witnesses.
        Mr. Yingling. Well, I want to say that banks have no
    trouble with the philosophy of CRAs. Indeed, if you are going
    to be a good banker, you should be serving your communities.
        Mr. Cleaver. I am sorry. I hate to interrupt, because I
    think that is rude. Could you just answer the question, because
    I only have 4 minutes.
        Mr. Yingling. We do have some problems with the regulatory
    costs, but I have made a strong argument during these hearings
    that the root cause--and some of your colleagues have talked
    about it--was the unregulated part of the financial services
    industry in starting these loans, bypassing the regulated
    banking system and taking them to Wall Street. CRA applies to
    the regulated side. So I am sometimes inconsistent, but I try
    not to be inconsistent in a public hearing. So, having argued
    that it is unregulated that started it, it is hard to argue
    that the regulated part with CRA is a major cause of it.
        Mr. Cleaver. Mr. Washburn.
        Mr. Washburn. I do not think it is a major problem. We live
    in a very regulated world. Being a commercial bank, it is part
    of the regulations that we understand and that we deal with
    weekly, daily and annually. So I do not see its being a major
    problem.
        Mr. Cleaver. Okay. So Congressman Green and I did not
    create this debacle, nor did our people?
        Mr. Yingling. Well, we have many community banks that are
    living with CRA, and they did not cause this problem.
        Mr. Cleaver. But do you understand the--you do understand.
    Thank you for your answers.
        I guess the point I want to make is whenever we begin to
    speak about regulations it generates the rising of this
    ideological opposition. And in order to make points, then false
    information is shot across the country. It is refreshing that
    those of you who represent the banking industry are not
    involved in that.
        I think it would be very healthy if you would--your
    associations would speak very openly and clearly about it
    because I knew that when I went to my town hall meeting
    Saturday that it would be just a matter of time before someone
    stood up and said the CRA and minorities caused this crisis.
    And I think when we talk about regulations, it is used as an
    opportunity to divide as opposed to trying to figure out ways
    in which we can operate our financial institutions better.
        Thank you, Mr. Chairman.
        The Chairman. Will the gentleman yield just briefly? I had
    the staff do a very thorough study, and at no point in the
    history of CRA is there any evidence that any covered
    institution was ordered to comply with CRA by engaging in
    credit default swaps. We are able to definitively say that.
        The gentleman from New Jersey.
        Mr. Garrett. I thank the chairman and I thank you all here
    for your testimony. One of the things, obviously, that has led
    to the macro issue, the credit problem issue they are currently
    experiencing as indicated earlier, is the problems in the
    mortgage sector. I thought I would take a moment to discuss an
    alternative to our current mortgage securitization process, and
    I think one of your members mentioned it before, just very
    briefly, and that is covered bonds.
        Covered bonds, as you know, have been used effectively in
    Europe for centuries and recently were introduced in the United
    States. Basically, they are debt instruments created from high-
    quality assets and they are held--and this important--on the
    bank's balance sheet and secured by a pool, and that is why it
    is called a covered pool of mortgages.
        And so in contrast to mortgage securitization where loans
    are made and then sold off to investors, a covered bond is a
    debt instrument issued by the lending institutions to the
    investors. And this debt is then backed or covered by that pool
    of typically high-rated AAA mortgages, and they then act as the
    collateral for the investor in the case of a bank failure. This
    structure keeps the mortgages on a lending institution's
    balance sheet. And that also provides for greater
    accountability, if you will, as to the high underwriting
    standards. And they have the potential to aid and return
    liquidity to the mortgage marketplace we are in today through
    improved underwriting and accountability.
        I will just say as an aside, I dropped in a bill, H.R.
    6659, the Equal Treatment of Covered Bonds Act of 2008, and
    this legislation will clear up some of the ambiguities in the
    current law and codify several existing parameters of the
    market. It enshrines in the investment tool the law that will
    provide greater certainty, stability, and permanency for
    covered bonds.
        In addition, the spreads would be narrower, which will
    encourage more institutions to enter into the covered bond
    marketplace. And it is a goal to provide an environment through
    its legislation in which the market would be able to flourish,
    as it used to be, and produce increased liquidity. So
    legislation covered bonds provide for a greater sense of legal
    security than ones through regulations.
        And so, Mr. Ryan, I will throw that out to you. I know
    SIFMA announced at the end of July, in the summer, that it was
    creating a U.S. covered bonds traders committee, possible
    investors that would support the growth of covered bonds market
    in the United States and play an active role in fostering and
    strengthening this market.
        I know that there have been a lot of other things going on
    as far as other proposals and recommendations that you have
    been talking on. But I would ask you, first of all, how is the
    committee going, what do you see for the future? And then I
    have another couple of questions.
        Mr. Ryan. The committee is working, I would say,
    comprehensively in coming up with reasonable suggestions to the
    Congress and the Administration on changes that are necessary
    in the United States so that we can have a covered bond market
    similar to Europe. Our members in Europe are integrated into
    that program. So we are trying to take what we have learned in
    Europe and apply it to the United States.
        We certainly appreciate the attention you paid to this
    issue because once we make our way through this crisis, we will
    need to find new tools for financing housing in the United
    States. This could be one of them.
        Mr. Garrett. One last question on this point is, do you see
    the benefit of doing this through the legislative process, to
    try to bring that homogeneity to it and also the structure to
    it and the stability to it, as opposed to a regulation
    approach?
        Mr. Ryan. I think it probably will require some statutory
    changes and we will give those to you.
        Mr. Garrett. I appreciate that. Does anyone else on the
    panel need to--or not need to, but wish to address the issue of
    covered bonds? I see my time is just about up. If not, then I
    yield back to the chairman.
        The Chairman. The gentlewoman from Illinois.
        Ms. Bean. Thank you, Mr. Chairman, and Ranking Member
    Bachus, for holding this important hearing today on something
    so many Americans are concerned about. They are rightfully
    concerned about their own and our Nation's economic futures and
    want to know that we are going to put in place the oversight
    and transparency to avoid this kind of situation ever happening
    again.
        I am proud to chair the new Democratic Working Group on
    Regulatory Modernization and we have put together a number of
    issues we are focusing on. And so, I wanted to give each of you
    maybe one question that addresses one of those each issues.
        To Mr. Washburn, regarding the mortgage reform bill that
    this committee passed last year, I believe it was in April, but
    unfortunately didn't get through the Senate and get to the
    President to become law, in that bill that we passed, we
    eliminated many of the risky lending practices that contributed
    to the subprime fallout that has so affected the rest of the
    capital market structure.
        We also put liability to the securitizers to address what
    Congressman LaTourette I think rightly attributed to, one of
    the problems was that the originators weren't ultimately going
    to be holding the bag for bad loans that they might write. And
    by putting liabilities to the securitizer we also then gave
    them a home waiver provision; that if they had best practices
    in place to make sure that the originators were adhering--the
    ability to pay models and old underwriting standards that used
    to work, they wouldn't have that liability.
        So my question to Mr. Washburn is, how do you feel about
    that bill, had it become law; and if it had a year ago, would
    we have avoided the number or the severity of some of the
    challenges that we are facing in this crisis? Before you go
    there, I want to lay out a couple of other questions and then
    we will come back.
        To Mr. Yingling, on mark to market, I think the chairman
    earlier talked about how the real issue--and you just spoke to
    it briefly--is that the capital calls more than necessarily how
    you measure, but the consequences of the accounting rules that
    affect it. My question is, the SEC has changed some of those
    rules recently, and how do you think that is affecting balance
    sheets currently with those changes that allow a little more
    flexibility?
        To Mr. Ryan, my question is regarding the uptick in the
    collateral rules. Earlier in the previous panel, we had some
    questions about the uptick rule and, if that was reinstated,
    would it avoid some of the naked short selling that has gone on
    and contributed to the downward spiral of many securities? But
    also the collateral role, not just as applied to those, but to
    the credit default swaps that don't require collateral to get
    involved in them and how that has allowed so many people to
    even create greater degrees of risk and leverage, what are your
    thoughts on that?
        And if we get to it with timing to Mr. Bartlett, you talked
    about a clearinghouse for derivatives and disclosure of risk
    and what your comments are on that.
        So I would like to go to Mr. Washburn first.
        Mr. Washburn. Could you go back over my question?
        Ms. Bean. Sure. Yours was on mortgage reform which
    eliminated risky lending practices, put liability to the
    securitizers so they would make sure the originators did what
    they were supposed to do to avoid that liability; is that a
    good thing, is that what we need now? Or do we need something
    else, because I think that bill would have addressed it. And
    second, if we had done it, would we have avoided some of this
    fallout?
        Mr. Washburn. I think that would have solved part of the
    problem that you see today. Some of it may have occurred that
    we could have done nothing about having happen in the past. But
    I think responsibility is something that the whole industry
    needs to step forward on. We talked about covered bonds being a
    way to keep those assets on the balance sheet. In each step
    those securities were moved from the originator, the less
    liability you have.
        As someone told me recently in a conversation, probably 80
    percent of those originators that were out there are no longer
    in business. So it is just a new day for mortgage origination.
    I think that might have helped.
        Ms. Bean. Okay. Thank you. Mr. Yingling, it was about the
    SEC's change.
        Mr. Yingling. The steps the SEC tried to take were
    marginally helpful. Unfortunately, FASB--they delegated part of
    it back to FASB and they took us right around in a circle. So
    marginal progress but really not significant, and I think it
    shows why the current system doesn't quite work.
        Ms. Bean. If I can, Mr. Chairman. I believe you concurred
    with the chairman earlier that it should be more about capital
    cost than changing the accounting rules specifically.
        Mr. Yingling. Well, the way the accounting rules--the
    impact of the accounting rules need to be changed as opposed to
    the disclosure.
        The Chairman. It triggers capital requirements at a time
    when it is a problem. You also have a situation where there are
    certain entities which by law can't buy certain other entities,
    and the mark to market can trigger an inability to sell and it
    is procyclical.
        And if you notice, Professor Stiglitz, who is not usually
    accused of being a shill for the industry, talked also about
    not having these things be procyclical.
        Mr. Yingling. He did. But just to correct the record, he
    said that we weren't pure when the market was up. We have
    raised these questions about mark-to-market accounting being
    procyclical in up and down. We have raised them for years. You
    are exactly right, Mr. Chairman.
        The Chairman. Well, if I were you, I would take the
    agreement I can get and go debate your purity elsewhere. But
    some arguments are easier to win than others.
        I would just say with regard to covered bonds, and this
    question of what consequences we should flow in a mark to
    market, will be very high on this committee's agenda next year.
    We have a very broad set of things to look at that will not
    stop us from doing some specific things, including continuing
    our deregulation in the areas of security and others as well.
        The gentleman from Alabama.
        Mr. Bachus. Thank you. I will submit a question on the
    countercyclical capital requirements, which I do believe that
    is a problem.
        The Chairman. If the gentleman would yield. I would note
    that on September 18th, the gentleman from Alabama asked that
    this particular subject be a specific topic of the hearing, so
    it is something that has our attention.
        Mr. Bachus. Thank you. Mark to market, early on when we
    started proposing an intervention to buy troubled assets from a
    small number of large institutions, many members mentioned mark
    to market. But I want to say this to representatives of the
    banking group, almost immediately, you all endorsed TARP as a
    way to solve the problem. I don't want to second-guess you, but
    it did undercut our efforts to have a more comprehensive
    program.
        I submitted a letter, again October 14th, to the SEC saying
    that we needed urgent action on this matter. And mark to market
    is because of Enron and WorldCom. So I am for fair valuation.
    But the existing interpretation of FAS 157, as you all know and
    I know, can be done better. And if we continue to place these
    reduced values on these assets it is going to cancel out, I
    think, any benefit of capital injection. So to me it is a very
    important thing. And I know you have my September--I mean
    October letter to the SEC, and I hope we will join together and
    continue to push this.
        Mr. Yingling. We agree completely with your letter. They
    have--at FASB and SEC, within the current rules they have
    flexibility to make important interpretations.
        Mr. Bachus. Absolutely. And they need to base those values
    on some reasonable expectation. Now, you know, you have
    mentioned that we continue to have this debate over regulated
    or nonregulated, what caused the problem. But now I am going to
    take issue with this idea that most of these institutions
    weren't regulated. At some level, they were regulated. If you
    are talking about the investment banks which, you know, if the
    investment banks hadn't engaged in what they did, I am not sure
    we would even be here today. And they were regulated by the
    SEC, by the CSE program. And it was the SEC that in 2004 let
    them water down their capital ratios that went from 12 to 1 to
    40 to 1.
        And you know AIG, is gone today. I mean not gone, they are
    the subject of a massive bailout. Now, the reason I bring that
    up is not to get in a conflict with you, but we still have this
    idea of licensing and registration of mortgage originators. And
    you know, you and I, we have been on the opposite sides of
    that. You all have opposed registration and licensing of
    mortgage originators. You want to just do it for the mortgage
    brokers, not for those under the regulated institutions.
        But, Mr. Bartlett, as you said, or Congressman Bartlett,
    40-something percent of the bad actors were working for
    regulated institutions. We are talking about Golden West,
    Countrywide, IndyMac, Washington Mutual, a lot of them are at
    banks. I know you all are continuing to resist my efforts to
    extend that to all mortgage originators. And I hope you will
    take a look at this in hindsight--because you all have resisted
    these efforts for 3 or 4 years in subprime reform--and just
    say, look, we are there.
        I am just going to ask you to continue to look at that.
    Because, look, if you don't, you are going to have 40 percent
    of the problem, or it could be 60 percent of these folks who go
    from one institution to another. They make bad loans in one
    State, they show up in another State, and it is a big loophole.
        Let me ask you this: When you all endorsed the TARP plan,
    did you not have the same concerns that I expressed from day
    one, that why would you want those assets to come into the
    government, you know, to be managed by the government? Wasn't
    the expertise with the institutions? Wasn't it far better to
    use covered bonds or lending or preferred stocks to inject the
    capital in the institution?
        Mr. Bartlett. Congressman, we endorsed it because there is
    a crisis, an economic crisis. And we think that you have to get
    capital back into the system to restore liquidity. The
    Secretary of the Treasury and others have proposed a solution.
    And we constantly advocated to advance that solution on all
    fronts and, to add to it, to allow for multiple options. It was
    a colloquy on the Floor, for example right at the end, that
    then permitted this or at least referred to investing equity in
    the institutions.
        Mr. Bachus. And that was that section, I think 118, which
    we actually insisted on.
        Mr. Bartlett. So we don't see it as one solution, we see it
    as advancing on all fronts to get liquidity back into the
    system. And it hasn't started yet. There is not a dollar that
    has moved yet.
        Mr. Bachus. I just want you to remember that there is a big
    difference that people seem to be missing. And that is if the
    government buys these mortgages and mortgage-backed securities
    and credit default swaps, they have to manage it. And if the
    institutions themselves aren't able to manage it with all their
    expertise and experience, how do you expect the government to
    do that? Mr. Ryan.
        Mr. Ryan. I would just like to make one comment. We are
    very supportive of the TARP program for a different reason. We
    feel that a major problem in today's financial sector is not
    only illiquidity in these troubled assets, but price discovery.
    And the one result which--and as Steve said, we haven't seen
    this yet, but our hope is that through the purchase program we
    will have transparency; people will know what an asset is
    worth; we will actually have a real mark that makes a
    difference; we won't be debating mark to market; we will know
    what the price is.
        Mr. Bachus. What about a private auction, or where the
    private sector has to participate at a certain level?
        Mr. Ryan. I am in favor of that.
        Mr. Bachus. As opposed--
        The Chairman. Your 2 minutes are up.
        Mr. Bachus. That is it. Thank you.
        The Chairman. Sometimes I wonder if price discovery is kind
    of like heartbeat discovery. We are trying to find out if there
    is one.
        The gentleman from Florida is next. The intervening members
    have agreed to let him go next.
        Mr. Klein. Thank you, Mr. Chairman. And thank you,
    gentlemen, for being here today.
        When speaking to people at home, large sophisticated
    borrowers, real estate, and large businesses as well as small
    businesses, we continue to hear, as you know, that it is
    difficult to get credit. And I appreciate the fact that
    community bankers have been very astute in their lending
    practices over the years. But generally speaking, we are not
    hearing that there is a lot of capital available. And when we
    are hearing it is available, it is available under very
    difficult terms to borrow.
        So I want to just--if people are listening at home,
    watching this today, some would think, based on some of the
    comments, that some lending is really free flowing out there.
    Maybe it is in different parts of the country.
        I am from Florida, South Florida, and it has been very very
    difficult. So just as a thought, one of the things we were
    talking about back home with small business, SBA loans for
    example, is maybe expanding the underwriting capacity a little
    bit. Those are high-quality loans for the most part; the
    default rate is fairly low, and we already have an institution
    in place. And that is something that, to the extent we can
    maybe get SBA loans out there quicker, that may be something to
    consider. I know there has already been an effort to do that,
    but if we can really push hard, it is a faster way of getting
    capital in businesses hands. So if you have some thoughts on
    that.
        And then just in general, also to the extent that we know
    that this is an immediate problem--and there are no silver
    bullets--whether it is the large, sophisticated borrowers or
    the smaller borrowers, is there anything that we can or should
    be doing other than maybe the SBA loans, Treasury, Fed,
    Congress, that can try to advance the small business side of
    this thing a little quicker?
        And if you could direct that to Mr. Yingling and Mr.
    Washburn.
        Mr. Washburn. I think we have always been big proponents of
    SBA lending, and that is what we do. We are, again, a community
    bank in Hoover, Alabama, with probably almost 20 percent of our
    portfolio concentrated in small- to medium-sized business
    loans. We have worked with the SBA and hopefully will continue
    to do so. That is a way to get money back out.
        As I mentioned earlier in my testimony as well, our loan
    demand is big, and is great as it has ever been, but capital is
    holding us back. And so any way to get capital injected into
    the community bank system, the healthy community bank system
    will only benefit your area as well as ours and any other area
    who has a community bank.
        Mr. Klein. Is that a question of using the $250 billion
    that is out there and trying to have our community banks and
    others--I read Mr. Paulson's letter, which I am sure you saw,
    in terms of everybody has access to us, not just for large
    institutions. Are you comfortable that that strategy or what
    you are hearing so far of the application process will get that
    capital into the community bank system?
        Mr. Washburn. We hope it will. We have a concern, because
    right now I think the way it is written, private banks and
    Subchapter S corporation banks are not eligible or may be left
    out. We hope there is some change in the dynamics of the bill.
    But I like what I--the initial read, I like what I see. I think
    it is a solution. If you read, I think most all the banks that
    are willing to participate can participate that are healthy.
    And I think you will see a flow of capital back out, which will
    result in lending money back into the markets where it needs to
    be.
        Mr. Klein. Mr. Yingling.
        Mr. Yingling. I agree with that answer completely. I think
    one of the problems with this idea of putting capital into
    community banks is a perception problem. And that is--and you
    see it on TV, you see it in the media--are we bailing out these
    banks?
        We don't need to bail out these banks. These banks are
    solid banks, willing to lend, and they don't have to take this
    capital. But the capital markets are pretty well closed to them
    right now. So if you want them to have more lending, you have
    to say, we want you to do this. And in a way, you are a hero to
    do it. It is not a natural thing for community banks to say, I
    want a government investment. That is against their philosophy.
    But they need to know they are not going to have a scarlet
    ``A'' around their necks if they do this kind of thing.
        Mr. Klein. And we are most concerned, obviously from a
    business point of view, of getting capital and credit available
    for small business. I mean, we want both capacity, large and
    small banks to be out there. But to the extent that if you see,
    as this process is beginning, that your community banks are not
    having the capacity or the access, for whatever reason, you
    know, please let our Chair know; and we are all interested,
    because we want to make sure everyone has the ability if they
    need it, and it will help the local businesses to get access to
    this capital, we would like to help.
        Mr. Yingling. You are right and thank you.
        Mr. Washburn. Thank you very much.
        The Chairman. The gentlewoman from Wisconsin.
        Ms. Moore of Wisconsin. Thank you, Mr. Chairman. I guess I
    want to direct my question perhaps to Mr. Ryan.
        One of the things that I have found more frightening than
    anything, more than these toxic assets, are these credit
    default swaps. Speculation is that the value, outstanding value
    is something like $58 trillion, more than twice the size of the
    U.S. stock market. And I guess the beauty of bankruptcy perhaps
    would be that we would be able to take advantage, avail
    ourselves of the discovery process in bankruptcy, where a
    special master could sort of do an autopsy and figure out what
    happened and sort of sort this stuff out.
        Many of my colleagues and many people on the first panel
    seem to be enamored with the idea of our having a select
    committee to pull together all the different jurisdictions and
    sort of tagging onto that idea.
        I guess my question would be, since the judicial
    jurisdiction is spread out among the Fed, the SEC, FTC, CFTC,
    FDIC, maybe even the Department of the Treasury, what do you
    think about--and in the absence of any bankruptcy except for
    Lehman Brothers, what about having a special master look at
    this and help us do an autopsy of what happened so that we can
    do the right thing? Mr. Ryan, I will let you answer.
        Mr. Ryan. Thank you. First of all, as to the number, the
    number that is floated around in the press is a notional
    number; it is not really the net number once these things are
    settled out. We are still talking in excess of $1 trillion.
        Ms. Moore of Wisconsin. Of what trillion?
        Mr. Ryan. $1 trillion, once it is netted out. Fifty is a
    lot of double counting. That is number one.
        Number two, the industry, meaning the financial markets
    industry, is very engaged right now with the Fed and with
    regulators in Europe to address the issues with structured and
    derivative products because it is not just CDS, it is other
    products. And what we are trying to do is to come up with a
    system that works. Principally, it is going to be a clearing
    system. And I expect that we will hear some reasonably positive
    news about that soon.
        Ms. Moore of Wisconsin. Okay.
        Mr. Ryan. I don't think we need a special master.
        Ms. Moore of Wisconsin. Well, the reason I am asking this
    question is because maybe I disagree with others, that we don't
    need to determine in order to move forward; I don't necessarily
    agree that we don't need to assign some blame in order to
    discern what has gone wrong. I think that without the judicial
    and the judicial sort of jurisdictions of all these departments
    engaged and involved, it is hard to hold people responsible.
        My colleague, who had to leave, had a question about credit
    default swaps as well. And basically her question was, should
    we have some collateral rules or capital requirements for
    credit default swaps?
        Mr. Ryan. Well, we do. I mean, most of the players in the
    derivatives business are major financial institutions around
    the world. They are, by the way, highly regulated. In the
    United States, those institutions are largely regulated by the
    Fed, and they have the same capital requirements that apply to
    all of the institutions represented here. So capital,
    collateral, are covered right now.
        Ms. Moore of Wisconsin. Okay. Well, then why is this so
    complicated? I mean, if there is--I guess my understanding
    about these credit default swaps is that one of the reasons
    that they are so problematic is because there are actually very
    little, unknown assets underneath them. I mean at least with
    the toxic mortgage asset products, we know that there is a
    house and an address associated with it. But some of the
    betting on top of betting and credit default swap activity is
    sort of opaque to us.
        Mr. Ryan. I am going to make a couple of comments. First,
    as to the general business of credit default swaps, they are
    risk mitigators and they serve a very useful purpose on a
    global basis. Some of the, I would say, concern that exists in
    today's marketplace and the reason for a lack of confidence is,
    as I said before, we have taken financial engineering to a
    level of complexity that people do not understand. Most of the
    problems, by the way, are not with credit default swaps, they
    are with other instruments where they were very very complex,
    and insurance was purchased around those securities, which are
    called credit default swaps. That is why this is implicated in
    the discussion right now.
        Ms. Moore of Wisconsin. Thank you. I yield back.
        The Chairman. The gentleman from Minnesota.
        Mr. Ellison. Mr. Ryan, maybe you can elaborate on that.
    What are some of the other instruments besides credit default
    swaps that are out there that played a role in the current
    financial meltdown?
        Mr. Ryan. As I said before, if we do a retrospective on
    this, which I believe we will be doing over the next couple of
    years, we will find that instruments like CDOs, certain types
    of CDOs, where the underlying assets are really by reference to
    an index, CDO squares which are a collection--
        Mr. Ellison. Just for the record, CDOs are collateralized
    debt obligations?
        Mr. Ryan. Correct, collateralized debt obligations. And
    when you had multiple CDOs collected and then securitized and
    sold, they were called CDO squares.
        Mr. Ellison. Now, another question. If you were to--let's
    just say you did not have these derivative instruments that
    have developed, but you did have the poor underwriting
    standards that were associated with subprime mortgages. Would
    we be in the financial circumstances we are in today?
        Mr. Ryan. Well, clearly many of the underlying assets in
    these problematic structures were subprime or Alt-A mortgages,
    mostly subprime.
        Mr. Ellison. I guess my question is, to what degree is the
    credit default swap proliferation and the derivative market, to
    what extent did it accelerate the problems associated with the
    subprime market? Do you understand my question?
        Mr. Ryan. I do, and I am not sure that it necessarily
    accelerated it. What it certainly did was it took these
    products, packaged them, and structured them in such a way that
    they could be distributed through the capital markets and
    distributed globally. So I would say the biggest difference,
    quite frankly, between the problems we have in the S&Ls between
    1989 and 1992, 1993 and today, is we have taken most of these
    mortgages and we have packaged them in such a way that they
    could be distributed through the capital markets. That is the
    biggest difference.
        The Chairman. It sounds pretty accelerating to me.
        Mr. Ryan. Excuse me?
        The Chairman. That sounds pretty accelerating to me.
        Mr. Ryan. Accelerating?
        The Chairman. Yes. That is what he asked you.
        Mr. Ellison. My next question is, you know, we have been
    debating over whether or not deregulation was a causal factor
    in the financial circumstance that we find ourselves in. And I
    guess my question is, you know--and I think it was the year
    2000--I think then-Senator Gramm introduced a piece of
    legislation, I think it was called the Commodity Futures
    Modernization Act. To what degree did the passage of this
    amendment exempt derivatives from regulation? Or in your view,
    Mr. Ryan, did they? Do you understand my question?
        Mr. Ryan. I think I understand your question, but I don't
    know the answer.
        Mr. Ellison. Does Mr. Bartlett know?
        Mr. Bartlett. I don't know.
        Mr. Ellison. Are you familiar with this piece of
    legislation, the Commodities Futures Regulations Act?
        Mr. Ryan. I am familiar with the fact that the regulation
    of credit default swaps was an issue at that time, and I
    believe Congress decided that it would not be regulated as a
    product. That is what you are talking about.
        Mr. Ellison. Yes. And how much did that decision--well, let
    me ask it this way: Did that decision by Congress serve the
    public well, particularly in light of the present
    circumstances?
        Mr. Ryan. I think that is something that time will tell. I
    am not sure of the answer to that question right now.
        Mr. Ellison. Mr. Bartlett, do you have a view on this?
        Mr. Bartlett. I don't have a conclusion. I have a lot of
    views. The first view is that setting up this clearinghouse,
    the New York Fed setting up a clearinghouse, we will know more
    about it. And then over the course of the next several months,
    I think that we will have a full debate as to whether to
    regulate credit default swaps through either CFTC or the
    Federal Reserve.
        I haven't reached a conclusion yet, but I do think it is
    fair to say that the question has been reopened.
        Mr. Ellison. And the last question. We have talked about
    some of the economic history, Glass-Steagall and then the move
    to Gramm-Leach-Bliley. And the way I understand Gramm-Leach-
    Bliley--I wasn't in Congress then--is that it allowed financial
    institutions to leave their area of core competency and sort of
    do things that they traditionally had not been doing. What now
    is the best regulatory approach to address the current
    circumstances?
        I mean, I guess we could have repealed Gramm-Leach-Bliley
    and returned to a Glass-Steagall-type era, or we could try to
    modernize, as I guess that is the topic of today's hearing.
    What strategies should we pursue if we are going to try to meet
    the financial opportunities opened up by Gramm-Leach-Bliley?
        Mr. Yingling. The one comment I would make is that Gramm-
    Leach-Bliley had nothing to do with this. I mean Gramm-Leach-
    Bliley didn't have anything to do with mortgages or mortgage
    origination. It didn't have anything to do with Fannie or
    Freddie. It didn't have anything to do with AIG. It didn't have
    anything to do with Lehman Brothers or Bear Stearns. In fact,
    Bear Stearns and Lehman Brothers were stand-alone securities
    firms.
        In a way, Gramm-Leach-Bliley has provided an exit because
    Merrill Lynch was able to be acquired by Bank of America, and
    Goldman Sachs and Morgan Stanley were, because of Gramm-Leach-
    Bliley, able to get under the Federal Reserve. And in fact,
    Gramm-Leach-Bliley had some good capital provisions in it.
        So I think that argument, in my opinion, is misguided. I do
    think that Gramm-Leach-Bliley was incomplete in the sense that
    we did not have--and I keep coming back to this--a systemic
    regulator. And that is what we really need is a systemic
    oversight regulator.
        The Chairman. Thank you. I think that point is fascinating.
    The gentleman from Alabama wanted to take 30 seconds.
        Mr. Bachus. Let me credit default swaps, and correct me if
    I'm wrong--I would compare in the real world with sort of
    insurance or a guarantee. I mean it is a form of where you are
    issuing insurance on an obligation. Now, the problem with it
    was, unlike insurance, where there are reserves and it is
    regulated, when you make a guarantee you have to have reserves
    to stand behind it. It was so highly leveraged that you may
    issue some on a $100 million obligation. When it went wrong
    there was only, you know, $200,000 worth of capital backing
    that guarantee and it was blown through almost immediately.
        The Chairman. If the gentleman would yield, the analogy, I
    think, is that these were people who were issuing life
    insurance on vampires. They didn't think they needed any money
    because vampires don't die. And then when the vampires died,
    they didn't have any money.
        Mr. Bartlett. Well, just briefly, the problem with credit
    default swaps was its excess leverage to the extreme and then
    no systemic regulation at all. I mean none.
        The Chairman. If you don't think you are ever going to have
    to pay it off, then you don't worry about your obligations.
        Mr. Bachus. It was an incredibly leveraged guarantee with
    no reserves backing it.
        The Chairman. The gentleman from--
        Ms. Moore of Wisconsin. Will the gentleman yield?
        The Chairman. Yes.
        Ms. Moore of Wisconsin. So did I use the wrong term by
    calling them credit default swaps instead of CDOs?
        The Chairman. They are two different issues. They are two
    different things.
        Ms. Moore of Wisconsin. So would your answer change?
        The Chairman. Gwen, we don't have time.
        Ms. Moore of Wisconsin. No problem.
        The Chairman. The gentleman from Colorado.
        Mr. Wilson. Thank you, Mr. Chairman. You can see from the
    conversation that the setting we have to try to solve all the
    ills of the financial markets by asking you all 5 minutes'
    worth of questions doesn't quite meet the issues that we have
    to confront.
        But just a couple of things, and then I have a bunch of
    questions. This applies to Mr. Ryan or Mr. Washburn. I came out
    of the 1980's, the savings and loans, the oil and gas
    bankruptcies, all of that stuff, and a lot of community banks
    failed back then. And the good news is we are not seeing that.
    It is sort of a different sector of the financial industry that
    has been struggling.
        But there was an article yesterday by Robert Samuelson,
    entitled, ``The Trouble With Prosperity.'' It says, if things
    seem splendid, they will get worse. Success inspires
    overconfidence in excess. And if things seem dismal, they will
    get better. Crisis spawns opportunities in progress. And we see
    that kind of--those ups and downs within the financial market.
        Now, one of the things that I want to ask about is we see
    within community banks in particular, smaller banks, credit
    unions, less interconnectness--I think that was somebody's
    terminology, interconnectness--that has allowed them to be not
    immune from all of this, but at least in a better financial
    position than those groups that were very interconnected. And
    whether it is Gramm-Leach-Bliley or not, you have banks,
    investment banks and insurance companies, all, in my opinion,
    kind of wrapped up in one big thing.
        I would like a comment on that if you could, Mr. Washburn
    or Mr. Ryan. And then I want to talk about money markets,
    because we went through a whole heck of a lot. We went through
    two hedge funds failing, we went through a failure of Bank
    Paribas, we had the lockup in the student loans and the
    municipal bonds, we had Bear Stearns, we had Fannie Mae, we had
    Freddie Mac, we had AIG go down, and Merrill Lynch. And then we
    got involved when the Treasury ran over here because there was
    a run on money markets. So I want to talk about how do we deal
    with money markets. So first question, interconnectedness.
        Mr. Washburn. I think you are correct. The lack of that
    interconnectedness is what made the community bank model
    successful. And there were failures back in the time you
    mentioned. But if you look at the overall economy we are still
    doing--or the overall industry, we are still doing the same
    thing we have done for years. I mentioned earlier we are
    lending money to people who pay it back. And we offer some
    peripheral services that are tied into our client base. So us
    extending what we normally do, extending into markets we don't
    understand and into products and services we don't understand,
    we shied away from that. I don't see that changing going
    forward, so yes, I think that is correct.
        Mr. Wilson. Mr. Ryan.
        Mr. Ryan. Clearly, we have cyclicality at work and there
    are certain types of institutions that are affected more by the
    pressures they are under--15 years ago it was the smaller
    banks, and now it is, I use the word ``interconnected''
    financial institutes. That is the principal issue. It is why
    our principal recommendation is to have a systemic regulator.
    And we need one on a global basis. So that is as to the first
    question.
        As to the second question, you know, your litany of the
    problems we have been dealing with over the last 2 months, it
    tells the whole story as far as the crisis atmosphere. The
    issues with money markets are also interconnected with many of
    the other issues because the market funds were investing in
    what they thought were very high-level AAA and AA bonds to
    support the money markets. We are, I would say, very, very
    pleased at the way the Treasury stepped in, because we cannot
    afford to have the money markets break the buck. So the fact
    that they used the emergency stabilization fund quickly and
    then came to you in the form of TARP, we think was critical in
    stemming the tide. So we thank you for your help on that.
        Mr. Wilson. And then to Mr. Bartlett or Mr. Yingling, both
    of you were talking about under TARP, I think there are three
    things that we could do. And I would ask that you talk to your
    members about it. One is, you know, buy the junk portfolios,
    whatever you want to call them, the troubled assets. Two,
    recapitalize the banks. And the third one is--and this I got in
    a colloquy with the chairman--is that we can use this $700
    billion to go directly through the SBA, go through the Federal
    Home Loan Bank system or get to the community banks directly
    and the Farm Credit Administration, because there is fury out
    in, you know, Wheat Ridge, Colorado, about money getting down
    to small businesses and to people. I mean, there really is a
    huge amount of anger about all of this.
        And so one of the things that I would ask all of you to
    take back to your members and also continue to promote is that
    there is a way through this whole thing we have done to get it
    directly down to the people on the street, the small businesses
    on the street, the homeowners on the street, the bankers and
    the farmers. But I didn't get that in there. It is not as
    crisply written as I would like, but it is in the record. Thank
    you.
        The Chairman. The gentleman from Indiana.
        Mr. Donnelly. Thank you, Mr. Chairman, Ranking Member
    Bachus, and members of the panel. We want to try to help create
    proper regulations as we move forward. But the question I have
    is regarding the executives running your companies, the people
    in charge. Do they get the sense of responsibility that they
    have, because folks back home in Indiana who played by the
    rules and who worked hard have been damaged extensively,
    personally by this. And this is a crisis of confidence. Can you
    tell everybody that the executives of these companies get it
    now? That they are not chasing a way to get a higher bonus
    through a risky leverage program? Is there a code of conduct in
    place? Have they talked about that?
        I would like you to speak as to these people that you talk
    to every day. And do they understand they not only have an
    obligation to their shareholders, which I understand, but to
    this country; that the people investing their dollars in their
    organizations are going home and looking at their kids and
    trying to make sure they can make ends meet every day.
        Mr. Bartlett. Congressman, the executives of my companies
    feel a heightened and a strong sense of responsibility, a sense
    of accountability, and a sense of accountability for getting it
    right and moving forward. I do have to say it is easy to say
    ``they.'' I am sure that each of the 435 Members of Congress
    have a sense of responsibility also.
        Mr. Donnelly. Absolutely.
        Mr. Bartlett. And so each of us has a responsibility to get
    it right. This crisis sort of melted down and there is a lot of
    blame. But these executives take it seriously, and it is a
    sense of total commitment to get it right.
        Now, I do want to say one other thing, and that is that the
    sense of ``they'' is that they are not to blame. Clearly there
    were individual companies and individual executives who made
    mistakes. But if you look at these companies--U.S. Bank,
    Raymond James, Prudential Financial, Wells Fargo, PNC, Frost
    Bank, Bank Corp South of Tupelo, American General in
    Evansville, Indiana--it is neither accurate nor--well, it is
    not accurate to sort of broad brush and say, well, all of those
    people are somehow--
        Mr. Donnelly. And nobody is doing that.
        Mr. Bartlett. I know you weren't.
        Mr. Donnelly. What we are trying to do is to say to
    everybody who may be watching that they can be confident, that
    they can look to these organizations and know that their funds
    will be protected.
        And so what I am wondering is, is there some code of
    conduct that we won't invest in these type of products; that
    these are areas we will stay out of. We have exceptional
    leaders.
        You know, I am familiar with the banks and institutions in
    my home State. Our community bank leaders and credit union
    leaders and others have been off the charts in their solid
    nature and what they have done. And what I am trying to do is
    to tell the folks back home why they can have this confidence.
        Mr. Bartlett. Congressman, to take one more minute. In
    fact, these executives have, and the executives I work with
    have a total commitment to get it right, to work with the
    Congress and with the regulatory agencies to get it right. It
    was a systemic failure.
        And I will use one example of one company in Indiana.
    American General had one of the lowest rates of delinquencies
    of the subprime market and one of the largest subprime lenders
    in the country, 2 percent rate of delinquency. And yet they are
    owned by AIG. The credit derivative swaps was the problem that
    brought the whole company down. But it wasn't the subprime
    loans that were being made in Evansville, or throughout the
    country, from Evansville, Indiana. So it is a systemic failure,
    not a failure of individual parts. It is the fact that the
    parts didn't have a mechanism to talk to one another.
        Mr. Donnelly. And I know as a leader with them, you will be
    talking to them about--and they of course know, we hope going
    forward, what areas they don't want to get into. They don't
    want to go near, in terms of just the things you were talking
    about, the credit default swaps that may not have been backed
    up.
        And then to Mr. Washburn, what are the things that we can
    do to make it easier for our small businesses to be able to get
    loans? How can we be able to make sure that those who are so
    creditworthy, coming to you, that the funds are there? What are
    the things the community banks and small banks are looking for
    as we move forward?
        Mr. Washburn. I think the number one thing that--and again
    I am speaking for 8,000 banks, but I think the number one thing
    that we see as a need for us is capital. We may be a little bit
    unique, but we are in a high-growth area, and opportunities are
    great at this time, as I have mentioned a couple of times
    today.
        The access to capital and stabilization of the market, I
    think there is fear out there that has just caused a lot of the
    lenders to sit on the sidelines not knowing what is coming
    next. So I think a combination of those, the possible fear
    going away, capital injected into the markets, and just the
    ability to get the system moving again.
        Mr. Donnelly. Thank you.
        The Chairman. The gentlewoman from California.
        Ms. Speier. Thank you, Mr. Chairman. And thank you for
    being here and for your participation. I will make this
    painless because I know I am the last to ask questions here.
        One of the things that is very apparent to me, and I think
    to all of us really, is if you have no skin in the game it is
    really easy to make mischief and get out there. And a lot of
    that went on in this crisis. You all are supportive of ceasing
    mark to market. And yet I worry that if we do in fact get rid
    of mark to market, that it is going to create an environment
    where banks can take on risks because there is not going to be
    the accountability that mark to market requires.
        So my question is, are you interested in seeing mark to
    market suspended for a short period of time because we are in
    this crisis, and then return to it? Or are you supporting doing
    away with mark to market completely?
        Mr. Bartlett. Congresswoman, I would like to start. There
    may be slightly different variations. But I think that mark to
    market or fair value accounting needs to be reformed to where
    it actually obtains a fair value. If there is no market of a
    daily market then you can't use the market of a transactions to
    achieve the market. And we believe that is part of the law,
    that is part of good accounting principles, and that what we
    have urged is that FASB and the PCLB use the fair value
    accounting in its proper way, which is if there is no market
    then use a cash flow model to estimate the value.
        Ms. Speier. So you still support mark to market?
        Mr. Bartlett. Yes, we do. We don't support a return to
    historical cost accounting. But currently the system is broken
    because it is being regarded in many places as a theology
    rather than an accounting method. And so we want to move back
    to good accounting and away from the theology of it.
        Ms. Speier. Mr. Ryan.
        Mr. Ryan. Just to get the record straight--at least within
    our industry representing, really, the financial market
    players, these are global players--that we do not have the same
    uniform view expressed by the other panelist on mark to market
    accounting. So that is from an industry standpoint.
        From a personal standpoint, and this goes to the point you
    just made, it is a pretty difficult time period to make a
    change to the accounting as we are in the middle of a crisis.
    And that is especially true when pricing and confidence in the
    system is so critical. So when you at this juncture, just on a
    personal basis, I have a hard time supporting a change in
    accounting exactly today.
        I think that we all need to look at overall accounting
    standards and how they apply to the financial services business
    because there are other accounting conventions that have also
    caused problems. So the whole issue as we start looking at how
    do we want to be regulated in the future, we need to put the
    accounting profession into this system and think through
    broadly the impact the accounting profession has had on this
    industry.
        Ms. Speier. To you, Mr. Yingling, you said something
    earlier in your testimony that kind of stunned me. You said you
    kind of gasped when you saw the number of loans that were being
    offered with no money down, and that government should have
    done something. Well, I guess my first reaction is, why didn't
    you come to Congress and say, hey, there is a problem here, we
    need to fix it, instead of sitting back and looking at it? We
    don't look at your figures on a daily basis. You are in a
    position to do that.
        Mr. Yingling. That is a good question. By that point in
    time, we were already well into it, and so we did come up here
    and work with the chairman and this committee on the
    legislation that ultimately passed the House. So by that point
    in time, it was too late.
        Part of the problem is these statistics, largely again,
    were outside the banking industry. And so we weren't looking at
    them, we weren't looking at the mortgage brokers. And my point
    was I don't think there was anybody in the government that was
    really looking across the whole spectrum of what was going on
    in mortgage lending.
        And so, yes, we probably should have seen it earlier
    because it had a terrible impact on our industry. But at that
    point, we were already well into the problem.
        Ms. Speier. Last question: I met with a national investment
    firm CEO last week who said to me, ``We are not about to invest
    in any bank right now because we can't tell what they have.''
    And he was speaking particularly of Wachovia and how there is
    no transparency. If we can't find out what they are holding,
    why would we invest?
        So my question to you as the head of the ABA is, how far
    are you willing to go out in terms of transparency within the
    industry? And that is my final question.
        Mr. Yingling. Well, we should have full transparency. I
    think the problem is in this dynamic, you not only have trouble
    seeing what may be in a loan portfolio, you really have trouble
    knowing what it is going to be worth 2 months from now or 3
    months from now because the market is changing so rapidly. But,
    yes, we ought to work on issues of greater transparency.
        Ms. Speier. Thank you.
        The Chairman. The gentleman from Ohio had a question.
        Mr. LaTourette. Thank you very much. Mr. Ryan--I am going
    to ask the chairman unanimous consent--when you were talking to
    Ms. Moore, this issue that has been in the newspaper about $53
    trillion of securitized stuff out there, and I think you said
    $1 trillion.
        Could you supply for the record, and I ask the chairman
    unanimous consent for permission to do that, why you say it is
    $1 trillion and not $53 trillion?
        The Chairman. Thank you. Mr. Yingling, I would like to ask
    you a question. You said no one in the government was looking
    at mortgages across-the-board. At what period were you making
    that comment about?
        Mr. Yingling. I would say, it is just my impression, that
    if you go back to 2003, 2004, 2005, or 2006, maybe the Federal
    Reserve was looking at that.
        The Chairman. I want to take serious exception to that. It
    wasn't your job to know differently. But there is a fundamental
    issue here. In 1994, under John LaFalce's leadership as the
    second Democrat, and Chairman Gonzalez was chairman, this
    Congress passed the Homeowners Equity Protection Act.
        Mr. Yingling. I understand that.
        The Chairman. That said that the Federal Reserve should
    regulate mortgages. And it was assumed at the time that the
    bank regulators were regulating the mortgages on the regulated
    institutions, but that the Fed should do across-the-board
    mortgage regulation, knocking out a lot of things that should
    happen. Well, this is an important point, and it is not what
    you said.
        Mr. Greenspan, under his philosophy of deregulation,
    refused to use it. Now it is true, as some of my colleagues
    over there said, the law was on the books. But Mr. Greenspan
    said, no, the market is smarter than I am, and explicitly
    refused to use it. Federal Reserve Governor Gramlich urged him
    to use it, and he refused on philosophical grounds. Finally,
    frustrated that that wasn't happening, in 2005, four members of
    this committee--Mr. Bachus, who was then the chairman of the
    Financial Institutions Subcommittee as a Republican, Mr. Watt
    of North Carolina, Mr. Miller of North Carolina, and myself--
    began conversations to adopt legislation. So it is simply not
    true that no one was looking at this.
        In 2005, we began negotiations among us to adopt a bill to
    do what Mr. Greenspan wouldn't do, to restrict subprime
    mortgages that shouldn't have been granted. Those negotiations
    went on for a while, and I was then told by the then-chairman
    of the committee--I think Mr. Bachus got the same message--the
    Republican House leadership did not want that to go forward.
    And the efforts ended.
        In 2007, when I became the chairman, we took that issue up,
    and we did pass a bill in 2007. And Mr. Bachus, who voted for
    the bill, indicated he thought some of the people testifying
    had been against it, but we did pass a bill that would restrict
    most of these things.
        But here is some good news, and we don't like to talk about
    the good news for some reason. Even though that bill didn't
    pass in the Senate, which is a phrase you hear quite a lot
    these days, or forever, Mr. Bernanke, after the House acted,
    and in conversation with the House, then used exactly the
    authority that Alan Greenspan refused to use, and has
    promulgated a set of restrictions on subprime mortgage
    origination which will stop this problem from happening again.
    So the problem was twofold.
        And this is what the acceleration question is, Mr. Ryan.
    The weapons that destroyed the financial system of the world
    were the subprime loans. They shouldn't have been granted. A
    lot of people, certainly myself included, but top-ranked
    officials, all thought that while this would be damaging, the
    damage would be confined to the mortgage market. What very few
    people understood was the extent to which subprime damages
    would rocket throughout the system. And yes, it was the super
    sophisticated, not very well-understood, and not very well-
    regulated financial instruments that took these subprime loans
    and spread them around.
        Now, we have solved part of that problem going forward
    because, thanks to Ben Bernanke, acting after the House moved,
    there will be no more of those subprime loans. Ben Bernanke's
    rules are pretty good ones, and everything I would like to do.
    And we want to go further on yield spread premiums and
    elsewhere.
        The problem is that while subprime loans won't be the
    weapon that is loaded into these super sophisticated
    instruments and shot around, there may be something else. So
    that is why the second part of the job, having seen that
    subprime loans don't go forth, the second part of the job is
    what we have been talking about today--and you have all been
    very helpful and we appreciate it--how do we put some
    constraints on excessive risk-taking in the financial system so
    the next time--and nobody can be sure it won't happen-- loans
    are made that shouldn't have been made, we don't have them
    multiplied in their effect.
        But I did want to say it is really not fair to say that no
    one was looking at subprime loans. Many of us were doing it in
    2005, and even earlier, trying to get Mr. Greenspan to do it.
        Yes, Mr. Yingling.
        Mr. Yingling. Could I clarify my response, then? I am not
    saying that people weren't looking at--and I was here for all
    that history, so I know exactly what you are talking about. I
    am not saying people weren't looking at it from the point of
    view of consumer protection, and maybe weren't looking at it
    correctly from that point of view. And I think you have made
    this point before, and that is that consumer protection and
    safety and soundness are not separate items.
        The Chairman. But by 2005, and you are right, that the
    Homeowners Equity Protection Act had a consumer protection
    orientation. That was in the days before people really
    understood credit default swaps--or maybe they never do--but
    they weren't there. But by 2005, I guarantee you that when we
    were talking about this, we were talking about not just
    consumer protection, but about the systemic damage that could
    be done. We underestimated it, but we knew there would be
    systemic damage.
        Mr. Yingling. I guess my comment, then, is I don't know how
    regulators could look at that graph from a safety and soundness
    point of view and not say, whoa, we have a big problem.
        The Chairman. Well, you have to ask Mr. Greenspan, because
    he explicitly did. I mean look, this is a deep philosophical
    approach. Mr. Greenspan explicitly said in Mark Zandi's book,
    Greenspan's deregulatory failure, it is very clear there were
    fundamental philosophic issues here. And we are debating--and
    Mr. McCotter raised it, and Mr. Price raised it in very
    thoughtful ways. We are now discussing what the role is of
    regulation.
        But I agree, I think Mr. Ryan said it best in terms of--and
    others, and Mr. Yingling and Gramm-Leach-Bliley, this is not a
    case so much of deregulation as a case of not adopting
    appropriate new regulations to keep up with innovation. It is
    not that old rules were dismantled, it is that as the system
    innovated, appropriate new rules were not adopted. And that is
    what we need to do. But I do want to say on subprime we were
    looking at it from the systemic point of view as well as the
    consumer protection.
        Mr. Yingling. And should it not be the explicit requirement
    of a systemic overview regulator when they see something like
    that to address it?
        The Chairman. Yes, it should be. And you know what? While I
    think we need to fix it up, if you had asked me 10 years ago if
    that was part of Alan Greenspan's general mandate, I would have
    said I thought it was. So I regret the fact that we have to
    make it more explicit, because we wouldn't have had as much
    damage.
        The hearing is adjourned. The record is open for any
    submissions.
        [Whereupon, at 3:02 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                October 21, 2008

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