[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



                   U.S. GOVERNMENT PRINTING OFFICE
46-591 PDF                  WASHINGTON : 2009
----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free(866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, 
Washington, DC 20402-0001



                 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

[GRAPHIC] [TIFF OMITTED] 46591.001

[GRAPHIC] [TIFF OMITTED] 46591.002

[GRAPHIC] [TIFF OMITTED] 46591.003

[GRAPHIC] [TIFF OMITTED] 46591.004

[GRAPHIC] [TIFF OMITTED] 46591.005

[GRAPHIC] [TIFF OMITTED] 46591.006

[GRAPHIC] [TIFF OMITTED] 46591.007

[GRAPHIC] [TIFF OMITTED] 46591.008

[GRAPHIC] [TIFF OMITTED] 46591.009

[GRAPHIC] [TIFF OMITTED] 46591.010

[GRAPHIC] [TIFF OMITTED] 46591.011

[GRAPHIC] [TIFF OMITTED] 46591.012

[GRAPHIC] [TIFF OMITTED] 46591.013

[GRAPHIC] [TIFF OMITTED] 46591.014

[GRAPHIC] [TIFF OMITTED] 46591.015

[GRAPHIC] [TIFF OMITTED] 46591.016

[GRAPHIC] [TIFF OMITTED] 46591.017

[GRAPHIC] [TIFF OMITTED] 46591.018

[GRAPHIC] [TIFF OMITTED] 46591.019

[GRAPHIC] [TIFF OMITTED] 46591.020

[GRAPHIC] [TIFF OMITTED] 46591.021

[GRAPHIC] [TIFF OMITTED] 46591.022

[GRAPHIC] [TIFF OMITTED] 46591.023

[GRAPHIC] [TIFF OMITTED] 46591.024

[GRAPHIC] [TIFF OMITTED] 46591.025

[GRAPHIC] [TIFF OMITTED] 46591.026

[GRAPHIC] [TIFF OMITTED] 46591.027

[GRAPHIC] [TIFF OMITTED] 46591.028

[GRAPHIC] [TIFF OMITTED] 46591.029

[GRAPHIC] [TIFF OMITTED] 46591.030

[GRAPHIC] [TIFF OMITTED] 46591.031

[GRAPHIC] [TIFF OMITTED] 46591.032

[GRAPHIC] [TIFF OMITTED] 46591.033

[GRAPHIC] [TIFF OMITTED] 46591.034

[GRAPHIC] [TIFF OMITTED] 46591.035

[GRAPHIC] [TIFF OMITTED] 46591.036

[GRAPHIC] [TIFF OMITTED] 46591.037

[GRAPHIC] [TIFF OMITTED] 46591.038

[GRAPHIC] [TIFF OMITTED] 46591.039

[GRAPHIC] [TIFF OMITTED] 46591.040

[GRAPHIC] [TIFF OMITTED] 46591.041

[GRAPHIC] [TIFF OMITTED] 46591.042

[GRAPHIC] [TIFF OMITTED] 46591.043

[GRAPHIC] [TIFF OMITTED] 46591.044

[GRAPHIC] [TIFF OMITTED] 46591.045

[GRAPHIC] [TIFF OMITTED] 46591.046

[GRAPHIC] [TIFF OMITTED] 46591.047

[GRAPHIC] [TIFF OMITTED] 46591.048

[GRAPHIC] [TIFF OMITTED] 46591.049

[GRAPHIC] [TIFF OMITTED] 46591.050

[GRAPHIC] [TIFF OMITTED] 46591.051

[GRAPHIC] [TIFF OMITTED] 46591.052

[GRAPHIC] [TIFF OMITTED] 46591.053

[GRAPHIC] [TIFF OMITTED] 46591.054

[GRAPHIC] [TIFF OMITTED] 46591.055

[GRAPHIC] [TIFF OMITTED] 46591.056

[GRAPHIC] [TIFF OMITTED] 46591.057

[GRAPHIC] [TIFF OMITTED] 46591.058

[GRAPHIC] [TIFF OMITTED] 46591.059

[GRAPHIC] [TIFF OMITTED] 46591.060

[GRAPHIC] [TIFF OMITTED] 46591.061

[GRAPHIC] [TIFF OMITTED] 46591.062

[GRAPHIC] [TIFF OMITTED] 46591.063

[GRAPHIC] [TIFF OMITTED] 46591.064

[GRAPHIC] [TIFF OMITTED] 46591.065

[GRAPHIC] [TIFF OMITTED] 46591.066

[GRAPHIC] [TIFF OMITTED] 46591.067

[GRAPHIC] [TIFF OMITTED] 46591.068

[GRAPHIC] [TIFF OMITTED] 46591.069

[GRAPHIC] [TIFF OMITTED] 46591.070

[GRAPHIC] [TIFF OMITTED] 46591.071

[GRAPHIC] [TIFF OMITTED] 46591.072

[GRAPHIC] [TIFF OMITTED] 46591.073

[GRAPHIC] [TIFF OMITTED] 46591.074

[GRAPHIC] [TIFF OMITTED] 46591.075

[GRAPHIC] [TIFF OMITTED] 46591.076

[GRAPHIC] [TIFF OMITTED] 46591.077

[GRAPHIC] [TIFF OMITTED] 46591.078

[GRAPHIC] [TIFF OMITTED] 46591.079

[GRAPHIC] [TIFF OMITTED] 46591.080

[GRAPHIC] [TIFF OMITTED] 46591.081

[GRAPHIC] [TIFF OMITTED] 46591.082

[GRAPHIC] [TIFF OMITTED] 46591.083

[GRAPHIC] [TIFF OMITTED] 46591.084

[GRAPHIC] [TIFF OMITTED] 46591.085

[GRAPHIC] [TIFF OMITTED] 46591.086

[GRAPHIC] [TIFF OMITTED] 46591.087

[GRAPHIC] [TIFF OMITTED] 46591.088

[GRAPHIC] [TIFF OMITTED] 46591.089

[GRAPHIC] [TIFF OMITTED] 46591.090

[GRAPHIC] [TIFF OMITTED] 46591.091

[GRAPHIC] [TIFF OMITTED] 46591.092

[GRAPHIC] [TIFF OMITTED] 46591.093

[GRAPHIC] [TIFF OMITTED] 46591.094

[GRAPHIC] [TIFF OMITTED] 46591.095

[GRAPHIC] [TIFF OMITTED] 46591.096

[GRAPHIC] [TIFF OMITTED] 46591.097

[GRAPHIC] [TIFF OMITTED] 46591.098

[GRAPHIC] [TIFF OMITTED] 46591.099

[GRAPHIC] [TIFF OMITTED] 46591.100

[GRAPHIC] [TIFF OMITTED] 46591.101

[GRAPHIC] [TIFF OMITTED] 46591.102

[GRAPHIC] [TIFF OMITTED] 46591.103

[GRAPHIC] [TIFF OMITTED] 46591.104

[GRAPHIC] [TIFF OMITTED] 46591.105

[GRAPHIC] [TIFF OMITTED] 46591.106

[GRAPHIC] [TIFF OMITTED] 46591.107

[GRAPHIC] [TIFF OMITTED] 46591.108

[GRAPHIC] [TIFF OMITTED] 46591.109

[GRAPHIC] [TIFF OMITTED] 46591.110

[GRAPHIC] [TIFF OMITTED] 46591.111

[GRAPHIC] [TIFF OMITTED] 46591.112

[GRAPHIC] [TIFF OMITTED] 46591.113

[GRAPHIC] [TIFF OMITTED] 46591.114

[GRAPHIC] [TIFF OMITTED] 46591.115

[GRAPHIC] [TIFF OMITTED] 46591.116

[GRAPHIC] [TIFF OMITTED] 46591.117

[GRAPHIC] [TIFF OMITTED] 46591.118

[GRAPHIC] [TIFF OMITTED] 46591.119

[GRAPHIC] [TIFF OMITTED] 46591.120

[GRAPHIC] [TIFF OMITTED] 46591.121

[GRAPHIC] [TIFF OMITTED] 46591.122

[GRAPHIC] [TIFF OMITTED] 46591.123

[GRAPHIC] [TIFF OMITTED] 46591.124

[GRAPHIC] [TIFF OMITTED] 46591.125

[GRAPHIC] [TIFF OMITTED] 46591.126

[GRAPHIC] [TIFF OMITTED] 46591.127

[GRAPHIC] [TIFF OMITTED] 46591.128

[GRAPHIC] [TIFF OMITTED] 46591.129

[GRAPHIC] [TIFF OMITTED] 46591.130

[GRAPHIC] [TIFF OMITTED] 46591.131

[GRAPHIC] [TIFF OMITTED] 46591.132

[GRAPHIC] [TIFF OMITTED] 46591.133

[GRAPHIC] [TIFF OMITTED] 46591.134

[GRAPHIC] [TIFF OMITTED] 46591.135

[GRAPHIC] [TIFF OMITTED] 46591.136

[GRAPHIC] [TIFF OMITTED] 46591.137

[GRAPHIC] [TIFF OMITTED] 46591.138

[GRAPHIC] [TIFF OMITTED] 46591.139

[GRAPHIC] [TIFF OMITTED] 46591.140

[GRAPHIC] [TIFF OMITTED] 46591.141

[GRAPHIC] [TIFF OMITTED] 46591.142

[GRAPHIC] [TIFF OMITTED] 46591.143

[GRAPHIC] [TIFF OMITTED] 46591.144

[GRAPHIC] [TIFF OMITTED] 46591.145

[GRAPHIC] [TIFF OMITTED] 46591.146

[GRAPHIC] [TIFF OMITTED] 46591.147

[GRAPHIC] [TIFF OMITTED] 46591.148

[GRAPHIC] [TIFF OMITTED] 46591.149

[GRAPHIC] [TIFF OMITTED] 46591.150

[GRAPHIC] [TIFF OMITTED] 46591.151

[GRAPHIC] [TIFF OMITTED] 46591.152

[GRAPHIC] [TIFF OMITTED] 46591.153

[GRAPHIC] [TIFF OMITTED] 46591.154

[GRAPHIC] [TIFF OMITTED] 46591.155

[GRAPHIC] [TIFF OMITTED] 46591.156

[GRAPHIC] [TIFF OMITTED] 46591.157

[GRAPHIC] [TIFF OMITTED] 46591.158

[GRAPHIC] [TIFF OMITTED] 46591.159

[GRAPHIC] [TIFF OMITTED] 46591.160

[GRAPHIC] [TIFF OMITTED] 46591.161

[GRAPHIC] [TIFF OMITTED] 46591.162

[GRAPHIC] [TIFF OMITTED] 46591.163

[GRAPHIC] [TIFF OMITTED] 46591.164

[GRAPHIC] [TIFF OMITTED] 46591.165

[GRAPHIC] [TIFF OMITTED] 46591.166

[GRAPHIC] [TIFF OMITTED] 46591.167

[GRAPHIC] [TIFF OMITTED] 46591.168

[GRAPHIC] [TIFF OMITTED] 46591.169

[GRAPHIC] [TIFF OMITTED] 46591.170

[GRAPHIC] [TIFF OMITTED] 46591.171

[GRAPHIC] [TIFF OMITTED] 46591.172

[GRAPHIC] [TIFF OMITTED] 46591.173

[GRAPHIC] [TIFF OMITTED] 46591.174

[GRAPHIC] [TIFF OMITTED] 46591.175

[GRAPHIC] [TIFF OMITTED] 46591.176

[GRAPHIC] [TIFF OMITTED] 46591.177

