[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF IMPLEMENTATION OF THE
EMERGENCY ECONOMIC STABILIZATION ACT
OF 2008 AND OF GOVERNMENT LENDING
AND INSURANCE FACILITIES: IMPACT ON
THE ECONOMY AND CREDIT AVAILABILITY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 18, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-145
----------
U.S. GOVERNMENT PRINTING OFFICE
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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
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Page
Hearing held on:
November 18, 2008............................................ 1
Appendix:
November 18, 2008............................................ 85
WITNESSES
Tuesday, November 18, 2008
Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance
Corporation.................................................... 11
Bartlett, Hon. Steve, President and Chief Executive Officer,
Financial Services Roundtable.................................. 46
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 9
Blankenship, Cynthia, Vice Chairman and Chief Operating Officer,
Bank of the West, on behalf of the Independent Community
Bankers of America (ICBA)...................................... 49
Blinder, Dr. Alan S., Gordon S. Rentschler Memorial Professor of
Economics and Public Affairs and Co-Director of the Center for
Economic Policy Studies, Princeton University.................. 64
Feldstein, Dr. Martin S., George F. Baker Professor of Economics,
Harvard University, and President Emeritus, National Bureau of
Economic Research, Inc......................................... 68
Findlay, Hon. D. Cameron, Executive Vice President and General
Counsel, Aon Corporation, on behalf of the Council of Insurance
Agents and Brokers............................................. 51
Paulson, Hon. Henry M., Jr., Secretary, U.S. Department of the
Treasury....................................................... 6
Yingling, Edward L., President and Chief Executive Officer,
American Bankers Association................................... 48
APPENDIX
Prepared statements:
Bachmann, Hon. Michele....................................... 86
Brown-Waite, Hon. Ginny...................................... 88
Kanjorski, Hon. Paul E....................................... 90
LaTourette, Hon. Steven C.................................... 91
Manzullo, Hon. Donald A...................................... 97
Perlmutter, Hon. Ed.......................................... 99
Bair, Hon. Sheila C.......................................... 100
Bartlett, Hon. Steve......................................... 126
Bernanke, Hon. Ben S......................................... 139
Blankenship, Cynthia......................................... 145
Blinder, Dr. Alan S.......................................... 164
Feldstein, Dr. Martin S...................................... 173
Findlay, Hon. D. Cameron..................................... 185
Paulson, Hon. Henry M., Jr................................... 190
Yingling, Edward L........................................... 194
Additional Material Submitted for the Record
Frank, Hon. Barney:
Memo regarding Treasury's Loan Modification Authority, dated
November 17, 2008.......................................... 215
Letter from Michael E. Fryzel, Chairman, National Credit
Union Administration, dated November 14, 2008.............. 219
Letter from Hon. Dennis J. Kucinich, Chairman, Domestic
Policy Subcommittee, Committee on Oversight and Government
Reform, dated November 17, 2008............................ 220
Written statement of the National Association of Realtors.... 225
Kanjorski, Hon. Paul E.:
Letter to Federal Reserve Chairman Ben Bernanke, dated
October 9, 2008............................................ 229
Letter to Federal Reserve Chairman Ben Bernanke, dated
October 20, 2008........................................... 231
Letter from Federal Reserve Chairman Ben Bernanke, dated
November 17, 2008.......................................... 233
LaTourette, Hon. Steven:
Letter and information pertaining to National City Bank...... 235
Neugebauer, Hon. Randy:
Letter from the Credit Union National Association (CUNA),
dated November 17, 2008.................................... 241
Letter from the National Association of Federal Credit Unions
(NAFCU), dated November 14, 2008........................... 244
Bair, Hon. Sheila:
Responses to questions submitted by Hon. Lincoln Davis....... 246
Responses to questions submitted by Hon. Joe Donnelly........ 249
Responses to questions submitted by Hon. Kenny Marchant...... 251
Bartlett, Hon. Steve:
Letter to SEC Chairman Christopher Cox from Robert P. Kelly,
Chairman and Chief Executive Officer, The Bank of New York
Mellon, dated November 6, 2008............................. 253
Letter to Mr. Conrad Hewitt, SEC, from Citigroup, dated
November 12, 2008.......................................... 255
Letter to Acting Secretary Florence E. Harmon, SEC, from the
Center for Audit Quality, dated November 13, 2008.......... 258
OVERSIGHT OF IMPLEMENTATION OF THE
EMERGENCY ECONOMIC STABILIZATION
ACT OF 2008 AND OF GOVERNMENT LENDING
AND INSURANCE FACILITIES: IMPACT ON
THE ECONOMY AND CREDIT AVAILABILITY
----------
Tuesday, November 18, 2008
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:33 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Velazquez, Watt, Ackerman, Sherman, Meeks, Moore of
Kansas, Capuano, Hinojosa, Clay, McCarthy of New York, Baca,
Lynch, Miller of North Carolina, Scott, Green, Cleaver, Bean,
Moore of Wisconsin, Davis of Tennessee, Hodes, Ellison, Klein,
Mahoney, Wilson, Perlmutter, Murphy, Donnelly, Foster, Speier;
Bachus, Castle, Royce, Paul, LaTourette, Manzullo, Jones,
Biggert, Shays, Hensarling, Garrett, Brown-Waite, Barrett,
Gerlach, Pearce, Neugebauer, Price, Davis of Kentucky,
Campbell, Putnam, Roskam, McCotter, and McCarthy of California.
The Chairman. The hearing will come to order. We will need
the photographers to stop obstructing. I have a great belief in
the freedom of information, but I think America is fully
informed as to what these two gentlemen look like, so I don't
feel like I am interfering with First Amendment rights if I ask
you to let us get on with the hearing.
This hearing is called to do oversight on one of the most
important pieces of legislation this current Congress has
adopted and one of the most important, in many ways, that I
think any Congress has ever adopted. We were asked last
September by the Secretary of the Treasury, supported by the
Chairman of the Federal Reserve, to pass a very extraordinary
piece of legislation, putting potentially at risk, although we
hope in the end not, $700 billion of public money for purposes
that go beyond what government has ordinarily done and what
almost everybody--myself included--believe the two gentlemen at
the table think government should do. But it was a necessary
response to a crisis.
Some questions have arisen about decisions that have been
made with regard to the expenditure of those funds. We
certainly want to hear from the Secretary and the Chairman
their assessment of what has happened so far. And let me say at
the outset, we do have a problem with all of us that there
tends to be a focus on those areas of disagreement, and so
accomplishments, areas of agreement, things which worked well
tend to not get a lot of discussion. It is important, so that
we can understand what has happened and evaluate what we did,
that there be a full discussion today both of the successes of
this program, and I believe there have been significant
successes, and also of the concerns many of us have.
There are two that I hope we can address, and we have
talked about these in a variety of ways, both publicly and
privately, with these two officials. One, there is concern that
the banks which were the recipient of capital infusions under
the Capital Purchase Program have not used the funding entirely
for re-lending, which many people here understood would be the
purpose. There is both unhappiness at what would appear to be
on the part of some financial institutions excesses in use of
the money, although AIG attracted the most attention there, and
that was initially not out of the $700 billion program. But
even more substantively, there is concern that, and we hear
this anecdotally from people we represent, that credit is still
tighter than it ought to be and that the banks which received
the money have not yet begun to lend it out.
The second major concern is over foreclosure prevention.
And here I believe there is a very fundamental disagreement on
the part of a lot of Members with the decision recently made.
But we understand that decisions are subject to reexamination,
etc. When the program was passed, very explicit language was
included to provide for mortgage foreclosure and mortgage
foreclosure diminution as one of the purposes. There is very
specific language in there. And the question was, well,
investment versus spending? The bill itself specifically says
that we should, as we buy up mortgage assets, reduce the amount
that has to be paid to a reasonable level to avoid foreclosure,
so no one can argue that it was not contemplated. Indeed, it
was a very important part of, frankly, the effort to get votes
for this bill that we would do mortgage foreclosure reduction.
The Secretary's recent announcement was that none of these
funds would go towards mortgage foreclosure reduction, although
there are other programs on which we are working to do that.
And I welcome recent evidence by several of the largest banks,
all of whom were recipients of the capital funds and there is
no direct connection, but it is true; several of the largest
banks have now begun to get active. We also received an
announcement by Fannie Mae and Freddie Mac of movement,
although we have some concerns about how far they go and why
they lag the programs that the FDIC has put in.
But the fundamental policy issue is our disappointment that
funds are not being used out of the $700 billion to supplement
mortgage foreclosure reduction. It is unfortunately not the
case that all of our other efforts have been fully successful.
I was a strong proponent of our HOPE for Homeowners bill. I now
believe that if we were redoing that, we would do it
differently in some ways. We learn from experience.
There is, I believe, an overwhelmingly powerful set of
reasons why some of the TARP money must be used for mortgage
foreclosure. First of all, mortgage foreclosures continue at an
excessive pace from the standpoint of the economy. The negative
effects of this cascade of foreclosures go far beyond the
individuals who lose their homes. It has to do with
neighborhood deterioration. It has to do with municipal
inability to make their governments work. And it impacts,
obviously, the macro economy.
Second, there is a matter of public confidence. A number of
things need to be done to get us out of this recession, in my
judgment: Fiscal stimulus; increased lending, which I talked to
first; and foreclosure reduction. It may well be that further
action has to be taken. I have to say at this point that public
confidence in what we have done so far is lower than anybody
would have wanted it to be to the point where it should be an
obstacle to further steps. So because I want to keep strictly
to the time for everybody, I would just reiterate that it is
essential that we do something to use some of the TARP funds
for the diminution of the rate of mortgage foreclosures, and
the Chair of the FDIC, whom we have invited, has been very much
in the lead on this. No one here is endorsing any specific
plan, but the need to use TARP funds as the bill contemplates
to reduce foreclosures is paramount.
The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman, for holding this
hearing.
I welcome Secretary Paulson, Chairman Bernanke, and
Chairman Bair, and I appreciate your service to the country.
There have been some reports in the press recently that the
use of the TARP funds for direct injection of capital into the
financial institutions is somehow contrary to the intent of
Congress. I actually think that is not correct. The legislation
that we passed specifically authorized direct injection of
capital into the financial institutions through the purchase of
equity or shares.
As I think the panel realizes, there was a debate during
the entire legislative process in exactly how the situation
would be addressed, and the final legislation it passed
authorized both the purchase of distressed assets and capital
injections. And I think what happened--I think we would all
hopefully agree on this--is we simply found that it was
quicker, simpler, and I think safer for the taxpayers to
purchase shares of stock.
I have always had objections or at least reservations about
the government purchasing what has been called troubled or
toxic assets and having to manage them. So I for one, Secretary
Paulson, applaud you for--and I think most economists applaud
you--for actually being flexible and taking an approach which
was clearly authorized by the legislation.
As the chairman said, confidence is critically important to
the financial markets and to the overall economy. And it is in
the best interest of not only the economy but also of the
public that, as we shift and improvise on occasions, we clearly
communicate the objective and the basis for what we are doing.
I think we all agree on that. Conditions on the ground change.
You must be agile and adjust, and I hope we all understand
that.
I have a particular concern, which is that we don't appear
to have an exit strategy. We continue to purchase assets and
bring them onto the books of the government in the neighborhood
of $1 trillion. And most of us, I think, on the Republican side
have been troubled since day one about government intervention
into the private markets. One of our concerns has been that we
are taking capital that could be used by more efficient, more
successful companies and enterprises with better business
models, and we are shifting that money to companies that are
less efficient and whose business models need changing. And by
putting capital into those companies, we almost enable them or
allow them not to confront some of the inefficiencies in their
own enterprises.
Let me close by saying this: There has been a lot of
discussion about the greatest economic challenge since the
Great Depression. One thing that I have tried to do is go back
and look at the 9 or 10 recessions we have had since World War
II. What at least I find--and you may tell me that I am wrong--
is that the GDP in all but the last two of those recessions
dipped by as much as 5 percent in at least one quarter. In this
quarter, which many people are saying is the worst quarter, we
expect maybe a 4 percent dip in GDP. So, at least when you look
at the history of the recessions since World War II, you find
that this recession may, in fact, not be any greater, at least
now. I don't know if something in the future, but at least
right now, this recession as far as the loss of GDP is no
greater than at least 8 of our 10 recessions since World War
II.
So the question that I would ask is--and I will close with
this--if we are in a recession that is, at least from a GDP
standpoint, no greater than 8 of the last 10, why are we, in
this recession, having so much government intervention?
Thank you, Mr. Chairman.
The Chairman. The gentlewoman from New York is recognized
for 3 minutes. We are under the rule for Cabinet officials of
two 5-minute statements and two 3-minute statements.
The gentlewoman from New York.
Mrs. Maloney. Thank you, Mr. Chairman.
I welcome our distinguished guests and thank you for your
leadership.
I particularly would like to commend Chairman Bair for her
leadership in foreclosure prevention and particularly for
developing a new loan modification guarantee program to
refinance on a large scale, which would help us to save
millions of people and help them to stay in their homes. And I
would like to be associated with the comments of both the
ranking member and the chairman that our intention was to use
some of the TARP money to invest in our economy and to get it
moving in the right direction. Certainly stabilizing housing,
as Chairman Bernanke has said repeatedly, that we must fix the
housing crisis before we can get the economy back on track. So
whatever the model, I firmly support using TARP money to
stabilize housing and our economy.
Secondly, my constituents are telling me that many of them
still cannot get access to credit. Given that bank lending is
still basically shut down, we need to be asking whether and
when we should expect at least some fraction of TARP funds
injected into banks to be lent. After all, one of the primary
purposes of the TARP program was to get credit moving. I have
nonbank lenders who are my constituents who lend money to small
businesses and want access to the TARP to increase that
activity. Today's Wall Street Journal talks about insurance
companies that are buying up banks just to get access to the
TARP money. And we then read many articles that banks are using
TARP money for buying other banks. So we are basically funding
mergers and acquisitions, not lending.
My basic question is, why shouldn't we be giving TARP money
out based on the activity it funds? Why don't we fund
organizations that will lend it, whether it is a bank, an
insurance company, so that we will be getting the credit out
into the communities which was the purpose of the TARP program?
Again, every article talks about how it is being used for
capital formation, mergers, acquisitions, other activities,
buying up swaps, buying other things instead of getting the
credit out into the communities.
So there are many questions before us today, but those are
two of my prime focuses, that we should be helping people stay
in their homes, and we should be working harder to get credit
out into the communities.
Thank you.
The Chairman. The gentleman from Texas is recognized for 3
minutes.
Mr. Hensarling. Thank you, Mr. Chairman. Thank you for
holding this hearing.
It is certainly better late than never. It appears that 80
percent of the funds that are currently available under the
TARP program have already been committed. So I am glad we are
at least holding the hearing today.
The Washington Post reported last week that, ``no formal
action has been taken to fill the independent oversight post
established by Congress when it approved the bailout to prevent
corruption and government waste.'' So I believe there is
sufficient work for this committee at this time.
As many in this room know, I did not support the original
Emergency Economic Stabilization Act. Clearly, as most, I
recognize that we do have a legitimate crisis as opposed to
those that occasionally get manufactured around here. I
embraced an idea I thought I would never embrace, and that was
a government-insured model for mortgage-backed securities. I
also preferred a secured loan model.
My ideas and those of other conservatives did not carry the
day. This is the law of the land. We want to make sure that it
works. I had many reservations about the toxic asset purchase
model, not the least of which was my belief that the Federal
Government ultimately was not institutionally competent to
purchase the right assets at the right price, much less manage
them in a proper fiduciary fashion. But I recall being told at
the time that this model had been studied at Treasury for a
number of months and that the other alternatives, for a number
of reasons, were discounted.
On October 3rd when the law was passed, the Dow closed at
10,325; yesterday it closed at 8,273. To the best of my
knowledge, any data that has come across my desk shows that
consumer confidence remains low. So, clearly, we have a ways to
go.
I will be curious in this hearing to understand the reasons
why the toxic asset purchase model has apparently been
abandoned. If that is true, I for one applaud it and always
thought the direct equity infusion model would be a preferred
model, although I prefer debt as opposed to equity. I fear,
though, that some view it as a bait and switch, and I am
curious as to what extent regulatory and programmatic
uncertainty are leading or exacerbating the economic woes that
we face today as people wait to see what portion of the money
they may be able to apply for.
I hope going forward that, number one, we measure the
program by, is it working? Number two, $700 billion is a lot of
money. I haven't found anybody who doesn't want a piece of it
as of yet. I hope that we look upon the program as something
that the recipients will be chosen by how it could impact our
macro economy and not a politically-driven process picking
winners and losers. And last but not least, taxpayer
accountability and transparency must be paramount.
Thank you, Mr. Chairman. I yield back.
The Chairman. Mr. Secretary, let me explain to the members,
we have, I believe, until noon. We will obviously not be able
to accommodate all the members. I am going to hold very
strictly to time limits for all of us.
Mr. Secretary.
STATEMENT OF THE HONORABLE HENRY M. PAULSON, JR., SECRETARY,
U.S. DEPARTMENT OF THE TREASURY
Secretary Paulson. Thank you very much, Mr. Chairman.
Mr. Chairman, Congressman Bachus, and members of the
committee, thank you for the opportunity to testify this
morning.
Six weeks ago, Congress took the critically important step
of providing important authorities and resources to stabilize
our financial system. Until that time, we faced a financial
crisis without the proper tools. With these tools in hand, we
took decisive action to prevent the collapse of our financial
system. We have not in our lifetimes dealt with a financial
crisis of this severity and unpredictability. We have seen the
failures or the equivalent of failures of Bear Stearns,
IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie
Mae, Freddie Mac, and AIG, institutions with a collective $4.7
trillion in assets when this year began. By September, the
financial system had seized up, presenting a system-wide
crisis.
Our objectives in asking Congress for a financial rescue
package were to, first, stabilize a financial system on the
verge of collapse and then to get lending going again to
support American consumers and businesses. Over the next few
weeks, conditions worsened significantly. Confidence in the
banking system continued to diminish. Industrial company access
to all aspects of the bond market was dramatically curtailed.
Small- and middle-sized companies with no direct connection to
the financial sector were losing access to the normal credit
needed to meet payrolls, pay suppliers, and buy inventory.
During that same period, the FDIC acted to mitigate the failure
of Washington Mutual and made clear that it would intervene to
prevent Wachovia's failure.
Turmoil had developed in the European markets. In a 2-day
period at the end of September, the governments of Ireland, the
U.K., Germany, Belgium, France, and Iceland intervened to
prevent the failure of one or more financial institutions in
their countries. By the time legislation had cleared Congress,
the global market crisis was so broad and severe that powerful
steps were necessary to quickly stabilize our financial system.
Our response, in coordination with the Federal Reserve, the
FDIC, and other banking regulators was a program to purchase
equity in banks across the country. We have committed $250
billion to this effort. This action, in combination with the
FDIC's guarantee of certain debt issued by financial
institutions and the Fed's commercial paper program helped us
to immediately stabilize the financial system.
The Capital Purchase Program for banks and thrifts has
already dispersed $148 billion, and we are processing many more
applications. Yesterday, Treasury announced the terms for
participation for nonpublicly traded banks, another important
source of credit in our economy. We have designed these terms
to help provide community development financial institutions
and minority depository institutions with capital for lending
to low-income and minority populations. These institutions have
committed to use this capital for businesses and projects that
serve their communities. In addition, we are developing a
matching program for possible future use by banks or nonbank
financial institutions.
Capital strength enables banks to take losses as they write
down or sell troubled assets. Stronger capitalization is also
essential to increasing lending, which although difficult to
achieve during times like this, is essential to economic
recovery. We expect banks to increase their lending over time
as a result of these efforts and as confidence is restored.
This lending won't materialize as fast as any of us would like.
But it will happen much, much faster having used the TARP to
stabilize our system.
As we continue significant work on our mortgage asset
purchase plan, it became clear just how much damage the crisis
had done to our economy. Third quarter GDP growth showed
negative three-tenths of a percent. The unemployment rate rose
to a level not seen in 15 years. Home price status showed that
home prices in 10 major cities had fallen 18 percent over the
previous year, demonstrating that the housing correction had
not abated. The slowing of European economies has been even
more dramatic.
We assessed the potential use of remaining TARP funding
against the backdrop of current economic and market conditions.
It is clear that an effective mortgage asset purchase program
would require a massive commitment of TARP funds. In September,
before economic conditions worsened, $700 billion in troubled
asset purchases would have had a significant impact. But half
of that sum in a worse economy simply isn't enough firepower.
We have therefore determined that the prudent course at this
time is to conserve the remaining funds available from the
TARP, providing flexibility for this and the next
Administration.
Other priorities that need to be addressed include actions
to restore consumer credit. Treasury has been working on a
program with the Federal Reserve to improve securitization in
the credit marketplace. While this would involve investing only
a relatively modest share of TARP funds in the Federal Reserve
liquidity facility, it could have substantial positive benefits
for consumer lending.
Finally, Mr. Chairman, Treasury remains committed to
continuing to work to reduce avoidable foreclosures. Congress
and the Administration have made substantial progress on that
front through HUD programs, the FDIC's IndyMac approach, our
support and leadership of the HOPE NOW Alliance, and our work
with the GSEs, including an important announcement they made
last week establishing new servicer guidelines that will set a
new standard for the entire industry. Our actions to stabilize
and strengthen Fannie Mae and Freddie Mac have also helped
mitigate the housing correction by increasing access to lower-
cost mortgage lending.
As some on the committee know, I have reservations about
spending TARP resources to directly subsidize foreclosure
mitigation because this is different than the original
investment intent. We continue to look at good proposals and
are dedicated to implementing those that protect the taxpayer
and work well.
Mr. Chairman, the actions of the Treasury, the Fed, and the
FDIC have stabilized our financial system. The authorities in
the TARP have been used to strengthen our financial system and
to prevent the harm to our economy and financial system from
the failure of a systemically important institution. As facts
and conditions in the market and economy have changed, we have
adjusted our strategy to most effectively address the urgent
crisis and to preserve the flexibility of the President-elect
and the new Secretary of the Treasury to address future
challenges in the economy and capital markets.
Thank you again for your efforts and for the opportunity to
appear today. I would like to just make one last comment in
response to a question that Congressman Bachus asked because it
is one I hear a lot, the distinction between the financial
markets and the economy. So when we have talked about the
crisis and the financial markets and being unprecedented and
having to go back to the Great Depression to see anything of
this magnitude and be presented with this amount of difficulty,
we are talking about the financial markets. Now, when the
financial markets have problems, they hurt the economy. So the
reason that it was very important to get in quickly and
stabilize it was to mitigate damage to the economy. When we
were here before you, we saw what was happening to the economy.
We talked about it. We took the steps. The economy has
continued to get worse. The American people look at the
worsening economy. And as your chairman said to me yesterday,
in politics, you don't get much credit for what might have
happened and didn't happen. What the American people see is
what is happening to the economy. But again, our purpose in
coming to you was to take--
The Chairman. Mr. Secretary, the gentleman will have his 5
minutes. I appreciate that.
[The prepared statement of Secretary Paulson can be found
on page 190 of the appendix.]
The Chairman. Mr. Chairman.
STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you.
Chairman Frank, Ranking Member Bachus, and other members of
the committee, I appreciate having this opportunity to review
some of the activities to date of the Treasury's Troubled Asset
Relief Program, or TARP, and to discuss recent steps taken by
the Federal Reserve and other agencies to support the
normalization of credit markets.
The legislation that created the TARP put in place a
Financial Stability Oversight Board to review the actions of
the Treasury in administering the program. That oversight board
includes the Secretary of the Treasury, the Secretary of
Housing and Urban Development, the Chairman of the Securities
and Exchange Commission, the Director of the Federal Housing
Finance Agency, and the Chairman of the Federal Reserve Board.
We have met 4 times, reviewing the operational plans and policy
initiatives for the TARP and discussing possible additional
steps that might be taken.
Officers for the oversight board have been appointed, and
the Federal Reserve and other agencies are providing staff
support for the board. Minutes of each meeting are being posted
to a special Web site established by the Treasury. In addition,
staff members of the agencies whose heads are participating in
the oversight board have met with staff from the Government
Accountability Office to explore strategies for coordinating
the oversight that the two bodies are required to perform under
the enabling legislation.
The value of the TARP in promoting financial stability has
already been demonstrated. The financial crisis intensified
greatly in the latter part of September and spread to many
countries that had not yet been touched by it, which led to
grave concerns about the stability of the global financial
system. Failure to prevent the international financial collapse
would almost certainly have had dire implications for both the
U.S. and world economies.
Fortunately, the existence of the TARP allowed the Treasury
to act quickly by announcing a plan to inject $250 billion in
capital into U.S. financial institutions. Nine large
institutions received the first $125 billion, and the remainder
is being made available to other banking organizations through
an application process. In addition, the Federal Deposit
Insurance Corporation announced that it would guarantee non-
interest-bearing transaction accounts at depository
institutions and certain other liabilities for depository
institutions and their holding companies. And the Federal
Reserve expanded its provision of backstop liquidity to the
financial system.
These actions, together with similar actions in many other
countries, appeared to stabilize the situation and to improve
investor confidence in financial firms. Notably, spreads on
credit default swaps for large U.S. banking organizations,
which had widened substantially over the previous 2 weeks,
declined sharply on the day of the joint announcement.
Going forward, the ability of the Treasury to use the TARP
to inject capital into financial institutions and to take other
steps to stabilize the financial system, including any actions
that might be needed to prevent a disorderly failure of a
systemically important financial institution, will be critical
for restoring confidence and promoting return of credit markets
to more normal functioning.
As I noted earlier, the Federal Reserve has taken a range
of policy actions to provide liquidity to the financial system
and thus promote the extension of credit to households and
businesses. Our recent actions have focused on the market for
commercial paper, which is an important source of short-term
financing for many financial and nonfinancial firms. Normally,
money market mutual funds are major lenders in commercial paper
markets. However, in mid-September, a large fund suffered
losses and heavy redemptions, causing it to suspend further
redemptions and then close. In the next few weeks, investors
withdrew almost $500 billion from prime money market funds.
The funds, concerned with their ability to meet further
redemptions, began to reduce their purchases of commercial
paper and limit the maturity of such paper to only overnight or
other very short maturities. As a result, interest rate spreads
paid by issuers on longer maturity commercial paper widened
significantly, and the issuers were exposed to the costs and
risks of having to roll over increasingly large amounts of
paper each day.
The Federal Reserve has developed three programs to address
these problems. The first allows money market mutual funds to
sell asset-backed commercial paper to banking organizations
which are then permitted to borrow against the paper on a
nonrecourse basis from the Federal Reserve Bank of Boston.
Usage of that facility peaked at around $150 billion. The
facility contributed importantly to the ability of money funds
to meet redemption pressures when they were most intense and
remains available as a backstop should such pressures re-
emerge.
The second program involves the funding of a special
purpose vehicle that purchases highly rated commercial paper
issued by financial and nonfinancial businesses at a term of 3
months. This facility has purchased about $250 billion of
commercial paper, allowing many firms to extend significant
amounts of funding into next year.
A third facility expected to be operational next week will
provide a liquidity backstop directly to money market mutual
funds. This facility is intended to give funds confidence to
extend significantly the maturities of their investments and
reduce over time the reliance of issuers on sales to the
Federal Reserve special purpose vehicle.
All of these programs, which were created under section
13(3) of the Federal Reserve Act, must be terminated when
conditions in the financial markets are determined by the
Federal Reserve to no longer be unusual and exigent.
The primary objective of these and other actions we have
taken is to stabilize credit markets and to improve the access
of credit to businesses and households. There are some signs
that credit markets, while still strained, are improving.
Interbank short-term funding rates have fallen notably since
mid-October, and we are seeing greater stability in money
market mutual funds and in the commercial paper market.
Interest rates and higher rated bonds issued by corporations
and municipalities have fallen somewhat, and bond issuance for
these entities rose a bit in recent weeks.
The ongoing capital injections under the TARP are
continuing to bring stability to the banking system and have
reduced some of the pressure on banks to deleverage, two
critical first steps towards restarting flows of new credit.
However, overall, credit conditions are still far from normal
with risk spreads remaining very elevated and banks reporting
that they continued to tighten lending standards through
October. There has been little or no bond issuance by lower
rated corporations or securitization of consumer loans in
recent weeks.
To help address the tightness of credit, on November 12th,
the Federal banking agencies issued a joint statement on
meeting the needs of creditworthy borrowers. The statement took
note of the recent strong policy actions designed to promote
financial stability and improve banks' access to capital and
funding. In light of those actions, which have increased the
capacity of banks to lend, it is imperative that all banking
organizations and their regulators work together to ensure that
the needs of creditworthy borrowers are met in a manner
consistent with safety and soundness. As capital adequacy is
critical in determining a banking organization's ability and
willingness to lend, the joint statement emphasizes the need
for careful capital planning, including setting appropriate
dividend policies. The statement also notes the agency's
expectation that banking organizations should work with
existing borrowers to avoid preventable foreclosures which can
be costly to all involved: the borrower; the lender; and the
communities in which they are located.
Steps that should be taken in this area include ensuring
adequate funding and staffing of mortgage servicing operations
and adopting systematic, proactive, and streamlined mortgage
loan modification protocols aimed at providing long-term
sustainability for borrowers.
Finally, the agencies expect banking organizations to
conduct regular reviews of their management compensation
policies to ensure that they encourage prudent lending and
discourage excessive risk-taking.
Thank you. I would be pleased to take your questions.
[The prepared statement of Chairman Bernanke can be found
on page 139 of the appendix.]
The Chairman. Chairwoman Bair.
STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL
DEPOSIT INSURANCE CORPORATION
Ms. Bair. Thank you.
Chairman Frank, Ranking Member Bachus, and members of the
committee, I appreciate the opportunity to testify on recent
efforts to stabilize the Nation's financial markets and to
reduce foreclosures.
Conditions in the financial markets have deeply shaken the
confidence of people around the world and their financial
systems. The events of the past few months are unprecedented to
say the least. The government has taken a number of
extraordinary steps to bolster public confidence in the U.S.
banking system. The most recent were measures to recapitalize
our banks and provide temporary liquidity support to unlock
credit markets, especially interbank lending. These moves match
similar actions taken in Europe. Working with the Treasury
Department and the other bank regulators, the FDIC will do
whatever it takes to preserve the public's trust in the
financial system.
Despite the current challenges, the bulk of the U.S.
banking industry remains well capitalized. But what we do have
is a liquidity problem. This liquidity squeeze was initially
caused by uncertainty about the value of mortgage-related
assets. Since then, credit concerns have broadened
considerably, making banks reluctant to lend to each other and
to lend to consumers and businesses.
As you know, in concert with the Treasury and the Federal
Reserve, we took a number of actions to bolster confidence in
the banking system. These included temporarily increasing
deposit insurance coverage and providing guarantees to new
senior unsecured debt issued by banks, thrifts, and holding
companies. The purpose of these programs is to increase bank
lending and minimize the impact of deleveraging on the American
economy.
As a result of these efforts, the financial system is now
more stable and interest rate spreads have narrowed
substantially. However, credit remains tight and this is a
serious threat to the economic outlook. Regulators will be
watching to make sure these emergency resources are mainly used
for their intended purpose--responsible lending to consumers
and businesses.
In the meantime, we must focus on the borrower side of the
equation. Everyone agrees that more needs to be done for
homeowners. We need to prevent unnecessary foreclosures, and we
need to modify loans at a much faster pace. Foreclosure
prevention is essential to helping find a bottom for home
prices, to stabilizing mortgage credit markets, and to
restoring economic growth.
We all know there is no single solution or magic bullet.
But as foreclosures escalate, we are clearly falling behind the
curve. Much more aggressive intervention is needed if we are to
curb the damage to our neighborhoods and to the broader
economy.
Last Friday, we released the details of our plan to help
1.5 million homeowners avoid foreclosure. Our program would
require a total of about $24 billion in Federal financing. The
plan is based on our practical experience in modifying
thousands of mortgages at IndyMac Federal Bank. As we have done
at IndyMac, we would convert unaffordable mortgages into loans
that are sustainable over the long term. The plan would set
loan modification standards. Eligible borrowers would get lower
interest rates and, in some cases, longer loan terms and
principal forbearance to make their monthly payments
affordable.
To encourage the lending industry to participate, the
program would create a loan guarantee program that would absorb
up to half the losses if the borrower defaults on the modified
loan. While we applaud recent announcements by the GSEs and
major servicers to adopt more streamlined approaches to loan
modifications along the lines we have employed at IndyMac, the
stakes are too high and time is too short to rely exclusively
on voluntary efforts. Moreover, these recent announcements do
not reach mortgages held in private label securitizations.
We need a national solution for a national problem. We need
a fast-track Federal program that has the potential to reach
all homeowners regardless of who owns their mortgages. What we
are proposing is a major investment program that can yield
significant returns by attacking the self-reinforcing cycle of
unnecessary foreclosures that is placing downward pressure on
home prices. Average U.S. home prices have declined by more
than 20 percent from their peak and are still spiraling down.
If this program can keep home prices from falling by just 3
percentage points less than would otherwise be the case, over
half a trillion dollars would remain in homeowners' pockets.
Even a conservative estimate of the wealth effect this could
have on consumer spending would exceed $40 billion. That would
be a big stimulus for the economy and nearly double our
investment.
In conclusion, the FDIC is fully engaged in preserving
trust and stability in the banking system. The FDIC stands
committed to achieving what has been our core mission since we
were created 75 years ago in the wake of the Great Depression--
protecting depositors and maintaining public confidence in the
financial system.
Thank you.
[The prepared statement of Chairwoman Bair can be found on
page 100 of the appendix.]
The Chairman. Thank you.
Before I begin my questioning, I want to just put into the
record: A very thoughtful letter from our colleague Mr.
Kucinich, who was chair of a Subcommittee on Government Reform,
strongly arguing for help on foreclosures; a letter that was
sent to me and a letter was also sent to the Secretary from
Michael Fryzel, the Presidential appointee to head the National
Credit Union Administration, objecting strenuously on behalf of
the health of the credit union industry to the decision not to
buy up any assets; and also, a statement from the National
Association of Realtors.
I will now begin my 5 minutes, and I am going to hold
everybody to the 5 minutes.
First, I welcome the two Chairs to the interagency
statement on meeting the needs of creditworthy borrowers. It is
a very good statement. It will be an even better statement if
somebody gets whacked for not following it. There has to be
some teeth. And it does talk about compensation, about
dividends, and it is a very good statement. I can't imagine
that a month from now everybody will have complied, and so,
therefore, frankly, evidence that it meant something will be if
there were at least some letters issued or some penalties.
Secondly, I just want to report on the oversight board, and
the gentleman from Texas referred to it. My understanding is
that the Senate Majority Leader and the Speaker have appointed
their members. The minority leaders have not appointed their
members yet, so the board is not yet functional. Earlier this
week, or last week, three members were appointed, as called for
under the statute, by the Majority Leader of the Senate and the
Speaker.
Now I want to get to the issue of mortgage foreclosure.
First, Mr. Secretary, I am going to also put into the
record a 4-page memo of sections of the law that we passed
which mandate that if you buy assets, you do mortgage
foreclosure.
And make it very clear, when you say spending--first, I
have to say this: We obviously all appreciate the concern for
the taxpayers' money. But the Chair of the FDIC talks about $24
billion. That is, what, 40 percent of what we just gave to AIG
out of this program. And you say this is for an investment and
not spending. I don't know what investment counselor, absent
macro economics conditions, would have advised you to invest in
AIG. I suspect it does not rate highly as an investment these
days. I hope it goes well going forward. And there is no
question that this will be helpful to it. But $40 billion for
AIG, and then we can't find $24 billion on the mortgage
foreclosure, is part of the reason we have the real problem
with the country.
But let me just say, it is 4 pages of specific
authorization to buy up mortgages and write them down. Section
109(c): ``Upon any request arising under existing investment
contracts, the Secretary shall consent, where appropriate in
considering net present value to the taxpayer, to reasonable
requests for lost mitigation measures.''
In section 110, homeowner assistance by agencies: ``To the
extent that the Federal property manager holds onto, controls
mortgages, they shall implement a plan that seeks to maximize
assistance for homeowners.''
The bill is replete with authorization to you not simply to
buy up mortgages but in effect to do some spending because we
are talking about writing them down. So the argument that--
frankly, of all the changes that have come in the program, this
wouldn't be a change. This was the program. And my colleague
from California, whom you will be hearing from shortly, made a
big point of this on the Floor. So the argument that this is
not part of the program simply doesn't work.
Would you agree, Mr. Secretary, that in fact the bill does
authorize aggressive action not simply to buy up mortgages but,
in buying them up, take some action to reduce in some ways the
amount owed so we diminish foreclosures?
Secretary Paulson. Mr. Chairman, two things.
First, I need to just say a word about AIG, because the
primary purpose of the bill was to protect our system from
collapse. AIG was a situation, a company that would have failed
had the Fed not stepped in. Had we had the TARP at that time,
this is right down the middle of the plate for what we would
have used the TARP for. As it turned out--because it should
have had preferred and a Fed facility. And as it turned out, we
needed to come in, again, to stabilize that situation and
maximize the chances that the government would get money back.
So I just wanted--
The Chairman. I am not objecting to the AIG. I am just
saying, though, that the standards of what we do--and obviously
foreclosure is also a serious problem for the economy.
Secretary Paulson. I agree with you on the bill. There is
no doubt--and so don't misunderstand what I say--that we came
to Congress with the intent to get at the capital program that
banks were facing and the system was facing through purchasing
large amounts of illiquid assets. So the bill--and it was to
purchase those assets and then resell them. And our whole
discussion--because that is what we were talking about, was how
to use them and use this investment position to make a
difference and mitigate foreclosures.
My only point is, now that we haven't bought those assets,
illiquid assets, that the intent, as I had seen it, at least
all the discussions we had went to buying assets and reselling
them; it didn't go to a direct subsidy. But--
The Chairman. No, Mr. Secretary, I have to interrupt you.
You are talking legitimately about your intent. But we had to
get the votes for the bill. Our intent was also relevant, and I
read you sections of the bill which says, write it down; give
them assistance. So the bill couldn't have been clearer that
one of the purposes--and by the way, we are talking about,
what, $24 billion out of $700 billion; you are talking about 4
percent of the total amount. But the point is that clearly part
of this was not just to stabilize but to reduce the number of
foreclosures for good macroeconomic reasons. So, again, the
intent couldn't be clearer from what I read.
Secretary Paulson. Let me then, Mr. Chairman, say what you
have heard me say a number of times before, that, going back
many, many months, before it was as topical as it is now, we
have been working very, very aggressively at the individual--
helping the individual. As recently as last week--
The Chairman. Mr. Chairman, I am sorry--Mr. Secretary. We
don't have a lot of time. I don't usually do this, but the
question is the language in the TARP. We understand that there
are other activities going on. I don't accept them as a
substitute for using the authority that we very specifically
and carefully wrote into the TARP and that was essential to it
getting passed.
Secretary Paulson. Well, what you have heard from me and
what you heard from me last night and which I will say again,
that I am going to keep working on this and looking for ways to
use the taxpayer money as they expect me to here with regard to
foreclosure mitigation. We have been, you know, as recently as
last week, taking a step, which I think will have--
The Chairman. No, I am sorry, Mr. Secretary. Those are not
substitutable, because I will tell you, and I apologize for
taking the time, it is nobody's view that we have been as
successful as we need to be for the sake of the economy in
reducing foreclosures. We have a very large pot that was
intended to be part of that effort that is going untapped.
The gentleman from Alabama.
Mr. Bachus. He was responding to you.
The Chairman. We are out of time. He can respond to you.
Mr. Bachus. Thank you, Mr. Chairman.
You have just been told, if you don't give assistance or
lend to folks, you will be waxed. It is sort of a continuation
of what we have been hearing since the 1970's by Federal policy
and the GSEs, is, lend and meet the needs of folks and assist
them. I think, as a result of that, the financial system and
the economy has been waxed by lending to people who weren't
creditworthy. And I hope--and I appreciate that your
intergovernment statement stressed creditworthy borrowers.
Secretary Paulson, I very much appreciate something that
you did in your opening statement. I think you distinguished
between the economy and the financial system, because people
did question some of the actions by saying, well, the economy
is strong. But the financial system, chaos or distress there
will affect the economy. It has that effect. I think we have
heard good news here. There is stability returning to the
financial system. And I think the good news is, just like the
instability in the financial system affected the economy, going
forward, and it may take a while to do, but the stability that
has returned to the system will in the long term strengthen the
economy. I think that is good news for all of us.
The TARP program, the capital purchase program, all of them
had as a design two things. One was restoring the stability to
the financial markets. And I think that we are well on our way
to achieving that. And as you said, you don't get credit for
something that you avoid, and that would be a collapse of the
financial system.
The second objective was to strengthen the economy by
restoring lending to companies and borrowers. And on that
score, it hasn't worked as well. Would you comment on, do you
think we are on the right track in restoring lending?
Secretary Paulson. Yes, Congressman Bachus, I think we are
on the right track. Remember, this is early days. In terms of
the capital, it has just gone out, and a lot of it still hasn't
gone out to the banks. The way I look at where we are today is,
I think we have turned the corner in terms of stabilizing the
system, preventing a collapse.
I think there is a lot of work that still needs to be done
in terms of recovery of the financial system, getting it
working again, getting credit flowing again. I think this is
going to be key to getting the economy going. And it is going
to take a lot of work and time.
I agree with what the chairman said about bank lending. And
I just want to say, one, to get to your point on foreclosure
prevention, I understand the chairman's point. And he expects
and wants to see something in the TARP, specifically in the
TARP to deal with that. We are continuing to work on that.
I did want to say, though, that because I was so aware of
what the American people expected and what Congress expected
and because I cared so much about this, that I believe that the
actions we took outside of the TARP with regard to the GSEs and
the national standard they set has the potential to touch more
and do more than we might have achieved if we had used all $700
billion to buy illiquid assets. So we are working. I understand
the point. I know what you would like to see us do, but I just
wanted to make that point there.
Mr. Bachus. Thank you.
Let me say this. There have been quite a lot of things,
Chairman Bernanke, over $2 trillion of emergency loans to
institutions, and the identity of those assets that you have
taken back. You have always advocated--as the Secretary has--
committee transparency. I know you are refusing to disclose the
names of those institutions or the composition of those assets.
Is that a short-term--I will call it a refusal to disclose? Or
when do you anticipate letting the public know?
Mr. Bernanke. Congressman, I think there has been some
confusion about what this involves.
Mr. Bachus. Sure.
Mr. Bernanke. The Federal Reserve, like all other central
banks, has short-term collateralized lending programs to
financial institutions. We have always had that. The main
difference is we have extended it to primary dealers as well as
depository institutions. It is open to any bank that comes to
our window. We take collateral. We haircut it. It is a short-
term loan. It is very safe. We have never lost a penny in these
lending programs.
Now, some have asked us to reveal the names of banks that
are borrowing, how much they are borrowing, what collateral
they are posting. We think that is counterproductive for two
reasons: First, the success of this depends on banks being
willing to come and borrow when they need short-term cash.
There is a concern that if the name is put in the newspaper
that such and such bank came to the Fed to borrow overnight,
even for a perfectly good reason, that others might begin to
worry, is this bank creditworthy? And that might create a
stigma, a problem, and it might cause banks to be unwilling to
borrow. That would be counterproductive for the whole--
Mr. Bachus. So these are banks which have good sound CAMELS
ratings?
Mr. Bernanke. Yes. We only lend to good quality banks. We
lend on a recourse basis, that is post, post, post collateral,
and if the collateral were to be insufficient, then the bank
itself is still responsible. We have never lost a penny doing
this. I think it is a totally standard practice for central
banks around the world, and it is very constructive to provide
liquidity to the financial system.
Mr. Bachus. Thank you.
The Chairman. The gentleman from Pennsylvania.
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Secretary, I heard you use the comment in a response to
a question just a little while ago, ``turning the corner.'' It
is a quotable phrase, I think. It reminds me of another famous
phrase, ``return to normalcy.'' And it sort of scares me if you
look at the context of when ``return to normalcy'' was used.
I think there is a crisis of confidence that is in the
general public and within this body of the Congress. We are
trying to figure out, those of us who extended ourselves on the
vote for the bailout and the 180-degree change that you made in
policy from buying bad assets to injecting investments of
equity in banking institutions. I do not fault you for it. It
just was an extreme change and rather shocking. And it wasn't
your idea. It was the idea of the drafters of the legislation
that you set up in the form of a 3\1/2\ page draft and we
converted after several weeks to 400 pages. And part of those
400 pages gave you the authority to make that 180-degree
change.
Now, my problem is, that has happened once. And now
suddenly I see other things occurring where you make 180-degree
changes in policy. One example is this thing we are struggling
with this week, the potential bankruptcy or collapse of our
auto industry in the country. And it seems that there is a dual
idea, either at Treasury or at the White House, that if you
take the $25 billion out of certain qualified funds, then it is
necessary and should be used and obviously would avoid systemic
risk. The underlying principle: We shouldn't do it unless there
is systemic risk. But if you were to use money from the TARP
fund, that is unacceptable to the White House and Treasury and
should not be done.
Now it seems to me, when you are treating the disease, you
don't decide where the disease came from. You decide, what is
the prognosis, the likely prognosis, and then you take action.
So there is a lack of confidence it seems to me, both in this
body and in the general population. They want to get some idea,
do we have a plan? Where are we going? To say ``turning the
corner'' really is not terribly significant. It is no different
than what Herbert Hoover said, ``return to normalcy.'' And it
is causing fright to the people. Why can this Treasury and this
White House not lay out a plan that takes into consideration
all the contingencies that will happen or may happen and what
our potential response will be, knowing full well mistakes will
be made, money will be unreasonably or foolishly expended, but
we all tend to agree that if, in fact, we are on the precipice
of a disaster or a meltdown, we are willing to take those
opportunities. But we do not want to walk into a room of
darkness. We really want you to shed as much light in that room
before we take the leap over the threshold.
So I am sort of calling upon you, can you now give us some
indication, do you consider the loss of the American auto
industry a significant and systemic risk? Or do you not? If we
lose 3 million jobs, what would it cost to make it up? What
would be the loss of revenue? And would it be worth spending
$25 billion initially to stop that from occurring? And if we do
not do that, what is our backup plan, and what do we tend to
do?
It seems to me that if we are going to build confidence
among our constituents, the American people, and confidence
within this institution to respond to your requests and the
White House's requests just over the next 60 days and then the
next Administration, it seems to me we have to be a little more
forthcoming.
Secretary Paulson. Well, then let me be very, very
forthcoming to you. Because the intent of the TARP, when we
came here, was to stabilize the system to prevent a collapse.
That is what we talked about; we talked about the financial
system. And what I have said today here, I was very careful
when I said what turning the corner meant. I said I believe
that meant that we have stabilized the financial system and
prevented a collapse. I was also very clear in saying we have a
lot of work ahead of us, and the recovery of the financial
system is a lot of work to get the markets going again.
So now let's look at the TARP. When we came here, the
purpose was that: getting capital in the financial system. We
came forward with--the strategy was buying illiquid assets.
That was the strategy. The purpose was clear. We worked with
Congress, and we wanted those additional authorities. Don't
forever believe that we did not want--we were working to
maximize the authorities we have and the tools we have. And
when the facts changed and the circumstances changed, we
changed the strategy. We didn't implement a flawed strategy; we
implemented a strategy that worked.
Now, to get to your question--and I think what the American
people need, in terms of confidence, is a realistic assessment
of where we are, sticking with what our objective was to begin
with.
Now, look at the autos. Again, you haven't seen any lack of
consistency on my part with regard to the autos. The TARP was
aimed at the financial system. That is what the purpose is.
That is what we talked about with the TARP. Okay, now, in terms
of autos, I have said repeatedly I think it would be not a good
thing, it would be something to be avoided, having one of the
auto companies fail, particularly during this period of time.
We have asked Congress--you know, and Congress has worked
to deal with this. But I believe that any solution must be a
solution that leads to long-term viability, sustainable
viability here.
And so, again, I don't see this as the purpose of the TARP.
Congress passed legislation that dealt with the financial
system's stability. And, again, you know, there are other ways.
And, you know, you also appropriated money for the auto
industry and the Department of Energy bill. Another alternative
may be to modify that.
The Chairman. The gentleman from--who is next? The
gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman.
Mr. Secretary, I think I would like to follow up on that
line of questioning. I think what I hear you saying today and
what I think I have heard you say is that, as a matter of
policy, you do not believe that the TARP funds should be
allocated to the big three automakers.
But, to be specific, do you believe, under the definition
of ``financial institution'' in the underlying legislation,
that you are authorized to expend these sums, if you so choose?
Secretary Paulson. Congressman, I think I will just leave
it where I left it. I don't think this is the purpose of the
legislation.
Mr. Hensarling. Well, I understand that, Mr. Secretary.
Then let me follow up by asking, what is your understanding of
what qualifies for a financial institution under the
legislation?
For example, I read press reports recently that a group of
plumbing contractors were applying for portions of the TARP
funds in order to refurbish some foreclosed properties, making
their case that doing so qualifies them as a financial
institution.
So, in your mind, since you are essentially in charge of
disbursing the funds, can you give me a clearer, black-and-
white definition of what a financial institution is?
Secretary Paulson. Congressman, I cannot. We have a broad
definition. We got very broad authorities and powers. And I
think that is appropriate.
But we certainly are not going to give money to plumbing
contractors, and we are not going to give money to a lot of
other people and institutions that are applying. We have had a
very clear focus here right now.
And, again, I feel a great responsibility, even though the
powers may be very broad, and appropriately so, I feel a great
possibility to stick with what the purpose is. The purpose is
stabilizing and strengthening our financial system. And I have
said to you very clearly that I believe that the auto companies
fall outside of that purpose.
Mr. Hensarling. Chairman Bernanke, the Federal Reserve has
been very aggressive in developing new credit facilities,
expanded facilities, reducing collateral standards for troubled
financial services companies. But, by some estimates, we now
have an exposure somewhere in the neighborhood of $2 trillion
of commitments by the Federal Reserve.
Can you tell us exactly how much exposure is out there, how
much money has been lent?
Mr. Bernanke. Well, our balance sheet is about $2 trillion,
of which--I am guessing now--$600 billion is Treasury's and
agencies'. The rest is some kind of credit extension of some
type.
The overwhelming amount, however, is of two classes. It is
either collateralized lending to financial institutions. I
described earlier, those are loans made with recourse and on
haircut collateral. They are short-term loans, and they are
quite safe. We have never lost a penny on one of those.
The other type of lending we have been doing is we have
been doing currency swaps with some major central banks in
order to try to address dollar funding problems in other
jurisdictions. There the credit risk is of the Foreign Central
Bank, like the European Central Bank, and we consider that to
be zero risk, essentially.
So the overwhelming majority of our lending is at very low
credit risk.
Mr. Hensarling. Well, you appear to be going where perhaps
no Federal Reserve Chairman has gone before. And this may be a
very good thing, given the crisis at hand. But just how much
more are you prepared to commit and expose present and future
taxpayers' liability to?
Mr. Bernanke. Well, I think we need to do what we need to
do to keep the U.S. credit system working and to try to create
a recovery in the financial system.
By law, our lending has to be against fully collateralized,
secure backing. We are actually making money in some of our
programs. I don't see us as having a substantial exposure. It
is a liquidity provisioning process, not a credit or a fiscal
process.
Mr. Hensarling. At what point do you believe that these
activities could undermine your ability to actually, on a
prospective basis, impact monetary policies? And at what point
might it adversely affect the credit rating of the United
States?
Mr. Bernanke. Well, the size of the balance sheet has
affected, to some extent, the amount of reserves in the banking
system, which makes it more difficult to control the Federal
funds rate. It was a productive and useful feature of this same
bill that we are discussing that included the right for the
Federal Reserve to pay interest on reserves to banks, which has
been helpful in keeping the Federal funds rate, you know,
closer to the target that it otherwise would be. But that is
still an issue that we are working on.
Again, I see no significant credit risk in what we are
doing, and I don't think it will have any benefit or any
effect, one way or the other, on U.S. credit rating. That is my
assessment. I haven't heard anyone give me a view to the
contrary.
The Chairman. I thank the gentleman.
I do have to note, Mr. Secretary, there was a general
response which I heard from several of the members after your
last comment that the 15 minutes of fame for the plumbing
industry appears to have ended.
The gentlewoman from California.
Mr. Bachus. Joe has had a rough month, I will tell you
that.
Ms. Waters. Thank you very much, Mr. Chairman, for this
hearing. It is very much needed.
And I welcome the representatives from the three agencies
who are here today.
I come here very troubled about the direction that
Secretary Paulson has taken, as it relates to the $700 billion
that we made available to him to help stabilize our economy. It
is very clear, no matter how the Secretary describes it, that
we gave him the authority that you identified when you talked
with him, Mr. Chairman, to deal with foreclosure mitigation
efforts. As a matter of fact, the purchase of toxic assets was
at the centerpiece of this program, because everybody agreed,
at that time, that the subprime meltdown was at the epicenter
of the dislocation that we were experiencing in our economy.
So the fact that you, Mr. Paulson, took it upon yourself to
absolutely ignore the authority and the direction that this
Congress had given you just amazes me. I just could not believe
it when I heard that somehow you had abandoned the whole
foreclosure mitigation effort.
Now, in addition to that, I want you to know that I and
some others worked very, very hard to pass this. As a matter of
fact, I was looked at with great suspicion by members of my
caucus and the Congressional Black Caucus, in particular, as I
sold them this program and told them about my faith in your
ability to carry out this program. I was asked over and over
again, will the homeowners be helped? What are we going to do
about Main Street, not just Wall Street? We spent, and I spent,
considerable time selling this program to those who were
suspicious and did not want to do it.
Now, having said that, again, I am disappointed that you
have not utilized the authority and you have just divorced
yourself from dealing with that. On the other hand, in your
testimony today, you say, ``And we need to continue our efforts
to use a variety of authorities to reduce avoidable
foreclosures. The government has made substantial progress on
that front through HUD programs, through the FDIC's program
with IndyMac, through our support and leadership of the HOPE
NOW Alliance, and through the new GSE servicing guidelines
announced last week that will set a new standard for the
industry.''
Let me just relate to this statement. First of all, the HUD
programs working under HOPE NOW have not been successful. It is
a terrible failure. I convened in my office all of the HUD-
backed counseling programs when we went on break, and I sat
down and I talked with them to find out what kind of success
were they having working with the HOPE NOW program. And, to a
person, they have not been able to get in touch with the
servicers, in many cases. When they get in touch with them,
many of the servicers are inexperienced. They don't have the
ability to make good decisions. Nobody knows what formulas they
are using in order to make decisions about a homeowner's
ability to get a loan modification. And so, they all work under
HOPE NOW.
So HOPE NOW has been a failure. And even though you
identify it as a success, I am not going to challenge you, but
I would dare say that you could not cite for this committee the
number of modifications that have come through HOPE NOW because
you don't know. You probably are not tracking them. And,
secondly, if you were, you would know that it is not working.
Secondly, the GSE proposal that was recently released you
referred to, but it really hasn't gotten underway yet, and it
only deals with a small portion of the market.
You do refer to FDIC, and you are right, you are right
about FDIC's program and what has happened with IndyMac and
Chairman Sheila Bair. She has been able to come up with a way
by which we could do credible loan modifications, and it has
been ignored. Barney Frank and I sent a letter to you and
everybody else asking that you just give her the program and
let her run with it, because she has discovered how you can do
these loan modifications. You can't do them one by one, Mr.
Secretary, and get it done.
I spent time--I have 26 of them that I am working on in my
office right now--and I spend time, and I get a release from
the homeowner, and I get on the line with the servicer, and it
is absolutely ridiculous. I have had to go all the way to the
chairman, for example, of one of the banks, Mr. Stump over at
Wells Fargo, to tell him about what his servicing company is
and is not doing. They own America's servicing company. I
stayed on the line for 1 hour just trying to get to a servicer.
They are understaffed; they don't take this seriously. And then
when you talk to the servicers, they don't even know enough to
be able to evaluate the income of those persons who are trying
to get some help.
With that, I would like, Mr. Chairman, to go to Sheila Bair
and ask her to please unveil for this committee what she is
doing and what she has shown can be done with IndyMac
modifications that have been so successful.
The Chairman. I thank the gentlewoman, but that is going to
have to wait until the next round, if someone will ask for it.
Briefly, Mr. Secretary.
Secretary Paulson. I will be brief, because there is no one
whose disappointment--
The Chairman. Mr. Chairman, briefly and substantively.
Secretary Paulson. I will just simply say that I know how
hard the Congresswoman worked on this legislation and was
critical to getting it done, and this has been critical to
saving the system.
Let me just say specifically to you, Congresswoman, that I
have not said no to doing something here in the TARP aimed at
foreclosure mitigation. We did not buy illiquid assets for a
very good reason. We are going to continue to evaluate and look
for programs that protect the taxpayer and are effective.
And I just would make one last point here. In designing
programs, in broad-based programs, there is a balance to
getting money to those who need it as opposed to those who
don't need it. And there is also a balance to, you know, not
providing a windfall to the banks, and we are working hard on
that.
The Chairman. Thank you, Mr. Secretary.
The gentleman from Alabama has proposed that, if we have
unanimous consent, we will ask the Chair of the FDIC if she
would respond in a couple of minutes.
Is there any objection?
Hearing none, I will recognize the Chair of the FDIC to
respond.
Ms. Bair. Thank you very much.
At IndyMac, we became conservator in mid-July, and they had
a fairly sizable servicing portfolio with a number of
delinquent loans. So we developed a systematic protocol for
modifying them. Basically, we use a debt-to-income ratio in the
31 to 38 percent range. We verify income, and if the borrower's
income can support a modified loan that includes their
principal, interest, taxes, and insurance at 31 to 38 percent
of pretaxed income, they get that loan modification. And we
lower their mortgage payment through, first, interest rate
reductions, then extended amortization and, in some cases, we
do principal forbearance as well.
We do it on a systematic basis. We run all these loan
modifications through a net present value analysis, so we must
demonstrate that the net present value of the modified loan
exceeds the foreclosure value. And, generally, where there is
reasonable income to support a modified loan, these loans will
pass the test.
These modifications are within the authorities we have
under the pooling and servicing agreements that govern
IndyMac's servicing obligations. We have been able to do
modifications both for IndyMac-owned loans, as well as for
IndyMac-serviced loans, including private label securitization.
After some strenuous talking and advocacy, we were able to get
the investors on board. Even though the modifications were
permissible under the pooling or servicing, we briefed the
investors and they support the program. I would note that this
loan modification protocol was designed to work within the
framework of securitization trusts.
Our modification plan has been heavily relied upon. The
GSEs and some of the other larger originators are also
announcing they will conduct systematic loan modifications now
as opposed to a loan by loan approach.
We have suggested making this program national by providing
a financial incentive for servicers and investors to adopt it,
along with some loss-sharing. We found, in engaging in dialogue
with the investors, that the biggest pushback or the biggest
uncertainty for getting these loans modified is uncertainty
about the redefault risk. Specifically, what happens if you
modify the loan and the borrower still, down the road,
redefaults, and then you have to go to foreclosure later as the
home prices are going down and the losses are exacerbated? This
is a big concern and uncertainty.
To address this, some loss-sharing by the government is
appropriate. We have suggested that if servicers would agree
and investors would agree to support servicers in modifying
these loans to the IndyMac protocol, that, if there was a
subsequent redefault, up to 50 percent of the losses would be
shared by the government.
We would exclude early payment defaults, so the loan would
have to perform for 6 months before it would be eligible for
this loss-sharing program. And very high loan-to-value loans
also would have a declining loss-sharing.
We also would provide for administrative expenses of $1,000
per modification for servicers. This addresses another
impediment to systematic loan modifications. The pooling and
servicing agreements generally do not provide for compensation
for administrative expenses associated with loan mods, while
they do provide it for foreclosures. And even with the
systematic approach, you need to go through and verify incomes,
so there is some administrative expense involved. An additional
incentive of $1,000 per loan mod would be appropriate.
The combination of these steps could reduce foreclosures
for loans that would be going delinquent through 2009 by about
1.5 million, which is significant. We think it is about a 30
percent reduction in foreclosure rates that we would otherwise
see.
It is not a silver bullet, but it would be a huge reduction
in the foreclosures we are seeing, which are creating
significant downward pressure on home prices and adding to
broader economic problems.
And these measures together promote homeownership. The
modifications are available only for owner-occupied properties,
and where borrowers have documented income. For that category,
there should be a concerted effort to preserve homeownership,
which will help our broader economy.
The Chairman. Thank you, Madam Chairwoman.
I would note that, in the TARP, there is explicit
authorization to provide funding for servicers in appropriate
context. So we think it is embraced.
The gentleman from California, Mr. McCarthy.
Mr. McCarthy of California. Thank you, Mr. Chairman. If I
could just follow up one moment with the chairwoman.
How many loans did you provide in the IndyMac situation,
and what was the value overall?
Ms. Bair. We had about 40,000 delinquent loans that were
eligible. There were 60,000 delinquent loans total, but about
20,000 of those either were investor-owned or had been
abandoned or were just too far gone. They were in bankruptcy or
the homeowners had given up. So about 40,000 eligible.
As I indicated in my written testimony, we will do loan
modification proposals for about 30,000 of those 40,000. The
letters are still going out. We have completed modifications of
about 5,000, with several thousand more in process. We do
verify income--
Mr. McCarthy of California. And how long does that take
you? What is the timeframe from start to finish?
Ms. Bair. We started in late August with the first mailing
of 7,000 and have made mailings throughout the months since.
When the loan modification proposal goes out, it
specifically says, ``This is your current mortgage payment. We
are going to reduce your mortgage payment by `X' amount.'' The
average is about $380 a month. The proposal will go on to say,
``If you want this loan modification, send us a check for your
first month's payment, and sign this form that allows us to
document income through looking at your tax return.'' It is a
very simple, streamlined procedure. It is easy for borrowers to
understand. It is not a general, you know, ``Call us, we are
here to help you.'' Instead, it says, this is the loan
modification that you will get.
We have had a very strong response rate. Of the first
mailing we did in late August, over 70 percent of the borrowers
have responded.
But it still takes time. You still have to document income.
You still have to go and look at the tax return, and you have
to establish that borrower contact. The income verification
takes the most time.
Mr. McCarthy of California. Mr. Secretary, I understand you
have to modify, things change, and the latest is: no longer
planning to purchase troubled assets.
Have you taken a look since the last 6 weeks about part of
the plan in there, the insurance program? Have you pursued that
in any further way?
Secretary Paulson. Yes. We have a responsibility to develop
an insurance program for implementation. We have gone out for
public comment, got a number of proposals and comments, and we
are in the process of developing a program there.
Mr. McCarthy of California. When do you think that will
come back?
Secretary Paulson. I can't tell you when it will be
completed, but we are working to complete it. And then when it
is completed, it will be evaluated.
Mr. McCarthy of California. In listening to your statement,
you said toward the end part that you found at the beginning
$700 billion you thought would be a sufficient amount. Now,
within the troubled assets, you don't think that is a
sufficient amount of what you have left to pursue going
further.
And then also, listening to your speech, I think it was
November 12th, where you talked about maybe bringing in,
attracting private capital, which would create some synergy,
which I thought would be very positive, maybe if you could
expand on that, if that would be helpful, using the private
capital--how it would work, who would receive it, how could you
do the matching funding.
Secretary Paulson. Well, what I said in my remarks on
November 12th was that we needed to evaluate this capital
program once it is completed and look at the markets and then
be prepared to use another capital program if it is
appropriate, and that we were working to develop other
programs.
A matching program would work along the lines of, if an
institution, whatever the scope of the program is, whichever
institutions might be eligible for this program, to the extent
they can raise a dollar of equity, let's say common stock, then
it might be matched by a dollar of preferred. And so this would
have the advantages of making the capital of the TARP go
further. And it also has the advantages of being a filter, so
those healthy institutions that are able to raise money get a
match.
Now, the disadvantage of a program like that is it doesn't
work in a market where capital is not generally available. So
that is why we didn't start that way. So there are some
advantages and some disadvantages.
Another advantage might be that, if we chose to go beyond
institutions where there are Federal regulators, and we don't
have regulatory capability here at the Federal level or
capability of Treasury to make the sorts of judgments that the
regulators are making for us now with the banks, that the
private market could be a filter. In other words, those
institutions that are able to raise capital in the private
market would have an ability to get matching funds.
But no decision has been made. It is just a matter of
programs that we are working to develop.
Mr. McCarthy of California. Has anyone approached you about
coming forward, outside of the financial industry, being able
to do the matching money? I mean, is there capital out there
willing to make this investment?
Secretary Paulson. Well, there is definitely capital
available now for certain institutions and certain industries,
no doubt about it. And so we stay close to the market.
But, again, you should take away, the biggest part of what
I was saying is, given where we are now, capital is more
powerful. And you can get more bang for a dollar of capital
investment than you could buying a dollar of illiquid assets.
And so that is where the focus is.
But I think it is premature to be starting another capital
program while the current one is not even yet complete.
Mr. McCarthy of California. But there would be more capital
out there--
The Chairman. I am sorry. We are out of time.
The gentlewoman from New York.
Mrs. Maloney. Thank you, Mr. Chairman.
First, I would like to thank all the panelists for your
leadership in stabilizing our financial markets.
And I congratulate Chairman Bair on an innovative program
to help people stay in their homes, if it was expanded. She
testified that 1.5 million people could be kept in their homes
without a financial loss to this Nation, therefore helping to
stabilize our economy, which is now our major concern.
Chairman Bernanke, would you favor her program? Would you
use TARP funds to expand FDIC's loan modification program to
help stabilize our economy and help people stay in their homes?
Mr. Bernanke. Well, first let me say that I agree that we
need to do a lot more on foreclosure prevention. It is very
important for communities, and it is important for our economy
and for our financial system. So I very much commend Chairman
Bair and the FDIC for the work they have done, and I think we
need to build on these ideas.
There are a few points I would like to make.
First, I think a very strong point of the FDIC program is
that it is simple. And it is run by the servicers rather than
by the government, and that is a plus, certainly.
There are a couple of design issues that we would need to
talk about, I think, in the context of the Congress. Let me
mention two.
The first is that the FDIC program is focused on
affordability, which is understandable, getting the payment
down to 31 percent of income. The Congress recently passed HOPE
for Homeowners, which takes a different philosophy, which is
about principal write-down and getting mortgages out from
underwater. Those are two different philosophies, and they
depend on different views of what it is that keeps people in
their homes. So an alternative approach would be to strengthen
the HOPE for Homeowners approach, just to give one option
there.
The second comment I would make is that--and we have
discussed this extensively with the FDIC--addressing the issue
of what is the best way to induce servicers to actually
undertake these modifications. The suggestion by the FDIC is
that the government would ensure some portion of the loss if
the mortgage redefaults after it has been modified. And a
concern that we have had about that is that, in some cases,
that would be a very high cost. If a borrower had a large
capital loss in their home, and they paid for 6 months but then
moved or left for whatever reason, the government might be
liable for $100,000, depending on how much the loss had been.
So an alternative would be to consider other ways of
subsidizing.
But, just in general, I want to say this is a very
promising approach, and I think there is lots of interesting
things to talk about here.
Mrs. Maloney. Thank you.
Secretary Paulson and Chairman Bernanke, a large portion of
the TARP money has been used to pay off the AIG counterparties
in the new AIG deal. And since the government is now running
AIG, we should have full disclosure of what they are doing with
the TARP money so Congress can appropriately manage our
oversight.
Will you make public who those counterparties are and how
much they received?
Mr. Bernanke. Well, I think that information can be made
available. AIG had many, many counterparties, banks and other
institutions, which they essentially wrote insurance on--
Mrs. Maloney. Thank you. And if we can make it available,
if you could get that to the committee, we would appreciate it.
Mr. Bernanke. We will see what we have.
Mrs. Maloney. That would be wonderful. Thank you.
And on the credit default swaps, it is my understanding,
following up on your statement, that they were originally like
a form of insurance taken out by an investor to insure against
loss on securities owned by that investor, sort of like
insuring one's home against a fire; the homeowner deserves to
get paid by the insurer, should his house burn down.
It is also my understanding that a great number of
investors in hedge funds bought swaps from AIG when they did
not own the securities and were just betting on a default, like
taking out an insurance policy on your neighbor's house and
hoping that it will burn down so you can get paid.
My question with respect to AIG is whether we are using
taxpayers' funds to cover AIG's obligations to investors who
have suffered real losses, or are we using some of the taxpayer
funds to pay the investors who are basically gamblers the
billions of winnings that they earned at AIG's expense. I
personally do not think that taxpayers' money should be used to
help investors who are gamblers to collect their profits rather
than taxpayers' funds. They should be used to help those who
stand to suffer real economic losses.
And, Mr. Bernanke, Chairman Bernanke, can we differentiate
now between those two classes of swap purchases? Can we see
where they are? Are we paying the gambling type or only those
that are real losses?
Mr. Bernanke. Congresswoman, I don't think you can really
differentiate. People use credit default swaps to hedge all
kinds of positions. Even if you don't own the underlying
credit, you might be hedging against the stock or some other
thing that you own, or maybe you have taken a position in that
particular industry.
And, moreover, these are legal contracts. If they are not
paid, then the company is in default, and there is a bankruptcy
process. And the entire purpose here is not to pay off the
creditors per se, it is not to save AIG per se. It is to avoid
the contagion of losses and crisis that would occur if this
huge financial institution with large exposures across the
world were to fail and not to make good on its financial
contracts.
The Chairman. The gentleman from Texas.
Dr. Paul. Thank you, Mr. Chairman.
My question is directed to Chairman Bernanke.
You know, for many years, the Austrian free market
economists have predicted all these problems would come, and
they were certainly correct in everything that they said. Of
course, they are not very satisfied, including myself, with the
so-called solutions, because it looks like we are spending a
lot of energy and a lot of money trying to patch a system
together that is unworkable. So we have Congress spending a lot
of money; we have Treasury very much involved in trying to pick
and choose which worthless asset that we are going to buy. And,
of course, the Federal Reserve is involved in injecting
trillions of dollars that nobody seems to be keeping track of.
But what we are failing to do, I think, is to recognize
that the system no longer works. But I can understand why we do
this. Because, you know, if Congress couldn't do this and if
the Fed couldn't do this and the Treasury couldn't do this, it
would make us all irrelevant. And instead of looking at the
causes of this and then realizing that the solutions aren't
going to be found here, we have to make ourselves feel pretty
important.
But I think there is another reason why we think we are
pretty important. It is because, in a way, our interference in
the market corrections that tried to come about since 1971
seemed to work. I mean, the failure started in 1971 with a
system that had no way of automatically correcting the balance
of payment in the current account deficits. And that is where
the problem has been.
The economists, whether they were left, right, or middle
over the last several decades, have always said this current
account deficit is a big problem. Now it is totally out of
hand. So here we are, struggling with all these rules and
shifting back and forth and really getting nowhere.
But my question is: When we come to the full realization
that the system is unworkable, what are we going to do? What
have you thought about doing?
Already we see talk in the newspapers, we see articles
about a new international world reserve currency. And, to me,
that is pretty important, because the fiat dollar reserve
system is not going to work anymore. And that is the
information that we have to accept and decide what we are going
to do with in the future.
This is not new in history. Currencies have failed,
financial systems have failed. And, generally, to restore the
confidence that everybody is talking about, they usually have
to go back to a currency with integrity to it rather than just
fiat money.
And, you know, the stage is there; it is not impossible.
Already the central banks of the world still own 15 percent of
all the gold that was ever mined in all of history. So they
hold on to this gold for some reason. And, therefore, something
has to give, or are we going to keep trying to waste more money
and time patching this system together?
Just last week, there was a report that Iran purchased $75
billion worth of gold, took their reserves out of Europe,
bought gold, and put it in Asia. So is that a sign of the
times, and is that moving on?
Now, my question is, in your meetings, and you had a
meeting just recently with other central bankers, does this
thought come up, about a new international world reserve
currency? And, if so, does the subject of gold ever come up?
How do you restore the confidence? Have you recently had
conversation with any central banker? And is there a move on to
replace the dollar system?
Because the dollar system is essentially declared dead
because it is not working. But this, indeed, was predictable
because of these tremendous imbalances that were never allowed
to be corrected, and they were always patched up. We always
came in. We would spend, we would inflate, we would run up
deficits. And, since 1971, we have been able to correct these
problems.
Could you tell me what kind of conversations you have had
regarding a new reserve currency?
Mr. Bernanke. Yes, Congressman. I don't think the dollar
system is dead. I think the dollar remains the premier
international currency. We have seen a good bit of appreciation
in the dollar recently during the crisis precisely because
there has been a lot of interest in the safe haven and the
liquidity of dollar markets. And the Federal Reserve has been
engaged in swap agreements to make sure there is enough dollar
liquidity in other countries because the need for dollars is so
strong. So I think the dollar system remains quite strong.
I do agree with you very much on one point, which is about
the current accounts. The current account imbalances have
proven to be a very serious problem. It was, in fact, the large
capital inflows from those current accounts which created a lot
of the financial imbalances we saw and have led to some of the
problems we are seeing. And one of the silver linings in this
huge great cloud is that we are seeing some improvement in
greater balance in our current account deficits.
Dr. Paul. But does the subject of a new regime ever come
up?
Mr. Bernanke. No, it doesn't.
Dr. Paul. And does the subject of gold ever come up in any
of your conversations?
Mr. Bernanke. Only in terms of the sales that the central
banks are planning.
The Chairman. The gentlewoman from New York, Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Gentlemen and gentlewoman, while we now spend more than $1
trillion on the bailout, a recent report shows that
foreclosures increased 5 percent last month. We also know that
3 million more are likely to face foreclosure in the very near
future.
In light of the Fed's extensive options on taxpayers'
expense, can you tell us why foreclosures are still increasing?
Secretary Paulson. Okay, I will--the question is, why are
foreclosures still increasing?
Ms. Velazquez. Yes, sir.
Secretary Paulson. I will say to you that it is hard to
imagine, no matter what program we have, that we are not going
to have a good number of foreclosures when you look at what we
have gone through here and look at the excesses and look at the
shoddy lending practices.
Foreclosures take place for a number of reasons. Some of
them take place because speculators no longer want to stay in
their home.
But I think the question to really ask, which is one that
we are all asking, is, why are foreclosures taking place when
people, homeowners want to stay in their home and they are
willing to make an effort to stay in their home and they can
afford to stay in their home?
And this is, I will tell you, a--
Ms. Velazquez. Sir, I am the one asking the questions here.
Secretary Paulson. Well, I thought you asked me a question.
I was trying to answer it.
Ms. Velazquez. So let me ask you, to what extent are
foreclosures causing our continuing economic instability?
What is the relationship, Mr. Bernanke?
Mr. Bernanke. Well, they are both a symptom and a cause.
Now that the house prices are falling and that the economy is
weakening, people don't have the income to make their payments,
the house foreclosures are going up. So that is a symptom of
the downturn.
But it is also a cause, because it is weakening house
prices, it is hurting the value of mortgages, which hurts
financial institutions. So it is part of the mechanism which is
causing the economy to weaken.
Ms. Velazquez. So can you tell me how much of the more than
$1 trillion spent by the Treasury and Fed in the bailout has
gone to prevent individual foreclosures?
Mr. Bernanke. Where do you get the $1 trillion from? There
has been $250 billion by the Treasury, and the Fed hasn't spent
any money. We only lend money.
Ms. Velazquez. Okay. So, of the money that has been lent,
how many foreclosures have been prevented, individuals?
Mr. Bernanke. Well, as the Secretary has described, there
has been a whole number of programs, including HOPE for
Homeowners and so on. But I also agreed with an earlier
questioner that I think we need to do more.
Ms. Velazquez. You know, the trouble here, sir, is I
supported the bailout package. I agonized with that vote.
Still, Main Street America, the people who are watching this
debate here or this discussion, they are still waiting to hear
an answer as to how this is benefitting them, how this is
benefitting Main Street America.
You have the silver bullet, it seems to me, that just by
giving a blank check to financial institutions--this is a
partnership, this is taxpayers' money that is providing capital
infusion to financial institutions. But we expect from the
banks to do more to help families keep their homes.
And so we are giving this money or lending this money
without any strings attached to it.
Secretary Paulson. Let me just say three things here.
First of all, the key to turning around the housing
situation and avoiding foreclosures is going to be to keep
lending going. If the financial system collapsed, we would have
many more foreclosures, number one.
Number two, you are seeing a number of big banks take
extraordinary actions, and they have announced them, and you
could just tick them off, announcing actions they are taking.
So they are doing things, number one.
And number two, I would say that I believe that our actions
to stabilize Fannie Mae and Freddie Mac, who are the biggest
source of home financing in America today, have been critical.
So there have been real steps that have been taken that
make a difference. More needs to be done. I hear your
frustration; more needs to be done. And we are going to keep
working on it.
Ms. Velazquez. Yes, you hear my frustration. And I hope
that you understand the pain and the suffering of so many
homeowners in this country who are losing their homes.
So it is just not enough to say to the banks, ``Here is the
money. And, by the way, I trust you.'' Because they are not
lending; they are not lending to small businesses. They are not
working on a loan modification strategy.
You just told Mr. Frank here that you are examining
strategy to mitigate foreclosures. You don't have the strategy
to mitigate foreclosures; you are examining. Chairwoman Bair
does. Are you willing to support her plan?
Secretary Paulson. What I have said very clearly is that
the IndyMac protocol is an excellent protocol. We, as a matter
of fact, with the GSEs, if GSEs, with their whole guidelines,
endorsed the plan, what they have done, which I think will
become the national model, is based upon that plan. And I said
that I am looking very hard to find programs to put into the
TARP that I think strike the right balance between protecting
the taxpayer and are effective.
The Chairman. Without objection, I would ask for unanimous
consent for 1 minute.
Mr. Bernanke, you said HOPE for Homeowners, which this
Congress passed, has some problems, and we were taking a first
cut at it. I just want to advocate what the chairwoman has done
and IndyMac has been superb. And the leadership elsewhere is
important. They were different models. As interest rate
reduction, as pension reduction--let 100 flowers bloom, there
are different motivations and different impacts.
And there were some things about HOPE for Homeowners which
you have told us and we agree need to be modified, some of
which can only be done statutorily. But the TARP lets you do
that. So I would recommend, Mr. Secretary, work together on
another model, not in competition with, but give the
modifications in HOPE for Homeowners through the TARP that help
work that out. Because these are not competitive; they are
additive.
I thank the members.
The gentleman from Ohio.
Mr. LaTourette. Thank you, Mr. Chairman.
Mr. Secretary, I am going to let my colleagues be global
and I am going to be very parochial and talk about one bank in
particular. And that is that my frustration and, I guess, anger
that the TARP money has been used to--about to be used to
purchase National City Bank in Cleveland, Ohio, by PNC in
Pittsburgh, Pennsylvania. It was never my understanding that
the TARP program was designed to pick winners and losers.
I was struck by Chairman Bernanke's observation that his
window is open to everyone. I am going to detail for you in
hopefully 4 minutes and leave a minute to respond.
While the Treasury window was never open to National City
Bank, I wrote to you on the 30th of October; you were kind
enough to send me a letter back yesterday. The last graph
basically says--the letter says you haven't received an
application from National City Bank. The last graph says, and,
by the way, the documents that you want are in the possession
of OCC, so please talk to OCC. We talked to the OCC staff. They
said, since you sent a letter to the Secretary, we really don't
have time to respond to your request for documents.
But it is funny because, on October the 28th, I did get a
letter from the Comptroller of the Currency, Mr. Dugan, who
expressed umbrage that I would dare suggest that he was a
lawyer for PNC in private life before he became the Comptroller
of the Currency. But he says that you make the decision on
these applications, not him. And, by the way, he wished he
could tell me about these communications in this transaction,
but it is a secret.
National City Bank is one of the only--I think the only
top-25 bank in the country that is not permitted now to
participate in the TARP program. It is my understanding that it
is the only bank in the country that is being purchased with
TARP money.
And if you look at PNC's potential merger and acquisition
agreement, they are not only going to get their share, which is
about $4 billion, but they have been told by the regulator they
are also going to get National City's share, about $4 billion.
If you combine that with the tax changes that were made on
September the 30th as to how losses are treated by acquiring
banks, they are going to get an additional $5 billion.
And so, basically, they are going to be able to purchase
the 7th-largest bank in the country for free, a bank that has
existed since the American Civil War, survived the Great
Depression, can't survive 8 weeks of the TARP.
I just want to go through with you the timeline that was in
the Wall Street Journal. I ask unanimous consent that it be
included in the record.
The Chairman. Without objection, it is so ordered.
Mr. LaTourette. Peter Raskind, the CEO of National City
Bank, talked to Mr. Dugan, and said he wanted to apply for
TARP. He said, ``Well, I am happy to do that, but first I want
you to explore all M&A avenues.'' He says, ``Well, we have been
doing that, but I want to apply for TARP.'' He said, ``Just
keep doing it. Trust me.''
Minutes later, as Mr. Raskind was to go into a meeting with
his board of directors, he gets a telephone call from Richard
Davis, who is the CEO of U.S. Bancorp. Mr. Davis says, ``After
talking with the OCC and other Federal regulators, we have a
new interest in buying your bank. And the regulators have
indicated to us, have assured us that the government would
provide U.S. Bancorp with capital to finance a takeover. And we
will buy you for $1.10 a share,'' which was less than half of
what it was trading for on that particular day.
Mr. Dugan remained a constant presence, and his tone became
increasingly assertive with National City Bank. ``An M&A deal
is your only alternative,'' he told Mr. Raskind on more than
one occasion. Mr. Dugan warned National City Bank not to expect
to take advantage of any new government programs. When Mr.
Raskind said, ``Wait, I thought this was open to everybody,''
he said, ``That is all discretionary, and right now you
shouldn't be comfortable that it is available to you.'' He
said, ``I thought it was available to all banks.'' ``No, it is
discretionary.''
That evening, the board met. They felt that they were being
bullied. Talks continued with U.S. Bank under Mr. Dugan's
supervision. And then, all of a sudden, PNC comes in at this
moment in time when they are aware that they can get free money
from the TARP to buy another bank.
And just a couple of analysts, I ask that these be
submitted for the record, as well. A guy named Mike Mayo, who
is a pretty renowned analyst of banks and their values, writes
for Deutsche Bank that, ``National City Bank maintained a peer-
leading Tier 1 ratio of 11 percent. PNC was substantially less
than that.''
Another fellow, writing for Citibank, indicates under the
section, ``Why Sell?'' on October 24th, he says, ``So on face
value there was no immediate catalyst that would force them to
sell, since National City had sufficient capital and liquidity.
In our view, it is possible that there was a change in
management's outlook or a push from the government.''
Well, the change in management's outlook is also in an
October the 25th article in the Cleveland Plain Dealer that
said that Peter Raskind went to his board, and he laid out a
scenario that, when he wasn't even able to apply, not even able
to apply for TARP, the board was presented with a downside
scenario of deteriorating viability so horrifying that the bank
was almost forced to act now; and not only to act, but to sell
its very solid, well-capitalized business at a significant
discount.
Mr. Chairman, I would ask for just 1 additional minute.
The Chairman. We would ask for 2 additional minutes. The
committee has been accommodating. This is very important to the
gentleman. So if the gentleman can wrap up the question, and we
will have time for an answer.
Mr. LaTourette. I am going to wrap up the question.
And so the question is--there are two questions that I want
to ask you and give you time to answer.
This isn't WaMu, and this isn't Wachovia. As I indicated,
National City's Tier 1 capital ratio of 11 percent was amongst
the highest of any bank in the United States. They had $18
billion of cash, more than their cash requirements. PNC was at
8.2 percent.
My question is, why did you deny assistance to National
City Bank, affecting 29,000 employees in 9 States?
But first, I would like to ask and make a request of you
that the legislation--there is only one place that the OCC is
in that 300 pages, and it said that you are going to act in
consultation with the OCC. In my mind, you don't have an
application because the OCC wouldn't send you one, wouldn't
take one from National City Bank.
And so I am asking you, Mr. Secretary, on behalf of those
29,000 people and the City of Cleveland and 9 other States,
will you look at this under the authority that you have, not
Mr. Dugan, and reconsider that decision? And, if not, why did
you do it?
Secretary Paulson. Okay. Let me--you took a long time for
the question; it is important. I would like a little bit of
time--
The Chairman. This is of sufficient importance that we will
not be constrained here.
I will announce to all the members, this panel has to leave
at noon. At noon, we will take the next panel, and we will
begin the questioning on our side where we left off. So we
won't go back to the beginning.
Mr. Secretary?
Secretary Paulson. Now, let me, before getting into the
specifics, let me just say that, in my experience, that I have
seen institutions that have capital, that it meets certain
ratios, but where the market loses confidence in them and they
fail or are about to fail because there are questions about the
quality of the assets and the quality of the mortgages they
hold.
And so now I am going to get to the program and the way it
is designed and get to your question.
We do have a program--and you saw it with AIG--we have a
program to make investments if there is a systemic issue. If
there is an impending failure, we can step in. But this
program, which we designed under our authority, this program
was designed for healthy banks. And what we did is we set out
criteria, but the first criteria was that banks needed to apply
to their regulator and applications needed to come from the
regulator with a recommendation. We don't have regulatory
capabilities at Treasury, but we have outstanding Federal
regulators.
Mr. LaTourette. Mr. Secretary, I know you are answering my
question, but here is the problem. If the OCC tells the CEO not
to file an application, you never get to that point.
And let me just say one other thing. I mean, I get the fact
that there can be other factors. But the fact of the matter is
the regulator told National City Bank to raise $3.5 billion of
private capital. They raised $7 billion. They are one of the
best-capitalized banks in the country, and you guys wouldn't
even take an application.
Secretary Paulson. Let me then make two other points here,
because you are dealing with consolidations. I have heard a lot
about using capital from the TARP for mergers. And, again--and
I am just not going to deal with this--I will make the general
point that, if there is a bank that is in distress and it is
acquired by a well-capitalized bank, there is more capital in
the system, more available for lending, better for communities,
better for everyone. No doubt about that in my mind.
And so, when we get--and the applications which come to
Treasury, when it will come to Treasury--we have not received
an application for capital from either of the banks you have
mentioned--when it comes to Treasury, we will look at it and
act on it.
But, again, I just can't emphasize enough that this
program, to me, it was very, very important on this program
that--this is general; I am not speaking--that it not be used
to prop up failing banks or banks that might fail, that this be
used for healthy banks.
And I looked to the regulators. As a matter of fact, we
designed a process with the regulators. They would look at the
applications as they would come in. And there is even a peer-
review board with the regulators. And they submit them to us,
and we make a decision.
Mr. LaTourette. Mr. Secretary--and thank you, Mr.
Chairman--the analyst that I referred to from Citicorp
indicates that TARP changed the landscape. Because National
City Bank was able to survive, but because it was not on the
list, it was leaving itself open to possible unfavorable
outcome, to market perception that it was not a survivor.
And my question was--I appreciate your general answer--will
you personally look at the National City Bank situation and
discuss it with Mr. Dugan?
Secretary Paulson. Well, I will tell you I have great
confidence in John Dugan, and I am very happy to discuss it
with him. I have regular conversations with him. I have great
confidence in his judgment. And I believe, based upon generally
what I know, that he made the right decision. But I am
perfectly happy to talk about it with him some more.
Mr. LaTourette. Thank you.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman.
I am not going to go down the same path, but I would just
express to the Secretary that there is a strong feeling out in
the public that a number of the decisions that have been made
have had the effect of not only picking winners and losers, but
influencing who is a winner and is a loser.
And that is something that we have to deal with every day.
I am dealing with it in my own community, not in the sequential
fashion that Mr. LaTourette is, but there are a number of
people in my community who believe that, had a different set of
decisions been made regarding Wachovia, Wachovia would still be
a viable institution today.
But I am going to leave that alone. It is a perception
problem that, unless we are provided the kind of information
and assurance that people are looking at it and looking at it
with integrity, we can't reassure the public about.
That is not a question, Mr. Paulson.
Secretary Paulson. I would just say with that--
Mr. Watt. That is not a question, Mr. Paulson, because I
don't even know how to frame a question that will get to--but I
think you all need to deal with the reality that the perception
is out there and that we are having to defend these decisions.
So I hope you will make the decisions.
$24 billion is the figure that I have heard used to do the
FDIC foreclosure prevention program. How is that figure
calculated? What does that figure consist of, Ms. Bair?
Ms. Bair. That is based on a no-greater-than-50-percent
loss share for loans that are modified to a specific
affordability metric and then end up redefaulting later on. We
are assuming a 33 percent redefault rate, which we think is a
fairly conservative assumption. The government would take 50
percent of the loss between the net present value of the
modified mortgage versus whatever the recoveries were at
resolution. The mortgage might end up going into foreclosure as
a short sale, or it might be that it would be remodified or
refinanced.
Mr. Watt. Okay, who would get--I mean, where is that money?
Ms. Bair. That money would go to the--
Mr. Watt. Is it an expenditure?
Ms. Bair. It is.
Mr. Watt. Does it go to somebody?
I guess what I am trying to figure out is Mr. Paulson,
Secretary Paulson, apparently doesn't think that is part of
stabilizing the financial system, as he reads the language. And
I have the bill right here in front of me. That is what it
says, ``stabilizing the financial system.'' How does that
stabilize the financial system if we put up $24 billion?
Ms. Bair. It provides financial incentives to get loans
modified that are not being modified now that are going into
unnecessary foreclosures. That is the bottom line.
Mr. Watt. Okay.
And how is that less important, Secretary Paulson, than
basically telling some banks, you will take an equity
investment, some of whom, really, didn't even have any interest
in doing that and certainly didn't have the need for it,
according to their own public statements?
You have $24 billion, as I see this list here, almost
coming into banks in North Carolina, at least some of whom
said, I don't need this money.
How is that more important than what we have described here
about helping stop the cascade of foreclosures?
Secretary Paulson. I think I have been pretty clear. I
believe it is important to stop the cascade of foreclosures,
and I think the key--
Mr. Watt. Let me rephrase the question. How does that
stabilize the financial system more than stopping the cascading
of foreclosures under a program that is projected to cost $24
billion?
Secretary Paulson. I would say that these are--you are
dealing with apples and oranges here, and the apple is a very,
very big apple. Because the step that was taken to stabilize
the system--
Mr. Watt. The question I am asking is, is the apple more
important than the orange, or is the orange more important than
the apple?
Secretary Paulson. I would say that the forest through the
trees here was--the important step was the step that was taken
to stabilize the banking system, and the combined step taken
by--
Mr. Watt. And how does putting money in a bank that didn't
ask for it help to stabilize the banking system?
Secretary Paulson. Well, okay, to answer that question,
there are no banks, when the system is under pressure, unless
they are ready to fail, that are going to raise their hand and
say, please, I need capital; give me some capital.
What happens when an economy turns down and when there is a
crisis, they pull in their horns. They say, I don't need help.
They don't deal with other banks. They don't lend, and the
system gets ready to collapse.
So the step that we took was very, very critical, and to be
able to go out and go out to the healthy banks and go out
before they became unhealthy and to increase confidence in the
banks and of the banks so that they lend and that they do
business with each other, that was absolutely what we were
about. And when we came here to--
The Chairman. Mr. Secretary, we need to wrap it up. I won't
say we got a little metaphorically confused there, but I think
the summary is that our accusation is that you can't see the
orange grove for the apple trees.
The gentlewoman from Illinois.
Mrs. Biggert. Thank you, Mr. Chairman.
First of all, I would like to associate myself with the
remarks of Ms. Waters as to the problems of the loan
modifications.
But I would really like to turn to another subject that the
gentleman from California, Mr. McCarthy, addressed briefly and
that is that section 102 of the TARP authorized the Treasury to
set up an insurance program, and this is similar to the program
that I think that many members of this committee and Members of
the Congress really felt that the self-funded insurance program
would be a better alternative to the purchase of the assets and
the recoupment, because I think that this alternative minimizes
the risk to taxpayers, and it charges premiums to the financial
institutions and begins to determine a value for those toxic
assets that are on the books of the financial institutions.
So, Secretary Paulson, you said that you have had the
comment period. I would like to know, how many staff do you
have dedicated to setting up an insurance program and
evaluating the public comments that you recently received?
Secretary Paulson. I will have to get back to you on that,
because I don't have, offhand, how many staff.
We have, not a large staff, an overworked, hard-working
staff, and I can tell you that we will develop a plan, because
the legislation asked us to develop a plan, and we will develop
a plan.
Mrs. Biggert. Okay.
Then, have you received the Aon proposal? We have someone
testifying for the Council of Insurance Agents and Brokers in
the second panel, Mr. Findlay.
Have you reviewed that proposal, which was submitted, I
think, in the comment period?
Secretary Paulson. Yes. I would say my staff currently is,
as I am sure we have either reviewed or are reviewing the
proposal. I have not personally reviewed the proposal.
Mrs. Biggert. How, then, do you propose that we determine
the value of these toxic assets or the mortgage-backed
securities or their potential future mortgage foreclosures? Do
you think that this insurance program would help to do that?
Secretary Paulson. Well, an insurance program--there are a
number of programs that have the potential to help determine
value. And the insurance program would be, a properly designed
insurance program has the potential to do that. Clearly, the
illiquid asset purchase program has the potential to do that.
We have a--I might also add, that as banks are well
capitalized and they are able to write down and sell assets,
and the marketplace, market forces can also help determine the
value.
Mrs. Biggert. Well, it seems like we haven't gotten
anywhere.
And yesterday, Chairman Frank, who talked to you, said
yesterday that the insurance program is unlikely to be
implemented because it would do little to restore the liquidity
to cash-starved banks.
But have you considered, then, the actuarial valuation
markets, models, proposed for the insurance program? Isn't that
one way to do it?
Secretary Paulson. This is going to be a big part of what
we are going to need to do the develop the program, and we are
doing a lot of work developing a number of programs, and this
will be one that deserves careful consideration, and we need to
develop the best program possible.
Mrs. Biggert. Do you agree with Chairman Frank that it is
unlikely that this program will be implemented?
Secretary Paulson. I am not going to speculate about what
is likely to be implemented in the future until we understand
the program. And if we can develop a program that is a good,
workable program, then we will comment on it at that time.
Mrs. Biggert. Have you considered any of the proposals by
the credit bureaus to drill down into those toxic assets to
determine likely mortgage loan default rates?
Secretary Paulson. I have not personally done that, no.
But, again, we have a group of people who have been working
very hard analyzing many of these issues.
Mrs. Biggert. All right.
Then, Chairman Bair, do you think that if there is a
compulsory loan modification provision in an insurance program,
that this would help to make sure that the loan modifications
are effective and are made?
Ms. Bair. That is something I would want to take a look at.
We have based our program on the section 109 authority, outside
the section 102 insurance program. But I would happy to talk
with the Secretary about what they may be contemplating. There
may be some synergy between the two.
Mrs. Biggert. Thank you.
I yield back.
The Chairman. The gentleman from New York.
Mr. Ackerman. Thank you, Mr. Chairman.
During times of a national crisis, and we seem to be deeply
in the midst of one, people look for leadership in which they
can place confidence. Unfortunately, I think, our President is
not in the position to provide that right now.
And people are looking more strongly in the direction of
yourself, Mr. Chairman, Mr. Secretary, Madam Chairman, and to
the Congress.
It seems to me that with what has been going on very
recently, we seem to have a crisis in confidence.
You came to us with a plan and made a strong case for over
$700 billion based on a particular premise, and we, in turn,
listened and asked some questions and, in turn, were asked
questions by our constituents. And we answered those questions
and basically sold them the plan. Not everybody agreed that we
were doing the right thing. Some of us here voted for it not
sure if it was the right thing but confident that it was the
direction we had to go, and then suddenly woke up one day to
find out that $700 billion was going to be used for a different
plan.
It appears that you seem to be flying a $700 billion plane
by the seat of your pants. It seems to be that this is, at
least to me, and maybe it is the right direction to go, but it
seems to be the second largest bait-and-switch scheme that
history has ever seen, second only to the reasons given us to
vote for the invasion of Iraq.
I would like to know what the considerations are that you
might have had in other ways to spend the $700 billion. Is
there a plan ``C'' or ``D'' that you considered and set aside
because now plan ``B'' is better than plan ``A,'' and what
those plans might be so that we might have some input into
them? And what is your impression of the authority you have
with regard to those other plans?
Also, I would like to know, because choices are being made,
what would be the impact on the economy if the automobile
industry was allowed to fail? Certainly choices were made back
a month or so ago when a decision was made to allow Lehman
Brothers to fail, and perhaps there is some regret that that
decision was made.
I am sure, if we allow General Motors and the auto industry
to fail, that there will be a lot of concern afterwards as to
why we allowed that to happen.
And if the airline industry, for example, would be
teetering on the verge of failure, would we allow that to fail
as well?
Secretary Paulson. Okay.
Let me, first of all, take your questions or comments one
at a time. First of all, when we came to Congress, we came to
Congress saying the financial system was on the verge of
collapse, and there was clearly a need to recapitalize the
system. The strategy we laid out to do that was a strategy to
buy illiquid assets.
During the 2 weeks--and I commend Congress, this is not a
complaint on my part, giving us the authority as quickly as
they did.
But during the 2 weeks, the situation changed materially
during that 2-week period. And I went through that in my--
Mr. Ackerman. What was it that changed again?
Secretary Paulson. I went through that in my testimony. We
had the situation worsen in the United States, and we had a
couple of banks fail or approximately fail.
We had a whole series of banks in Europe go down. We had
the credit spreads widen further and further. The situation
froze up to the point that there was a market, serious change.
Mr. Ackerman. And did we not anticipate that might happen?
Secretary Paulson. We certainly did not anticipate
everything that was going to happen.
But, what we did anticipate, we got legislation that was
broad enough in the authority, so that what we came out--I
think the way you should be looking at it is we gave, we came
and we said there is a real crisis; there was a real crisis. We
got the authorities we needed, and we went to the heart of the
problem. And the heart of the problem was the financial system
and capital, and we used a strategy that would work more
effectively, and it has worked, number one, in stabilizing the
system.
Now, you have asked, what were the other things that we
were considering or have considered, plan ``B'' or ``C'' or
``D?'' And there are only--to deal with something in the
magnitude we are dealing with, there has only been one trade-
off we have made. And the trade-off we have made is between
capital, which goes farther per dollar of TARP investment, and
purchasing illiquid assets, which we would have to do in big
size.
We are also looking at a variety of other programs but
don't involve that big trade-off. I have talked about a program
to use a small amount of TARP assets to make it possible for
the Fed to provide liquidity to consumer credit. We have talked
about the future capital programs.
Now, with regard to the automotive industry--
The Chairman. Quickly, Mr. Secretary, please.
Secretary Paulson. Okay.
Let me also say, for the record, strongly, there was no
authority, there was no law that would have let us save Lehman
Brothers. We did not have the TARP then. The Fed did not have
any authority to lend if it was not properly secured.
So, now, with regard to the automotive industry, this
Administration has made it clear that, through modifications to
the Department of Energy bill, 136, we believe that there is a
path that leads towards a viability in the auto industry. And
we think these funds should be tapped only if they lead to a
long-term viable solution. And, no, we do not believe that it
is desirable to have an auto company fail with the economy in
its current situation.
The Chairman. The gentleman from Texas.
Mr. Neugebauer. Thank you, Mr. Chairman.
Secretary Paulson, under the TARP plan, would captive
finance companies be eligible for TARP funds, particularly for
the automobile industry?
Secretary Paulson. Well, there are broad powers under the
TARP to make captive finance companies eligible under the TARP.
Under the current plan we have outlined, the only capital plan
we have in place, they are not eligible.
If we were to implement the program we are working on with
the Fed, where we put a small amount of money into a Fed
liquidity facility, that facility could provide support for
triple-A auto paper, and so that is one option that is being
looked at.
Mr. Neugebauer. Chairman Bernanke, you have allowed
nontraditional entities to come to the Fed window currently, is
that correct? You said that in your testimony?
Mr. Bernanke. We have opened the window to primary dealers
as well as banks.
Mr. Neugebauer. So, captive finance companies currently, do
you have the authority to allow captive finance companies to
come to--
Mr. Bernanke. If we invoked our ability to lend under
unusual and exigent circumstances, and if we were fully
collateralized, we would have that power. We have not made a
decision to do that.
Mr. Neugebauer. But you could do it?
Mr. Bernanke. Yes.
Mr. Neugebauer. Now, then, to the three of you, I wrote you
a letter, I think, on Friday, and one of the concerns that I
have is that we keep focusing on $700 billion.
I think in your testimony, just a while ago, or you
answered a question, Chairman Bernanke, that your total assets
now are about $2 billion--I mean, $2 trillion, BETs. A year
ago, you were about a trillion, is that correct?
Mr. Bernanke. Eight hundred billion, something like that.
Mr. Neugebauer. So you have doubled, more than doubled the
size of the Federal Reserve, really, in the last 6 months, is
that correct?
Mr. Bernanke. In order to extend credit to currency swaps
to allow dollar liquidity to be provided around the world, to
allow access to banks and primary dealers, to provide that
security, that liquidity backstop, and to strengthen our
financial system, yes, we have done that.
Mr. Neugebauer. If the OCC had a bank outside the Fed
growing that fast, I think there would be some concern.
But the question I have, is anybody internally, Secretary
Paulson with the TARP programs and some of the other things
that you have done; Chairman Bernanke, with the things that you
are doing; Chairman Bair, you know, what is our contingent
liability, because this isn't a--we are not $700 billion into
this.
You know, when I just start doing a little bit of rough
accounting, it is over $2 trillion. Maybe it is a bigger number
than that when we look at what the potential liabilities in
Fannie and Freddie and what you are doing on commercial paper,
what are some of the things that Chairman Bair has done to
facilitate the taking over the banks--I think the American
people, I think this Congress, I think this committee needs, we
need a better accounting of where we are in this, and not just
be coming in here and saying, well, we need $24 billion more
for this and $50 billion for this and $100 billion for this.
I mean, we really have to have--and I am hoping that I can
get a fairly quick response to my letter from each one of you
as to where you think we are. Because, certainly, hopefully,
you are sitting in, as you are making these decisions and
looking at, you know, what is a potential downside here?
Obviously, we know, we hope, what the upside is in the
economy, and these markets start responding, but I wondered if
any of you had an opportunity to put some numbers together
before your testimony today.
Mr. Neugebauer. Well, let me make a general comment, which
is, I know what the downside was, and the downside was the
collapse of the financial system, which would have wreaked huge
havoc on this economy for many years.
Now, part of the issue that we have in answering the
question precisely is because these programs are very
different. For instance, let's just take a $250 billion bank
capital plan. That is not an expenditure; it is an investment.
I think it would be extraordinarily unusual if we, the
government, did not get that money back and more. And so that
gets accounted for as an expenditure against the deficit. That
will be coming back in, for instance.
The Fannie and Freddie, that is a, you know, there is, the
government is standing up there for the credit of those
entities and making good on what I believe our responsibilities
were and what investors in this country and around the world
understood our responsibilities to be, in that situation.
The liquidity programs by the Fed are not expenditures, but
they are impacting the markets, and right now, for instance,
this year, we will issue roughly $1.5 trillion of treasuries,
roughly 3 times than we ever have before.
Now, right now, there is huge demand for those securities,
huge demand all over the world. But that is to fund liquidity
programs that are shorter in duration.
Ben, I don't know, what about you?
Mr. Bernanke. Only that our programs are mostly short-term
lending and well collateralized.
The Chairman. We are over time.
Mr. Neugebauer. Well, I think--my intention is, I want to
follow up as you submit this response to me. Any time, and we
all know this, any time you are making an investment, whether
you call it an expenditure or investment, now, we also have to
ascertain, what is the risk, and what is the potential downside
loss of that?
So I understand what the economic downside was, but I think
we need some numbers of kind of where we are in this process.
The Chairman. The gentleman from California.
Mr. Sherman. Thank you, Mr. Chairman.
I would like to associate myself with your statements,
particularly those dealing with the mortgage foreclosure
prevention and the use of TARP funds to achieve that goal.
Earlier in our discussion, there was discussion of the
intent of the Secretary of the Treasury and the intent of
Members of Congress being balanced in interpreting this law. I
want to point out that, under the Constitution, Congress writes
the law, and legislative intent is the only intent that should
govern the construction of a statute.
I have a question for the record that I hope all three of
you would respond to, and that is whether you will use your
influence over banks to remind them of how important it is to
lend to creditworthy projects being done by charitable
organizations?
The work of charities is very important during this
recession, and all too often, banks refuse to lend or refuse to
provide letters of credit to charitable projects because they
are concerned about the bad public relations that they would
have if they ever had to foreclose. I think it is important
that they get some bad public relations for refusing to lend
and some pressure from you folks in achieving that objective.
Secretary Paulson, I want to commend you for buying
preferred stock rather than toxic assets. First, your approach
ensures that we are only bailing out U.S. institutions and not
buying toxic assets that were in safes in Beijing on September
20th.
Second, you are buying a much more valuable asset. Any 9th
grader would tell you, any 9 year-old would tell you that a
toxic asset is less valuable than preferred stock.
But I can't commend you on accepting half the rate of
return and one-sixth the number of warrants that Warren Buffet
was able to get on similar transactions. Our children will have
a larger national debt because we have been so generous in the
terms on the preferred stock.
I would also point out that, as Mr. Secretary, this would
bother me a lot except I wasn't in favor of buying toxic
assets, but you have basically testified here that October 3rd,
you had already decided to change your mind and not buy toxic
assets and instead buy preferred stock, and you didn't tell
Congress immediately before our vote that you would be going in
a different direction. Perhaps I have misinterpreted your
comments, and, if I have, I am sure the record will reflect
that if you hadn't made that decision until after our vote on
October 3rd.
I gather from your facial expression that is what you are
meaning to say.
Secretary Paulson. Absolutely.
Mr. Sherman. Then thank you, let me move on.
Secretary Paulson. This was a world changing--
Mr. Sherman. Then thank you, let me move on.
Secretary Paulson. And very seriously different situation--
The Chairman. Mr. Paulson, the members control the time.
Mr. Sherman. That I did misinterpret your comments and if
you made the decision after October 3rd, I fully understand.
Now under section 111 of the bill, you are supposed to put
forward regulations limiting executive compensation to that
which is appropriate. You have been remarkably liberal in that
you have only imposed by regulations the minimum standards set
forth in the statute and that you therefore allow unlimited
regular salaries and unlimited bonuses to be declared by boards
of directors.
But while you have been so liberal in that, defining that
part of the bill, another part of the bill requires you to
define financial institutions eligible for participation under
TARP. In fact, the statute explicitly says that insurance
companies are eligible, and yet the CPP has issued regulations
saying that only depository institutions are eligible; the
insurance companies have to go out and buy depository
institutions, as noted on the first page of today's Wall Street
Journal.
But the issue that I would like you to address orally is
bailing out or providing some sustenance to the automobile
companies. We know how important that is to the economy. If you
got rid of your CPP regulations and looked at the statute, you
would see that auto companies do qualify, since they are
incorporated under the United States, and they are regulated by
the United States and its State governments.
But, instead, your definitions in the CPP regulations limit
you to just depository institutions.
So the question I have for you, Mr. Secretary, is, if the
bill, as properly interpreted, allows you to buy preferred
stock from the three major auto companies, would you at least
buy enough preferred stock to tide them over until the new
Administration could make a policy decision? Or do you think--
The Chairman. If the gentleman wants an answer, you are
going to have to wrap that up now
Mr. Sherman. Or to have the Obama Administration just look
at three companies in Chapter 7.
Secretary Paulson. Again, I have answered this a couple of
times. I will answer it again.
I think it is very, very important to stay within the
purpose of the TARP, because this is all about protecting the
financial system, avoiding collapse and recovery. There is a
good deal more that needs to be done before this system is
recovered, the market is functioning as normal, credit is
flowing, and that will make a big difference.
Now, with regard to the auto companies, what we have said,
and I think you have heard me say it, you, the Congress has
acted. You have a bill that was passed, a $25 billion bill, the
Department of Energy--and, again, I urge you to modify that, to
have a path for making an investment in a viable company.
The Chairman. The gentleman from Georgia is recognized for
5 minutes.
Mr. Price. Thank you, Mr. Chairman.
I want to thank the panelists for their attendance here
this morning and their, oftentimes, responsiveness.
Now, I want to follow up a bit on the insurance companies
purchasing banks issue. We have learned over the past couple of
days that is, indeed, occurring.
I would ask you, Mr. Secretary, whether you believe that is
appropriate or consistent with the mission of the program?
Secretary Paulson. The mission of the program is focused on
banks and bank holding companies and getting capital into the
system. We don't have capability at the Federal level looking
at insurance. So what we are going to do is applications. If
applications--
Mr. Price. I understand what the process is. But my
question is, is it appropriate for insurance companies to be
forced through the machinations of this program to go out and
purchase banks to gain access to this money?
Secretary Paulson. I am not sure that is going to be a
successful strategy. We are going to look only at applications
that we think make sense after they are forwarded to us by the
regulator.
Now, there are a number of insurance companies that already
and have been bank holding companies for some time, have been
regulated at the Federal level for some time. And in my
judgment, it may make sense to put capital into those
institutions who are playing a vital role lending and keeping
our economy going.
Mr. Price. Let me ask the question and move on to some
smaller entities. I have many constituents who are members of
credit unions and small community banks, and they have many
concerns about them not being eligible for participation in the
TARP.
How are you working to address the concerns of these
smaller financial institutions which are oftentimes the keys to
their local communities?
Secretary Paulson. I think they are keys, and I think they
will do a lot of lending. And I had said in my opening
testimony that we have published regulations yesterday which
have now extended the term sheet for private banks, C corps,
there are thousands of them.
We expect to get applications from a number of community
banks and banks that are going to be very vital to this
economy, and we are expecting regulators to forward many of
those applications to us, and we are expecting to put capital
into many of them.
Mr. Price. Let me--I think the general concern that many of
us have voiced on both sides, and that is the Federal
Government picking winners and losers in this process, and
there is a general angst up here, as there is across the
Nation, about a relative lack of confidence in the Federal
Government to be able to get this right.
There are some fundamental principles that many of us
believe have resulted in the remarkable success of the United
States over hundreds of years. I might have broadened this to
the Chairman as well.
What fundamental principles do you believe are consistent
with the TARP program?
Secretary Paulson. Okay. I will answer it briefly and then
go to Ben.
The purpose of the TARP program is, as I said,
fundamentally about preserving our system here, keeping it from
collapsing and then helping it recover.
Now, once you have the government intervene, that is by
definition going against many of principles that we believed in
for a long time in terms of markets. We are doing this to
preserve our markets.
So we have--there are two programs we have outlined to
date. One program, if there is a failing institution, and the
failure would be big enough to be systemic, we need to come
into that.
With regard to the healthy bank program, my concern was the
exact opposite of yours, just to be candid. My concern was, I
thought, if we were looking back in history, the biggest
concern I might have would be government intervenes and puts
money into institutions that weren't viable and weren't going
to be competitive long term. Now, we at Treasury--
Mr. Price. I am running out of time on that--
Secretary Paulson. I don't have the capability to handle
that--
The Chairman. The gentleman from Georgia is recognized.
Mr. Price. Mr. Chairman, if you would comment as to what
fundamental principles you believe are consistent with TARP.
Mr. Bernanke. Certainly, this situation has sometimes been
represented as a failure of capitalism. I don't think that is
right.
The problem is that our financial system, there have been
problems of regulation and problems of execution that have
created a crisis in the financial system.
We have seen, in many cases, historically and in other
countries, that a collapse in the financial system can bring
down an otherwise very strong economy. So our efforts have been
very focused on stabilizing the financial system.
And as that situation is rectified, going forward, we need
to really think hard about our supervision and regulation and
make sure we get it right. But I don't think that this is an
indictment of the broad market system.
Mr. Price. I would just very briefly echo some of the
comments from the other side that said that we need to also
specifically identify an exit strategy so that we can return to
those fundamental principles.
The Chairman. The hearing is--briefly, Mr. Secretary.
I am getting you out of here, so if you want to talk.
I thank the three witnesses. There will be--does the
gentleman from California have a unanimous consent request?
Mr. Baca. Yes, thank you very much, Mr. Chairman, for
holding this hearing. I would like to submit my questions for
the record and thank you. I know that I wanted to--
The Chairman. The questions will be submitted without
objection.
Mr. Baca --ask about--
The Chairman. The gentleman from Texas has a request.
Mr. Neugebauer. Mr. Chairman, I would ask unanimous consent
to submit two letters: One from the National Association of
Federal Credit Unions; and the other one from the Credit Union
National Association.
The Chairman. Without objection, it is so ordered.
Any other information, material, or questions that members
want to submit, without objection, will be submitted.
This panel is excused.
We will now call up the next panel, and let's move quickly
here. We will begin on our side, the questioning where we left
off. The first question will be with Mr. Meek.
Please don't impede people's ability to leave. People can
socialize out in the hall.
Will the panel please be seated.
The gentleman from Pennsylvania will preside as we begin
this next panel.
Mr. Kanjorski. [presiding] If we will reconvene the second
panel now. We will start our testimony with the honorable Steve
Bartlett, president and chief executive officer, Financial
Services Roundtable.
STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, FINANCIAL SERVICES ROUNDTABLE
Mr. Bartlett. Thank you, Mr. Chairman, and Mr. Neugebauer
from Texas.
Mr. Chairman, I have submitted testimony for the record.
In addition, Mr. Chairman, I submitted two additional
letters for the record that I would like to have entered into
the record.
Mr. Kanjorski. Without objection, it is so ordered.
Mr. Bartlett. Mr. Chairman, to summarize my written
testimony, first, we believe that the TARP has had a positive
effect so far. It has only been 6 weeks, however, and so there
is a long ways to go.
We think that the implementation of the TARP has added to
liquidity, particularly in the LIBOR market, which was at
critical levels and upon which most of the other financing
globally is based.
Secondly, we think it has stabilized and provided a good
deal of stability with depository institutions and with
deposits, and we think it has strengthened the commercial paper
market.
We also believe that the TARP has, by being used for the
sale, there is a support the sale of weaker institutions to
stronger institutions, we think that has generally helped the
economy.
Secondly, we believe, and I have submitted in the
testimony, some evidence that commercial lending has increased,
actually rather substantially. We did a survey of eight of the
major lenders out from their 10Qs, from the third quarter,
showing an increase of lending from 12 percent. We have done
some verbal interviews for September, October, and November and
concluded that lending during those months and going forward
will also increase.
I would note, however, that the economy is generally down,
so loan demand is down, but the banks have not changed or
raised their underwriting standards.
Third, with regard to the difference between asset
purchases and capital infusion, we think that the capital
infusion method was right. We think it has had some positive
effect. However, we do think that the Treasury will and should
look at both asset purchases and asset guarantees going
forward. We think all of those are authorized by the
legislation.
Fourth, Mr. Chairman, I provided some information on
mortgage rates. Financial Services Roundtable believes that
home mortgage rates are artificially high, and it is urging the
Treasury, the Federal Reserve, and others take some action to
reduce those home mortgage rates, because until home mortgage
rates come down, the economy cannot recover.
Our evidence indicates that mortgage rates are 165--for
conforming mortgage-backed securities of GSEs, are 165 basis
points above comparable treasuries, even though the GSEs are
now in conservatorship and should be traded like treasuries.
What that means is that rates should be about 5.5 percent, but
in fact, they are 6.2 percent. That prices out of the market
large numbers of homeowners. We think, at 5.5 percent, that
would allow about 30 percent of current mortgages to refinance.
Fifth, we think that the fair value accounting continues to
be an overwhelming problem. I have submitted for the record a
letter from the Center for Audit Quality, which historically
has been defending fair value accounting, but which makes some
very specific recommendations on ways to improve fair value
accounting. We think that this committee, this Congress, and
all the players of the Executive Branch should take that letter
and those suggestions seriously.
Sixth, Mr. Chairman, we are totally committed to
foreclosure prevention. Foreclosures are too high. Our
organization through HOPE NOW and our specific lenders are
producing about 200,000 loan modifications and repayment plans
a month. We expect our new streamlined plan, which is not
dissimilar to the plan that FDIC Chairwoman Bair has proposed,
we think that plan will increase it to another 100,000 a month.
There is still a long ways to go. We have a total commitment
that we are going to review the FDIC plan to determine ways to
make that work.
And last, Mr. Chairman, we believe that the Federal
Reserve, and we have communicated this to the Federal Reserve,
should take specific and proactive and aggressive steps to
expedite the application of bank holding companies. We think
that if a company is seeking to be a bank holding company, if
it is applicable, that would strengthen the system, not weaken
it.
We think the Federal Reserve has taken those steps in three
specific cases of very large institutions; that is good. But we
think other institutions that are large- and medium-sized would
also strength the economy. We think that the Federal Reserve
should take specific steps to be the quarterback to cause the
bank holding company applications to be expedited.
And with that, Mr. Chairman, I yield back my remaining 52
seconds.
[The prepared statement of Mr. Bartlett can be found on
page 126 of the appendix.]
Mr. Kanjorski. Thank you very much, Mr. Bartlett.
Now we will here from our second witness, Mr. Edward L.
Yingling, president and chief executive officer, American
Bankers Association.
STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AMERICAN BANKERS ASSOCIATION
Mr. Yingling. Thank you, sir.
I appreciate the opportunity to testify on the current
status of the Troubled Asset Relief Program.
The TARP program has served to calm financial markets and
does have promise to promote renewed economic growth. However,
it is also a source of great frustration and uncertainty to
banks. Much of the frustration and uncertainty is because of
the numerous significant changes to the program and the
misperceptions that have resulted on the part of the press and
the public. Hopefully, this hearing will help clarify the
situation.
ABA greatly appreciates the consistent statements by
members of this committee, and particularly its leadership,
that regulated banks were not the cause of the problem and have
generally performed well. Not only did regulated banks not
cause the problem, they are the primary solution to the
problem, as both regulation and markets move toward the bank
model. Thousands of banks across the country did not make toxic
subprime loans, are strongly capitalized, and are lending.
As you know, TARP started out focused on asset purchases.
But then after European countries announced they were putting
capital in undercapitalized banks, everything changed.
Overnight, nine banks were called to Washington and requested
to take capital injections.
As this program was extended beyond the first nine to other
banks, it was not initially clear that the program was to focus
on healthy banks and its purpose was to promote lending. ABA
was extremely frustrated with the lack of clarity, and we wrote
to Secretary Paulson asking for clarification. The press, the
public, Members of Congress, and banks themselves were
initially confused. Many people understandably did not
differentiate between this voluntary program for a solid
institution and bailouts.
Bankers, for a few days, were not sure of the purpose,
although they were sure their regulators were making it clear
it was a good idea to take the capital. Put yourself in the
place of a community banker. You are strongly capitalized and
profitable. Your regulator is calling you to suggest taking
TARP capital is a good idea. You, the banker, can see that it
might be put to good purposes in terms of increasing lending,
but you have many questions about what will be a decision that
will dramatically affect the future of your bank, questions
like, what will my customers think? What will the markets
think? What restrictions might be added ?
Despite the uncertainty, banks are signing up. In my
written testimony, I have provided examples of how different
banks can use the capital in ways to promote lending.
One aspect of the program that needs to be addressed
further is the fact that it is still unavailable to many banks.
Last night, the Treasury did offer a term sheet for private
corporations, and we greatly appreciated that. However, term
sheets for many banks, including S corporations and mutual
institutions, have not been issued. This is unfair to these
banks, and it undermines the effectiveness of the program.
In my written testimony, I have discussed the fact that
while TARP is designed to increase bank capital and lending,
other programs are actually in conflict and are actually
reducing capital and lending.
In that regard, I once again call to the attention of the
committee the dramatic effect of current accounting policies
which continue unnecessarily to eat up billions of dollars in
capital by not understanding the impact of mark-to-market and
dysfunctional markets.
Finally, in our written testimony, ABA also supports
efforts to address foreclosures and housing. We have proposed a
four-point plan: First, greater efforts to address
foreclosures; second, efforts to address the problems caused by
securitization of mortgages that you have championed, Mr.
Kanjorski; third, the need to lower mortgage interest rates,
which are not following normal patterns; and fourth, tax
incentives for purchasing homes.
Thank you.
[The prepared statement of Mr. Yingling can be found on
page 194 of the appendix.]
Mr. Kanjorski. Thank you very much, Mr. Yingling.
Now, we will hear from the third panelist, Ms. Cynthia
Blankenship, vice chairman and chief operating officer, Bank of
the West, on behalf of the Independent Community Bankers of
America.
STATEMENT OF CYNTHIA BLANKENSHIP, VICE CHAIRMAN AND CHIEF
OPERATING OFFICER, BANK OF THE WEST, ON BEHALF OF THE
INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)
Ms. Blankenship. Thank you, Acting Chairman Kanjorski, and
members of the committee. Thank you for allowing the
Independent Community Bankers of America to testify today.
I am Cynthia Blankenship. I am chief operating officer and
vice chairman of Bank of the West in Grapevine, Texas, and
chairman of the Independent Community Bankers of America.
We want to express our appreciation to Chairman Frank,
Representative Kanjorski, Representative Bachus, and many
others on the committee for their support of important
community bank provisions in the Emergency Economic
Stabilization Act.
ICBA commends the extraordinary efforts of Congress,
Treasury, the Federal Reserve, and the FDIC to address the
current economic crisis. Given the speed and the enormity of
the undertaking, it is understandable that significant issues
have come up regarding the Troubled Asset Relief Program's
Capital Purchase Program.
The terms released by Treasury several weeks ago were
unworkable for privately-held banks, Subchapter S banks and
mutual institutions because of legal constraints and
organizational structures peculiar to each of the types of
these institutions.
ICBA and others have provided Treasury concrete suggestions
to overcome the obstacles. We have had a constructive dialogue
with Treasury on these issues, and last night, Treasury
released a term sheet for a privately held C corporation bank.
But a term sheet is still urgently needed for the more than
3,000 Subchapter S and mutual banks. This represents one-third
of most of the community banks, privately-held banks, in the
United States that still have no access to the TARP.
While Treasury is working in good faith to produce term
sheets, ICBA members are growing increasingly concerned about
the rate the funds are flowing out of the program. At this
point, only $60 billion is left uncommitted from the $250
billion Capital Purchase Program. And, yet, more than 6,000
privately-held Subchapter S and mutual institutions have not
had the opportunity to apply.
There are more than 8,000 community banks nationwide, and
they are well-positioned to extend lending in their communities
should they choose to use the Capital Purchase Program.
Including them will stimulate lending in those communities.
ICBA applauds FDIC's actions to unlock the market through
the Temporary Liquidity Guarantee Program. The guarantee
provides deposit insurance in transaction accounts and will
enhance depositor confidence in community banks and free up
capital to large deposits.
The guaranteed program for our senior unsecured debt,
however, provides few benefits for community banks, as they do
not issue much in the way of senior unsecured debt, other than
Federal funds purchased. The current processing for the program
makes it unattractive for Federal funds to purchase
transactions.
Overnight Federal funds pose little risk of default. And at
current prices for Federal funds, the 75 basis point fee
exceeds the interest rate. We have suggested that the FDIC
adopt risk-based pricing for the guarantee so that it will be
more attractive for overnight transactions and consider
allowing banks to separately opt out of the guarantee for
overnight Federal funds.
If the guarantee fee does not cover the cost of the
program, only banks and thrifts will be subject to a special
assessment fee to make up that deficit; yet holding companies
with significant nonbank subsidiaries can participate in the
program. Some mechanism is needed to ensure these holding
companies pay their fair share.
Community banks played no role in causing the current
economic crisis, the foreclosure crisis, and by and large they
did not engage in subprime lending practices. And they did not
become entangled with toxic investment products. As a result,
community banks are not experiencing unusual levels of mortgage
defaults. When defaults do arise, community banks understand
that foreclosure is the least attractive alternative and do
everything they can to avoid it.
Our involvement in servicing loans and finding solutions
for consumers extends beyond our own customers, and we offer
refinancing to many troubled borrowers and loans from other
institutions.
Mr. Chairman and members of the committee, ICBA stands
ready to work with you to maximize participation in the
programs authorized under the EESA and to promote the free flow
of capital so essential to our economy.
I appreciate the opportunity to testify today.
[The prepared statement of Ms. Blankenship can be found on
page 145 of the appendix.]
Mr. Kanjorski. Thank you very much.
Now, a fourth member of our panel, the honorable D. Cameron
Findlay, executive vice president and general counsel, Aon
Corporation, on behalf of the Council of Insurance Agents and
Brokers.
STATEMENT OF THE HONORABLE D. CAMERON FINDLAY, EXECUTIVE VICE
PRESIDENT AND GENERAL COUNSEL, AON CORPORATION, ON BEHALF OF
THE COUNCIL OF INSURANCE AGENTS AND BROKERS
Mr. Findlay. Thank you, Congressman Kanjorski.
I am Cameron Findlay, the executive vice president and
general counsel of Aon, and I appreciate the opportunity to
testify today on behalf of the Council of Insurance Agents and
Brokers.
My written testimony provides the details of an innovative
proposal for the Department of the Treasury to exercise the
authority you have granted under Section 102 of TARP, so please
permit me here just to summarize the high points.
We start with the premise that the insurance industry has a
lot to offer in the efforts to stabilize the economy, because
insurance is a critical but sometimes overlooked part of the
financial services industry.
Put simply, we believe that the Department of the Treasury
should use its statutory authority, the authority you have
granted it, to establish a program to insure a portion of the
expected payment of principal and interest from troubled and
illiquid financial instruments.
While Treasury's efforts to inject capital in financial
institutions is important--and has succeeded in some respects--
this effort doesn't address a primary cause of the liquidity
problem, the hundreds of billions of dollars of illiquid assets
that are on the books of America's financial institutions.
Our proposed approach is an insurance program that would
combine risk pooling, risk retention by the financial
institutions themselves, and potential government backstop
liquidity. In our view, such an approach would benefit all the
stakeholders here, taxpayers, financial institutions, and
homeowners.
The plan involves, first, the sharing of risk by
participants in an asset stabilization pool. Participants in
the pool would pay risk-based premiums, and the pool would
insure a portion of the principal and the interest from
illiquid assets on their books. Thus, the program would
insulate an asset holder from having to immediately recognize
the decline in value resulting from the nonpayment or expected
nonpayment of principal and interest.
Second, our plan requires financial institutions to retain
some risk. Just as holders of insurance policies retain risk
through deductibles, asset holders would be required to retain
a percentage of the shortfall of principal and interest. Asset
holders would be reimbursed from the pool for a shortfall, only
when the shortfall exceeds their retained amount in a single
year. It is just like a deductible in your home insurance
policy.
Third, our plan involves the potential of government loans
as a backstop. That is, in the event that in the early years,
payments from the pool exceeded premium collections, the
government could loan the pool funds needed to make good on the
guarantees. The government would then be reimbursed by premium
collections in subsequent years.
Let me illustrate the proposal by using a very simple
example. Suppose an institution holds $1 million in mortgage-
backed assets. Assume that the current lack of confidence in
the liquidity of these assets has dropped the market value to,
say, $600,000. Now, this $400,000 drop is not necessarily the
result of a true decrease in the asset's intrinsic value. It
may simply be the result, at best, of a lack of information
about the value of the asset or, at worst, in the current
environment, to sheer panic.
Let's assume in our example that the actual intrinsic value
of the asset is $800,000. Without our proposed insurance
program, the institution might have to mark the asset to
market, resulting in an immediate loss of $400,000 in value or,
even worse, the institution might have to sell the asset into a
panicked market.
But an insurance pool that guarantees the repayment of the
principal and interest from these assets would, under proper
accounting treatment, result in the institution holding assets
worth $800,000, not $600,000.
The insurance industry knows how to do this. Actuaries can
set initial premiums based on the law of large numbers, and
then after experience working with the proposed pool, actuaries
could use the accumulated data about the performance of the
assets to develop ever-more-accurate premium pricing models,
reflecting the actual value of the underlying securities.
In our view, this program will have significant benefits
for all stakeholders: Taxpayers; financial institutions; and
homeowners. For taxpayers, an insurance program would have
significantly less short-term cash requirements and capital
infusions. Also, because it would be funded by its direct
beneficiaries, it would restore liquidity without requiring
massive immediate outlays of government funds.
The insurance solution would also assist financial
institutions. As an insurance program, it would provide asset
holders the option to hold assets until maturity or until
economic conditions permit the recognition of the assets' real
value. It wouldn't flood the market with distressed assets,
which could have the effect of further depressing asset values.
An insurance program would also prevent opportunistic purchases
of depressed assets by predatory investors.
Finally, our plan helps homeowners as well, homeowners
facing foreclosure, by proposing that participating companies
have to agree to a plan to restructure individual mortgages as
a condition of participation.
On behalf of Aon and the CIAB, I want to thank you again
for the opportunity to testify today. We stand ready to work
with you on our proposal, and we would be pleased to take any
questions that you may have.
[The prepared statement of Mr. Findlay can be found on page
185 of the appendix.]
Mr. Kanjorski. Thank you very much.
Now, without objection, I ask unanimous consent that an
exchange of letters between Federal Reserve Chairman Ben
Bernanke and myself dated October 9th, October 20th, and
November 17th, be submitted into the record.
Without objection, it is so ordered.
I now recognize the gentleman from New York, Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
It is good to see you.
Let me start off by asking this question. There were some
questions earlier to the first panel, initially by my
colleague, Ms. Waters, where I think we are suffering from the
same problem, and that is, when you look at the number of
constituents who are being foreclosed upon and trying to help
them, it has been very difficult.
It is very difficult working with servicers in getting the
final information, etc., so that we can make sure we are
preserving them and giving them every opportunity to stay in
their home. To that end, in my district, I joined hands with a
local community organization, CWE, who, every week, they come
in with lawyers and financial consultants. They speak to my
constituents, and the numbers have just gone up astronomically.
And then they call the banks and work things out, and I have
called them, my community banks, etc., to let them now, when
they hear from this group, to make sure that--see if something
can be worked out.
As a result, I can tell you, when we put this program in
place as a pilot program about 3 weeks ago, there were about 8
homes that I know were about to go into auction the next day.
We were able to save those people from foreclosure. They stayed
in their homes.
So my first question is, as opposed to just relying on the
whole program, has there ever been any consideration,
especially with community banks, who have been, to a great deal
responsive, to partnering with some community-based
organizations who are on the ground, because we find oftentimes
with the number, when the financial institutions, when they get
something from them, it just goes right into the garbage can,
and they need someone, they are trying to figure someone to
trust; we found there is a trust factor that has been missing.
And they trust someone else; they trust coming into my office.
So my first question is, has there been any consideration about
trying to partner with community-based organizations in
communities to help people stay in their homes?
Ms. Blankenship. I don't know of any formal effort that we
have at this time, but I will tell you that most community
banks have a personal relationship with the borrower. As I
stated in my testimony, we do everything we can to avoid
foreclosure.
I think if you look at the statistics, you would find that
in the community banks, there is going to be a lower percentage
of foreclosures, simply because we do have that relationship if
the customer will come in. I think it would be beneficial to
have an organization to which you speak that could encourage
those borrowers, who are sometimes intimidated, when they go
into default, to communicate with the bank, because once we get
communication, then it would be rare that we couldn't find the
solution.
Mr. Yingling. I would just, one, commend you for your
efforts, and, two, say that you hit on one of several very
important factors here. That is trust. We know that many people
give up, and they shouldn't give up, and having a group that
they trust as an intermediary could be very valuable. I think
it is something we should do more with. I think it is an
excellent idea.
Mr. Bartlett. Congressman, in fact, we do partner with many
organizations, a lot of organizations. Our principal partner on
a national level is NeighborWorks. They have an affiliate in
virtually every community of the country. We find that working
with those nonprofit groups is the most effective way that we
have of providing counseling that leads to the results of loan
modification.
Now our goal here is, counseling is nice, but counseling
has to have the result of a loan modification. That is what we
set out to do. And frankly, we pay the costs to those nonprofit
counseling organizations and find it to be the most effective
way to negotiate.
I will say that it seems, perhaps, on the outside, to be
opaque. It is not. If someone is not able to pay their
mortgage, then we have to figure out a way with that person to
take their income and convert it into mortgage payments and
then see if--it is not a gift; it has to be a mortgage to make
sure that a mortgage is comparable to or better than--
Mr. Meeks. Let me ask this question really quick, because I
wanted to ask this of Secretary Paulson, but then let me ask
you, maybe it will have an effect with you.
Given that Secretary Paulson has unilaterally decided not
to purchase the toxic assets, are you concerned at all with the
position that may reverse--you know, not buying this--LIBOR
rates? You know, this is an international market right now. By
not buying this, it could change. We had some stability. And
now, things have changed. Does that give you any concern?
Mr. Bartlett. As it turns out, LIBOR rates have come down
rather significantly and are back to a stable level. We think
that the Treasury did the right thing with their capital
infusion, but we also think they ought to review the other
opportunities.
The Chairman. The gentleman from California.
Mr. Campbell. Thank you, Mr. Chairman.
A question for Mr. Bartlett, Mr. Yingling, or Ms.
Blankenship, whichever one of you. Most of the TARP money thus
far has been spent, as Mr. Bartlett just pointed out, for
capital infusions into banks and financial institutions, or
will be by the time they finish the first tranche of money.
In all of your views, is the banking system now adequately
capitalized such that it can get further capital privately, or
do you think that more capital injections are necessary?
Mr. Bartlett. More capital is always better than less
capital. So I would never say adequate.
Mr. Campbell. I understand that.
Mr. Bartlett. I think the capital has to come from private
sources. So the Treasury's infusions was, in essence, to kind
of put a foundation and a floor. I think we will see more
capital than we have seen and we will see more capital as a
result. But it is an ongoing process.
Mr. Campbell. The Treasury Secretary today talked a little
about the fact that they are studying an idea to leverage
private capital so that when there is a private capital, new
private capital investment, stock issuance that the Treasury
would then have some kind of matching program. Comments on that
idea from any of you?
Ms. Blankenship. Well, I would just like to comment that
until they get the initial program fixed where all banks have
access to capital, because still there is--with the Subchapter
S and the mutual banks and they did issue the privately held
term sheet last night, which is helpful, but you have 8,000
community banks out there that would like access to this
capital so they could expand lending in their communities.
Because, frankly, that is the only way capital is going to pay
off as an investment in a community bank. It is not cheap
capital, but it is access to capital; and, you know, that is
very much necessary in today's market.
Mr. Yingling. I would just add that, I must say, I think
the reaction of most of the banking industry in that 24-hour
period where nine banks just overnight were called in a room
and requested to take capital was one of shock and concern. It
is not something we had asked for.
Having said that, as the program has rolled out and become
clearer, we can see an advantage to it.
I agree with what Ms. Blankenship just said, that at this
point there is an equity question and a competitive issue, and
all banks ought to be treated equally. But, beyond that, to the
degree we can rely on private equity, we ought to; and to the
degree that there are other excellent uses for money, such as
foreclosure prevention, they ought to be considered.
Mr. Campbell. Thank you.
Let's talk about what the TARP did not do for the three of
you again; and then I have one more final question for you, Mr.
Findlay. I won't ignore you there.
What it did not do is buy troubled assets, which was
obviously what we originally thought we were going to do. Are
you seeing any liquidity in that market whatsoever? Are those
trading at all? Has there been any thawing in that as there has
been a little thawing in commercial paper, a little thawing in
interbank lending, a little thawing in a few of these other
things? Is there any liquidity in that market right now?
Mr. Bartlett. No. We think bringing down mortgage rates
will help with that. We think, actually, that the capital
infusion of the banks will help with that. LIBOR being reduced
has helped with that. But in 6 weeks' time, we haven't seen a
thawing at this point of the mortgage-backed security market.
That has to happen. Nothing can recover until that does happen,
and we think that the steps have been taken to cause it to
happen. But it hasn't happened yet.
Mr. Campbell. So those are still not tradable assets
basically to the extent they sit on anyone's books?
Mr. Bartlett. I would hate to say not tradable but pretty
close to not tradable.
I also suggested in my testimony that dealing with--curing
fair value accounting is a big part to that. So fair value
accounting continues to be kind of the heavy hand of government
that is causing a large part of the problem at this point.
Mr. Campbell. Let me get to Mr. Findlay, if I may, with one
final question. How is the program that you describe, this
insurance program, how is that different from what is actually
in the bill that we passed in the rescue bill in October, which
the Treasury is studying, insurance? In listening to you, I
wasn't able to see a distinction between the two proposals.
Mr. Findlay. In fact, the proposal we have is one that we
believe Treasury has authorized under section 102 of the EESA;
and our proposal is one that Secretary Paulson said is being
studied right now. When we were talking about how much capital
outlay is the right amount, I mean, one of the advantages of
our program is it doesn't require immediate infusions of
capital.
Mr. Campbell. So you are simply expressing your support, I
guess, for the idea that was put in in the bill as an option
for Treasury?
Mr. Findlay. That is exactly right, Congressman.
Mr. Campbell. Thank you, Mr. Chairman.
The Chairman. The gentleman from Massachusetts.
Mr. Lynch. Thank you, Mr. Chairman, and I want to thank you
and the ranking member for continuing to hold these hearings,
and I want to thank the panelists for helping the committee
with our work.
Mr. Yingling, I really appreciate the candor of your
testimony this morning; and I want to just--I am just going to
quote you a little bit, if you don't mind.
You talked about the great frustration and uncertainty to
banks caused by the significant and numerous changes to the top
program and misperceptions by the public and the press. I just
think you might want to add Congress to that list as well.
As you know, and you have been a frequent flyer to this
committee in recent weeks, Mr. Paulson had come here and in
great detail described a toxic mortgage repurchase program that
he put forward to Congress; and much of our time here and your
time and those who are trying to protect taxpayers time were
spent in examining that specific proposal which was to clear
these toxic mortgages off the bankers' balance sheets. And we
probed that question in great detail, and the benefit to both
the banks and to these distressed homeowners and to the
communities that they are located in was quite apparent.
And then it seemed like just a matter of days after
Secretary Paulson got the $700 billion, he went to plan ``B.''
He basically abandoned that original plan that was the basis of
his request and went to plan ``B,'' which was, as you have
described, getting those bankers in a room and then proceeding
to--at least in the words of some of those bankers--give them--
force money that they didn't need and didn't want, and the
process nationalized a considerable percentage of those banks.
And then, after the fact, he has gone to plan ``C,'' which
is now to recapitalize some of these credit card issuers.
And I just want to know--I mean, I think he had an
obligation here to come to Congress and say, okay, here is plan
``A;'' and I am going to try this. Here is plan ``B.''
The problem with the banks wasn't unforeseen. He could have
explained that to us. He never mentioned it. As a matter of
fact, the only time it ever came up, he rejected the proposal
of direct capitalization in the banks.
But I just want to know, what is the response of your
constituents, your banking committee as well as--Ms.
Blankenship as well, the community banks. What is happening
here? What has this done for confidence within the banking
community, all the changes that the Secretary has instituted?
Mr. Yingling. Well, it has been very confusing and very
difficult. I would differentiate the question of what is the
right policy, because it may be we have arrived at the right
policy in terms of the best use of the money at this time.
Although, again, I think foreclosures is another important use
of money.
We didn't ask for capital infusions. And I can remember
when this was announced sitting in my office, and I have to
watch the news all the time to see what has been going on and
what the effect may be, the immediate response in the hours
after this program was announced was a series of stories about
how the banking industry had thousands of banks that were going
to fail.
It was completely misinterpreted, and it took several days
for this to calm down. It also took several days for banks to
figure out what was going on, and that is why you saw some
statements from bankers, I think, about the use of the funds.
It was just because they didn't understand. I think now people
are beginning to understand. But I would think it is confusing
for bankers. We have done--are starting to do--some polling on
do your customers think you are weaker or stronger if you take
the money?
Mr. Lynch. Right.
Mr. Yingling. Customers don't know how to react to it. All
of these things have ripple effects that are unforeseen. And as
several of you have commented about your constituents' point of
view, we could understand the anger and the concern and the
confusion; and, of course, that affects us. We hear from the
customers as well, and it can lead to policy confusion.
Mr. Lynch. I understand. I am running out of time. I just
want to ask, what about the fact that Secretary Paulson
basically--and this is reflected widely in the press--that the
Secretary basically forced people to take the money, when they
didn't want the money, they didn't need the money, and now it
looks like there won't be enough assistance to help some other
banks that may indeed need a little bit of help?
Ms. Blankenship. Well, that is the total frustration of the
community banks. Because, you know, the perception is that the
big banks did take it, the nines. And that has been well over a
month ago, and still the deadline came and went. And the
community banks, the 8,000 that represent over 90 percent of
the banks nationwide, they represent Main Street. They couldn't
get access to the capital. And still even today we can't get
total access to it.
Mr. Lynch. I appreciate that. That is very helpful to hear.
Thank you, Mr. Chairman. I yield back.
The Chairman. The gentleman from Illinois.
And let me just say, if people are watching this on
television and aren't members of the committee, don't come. We
have about 16 minutes. We have three members who will be able
to ask questions.
We are going to then break at 1:00. We will come back at
2:30, because our academic witnesses had asked that they be
allowed to testify in the afternoon. So we will come back for
Professors Feldstein and Blinder.
The gentleman from Illinois is recognized.
Mr. Manzullo. Thank you, Mr. Chairman.
I represent the 16th District of Illinois, which is right
on top of the State; and we have a lot of agriculture, a lot of
manufacturing, a lot of small independent community banks. And
the community bankers are extraordinary people because they
have not caused this problem. Their conservative principles,
the fact that when you get a loan you sit across a desk and you
can judge a person's integrity by looking into their eyes--they
represent institutions in this country which really serve to me
as models.
And, Ms. Blankenship, I have a question for you. We are
told that there is a need to use part of the $700 billion
financial services package by the auto industry in large part
because the financial arms of the big three are unable to issue
any more car loans except to customers with a FICO score of
greater than 720. In many cases, they said that they just don't
have any money at all. I have been informed by several
community banks in the district I represent, including my own
banker, that they have plenty of money to lend for automobiles.
They are very frustrated with the fact that people are saying--
and I am going to be very up front.
The last panel has done more to instill fear into America
and, by some of the outrageous statements, are making it more
and more difficult to recover. In fact, they are extending the
recovery, starting with my good friend Mr. Paulson from
Illinois, the statements that he made in September about how
the world would collapse unless he was given $700 billion to
buy bad assets.
People are not buying automobiles, and they are not going
and doing their regular Christmas shopping because of fear.
And, all along, the community banks have all kinds of money. My
question to you is, are community banks--and I don't want to
use the words ``able to fill the gap,'' but are there enough
community banks in this country that can work with dealerships
and make sure that people receive appropriate and fair and
reasonable financing for their automobiles and trucks?
Ms. Blankenship. Well, I would--
Mr. Manzullo. Do you like that question?
Ms. Blankenship. I will take that question.
Of the 8,000 community banks, the banks that are on Main
Street and in the agricultural and rural communities that
represent 22,000 communities across the Nation, by and large
they are well capitalized and they do have money to lend. Our
own bank actually has increased in lending--our net lending
since this time last year. The market confidence was a huge
factor.
When there were comments that thousands of banks would
fail, you know, we had--that is where you saw your customers
pulling in. It wasn't the fact that the banks didn't have money
to lend. The consumer confidence just went to the tank. And so
we had to restore that. And coupled with that was the deposit
insurance question and, you know, does your bank save? And the
confusion over money market guarantees where the mutual funds
got unlimited and our banks had $100,000 still. So it is hard
to compete.
And yet those customers know us. They know us by name, as
you said. And the confidence--we were able to rebuild that
confidence. But it was a campaign. We do have money to lend,
and we would be glad to lend it.
Mr. Manzullo. Thank you.
Mr. Yingling.
Mr. Yingling. Just a few numbers that I think would
surprise most people. Consumer and industrial loans for banks
are up 15 percent this year. Home equity loans, admittedly from
a low base, are up 21 percent. Asset-backed securities
lending--not mortgage but other asset backs--down 79 percent.
We have a chart on page 10 of our testimony that shows consumer
and industrial business lending, and consumer lending is
actually up for banks.
Mr. Manzullo. And this is all banks?
Mr. Yingling. Right. The world is coming back somewhat to
the bank model, and we are ready to go.
Mr. Manzullo. The question I asked of you, Ms. Blankenship,
I just want to make sure that we have a lot of larger banks in
our district with local branches and real-life people there.
They are also telling me the same things that many of the
community banks are saying.
Thank you.
The Chairman. The gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman, and I thank the
witnesses for appearing today.
I have two quick questions. The first is, having heard the
plan that Chairwoman Bair has, is there anyone who is in
disagreement with the plan? Anyone? And the Chair has taught me
that I am to build a record by indicating that the absence of
hands--ah, we do have hands. Okay. All right. Let's hear from
you please, Mr. Bartlett.
Mr. Bartlett. Well, we are in agreement with the direction
of the plan and with the goals and the broad parameters. But
the plan wasn't--the details weren't laid out today. There are
some details in the plan that we would like to work with either
the FDIC or Treasury to make sure--
Mr. Green. Let me be a little bit more specific. Do you
agree with the notion of an incentive for the servicers?
Mr. Bartlett. We agree with the notion.
Mr. Green. A monetary emolument?
Mr. Bartlett. Yes, although we are not asking for it. We
can do it without that incentive. But we agree with the plan.
Mr. Green. Now I have to ask you, why haven't you done it
without it?
Mr. Bartlett. Well, legally, we are.
Mr. Green. The empirical evidence doesn't seem to indicate
that you are. It may very well be, but I just haven't found
anything to substantiate what I think is a fair position for
you to make.
Let me go on to the next. Mr. Yingling.
Mr. Yingling. We generally agree with the approach. I spoke
with Sheila Bair about it 5 weeks ago. We like the idea of
using the institutions that know the customer, that are there
to work with them, rather than sending it to Washington and
that type of delay.
I just raise two caveats. One is--and it is all a matter of
calibration--we do have a concern that if it becomes a
government program--say you are in a neighborhood in Texas and
there are two or three foreclosures, potential foreclosures in
your neighborhood--are others going to see this program and see
that Bill or Mary got this and say, okay, I will stop paying so
I can qualify? That is all a matter of the details and the
communication.
And the other is, I think we need to sit down with real,
live lenders, community banks and others, and design a program,
make sure it works.
Mr. Green. Thank you very much.
I take it that there were only two hands, persons who were
in disagreement; and they have spoken. Is there a third?
Ms. Blankenship. I would just like to qualify that the
community banks didn't face the same problems as IndyMac
because, typically, they make their mortgages just
individually; and they are working through those.
Mr. Green. Ms. Blankenship, if I may interrupt, because my
time is short. Let me just ask, the plan itself, however, are
you in agreement or disagreement with it? The concept that you
heard.
Ms. Blankenship. I think the concept is good to work with
the consumer.
Mr. Green. And to have an emolument, a payment of money for
foreclosure avoidance.
Ms. Blankenship. I don't think it should be a government-
mandated plan for the banks. But I think that a tool for the
banks to work with would be--
Mr. Green. It is not mandated; it is if you buy into the
program. Then you will receive the emolument if you participate
in foreclosure avoidance. That is the way it is established, as
I understand it.
Ms. Blankenship. Yes.
Mr. Green. Would you support that?
Ms. Blankenship. Yes.
Mr. Green. Let's go on to the last person, and I will be
done.
Mr. Findlay. Everyone keeps forgetting about me here from
the insurance industry. We don't have a position on behalf of
the CIAB on it. But I support the concept. We believe that
there ought to be relief for individual homeowners, and we
built something like that into our proposal.
Mr. Green. Well, just in response to your question, there
were many people who thought that this would not impact them. I
say you are involved in it simply because life is an
inescapable network of mutuality tied to a single garment of
destiny. Whatever impacts one directly impacts all indirectly.
That is Dr. Martin Luther King. So we are all in this together.
Thank you very much, Mr. Chairman.
The Chairman. If I may in the gentleman's remaining time
ask--because I appreciate him asking that question. Let me ask
each of you to indicate, if we can work out the specifics--and
I agree; those are important--would you think it is appropriate
to use TARP money for the costs of this? Beginning with Mr.
Bartlett.
Mr. Bartlett. Mr. Chairman, yes, I do, if we can work out
the details.
The Chairman. Mr. Yingling.
Mr. Yingling. I think it is important that foreclosures and
housing be dealt with. Yes, I would.
The Chairman. Ms. Blankenship.
Ms. Blankenship. Yes, I would agree.
The Chairman. And Mr. Findlay.
Mr. Findlay. I can't disagree.
The Chairman. That is very important. We will note that to
the Secretary.
The gentlewoman from Illinois.
Mrs. Biggert. Thank you, Mr. Chairman.
Mr. Findlay, you have talked about the theory of the
current crisis is not a liquidity crisis but instead a
transparency crisis as it relates to the pricing of illiquid
assets and your belief that the insurance program could help.
How will the insurance program affect the financial statements
of the participating entities?
Mr. Findlay. I think the way we view this, Congresswoman,
is that the fundamental problem in the marketplace right now is
a lack of reliable information on the value of assets and
indeed a sort of panic that sets in when you don't have
reliable information. You don't want to be the last person
holding a troubled asset. And all these financial institutions
have on their books assets that they had valued a certain way
in August, and it is a fraction of that value today.
We are fairly confident that the fire sale price at which
assets are being held today is not the intrinsic value of the
asset, and it wouldn't be a good thing to require institutions
to mark assets down to that value. So what we have tried to do
is come up with an innovative way to take the panic out of the
marketplace, and allow information to get into the marketplace,
so we can determine what these assets' values are and
essentially give a little breathing space to the market over
the next year or two to bring these assets back to their
intrinsic values, which we know they are not at today.
Mrs. Biggert. Thank you.
Mr. Yingling, do you think that this insurance program
would really help the banks and financial institutions and be
able to--you know, we have the mark to market, which has
lowered that. But is the insurance program something that would
be to your benefit, to be able to have what these mortgage-
backed securities really are worth?
Mr. Yingling. Well, I think it is very valuable to explore.
I think we do have an issue of just how many programs we can
have working at one time. But certainly it is a program in
terms of its design that makes sense.
Mrs. Biggert. But this really was a program that was one of
three that was the Secretary's proposal and the alternative--
Mr. Yingling. Yes.
Mrs. Biggert. --and it seems like--I am not sure that the
Secretary really wants it to be implemented. And it seems to me
that the only way that we are really going to know what the
value of these mortgage-based securities is by this program. I
haven't heard of any other basis that they are really going to
be able to find that out.
Mr. Bartlett, is that important? Do we really have to know
what all of these mortgage-based assets are worth?
Mr. Bartlett. We support the program as outlined by Mr.
Findlay; and I put it, actually, in my written testimony. So we
think that now that the capital infusion has been put in place,
then the Treasury should be looking at other alternatives of
additional ways to provide liquidity back in the market of
which the asset guaranteed program, the asset purchase perhaps
and perhaps the asset guarantee and the insurance program is a
better, more leveraged way of providing the same thing.
It is important to note that all the money that is needed
for liquidity in the market cannot come from the government,
not even a small fraction of it. So the government money has to
be used to cause the private money to come to the table; and I
think that is the basis of this insurance program, which is the
right approach.
Mrs. Biggert. Thank you.
Ms. Blankenship, do you look at this program as being
helpful or does it apply to the community banker?
Ms. Blankenship. I do think I would agree, because anything
that would help us alleviate the decline in those mortgage-
backed securities values, because it affects the industry on
all levels, so it would be helpful. Thank you.
Mrs. Biggert. Thank you.
I yield back.
The Chairman. The gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman.
After reading about the supposed demise of my State's
influence in the Nation's Capital in the Hill newspaper today,
I am very happy to see two fellow Texans on this panel,
representing 50 percent of the panel. Obviously, there has been
a big discussion about foreclosure prevention in mitigation
efforts.
The gentleman from Texas is no longer in the room, my
friend, and spoken that he had seen no--I believe--I hope I had
the proper context--had seen no empirical evidence that there
was voluntary reworkings, refinancings of these mortgages. I
haven't looked at numbers recently, but my thought is, as of a
few weeks ago, there had been something around the neighborhood
of 2.5 million voluntary refinancings. Mr. Bartlett, do you
know what the latest number may be?
Mr. Bartlett. Congressman, actually, it is 2.5 million
since July of 2007. Those are real numbers. There is a
combination. A little over half of them are modifications; the
other is a repayment plan. They get people back in their houses
and the mortgage reinstated so that they can afford it.
We believe that the streamlined mortgage, which we
announced last week, which is similar but not identical to what
Chairwoman Bair proposed, we think that should increase it by
another 100,000 a month. So it is running about 200,000 a
month. We think we can increase it to about 300,000 a month. It
is a long ways to go, but those are big numbers, and they are
real, and those are real people that are being able to
reinstate their mortgages and keep their homes.
Mr. Hensarling. Well, there seems to be a belief by some on
the committee that these refinancings are not taking place or
that you apparently have no incentive to do it. Is it not true
that the average foreclosure cost to financial institutions is
somewhere in the neighborhood of $60,000 to $80,000? Does
anyone feel qualified to answer that?
Mr. Bartlett. We did a survey a year ago. It was an average
of $57,000. So I suspect it is more like $80,000 by now.
Foreclosures are financially as well as emotionally
devastating for all involved. But, having said that, it is a
mortgage. It is not a grant, and we all know that. So we set
out to reinstate the mortgage and modify the mortgage if we can
get it back to a basis of a mortgage with a homeowner able to
pay that mortgage and stay in the house. We do that 200,000 a
month, and we are doing it faster every month.
Mr. Hensarling. Mr. Yingling, in an answer to a previous
question, I think you kind of brought up the moral hazard
dilemma about incenting some people with Federal funds to
renegotiate their mortgages. I think it begs the question, how
many people can't pay their mortgages and how many people
choose not to pay their mortgages? And can you speak to the
moral hazard of a program that, if not properly structured, is
going to incent people to purposefully default?
Mr. Yingling. We do believe that we need very strong
programs to address foreclosure, and one of the issues I
believe that came up in a recent hearing at this committee was
the securitization issue and how that has been a roadblock to
be able to do foreclosures in many cases. What bankers have
expressed is a concern. It is all a matter of communication and
calibration of the program.
But it is one thing, for example, in IndyMac, where the
FDIC goes out with letters to IndyMac borrowers and says, you
are an IndyMac borrower; here is what we can do for you. And a
more general situation, okay, is where there is a government
program that if you miss three payments you qualify for and you
will get your monthly payment cut by a third, and that goes
around the neighborhood. What you don't want is for people to
say, okay, it is a government program. I should be able to
participate. I won't pay my mortgage for the next 3 months.
Because then the cost to the taxpayers will just balloon.
Now this can be dealt with, but it is something that we
really need to think through.
Mr. Hensarling. Ms. Blankenship, in your testimony--and let
me thank you for coming here and making the committee aware of
the lack of access to many of our community financial
institutions, their inability to access much of the TARP money.
You brought the lack of access to our attention and you also
stated that community bankers were not the cause of the
financial crisis. And perhaps it is the cynic in me pointing
out, maybe that is your problem. There tends to be a habit in
the Nation's Capital of rewarding failure and punishing
success. You might want to think about that for the next round.
Mr. Findlay, I don't know where your voice was 6 weeks ago.
I wish we could have heard it more loudly than we have today.
I know that at least our chairman has been quoted in The
Washington Post at the time the original legislation passed--I
believe I have this right, Mr. Chairman--that you did not
expect the insurance program to materialize. And I hope that is
``expect'' as opposed to ``hope.'' But I think it holds a lot
of promise, and I am glad the chairman had an opportunity to
hear your testimony.
I see my time is out, and I yield back. I would be happy to
yield to the Chair.
The Chairman. I did express that view after talking to the
Secretary of the Treasury.
I thank the panel. We will reconvene at 2:30.
[Recess]
The Chairman. The hearing of this morning will reconvene.
I apologize. A Democratic caucus was scheduled at the same
time. I regret that more of our colleagues won't hear our
witnesses, but it will be on C-SPAN. There is nothing competing
with it on the Floor of the House. And, obviously, the
testimony will be available. It is a subject of continuing
importance, I think, as a result of this morning's hearing and
the conversations we had, particularly with the Secretary of
the Treasury, that this question of what more to do with regard
to mortgage foreclosure is very much an open question. And so
this testimony will be especially relevant in helping us shape
what I think is going to be the next step.
And, with that, we will begin in alphabetical order with
Dr. Alan Blinder, who is a professor of economics and co-
director of the Center for Economic Policy Studies at Princeton
and a former Vice Chair of the Federal Reserve Board of
Governors.
Mr. Blinder?
STATEMENT OF ALAN S. BLINDER, GORDON S. RENTSCHLER MEMORIAL
PROFESSOR OF ECONOMICS AND CO-DIRECTOR OF THE CENTER FOR
ECONOMIC POLICY STUDIES, PRINCETON UNIVERSITY
Mr. Blinder. Thank you, Mr. Chairman, and members of the
committee. Thank you for the opportunity to testify here this
afternoon.
I have come here neither to praise the TARP nor to bury it,
but rather to urge Congress to exercise its oversight authority
to ensure that the Secretary of the Treasury pursues the stated
goals of the legislation. Failing that, I think Congress should
take the Secretary's checkbook away and wait for a new
Secretary of the Treasury.
I note that the Secretary just said he is probably not
going to ask for the second $350 billion anyway. So that last
point might be moot.
Mr. Chairman, I think you will remember that I was among
the earliest voices calling for something akin to, though not
exactly the same as, the TARP. Specifically, I recommended the
establishment of two new institutions, one of which would
purchase and refinance imperiled mortgages and the other of
which would buy up some of what we now call troubled assets,
that is, mortgage-backed securities and the like.
The TARP was, in fact, established to serve both of those
purposes. That is in the legislation. So it is with great
dismay that I look at what has been done as of today and
conclude that the TARP is not, in fact, performing its
legislatively-mandated duties.
I object to the decisions Secretary Paulson has made on at
least three different levels: First, the choices he has made
regarding how to deploy the money; second, the execution of
those choices; and, third, what seems to me, although you
ladies and gentlemen can judge this better than I, to be a
pretty sharp deviation from congressional intent. Let me take
each up in turn, starting with the last.
Because the financial crisis has grown to be so complicated
and multifaceted, it is worth remembering that it all began
with falling house prices and defaults on mortgages or, to be
more precise, fears that defaults on mortgages would become
rampant.
Foreclosures are personally painful and economically
costly. They undermine property values, and they lead to fire
sales of homes, which further depress house prices, thereby
contributing to the vicious circle. It is difficult for me to
see a way out of this mess without reducing foreclosures
sharply.
Understanding that, Congress wrote legislation that at
numerous points exhorts, encourages, and even, I think, directs
the Secretary of the Treasury to use TARP funds, at least some
of them, to acquire mortgages and get them refinanced. But, as
you all know, he has not done so. Nor has he purchased any of
the so-called troubled assets; and he has recently said he does
not intend to do so.
The law that you passed in early October authorizes
establishment of the TARP to purchase troubled assets, which
are defined in Section 3.9. If you have my testimony, the exact
words are reproduced on page 3. But they basically say, ``A,
residential or commercial mortgages and any securities,
obligations or other instruments based on mortgages.'' And then
there is clause B, which basically says, ``any other instrument
that the Secretary deems to be essential to promoting financial
market stability.'' And it adds to that clause, ``but only upon
transmittal of such determination in writing to the appropriate
committees of Congress.'' I presume this is the appropriate, or
at least one of the appropriate, committees.
So I think of that language as defining three eligible
classes of assets for the TARP to purchase: Mortgages;
mortgage-related securities; and then the catch-all, anything
else that the Secretary deems important to financial stability.
Well, I guess I am an old-fashioned believer in
constitutional democracy. I followed from a distance--you
ladies and gentlemen were right in the middle of it--a pretty
rancorous congressional debate over the TARP. And I am pretty
sure that Congress believed it was authorizing $700 billion
mainly for the first two of those purposes: buying and
refinancing mortgages and purchasing mortgage-related
securities.
Instead, as you know, almost all the money committed to
date is for capital injections into banks, justified under that
catch-all phrase, ``any other financial instrument.'' Were I a
Member of Congress, I would be pretty unhappy about this turn
of events. And, in fact, as a taxpayer shouldering his share of
the $700 billion burden, I am unhappy about this turn of
events.
To be sure, I am not suggesting that Secretary Paulson
overstepped his legal authority by making capital injections.
They are, in fact, justified by Section 3.9(B). Nor do I
question the wisdom of allocating some of the TARP money to
recapitalizing banks. But I think we need to pay attention to
the scoreboard, which so far, at almost half-time, reads,
``mortgages: zero; mortgage-related assets: zero; other: 100
percent.''
I don't believe that such a lopsided allocation of funds is
the optimal use of the public's money. And to see why, I would
like to review very briefly the arguments that support each of
these three alternative uses of the funds, starting with
mortgages.
As I mentioned a moment ago, the financial crisis began
with mortgages and fears of foreclosures. So, naturally, the
legislation directs the Secretary to use TARP funds to get
mortgages refinanced. Unfortunately for the country, he has
chosen not to do so, and the mortgage problem has festered and
worsened.
Second, mortgage-related securities. Three main arguments
were used to support the idea of buying these kinds of assets--
an idea, as you will remember, that was very controversial.
First, panic had virtually shut down mortgage-backed securities
(MBS) markets, which had to be put back in working order to
restore our mortgage finance system. Second, one of the reasons
for the panic, though not the only one, was that nobody knew
what these mortgage-related securities were actually worth. A
functioning market would at least establish objective values.
Third, and most importantly, many mortgages are tied up in
complicated securitizations, so buying some of those securities
would enable the government to get control of these mortgages
and refinance them. In fact, that third objective was written
explicitly into the law in several places, prominently in
Section 109.
The third purpose is recapitalizing banks or, more
precisely, the catch-all, ``any other financial instrument.''
That was a wise addition to the Act because it gave the
Secretary much-needed flexibility to respond to unforeseen
circumstances. And I believe Secretary Paulson was right to
decide that bolstering weak bank balance sheets was, and this
is the phrase in the law, ``necessary to promote financial
market stability.''
But this circumstance was hardly unforeseen. It makes one
wonder why it wasn't written into the legislation. I would also
question whether capital injections are the most appropriate,
let alone the only appropriate, use of the TARP money. And I
have serious questions about the details of the program, which
I will come to in a moment.
So was this a case of bait and switch? Secretary Paulson
has appealed to the well-known Keynesian dictum that reasonable
people can change their minds when the facts change. And there
is no doubt that lots of facts have changed since October 3rd.
But he has not, to my knowledge, explained what new facts
invalidate the three arguments that I just gave and that were
given in the congressional debate. Foreclosures are still
coming en masse, and they still destroy value. The MBS markets
are still in ruins.
Furthermore, there is a natural symbiosis between buying up
mortgages and buying up troubled assets. Purchasing the MBS
helps the government acquire the mortgages to finance,
mortgages that were otherwise buried in securitizations. And
refinancing mortgages to avert foreclosures should enhance the
values of mortgage-backed securities.
And, by the way, each of those should also bolster the
financial positions of the banks, which, of course, is the
purpose of capital injections.
So I conclude that the arguments for buying both mortgages
and mortgage-related securities still stand, as they did on the
day Congress passed the legislation. And I think it is a shame
that neither of these are being done.
But even given the decision to devote virtually all of the
first $350 billion tranche of TARP money to capital injections,
taxpayers might reasonably have expected a better designed
program.
I would fault the Treasury's execution on at least six
dimensions:
First, the program is enshrouded in too much secrecy.
Second, Secretary Paulson decided to purchase preferred
stock with no voting or other control rights. So the government
winds up providing money while acquiring virtually no influence
over the recipient banks' behavior.
Third, taxpayers will receive only a 5 percent dividend
rate on their preferred stock investments. Warren Buffet got 10
percent on a similar investment with Goldman Sachs.
Fourth, participating banks are allowed to continue to pay
dividends to their shareholders, which I found amazing. It
raises the spectacle of banks borrowing money--cheaply, by the
way--from the taxpayers in order to maintain dividends to the
common stockholders.
Fifth, contrary to many suggestions, Secretary Paulson did
not require participating banks to raise private capital pari
passu with the government's capital injections, which I, among
many, thought would have been a good idea because it at least
would have provided a valuable market test of the viability of
the institutions.
Sixth, the capital injections are being made with no--I
repeat, no--public purpose quid pro quo at all, such as, for
example, some minimal lending requirements or maybe a pledge to
refinance more mortgages.
So the question is, why make the terms so favorable to
banks and, by inference, so unfavorable to taxpayers? Based on
what Secretary Paulson has said, I can only presume that he
wanted to ensure the widest possible bank participation by
avoiding stigma. Indeed, to this end, as you know, he even
forced the money on several unwilling banks at that famous
October 13th meeting at the Treasury.
The Chairman. You have 1 more minute.
Mr. Blinder. One more minute? Okay.
So, to put it mildly, the anti-stigma strategy didn't work.
Within minutes, the big banks that didn't want or need the
Treasury's capital made that fact known to the markets, and
more banks continue to do so daily. And, of course, that is
exactly what we should have expected. It is in the interest of
the healthy banks to demonstrate their health by saying, ``We
don't need this money.'' But by forcing it on recipients who
don't need it, the TARP is wasting what, to me, is a precious
resource: taxpayer money.
So where do we go from here?
First, I think there has not been sufficient oversight over
the TARP's choices and operations. That is probably nobody's
fault; it is hard to get organized that fast. And I am glad to
see that the congressional oversight panel is at least in
sight, although not yet operating.
Second, as I said, I question whether zero allocations of
funds to buying and financing mortgages and to buying MBS is
really consistent with either the spirit or the letter of the
law. I don't think it is.
Thirdly, despite that, one might ask whether Secretary--
The Chairman. You have to wrap it up.
Mr. Blinder. Okay--Paulson--finish the sentence?
One might ask whether Secretary Paulson's decisions to date
have actually advanced the objectives of the law better than
what the law itself called for. I don't think they have.
Thank you.
[The prepared statement of Dr. Blinder can be found on page
164 of the appendix.]
The Chairman. And next, Professor Martin Feldstein, former
chairman, I believe, of the Council of Economic Advisors and my
classmate.
So, Dr. Feldstein?
STATEMENT OF MARTIN S. FELDSTEIN, GEORGE F. BAKER PROFESSOR OF
ECONOMICS, HARVARD UNIVERSITY, AND PRESIDENT EMERITUS, NATIONAL
BUREAU OF ECONOMIC RESEARCH, INC.
Mr. Feldstein. Thank you, Mr. Chairman, fellow classmate.
I am very worried about the U.S. economy. I think this
financial crisis and the economic downturn are mutually
reinforcing and that, without further action from the Congress,
this recession is likely to be longer and more damaging than
any that we have seen since the 1930's.
The fundamental cause was the underpricing of risk and the
creation of excess leverage. But the primary condition that now
threatens the economy is the expectation that house prices will
continue to decline, leading to more defaults and foreclosures.
And those foreclosures put more houses on the market, driving
house prices down further.
This potential downward spiral reflects the fact that in
the United States, unlike every other country in the world,
home mortgages are no-recourse loans. If someone stops paying
his mortgage, the creditor can take the home but cannot take
other assets or look to the individual's income to make up any
unpaid balance. This no-recourse feature gives individuals
whose mortgages exceed the value of their homes an incentive to
default and to rent until house prices stop falling.
Because the number of defaults is now rising rapidly and
expected to go on increasing, financial institutions cannot
value mortgage-backed securities with any confidence. That is
what stops interbank lending and lending by financial
institutions that cannot judge the value of their own capital.
The actions, I think, of the Federal Reserve and the FDIC
have done a lot to prevent a runoff of funds from the banks and
from the money market mutual funds and to maintain the
commercial paper market.
In contrast, I believe that the TARP, itself, has not done
anything to resolve the basic problem of the financial sector.
The Treasury's original plan to buy impaired loans as a way of
cleaning the bank's balance sheet simply couldn't work. Even
$700 billion is not enough to deal with more than $2 trillion
of negative-equity mortgages. The plan to buy impaired assets
by reverse auction couldn't work because of the enormous
diversity of those securities. And even if the Treasury had
succeeded in removing all of the toxic assets from the banks'
portfolios, that would have done nothing to stop the flow of
new impaired mortgages and the fear of more such toxic assets
in the future. It was good that the Treasury abandoned this
asset purchase plan.
Injecting capital into selected banks is also not a way to
resolve the problem and get lending going again. A bank like
Citigroup has a balance sheet of $2 trillion. Injecting $25
billion of government capital does not provide a significant
amount of loanable funds, nor does it give anyone confidence
that Citi would have enough capital to cover any potential
losses on its mortgage-backed assets. Although it does raise
Citi's Tier 1 capital, that was not a binding constraint. So it
was good that the Treasury abandoned the equity-infusion plan,
as well.
Last week, Secretary Paulson announced that he will now
concentrate on propping up credit for student loans, auto
loans, and credit cards. He didn't say how that would be done.
But doing so will not stop the lack of confidence caused by the
expected continuing meltdown of mortgage-backed securities that
is driven by the process of defaults and foreclosures.
In light of this poor record, the Treasury's announcement
yesterday that it will not seek any of the remaining $350
billion of the original $700 billion TARP funding seems to me
to be quite appropriate.
What needs to be done? Stopping the financial crisis and
getting credit flowing again requires ending the spiral of
mortgage foreclosures and the expectation of very deep further
house price declines. To do that, I think, requires two
separate new programs, one for homeowners with positive equity
and another for homeowners with negative equity. Here, briefly,
is a possible way of dealing with each of these two groups.
Consider first the problem of stopping homeowners who have
positive equity from falling into negative equity as house
prices decline to the pre-bubble level. Earlier this year, I
suggested that the government offer all homeowners the
opportunity to substitute a loan with a very attractive low
interest rate but with full recourse for 20 percent of the
homeowner's existing mortgage. This mortgage-replacement loan
from the government would establish a firewall so that house
prices would have to fall more than 20 percent before someone
who now has positive equity would decline into negative equity.
The key to preventing further defaults in foreclosures
among the current negative-equity homeowners is to shift those
mortgages into loans with full recourse, allowing the creditor
to take other assets or a fraction of wages if the homeowner
defaults, as banks and other creditors do in Canada, in
Britain, and, indeed, in every other country in the world.
But the offer of a low-interest-rate loan is not enough to
induce a homeowner with a substantial negative equity to forego
the opportunity to default and, thus, escape his existing debt.
Substituting a full-recourse loan requires the inducement of a
substantial write-down in the outstanding loan balance.
Creditors now do have an incentive to accept some write-down in
exchange for the much greater security of a full-recourse loan.
The government could bridge the gap between the maximum
write-down that the creditor would accept and the minimum
write-down that the homeowner requires to give up his current
right to walk away from his debt. And I described this plan in
some more detail in an op-ed piece in today's Wall Street
Journal that is attached to the written testimony.
If these two programs are enacted, the financial sector
would be stable, and credit would again begin to flow. But
while that is a necessary condition for getting the overall
economy expanding again, I am afraid it is not sufficient. To
achieve economic recovery, the Nation also needs a program of
government spending for at least the next 2 years to offset the
very large decline in consumer spending and in business
investment. To be successful, it must be big, quick, and
targeted at increasing production and employment.
I am, as you know, a fiscal conservative. I generally
oppose increased government spending and increased fiscal
deficit. But I am afraid that is now the only way to increase
overall national spending and to reverse the country's economic
downturn.
If these two things are done--that is, stopping the
incentive to default on home mortgages and increasing
government spending--I will be much more optimistic about the
ability of the economy to begin expanding before the end of
next year.
Thank you, Mr. Chairman.
[The prepared statement of Dr. Feldstein can be found on
page 173 of the appendix.]
The Chairman. I thank you both.
Let me ask Mr. Feldstein, the 20 percent swap, did you say
that everybody now has the right to prepay? Are we clear that
there are no restrictions on prepayment in anybody's mind?
Mr. Feldstein. No, what I would suggest is that, if you go
that route, the legislation provide that individuals have the
right to prepay.
The Chairman. In abrogation of existing contracts?
Mr. Feldstein. To that extent. But I can't believe that
there are going to be many creditors who would find that
unattractive.
The Chairman. Well, that had been a problem, but, just what
you say, since individuals now have the right to prepay, and
they don't. I mean, that is--
Mr. Feldstein. I don't think--did I say that?
The Chairman. Did somebody else say that?
Mr. Feldstein. I don't think so.
The Chairman. Yes, it is in your testimony. Well, it is not
important. I am sorry; it was in the March 7th piece.
Mr. Feldstein. Oh, yes. Well, I have learned some things.
The Chairman. Well, no, but it was true, in fairness, it
was true that, under the HOPE NOW program, they did get a
waiver of prepayment; it wasn't legally binding.
Mr. Feldstein. I would say that they would have--they
should be given the right to prepay.
The Chairman. What about with recourse? What does this do
with second mortgages? Which has turned out to be one of our
problems in trying to resolve things, is that--and I say this
in the spirit of cooperation. I welcome these cooperative
things. What about the second mortgage issue?
Mr. Feldstein. I think that has to be done in proportion.
In other words--
The Chairman. That get their share--
Mr. Feldstein. --that they would share in this same thing.
I would want to see--
The Chairman. And I appreciate that. I think we
undercompensated them in HOPE for Homeowners. And that is one
of the things that I hope will get resolved.
Mr. Feldstein. Well, it is clear you are not getting the
take-up in the HOPE for Homeowners--
The Chairman. Yes. In fact, one of the things I hope they
would do with the TARP would be to--if we were redoing HOPE for
Homeowners, we have learned some things we would do
differently. Some things could be done administratively; some
would require a statutory change. But if they did it out of the
TARP, they could, in fact, make those changes.
But let me just get to the problem we have, which was the
$156 billion figure. That is for the people underwater. That
would have to be regular spending?
Mr. Feldstein. Real money.
The Chairman. Yes. And one of the things we are trying to
deal with, and it is helpful to have two economists who don't
obviously share the same ideological position make the point,
because we run into a lot of resistance with people saying,
none of my tax dollars go to help people elsewhere.
Now, you do, to some extent, respond to that with offering
the 20 percent repurchase to everybody, so all homeowners with
this package could get some advantage. But the $156 billion at
this point appears to be a large chunk.
And let me ask--and I welcome, obviously, your testimony
about the need for a stimulus, and I think you talked about
$300 billion. Is that in addition to the $156 billion, or would
that be part of the $300 billion?
Mr. Feldstein. The $300 billion, I think, is a number that,
in fact, is a kind of minimal number, and it would be required
not just for the coming 12 months but probably for the 12
months after that.
The Chairman. So that doesn't include the $156 billion?
Mr. Feldstein. It doesn't include the $156 billion. The
$156 billion is not going to have a significant stimulus
impact.
The Chairman. It is prevents it from getting worse, is the
issue.
Mr. Feldstein. Right. And to that extent, it helps every
homeowner, because it stops other home prices from being--
The Chairman. Yes, we have made that argument. It is a hard
sell.
One of the things I said to Chairman Bernanke yesterday,
and I will say it with all respect as a, you know, former
colleague, counterfactuals buy you more in more academic
discussions than they do politically. Harm avoided is rarely
something on which you can run for reelection. And that
affects, I am afraid, some of my colleagues.
Dr. Blinder, since you have been following this very
closely, too, I know, the FDIC plan, would you modify it some?
Let me put it this way. The Secretary of the Treasury has
said, in partial criticism of it, that he thinks the way it is,
with us guaranteeing half of the loss if there is a redefault,
that you could wind up with a fairly small benefit for some
homeowner and after 6 months a disproportionately large one for
the lender. A, do you think that is reasonable? And B, is it
reparable, if it is?
Mr. Blinder. It is reasonable; it is definitely reparable.
One sentence, and then let me address the question you
asked more specifically. I think, at this stage, we have gone
so far down the ``let the foreclosures rip'' road that I, for
one, would be ready to board any train that is ready to leave
the station. So I would certainly board the Sheila Bair train.
I think her plan could be improved. One thing I don't like
about it--though this is in the context of being very favorable
toward it compared to what is going on with the TARP--is that
eligibility requires delinquency. Any plan that has that
feature sort of incents people to stop paying their mortgages.
So I would like the eligibility to depend on--
The Chairman. No, I agree with that. And let me say this.
Fortunately, you know, sometimes we get into the legal habit of
we have to accept it or not accept it. The TARP is so written
as to give, as we are now aware, a great deal of flexibility to
the Secretary. The argument that there are this or that aspect
of Sheila Bair's very creative planning--she has been a very
positive force here--needs modification is simply an argument
to modify it. Under the TARP, they could do that. So I take
that as encouragement.
And, in fact, it would be good to have two models. The HOPE
for Homeowners is a principal-reduction model; the other is an
interest-reduction model. And they could both be made available
depending on what is appropriate, with elements of Professor
Feldstein. I mean, the nice thing about the TARP, its weakness
could be its strength, in that it does allow for several
approaches.
The gentleman from California.
Mr. Royce. Thank you.
Let me ask a question of our two economists here. Because
one of the occurrences that we listen to over and over again in
this committee is the Federal Reserve coming up here and also
Treasury Secretaries saying that there was a systemic risk to
the economy because of the leveraging that was occurring in the
system. And, specifically, they were identifying the
leveraging, which I guess got up to about 100 to 1 at a point,
with the GSEs, with Fannie Mae and Freddie Mac doing what
somebody described as arbitraging, but borrowing at one rate
and then--I guess they borrowed about $1 billion and then went
out into the market and had $1.5 billion in these mortgage-
backed securities in the portfolios.
And, as they described it, one of the consequences of this
was that the financial system worldwide was relying heavily on
the mortgage-backed securities and, I guess, also, the debt a
lot of the banks were holding as part of their collateral,
these instruments from Fannie and Freddie.
So maybe one of the things we weren't thinking about at the
time was that there was also all of this leveraging going on
not just in the institutions themselves--maybe that got up to
100 to 1--but also, because it was collateral for loans, there
was this additional leveraging that was leveraged into the
system.
And then, along the way, there was a little bit of nudging
from Congress to Fannie and Freddie, in terms of the type of
loans that they should be purchasing, the goals that they
should have. And so, as a consequence, Alt-A loans, you know,
and subprime loans, I mean, this was a place then that those
who were writing those loans could get Fannie and Freddie to
purchase them, as they got near the end of the year especially
and needed to make that target.
And so, as they ended up buying those back into their
portfolio, and that being 10 percent of the portfolio, the
argument that I have seen is that 50 percent of their losses at
one point were these Alt-A loans and subprime loans that they
had repurchased.
And so one of the questions was: We have tried creating a
charter, we have tried giving direction to a quasi-governmental
entity or a private entity, however we want to define Fannie
and Freddie, but might it be wiser, going forward, for us to
just let market principles play out, rather than take a scheme
like securitization through Fannie and Freddie and then
disallow or prevent the regulator--in this case, OFHEO, because
OFHEO testified here maybe a month ago or so, the Director of
OFHEO. He said, if they had gotten the legislation that they
wanted, which would have allowed them to regulate for systemic
risk, they could have deleveraged the situation, forced more
capital. And they felt that even as, you know, 16 months from
today, if they could have gotten that authority, they could
have deleveraged this problem and made it a lot less of a
crisis for at least the GSEs. And that might have staved off--
they said it would have staved off the GSE problem.
Be that as it may--that is their opinion--I had carried
legislation in 2005 that the Federal Reserve had asked for to
try to give them the ability to regulate for systemic risk in
this way.
But that is the question I wanted to ask you gentlemen. Do
you think, going forward, that perhaps we should back off of
the portfolio arrangement there that we have, or the leveraging
arrangement, and look at simply market principles maybe, in
terms of the way that Fannie and Freddie would conduct itself
in the future?
Because I can see, going out 4 years, 5 years from now as
we get this thing resolved, that same dynamic occurring again
as long as we have that--
Mr. Feldstein. I think there is a built-in flaw in a system
that provides a government guarantee, even if it is with a
wink, a government guarantee for a for-profit corporation. And
I think we have seen the adverse consequence of doing that.
So I would hope that gradually over time that gets wound
down. The economic studies of the effects of Fannie and
Freddie, in terms of helping the home mortgage market, is that
it lowers the cost of mortgages by a very small amount. And so,
for most individuals, the gain that comes from that is very
small relative to what we now see was a major risk for the
system as a whole.
So my own view is the challenge going forward is to find a
way to gradually reduce the role of Fannie and Freddie.
Mr. Royce. Thank you, Dr. Feldstein.
Mr. Blinder. I don't entirely agree with what Dr. Feldstein
just said. So if I could just suggest something: Fannie and
Freddie had their origins in the perceived need--and I don't
think the perception was wrong--to create some securitizations,
mortgage-backed securities and so on. In our wisdom, we the
United States gave them this rather odd duck character once
they got privatized. They were sort of private companies but
not quite private companies.
They are now operating as nationalized industries,
basically. I think that at the end of the day, once we can get
out from doing that, this is a case where we need to go to one
extreme or the other. One extreme is to make them public
enterprises analogous to Ginnie Mae, so nobody questions that
this is the government. And, by the way, that is where public
purpose, low-income housing, affordable housing would naturally
go. Or you go to the other extreme, which is what I think you
were suggesting, sir, which is to make them just private
companies.
Mr. Royce. They do the securitization, but they aren't
leveraged 100 to 1.
Mr. Blinder. They have no line to the Treasury, and,
therefore, they could never operate with the kind of leverage
that Fannie and Freddie did. They would have leverage, but not
as much.
Indeed, I can well imagine that, at the end of the day, we
do both. Those are two very large institutions, so that out of
the ruins of those institutions comes a new government
enterprise--with no ambiguity. It doesn't have shareholders to
cater to. It is just a government enterprise. On the other
hand, maybe more than one purely private company can also
arise. A company or companies that are in the securitization
business, with no line to the Treasury, no special privileges
at all.
The Chairman. I think time has expired.
The gentleman from Pennsylvania.
Mr. Kanjorski. Thank you, Mr. Chairman.
Dr. Feldstein, just one point that I wanted to get from
you. You have talked about no recourse in home mortgages. But
in Pennsylvania we have a dual system; you sign a mortgage, and
you also sign a judgment note. And the judgment note stands for
any money not covered by the mortgage. So we have a very low
default rate or foreclosure rate in Pennsylvania.
Is that not common in a lot of States, that there is a
judgment?
Mr. Feldstein. In general, it is not. In most States it is
pure no-recourse. In some States, like California, the creditor
has the choice between taking the property or going after other
ways of collecting, but then the property is taken out of the
potential sources of funds.
So I think it is something like 75 percent of mortgages are
strictly no-recourse. But the de facto practice in many other
places is not to pursue the individuals.
Mr. Kanjorski. Right. And in Pennsylvania, very seldom do I
see any pursuit on the judgment--
Mr. Feldstein. Well, that is also true in Europe, in
Canada, and elsewhere. The fact that they can pursue it is
enough to discipline individuals to not default, and that
avoids the foreclosure.
Mr. Kanjorski. Right.
Now, I am rather enamored with your proposals, to tell you
the truth. What I do not understand is, this is something that
will take weeks or several months to finally put in language,
statutory language, and to persuade the American people and the
Congress to pass something like this.
Why is it not advantageous--or is it advantageous--for us
to remain in session, have these types of proposals, reduce
them into legislation, so that at least with the new Presidency
we are prepared from day one to be able to act, as opposed to
waiting around for a blind piece of legislation to appear and
then we are all forced to make an either/or selection, knowing
full well there are many things we could add to the bill that
would make it much more applicable to the situation?
Mr. Feldstein. I think that would be a good thing. I am
very worried because of the state of the economy of saying,
well, let's just wait until the new President is sworn in,
until he builds his team, until everybody discovers where their
office is and starts working. That gets you to March, and a lot
of damage gets done between now and March.
Mr. Kanjorski. So if you had your druthers--
Mr. Feldstein. I would keep you all working.
Mr. Kanjorski. --you would recommend to the leadership that
we stay in, or at least establish a committee, whether it is a
special committee or whether it is this committee, to start
drafting the legislation that would be in total by the time the
new President takes his oath of office?
Mr. Feldstein. Of course the President would want to have
his input--the President-elect would want to have his input
into that. But, again, I assume he is going to name his
economic team within a matter of days, and so there is no
reason why they couldn't start working with the Congress on
this well in advance of late January.
Mr. Kanjorski. In a way, I am sympathetic, particularly to
you because I think I know your philosophical bent, and for you
coming with a proposal like this and taking an argumentative
position to hold that proposal, I have great admiration for
that. But it does set you up with a conflict with my friend
from California, who believes that the market itself should be
allowed to go forward.
Why, being as free a marketeer as you are, why have you
cancelled out the market really being able to resolve this
problem?
Mr. Feldstein. Because of the no-recourse nature of loans,
the market is not working as well as it should. Because of the
mistakes that were made in extending excess credit during this
past decade, allowing for very high loan-to-value ratios, I
think we need to have some intervention to correct these
problems.
Mr. Kanjorski. Would this require a nationalization of real
estate law, basically?
Mr. Feldstein. Certain features of it Congress would have
to override the existing contracts and existing State rules.
Again, I am not a lawyer, I don't know how broad that would
have to be. Somehow I don't think these are major changes in
real estate law.
But, for example, if an individual now pays down a piece of
his mortgage, the typical practice is that reduces the
principal but not the monthly payment, so they end up paying
off their mortgage sooner. Well, my 20 percent mortgage
replacement loan is intended to reduce their mortgage payments
by 20 percent. So the legislation would have to provide for
that.
Mr. Kanjorski. All right. Thank you.
The Chairman. I would just say, legally, if it was a
voluntary decision by a homeowner to accept the 20 percent in
return for recourse, there is no problem. I do think you would
have a problem, though, abrogating existing contracts unless
you had mutual consent. I mean, that would be the legal thing.
But substituting a recourse for nonrecourse in return for the
20 percent swap could easily be done.
Mr. Feldstein. And similarly for the negative-equity group,
substituting full recourse on the entire thing, again, for the
reduction. That is okay for them. The question is--
The Chairman. I think you would have a hard time legally
forcing it on others.
The gentlewoman from Illinois.
Mrs. Biggert. Thank you, Mr. Chairman.
Mr. Blinder, you talked about, in your statement, that
there had been zero purchases of the two asset classes, and it
has just been capital injections into the banks. And you say,
``Were I a Member of Congress, I would be pretty unhappy about
this turn of events. In fact, as a taxpayer shouldering his
share of the $700 billion burden, I am unhappy.''
But there is still--and I don't know if you were here for
the prior panels--well, one of them was a plan for the
insurance, which was actually in the bill. What do you think of
the insurance plan? Is this something that we should look at?
Which would then--you know, the actual financial institutions
would carry the burden for paying for the premiums.
Mr. Blinder. I don't rule it out. But I thought at the time
and I still think that, being a different direction and given
the complexities of starting from scratch, I would rather jump
on the train that is leaving the station.
However, I don't rule it out. The problem with the
insurance plan that was being debated back in September--and,
by the way, some insurance aspects come into a lot of these
plans--was that it was too much like insuring the house after
it had burned down. It is very hard to design an insurance plan
for catastrophes that have already happened. But insurance is
quite relevant to the ones that haven't happened yet, and
probably has merit in that regard.
Indeed, a lot of these plans, such as the essence of HOPE
for Homeowners, which passed this committee first and then
passed the Congress back in July, was to bring in FHA insurance
to close the deal. So it was, at its essence, an insurance
plan. The government was becoming an insurer. So it really was
a first cousin to that idea. Insurance is already in the law.
If I was able to wave a magic wand here, which, of course,
I cannot, I would make some amendments to HOPE for Homeowners
to broaden it and enhance the eligibility. You need money for
that. And I would take that away from the TARP.
And further to your question, insurance is the essence of
that.
Mrs. Biggert. But we did pass the FHA reform, and we did
put a lot of money into the housing bill, the $300 billion.
Wasn't that to help with FHA being able to raise the loan
limits so that they would be able to participate in the market?
Mr. Blinder. Yes, but Congress didn't actually put much
money in it. That $300 billion was someone's estimate, it might
have been the staff of this committee, of the value of the
mortgages that were hoped to be refinanced. The bill was
carefully crafted, as I understand--I see the chairman has left
the room, but other members of the committee are here--to get
the CBO scoring down to basically zero. So the official
budgetary expenditure was nil.
Mrs. Biggert. Well, with the insurance that was talked
about today and was in the bill, was really to let us know what
the value of these mortgage-backed securities, what the
intrinsic value is, what the true value of them is. Is this
important or not?
I mean, we have not really addressed that issue. And that
was really--the purchase was supposed to be the start of that,
that we would know what these mortgage-backed securities were
about.
Mr. Feldstein. It is very important and impossible to do as
long as there remains this risk of continued defaults driving
foreclosures, driving house prices down further. So if you
looked at an individual mortgage-backed security or even an
individual mortgage, it is hard to know what that is worth if
there is a risk that, at some point in the future, that is
going to default. And that is what makes it so important.
Mrs. Biggert. But it seems like we can't solve the problem
until we know what they are worth.
Mr. Feldstein. No, you have to stop the bleeding first, and
then the market will put prices on it.
Mr. Blinder. But if I may interrupt, I do agree that it is
important to find out what these things are worth. I may be one
of three people left in America who thought the purchase of
troubled assets made sense. And one of the reasons is exactly
the point you are making: Get some semblance of a market going,
and we might actually be able to put prices on these assets.
Mr. Feldstein. I don't think so. I think--of course, the
Treasury can put a price on it. It can say, I am prepared to
pay ``X'' for mortgages, adjustable-rate mortgages in
California issued in 2007, and that will be a price. But is it
a price that private individuals would be prepared to trade at
if they couldn't then hand it on to the government? I doubt it,
I think, because they don't know whether the foreclosure rate
is going double again in the next year and make those assets
worth a lot less.
So I think that is the underlying problem here. We don't
know what the future foreclosures are going to be.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman.
Dr. Blinder was clear that he would, as an interim
proposition, endorse the FDIC proposal. I am not sure we got on
the record what Dr. Feldstein's attitude would--I am assuming
it would take a while to get the political will or whatever to
move to your proposal. Would the FDIC proposal be at least a
reasonable step to pursue in the interim?
Mr. Feldstein. Well, I tell you what I worry about with
respect to the current version of the FDIC proposal. It would
be very tempting for creditors to accept the terms, write down
for people who are thinking about defaulting, write down the
monthly mortgage payments so that they qualified, but knowing
that at the end of 6 months, the individual would default and
the government would pick up the--
Mr. Watt. I understand you have reservations about the way
it is drafted. I am asking, as an interim proposition between
what we have now, which is nothing in this area, and the
proposal that you have made, would some variation of that,
addressing some of the concerns that everybody has addressed,
be a step in the right direction?
Mr. Feldstein. Well, I guess the question is, would it be,
as you said, something to do now as we move on to do other
things? I think there is room for multiple things. Or would it
block the political process?
Mr. Watt. And, Dr. Blinder, I am not sure you are on the
record yet as whether you support the approach that Dr.
Feldstein has laid out. Is that something that you would
endorse?
Mr. Blinder. I could in principle. But I come back to what
I said before about trains that are leaving the station. I
think it would take a long time to get from here to there.
Mr. Watt. I understand that. But you think it would be a
good place to get to if we could get there?
Mr. Blinder. Yes, certainly. If you compare it to the
status quo, it is a good place to go.
Mr. Watt. Now, could either one of you distinguished
gentlemen explain to me what in the world Secretary Paulson is
saying when he says that dealing with this mortgage situation
is not important to stabilizing the financial system?
Do you all have a clue what he is--I mean, he says this is
not the purpose of what we passed. Can somebody--he couldn't
explain it to me this morning. I am trying to find somebody who
can explain to me what in the world he is saying.
Mr. Blinder. I am baffled by that, frankly.
Mr. Watt. Okay. So you can't explain it.
What about you?
Mr. Blinder. If I may, just one more sentence?
Mr. Watt. All right.
Mr. Blinder. In preparing to come to this testimony, I
scanned through the Act. And there must be 15 places or
something like that in the Act--
Mr. Watt. The chairman was good at pointing those out to
him, which makes it even more baffling.
Explain it to me, Dr. Feldstein.
Mr. Feldstein. I am afraid I cannot.
Mr. Watt. Okay.
I don't have any further questions, and I yield back.
The Chairman. Having stumped the experts, the gentleman
from North Carolina retires in triumph, and the gentleman from
Alabama is recognized for 5 minutes.
Let me just say to my colleagues, they are about to start
the votes. I think we will be able to get all three questions
in, and then we can go over and vote in the caucus. I
appreciate it.
The gentleman from Alabama.
Mr. Bachus. Dr. Feldstein, you are opposed to taxpayer
money being used to bailout or to loan to GM and Chrysler, is
that correct?
Mr. Feldstein. My first choice would be that they go
through Chapter 11. My second choice would be that any money
that is given to them be given under the kind of conditions
that would make them long-term viable, which, to me, means a
rewriting of the labor contracts, the fringe benefits, the
retiree benefits.
Mr. Bachus. All right. And I think if some concessions by
the union, management, and maybe the pension funds, would those
be the three parties that would have to--
Mr. Feldstein. Exactly. And I think those--if the
alternative to getting money and making those concessions was
not getting money and going to a bankruptcy court, they might
well be willing to make the kind of concessions that would make
those companies viable.
Mr. Bachus. And without any assurance that they would
become competitively viable, any loan would actually be very
risky. So I agree with you totally.
Mortgage foreclosures--let me ask you three or four things.
The basic thing that I am struggling with is, mixed up with
this issue of mortgage foreclosure mitigation is this idea of,
``stabilizing housing prices.'' And I am very skeptical that
the government, number one, can stabilize housing prices and,
even if they could, that it would be beneficial.
Now, I understand that preventing a foreclosure--you know,
a house in a neighborhood diminishes housing values. But, you
know, the reason we are coming down and housing prices are
coming down is, for decades, you loaned money to people about 3
times their income. And then 10 or 15 years ago, we lost our
way and we started loaning 4 and 5 and 6 times as much. And
then the closing costs went from 2 percent to 5 percent to
sometimes 15 percent. And these were loans that they simply--I
mean, they couldn't afford these properties on their income.
So is supporting housing prices even--is it realistic
that--
Mr. Feldstein. Housing prices have to fall further. So I
don't think that government should be trying to stabilize house
prices at the current level. They overshot on the way up. They
have come partly down. They have to come down further.
The danger is that they can way overshoot on the way down.
And that would be a bad thing. That would destroy financial
institutions that are holding mortgage-backed securities. It
would destroy household wealth, which, in turn, would make
people cut back on their spending. That, in turn, would drag
the economy down.
So the ideal thing would be to see house prices come down
to a sustainable level but not overshoot on the way down. And
that is why I talk about this firewall as a way of stopping
house prices from falling beyond the amount that is necessary
to get back to pre-bubble levels.
Mr. Bachus. Dr. Blinder?
Mr. Blinder. I agree with that. But one of the main
arguments, to my mind almost the main argument, for pushing
foreclosure mitigation is that you can avoid, or minimize
anyway, fire sales of houses, which do, almost by definition,
overshoot on the way down.
Mr. Bachus. And I would agree with that. You know, I think
many of us conservatives, our dilemma is that we don't believe
that government ought to intervene into some of these natural
processes. But at the same time, we do care about the
communities, we care about the families, and we care about the
fire sale and the implications for all involved. And it is a
dilemma.
One thing I would like to say--and I am very glad that, Dr.
Feldstein, you said, and, Dr. Blinder, I think you agreed--and
I have said for the last 2 or 3 months putting a delinquency
requirement in these different mortgage mitigation plans is the
absolute wrong thing to do. I mean, people get delinquent. And
I want to fully endorse and I applaud you for taking that
stand.
Let me ask you this: What about the homeowner who is
underwater? You know, the house is worth $400,000, and he has a
$600,000 mortgage. Now, you know, in that case, it is best for
him to walk away, is it not? I mean, isn't that why a lot of
these people are walking away?
Mr. Feldstein. It is certainly in his interest now to walk
away. But the proposal I described in today's Wall Street
Journal op-ed piece tries to address what we could do for that
person.
And, basically, the idea would be to take that shortfall
between what the house is worth and what he currently owes and
divide that, some of it being accepted by the creditor as a
write-down and some of it paid by the government to bridge the
gap, but then requiring the individual to carry on with that
mortgage as a full-recourse mortgage, so that they wouldn't be
able to walk away from it.
The Chairman. The gentleman from Massachusetts.
Mr. Bachus. Could he respond?
The Chairman. Quickly.
Mr. Blinder. I was only going to say that you took an
example of something that was really deeply underwater. And in
cases like that, the best solution for everybody may just to be
to walk away. Most of the houses in America, thank goodness,
are not that deeply underwater.
The Chairman. Thank you.
Mr. Lynch?
Mr. Lynch. Thank you, Mr. Chairman and the ranking member.
I want to thank both of the witnesses here for your
thoughtful testimony.
Dr. Blinder, I do want to say that I think it is a double-
edged sword, the fact that Secretary Paulson has said he is not
going to ask for the other tranche of $350 billion. Instead, he
has really, to use a football term, he has punted basically, or
fumbled is another football term. He is basically telling us he
is not going to ask for any more money.
However, given our recent experience, I don't think we
should take him at his word. Not because he doesn't mean it,
but because we are having a crisis a week, and it may very well
need to happen that he reaches out for more assistance.
One aspect of the problem that we are dealing with here is
the fact that we have somewhere in the area of $1.5-, $2
trillion in securitization pools. These mortgages are
securitized, they are bundled.
We have some very complex CDOs. There is an opacity, a lack
of transparency that is really causing problems with even
ascertaining what the value of some of these instruments are.
To make matters worse, no one--the banks don't want to lend to
each other, because nobody knows what the value of these CDOs
are on each other's bank books.
Because the--actually, the CDOs, because they are not
liquidating more, no one wants to buy them. It is causing the
assets within them and themselves within these banks to being
written down, and it is causing a capitalization problem for
the banks that are holding these.
The problem for us is that we have seen some efforts so far
to pluck, say, the lowest traunch, the equity traunch mortgages
out of some of these CDOs. Because the way they are structured
and the agreements that govern them, we have had senior
traunches, or people with interest in the senior traunches,
basically, stop that practice.
How do we deal with this $1- to $2 trillion of securitized
mortgages? How do we get at those in order to deal with
homeowners who happen to be in that unhappy position?
Mr. Blinder. Yes, well, first let me say it is a very
difficult problem, and we are not going to solve it fully.
Having said that, one of the ideas of the original
conception of the TARP, as I mentioned in my testimony was to
buy some of these assets, MBS, CBOs, whatever, to get control
of them inside the TARP. The government then would be the
controlling investor, and the government could then go in and
pluck out mortgages and refinance them.
I thought that was a good idea, actually. It is not being
done.
Mr. Lynch. I don't know if you saw it this week, Gretchen
Morgenson had a column about two gentleman, Thomas Patrick and
Max Taylor, who have a pretty good plan to go in there. Do you
have familiarity with that plan?
Mr. Blinder. I read the article. I am not a good enough
lawyer to know exactly what is the right point of attack. But
the basic principle is clear, that if the government becomes
the beneficial investor, it then can restructure the mortgages
and wipe out the others. Now, you won't be able to do this for
every single one of them, but you can do it for some.
Mr. Lynch. Okay. Thank you both, gentlemen.
I yield back the balance of my time.
The Chairman. The gentleman from Missouri.
Mr. Cleaver. This is for both of you. We have to go. I
wanted to talk about situational conservatism, but we don't
have time, Dr. Feldstein. I mean, it is always amusing that
people are opposed to government involvement until they want
government involvement, but that is just not what I am going to
talk about now, because I don't have time.
But the question I want to ask is, do either of you find
that there is something wrong with the fact that the banks are
able to borrow cheap money from the government? The loan rate,
the lending rate between banks is still unstable; and, at the
same time, the consumers' borrowing costs seem to be rising. I
mean, is there something--does that bother you, trouble you at
all, particularly when you consider the fact that we are
putting money into these lending institutions?
Mr. Blinder. It does. I think that is part of the essence
of the problem. The risk-free or virtually risk-free short-term
interest rates are extremely low. The target Federal funds
rate, as you know, is 1 percent and, in fact, the actual rate
is trading at a quarter of a percent. The LIBOR has come way
down, although it is not very low by historic standards.
The essence of getting out of this broader financial
problem is to get the risk spreads, that intervene between the
risk-free rates and the rates that real borrowers have to pay,
down. That is, in some sense, the overall uber goal of the
whole thing, the whole effort.
The specific issue that does bother me--you started to
allude to it in your question, Congressman--is the low rate
that the taxpayers are receiving on the preferred stock that it
is injecting into banks. It is a bargain rate.
Mr. Cleaver. Dr. Feldstein.
Mr. Feldstein. I think what Alan said is essentially
correct. The fact that mortgage rates have not come down at
all, even though the Federal funds rate has come down to 1
percent, tells you how dysfunctional the credit markets are and
how wide these risk spreads are. Until we get the financial
institutions to a point where they are willing to buy long-term
assets and take those kinds of risks, we are going to see the
situation in which interest rates facing consumers are very
high, despite the action by the Federal Reserve in bringing
down the short-term rates.
Mr. Cleaver. Thank you. I wish we had more time. Thank you
very much. I appreciate it.
The Chairman. Witnesses, I very much appreciate this. This
has been very useful. As I said, this is ongoing; and we will
be doing more.
We are now, the Democrats, going to have to go vote in
caucus.
In closing the hearing, the ranking member had a statement
he wanted to make, and he will close out the hearing.
Mr. Bachus. [presiding] Thank you, Mr. Chairman.
In fact, going forward--and you two gentlemen may be aware
of this--as we address the foreclosure delinquencies and our
foreclosures and mortgage delinquencies, that next year we will
face somewhere between 250,000 and 300,000 resets of mortgage
interest rates, that is, people that can pay the mortgages now
but can't next year. And sometimes people hadn't factored that
in, as if that was not a problem.
In the year 2010, we face approximately 700,000 of these,
as I call them exploding mortgages. Of all the planning we need
to do, that is something that we need to factor into our plans
going forward.
I don't know if you have a comment on that as we close.
Mr. Blinder. I think you are 100 percent right. From the
get-go, when I first started writing about this problem in
January, that was one of the problems on my mind and on many
other people's minds. It is a prime argument for getting more
of these mortgages refinanced so that the ticking time bomb
doesn't actually blow up when the time comes. Yes, absolutely.
Mr. Bachus. Dr. Feldstein?
Mr. Feldstein. Yes, I agree with that.
Mr. Bachus. It is one of the most disturbing challenges we
face in going forward.
Thank you very much for your attendance. The committee is
recessed--or adjourned, actually.
[Whereupon, at 3:58 p.m., the hearing was adjourned.]
A P P E N D I X
November 18, 2008
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