[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

                               ----------
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York         MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois          PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York         EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York           RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois                KENNY MARCHANT, Texas
ANDRE CARSON, Indiana                THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California            KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana              DEAN HELLER, Nevada
TRAVIS CHILDERS, Mississippi

        Jeanne M. Roslanowick, Staff Director and Chief Counsel






















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    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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