[Senate Hearing 110-1013]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 110-1013
 
TURMOIL IN THE U.S. CREDIT MARKETS: THE GENESIS OF THE CURRENT ECONOMIC 
                                 CRISIS
=======================================================================


                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

        THE CAUSES OF THE CURRENT FINANCIAL AND ECONOMIC CRISIS


                               __________

                       THURSDAY, OCTOBER 16, 2008

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania        MEL MARTINEZ, Florida
JON TESTER, Montana                  BOB CORKER, Tennessee

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel

                      Amy S. Friend, Chief Counsel

                    Mark Osterle, Republican Counsel

                       Dawn Ratliff, Chief Clerk
                      Devin Hartley, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor


                            C O N T E N T S

                              ----------                              

                       THURSDAY, OCTOBER 16, 2008

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     6
    Senator Akaka................................................     7
    Senator Brown................................................     8
    Senator Casey................................................    10
    Senator Menendez.............................................    12

                               WITNESSES

Arthur Levitt, Jr., Senior Advisor, The Carlyle Group, and Former 
  Chairman, Securities and Exchange Commission...................    15
    Prepared statement...........................................    48
Eugene A. Ludwig, Chief Executive Officer, Promontory Financial 
  Group, and Former Comptroller of the Currency..................    17
    Prepared statement...........................................    56
Jim Rokakis, Treasurer, Cuyahoga County, Ohio....................    23
    Prepared statement...........................................    80
Marc H. Morial, President and Chief Executive Officer, National 
  Urban League...................................................    25
    Prepared statement...........................................    98
Eric Stein, Senior Vice President, Center for Responsible Lending    29
    Prepared statement...........................................   108


TURMOIL IN THE U.S. CREDIT MARKETS: THE GENESIS OF THE CURRENT ECONOMIC 

                                 CRISIS

                              ----------                              


                       THURSDAY, OCTOBER 16, 2008

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:42 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order.
    Let me welcome everyone to the hearing this morning. I want 
to welcome my colleagues who are here. Senator Crapo, I welcome 
you and thank you very much for being here this morning. 
Senator Akaka, Senator, how are you this morning? Good to see 
you as well. And, Sherrod, thanks for being here this morning. 
Let me thank our witnesses as well.
    What I am going to do, if we can here this morning, is to 
make an opening statement, turn to my colleagues for any 
opening comments they would like to have this morning, and then 
we will get to our witnesses. Any and all statements or 
supporting documents that you would like to have included in 
the record, we will certainly make it a part of the record.
    Just so people can be aware, my intention over the coming 
weeks is to have a series of hearings and meetings--some of 
them more informal, some of them more formal--to do what we are 
doing today, obviously, to go back and examine how we arrived 
at the situation we are in today; but just as importantly--in 
fact, I would argue even more importantly--what do we need to 
do from here forward so as to minimize these problems from ever 
occurring again.
    Second, we want to watch and we are going to monitor very 
carefully, of course, the rescue plan that was adopted several 
weeks ago. As I think all of you are aware, there are 
provisions in that bill that literally require almost hourly 
reporting, every 48 hours or so on various transactions that 
occur, and we want to watch very carefully following the 
auditing process that we wrote into the legislation with the 
GAO and the Inspector General as well. And so the Committee 
will be working at that almost on a daily basis.
    Then, third, the issue of financial regulatory reform. 
Secretary Paulson a number of weeks ago now, months ago, 
submitted a proposal on regulatory financial reform, and we 
never got to having the hearings we wanted to have on that, 
frankly, over the summer because of events with the foreclosure 
crisis and more recently with the broader economic crisis.
    But I would like over these coming weeks between now and 
the first of the year to have this Committee, both formally and 
informally, meet with knowledgeable people--and there are some 
at this very panel who could be of help in this regard--as to 
what the architecture and structures of our financial services 
system ought to look like in light of the changes that have 
obviously occurred, updating a system that in many instances 
actually dates back more than 80 years.
    The world has obviously changed dramatically, as we are all 
painfully aware, and having an architecture and a structure 
that reflects the world we're in today is going to be a 
critical challenge.
    This is not an easy task. It will require a lot of thought, 
and careful thought, about how you do this. But I thought it 
would be worthwhile to begin that process, and then with a new 
administration arriving on January 20th, to already have sort 
of an up-and-running effort that we could then work with the 
new administration, be it a McCain administration or an Obama 
administration, to move that process along rather than just 
wait until after January 20th to begin a process that I think 
will take some time, quite candidly, given the complexity 
involved, going back to the 1933 act and other provisions. And 
as I said, several of you on this panel here have a wealth of 
knowledge about those laws and how they work or do not work. So 
I may very well be calling on some of you to participate, 
either informally or more formally, in that conversation and 
discussion.
    Today's hearing is entitled ``Turmoil in the U.S. Credit 
Markets: The Genesis of the Current Economic Crisis,'' and I 
want to share some opening comments if I can on this and, 
again, turn to Senator Crapo and then to others to share some 
thoughts as well, if they care to, before we turn to our 
witnesses.
    This morning the Committee examines the genesis, as I said 
a moment ago, of the crisis in our credit markets. Such an 
examination is in keeping with this Committee's extensive work 
over the past 21 months to understand the implosion of the 
mortgage markets and how that implosion has infected the wider 
economy.
    All told, this Committee has held 73 hearings and meetings 
since January of 2007 when I first became the Chairman of this 
Committee. No less than 31 of those hearings have addressed in 
one form or another the origins and nature of the current 
market turmoil. Today's meeting is essential to understand not 
only how we got here, but just as importantly--and I would 
argue even more importantly--where we as a nation need to go. 
Only if we undertake a thorough and complete postmortem 
examination of the corpus of this damaged economy will we have 
any chance to create a world where the mistakes of the past are 
less likely to be repeated and where all Americans will have a 
fair chance at achieving security and prosperity.
    It is by now beyond dispute that the current conflagration 
threatening our economy started several years ago in what was 
then a relatively discreet corner of the credit markets known 
as subprime mortgage lending. The Chairman of the Federal 
Reserve, Ben Bernanke, and Treasury Secretary Hank Paulson and 
many other respected individuals have all agreed on that fact. 
Mortgage market participants, from brokers to lenders to 
investment banks to credit rating agencies formed an unholy 
alliance conceived in greed and dedicated to exploiting 
millions of unsuspecting, hard-working American families 
seeking to own or refinance their homes. Relying on two faulty 
assumptions that housing prices would continue to rise maybe 
forever and that new financial instruments would allow them to 
shift the risk to others, these market participants flouted the 
fundamentals of prudent lending.
    Certainly some borrowers themselves sought unjust 
enrichment in the process. They deserve neither our sympathy 
nor our assistance. But the millions of American homebuyers who 
today face foreclosure and financial ruination, the vast 
majority were victims, not perpetrators, of what will be 
remembered as the financial crime of the century. Indeed, the 
misdeeds of a few have robbed nearly every American. Whether 
they suffer from the loss of a home, retirement security, a 
job, or access to credit, Americans are reeling from the credit 
crisis.
    Sadly, in my view, this crisis was entirely preventable. It 
is clear to me that greed and avarice overcame sound judgment 
in the marketplace, causing some very smart people to act in 
very stupid ways. But what makes this scandal different from 
others is the abject failure of regulators to adequately police 
the markets. Regulators exist to check the tendency to excess 
of the regulated. They are supposed to step in to maintain 
transparency, competition, and fairness in our economy. In this 
case, though, our Nation's financial regulators willfully 
ignored abuses taking place on their beat, choosing to embrace 
the same faulty assumptions that fueled the excessive risk 
taking in the marketplace. Instead of checking the tendency to 
excess, they permitted and in some ways even encouraged it. 
They abandoned sensible and appropriate regulation and 
supervision.
    No one can say that the Nation's financial regulators were 
not aware of the threats posed by reckless subprime lending to 
homeowners, communities, and, indeed, the entire country. That 
threat had already been recognized by Congress. In fact, the 
Congress had already taken strong steps to neutralize it. In 
1994, 14 years ago, then President Clinton signed into law the 
Home Owners and Equity Protection Act. This law required--let 
me repeat, required, mandated--the Federal Reserve Board as the 
Nation's chief financial regulator, and I quote, ``to prohibit 
unfair, deceptive, and excessive acts and practices in the 
mortgage lending market.''
    Despite this direct requirement and mandate, the Federal 
Reserve Board under its previous leadership decided to simply 
ignore the law--not for days, not for weeks, not for months, 
but for years. Indeed, instead of enforcing the law by simply 
imposing the common-sense requirements that a mortgage loan be 
based on a borrower's ability to repay it, the Fed leadership 
actually encouraged riskier mortgage products to be introduced 
into the marketplace. And the public information on this point 
is massive.
    The Fed's defiance of the law and encouragement of risky 
lending occurred even as the Fed's own officials warned that 
poor underwriting in the subprime mortgage market threatened 
homeownership and wealth accumulation. And it was incompatible 
with safe and sound lending practices. The Fed's defiance of 
the law and encouragement of risky lending occurred despite 
warnings issued by Members of Congress, I would add, including 
some of us who served on this Committee, that occurred despite 
warnings from respected economists and others that the Fed and 
its sister agencies were playing with fire.
    It was only this year, 14 years after the enactment of the 
1994 law, that the Fed finally published regulations to enforce 
the bill's provisions, the needed protections. By that time, of 
course, the proverbial horse was out of the barn. Trillions of 
dollars in subprime mortgages had already been brokered, lent, 
securitized, and blessed with unrealistic credit ratings. 
Millions of American homeowners faced foreclosure, nearly 
10,000 a day in our country.
    I spoke to a housing group from my State yesterday. There 
are 1,000 legal foreclosure proceedings every week in the State 
of Connecticut, and we have a foreclosure rate that is lower 
than the national average. A thousand cases a week in the 
courts in Connecticut in foreclosures. Tens of millions more 
are watching as their most valuable asset--their homes--decline 
in value. And the entire global financial marketplace has been 
polluted by toxic financial instruments backed by these 
subprime mortgages, which has caused a financial meltdown of 
unprecedented proportions and laid low our economy.
    The evidence is overwhelming. This crisis is a direct 
consequence of years of regulatory failures by government 
officials. They ignored the law. They ignored the risks to 
homeowners. And they ignored the harm done to our economy. 
Despite this clear and unimpeachable evidence, there are still 
some who point fingers of blame to the discretion of Fannie 
Mae, Freddie Mac, and the Community Reinvestment Act. These 
critics are loud and they are shrill. They are also very wrong. 
It is no coincidence that they are some of the very same 
sources who were the greatest cheerleaders for the very 
deregulatory policies that created the financial crisis.
    Let's look at the facts, or as Pat Moynihan used to say, 
``Everyone's entitled to their own opinions, but not their own 
facts.''
    On Fannie Mae and Freddie Mac, the wrong-headed critics say 
Fannie and Freddie lit the match of the subprime crisis. In 
fact, Fannie and Freddie lagged in the subprime market. They 
did not lead it. Between 2004 and 2006, the height of the 
subprime lending boom, Fannie and Freddie's share of subprime 
securitizations plummeted from 48 percent to 24 percent. The 
dominant players were not Fannie and Freddie, but the Wall 
Street firms and their other private sector partners: the 
mortgage brokers and the unregulated lenders.
    In fact, in 2006, the height of the subprime boom, more 
than 84 percent of subprime mortgages were issued by private 
lenders. Private lenders. One of the reasons Fannie and Freddie 
lagged is because they were subject to tougher underwriting 
standards than those rogue private unregulated lenders. So it 
was the private sector not the Government or Government-
sponsored enterprises that was behind the soaring subprime 
lending at the core of this crisis.
    At the risk of stating the obvious, it is worth noting that 
at the height of the housing boom, the President and his 
supporters in and out of Government did nothing to criticize or 
stop predatory lending. They did nothing to support, much less 
advance, the legislation that some of us were working on to 
move in the Congress that would have cracked down on predatory 
lending.
    Regarding the Community Reinvestment Act, the critics are 
also speaking in ignorance of the facts. The overwhelming 
majority of predatory subprime loans were made by lenders and 
brokers who were not, I repeat were not, subject to CRA. In 
2006, for example, 24 of the top 25 subprime lenders were 
exempt--exempt--from the CRA. In fact, CRA lending is in no way 
responsible for the subprime crisis. CRA has been the law of 
the land for three decades. If it were responsible for creating 
a crisis, this crisis would have occurred decades ago.
    The late Ned Gramlich, the former Fed Governor, put it well 
when he said that two-thirds of CRA loans did not have interest 
rates high enough to be considered subprime. Rather than being 
risky, lenders have found CRA loans to have low default rates. 
According to former Governor Gramlich, ``Banks that have 
participated in CRA lending have found that this new lending is 
good business.''
    So people are entitled to their own opinions, as Pat 
Moynihan would say, but they are not entitled to their own 
facts. And Ronald Reagan once said, ``Facts are stubborn 
things.'' Indeed, they are, as they should be in this regard.
    Let me also say that I have learned over the years from 
this debacle that the American consumers, when all is said and 
done, remain the backbone of the American economy and deserve 
far better than they have been getting from too many people.
    The lessons, obviously, of this crisis are already becoming 
clear to us. One of the central lessons is that never again 
should we permit the kind of systematic regulatory failures 
that allowed reckless lending practices to mushroom in the 
global credit crisis. Anther is that never again should we 
allow Federal financial regulators to treat consumer protection 
as a nuisance or of secondary importance to safety and 
soundness regulation.
    If we have learned one thing from all of this, it is, as I 
said a moment ago, the American consumer, when all is said and 
done, remains the backbone of the American economy, that 
consumer protection and safe and sound operation of financial 
institutions are inextricably linked.
    I look forward to hearing from our distinguished panel of 
witnesses and from my colleagues this morning as we go back and 
look at what occurred here and the ideas that can be put 
forward as to how do we minimize these problems from ever 
occurring again.
    Again, I thank the witnesses very much and my colleagues 
for interrupting their time back in their respective States and 
districts to be here this morning to participate in the 
hearing.
    With that, Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman. Our 
financial markets and the economic crisis that we face today 
represent a very serious and a real threat, and we need to make 
sure that we are very clear about what the sequence of events 
were that occurred and what choices were made to place us in 
this catastrophic state of affairs. I agree that we have got to 
figure out how we got here so that we can correctly and 
properly address it.
    I was pleased to hear that you intend to pay some very 
specific attention not only to oversight of the implementation 
of the recovery plan that Congress passed, but also to the need 
for regulatory reform and your mention of the blueprint that 
Secretary Paulson put out.
    As you know, I am one who has been very involved in 
regulatory reform and modernization over the past few years, 
and I have some pretty strong opinions about how we need to 
approach establishing our regulatory system in this country. 
And I have noted in the testimony of some of the witnesses an 
explanation and a recognition of the fact that our regulatory 
system, developed decades and decades ago, has not kept up with 
the state of the economy and the types of financial activities 
and financial products that we are now dealing with on a global 
basis in our economy. And because of that, I think there is a 
true need to address what regulatory structure this Nation 
should have for a whole host of different pieces and aspects of 
our financial system. I am going to be interested in the 
witnesses' testimony about that.
    I personally think that we, collectively, the Congress, as 
we struggle with this, will probably end up with some very 
different opinions and points of view about how we should 
approach that. There will be some who want a much more 
extensive role for the regulators than others. But the bottom 
line is we need to figure out how we will move forward, and we 
need to establish a regulatory system that will allow capital 
to flow in our country and in the global economy, really, in a 
free and an efficient and a safe way. And I believe that there 
is a way for us to achieve that.
    So I appreciate the fact that you have indicated that you 
are going to be paying some very close attention to that even 
before the next Congress starts, and I look forward to working 
with you in that evaluation.
    Chairman Dodd. Thank you very much. And, by the way, let me 
thank all of the Members of this Committee. Obviously, not all 
are here for all the obvious reasons. I mentioned that when I 
became Chairman of the Committee in January of 2007, the very 
first hearing we had were on the foreclosure crisis--in this 
very room, in fact, and Members will recall, because they 
participated in it, that we filled this room with stakeholders 
on the foreclosure crisis and asked them what they were going 
to do to have a plan of workouts for people facing foreclosure.
    Senator Crapo has been a leader for years here on 
regulatory reform, and he deserves a lot of credit for thinking 
about it.
    In 2006, in fact, when our friends in the minority today 
were in the majority, it was Senator Bunning and Senator Allard 
that had some of the very first hearings on the foreclosure 
crisis, and the record ought to reflect that as well. And I 
also want to thank Senator Shelby, the former Chairman of this 
Committee and now the Ranking Republican on the Committee. We 
never would have been able to pass that very important housing 
bill in July of this year without the cooperation of every 
Member of this Committee. We came out of this Committee on a 
vote of 19-2 on a matter that people did not think you could 
come together on, including GSE reform as well as modernization 
of FHA and a variety of other points.
    And so I thank all Members of the Committee, and obviously 
the rescue package, Senator Bennett and Senator Corker 
particularly on this Committee were invaluable in helping put 
together that plan as Republican Members, not to in any way 
detract from the tremendous work being done by the majority 
Members of this Committee as well on that effort.
    So I would like the 73 hearings that this Committee held 
over the last 21 months, almost a hearing a week, over a third 
of them on this subject matter alone that brings us here today, 
as well as the legislative work of the Committee. But I wanted 
the Members to know how much I appreciate the efforts this 
Committee has made over the last 21 months.
    Chairman Dodd. With that, let me turn to Senator Akaka for 
any opening comments you may have, and I will ask other 
Members, and we will turn to our witnesses.

               STATEMENT OF SENATOR DANIEL AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. Thank you 
for conducting this hearing today.
    I am hopeful that this hearing will help clear up some 
misconceptions and help promote a greater understanding of the 
cause of this financial crisis as we work to reform the 
financial services regulatory structure. And I thank you for 
this opportunity, Mr. Chairman.
    I want to express some of my thoughts thus far on what has 
been happening. The uninformed have blamed much of the current 
financial crisis on the Community Reinvestment Act. That is 
simply not true. The CRA has helped empower individuals in low-
income communities by promoting access to mainstream financial 
services and investment. Instead of finding excuses to stop 
Federal efforts to expand across to mainstream financial 
services, we must do more. Low- and moderate-income working 
families are much better off utilizing mainstream financial 
service providers rather than unregulated or fringe financial 
service providers. Working families would have been better off 
obtaining mortgages from their local financial institutions 
instead of obtaining mortgages through independent peddlers 
such as Countrywide.
    The majority of subprime mortgage lending was done by 
independent mortgage companies that are not subject to CRA 
requirements and lacked effective consumer protections. I have 
greatly appreciated the extraordinary leadership and judgment 
shown by the Chairman of the Federal Deposit Insurance 
Corporation, Sheila Bair, during her tenure. I also have highly 
valued Chairman Bair's efforts to promote financial literacy 
and address issues so important to working families. Under 
Chairman Bair's leadership, the FDIC is encouraging the 
development of affordable, small-dollar loans using CRA 
initiatives.
    Working families are exploited by predatory lenders who 
often charge triple-digit interest rates. As access to 
legitimate credit tightens, more working families will be 
susceptible to unscrupulous lenders. We must encourage 
consumers to utilize the credit unions and banks for affordable 
small loans. Banks and credit unions have the ability to 
improve lives of working families by helping them save, invest, 
and borrow at affordable rates. Repealing or weakening the CRA 
would be a mistake. Low- and moderate-income families must have 
greater access to regulated mainstream financial institutions, 
not less.
    Critics of the CRA seem to forget that it does not apply to 
investment banks. Investment banks bought securitized and sold 
subprime mortgages. The CRA does not apply to credit rating 
agencies. The CRA does not apply to the sale of derivatives or 
credit default swaps. These products have contributed 
significantly to the financial situation that we are in now.
    The causes of this crisis are complex and cannot simply be 
blamed on the CRA. Instead of repealing the CRA, we must 
overhaul and strengthen the regulation of financial services to 
better protect consumers, protect markets ability, and empower 
the regulators to be more forward-looking. Instead of just 
reacting to a crisis, regulators must quickly adapt to the 
financial service innovations.
    I thank the witnesses for appearing here today, and I look 
forward to their testimony, and thank you very much, Mr. 
Chairman.
    Chairman Dodd. Thank you, Senator.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. I really, really 
appreciate your holding this hearing today and the work you 
have done for much of the last year and a half. I want to thank 
the witnesses for their public service and their terrific work 
to explain and cajole and do all the things that I know many of 
you do very well.
    It seems like a lifetime, but it was only about a little 
over 3 weeks ago when we heard from Secretary Paulson and 
Chairman Bernanke and others about the need for the Federal 
Government to spend $700 billion to shore up our financial 
system. The interest in that hearing was extraordinary. People 
were stunned by the Paulson proposal, shocked that we had 
reached that point where such massive Government intervention 
was necessary. More than 40,000 very angry Ohioans e-mailed me, 
called me, stopped me on the street, sent letters. Five 
thousand of those simply, Mr. Chairman, asked for hearings, 
thought that they wanted--people want to know who is 
responsible for this financial mess. Was there simply 
incompetence and indifference? Or was there criminal activity? 
And people want us to figure out in these hearings leading up 
to--well, through the end of this year, beginning next year, 
want us to figure out a regulatory structure so this does not 
happen to the American people again.
    With the passage of a few weeks, I think it is becoming 
clear why we needed to take action, although by no means was it 
then or now a popular decision. The credit crunch has begun to 
cost jobs. My State of Ohio just in less than a decade has lost 
some 200,000 manufacturing jobs alone. We cannot afford any 
more job loss. The impact on middle-class families and their 
retirement accounts and their savings has become clear to 
everybody who had the nerve to open their quarterly statements 
they got the first week of October.
    The last thing that Toledo's Joe Wurzelbacher has to worry 
about is the tax rate he might pay if he is lucky to have a 
quarter-million-dollar profit in his new business. My guess is 
he needs to worry a lot more about how he is going to finance 
the purchase of that plumbing business and what his cash-flow 
will look like, so long as residential and commercial real 
estate markets are stalled the way that they are.
    So while we have a better understanding of the impact of 
the credit crisis, I think the causes are still unclear to so 
many Americans. In part, this is because there are a number of 
contributing factors that added fuel to the fire of an extended 
period of time. It is also because of a deliberate campaign to 
mislead the American public. Here are three of my favorite 
examples.
    No. 3, blame the Democrats. Fannie and Freddie were the 
problem, so the argument goes, and Democrats pushed them to 
make loans to risky people. Really?
    I served in the House of Representatives from 1993 to 2006. 
I can assure everybody the Democrats were not calling the shots 
after 1995. One of the few occasions when there was bipartisan 
cooperation was in 2005, when my former colleague from Ohio, 
Representative Mike Oxley, worked with Democrats to pass 
bipartisan legislation to strengthen oversight of Fannie and 
Freddie, legislation which the Bush White House torpedoes.
    No. 2, it's Jimmy Carter's fault. You would think there 
would be some sort of statute of limitations. Maybe after 30 
years, we should stop blaming past Presidents. But somehow, as 
Senator Akaka mentioned, the Community Reinvestment Act of 1977 
is at fault for all the underlying current mess. Apparently, it 
has been laying dormant like a cicada on sleeping pills, 
waiting, just waiting, to devour our financial markets.
    But my No. 1 favorite falsehood is a campaign ad being 
aired on television sets across the country. Among the lies it 
packs into 30 seconds are these, and I quote: ``Congressional 
liberals fought for risky subprime loans. Congressional 
liberals fought against more regulation, then the housing 
market collapsed, costing you billions.''
    Now, I know quite a few congressional liberals in both 
Houses. Some are actually friends of mine, Mr. Chairman. And I 
can tell you that these claims simply turn history on its head. 
Does the campaign airing this ad really think the American 
people are going to buy this nonsense?
    I think sowing confusion and cynicism is their real goal. 
They should not be surprised at the harvest.
    Thanks to today's hearing, no one need take my word for it. 
The witnesses we hear from this morning will give the American 
people a clear picture of who supported efforts to update and 
enforce our laws to protect investors and protect depositors 
and middle-class Americans, and who opposed these efforts. I 
look forward to their testimony.
    I would be remiss, Mr. Chairman, if I didn't first thank 
Treasurer Rokakis of Cuyahoga County, the largest county in my 
State, the Cleveland area, for his efforts dating back many 
years. He, Cleveland Mayor Frank Jackson, and others have been 
fighting against not just predatory lenders in places like 
Maple Heights and Slavic Village and Rocky River, but also 
fighting State and Federal agencies that for most of this 
period have ranged from indifferent to hostile.
    Thank you, Mr. Rokakis, and thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Casey.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Mr. Chairman, thank you, and thanks for 
calling this hearing in the midst of a time period when most 
people are back, most Senators and most House Members are back 
in their States. It is important that we keep a focus on this.
    I want to commend the Chairman and Members of this 
Committee and others, even those not on this Committee, for the 
work that has already gone into dealing with this horrific 
financial crisis that the country is living through. We are far 
from resolving it. There is still a long way to go, but I think 
we have seen a lot of effective leadership here in both 
parties, and I think we need more of that. And, Mr. Chairman, 
you were among the leaders of that, and we are grateful for 
that. I do not think anyone will fully appreciate that 
leadership until maybe many years from now, but we are 
grateful.
    And we are grateful for the witnesses today and the 
testimony you will provide and the guidance you will give us.
    I think that we can get lost in a lot of the detail, but 
one of the reasons we are all here today, maybe the only 
reason, the main reason, is that we are here to talk about the 
root cause of this problem, and that is, foreclosures, 
foreclosures, foreclosures. We cannot say it enough. And, 
frankly, there is not enough being done to meet the challenge 
that poses.
    Fortunately, despite the campaign season we are in, despite 
the silly season, some of which Senator Brown just recounted--
and, unfortunately, some of it is deliberately misleading, not 
just misleading and erroneous but deliberately so for political 
reasons. But, fortunately, a lot of the work that has been done 
in the Congress the last couple of weeks and months and a lot 
of the work done by this Committee has been free of that, 
fortunately, and I think that is a good sign. This Committee 
has been an ideologically free zone for the most part, and I 
think that is a good example.
    But I think we have got to be honest about the origin of 
this. The origin of this was bad lending practices and bad 
lending by, frankly, people in the private market--private 
players in the marketplace that were often unregulated 
completely or in many cases not regulated enough.
    So that is why we are here, and I am resisting the 
temptation to say more, because it is pretty maddening when you 
see what some people in this political season will say about 
the root causes of this--and I will say it again--deliberately 
misleading the American people. But I think most people can see 
through it.
    I am sending a letter to Secretary Paulson today with some 
concerns that I have and some suggestions as well that--look, 
we all want to support efforts that have been made by Secretary 
Paulson and others. But I have to say it troubles me that the 
Treasury Department most recently has talked about committing 
$250 billion to a new effort that has arisen to provide help 
for banks, but Treasury has provided or suggested that we 
provide $250 billion without modifying a single loan. And I do 
not believe that is what Congress intended. So I think the 
Treasury Secretary has more work to do and a lot more 
explaining to do. And the story, today I guess it is, in the 
Wall Street Journal about FDIC Chairman Sheila Bair about her 
concerns about the same topic, about the lack of action on 
modifications and foreclosure prevention.
    I think we need to see more urgency when it comes to loan 
modifications and getting this asset purchase program up and 
running, because I am hearing--and I am sure others are hearing 
this as well--from housing counselors in Pennsylvania that for 
the past 3 weeks, lenders who had previously worked with them 
are now refusing to return telephone calls. They do not know 
why since no one will talk to them anymore, but they suspect, 
as I do--and I think many suspect this--that banks are now 
holding back on modifying loans because they are waiting to see 
if they can sell them to Treasury first. And I think Treasury's 
lack of clarity is apparently causing banks and investors to 
sit and wait--the worst thing that could happen right now.
    While we attempt to learn from the mistakes of the past, we 
need to learn from the mistakes of the recent past as well, and 
Treasury needs to move more quickly to fully describe their 
plan to the American people, and especially to players in the 
marketplace. The Treasury also needs to commit to modifying 
more mortgages and making banks modify more mortgages as well.
    So we have a long way to go, and this hearing, I think, is 
a step in the right direction. It moves the ball down the field 
to understanding where we have been, where we are now, and 
where we need to go. But the last thing we need is a lot of 
blowhards who are throwing theories out and charges out in the 
political silly season to score political points. We do not 
need that. We do not need ideology, and we do not need 
politics. We need clear-headed thinking, and we need people 
that are committed to solving the problem and not scoring 
political points to get their base fired up for election day. 
That is not what we are doing here today, fortunately, but 
outside the walls of this hearing, there is a lot of it going 
on. We should condemn it, we should point it out, and make sure 
that those who are doing it have the bright light of scrutiny 
applied to their misleading tactics.
    Thank you.
    Chairman Dodd. Thank you very much, Senator, and I want to 
just mention briefly as well, I think Senator Akaka did it as 
well. Sheila Bair, President Bush's appointee to be the Chair 
of the Federal Deposit Insurance Corporation, formerly--I do 
not know if Members are aware of this. She was Bob Dole's legal 
counsel for years here in the Senate. She has just done a 
remarkable job, and I want to join in the voices commending her 
and thanking her for the work that she has done.
    I mentioned earlier about the work of this Committee. 
Senator Shelby and I have worked very closely together, as I 
have with all Members, and I try to call all Members of the 
Committee when we are doing things as well. And I want my 
colleagues to know that certainly Senator Shelby and I, even 
when we have disagreed, stay in very close touch with each 
other. And I want to thank Barney Frank on the House side, and 
Roy Blunt, a Republican. They were invaluable during the most 
recent effort to put together a package here of rescue.
    So there are a lot of good people up here working very hard 
on a bipartisan basis to get things done, and too often that 
gets lost. It is not as newsworthy when things like that 
happen, but it is worth noting and mentioning, and I am glad 
the Senator from Pennsylvania did.
    Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Well, thank you, Mr. Chairman, for 
holding what I think is a very important hearing on the genesis 
of the current economic crisis. You know, it is said over the 
mantel of the Archives Building, ``What is past is prologue.'' 
And I think that unless we come to understand what has happened 
here, we are destined to relive it again--something that I do 
not think any one of us wants to see.
    So as we navigate through what are treacherous waters, I 
think it is pretty critical to understand how we veered off 
course and ended up in uncharted territory.
    Now, there are some who say we need to close this chapter 
in our history and stop looking back, but to me that is like 
trying to diagnose a patient without looking at the medical 
records. We need to know what went wrong in order to prevent it 
from happening again.
    One of the major things that I personally believe led us to 
the conditions in which we are today is the administration's 
repeated mantra of regulatory relief, and now relief from that 
ideology is what I think we need. The administration was 
entranced with a mentality that Wall Street can do no wrong, 
but the inherent flaw in this thinking is that Wall Street is 
run by human beings who, like anyone else, are capable of greed 
and bad decisions. They need to be regulated by our regulators. 
But instead of being the cop on the beat, they were asleep at 
the switch.
    Time and time again, the administration turned an absolute 
blind eye to warning signs. For example, the Federal Reserve 
sat on authority to regulate predatory lending. Then the 
Securities and Exchange Commission took a hands-off approach on 
supervision. That net operating rule decision, one in which 
they unlocked billions of dollars that were there to cushion 
against the possibility of loans that might default, and then 
use the computer modeling of the banks themselves to determine 
what was risk and what was value is beyond--blows the 
imagination. This is delegating the regulatory responsibility. 
This is delegating the responsibility of being the cop on the 
beat to those who you are ultimately supposed to supervise. And 
in my mind, that did no good for the American people and the 
American taxpayers.
    In March, Mr. Chairman, of 2007--I have repeated this 
several times because it was a warning sign then. At a hearing 
that you chaired in these very chambers, I said then before the 
administration witnesses that we were going to have a tsunami 
of foreclosures. The administration said that was an 
overexaggeration. I wish they had been right and I was wrong. 
The reality is that we have not even fully seen the crest of 
that tsunami.
    And so the challenges were there early on, and the lack of 
the responsibility of regulators, I think, to regulate was just 
an incredible abdication of responsibility. And they took 
action only when the house of cards was falling apart.
    So I look forward to our witnesses today, some of them who 
have some extraordinary experience in the fields that the 
regulators of today pursue, but they had those experiences in 
the past, and I look forward to hearing some of their views and 
commentaries.
    Mr. Chairman, I appreciate your calling this hearing. I 
hope it is one in a series. I am not one to have a great degree 
of trust in an administration who got us into this mess to get 
us out of it as successfully as we all want to see, which 
means, again, oversight. And as we look at the rescue plan, I 
hope that you will consider at the appropriate time making sure 
that we have some oversight of what's going on in that rescue 
plan, because, you know, I want to make sure that, first of 
all, this funding that we are infusing into banks--which I 
think is a good idea. However, I also want to make sure that 
that infusion works its way into Main Street and does not just 
stay on Wall Street.
    Mr. Chairman, I think we have not done anywhere near what 
we need to do on the question of foreclosures. I find it ironic 
that we can keep a CEO in their office, but we cannot keep a 
family in their home. And this is the core of the issue--as you 
have so aptly said many times, this is the core of the issue of 
what has brought us to the credit problems that we are having 
in the country, the financial problems we are having. And it 
seems to me we would want to keep families in their homes and 
make them performing assets versus nonperforming assets, and 
everybody wins at the end of the day, as do communities. But we 
have not done anywhere near--I do not get the sense that the 
Treasury Department has any real commitment to trying to keep 
more families in their homes.
    And so I look forward to today's hearing, to the ones I 
hope you will continue to call in the future. But, above all, I 
hope that we will get in the next administration regulators who 
understand what their duty and obligation is, what their oath 
is. And at the end of the day, that oath is to protect the 
American people and its institutions so that, in fact, there is 
transparency, so that, in fact, there is honesty, so that, in 
fact, we know what the real value of assets are, so that we do 
not find ourselves in the set of circumstances we find 
ourselves today.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator. You may have 
just been walking in when I mentioned that our intention is, in 
fact, to have a series of hearings, either formal or informal, 
on both this issue and where we go from here specifically.
    Second, I am monitoring very carefully, and with designated 
staff, on a daily basis because some of the reporting 
requirements are on a 48-hour basis of the rescue plan. And 
then, third, looking at--and Senator Crapo has talked about it 
as well for a long time, which will require a lot more work, 
both informally and formally, about the structure, the 
regulatory reform structure that we need to put in place, 
sooner rather than later, obviously, but to begin that work 
even now to be able to offer to the new administration coming 
in some good work being done over these weeks before we convene 
after January 20th. So I thank you for those observations.
    In fairness, too, I should mention that Chairman Bernanke--
we have spent a lot of time with him over the last couple of 
years, but the Fed finally did, in July, promulgate regulations 
dealing with the 1994 law, and I appreciate him doing that. He 
also did stuff on credit cards, which I appreciate as well. 
Now, I would do more, and I think we ought to codify what they 
have done by regulation. But I would want the record to reflect 
that we appreciate the fact that Chairman Bernanke has moved on 
these issues.
    As I said earlier, the horse was out of the barn, in 
effect, when this happened, but, nonetheless, they have moved 
on those two fronts.
    With that, let me turn to our panel of witnesses, and I 
thank them immensely. Someone who has dedicated a tremendous 
amount of his life to public service, Arthur Levitt, Arthur, we 
thank you immensely for coming back. You are a familiar figure 
in this room. During your 8 years as Chairman of the SEC, you 
were here on numerous occasions. We worked on a lot of issues 
over the years, so I thank you for coming back. You served as 
the 25th Chair of the Securities and Exchange Commission, the 
longest-serving Chairman of the Commission ever in its history. 
And I for one do not mind editorializing and saying you did a 
great job, in my view, over the years.
    Before joining the Commission, Arthur Levitt served as the 
Chairman of the New York City Economic Development Corporation 
and Chairman of the American Stock Exchange, among many other 
things, but certainly very visible positions in those posts.
    He is sitting next to another very significant and 
tremendously successful public servant, Gene Ludwig. Gene, we 
thank you for being here this morning. Mr. Ludwig is the Chief 
Executive Officer of the Promontory Financial Group. He is the 
former Comptroller of the Currency where he was responsible for 
supervising federally chartered commercial banks and Federal 
branches and agencies of foreign banks. Prior to founding 
Promontory, Mr. Ludwig served as the Vice Chairman and Senior 
Control Officer of Bankers Trust Corporation/Deutsche Bank. 
Earlier in his career, Mr. Ludwig was a partner in the law firm 
of Covington and Burling.
    Next we will hear from the Honorable Jim Rokakis, who is 
Treasurer of Cuyahoga County. He has already been introduced in 
a sense by Senator Brown. Mr. Rokakis has served as the County 
Treasurer since 1997, and prior to this position, he served for 
19 years on the Cleveland City Council. He has been recognized 
for his outstanding work in Cuyahoga County. In 2007, he 
received the NeighborWorks America Local Government Service 
Award, the Leadership in Social Justice Award from Greater 
Cleveland Community Shares, and was named the County Leader of 
the Year by American City and County Magazine. We welcome you 
here this morning.
    And a good friend of mine whom I have known for many, many 
years, Marc Morial, who is President and CEO of the National 
Urban League, the Nation's largest and oldest civil rights and 
direct services organization. Mr. Morial joined the Urban 
League in 2003 where he was focused on a five-point empowerment 
agenda encompassing education and youth, economic empowerment, 
health and quality of civic life, engagement in civil rights 
and racial justice. Prior to joining the Urban League, Mr. 
Morial served for two terms as the mayor of New Orleans and was 
President of the U.S. Conference of Mayors and was a Louisiana 
State Senator. Marc, it is good to have you here before the 
Committee as well.
    And, last, we are going to hear from Eric Stein. Eric, you 
are going to join us at one point. You are not walking out on 
me now, Eric?
    Eric Stein serves as President for the Center for Community 
Self-Help and the Chief Operating Officer for Self-Help and its 
affiliates, Senior Vice President for the Center for 
Responsible Lending, a nonprofit affiliate of Self-Help 
dedicated to protecting homeownership and family wealth by 
working to eliminate abusive financial practices. Mr. Stein is 
on the Community Development Advisory Council of the Federal 
Reserve Bank of Richmond, and prior to joining Self-Help, Mr. 
Stein was Executive Director of CASA, a nonprofit housing 
developer, in addition to working for Congressman David Price 
and the U.S. Fourth Circuit Court of Appeals Judge Sam Ervin 
III. So you have had a long career as well, and we thank you 
for being with us.
    Arthur, we will begin with you this morning, and, again, 
thank you for being back before this Committee.

 STATEMENT OF ARTHUR LEVITT, JR., SENIOR ADVISOR, THE CARLYLE 
 GROUP, AND FORMER CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION

    Mr. Levitt. Thank you, Chairman Dodd and Senator Crapo, for 
the opportunity to appear before the Committee at this 
momentous time in the life of our markets.
    From where we stand at this moment in this deeply serious 
and destructive market crisis, we already know that there is 
plenty of blame to go around, but let me be clear about one 
point. We are here today not because of what happened this year 
or last, but because of at least two decades of societal and 
political adherence to a deregulatory approach to the explosive 
growth and expansion of America's major financial institutions.
    Furthermore, it is now readily apparent that our regulatory 
system failed to adapt to important, dynamic, and potentially 
lethal new financial instruments as the storm clouds gathered.
    The list of failures goes well beyond the Securities and 
Exchange Commission, but today I would like to focus my remarks 
on that agency.
    Right now, the key problem plaguing our markets is a total 
breakdown in trust, in investor confidence, in every 
institution that we have.
    Since 1934, a strong SEC--staffed by consummate 
professionals and led by independent-minded commissioners--has 
succeeded in maintaining investor confidence and helping to 
make our markets the envy of the world.
    Unhappily, over the past few years, the SEC has not lived 
up to this storied history.
    As the markets grew larger and more complex--in scope and 
in the products that they offered--the Commission simply failed 
to keep pace. As the markets needed more transparency, the SEC 
allowed opacity to reign. As an overheated market needed a 
strong referee to rein in dangerously risky behavior, the 
Commission too often remained on the sidelines.
    As this Committee examines the record, I believe it will 
find a lack of transparency, a lack of enforcement, and a lack 
of resources all played key roles. Allow me to highlight a few 
instances of these problems.
    After all the markets have undergone the past few weeks, we 
still do not know the full extent of the losses incurred by 
banks and other companies on mortgage-backed securities. A lack 
of information about where risk resides is keeping investors 
suspicious and out of the markets.
    One of the biggest steps we can take to bring to light a 
fuller picture of companies' financial health would be to 
expand fair value accounting to cover all financial 
instruments--the securities positions and the loan 
commitments--of all financial institutions.
    Yet in recent weeks, fair value accounting has been used as 
a scapegoat by the banking industry--the financial equivalent 
of shooting the messenger. If financial institutions were 
accurately marking the books, they would have seen the problems 
they are experiencing months in advance and could have made the 
necessary adjustments, and we might have diminished the current 
crisis.
    As the markets grew more complex, there was also a failure 
of oversight to keep up with growing and risky parts of it. The 
recent revelations about the CSE program are a glaring example 
of this problem.
    The last area where we have seen a deviation from decades 
of SEC history, tragically, has been the enforcement of the 
laws on the books.
    In part, this is the result of a lack of adequate 
resources. Budget and staffing levels have not kept pace with 
inflation or financial innovation. And recent procedural 
changes at the Commission have led to a lessening of the 
imposition of corporate penalties against egregious wrongdoers, 
a reduction in the corporate penalty in terms of penalty 
numbers over the past year and a demoralizing of the 
enforcement staff undermining their efficacy.
    Of course, resources alone will neither reinvigorate the 
SEC nor revive our markets.
    For the past 75 years, the Commission has been the crown 
jewel of the financial regulatory infrastructure and the 
administrative agencies because its leadership from both 
political parties--Chairmen like Kennedy and Douglas at its 
founding, and Ruder, Breeden, and Donaldson in recent times--
understood the importance of public pronouncements and signals 
sent to the market, signals that were far more important than 
any rule that was passed or regulation that may have been 
considered.
    Recently, at critical moments and on critical issues, the 
SEC has been reactive at best or has shown no real willingness 
to stand up for investors. And it is these moments that weaken 
the power of the agency and investors' faith in the markets.
    Looking forward, restoring trust in our markets will 
require rejuvenating the SEC. It is the only agency with the 
history, the experience, and specific mission to be the 
investor's advocate--a history earned under the chairmanship of 
individuals from both political parties. Losing that legacy 
would be devastating to our ability to regulate the markets and 
restore investor confidence.
    And let me be clear: A restoration of the SEC to its 
position from before this current slide simply is not enough. 
At this moment, we need a dramatic rethinking of our financial 
regulatory architecture--the biggest since the New Deal. And 
the SEC will need to undergo changes and evolve to keep pace 
with a dynamic marketplace.
    As we move forward in the process, we must make sure that 
there is an agency that is independent of the White House, 
dedicated to mandating transparency with robust law enforcement 
powers, with the wherewithal and knowledge to oversee and, if 
necessary, guide risk management, and built around one mission: 
protecting the interests of investors.
    If we do, investors will know that they have someone in 
their corner, that the markets will be free and fair, and then 
they will invest with confidence.
    Thank you.
    Chairman Dodd. Thank you very much, Chairman Levitt. I want 
my colleagues to know as well that I invited both Bill 
Donaldson and former Chairman Breeden to be with us. Both 
wanted to be here this morning, but schedules would not permit 
it. But they are going to come. I am going to ask them back and 
they would like to come back and be here. And the point you 
made--I wanted both of them to come--both were Republican 
nominees. These issues should not necessarily be rooted just in 
politics, as you pointed out. We have had some very good Chairs 
of the SEC, and Bill Donaldson and Chairman Breeden I think 
fall into that category. I am glad you mentioned both their 
names. As I pointed out, we tried to have them here this 
morning, but their schedules did not allow them to be here, but 
I am glad you brought their names up.
    Gene Ludwig.

    STATEMENT OF EUGENE A. LUDWIG, CHIEF EXECUTIVE OFFICER, 
   PROMONTORY FINANCIAL GROUP, AND FORMER COMPTROLLER OF THE 
                            CURRENCY

    Mr. Ludwig. Mr. Chairman and Members of the Committee, I 
commend you for your leadership in holding these really 
important hearings on the origins and impact of the crisis 
developing--evolving in the financial services world. 
Understanding the root causes of our predicament will allow us 
to restore our economy and install a regulatory framework that 
can withstand the challenges of the technology-driven 21st 
century.
    I am honored to testify before your Committee, Mr. 
Chairman, and to contribute my thoughts and answer any 
questions you have.
    The increasingly painful and heart-stopping developments in 
the United States and global financial systems are not the 
result of mere happenstance. We are in the midst of a historic 
sea change, particularly in the American financial system, 
indeed in the direction of the American economy itself. The 
paradigm of the last decade has been the conviction that un- or 
underregulated financial services sectors would produce more 
wealth, net-net. If the system got sick, the thinking went, it 
could be made well through massive injections of liquidity. 
This paradigm has not merely shifted--it has imploded.
    This paradigm implosion is rooted in fundamental imbalances 
in our economy and financial system, as well as regulatory 
structures and crisis response mechanisms that are outdated, 
including importantly:
    Consumerism run riot, made worse by domestic fiscal laxity 
and modern financing techniques;
    A deterioration in market conduct, brought on by a short-
term profitability horizon, aided and abetted by technology and 
globalization;
    A regulatory hodgepodge involving absent or inadequate 
regulation of the predominant portion of our financial system 
and procyclical policies that have not been well conceived;
    And, finally, a misguided belief that in financial storms 
we should let bare-knuckled, free-market capitalism as opposed 
to compassion and balance rule the day.
    By understanding these root causes of our predicament, we 
can rebuild from the ashes of the current burnout.
    For decades we have looked to the consumer as the key 
driver of our economy. Taken in proportion this is a good 
thing. However, consumerism has been taken to an extreme, 
propelled by policies that have resulted in a negative savings 
rate of historic proportion. Policymakers' excuses that 
negative savings were not a problem because home prices were 
rising only caused the consumer to dig a bigger hole for 
himself. Home and hearth became the consumers' ATM machine as 
home equity and other consumer loans leveraged the American 
consumer to the hilt. Such excess would inevitably lead, as it 
did, to a financial wildfire.
    The actual sparks that ignited the fire began to fly in the 
early months of 2006. It was at this moment when house prices 
begin to level off and fall while at the same time there was an 
explosion in the use and availability of novel, low-quality 
mortgage instruments designed to ``help''--and I put ``help'' 
in quotes--consumers pump every dollar possible out of their 
homes.
    Our grandparents' generation would have recognized the 
``help'' consumers were getting from financiers and from 
Government for what it was. Consumers were not being helped. 
They were being enticed to mortgage not just their homes but 
their futures and the future of their children on national and 
personal deficits based on thin promises. The notion that home 
prices would climb forever and that we could spend our way to 
financial and national success was accepted unblinkingly. 
Interest rates held too low for too long, excess liquidity, and 
structural fiscal and trade deficits based on an imbalanced tax 
regime benefited the sellers at the expense of those who really 
could not afford what they were buying.
    And this excess, this lack of sound standards, was turbo-
charged by the plentiful oxygen of model-driven, structured 
financial products. Importantly and unfortunately, these highly 
leveraged products, based on misunderstood and often inaccurate 
ratings, were distributed throughout the world. Derivatives 
with even thinner capital bases were in turn piled on top of 
this mountain of structured products. Acronyms for plain old 
excessive, underregulated leverage--SIVs, CDOs, CDOs squared, 
swaps, swaptions--lulled us into a false sense of high-tech 
financial complacency.
    A second major area of failure that brought on the current 
conflagration has been a marked deterioration over the last 
several years in market conduct by too many financial services 
players--mostly, but not only, the un- and underregulated 
financial intermediaries. So mortgage brokers sold consumers 
mortgages that were too often inappropriate for their 
circumstances in exchange for outsized fees. More heavily 
regulated financial institutions sliced, diced, and bundled the 
inappropriate mortgages, selling them off to other 
intermediaries or end purchasers, feeling no compunction 
because they held no principal risk.
    This turn away from traditional relationship finance based 
on customer care and high integrity standards has been 
facilitated in part by the increasing financial use of 
technology and by globalization. Through increasing speed and 
scale, the face-to-face linkage to the consumer has been 
attenuated. This has made rules fashioned for a bygone era 
harder to apply.
    Finance is in many ways an information business, and the 
technological revolution we have been living through has been 
essentially an information technology revolution. The computer 
has allowed global connectivity, mathematical/financial 
modeling, and savings to scale that have created entirely new 
financial products, and allowed, if not driven, rapid and 
extraordinary consolidations and concentrations on a global 
scale unthinkable a decade ago. It has also placed financial 
firms further away from the end-use consumer.
    In a sense, technology, plus globalization, plus finance 
has created something quite new, often called ``financial 
technology.'' Its emergence is a bit like the discovery of 
fire--productive and transforming when used with care, but 
enormously destructive when mishandled.
    Like anything new and dangerous, we should have handled 
this financial technological fire with great care, with 
appropriately cautious regulation, with concerns about those--
particularly low- and moderate-income Americans--who were 
touched by it in numerous ways but by no means understood it. 
But instead of more cautious regulations in this new more 
dangerous era, we took the regulatory lid off.
    Over approximately the last decade, the country has been in 
the thrall of a deregulatory viewpoint which has left us with 
too few financial regulatory firefighters too far away from 
where the fire started and where it has burned the hottest. We 
have allowed a huge portion of our financial system--perhaps as 
much as 80 percent--to go un- or underregulated. Indeed, going 
into this crisis, official Washington not only did not know 
where all the pockets of mortgage-related risk were; they did 
not know the magnitude of the risk itself.
    At the same time, the regulated portion of the system has 
been unevenly regulated. Some aspects of bank regulation--for 
example, in the anti-money-laundering area--have been very 
heavily regulated with tens of millions of dollars of fines and 
enforcement actions being piled on enforcement action. Other 
aspects of finance--for example, credit standards, 
securitizations, suitability of products for customer usage--
have been markedly less strictly regulated.
    To add insult to injury, as a result of history and not 
logic, we have a bank and securities regulatory system that has 
been unflatteringly referred to as the ``alphabet soup'' of 
regulators. This alphabet soup of regulators has exacerbated 
the problem of overregulation in some areas and created gaping 
holes in other areas. For example, the ``special investment 
vehicles,'' the SIVs, which were a great portion of the bank 
subprime mortgage risk, were off-balance-sheet bank holding 
company constructs that were essentially completely 
unregulated.
    As if this were not enough, over the past decade we have 
allowed a number of procyclical and largely untested policies 
to grow up that are wholly inappropriate and way too rigid. 
What I mean by procyclical is that regulatory, accounting, and 
policy standards and practices tend to move in the same 
direction as the broader economy. The result is a sort of 
amplifier effect, in which both good times and the bad times 
are reinforced as their effects are rapidly transmitted through 
the economy. And one way to think about it is that the failure 
of our regulatory, accounting, and policy standards and 
practices to exert a moderating influence at all times is what 
makes the highs so high and the lows so low; that is to say, 
this procyclicality that we have built in now to our accounting 
and other regulatory systems actually exacerbates these swings 
in the cycle which we are living through right now.
    Now, while procyclicality bias sounds rather abstract, it 
is a real weakness of our financial system with which 
policymakers must grapple. Some countries already have, as a 
matter of fact.
    Now, how does procyclical bias present itself in clinical 
terms? We see it in our accounting rules. The concepts around 
mark-to-market accounting and the relatively recent reliance 
upon accounting formulas instead of judgments in establishing 
loan loss reserves clearly added to the financial catastrophe. 
Mark-to-market accounting by definition cannot work when 
markets cease to operate correctly. Likewise, we have relied on 
rigid new accounting rules and models to set loan loss reserves 
with a mark-to-market methodology that has left the reserves 
too thin to do their job in difficult times.
    More subtle, but of even greater importance, is the 
accounting governance mechanism that disconnects accounting 
rulemaking from business and economic reality, as well as from 
the public policymaking framework. This has resulted in some 
rules that run contrary to the time-honored principle that 
accounting should reflect, not drive, economic reality.
    Now, every bit as important, perhaps more important even 
than our off-kilter accounting rules and rulemaking, is that 
our regulators have allowed short-term pressures to rule our 
financial institutions. Compensation schemes, too, have 
rewarded executives for short-term results. All of this has 
forced our financial institutions, their senior executives, and 
their boards to ``keep dancing'' when times were good even 
though they knew in their hearts that the music would stop with 
a thud.
    Further, Basel II capital standards, though less of an 
obvious cause, are certainly not a help in these troubled 
times. Basel II Pillar 1 is itself too new, too procyclical, 
too complicated and model-driven. There is no evidence that it 
in any way has helped in the crisis, and there is evidence that 
it was overly procyclical.
    To summarize, gobs of liquidity, consumers on a binge, new 
highly combustible financial tools, and little effective and 
overly procyclical regulation has resulted in a financial 
firestorm. It is as if the modern tools of finance were used to 
create their magical new fire of finance in the center of our 
living rooms, filled with highly combustible furniture, and not 
in a properly regulated fireplace.
    Too little, too late. To add insult to injury, the response 
to the rising heat of the fire was a series of too little, too 
late steps based on an ideology that the market could take care 
of itself. Bureaucracies proved less flexible than was 
necessary. Our responses to the conflagration were typically 
taken after the next fire broke out, not before.
    The capstone of this initial phase of the effort was the 
decision to allow Lehman Brothers to fail. To my mind this is 
what started the financial panic, egged on by the failure to 
support the preferred stockholders in the Fannie and Freddie 
nationalizations and the decision to treat AIG so differently 
from Lehman Brothers.
    And the panic got out of control because we have allowed 
short sellers and rumor mongers to roil instead of calm the 
markets on the one hand and have not had sufficiently flexible 
circuit breakers to give the markets a bit of a time out on the 
other.
    The TARP, the liquidity facilities being created by the 
Federal Reserve, and the nationalization of parts of the 
financial system will ultimately get the economy under control. 
Ultimately. The key is for the Fed and the Treasury to act 
vigorously and liberally now with the use of these facilities 
to remove the much discussed stigma of seeking Government 
support and move these facilities forward. And I still worry 
that there is a disconnect between policy and bureaucracy, one 
that can and should be bridged with great haste at this time.
    It is clear that the deregulatory mantra of the last decade 
is dead. The real question is how far do we go in terms of 
regulating the financial system. Do we in essence nationalize 
it, making banking all but a public utility? I fervently hope 
not. But we have to massively change how we have been 
regulating and supervising. We have to take better control of 
the revolutions in technology and globalization. We have to get 
the fire back in the fireplace.
    In order for America to enjoy the benefits of a modern 
financial system that can allow it to move readily to help 
rebuild our factories, hospitals, schools, and homes, we need a 
new regulatory framework, one suited to a technology-driven 
financial system of the 21st century. Let me quickly go through 
what I think are the nine key points we need.
    One, sound finance must start with fair treatment of the 
consumer and much higher standards of market conduct. I think 
this is the No. 1 heart of the problem. We must have a 
financial system that starts with the consumer and with higher 
standards of market conduct. We cannot allow any American to be 
knowingly sold inappropriate financial products as has just 
taken place too often in respect of subprime and Alt-A mortgage 
products. For all the good we are doing to bolster the 
financial system, we will have won the battle and lost the war 
if we fail to redouble our commitment to keeping homeowners now 
in their homes.
    No. 2, all financial enterprises should be regulated within 
a unified framework. In other words, financial enterprises 
engaged in roughly the same activities that provide roughly the 
same products should be regulated in roughly the same way. The 
same logic must apply to institutions of roughly the same size. 
They should be under roughly the same regulatory regime. Just 
because an institution chooses one charter or one name does not 
mean it should be able to manipulate the system and find a 
lower standard of regulation.
    Three--and I appreciate your patience--the U.S. must 
abandon our alphabet soup of regulators and create a more 
coherent regulatory service. We have a system that is rooted in 
a proud history, that includes exceptionally fine and dedicated 
public servants, and that in many ways has served us well in 
the past. But it is now beyond debate that a banking regulatory 
framework with its roots in agrarian 18th century America is in 
urgent need of a radical 21st century change in our global 
economy. However, the secret to effective regulation is not how 
we move around the boxes. Mashing the alphabet noodles into one 
incoherent glob will not make the concoction taste any better. 
What we need is a much more effective regulatory mechanism. We 
have to take the whole effort up a notch. We have to put the 
time and energy into determining both what regulations are 
effective and what regulations place pure counterproductive and 
bureaucratic burdens on institutions.
    We need to professionalize financial services regulations. 
We have college degrees for everything from carpentry to 
desktop publishing to commercial fishing, yet we do not have 
full courses of studies, degrees, or chairs at major 
universities in supervision and regulation. America is, in 
fact, blessed with many talented and dedicated examiners and 
supervisors, almost despite our system, not because of it.
    We need to deleverage the financial system--this is a very 
important point--deleverage the financial system and country as 
a whole and restrain excess liquidity buildup. In this regard, 
we have to encourage savings, eliminate the structural Federal 
budget deficit, and contain asset price bubbles before they get 
so large that pricking them brings down the economy.
    We must reverse the tendency of the last decade to have 
procyclical regulatory and accounting policies. Mark-to-market 
accounting is clearly flawed and must be materially reworked.
    Finally, we need to align financial rewards for executives 
with the well-being of their companies and the stakeholders 
they serve. Clearly, financial institution governance is off 
kilter. And to give a king's ransom to traders and other 
financial executives who have in essence beggared their 
companies and then walked away from a shipwreck to a 
comfortable retirement is pernicious. At the same time, 
executives who take the wheel, stay with the vessel, and steer 
it through stormy seas deserve to be fairly compensated.
    These are but a few elements of what must be a greatly 
changed financial services system. I have also submitted for 
the record a lecture I was asked to deliver on this topic 
recently before the International Conference of Banking 
Supervisors, which provides a more detailed description of my 
thoughts on this matter. For America to continue to be a leader 
in the world and for finance to serve the needs of our people, 
we cannot wait. We must start now to learn from our mistakes 
and move forward and rebuild.
    Thank you very much.
    Chairman Dodd. Thank you very much, Mr. Ludwig. I 
appreciate it.
    Mr. Rokakis.

STATEMENT OF HONORABLE JIM ROKAKIS, TREASURER, CUYAHOGA COUNTY, 
                              OHIO

    Mr. Rokakis. Thank you, Mr. Chairman and Members of the 
committee, for the opportunity to speak to you today. I am the 
Treasurer of Cuyahoga County, Ohio, the State's largest county, 
representing Cleveland and 59 cities, villages, and townships.
    While the events of the past several months have focused 
the attention of the entire financial world on the practices of 
the subprime lending industry, we have suffered the 
consequences of reckless and irresponsible lending for many 
years. Since the late 1990's, Ohio and Cuyahoga County have 
consistently led the Nation in this sad statistic of 
foreclosure filings.
    Consider these numbers. In 1995, 3,300 private mortgage 
foreclosures were filed in Cuyahoga County and about 16,000 in 
the State of Ohio. By 2000, the number in Cuyahoga County had 
more than doubled to over 7,500 private mortgage foreclosures 
and over 35,000 in Ohio--better than double the number for 5 
years earlier. In 2006, there were 13,000 foreclosures--13,600, 
actually, filed in Cuyahoga County; 15,000 filed in Cuyahoga 
County in 2007. And, sadly, we are on pace to foreclose on an 
additional 15,000 properties in Cuyahoga County in 2008.
    I am accompanied here today by Professor Howard Katz, a 
professor of law from Elon University, who was our Director of 
Strategic Planning in Cuyahoga County back in 2000. Professor 
Katz and I approached the Federal Reserve Bank of Cleveland in 
the fall of 2000 to ask for their help in controlling the 
reckless lending practices that were doing real harm to 
Cleveland neighborhoods, harm I describe in detail in an 
article I wrote for the Post entitled ``Shadow of Debt.'' We 
knew the Fed had the authority to act under HOEPA, the Home 
Ownership Equity Protection Act, and under the truth-in-lending 
laws. Our hope was that the Fed would step up once they knew 
the extent of the problem. That was our hope. The Fed 
cosponsored a 1-day conference in March of 2001 entitled 
``Predatory Lending in Ohio'' where we discussed potential 
solutions, Federal, State, and local. Our keynote speaker, Mr. 
Chairman, was Ed Gramlich, the late Fed Governor who passed 
away in 2007. We had contacts from the Fed that said that late 
Governor Gramlich understood the nature of the problem. As we 
all know now, he had warned Fed Chairman Greenspan about the 
need to regulate these practices. Nothing of substance came 
from this conference. In frustration, local ordinances were 
passed later that year in Cleveland, Dayton, and Toledo to try 
to slow down the practices of the mortgage bankers and brokers. 
Within 90 days of these ordinances passing, the Ohio 
Legislature passed a law pre-empting the right of Ohio cities 
to regulate in this area.
    In early 2005, I approached the U.S. Attorney of the 
Northeast District of Ohio, U.S. Attorney Greg White, and 
requested a meeting of Federal and local officials to deal with 
these practices from the enforcement side. We knew we were the 
victims of fraud on an industrial scale. This meeting included 
U.S. Attorney White, other Assistant U.S. Attorneys, FBI 
agents, and postal inspectors where we begged that Federal 
authorities make this enforcement issue a high priority.
    I still remember one Assistant U.S. Attorney making the 
point that they had received not a single complaint from any of 
the mortgage banks involved in these loans. He asked me, and I 
remember, ``If they aren't complaining, who are the victims?'' 
Well, Mr. Chairman, the victim was the homeowner who lived on a 
stable street and woke up 1 day and found that there was a 
vacant house next to him, and a month later one across the 
street, and a year later three more on that street. That entire 
neighborhood was victimized by this, and as we have come to 
learn now, Mr. Chairman, the victim is the entire world.
    For the record, a very limited number of prosecutions came 
as a result of these meetings. The only significant 
prosecutions in our community have been by the county 
prosecutor's office. We tried, Mr. Chairman and Members of the 
Committee, we did try. We were ignored. There were others who 
tried to warn the Federal Government about this problem, the 
Fed, but we were no match for Wall Street.
    Mr. Chairman, I would like to take my remaining time to 
discuss the attempts, as you have and others here, to pin this 
entire crisis on the Community Reinvestment Act of 1977. You 
all know what the CRA is, what it does. I do not need to get 
into the details. But if you really want to understand how 
silly this allegation is, all you need to do is look at the 
lending data for the city of Cleveland.
    The peak year for home purchase mortgage origination in 
Cleveland was 2005. A local nonprofit research organization, 
the Housing Research and Advocacy Center, has analyzed the HMDA 
data for that year. They found that of the top ten mortgage 
originators in the city that year, only four were affiliated in 
any way with local depository banks, and those four accounted 
for less than 15 percent of the total mortgages originated.
    Of the 7,100 Cleveland mortgages reported in HMDA data that 
year, 1,258--almost 18 percent--were originated by the now 
defunct subprime lender Argent Mortgage. Argent was never 
covered by the CRA.
    The second largest Cleveland lender that year was New 
Century Mortgage, also now defunct, with about 5 percent of the 
total.
    The third largest lender, also accounting for about 5 
percent, was Third Federal Savings, which I have to say, Mr. 
Chairman, there are some heroes in this crisis. Third Federal 
Savings and Loan has been one of the few really good guys in 
this industry, at least in our community. They have done an 
outstanding job. They did not make these kinds of loans.
    Numbers 4, 5, and 6 and others on that list, again, were 
companies like Aegis, Long Beach Mortgage, and others, which 
were not covered by CRA.
    Finally, way down that list, we get to banks like Charter 
One, National City, and Fifth Third, but they each only had 
about 3 percent of the market, adding up to about 648 loans. 
Did they make these loans to help their parent institutions' 
CRA ratings look better? Possibly. Did these 648 loans play a 
major role in the city's default and foreclosure crisis? 
Hardly.
    I realize I am out of time, but I would like to just point 
to one bit of statistic. As dangerous as mortgages, Mr. 
Chairman and Members of the Committee, were the home refis. If 
you look at the home refi data, you will find that they, first 
of all, equaled the number of home purchase mortgages. Refis 
have been very destructive in our community, have resulted in 
many foreclosures. And if you look at the refi data, Mr. 
Chairman, only 7 percent of those loans were made by CRA-
affiliated institutions.
    The foreclosure crisis in Cleveland for the last 6 years 
has not been driven by CRA-covered depository banks, even 
though some of them--notably National City--were minor players. 
The problem has been driven by Argent, New Century, Aegis, 
Countrywide, Long Beach, and others, dozens of other subprime 
and high-cost loan peddlers with no local depository services 
and no CRA obligations in our community.
    Thanks for the chance to be on this distinguished panel.
    Chairman Dodd. Thank you very, very much. I appreciate your 
testimony.
    Marc.

  STATEMENT OF HONORABLE MARC H. MORIAL, PRESIDENT AND CHIEF 
            EXECUTIVE OFFICER, NATIONAL URBAN LEAGUE

    Mr. Morial. Thank you very much. It is almost afternoon, 
but good morning.
    Let me, first of all, say that I am proud to be here on 
behalf of the National Urban League, its 100 affiliates who 
exist in all of the States and cities represented by Members of 
the Committee. I am also here representing the Black Leadership 
Forum, an umbrella organization of some 30-plus African 
American-focused organizations from coast to coast. I serve 
this year as its Chair.
    I come today to set the record straight about what I call 
the ``financial weapon of mass deception,'' the ugly, 
insidious, and concerted effort to blame minority borrowers for 
the Nation's current economic straits. This financial weapon of 
mass deception, as false and outrageous as it is, has taken 
hold, thanks to constant and organized repetition and 
dissemination through the media, political circles, newspapers, 
and the Internet.
    It is not a harmless lie. It is a stretching of the truth 
for fleeting political advantage. It is an enormously damaging 
and far-reaching smear designed to shift the blame for this 
crisis from Wall Street and Washington, where it belongs, onto 
middle-class families on Main Streets throughout this Nation.
    For years, the National Urban League and others have raised 
the flag and urged Congress and the administration to address 
the predatory lending practices that were plaguing our 
communities. For example, in March of 2007, I issued the 
Homebuyers Bill of Rights in which I called upon the Government 
to clamp down on predatory lending and other practices that 
were undermining the minority homebuyer and homebuyers of all 
races. Unfortunately, not only did our call go unheeded, but 
also we spent time right here in this Congress fighting back 
efforts to preempt the ability of States to regulate predatory 
practices. Now disaster has struck.
    Many of those who caused it are trying now to blame 
communities of color and urban communities and those measures 
that helped clear the way for qualified people to purchase 
homes--most notably the Community Reinvestment Act. In fact, it 
was the failure of regulatory policy and oversight that led to 
this debacle that has been completely expressed by every one of 
the three witnesses that have gone before me.
    But I want for the record to share with you some plain and 
simple facts, stubborn facts, Senator Dodd. It was Wall Street 
investors--not Fannie Mae and Freddie Mac--who were the major 
purchasers/investors of subprime loans between 2004 and 2007, 
and we have a chart that demonstrates this very clearly that we 
will make a part of the record.
    No. 2, while minorities and low-income borrowers received a 
disproportionate share of subprime loans, the vast majority of 
subprime loans--the vast majority--went to white middle- and 
upper-income borrowers. The true racial dimensions of the 
housing crisis have been reported in places like the New York 
Times, and that is expressed by another chart.
    Third, African Americans and Latinos were given subprime 
loans disproportionately compared to whites, according to 
ComplianceTech, a leading expert in lending to financial 
services companies, researcher to financial services companies. 
Also, African American borrowers were more than twice as likely 
to be scared into a subprime loan as white borrowers.
    In each year from 2004 to 2007, non-Hispanic whites had 
more subprime rate loans than all minorities combined.
    In 2007, 37 percent of African American borrowers were 
given subprime loans, versus 14.21 percent of whites, according 
to ComplianceTech. More than 53 percent of African American 
borrowers were given subprime loans compared versus 14 percent 
of whites, according to ComplianceTech.
    The vast majority of subprime rate loans were originated in 
largely white census tracts.
    The volume of subprime rate loans made to non-Hispanic 
whites dwarfs the volume of subprime rate loans made to 
minorities.
    In each year, the white proportion of subprime rate loans 
was lower than all minorities, except Asians.
    I want to point out that while the majority of subprime 
loans did go to white Americans, African Americans and 
Hispanics were disproportionately steered into subprime loans. 
At the end of the day, this is a problem that affects Americans 
of all races, and I urge this Committee to strongly and 
publicly not only affirm that but to challenge the false 
assumptions being peddled by the agents of mass deception.
    Upper-income borrowers--upper-income borrowers--had the 
highest share of subprime rate loans during each year except 
2004, where middle-income borrowers had the highest share. The 
misconception is that lending to low- and moderate-income 
Latinos and African Americans caused this problem. The stubborn 
facts, not hidden but in the Mortgage Disclosure Act, clearly 
affirm this point.
    It is clear that a large number of people who ended up with 
subprime loans could have qualified for a prime loan, and the 
incentive system set up for brokers and originators which 
incentivized steering people into higher-rate loans was one of 
the causes of this.
    Non-CRA, as the Treasurer mentioned, financial services 
companies--non-CRA financial services companies were the major 
originators of subprime loans between 2004 and 2007.
    These facts are unequivocal. They are clear. And they are 
indisputable. There have been commentators, some who hold a 
great deal of respect, who write and broadcast, some members of 
the other side of this Congress, who for some reason have 
peddled this story of mass deception as though they were 
reading off a set of political talking points.
    As we have seen in numerous Internet blogs, highly 
trafficked sites, this baseless blame game has turned into 
vicious attacks on the Internet directed at African Americans, 
Latinos, Jews, gays, and lesbians.
    In the last few weeks, I have undertaken an aggressive 
campaign directed at the Nation's financial leaders to dispel 
this myth. I have written to Treasury Secretary Paulson and 
Federal Reserve Chairman Bernanke and asked that they publicly 
refute claims by these pundits and politicians that most of the 
defaulted subprime loans at the root cause of the crisis were 
made to African Americans, Hispanics, and other so-called 
``unproductive borrowers.''
    On the basis of hearsay, on the basis of rumors, on the 
basis of statements made by respected commentators, the seeds 
of division around this financial crisis are being sown in this 
Nation. History tells us too many times that the consequences 
of singling out only certain segments of the population as 
culprits for the Nation's woes for us not to do all within our 
power to stop these attacks, to end this smear campaign in its 
tracks, requires--and I would ask and urge that this Committee 
join us in the strongest possible terms available to stand up 
to this lie, to stand up to these agents of mass deception, to 
stop the waste of discussion and time being spent on blaming 
victims and force, as this Committee seeks to do, a healthy 
debate on what must be done to curb too much Wall Street greed 
and too little Washington oversight. This hearing is an 
important start toward that.
    So I urge you to stay focused and take strong and positive 
steps to strengthen our communities and this Nation's financial 
foundation through regulatory reform.
    Finally, with respect to regulation, I want to encourage 
the Congress not to leave it to the rulemaking authority of the 
Federal Reserve to regulate anti-predatory lending. I urge this 
Congress, I urge this Committee to take the lead, as you 
suggested, Senator Dodd, to codify the boundaries going forward 
for the type of loan products that financial services companies 
are going to be able to offer to the American people.
    No. 2, an area of failed oversight and regulation not 
mentioned thus far has been the failure to enforce fair lending 
laws. Both the Department of Justice and the Department of 
Housing and Urban Development ought to be called to account, 
ought to be called to be transparent, on where they were as 
this crisis has fomented, because they, too, have a very 
important responsibility in enforcing laws on the books.
    No. 3, the Community Reinvestment Act is a very important 
vehicle that has yielded great benefits for this Nation. The 
idea that it has been assigned responsibility and blame for 
this crisis is so far-fetched, so imaginary as to almost not 
merit a response. But we know that there are those who for 
years have held it close on their legislative agenda to try to 
water down, to try to eliminate, to try to undercut the 
Community Reinvestment Act. I would suggest that at a time when 
the taxpayers of this Nation have been asked to take an 
unprecedented move--that is, to authorize the Treasury to 
invest taxpayer dollars in the preferred stock of financial 
services corporations--then the direction that the Congress 
should take in exchange and in return is not a weakening of the 
Community Reinvestment Act, but a strengthening of the 
Community Reinvestment Act and its enforcement mechanisms.
    So, Senator Dodd, I thank you for your leadership. I urge 
the Committee to take a very strong stand, and I thank you for 
your time today.
    Chairman Dodd. Thank you very, very much, Mayor. And let me 
just on that point, before turning to Mr. Stein, I am somewhat 
reluctant to quote the Wall Street Journal on this point, but 
the Wall Street Journal noted that between 60 and 65 percent of 
subprime borrowers actually would have qualified for 
conventional mortgages; 60 to 65 percent of those borrowers 
would have qualified for less costly mortgages.
    As you may recall, for those who were here, we had the 
first hearings and had the representatives from the Brokers 
Association. We put up the Web page, and the first instruction 
to brokers from their association was, ``Convince the borrower 
that you are their financial adviser.'' The most deceptive of 
practices. They were anything but the financial adviser to the 
borrower. And as a result, literally thousands and thousands of 
people ended up with mortgages vastly more expensive than ones 
they qualified for. That is criminal, in my view.
    And to make your point, let me just quote on the last 
point--or the first point you made in your testimony, just to 
make your point, this is a commentator that wrote an article 
called ``They Gave Your Mortgage to a Less Qualified 
Minority.'' And let me quote, if there is any doubt about what 
you just said. Listen to this quote:
    ``Instead of looking at outdated criteria, such as the 
mortgage applicant's credit history and ability to make a 
downpayment, banks were encouraged to consider non-traditional 
measures of creditworthiness, such as having a good jump shot 
or having a missing child named Caylee.'' The article goes on 
to say that, and I quote, ``Ultimately, the housing bubble 
burst and, as predicted, food stamp-backed mortgages 
collapsed.'' The article goes on and refers to this kind of 
mortgage crisis ``as an affirmative action time bomb that has 
gone off.''
    If there is any doubt about what Mayor Morial just said, 
that is the kind of articles that are appearing all across the 
country, and the data is, of course, entirely the opposite. The 
facts are entirely the opposite. And so I appreciate immensely 
you testifying this morning about this theory that is being 
promulgated.
    I remember Paul Sarbanes, who chaired this Committee--he is 
a great friend of mine, a great Chairman of this Committee. 
Chuck Schumer and I--he was a House member in those days, in 
1999, we sat up all night on that 1999 law to fight those on 
this Committee and elsewhere who did everything in their power 
to get rid of the Community Reinvestment Act, and we prevailed. 
I think, Bob, you may have been in the House that year, maybe 
on the Banking Committee. But I will never forget staying up 
until 5 and 6 o'clock in the morning to fight to keep the CRA. 
And so I appreciate very much your testimony.
    Mr. Morial. Thank you, Mr. Chairman.
    Chairman Dodd. Mr. Stein, welcome.

  STATEMENT OF ERIC STEIN, SENIOR VICE PRESIDENT, CENTER FOR 
                      RESPONSIBLE LENDING

    Mr. Stein. Good afternoon. Chairman Dodd and Members of the 
Committee, thank you for the opportunity to testify.
    In the middle part of this decade, Wall Street demand led 
to literally trillions of dollars of subprime and Alt-A loans 
to be originated. What was interesting about it was that Wall 
Street paid more the more dangerous the loan was. For example, 
in 2004, Countrywide, if they gave a borrower a fixed-rate 
conventional mortgage, they received 1 percent. If they put 
that exact same borrower in a subprime loan, they received 3.5 
percent.
    It is not a surprise that they paid their originators more 
if they put that borrower in the more expensive loan, the one 
that statistically has been shown more likely to cause a 
foreclosure.
    Wall Street then bundled these mortgages into mortgage-
backed securities, and credit rating agencies, paid by the 
issuers only when they are issued, found many too many of them 
to be AAA quality. And then they were sold around the world.
    In 2006, the top five investment banks earned $1.7 billion 
in revenues structuring and packaging these subprime mortgage-
backed securities. These are the loans that helped cause the 
housing bubble, and what they have in common, the subprime and 
the Alt-A loans, are that they start at what seems like an 
affordable level, but built into the structure of the loan is 
unsustainability. They start cheaper, but then they get more 
expensive. There is no free lunch in a mortgage. And that is 
what they have in common, and that helped build the housing 
bubble because people were put in a larger loan than they could 
actually afford, and on the flip side, once the bubble burst, 
it caused the massive foreclosures that we have now because 
when the housing bubble was going up, that unsustainability was 
masked. Once people could not afford the mortgage, they could 
refinance or they could sell. When the bubble comes back down, 
they no longer have those options, and that is why we have the 
foreclosure crisis that we have today. This leaves the 
question: This is what Wall Street was doing. Where were the 
regulators? I will not repeat what has been said. I will just 
identify a couple, and my testimony goes into more regulatory 
failings.
    The first is the Federal Reserve. Back in 2000, my boss 
testified, and Chairman Leach, I remember him saying that the 
Federal Reserve is AWOL because they received the authority to 
prevent abusive lending in 1994 and had not used it.
    The second one that I would like to mention is the Office 
of Thrift Supervision. They allowed Washington Mutual and 
IndyMac to push abusive mortgages until they failed and did not 
even put them on the watchlist until right before they failed, 
so the FDIC could not clean them up sooner.
    It is clear now that a lack of common-sense rules, like how 
about only making a loan if the borrower can afford it, 
actually impeded the flow of credit beyond anybody's wildest 
dreams. Many of us who were trying to get the regulators to 
crack down on predatory lending abuses were fighting a 
defensive action in Congress, saying don't preempt the State 
laws that are there, since the proposed bills would have made 
the situation worse. And the regulators would always say, ``We 
cannot stop the free flow of credit,'' and we can see the 
results today.
    Since the problem is rooted in excessive foreclosures, the 
solutions must start there. I would like to identify five very 
briefly.
    The first is that Congress should lift the ban on judicial 
loan modifications, which would allow hundreds of thousands of 
families to have their loans restructured and stay in their 
homes at no cost to taxpayers. We are spending $700 billion 
when we can do something that is free.
    In Chapter 13 bankruptcy, the only secure debt that cannot 
be modified is the home on the principal residence, whereas 
loans on a yacht or investment property can be modified now. I 
would like to illustrate that point for a second.
    If you consider Candace Weaver, who is a school teacher 
from Wilmington, North Carolina, in 2005 her husband had a 
heart attack, and she refinanced her mortgage with a lender 
called BMC. She received what seemed like a reasonable rate, a 
little bit high, 8.9 percent. Two years later, it turns out--
she was not told this--it was an exploding 2-28 subprime 
mortgage. The rate goes up to 11.9 percent, which she just 
could not afford. She was diagnosed with kidney cancer and had 
surgery scheduled. She called the servicer and said, ``I cannot 
make my July payment. This payment is too high. I can barely 
make it. But I cannot make the July payment because of 
surgery.'' The servicer said, ``I am sorry. I cannot even talk 
to you until you are delinquent.''
    She had the surgery, became delinquent because she could 
not keep it up, called again, and they said, ``We cannot talk 
to you until you are in foreclosure.''
    Then she can't keep up, she actually goes into foreclosure, 
calls again, and they say, ``OK, we will give you a repayment 
plan. Make your current payments of 11.9 percent, and on top of 
that catch up the past payments that you did not make,'' which 
she could not do. The bankruptcy judge cannot help her even 
though she could afford a market rate mortgage.
    Consider, on the other hand, Lehman Brothers. They were 
among the biggest purchasers and securitizers of subprime 
loans, earning hundreds of millions of dollars. They were a 
huge investor in these mortgages at 30:1 leverage, which caused 
their failure, and hurt everybody. Finally, they owned a 
mortgage lender named BMC, the exact same lender that is 
potentially costing Ms. Weaver her home--hopefully not because 
she has representation now.
    The Wall Street Journal investigated BMC Mortgage and found 
widespread falsification of tax forms, cutting and pasting 
documents, forging signatures, ignoring underwriter warnings. 
Lehman Brothers last month, as everybody knows, went to 
bankruptcy court. They can have their debts restructured, but 
Ms. Weaver cannot.
    The second thing I would focus on is for Treasury under the 
TARP program to maximize loan modifications, as some of the 
Senators have mentioned. Whenever Treasury buys equity in a 
bank, buys securities from a bank, buys a whole loan or 
controls a whole loan, they should do the streamlined 
modification program that Sheila Bair is doing at FDIC. What 
she does is target an affordable payment, first by reducing the 
interest rate, then by extending the term, then by reducing 
principal if you need to. And they should focus on a 34-percent 
debt-to-income ratio, which is the target in the Attorney 
General settlement with Bank of America over Countrywide.
    The other thing that they should do, which I think you had 
something to do with, Senator Dodd, is to guarantee modified 
mortgages, which would be cost-effective, but you need to make 
sure that the mortgage is modified well. But that could be a 
powerful tool.
    The third thing I would suggest is go ahead and merge OTS 
into OCC. They have not proven up to the challenge.
    Fourth, the Federal Reserve should extend their HOEPA rules 
to cover yield-spread premiums, broker upselling, and, second, 
extend the subprime protections to nontraditional mortgages. 
Those are problematic now, too.
    And, finally, Congress should pass the Homeownership 
Preservation and Protection Act--two things to mention there--
that Senator Dodd sponsored and many Members of the Committee 
co-sponsored. This would stop abuses. First, no preemption. If 
there is preemption, there should not be a bill because the 
States are doing all they can. And, second, if anything is 
clear by now, it is that Wall Street will pay best money for 
mortgages and loans that help their short-term profits and that 
originators will supply those if they are paid well for it. But 
that is not necessarily the same thing as a long-term 
sustainable mortgage for the homebuyer. Purchasers need a 
continuing financial incentive to ensure good lending through 
the imposition of strong assignee liability.
    Thank you very much.
    Chairman Dodd. Well, thank you very, very much, and just on 
your last point, my intention is if we have a lame-duck 
session, which we are apt to have after the elections, and if 
there is a package that may move forward, a stimulus package, 
my intention is to take the predatory lending bill which we 
craft in this Committee, along with the credit card 
legislation, along with a moratorium on foreclosures--and there 
is one other item--the bankruptcy provisions that would deal 
with that single home that people have, in a package then and 
ask our colleagues to support those measures. We have done a 
lot here for the financial sector of our economy. We have not 
done anything yet, in my view, very significantly, for the 
consumer side. And so in November my hope is we can package 
that together, make it part of that stimulus package that may 
be forthcoming, and give our colleagues a chance to do 
something before the Christmas holidays. It might provide some 
relief for people. Ten thousand a day. Every day that goes by--
every day that goes by, imagine. And as you point out so 
accurately, when you get into the court proceeding, as people 
told me in my own State yesterday, once you are in that court 
proceeding, too often the lender says, ``I would like to help 
you, but I am instructed I cannot do anything now. We have to 
complete the legal process.'' And I am getting a thousand a 
week of those in Connecticut, and I know other States are going 
through many more as well.
    Well, let me raise some questions here, and I will put up a 
brief clock because you have been very patient, all of you.
    We have talked a lot about CRA, and I think that is 
important. But also, the second theory--and, again, I thank my 
colleagues here and I thank Barney Frank and his colleagues in 
the House--that after many years of debating and discussing 
what to do about the GSEs, we actually did it this year. And as 
pointed out, I think by Sherrod Brown, or others, in 2005--Mike 
Oxley deserves a lot of credit. He and Barney Frank put 
together a bill, and it had 331 supporters in the House, 90 
opponents. Then came in Senator Sarbanes, offered that 
proposal, slightly modified, to appeal to people over here, and 
it went down on a party-line vote. That was the bipartisan bill 
that would have done something in 2005. But what this Committee 
finally did this year is make those modifications and 
corrections.
    But there is this story going around, this was all about a 
Fannie and Freddie problem, and I wonder, Mr. Stein, if you 
might address that issue. To what extent is there accuracy in 
that? Is there a legitimacy in that argument? Or is it 
overstated, in your view? And I will ask anyone else on the 
Committee who wants to comment on this your own thoughts. What 
is the true answer to that question?
    Mr. Stein. I think it is substantially overstated. I think 
Fannie and Freddie followed the market. They did not lead the 
market. They did purchase the senior tranches of AAA subprime 
securities, and that was a bad idea because they are supporting 
a bad market, and they end up not to be very good loans. But 
these were the marketable AAA tranches that others would have 
purchased, and as someone mentioned earlier, those percentages 
declined as the subprime market went way up.
    The problem is that people conflate the subprime securities 
with what caused Fannie and Freddie to have financial problems, 
but actually, those were the Alt-A mortgages talked about 
earlier that did not document income. Those are the higher-
income borrowers. Those actually diluted their affordable 
housing goals. Ten percent of their mortgages are Alt-A 
mortgages; 50 percent of both Fannie's and Freddie's losses are 
Alt-A losses.
    The critique that if Fannie and Freddie had not purchased 
those securities that subprime abuses wouldn't have happened is 
ridiculous because they were originated by Wall Street, Wall 
Street packaged and promoted the products, the originators were 
making those loans, and often the people saying Fannie and 
Freddie are to blame do not want any sort of regulation on the 
people that actually made the mortgages and made them happen. 
So I think it is a pretty weak argument.
    Chairman Dodd. Any other comments?
    Mr. Morial. I wanted to add one other point. When Fannie 
and Freddie sort of followed the market, they relaxed a 
critical underwriting rule that they had followed for years, 
and that was the rule that they would purchase mortgages where 
the homebuyer had been through pre-purchase counseling as a 
mandatory requirement. And my understanding is that that rule 
got relaxed to some extent because they had pressure from the 
sellers who said, ``I can sell to somebody else now. I do not 
need to sell to you, and all of your sort of requirements are 
too burdensome for the type of business that we want to do.''
    So it is an affirmation of what this Committee has strongly 
supported twice in the last year, and that is, an increase in 
investment in homeownership counseling. I think any view toward 
a new system, if you will, for housing finance in this country 
ought to place heavy emphasis on pre-purchase homeownership 
counseling. I believe the data will show that the default rates 
and the foreclosure rates are less where purchasers have had 
the benefit of homebuyer education prior to purchase.
    Chairman Dodd. I agree.
    Gene or Arthur, do you have any comment on this issue that 
has been raised, the Fannie and Freddie argument?
    Mr. Ludwig. We really need to rethink how Fannie and 
Freddie----
    Chairman Dodd. Do you want to turn your microphone on?
    Mr. Ludwig. We have to really rethink, Mr. Chairman, how 
Fannie and Freddie fit in our financial system.
    Chairman Dodd. I agree with that totally.
    Mr. Ludwig. They have been really beat on in the last 8 
years as orphans that do not need to exist, and that may or may 
not be true, but we have not had an architecture of how they 
really fit.
    My own belief is that they are very important props and 
should have been key factors in solving the current crisis. But 
they frankly were so constrained earlier in the decade that 
they were not in a position to be able to help.
    Chairman Dodd. Arthur, any thoughts on that subject matter?
    Mr. Levitt. I think with adequate supervision and adequate 
regulation, they are an important part of our market.
    Chairman Dodd. Let me, if I can, I wanted to get Gene 
Ludwig, if I could, to pick up on this. And, again, we heard 
the comments on CRA, and, of course, you had dealt directly 
with this issue when you served as Comptroller of the Currency, 
and you have some insight into the experience with CRA.
    At the time you were Comptroller, OCC worked with other 
banking agencies to overhaul CRA regulations, and you have had 
experience supervising CRA lending and investment by banks. I 
wonder if you could tell us about whether CRA helped to fuel 
the current economic crisis in your view. And on the topic of 
CRA, I would like to--well, I read that comment earlier. I 
wonder if you could just pick up on those thoughts as well 
about the pernicious argument being posed by those who suggest 
the CRA was a part of this or a major cause of this problem.
    Mr. Ludwig. Mr. Chairman, I commend you for focusing on 
this very important matter, and I share the views expressed by 
the other members of the panel today. CRA is about our better 
instincts, it is about a better world. I have done a study for 
the Boston Federal Reserve and the San Francisco Federal 
Reserve which will be published in January at their request on 
this very topic. And the notion that CRA has caused this 
problem is a pernicious thought. It goes to your comment that 
this is just not--these are not truthful statements. And my 
panelists have covered it very accurately. This just is not the 
case. CRA has helped to create a better and sounder world for 
finance, not the opposite.
    Chairman Dodd. Well, thank you.
    Mr. Levitt. I think a market that has to be believed in by 
public investors has to be fair and open. And I must say the 
testimony we heard before was absolutely inspiring because it 
has not been fair and open. It has been loaded with innuendo 
and statements that, as Americans, we should all find 
appalling.
    Chairman Dodd. Arthur, let me ask you, if I can, about 
something you have raised already in your opening statement, 
but I want to pursue it a little further with you, and it will 
be my last question before I turn to my colleagues.
    SEC Chairman Cox testified before this Committee on 
September 23rd of this year about, and I quote, ``a regulatory 
hole that must be immediately addressed, the $58 trillion 
national market in credit default swaps, which,'' he noted, 
``is regulated by no one. Neither the SEC nor the regulator has 
authority over the CDS market even to require minimal 
disclosure to the market.'' And he asked Congress for the 
authority to regulate.
    What role did the absence of such authority, in your view, 
have in the current crisis? And which specific authorizations 
would you recommend be given to the SEC to regulate over-the-
counter swaps and other credit derivatives?
    Mr. Levitt. This is an issue that came up in 1998 when the 
President's Working Group was confronted with a recommendation 
by the Chairman of the CFTC to regulate swaps. Chairman 
Greenspan felt that this would cast trillions of dollars of 
outstanding contracts into a situation of what he called 
``legal uncertainty.'' All 20 or so members of the working 
committee, with the exception of Brooksley Born, supported 
Chairman Greenspan, as did I.
    We also called for a clearinghouse to be established to 
give greater transparency. Unfortunately, we did not mandate 
that clearing facility. As I reflect back upon that period, I 
wish that I had probed further. I wish that I had asked for 
swaps and derivatives to be given the transparency which has 
led to many of the problems that we face today.
    What do we do now? I think no longer can we assume that 
these are instruments used by sophisticated investors, and the 
fact that they are unregulated, listed on no exchange, and have 
permeated our markets at every level no longer allows that 
condition to continue.
    I believe that an SEC, CFTC, a merged entity, should have 
oversight of the whole derivatives market, should have 
oversight in a way that is reasonable and practical and cost-
effective. If I could wave a magic wand and do away with 
derivatives, I would not do it. They have been a valuable, 
important, essential, liquefying factor and risk-protecting 
factor in our markets. However, as I believe Gene said before, 
improperly used, their impact can be devastating.
    We are entering what I believe will be a decade of 
transparency. In that connection, I think derivatives must be 
more transparent. I think the agencies to do that are the CFTC 
and SEC. I do not believe that that should be--that our 
regulation should be Fed-centric, as outlined in the 
Secretary's blueprint. I think that blueprint marginalizes many 
other agencies, including the SEC. And I think in terms of 
investor protection that would be a tragic mistake.
    Chairman Dodd. One other quick question on this. Can you 
make the correlation between what you have just said and the 
crisis? People talk about these derivatives, and I do not know 
if it has been clearly explained about why those instruments, 
as they have been working, actually have affected the very 
crisis we are in, connecting the dots between the two. I do not 
think that has been well done.
    Could you do that for us?
    Mr. Levitt. Well, what derivatives essentially are, they 
represent leverage on leverage, having narrowed the margin of 
error. If you traded stocks or bonds or mortgages in the past, 
and a mistake was made, you had time to correct that mistake. 
With derivatives it is a millisecond. And the problem is that 
we are talking about trillions of dollars without a clearing 
facility to be able to tell us whether Customer A can complete 
a transaction with Customer B. And I dare say that a lot of 
these contracts without a clearinghouse simply do not have 
counterparties to account for them.
    We will find out more about that as the Lehman Brothers 
bankruptcy winds its way through the courts. The key issue here 
is a clearinghouse. The ultimate failure that we talk about in 
terms of systemic failure in the United States in my judgment 
is a clearance failure. We have clearinghouses with respect to 
stocks and bonds and options. It is unthinkable that we have 
yet to have a clearing facility for these derivatives.
    Chairman Dodd. And a lot of these instruments, of course, 
we are talking about some of the subprime mortgages.
    Mr. Levitt. Yes. They were packaged----
    Chairman Dodd. That is my point. So that is the point. 
These were these things moving through with the subprime. That 
is the piece that I think is missing in this.
    Yes, Gene, do you want to comment?
    Mr. Ludwig. Yes, Mr. Chairman, I agree with what Arthur 
said. They are one part of what has become a faceless, high-
technology liquification. It is as if you sort of have huge 
amounts of liquid pouring into homeowners' living rooms, 
opportunities to borrow, new opportunities to mortgage 
themselves. It is one piece of a chain that is faceless, where 
people who are part of it are not connected in any way to the 
end-use customer. And getting this right has to start with 
making sure that the end-use customer, the product is safe for 
that person's use, and making sure that up the chain people 
have a sense of responsibility for the risks they are taking 
on, which has not been part of it. The derivatives tend to 
explode this because they tend to be highly leveraged, but it 
is one part of a bigger puzzle, sir.
    Chairman Dodd. I thank you both very much.
    Mr. Morial. Senator Dodd, I am going to have to excuse 
myself. I want to thank you and----
    Chairman Dodd. Let me turn to my colleagues here and see if 
they have a question for you before you walk out of the room.
    Senator Brown. I do not, Mr. Chairman.
    Chairman Dodd. Thank you, Mayor, very much.
    Senator Brown. Thank you, Mayor.
    Mr. Morial. Thank you very much. Thank you.
    Chairman Dodd. Senator Brown.
    Senator Brown. Thank you, and thank you, Mayor Morial, for 
your public service and----
    Chairman Dodd. Thank you, Mayor, very much.
    Senator Brown. Mr. Rokakis, I will start with you. I have 
several questions. Secretary Paulson testified before our 
Committee on the need for intervention 3 weeks ago to shore up 
financial markets. As you know, while he originally sought 
authority to purchase troubled assets, he now appears to be 
heading in a direction that some of us preferred, which is 
buying a stake in troubled companies.
    All along, one of the things that I know troubled you and 
troubled a lot of us on this Committee is the ineffectiveness 
of either of these approaches in addressing the underlying 
problems in the housing market.
    One suggestion that has recently been made is to buy up all 
the troubled mortgages at face value. While I am sympathetic to 
the goal of helping homeowners, this proposal strikes me as 
pretty generous to the people who got us in this mess in the 
first place.
    I understand that in the home you lived in growing up, the 
vast difference between the mortgage value versus the actual 
value that you have talked about publicly and privately. Give 
me your thoughts on that.
    Mr. Rokakis. Thank you, Senator Brown. If you buy these at 
face value, you are going to guarantee billions and billions of 
dollars of losses for the U.S. Government. I have testified 
before Senator Schumer's Committee in particular about Argent 
Mortgage. Argent was a wholly owned subsidiary of Ameriquest, 
now out of business. Argent Mortgage did not make a single loan 
in Cuyahoga County in 2002. By 2003, they led in two 
categories: mortgages issued and foreclosures. They led in that 
category in 2004, 2005, and 2006. The negative equity of the 
Argent loans in Cuyahoga County is probably somewhere in the 
nature of $300 to $350 million. I used this when I came to the 
earlier Committee. Maybe we showed the color-coded graph. 
Virtually all of these loans were made for at least 150 to 175 
to 200 percent of the auditor's value. If you buy those--first 
of all, that was then, but this is now. We are talking about 
many thousands of foreclosures later. Those properties may have 
been worth that much when the mortgage was issued, that much 
less, but they are worth even less now. Many of them are empty. 
They have been gutted. They are in communities where there are 
a lot of additional properties that are empty as a result of 
this foreclosure crisis.
    If you buy them at face value, Mr. Chairman, Members of the 
Committee, you are guaranteeing yourself, I believe, tens of 
billions of dollars of losses. I cannot speak for other 
markets. I can only speak for what I have seen in Ohio and 
particularly Cleveland.
    Senator Brown. Thank you, Mr. Rokakis.
    Mr. Levitt, it seems like among all the other things we 
have outsourced is the enforcement of investor and consumer 
protections over the past few years. Whether it is the mayor of 
Cleveland forced to sue lenders or the New York Attorney 
General stepping in on repeated occasions, it does not seem 
like these days the SEC has particularly done its job. Some at 
the SEC might argue it lacks authority.
    My question is: Is that true, it lacks authority? And if 
so, didn't the leadership of the SEC have an obligation a long 
time ago to ask for greater authority?
    Mr. Levitt. I do not believe the SEC does lack authority. I 
think the SEC is starved for resources. They have not been 
given--as a matter of fact, they rejected additional funds that 
were offered to them by appropriating committees.
    Senator Brown. When was that, Mr. Chairman?
    Mr. Levitt. I beg your pardon?
    Senator Brown. When was that that they rejected----
    Mr. Levitt. Sometime over the course of the past 2 years, 3 
years. I will get back to you with the specific time of that. 
But so much of what the SEC does, as I said in my statement, is 
the sending of signals, the speeches given, not the rules that 
are passed. And those signals simply have not been sent.
    Shareholder access to the proxy, a terribly important 
issue. It has been bubbling around for 10 years now, and the 
Commission failed to act. A non-binding shareholder vote on 
executive pay, again, bubbling around for some years. The 
Commission did not act.
    Over and over and over again, the message was sent that 
this Commission is not an investor-friendly Commission. I do 
not think this is a question of authority except with respect 
to such issues as derivatives. There clearly we are in an 
unregulated area, and a lot of us were responsible for not 
calling attention to this early on. There is more I could have 
done while I was there, and the condition grew worse and worse 
and worse.
    I do not believe this is a question of giving the SEC 
authority that they lack. I think it is a question of the SEC 
properly utilizing that authority, reinvigorating their 
Enforcement Division, which has been demoralized by a variety 
of factors. Giving them more cops on the beat, allowing them to 
send a message which only they can send that they truly are the 
investor's protector.
    Senator Brown. Thank you, Mr. Levitt. One last question, 
Mr. Chairman, if I could.
    The 40,000 angry e-mails and letters and calls I received 
told me--and they have said it repeatedly--that this is not a 
natural disaster, this is a man-made one. I would guess, I 
would say likely, that most of the 40,000 believe that some of 
this behavior was illegal. There seems to be certainly no self-
imposed accountability.
    Mr. Ludwig, while we do not really know the facts yet, do 
you think the architects of this disaster might be held 
accountable by the law?
    Mr. Ludwig. There clearly are victims here, and there 
clearly are violations of the law without question. That is a 
big part of it. It is not the whole part of it. We are at a 
time in history, Senator, where the entire system needs to be 
radically remade in this country. There are parts of it that 
simply will not function if not markedly changed. But it starts 
with the consumer. There clearly were elements here where 
people were cheated badly, and they were victims, and there 
needs to be accountability.
    Mr. Levitt. I agree with that totally. I think there are so 
many areas in corporate America in recent years of bad behavior 
that has disillusioned the public. The pre-dated stock options, 
the misdeeds in San Diego of the custodians of the pension 
fund--these are all areas that could have been front-page 
headlines with regulators doing the right thing.
    Regulators cannot capture every bit of wrongdoing, but they 
can bring and promote signal cases to deter practices of that 
kind. And we need much more of that than we have had.
    Senator Brown. Mr. Stein, any thoughts you have on 
potential criminal activity, without, again, knowing all the 
facts? And I do not ask you to be more specific than you can--
--
    Mr. Stein. We have a little litigation arm that represents 
borrowers such as Ms. Weaver that I mentioned. The converse of 
victims were fooled is people doing the fooling, and I do not 
know anything worse than stealing somebody's home and ruining 
somebody's neighborhood, ruining an economy. So I think there 
should be accountability. I think there should be.
    Senator Brown. Thank you.
    Thanks, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you all 
for your testimony. It has been very elucidating and I 
appreciate it.
    Chairman Levitt, let me ask you, you know, I appreciate 
your responses to the Chairman on the whole question of credit 
derivatives is a market that grew to over $62 trillion in value 
and only $6 trillion in loans, so it gives you an example of 
the need for the transparency there. But isn't there even a 
greater need for transparency across the system? You know, 
right now we have a lot of calls to undo the mark-to-market 
system. And we do not even know the full extent of the losses 
of the risky investments. To this date, we still do not know. 
And there is a lack of information of what that risk is that is 
posing one of the most significant underlying problems here.
    What do you say to those who say let's undo mark-to-market?
    Mr. Levitt. I think we are entering a decade of 
transparency. Everything that we do, every rule that is made, 
every regulation that is considered for the next 10 years will 
be viewed in terms of is it transparent.
    In that connection, I cannot possibly accept a notion of 
saying that the banks can take a product that may well be worth 
what they paid for it at the end of a certain period of time 
and consider that it is worth it right now. I believe in mark-
to-the-market. I think the U.S. and global economies do have 
cycles. They did before we had mark-to-the-market accounting, 
and I think they will afterward. But it is not mark-to-the-
market anything that created or made worse the cycles, 
including the present crisis. It was created by lenders making 
bad loans they could not collect on, thereby taking capital out 
of the system. Accounting has only informed the public of what 
those losses were. As loans began to reset after these 
unconscionable gimmicky loans were created and then 
securitized, as foreclosures grew more homes came into the 
market, and eventually supply overtook demand, depressing home 
prices at a faster rate. As losses got worse, as more homes 
went into foreclosure, accounting only informed the public 
that, in fact, it was getting worse.
    So I understand the problem of valuing instruments that are 
so difficult to value, and there are no absolutes here. I think 
we have got to look to some way to deal with this, but I feel 
very strongly that mark-to-the-market is a principle that is so 
much part of an era of transparency.
    Mr. Ludwig. Senator, I agree with much of what the Chairman 
said, that is, Chairman Levitt. But there is clearly a problem 
here with mark-to-market accounting that has to be fixed, and 
the best way I could describe the problem is that if any of us 
had to sell our house in 24 hours and in this market we said, 
OK, I have got to sell my house in 24 hours, whatever it costs, 
somebody might offer you 10 percent of what your house is 
worth. To say that that house, your own house, which you may 
have paid $200,000 for, is now worth $10,000 because you had 
only 24 hours to sell it in a very bad market is not, in 
common-sense terms, the true value of that house.
    Mark-to-market accounting by its term presupposes there is 
a functioning market. And the problem we have had over this 
really once-in-a-hundred-year cycle is that there has not been 
a market. So there clearly has to be honesty and transparency 
in our accounting principles, but what we cannot do is what you 
cannot do when there is no market.
    One method that has been suggested in these kinds of 
circumstances that can be used is to cash-flow. If the loan is 
cashflowing, if you are getting payments on time, it is clearly 
not worth zero. It is worth more than that.
    So this is an area, I think, that deserves some 
considerable study. We, of course, do not want to just throw 
the baby out with the bath water. But mark-to-market accounting 
when there is no market has not served wholly well.
    Senator Menendez. I understand that, and I----
    Mr. Levitt. It is not a simple matter, but my only thought 
here is that I think it would be a dreadful mistake for 
Congress to get involved in the standard-setting process. It is 
such----
    Chairman Dodd. I promise you we will not do that. I have 
fought that for years up here.
    Mr. Levitt. It is like base closings.
    Chairman Dodd. Don't go down that road.
    Senator Menendez. Well, I understand what you said, Mr. 
Ludwig. I am concerned--and maybe there is not a market at 
present, but those who advocate for its elimination are not 
talking about a temporary suspension or an adjustment. And that 
is the core principle. At the end of the day, part of what we 
have here was listening to the credit rating agencies and the 
lack of what they needed to do and the chain of the 
responsibility to investors here. And so in my mind, if you now 
cannot value--if you do not have a transparency as it relates 
to valuation, how do you ever make the right judgments, whether 
you are an investor, whether you are a regulator at the end of 
the day. And so there has to be some reasonable valuations that 
are real, not in the desired world but in the real world, 
because, otherwise, I think that is such a slippery slope that 
leaves the door open to revisit this set of circumstances 
again.
    Mr. Ludwig. I agree with you, Senator, and I agree with the 
Chairman that the Congress is very difficult to make accounting 
rules. That is why I said in my testimony I think we really 
need to look at the governance mechanism for how those rules 
are made. That I think is a very big issue. And right now the 
governance mechanism is not really closely tied to the policy-
setting mechanism in Washington, and that is something I think 
ought to be considered.
    Senator Menendez. Let me ask one last question here. We saw 
a lot of efforts at self-regulation. You know, I mentioned in 
my opening statement the net operating rule, and then unlocking 
billions of dollars that were meant as cushions against loans 
that ultimately might go back. And then the cushion was gone, 
and then you had the set of circumstances where you used the 
banks' own computer models to determine risk instead of 
independently determining that risk and exercising the 
appropriate oversight as a regulator on behalf of investors and 
our whole financial market.
    Shouldn't that be rejected as a potential form of 
regulation, self-regulation?
    Mr. Ludwig. I think that you have hit on something very 
important, Senator. There is a fox-in-the-henhouse issue that 
you are focusing on that just common sense, we all know that it 
has got to be monitored. And we have seen it evolve, and 
whether it is--it is in all kinds of self-regulatory proposals.
    It is fine to have industry groupings and self-regulatory 
efforts. That is a fine thing. But you always have to have the 
referee, the cop on the beat, the independent party, the 
regulator that really controls at the end of the day the 
playing field. That is essential. And, accordingly, something 
like Basel II has to, I think--the capital standard rule for 
banks--be looked at very, very cautiously as we move forward. 
So it really is the Government, the referee, that sets the 
standards with a bright line the people can rely on and 
industry can participate in that but should not be controlling 
it.
    Senator Menendez. I will just close. I cannot fathom for 
the life of me how if I have the responsibility--this is like 
the cop on the beat. You know, the reason we have police 
officers in our society is we expect everybody to obey the law. 
But the reality is not everybody does. And by the same token, 
it is a deterrent. We are maybe stopped at that red light, and 
we are very late for a meeting, and we are late for a meeting, 
and we are tempted to take it, but we do not because, No. 1, it 
would be violating the law; No. 2, you know, there may very 
well be a cop on the beat that is going to stop us. But if 
there is no cop on the beat to enforce the law, at the end of 
the day there will be people who will take the red light.
    This is exactly what--in my mind, I do not know how you 
delegate the responsibility, the authority, and the oath to be 
a regulator and then to delegate that responsibility to the 
very industry that you are regulating. It is fine for them to 
have it as high standards internally for them to pursue. But in 
my mind, it is not right for the regulators to go ahead and 
delegate their authority at the end of the day.
    Mr. Levitt. I would agree that total delegation would be a 
mistake, but I do not know of any regulatory agency in 
Government that has the means to totally regulate their 
industries. And in a number of instances, many instances, self-
regulation as an adjunct to the process of oversight, if there 
is appropriate oversight, is the very best way of doing it. The 
SEC could not possibly do the job that they do without the 
mechanisms of the NASD and the various stock exchanges. They 
have to be fast to crack down on them if they blow it, which 
they do periodically. But they are a useful adjunct, and I 
would not do away with----
    Senator Menendez. Would you have supported the net 
operating rule decision as it was pursued?
    Mr. Levitt. No, I would not have.
    Senator Menendez. Thank you.
    Mr. Stein. Senator, can I make one follow-up comment on 
that? I fully agree with that last comment that the regulators, 
even if they are empowered and even if they are motivated, 
which they have not been recently, are not enough to stop the 
abuses, which is why I mentioned the assignee liability in my 
oral statement, that they cannot do it alone. There are 
millions of transactions going on there. And what we know is 
that investment banks will not act against their financial 
interest if it would provide a sustainable loan for borrowers, 
and so we need the marketplace to police itself by putting 
incentives on the purchasers of loans as well.
    Chairman Dodd. That is a very good point.
    I am going to leave the record--I have two or three quick 
questions. I wanted to point out, Senator Menendez asked a very 
good question and one that we have spent a lot of time talking 
about, and that is the mark-to-market or any changes in that. I 
presume people are aware of the SEC Office of the Chief 
Accountant and FASB, of course, which is the Accounting 
Standards Board, staffs on September 30th issued guidance to 
provide more flexibility on valuation under fair value 
accounting or mark-to-market.
    For example, it said--and I am just quoting this here: 
``When an active market for a security does not exist''--as 
Gene Ludwig pointed out--``the use of management estimates that 
incorporate current market participant expectations of future 
cash-flows''--which you have also talked about--``and include 
appropriate risk premiums is acceptable.''
    Let me tell you, having worked on this Committee, I know in 
the past we had some very critical moments when people wanted 
to legislate accounting standards, and Congress has certain 
capacities. That is not one of them. And do I have rigorously 
opposed over the years to have Congress get involved in this. 
But certainly we ought to get involved if there is a standard 
here that is going in the wrong direction.
    How do you quickly react to the guidance issue?
    Mr. Levitt. I think the guidance is an appropriate 
responsiveness on the part of the SEC to a very difficult 
problem. I do not dismiss the notion of the fact that at this 
time of opaqueness in our markets, where we are getting a 
surprise a day, a restatement a day, the signal being sent that 
we are suddenly giving up something as transparent as mark-to-
the-market would be a mistake.
    Chairman Dodd. I agree. All right. That would be a total 
mistake in my view, and I agree with you on that completely.
    Let me ask three quick questions and ask you to be brief if 
you could on them. Gene, you mentioned one thing earlier in 
your opening statement that I just wanted to pursue, and that 
is consumer protection issues. As I pointed out in my opening 
statement, in the past they have been sort of treated as 
nuisances from time to time, to put it mildly, and they have 
failed, I think, historically. And we have failed up here as 
well, I might add, in making the inextricable link between 
safety and soundness of our markets and consumer protection. We 
have treated them as if they were kind of separate things. One 
was sort of important, the other far less important.
    I wonder if you might just comment on that nexus between 
consumer protection and the safety and soundness of our 
systems.
    Mr. Ludwig. Mr. Chairman, that comment is very wise, and I 
could not agree with it more. There is clear linkage between 
safety and soundness and consumer protection. After all, you 
could have called the standard in bank regulation ``safety and 
safety,'' but they did not. They called it ``safety and 
soundness.'' And what did soundness really mean when our 
forefathers put that word in? They meant something of high 
integrity, of probity. It was in the concept to begin with. It 
got lost. And in today's day and age, it is even more important 
that concepts of probity, of integrity, of compliance, of 
consumer protection be inextricably linked with supervision. 
And why? Because in a global environment where the consumer is 
more and more disassociated with this long chain of funding and 
of huge combines of institutions, faceless institutions, that 
consumer, that linkage, which is at the heart of a financial 
transaction, must be protected and must be part of the way the 
system thinks of a financial transaction. Because unless we do 
that at our regulatory mechanisms, these global huge 
enterprises will forget it.
    So you are absolutely right. We have to make this linkage 
much tighter than we ever have before, and for the own safety 
of the financial institution. If you have a financial 
institution--take some of the ones that have been beat up in 
the press, say Lehman Brothers, and they are views as 
disreputable because they are selling disreputable products, it 
affects their base safety and soundness in a palpable way that 
has never been true before. So I could not agree with you, Mr. 
Chairman, more.
    Chairman Dodd. Let me ask quickly Mr. Stein and Mr. Rokakis 
this question. I raised in my opening statement, again, the 
issue of the HOEPA legislation in 1994 that required--it was 
not a request; it was a requirement--that there be regulations 
promulgated to protect against deceptive and fraudulent 
practices in the residential mortgage market, and nothing 
happened for 14 years. Let's assume nothing had happened for 
10. If 4 or 5 years ago regulations had been promulgated--and 
look at the ones that came out this July. Let's just assume 
that is what sort of emerged. We will not try to pretend they 
are a higher standard, just the ones the present Fed has put 
out. Could we have avoided this mess we are in today?
    Mr. Rokakis. Mr. Chairman, if you look at what happened in 
July, just look at the rules that were promulgated--prohibiting 
loans without regard to making good on that loan; the repayment 
of the loan; requiring creditors to verify income; banning 
prepayment penalties in the first 4 years of an ARM was 
involved; rules against the pressuring, against the coercion of 
appraisers--if those rules had been put into effect back when 
they went to the Fed, let's say 2001 or even 2002 or 2003, the 
outrageous lending practices that accelerated between 2003, 
2004, 2005, and 2006 I think would have been prevented, or 
certainly slowed down, and I think we would be in a different 
position here today.
    Chairman Dodd. Mr. Stein.
    Mr. Stein. I agree. About half of all foreclosures now are 
due to subprime loans, which is about 11 percent of mortgages 
originated. And the problem with those loans is that people 
cannot afford them. Half of them were undocumented income. They 
had prepayment penalties that statistically increased 
foreclosure.
    So, I agree, had those rules been promulgated even 4 years 
ago, a lot of the subprime foreclosures that we have seen--I 
would say the significant majority--would not have happened. It 
would not have addressed the Alt-A loans, which is kind of the 
second wave. We have a chart in our testimony of the resets. 
The subprime resets come first, and the Alt-A resets come 
after. That is why it is important for them to extend it to 
Alt-A, the protections to Alt-A, and the protections would not 
have helped that unless it changed the culture of originations.
    Chairman Dodd. Thank you for that. Let me jump quickly to 
one more subject matter.
    Today's Wall Street Journal reports that, ``Even after 
receiving an emergency loan that gave the Government an 80-
percent ownership stake, American International Group, AIG, is 
spending money to lobby States to soften new controls on the 
mortgage industry.''
    The Journal goes on to report that State regulators say 
that, ``AIG is currently working to ease some provisions in a 
new Federal law''--the one we passed this summer, in July--
''establishing strict oversight of mortgage originators.''
    I assume that the provision referred to here is the 
mortgage originator licensing requirements, which I wrote into 
the Housing and Economic Recovery Act. And, by the way, Senator 
Mel Martinez, of Florida, a Republican member of this 
Committee, and Dianne Feinstein, the Senator from California, 
were the two who really argued very strongly--they deserve the 
credit, in my view, for pushing very hard for this provision to 
be included in the law. And so I want to recognize that.
    Would any of you care to comment, first, on the 
appropriateness of a company whose very existence is dependent 
upon Federal largesse lobbying against a Federal consumer 
protection statute; and, second, whether mortgage brokers 
should be properly licensed, in your opinion?
    Mr. Levitt. I have difficulty with any company receiving 
Federal funds lobbying for any purpose.
    Chairman Dodd. Gene.
    Mr. Ludwig. This mortgage broker situation is really 
pernicious, Mr. Chairman, and what the Congress has done under 
your leadership is very important. It is one step in bringing 
back a regulatory framework for our entire financial system. 
The fact that we have parts of the financial system that have 
been un- and underregulated, that can drive the whole system--
in good times they have extra benefits in capital, extra 
benefits in cost savings, because they do not have the 
regulatory safety net. But it drives the whole market in the 
wrong direction.
    So you are to be commended, sir, for what has been done 
here, and anything to cut back on that is a very bad thing.
    Chairman Dodd. The other two of you?
    Mr. Rokakis. Mr. Chairman, the destruction of the agency 
relationship, if you look at, I think, the three principal 
causes of this entire crisis, clearly deregulation at the top 
of the list, reliance on these complex, mathematical constructs 
that nobody really understands, yet Wall Street relied upon. 
But if you look at the destruction of the agency relationship, 
the fact that that broker sitting across from you is not 
working for you but is working against you, Mayor Morial talked 
about some of the other statistics. I think it is absolutely 
critical that we move in that area of regulation.
    I also know that when there was talk about eliminating the 
yield-spread premium, this Congress was bombarded by, I 
believe, hundreds of thousands of calls and letters arguing 
against that. But I think it is that yield-spread----
    Chairman Dodd. It is not in those regulations that came out 
in July either.
    Mr. Rokakis. No, it is not.
    Chairman Dodd. I feel very strongly about the yield-spread 
premium, and we are going to have that in our bill.
    Mr. Rokakis. And I commend you for that.
    If I might, Senator Dodd, there is just one thing, Mr. 
Chairman, and that is that I promised the housing counselors 
back home, the foreclosure counselors, that I would raise this 
point.
    Chairman Dodd. Yes.
    Mr. Rokakis. Senator Casey touched on it, and I think it is 
so important, and we are going to look to you for leadership on 
this. We are being told now that we do not know what this 
format will look like when these mortgages get bought back, but 
we are being led to believe--we have been told that we cannot 
expect any additional leveraging or negotiating power once the 
Government steps in and buys these mortgages back because of 
the complex way in which these mortgages were held and sliced 
and because of the trust agreements in place and need to get 
cooperation from all the other bondholders. And I just have to 
ask you, if I could, Mr. Chairman, to please look more closely 
at this, because what Senator Casey has said is, in fact, true. 
We are getting a sense that the negotiations, which are so 
difficult--difficult? I run a program. We have done 4,000 
mortgage saves since March of 2006. It is difficult as it is. 
It is often hand to hand combat. But the fact that we will have 
no additional leverage once these mortgages are purchased makes 
us very concerned.
    Chairman Dodd. Well, I agree. And, again, going back almost 
2 years ago, as I pointed out earlier today in this hearing, in 
this very room, where around in the back of the room a large 
table was set up with all of the stakeholders on this issue, 
including most of these major institutions, many of which are 
not around today, unfortunately, but were holding an awful lot 
of these mortgages. Again, this gets into the weeds a little 
bit. But most of these mortgage-backed securities are 
contracts. And as I read and went back and really probed this 
very hard, the language allows for a lot of flexibility in 
working out those mortgages.
    When they are trust agreements, it is much more difficult, 
and that will require maybe some legislation. But the good news 
is not many of them are trust arrangements. Most of them are 
contracts. And so I believe we have the authority under 
existing law for us to modify those mortgages. And it sounds 
confusing. It is not that confusing, and I think we do a 
disservice by suggesting this cannot be done. Somehow it can 
be. And certainly my intent would be--I would be furious to 
discover that we are going to make a strong effort here 
acquiring these mortgages, if you will, these instruments, and 
then not be in a position to do exactly what the legislation we 
drafted this summer is designed to do and which we set up for 
October 1 to begin the process, and that is to make it possible 
for people to get through the insurance.
    So, look, you heard John McCain and Barack Obama debate 
this last evening, and that is the question of whether or not 
we do what they did in the 1930s, and that is where the 
Government actually purchased the mortgages. That idea had some 
appeal to me early on, and that is what they did in the 1930s. 
The difference is today we have the FHA. You can insure this. 
You do not have to go that route. And you can get a much better 
deal through this process at less cost. So while it is an 
appealing notion, I actually think the idea of actually buying 
these, as suggested, is not as attractive as the insurance idea 
is that we have included in the legislation this summer. But I 
am certainly going to insist that as we do this, we make sure 
that we have the ability to work those out.
    Any other comments? Yes.
    Mr. Stein. Just to piggyback on that comment, when the 
Government buys some mortgage-backed securities, I do think 
that it is right to limit it compared to other investors in 
terms of requiring a modification, but the guarantee ability is 
there, and the other investors should like that.
    And just on your question about AIG, I do think they should 
not be lobbying on that. My understanding of what they are 
trying to do is to say their brokers should be not licensed, 
they should be called an employee, even though they are really 
a broker. They are not a principal. And that just is kind of a 
ridiculous argument.
    Chairman Dodd. Yes. Well, listen, I wanted to ask and leave 
the record open. I know Members may have some questions, and I 
have some additional ones I will submit to you, and if you get 
a chance sometime in the next week or two to maybe respond to 
ones that you think you would have something to comment on, I 
would appreciate that very, very much.
    Chairman Dodd. We are going to have additional hearings, 
not just on what we have done here. As I said, I would have 
very much liked to have had Bill Donaldson and Chairman 
Breeden, who I have great respect for as Republican appointees 
to head up the SEC, did a very, very good job, in my view, and 
have had some very worthwhile comments to make over recent days 
on a lot of what we are talking about, more in the case of Mr. 
Breeden than Bill Donaldson. But it is important to hear from 
them as well.
    What I said earlier to Mike Crapo, Senator Crapo, who has 
done an awful lot of work on regulatory reform, and I have a 
lot of respect for Senator Crapo, what he cares about, we are 
going to really look at that. That is going to require a lot of 
work, but I want to begin that process.
    Then, also, what we need to be doing, and some good 
suggestions here today already, the things that we can do to 
minimize this kind of occurrence happening again. We will get 
out of this, and my hope is that what we have done already is 
pointing us in that direction. And even though the markets do 
not reflect that from day to day, there are a lot of other 
things occurring that I think are still causing people to be 
very skittish and frightened about getting back into the 
market.
    But I think we are on the right path, and I believe very 
strongly that investors and the American consumer can have far 
more hope and confidence we are going to get there than they 
certainly have felt over the last several weeks. You may not 
see it today, and it is not going to blossom all at once. But 
we are on the road to getting this right again, in my view. And 
so I do not want a hearing like this to end without having some 
sense of hope and opportunity and confidence.
    As Franklin Roosevelt said so eloquently more than 80 years 
ago, it is fear, and that fearing fear is what has, I think, 
had an awful lot to do with the lack of confidence in our 
country, and we need to get our confidence back. And I think we 
are on the road to

doing that, and your testimony here today has helped us, I 
think, get rid of some of the myths and talk about the real 
problems we need to address, and I am very grateful to all of 
you.
    The Committee will stand adjourned.
    [Whereupon, at 1:15 p.m., the hearing was adjourned.]
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