[Senate Hearing 110-1015]
[From the U.S. Government Publishing Office]





                                                       S. Hrg. 110-1015


                  OVERSIGHT OF THE EMERGENCY ECONOMIC 
                STABILIZATION ACT: EXAMINING FINANCIAL 
                 INSTITUTION USE OF FUNDING UNDER THE 
                        CAPITAL PURCHASE PROGRAM

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

                                HEARING

                               before the

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

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

 THE FINANCIAL INSTITUTIONS USE OF FUNDING UNDER THE CAPITAL PURCHASE 
                                PROGRAM


                               __________

                      THURSDAY, NOVEMBER 13, 2008

                               __________

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


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                            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
                  Jonathan Miller, Professional Staff
                    Jennifer Fogel-Bublick, Counsel
                       Dean V. Shahinian, Counsel
                       Aaron D. Klein, Economist
                       Lynsey Graham Rea, Counsel
          Julie Y. Chon, International Economic Policy Adviser
               David Stoopler, Professional Staff Member
                Laura Swanson, Professional Staff Member
                 Jayme Roth, Professional Staff Member
                       Deborah Katz, OCC Detailee
                  Drew Colbert, Legislative Assistant
                   Lisa Frumin, Legislative Assistant
                   Mark Powden, Legislative Assistant
                Nathan Steinwald, Legislative Assistant
               Daniel Schneiderman, Legislative Assistant

         Gregg A. Richard, Republican Professional Staff Member
      Jennifer C. Gallagher, Republican Professional Staff Member

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











                            C O N T E N T S

                              ----------                              

                      THURSDAY, NOVEMBER 13, 2008

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     4
    Senator Johnson..............................................     6
    Senator Martinez.............................................     7
    Senator Casey................................................     8
    Senator Brown................................................     9
    Senator Schumer..............................................    10
    Senator Bayh.................................................    13

                               WITNESSES

Martin Eakes, Chief Executive Officer, Center for Responsible 
  Lending........................................................    14
    Prepared statement...........................................    59
Barry L. Zubrow, Executive Vice President, Chief Risk Officer, 
  JPMorgan Chase.................................................    16
    Prepared statement...........................................    76
    Response to written questions of:
        Senator Schumer..........................................   115
        Senator Casey............................................   117
Gregory Palm, Executive Vice President and General Counsel, The 
  Goldman Sachs Group, Inc.......................................    18
    Prepared statement...........................................    80
    Response to written questions of:
        Senator Schumer..........................................   129
        Senator Casey............................................   129
Susan M. Wachter, Worley Professor of Financial Management, 
  Wharton School of Business, University of Pennsylvania.........    21
    Prepared statement...........................................    86
    Response to written questions of:
        Senator Schumer..........................................   137
Anne Finucane, Global Corporate Affairs Executive, Bank of 
  America........................................................    22
    Prepared statement...........................................    94
Jon Campbell, Executive Vice President, Chief Executive Officer 
  of the Minnesota Region, Wells Fargo Bank......................    24
    Prepared statement...........................................   103
    Response to written questions of:
        Senator Schumer..........................................   138
        Senator Casey............................................   140
Nancy M. Zirkin, Executive Vice President, Leadership Conference 
  on Civil Rights................................................    26
    Prepared statement...........................................   108
    Response to written questions of:
        Senator Schumer..........................................   142

 
   OVERSIGHT OF THE EMERGENCY ECONOMIC STABILIZATION ACT: EXAMINING 
FINANCIAL INSTITUTION USE OF FUNDING UNDER THE CAPITAL PURCHASE PROGRAM

                              ----------                              


                      THURSDAY, NOVEMBER 13, 2008

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:05 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 thank our witnesses in advance of their 
participation in this morning's hearing, and as is the normal 
practice, I will begin with a brief opening statement. I will 
then turn to--I believe Senator Crapo is going to be making an 
opening statement, and then to my colleagues who are here for 
any comments they may have as well on the subject matter of 
today's hearing, or any other matter related to the issue 
before us.
    This hearing is the third hearing we have had in as many 
weeks on the oversight of the economic stabilization act that 
was adopted in the waning days of this Congress, and we did not 
have a hearing during the election week, but we have had 
oversight hearings every other week during that period of time 
on a variety of subject matters. And I fully recognized at the 
time that because of the election cycle, not all of my 
colleagues could be here for those hearings, but I appreciate 
very much those who were able to attend and participate, as 
well as the witnesses who came before us.
    So today is our fourth hearing, and we will continue, by 
the way, through the month of November, into December if 
necessary, to follow up. Obviously, this matter requires our 
ongoing attention, as all in this room certainly fully 
understand. And so I would just advise my colleagues to fully 
expect a very active Committee during these weeks, as well as, 
obviously, beginning in January, I presume even before the 
Inauguration on the 20th, to have an active period of time, 
whether it is confirmation hearings or continued oversight of 
the subject matter that is, of course, our financial situation 
in the country.
    Today's hearing is entitled ``Examining the Financial 
Institution's Use of Funding under the Capital Purchase 
Program,'' and so I welcome all who are here. Today the 
Committee continues its oversight of the implementation of the 
Emergency Economic Stabilization Act of 2008, known as EESA. 
Three weeks ago, we heard from the administration witnesses 
about what steps they were taking to implement this important 
legislation. Today we hear from four of our largest firms that 
have received assistance pursuant to that law. We are also 
joined by three very distinguished witnesses who will share 
their views on the effectiveness of recent actions by lenders 
and regulators and on what additional steps would be 
appropriate in order to help stabilize and strengthen our 
economy.
    Forty-one days ago, President Bush signed into law the $700 
billion EESA bill. Ten days later, on October 13th, the 
Secretary of the Treasury announced that nine of the largest 
financial institutions in our Nation, including the four who 
are with us today, would receive a total of $125 billion of 
EESA funds in the form of direct equity investments by the 
Treasury Department.
    These investments of taxpayer dollars are not the only 
taxpayer-backed benefits that have been made available to these 
and other financial institutions. On the contrary, they amount 
to just a fraction of the approximately $5 trillion taxpayer 
dollars that have been put at risk in recent weeks and months 
for the benefit of our Nation's financial institutions. And I 
want to enumerate those because it is the subject matter of the 
hearing today to understand what the expectation is coming back 
as a result of those kinds of commitments.
    Those $5 trillion have been committed in several forms, and 
let me enumerate them for you: one, the guarantee of all non-
interest-bearing deposit accounts at federally insured banks 
and thrifts; the increase in deposit insurance for interest-
bearing accounts to $250,000 per account; the guarantee of 
senior unsecured bank debt for a period of 3 years, which 
financial institutions may opt out of; the decision to place 
Fannie Mae and Freddie Mac, whose mortgage financing is used by 
virtually every home lender in the country, into 
conservatorship and provide them with a $200 billion Federal 
backstop; the guarantee of hundreds of billions of dollars in 
money market funds; the decision by the Treasury to reverse 
over two decades of tax law to allow companies, including 
financial institutions and banks, to write off their taxes the 
losses of companies that they acquire; the guarantee of major 
segments of the commercial paper market; and, last, the 
creation by the Federal Reserve of numerous facilities and 
special purpose vehicles for bank holding companies, primary 
dealers, and commercial firms so that they can find sources of 
reliable, affordable financing for their business activities. 
The Fed alone has committed $1 trillion in tax dollars so far 
to the recovery effort.
    By any measure, these actions amount to an extraordinary 
commitment of public resources. On some level, all of us, 
including members of the public, expect that this extraordinary 
commitment befits the extraordinary financial crisis now facing 
our Nation. It is an unprecedented sum for these unprecedented 
economic times.
    It is no secret that some who have received funds under 
EESA, including some of the institutions represented here this 
morning, did not ask for this funding. Nevertheless, they 
accepted it. Indeed, given the irrationality of the markets 
that seemed to target and take down one renowned firm after 
another, these public investments serve as a seal of approval. 
That explains why so many other firms are quickly lining up for 
their capital injections.
    Given that fact, it is reasonable, I think, for us to ask, 
now that they have the money that they have received, what are 
they going to do with these resources. What is their 
responsibility to the citizens of our country who are making 
enormous sacrifices to support the financial sector and the 
economy as a whole? The acceptance of public funding carries 
with it a public obligation, in my view. One cannot benefit 
from taxpayer support in all of its many forms and assume that 
one has no duty to serve that same taxpayer. The people of this 
great country of ours are generous and understanding, but they 
are entitled, in my view, to expect that those who benefit from 
their sacrifices will act with appropriate restraints and 
purpose. In my view, lenders who enjoy benefits conferred by 
taxpayers owe those same taxpayers consideration that includes 
the following:
    First, that they preserve homeownership. This Committee has 
said this over and over and over again, beginning with the very 
first hearing almost 2 years ago, over and over again. In fact, 
one of our witnesses here today was a witness 2 years ago 
before this Committee and predicted some 2 million 
foreclosures. It now seems quaint, that number. And yet at the 
time, it was suggested that somehow he was exaggerating and 
engaging in hyperbole. We now know the numbers this morning 
indicate how bad that situation is, and I am going to continue 
on this. It is still confounding to me why the Secretary of the 
Treasury and others refuse to understand this is the heart of 
the problem. And until we address this, this problem is not 
going to go away.
    So the first issue is preservation of homeownership. The 
foreclosure crisis is the root cause of the larger financial 
crisis, and the root of the foreclosure crisis, of course, was 
bad lending practices in which many of the well-known lending 
institutions engaged. Until we solve the foreclosure problem, 
we will not have any hope of solving the larger economic 
issues.
    Now, I appreciate the efforts that numerous lenders have 
started to make in this area, including some who are here 
today, and I appreciate that very much. But more, much more, 
must be done on a lender-by-lender as well as on an industry-
wide basis to address the foreclosure crisis. Even lenders who 
have modified a relatively large number of loans are doing so 
in a manner whereby many of those loans default or redefault. 
That does not seem to be good for anyone, borrowers or lenders. 
Now is the time to utilize Hope for Homeowners and other 
initiatives designed to truly preserve homeownership and 
stabilize the economy.
    Second, lenders who receive public funds should use those 
funds to lend. Many are failing to do that. CEOs have been 
directly quoted as saying they intend to use public dollars to 
acquire other financial firms and widen their capital cushion. 
Let me say as clearly as I can this morning, hoarding capital 
and acquiring healthy banks are not, I repeat not, reasons why 
Congress authorized $700 billion in emergency funding. The core 
purpose of this law and the purpose of virtually every other 
action taken during this crisis is to get lenders back into the 
business of lending. Credit is the lifeblood of the economy, 
and it is absolutely essential to businesses and consumers.
    Lenders have a duty to use these funds, in my view, to make 
affordable loans to creditworthy borrowers on reasonable terms. 
If they do not, then in my view they are acting outside the 
clear intent of the statute and should reform their actions 
immediately.
    Third, and last, lenders who are eligible for EESA funding 
and for other items on the smorgasbord of Federal assistance to 
financial firms would do well to examine their executive 
compensation policies. EESA sets forth clear, if modest, I 
might add, restrictions on executive compensation for companies 
that receive financial assistance under this act. I would 
suggest that these restrictions serve as a beginning, not an 
end, to the restraint firms should show in compensating their 
most highly paid employees.
    Our Nation clearly is in a crisis. We all know this. We are 
at war in two distance countries. Our financial markets remain 
uncomfortably close to the precipice of collapse. Working 
Americans have been forced to cut back in their personal lives, 
even as they have been asked to shoulder the enormous burden of 
propping up the financial sector. At this time of austerity and 
apprehension, it would be regrettable if some carried on as if 
they do not owe a duty of restraint and modesty to those 
countless Americans whose sacrifice helps make your viability 
and prosperity possible of national economic peril.
    For those tempted to conduct business as usual with respect 
to their compensation policies, I would simply ask: Where would 
your company and your industry be today without taxpayer-backed 
deposit insurance, without taxpayer-backed guarantees of your 
bank debt, without taxpayer-backed special lending facilities 
at the Federal Reserve, and without all of the other special 
benefits that your industry is receiving courtesy of the 
American taxpayer?
    If you believe that you would be no worse off than you are 
today, then I invite you to return to the Treasury the billions 
of dollars in taxpayer investments, guarantees, and discounts 
that you currently receive. And I wish you well as you try to 
make it on your own. Until that happens, I think I speak for 
many Members of this Committee and the Senate in saying that we 
want to see more progress, and your friends in the financial 
sector, more progress in foreclosure mitigation and affordable 
lending and in curbing excessive compensation. And if that 
progress is not forthcoming, then we are prepared to 
legislate--now if possible, but next year if necessary.
    With that, let me turn to Senator Crapo for any opening 
comments he may want to make.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman, and, 
again, I appreciate the attention you have given to the need 
for strong and continuous oversight by this Committee after now 
seeing the extreme and serious repercussions throughout every 
aspect of our economy as a result of the credit crisis.
    According to one study, for every dollar of net losses on 
loans and securities, there is a multiplier of 10 in the 
reduction of credit. If we use the most recent number of $1 
trillion in writedowns and credit losses and take into 
consideration the fact that the banks have raised $350 billion 
in new capital, there would be a $650 billion net loss and, 
using that formula, a $6.5 trillion loss in credit available in 
the market. I am not sure whether these are the right numbers 
or whether we actually know what they are or what the 
deleveraging is. But it is clear that we are facing a 
significant credit loss, and it has the potential to become 
even worse.
    Secretary Paulson's announcement that Treasury is not 
planning to buy toxic assets and that there are more effective 
ways to use the taxpayer dollars that have been provided 
provides a perfect opportunity to assess the results of the 
rescue package and to consider other directional changes.
    As you know, Mr. Chairman, I was not one of those who 
supported the notion of purchasing these toxic assets and have 
been very concerned that not only was the taxpayer not 
adequately protected, but that Treasury's proposal to buy toxic 
assets created an incentive for investors to stay on the 
sidelines and watch what the Government would do to then step 
in at a later date and either buy or purchase or finance 
purchases from the Government at a discount.
    I am very interested in what ways our witnesses believe 
these taxpayer dollars should be used and in what direction we 
should go. I have always believed that the direct utilization 
of our resources to increase liquidity with specific actions 
was a more appropriate direction that we should take, and I am 
hopeful to hear the witnesses' advice on those matters as well.
    In addition, Mr. Chairman, I hope that we can get into a 
strong discussion about some of the broad regulatory, 
structural reforms that we need to consider. Again, as you 
know, I have strongly argued for regulatory reform of our 
financial institutions, and this is an opportunity now for us 
to evaluate just exactly what is the regulatory structure our 
Nation should have.
    This week, the head of the CFTC said that he believes the 
United States should scrap the current outdated regulatory 
framework in favor of an objectives-based regulatory system 
consisting of three primary authorities: a new systemic risk 
regulator, a new market integrity regulator, and a new investor 
protection regulator. The risk regulator would police the 
financial system for hazards that could ratchet across 
companies to have broad economic consequences. The market 
integrity regulator would oversee safety and soundness of 
exchanges and the key financial institutions, effectively 
acting as a replacement for existing bank regulators and the 
SEC's function of regulating brokerages. The investor 
protection regulator would protect investors and business 
conduct across all firms.
    This is a similar idea to the outline provided in March by 
Secretary Henry Paulson of the Treasury, and I for one believe 
we should evaluate these kinds of proposals. I hope we also 
evaluate the potential for a single regulator, as has been done 
in other parts of the world where we have seen some significant 
effectiveness. But whatever our new regulatory structure is, I 
think it is important that we move from the outdated regulatory 
structure that we have now into one that still protects a 
strong, viable market, but allows for the consumer protections 
and the other protections against the systemic risks that we 
are seeing today that the Chairman has described. And I look 
forward to working with you closely as we evaluate this 
important part of our regulatory system.
    Thank you, Mr. Chairman.
    Chairman Dodd. I thank you, Senator, very much.
    Let me just say to you very quickly here, it is my intent 
as Chairman of the Committee that we are going to examine 
thoroughly the whole issue of modernization of financial 
regulations. And these suggestions you have made this morning, 
among others, will certainly be a part of the Committee's 
deliberation. It is maybe the most important issue for us in 
the long term for this Committee to address and make 
recommendations to the full Senate.
    Senator Crapo. Thank you, Mr. Chairman. As we do that, we 
have got to be sure we get it right, and I look forward to 
working with you.
    Chairman Dodd. Senator Johnson. Congratulations, by the 
way. Welcome back.

                STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Thank you, Mr. Chairman, for holding this 
hearing today.
    Since the passage of the bailout, which I voted against, 
this Committee has talked with the regulators regarding the 
implementation of the $700 billion package. While there are 
clearly some concerns about implementation, it is moving 
forward. I think it is equally important that this Committee 
talk with the institutions that are receiving this money, and I 
thank the witnesses for being here today.
    I have been concerned in past weeks with reports of 
continued executive compensation, expensive trips, and other 
benefits for CEOs of some companies receiving Government help, 
and reports that over one-half of Capital Purchase Program 
funds will be used to pay investor dividends. In a business 
environment where accountability has clearly been lacking and 
contributed to our current economic situation, I want 
assurances from financial organizations using Treasury funds 
that they will not misuse the taxpayers' money and that there 
will be punitive actions by Members and regulators if funds are 
misused.
    I have a problem with the funds being used for executive 
compensation and dividends. Both of these should be rewards for 
a job well done, and that is currently not the case for many in 
this industry.
    The intent of the bailout was to stabilize troubled 
financial institutions and help those businesses and 
individuals on Main Street affected by the credit freeze--a 
freeze resulting from poor decisions in the subprime mortgage 
market. Those making the decisions on how to spend the $700 
billion and those receiving the funds must remember this 
intended use.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Martinez.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Mr. Chairman, thank you very much for 
calling this timely hearing, and thank you also for your very 
passionate remarks, and I tend to agree with much of what you 
had to say.
    Let me begin by just saying that over the last several days 
I have had the opportunity to travel around the State of 
Florida, and the news on the ground is really not good. Talking 
to bankers, real estate developers, and others in the home 
industry, it is clear to me that until we change the dynamics 
of what is occurring today where foreclosures continue to pile 
up, where we continue to see banks--and I am talking now about 
local banks, I am talking about community banks, I am talking 
about Main Street banks that are being told by regulators that 
even though they have performing loans that are on their books, 
because they are real estate loans, perhaps they should call 
them in. And all of a sudden we have now builders that are in 
the toughest of times but able to maintain that business going 
and keep people on the job, being told that their lines of 
credit are being canceled or not extended because the banks 
simply are being squeezed by regulators.
    This is a real problem. It also relates to the problem that 
they are facing at the level of not also being sure what is 
going to occur with TARP. You know, one set of rules was first 
put out. They were going to try to work under that set of 
rules, and now changes have been made to how the Treasury is 
handling the whole TARP matter. I think some clear guidelines 
so that bankers and others in the lending business know exactly 
what the rules of the game are going to be are essential, and I 
think the sooner we do that, the better that it is going to be.
    Florida has the third highest foreclosure rate in the 
Nation, and it is clear to me that Florida's entire economy--
and I think the Nation's--is impacted by the homeownership 
crisis. And in my view, until we stem the tide of foreclosures, 
until we begin to find effective ways of--and I commend some of 
the banks that are here today for what they are doing. Some of 
them have been at some events that we have tried to sponsor to 
help families stay in their homes. To keep those loans as 
performing loans and active loans, as opposed to foreclosures, 
is something I think we need to work toward.
    Until we get to the bottom of this, until we get to the 
foreclosure crisis, I do not think any of these other problems 
are going to ameliorate. I think this crisis began with 
homeownership problems, and I think it is going to end when we 
get a handle on that side of the equation. And I believe that 
your comments are precisely on point. I think we need to ask 
that as these infusions of capital are being made to the large 
financial banks, that capital then move downstream and is out 
there to help local businesses who cannot get credit, to help 
borrowers who would buy a house if they could just get a loan, 
and maybe not with 20 percent down but with something different 
than that.
    The bottom line is that until we turn the tide of where we 
are today in terms of the housing crisis and the foreclosure 
crisis, I believe that our entire economy continues to be at 
risk. And I look forward to hearing the testimony from the 
witnesses today.
    I very much support the efforts by FDIC Chairman Sheila 
Bair to put a more aggressive approach to loan modifications. I 
think she is on the right track, and I believe that it is time 
that we get this done and we get aggressive about it. We have 
done a number of things, the administration has done a number 
of things, all well intended and, I think, designed to do some 
good to the problem. But they have all been timid and they have 
been late. I think we need to get aggressive and get ahead of 
the problem once and for all.
    You are right. We heard a couple of years ago about 2 
million foreclosures, and we wish that that was the end of the 
story. And if we do not get ahead of this, if downward 
spiraling prices of homes does not get stemmed, if we don't get 
a floor on the housing economy, I think we are going to see 
this problem only continue to escalate.
    Thank you.
    Chairman Dodd. Thank you for that, and, of course, the news 
this morning is, I think, 9,128 foreclosures on average per day 
in the month of October, up 5 percent from the month of 
September and up 25 percent from a year ago. So the problems 
persist.
    Senator Casey.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Mr. Chairman, thank you very much, again, 
for calling this hearing and keeping a steady vigilance of this 
problem. I just have a very short statement.
    I think that the witnesses here today know as well as 
anyone in this room knows, anyone in the country would know, 
that until we get serious about the foreclosure problem, we are 
not going to be able to tackle this, and no financial system or 
no financial institution is going to be in good shape until we 
do that.
    Unfortunately, the Treasury Department does not seem to 
have the same urgency with regard to preventing foreclosures 
and helping homeowners as it had to get the legislation passed 
and to help financial institutions. Of course, that is my 
opinion, but I think there is a broad consensus that they are 
not moving with the same intensity that they moved to get the 
legislation passed, the emergency economic stabilization 
legislation passed in October.
    This foreclosure problem is an ever bleeding wound on our 
economy, and until we get serious about it, we are not going to 
rescue our financial system and, therefore, stabilize our 
economy more broadly.
    I was just looking at the numbers today from across the 
country, but just in terms of Pennsylvania, the State that I 
represent, which is not in the top ten, fortunately for us, 
still, in October, the fifth straight month where Pennsylvania 
saw that more than 4,000 foreclosures filings, the largest--I 
should say the longest such stretch since at least 2005.
    So we have got much work to do on this issue, and I hope 
that the Treasury Department moves with much greater speed than 
they have demonstrated so far when it comes to preventing 
foreclosures. And that is why I think this hearing and so many 
like it are so important, Mr. Chairman.
    Thank you very much.
    Chairman Dodd. Thank you very much, Senator.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, for calling this 
morning's hearing and those hearings that have preceded it. 
Thank you for all the work you have done in the last several 
weeks with oversight and with what we need to do, discussing 
what we need to do in the future.
    I want to thank our witnesses. I commend the banks that 
have recently announced major efforts to modify loans in a 
broad and meaningful fashion. I appreciate the efforts of those 
on the panel who are advocating on behalf of our Nation's 
homeowners. Thank you for that.
    It has been a month and a half since Treasury Secretary 
Paulson and Federal Reserve Chairman Bernanke and their 
colleagues came before this Committee to ask for the authority 
to commit $700 billion for stabilizing our economy. Congress 
responded quickly to provide that authority, as we know, but as 
Secretary Paulson recognized in his testimony then, such an 
extraordinary grant of authority must be accompanied by 
oversight and by transparency.
    Mr. Chairman, you were accomplishing the former, the 
oversight. I am not convinced we have achieved the latter. 
Almost 3 weeks ago, the people of northeast Ohio learned that 
National City Bank, which had been in business since 1845, 
would be purchased by PNC. The taxpayer funds that would have 
been allocated to National City were instead allotted to PNC. 
PNC will be able to take advantage of the recent decision by 
the IRS to permit banks to write off the losses of banks that 
they acquire without limitation.
    I do not fault in any way PNC in this. Given the 
Government's decisions, its actions made sense. It gives every 
indication it will be a good corporate citizen, as National 
City has been in Cleveland. But while this was the first 
acquisition funded by the Emergency Economic Stabilization Act, 
it appears it will not be the last. Several banks have 
indicated they plan to use taxpayer capital for acquisitions. I 
have asked Treasury a number of questions regarding the planned 
acquisition of National City as well as the larger issue of 
using taxpayer funds to finance mergers and acquisitions. 
Several of my colleagues on this panel have done the same. I am 
not aware of any answers having yet been supplied.
    The American people are waiting for answers, too. Many of 
them were not thrilled with the idea of committing $700 billion 
in taxpayer money to some of the very companies that engineered 
this crisis. They know we face a credit crunch, but must 
reconcile that against companies that seem to be carrying on 
business as usual, as Senator Johnson said, with their lavish 
retreats and their healthy bonuses.
    I hope our witnesses today will provide some answers. We 
all understand, as Secretary Paulson discussed yesterday, the 
need to change tactics when one approach does not work or when, 
as Secretary Paulson said, circumstances change. But the 
purpose of the legislation we passed remains the same: to 
unfreeze the credit markets. If taxpayers' funds are not going 
to be used for lending, then we need to give serious thought to 
whether this effort still makes sense.
    The whole purpose of the economic rescue bill is to prevent 
a recession from becoming something worse, maybe not the Great 
Depression, but perhaps the Not So Great Depression. I mean no 
offense to our witnesses, but I did not vote to save Wall 
Street. I voted to save Main Street. I voted to save Main 
Street not just from the credit crunch that has engulfed the 
country for the past few months, but from the grinding pace of 
foreclosures that has gripped my State for several years.
    I do not see how any strategy to right the economy can 
succeed if it does not bolster banks' lending efforts and fix 
the damage from the evaporation of lending standards over the 
past several years. We have only solved half the problem if we 
get credit to a tool and die shop, but its employees are losing 
their homes.
    We are finding ourselves forced, in effect, to impose 
underwriting standards in the middle of a loan rather than at 
the outset. That inevitably is going to be messy. Some loans 
will still default. Some people just bought too much house or 
lost a job and simply cannot afford their mortgage or any 
mortgage. But we owe it to the millions of homeowners facing 
foreclosure to work with them. It is in the investor's interest 
to keep that person in the home rather than taking on the 
expense of foreclosure and selling it into today's market. And 
it is in the Government's interest to accept an imperfect 
approach as the better alternative to inaction.
    As Franklin Roosevelt said some 70 years ago, ``Better the 
occasional faults of a Government that lives in a spirit of 
charity than the consistent omissions of a Government frozen in 
the ice of its own indifference.''
    We cannot be indifferent to the millions of Americans who 
face the prospect of losing their homes. We need to live in a 
spirit of charity while making very rational--very rational--
decisions on how to deploy the resources of the Federal 
Government to help both the struggling credit markets and the 
millions of people who depend on them.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator, and before 
turning to Senator Schumer, you have made the point, and it 
deserves being remade. I read this morning about we are going 
to see the Treasury move now to consumer issues on credit cards 
and car loans, and that sounds good. But to put that ahead of 
homeownership to me is just, once again, denying the underlying 
problem that we face.
    Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. I want to thank 
you for your diligence throughout this period of holding a 
whole series of hearings. It is vital that we make sure that 
the programs implemented by Treasury and the Federal Reserve 
are accomplishing the goals of restoring our financial system 
and our economy, and these hearings play a major role in that, 
so I thank you.
    Now, although we seem to have avoided the devastating 
effects of a full-fledged depression through the recent 
emergency interventions, particularly the Government backing 
interbank lending and business deposits at banks, we still face 
frozen credit markets for consumers and businesses as well as a 
recession that threatens to be too long and too painful for the 
entire country.
    I am glad that Secretary Paulson and the rest of the 
Treasury team have finally seen the light and decided to 
abandon asset purchases. It was the worst-kept secret in 
Washington that the asset purchases and the auctions Treasury 
proposed would not work and were likely to be scrapped. During 
the entire negotiations, from the days you and I, Mr. Chairman, 
and some of the others sat across the table, Treasury never 
figured out how to price the assets, whether by auction or by 
purchase. So it was just a matter of time until Secretary 
Paulson finally acknowledged that reality, and I am glad he did 
so we could move on.
    Now, many of my colleagues and I recognized that capital 
injections were clearly the correct approach from the 
beginning, and we gave Secretary Paulson the authority to do 
them without him asking for them. Now I suspect he is grateful 
we did, since it has become the most indispensable tool to 
restore confidence in our financial system, and I am glad we 
have moved away from auction and asset purchase and to capital 
injection.
    But the Capital Injection Program is not working either, 
not because there is a fundamental flaw in the concept of 
capital injection, but because of the way the program is 
structured. Because of the way it is structured, it is not 
meeting its goals of improving stability in the system and 
increasing lending the way it should. Treasury's stated purpose 
for the capital injections was to give banks a strong capital 
base so that they could increase lending into the economy for 
things like credit cards, auto loans, and small business loans. 
But in these uncertain and difficult times where nobody is sure 
of asset values, banks are inclined to hoard rather than deploy 
capital. They do not know how much lower the value of the 
assets they have will go, so they are hoarding the new capital 
in case they go lower. And in its zeal to include the largest 
banks and avoid any stigma in participating, Treasury failed to 
make the rules strict enough to overcome that inclination. And 
as a result, the Capital Injection Program is not producing 
very much new lending.
    Even if Treasury may not be able--now I intend to ask the 
witnesses here from the banks why they are not lending more 
with this additional capital. But even if Treasury cannot 
change the terms retroactively, any new capital injection must 
come with tougher requirements. Treasury should revise the 
terms for the next $125 billion, and if they come to us and ask 
us for the additional $350 billion, I intend to write those 
provisions--do my best with, I know, the support of many of my 
colleagues here, to put those provisions into the new terms of 
the law.
    Because consumers and businesses around the country depend 
on credit, if it is not available, the recession will be deeper 
and longer than it has to be. And yesterday Secretary Paulson 
said, well, let us focus on auto loans and credit card loans 
and small business loans. But he is ignoring the best way to 
get to do it, which is through the Capital Injection Program, 
but a Capital Injection Program with some stringency, with 
making sure that the institutions who take it--and I am against 
forcing institutions to take it; I think that was a bad idea--
but that those who take it, need it, should have to meet some 
requirements.
    It is particularly true for small businesses that need 
credit to expand and create jobs. I just got a call yesterday 
and saw up in Buffalo a company of 300 employees, been there 
for a long time, cannot get a loan. Good-paying jobs in 
Buffalo, they do not come easy, and they are ready to go under 
even though the firm has been in business for a long time. And 
I am sure that story can be repeated in every one of our States 
over and over and over again. Small businesses need credit to 
expand and create jobs. They also need it to keep their doors 
open to protect the jobs they have. Millions more jobs could be 
in jeopardy if we do not fix the lending markets, and fast. The 
Federal Reserve Quarterly Lending Report for the third quarter 
reported that 75 percent of banks have tightened credit on 
commercial and industrial loans to small firms during the third 
quarter. That was up from 65 percent in the second quarter and 
50 percent in the first.
    So Senator Kerry and I have been working on adding some 
targeted small business items to the stimulus package, such as 
temporarily waiving all lender and borrower fees, and 
increasing the maximum loan amount, and I will be asking these 
questions in addition to encourage banks to lend to small 
business as larger banks.
    I also believe, as some have stated--I think you, Mr. 
Chairman, and I could not agree with you more--that tougher 
terms should include more stringent restrictions on executive 
compensation to ensure that there are not incentives for 
executives to take excessive risk and more help for struggling 
homeowners. Chairman Bair's proposal in combination with the 
change in bankruptcy laws--and I believe this will only work if 
we change the bankruptcy laws--is the clearest and cleanest 
solution.
    One more point, Mr. Chairman. It is critical that we ensure 
the Government's capital is not wasted in other ways. I am 
calling for any mergers completed with the help of TARP money 
first to be approved by Treasury. And this relates to my 
colleague from Ohio's point. While there are mergers that 
should take place to improve systemic stability and encourage 
lending, in a very weak institution a merger may be the right 
way to go. Giving away Government money so that it can be used 
to gobble up competitors in a way that will not have any impact 
on the overall stability of the financial sector should not be 
endorsed.
    Mr. Chairman, the Government's assistance has to include 
significant help from Main Street as well as Wall Street. 
Consumers and businesses must see improved access to credit as 
a result of the Government's actions, and struggling homeowners 
must see a renewed commitment from the Government to help them 
avoid foreclosure.
    I look forward to discussing these issues with the panel, 
and thank you for holding the hearing.
    Chairman Dodd. Thank you very much, Senator.
    We have been joined by Senator Bayh, and I do not want to 
spring it on you here just as you sit down, but would you like 
to make an opening comment, Senator?

                 STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. No, Mr. Chairman, except to say that I share 
the concerns of our colleagues as I understand that they have 
been expressed with regard to executive compensation dividends 
and, most of all, getting the capital that has been provided 
into the marketplace to get the job done for which it was 
intended.
    So I look forward to hearing from our panelists, and thank 
you for this very, very timely hearing.
    Chairman Dodd. Thank you very much, Senator.
    Well, let me welcome our panelists, and I am going to 
introduce them briefly and then turn to them for any opening 
statements. Let me encourage you to try and keep your 
statements relatively brief, if you can, and then we take the 
full statements, obviously, as part of the record, and any 
supporting documentation or evidence that you think would be 
helpful for the Committee to have, we will consider it as 
accepted at this juncture. So I look forward to your full 
testimony.
    Let me, first of all, introduce Martin Eakes, and Martin is 
no stranger to this Committee. In fact, at the outset of my 
remarks, I pointed out that we had witnesses in February of 
2007 to come and talk about the very issue which is the subject 
matter in part of today's hearing, and it was Martin Eakes who 
made the statements that caused some voices in this city and 
elsewhere to ridicule his predictions of 2 million foreclosures 
2 years ago. So, Martin, we thank you for being with us.
    Martin is the CEO and founder of Self-Help, a community 
development lender, and CEO of the Center for Responsible 
Lending. He has received numerous awards, including the 
MacArthur Foundation Fellowship in 1996, and I want to note, as 
I did a minute ago, that in 2007, Martin Eakes testified before 
this Committee--at one of our first hearings, I might add, 
under my chairmanship--that there would be 2 million 
foreclosures, a number that was met with great skepticism by 
people in the industry, and others. I think everyone would 
agree today that we would be lucky if that were the number, as 
Senator Martinez pointed out, that we were actually dealing 
with.
    Next to Martin Eakes is Barry Zubrow, who is Executive Vice 
President and Chief Risk Officer for JPMorgan Chase, also 
serves as the Chairman of the New Jersey Schools Department 
Authority. I do not know which is the tougher of those two 
jobs. We thank you for being with us.
    Our next witness is Mr. Gregory Palm, Executive Vice 
President and General Counsel, The Goldman Sachs Group, and a 
member of its Management Committee. He joined Goldman Sachs as 
a partner in 1992. Previously, Mr. Palm served as law clerk to 
Justice Lewis Powell of the Supreme Court. We thank you, Mr. 
Palm, for being with us.
    Then we will hear from Susan Wachter, who is the Richard 
Worley Professor of Financial Management and a professor of 
real estate and finance at the Wharton School, University of 
Pennsylvania. She served as Assistant Secretary for Policy 
Development and Research at HUD from 1998 to 2001.
    The next witness is Anne Finucane. Anne is the Global 
Corporate Affairs Executive of Bank of America Corporation, 
also serves as the Northeast President, Executive Vice 
President of Corporate Communications, and a member of the CEO 
senior management team. She is someone I have known for a long 
time. Anne, thank you for being here with us today.
    We are then going to hear from Jon Campbell, who is the 
Chief Executive Officer of the Minnesota Region and Executive 
Vice President of Wells Fargo Bank. In his current position, he 
is responsible for the Wells Fargo Regional Banking Mergers and 
Acquisitions Program.
    And our final witness is Ms. Nancy Zirkin, well known to 
many of us here. She is Executive Vice President and Director 
of Public Policy for the Leadership Conference on Civil Rights. 
Ms. Zirkin joined the Leadership Conference in 2002, and under 
her leadership the organization has gone from a 10-person 
operation to four times as many who work on these issues, and, 
Nancy, we thank you for joining us this morning.
    With that, Martin Eakes, we welcome you to the Committee, 
and the floor is yours.

STATEMENT OF MARTIN EAKES, CHIEF EXECUTIVE OFFICER, CENTER FOR 
                      RESPONSIBLE LENDING

    Mr. Eakes. Good morning, Chairman Dodd and Members of the 
Committee. Thank you for holding this hearing and for inviting 
me to testify.
    My organization Self-Help has made $5 billion of loans to 
55,000 low-wealth families to purchase their first homes. I 
take it personally when people are losing those homes.
    I am also the CEO of the Center for Responsible Lending, a 
nonprofit, non-partisan research and policy organization 
dedicated to protecting homeownership. I have been at this work 
a long time, more than 10 years, trying to stop abusive loans 
and foreclosures.
    In 1998, I helped put together the coalition in North 
Carolina of banks, credit unions, realtors, home builders, 
seniors, churches, civil rights groups, housing groups, to put 
together an almost unanimous bill to stop abusive lending in 
North Carolina.
    I have testified at Federal Reserve and congressional 
hearings starting in 2000, and virtually one or two every year 
since. In 2007, I testified in front of this Committee saying 
that we had a silent storm of foreclosures that were 20 to 30 
times the magnitude of Hurricane Katrina in its devastation. 
Unfortunately, that storm is no longer silent.
    So you will excuse me, I hope, for being a little bit 
impatient at this point. I have taken calls and sat with 
hundreds of parents facing foreclosure, and every single one of 
them are numb in their face and have tears in their eyes, and I 
have had to watch them lose their homes. I have sat in State 
legislative hearings where 90-year-old grandmothers walk to the 
podium with their walker, saying that they were looking in the 
want-ads to get a job so that they could prevent foreclosure of 
their home. They were not going to get a job.
    Let me just say flat out that voluntary efforts by lenders 
and servicers, while admirable, will not fix the problem of bad 
loans in this country and the problem of foreclosures. The 
voluntary efforts have been too little, too late at every 
single stage of the crisis. It is not that Hope Now, the 
voluntary association, intends to be ineffective, but there are 
structural barriers that make it so. Eighty percent of the 
foreclosures we see today are happening in private label 
securities. These are subprime loans and Alt-A that are in 
these complicated structured securitizations.
    Within those securitizations, the various tranches have 
what we call ``tranche warfare.'' When one party benefits, 
another one loses, and they threaten to sue the servicer if 
they continue modifying loans. Fifty percent of the subprime 
and Alt-A loans that are subject to foreclosure have piggyback 
second mortgages, which makes it almost impossible to structure 
and modify those loans, because you still have a party that is 
not part of the solution.
    Then, finally, one of the most pernicious barriers is that 
there is actually an incentive in the industry now to foreclose 
versus working out loans. Loan servicers who govern these 
securitizations get paid when they foreclose, but they do not 
get paid when they work out a loan. They just do not get paid. 
In the worst cases, the servicer gets paid twice when it 
forecloses. The world owes Bank of America, one of the best 
banks in America, a debt of gratitude for taking on the 
thankless task of cleaning up Countrywide's wasteland of 
unethical lending practices. But Bank of America has not had 
time to get rid of Countrywide's affiliates which prevent a 
conflict of interest in fees that are paid to its own 
affiliates every time there is a foreclosure. For most of 
Countrywide's foreclosures, they would order a credit report 
and an appraisal, purchased from an affiliate that they owned 
100 percent every time there was a foreclosure. They would 
order a forced placed insurance for people who got behind on 
their payments, again, from a company 100 percent owned by 
Countrywide. And, finally, when there was a foreclosure 
necessary, the trustee that was hired was 100 percent owned by 
Countrywide. In my book, that is simply corrupt.
    I have been in meetings where the senior executives of the 
largest banks have talked about being arm-twisted into 
accepting the $25 billion of Government risk capital at a 
dividend rate of 5 percent. Taking the money was an act of 
patriotism, agreed to in order to protect the anonymity of 
those other banks, those anonymous ones that really were weak 
enough to actually need it.
    Let me just say on this panel we have four of the 
strongest, best managed financial institutions in the world, 
but not a single one of these banks would exist today if it 
were not for support and backing from the Federal Government. 
If there were not Federal deposit insurance and access to the 
Federal-backed liquidity windows at the Federal Reserve and 
Federal Home Loan Bank, not a single one of these banks would 
have survived from August 2007 until today.
    So there is a duty to fix these loans and make the steps, 
and there are two things we need to do right now. The first has 
been referenced already. Lift the ban on judicial loan 
modifications so that loans against a personal residence can 
get fixed if the lender is unwilling to do it voluntarily. Note 
that the recent bills that have been presented to fix this 
bankruptcy provision would not allow a modification of the home 
loan if the lender voluntarily modified it in advance. Lifting 
the ban on judicial modifications for residences is what solved 
the debt problem for farmers in the 1990s, and it will do the 
same thing here.
    No. 2, we should insist that Treasury invest up to $50 
billion of the $700 billion, or 7 percent, in the plan proposed 
by Sheila Bair and the FDIC. It is the only plan that has been 
put forward thus far that will actually work to help the 
foreclosures on the ground. Many of you commented in your 
opening statements that we cannot solve this crisis until we go 
right to the source, which is foreclosures and the spillover 
effect. Every time a house gets foreclosed, it damages and 
destroys the neighbors all around it.
    The FDIC's plan is really the carrot, if bankruptcy is the 
stick, saying do the right thing or we will let a court do it. 
This is a carrot. What the plan says is let us induce loan 
servicers to make the loan modifications that have not been 
able to be done voluntarily. It would set a 31-percent housing-
payment-to-income ratio as the threshold for what is an 
affordable modification. And in order to have the lenders 
reduce the interest rates on their loans to as low as 3 percent 
or extend the term or defer principal to get the loan to an 
affordable level, the Government would then take on 50 percent 
of the redefault losses if those loans that were modified 
eventually went to default. Loan servicers have told us that is 
their biggest concern, so it addresses the problem not only 
taking on 50 percent of the losses, there is still an incentive 
for the lenders to not throw losses at the Government because 
they would still have losses themselves.
    This program could reach 3 million households. If 2 million 
of them were successful and one-third redefaulted, the one-
third would create $100,000 of loss per house, let's assume, 
times a million households, would be $100 billion of loss. The 
Government's 50-percent share of that would be $50 billion. It 
is a pretty paltry amount to invest to actually solve the 
problem that we have been facing.
    When are we going to insist that the taxpayer funds that 
were set up to solve this problem are actually spent on the 
people who are losing their homes, particularly in Florida and 
Arizona and Michigan, Ohio and California, places where the 
problem is utterly out of control?
    So I thank you for holding this hearing. I appreciate your 
work, and let me help you any way I can in putting some 
pressure on Treasury to do the right thing.
    Chairman Dodd. Thank you, Martin, very much. And I am sure 
we are going to--I know I am going to raise the question with 
the other panelists about the Sheila Bair proposal, and just 
get prepared as witnesses to anticipate that question that Mr. 
Eakes has raised and address it.
    Mr. Zubrow, thank you for being with us. You have to pull 
that microphone a little closer to you.

 STATEMENT OF BARRY L. ZUBROW, EXECUTIVE VICE PRESIDENT, CHIEF 
                  RISK OFFICER, JPMORGAN CHASE

    Mr. Zubrow. Thank you very much, Mr. Chairman. Chairman 
Dodd and Members of the Committee, thank you for including us 
in today's hearing on the Capital Purchase Program. I am 
pleased to represent JPMorgan Chase before this Committee. You 
have with you my detailed written testimony. Given the size of 
this panel, allow me to summarize a few key points.
    At JPMorgan Chase, we believe that the Government's 
investment in our firm comes with a responsibility to honor the 
goals of the Capital Purchase Program. To that end, we are 
using the CPP funds to expand the flow of credit into the U.S. 
economy and to modify the terms of hundreds of thousands of 
residential mortgages. At the same time, we continue to 
maintain prudent business practices and underwriting standards 
that have helped JPMorgan Chase to create and maintain a 
fortress balanced sheet.
    What does this mean in practice? Let me begin with our loan 
modification efforts, which we believe will help to strengthen 
the U.S. real estate markets and to keep people in their homes.
    Last week, we announced the significantly expanded loan 
modification program that we expect will help roughly 400,000 
additional families to stay in their homes. Since early 2007, 
Chase has helped about 250 families avoid foreclosure, 
primarily by modifying their loans or their loan payments. Our 
new initiative is reaching out to additional customers of 
Chase, but also to Washington Mutual and the EMC unit of Bear 
Stearns, which are now part of the bank.
    As part of these efforts, we are opening 24 regional 
counseling centers to provide borrowers with face-to-face help 
in high delinquency areas.
    We are hiring over 300 new loan counselors, bringing our 
total to more than 2,500, so that homeowners can work with the 
same counselor from the start to the finish of the process.
    Proactively, we are reaching out to borrowers to offer pre-
qualified modifications, such as interest rate reductions and 
principal forbearance.
    We seek to expand the range of financing alternatives which 
are available to our customers and to provide an independent 
review of each loan before moving it into the foreclosure 
process. Until all of these changes are fully implemented--we 
hope within the next 90 days--we have stopped any new 
foreclosure proceedings on our owner-occupied properties.
    The Capital Purchase Program's goal of providing capital to 
the U.S. economy is absolutely consistent with our own core 
business of supporting our customers through lending 
operations. Despite the challenges economic conditions, we 
continue to provide credit to our customers, whether they are 
consumers, small businesses, large corporations, not-for-profit 
organizations, or municipalities.
    Throughout the past year, during some of the most turbulent 
and difficult conditions many of us have ever witnessed, we 
have prided ourselves on being there for our clients, whether 
by making markets, committing capital to facilitate client 
business, investing in infrastructure and other projects, or 
making loans to creditworthy borrowers. In short, we have been 
open for business and we continue to be open for business. The 
CPP enhances our ability to lend to consumers and businesses 
large and small, and we are committed to honoring the goals of 
this program.
    The Committee has also asked us to address executive 
compensation practices, and I am pleased to do so. JPMorgan is 
in business for the long term, and our compensation philosophy 
reflects that. Simply stated, we believe that compensation 
should be based on the long-term performance of our firm and 
the individual's contribution to his or her business, and to 
provide important and appropriate safeguards for safe and sound 
behavior. We require our senior executives to retain at least 
75 percent of all their equity awards that are granted to them 
so that their interests are aligned with the long-term 
interests of our shareholders. We offer no golden parachutes or 
special severance packages. Our top executives are subject to 
the exact same severance provisions as all of our employees.
    Even prior to the CPP, our firm had in place a bonus 
recoupment policy. We have obviously amended that to ensure 
full compliance with the terms of the CPP.
    We are not yet in a position to provide specific 
information about compensation for this year, given that the 
year is not complete. However, given the type of year we are 
experiencing and even though we have produced profitable 
results in each quarter to date, I have little doubt that 
employees and executives will make substantially less than they 
did last year. Let me also state very clearly that the CPP 
money will have no impact on the compensations that are taken 
for JPMorgan Chase employees or executives.
    The Government's investment in our firm came along with a 
special responsibility, as you have noted, Mr. Chairman, to 
America's taxpayers. We fully intend to honor that 
responsibility by promoting the goals of the CPP while also 
acting prudently and sensibly and in the interests of all of 
our shareholders to maintain a healthy and vibrant company.
    Many believe that irresponsible lending was one of the 
causes of the current distress in the financial markets. No one 
wants a repeat of those mistakes. Every day we seek to make 
capital available in a responsible, safe, and sustainable way 
to help get the economy back on track.
    John Pierpont Morgan once said that he wanted to do first-
class business in a first-class way. That continues to be a 
guiding principle for us. It remains our goal and our 
commitment to our customers, to our shareholders, our 
employees, and to the taxpayers of this Nation.
    Thank you very much.
    Chairman Dodd. Thank you very much.
    Mr. Palm.

STATEMENT OF GREGORY PALM, EXECUTIVE VICE PRESIDENT AND GENERAL 
             COUNSEL, THE GOLDMAN SACHS GROUP, INC.

    Mr. Palm. Thank you. Chairman Dodd and Members of the 
Committee, on behalf of Goldman Sachs, I wish to thank you for 
inviting us to participate in today's hearing.
    Clearly, the last several months have been an extraordinary 
and unsettling time in financial markets and the economy 
generally. The actions taken by Congress, regulators, and the 
administration to address the market dislocation have been 
significant and decisive. We also recognize, however, that much 
remains to be done, and hard and thoughtful work will be 
required by all of us. We look forward to working with all 
concerned parties to work our way through the current crisis 
and to identify and address the failings that have led to this 
difficult situation.
    First, the Committee asked us to discuss our plans for the 
use of funds provided under the CPP. Goldman Sachs' principal 
businesses are investment banking, securities, and investment 
management. A number of our core businesses require the 
commitment of capital. In investment banking, offering 
strategic advice remains at the center of what we do. But 
clients frequently expect our advice to be accompanied by 
access to the capital necessary to make that advice actionable 
and practical. In short, our value to clients depends not only 
on the quality of our advice, but on our willingness to draw on 
both our expertise and balance sheet to help finance 
transactions or support a company's strategic direction.
    In addition, Goldman Sachs plays a very significant role as 
a market maker. As you know, market making is essential to the 
liquidity, efficiency, and stability of financial markets. In 
dislocated markets, the role we play as a market maker on 
behalf of our clients can be challenging, but it is even more 
important. Illiquid markets and the resulting lack of price 
discovery produce volatility. Having the ability to take the 
other side of a client's transaction and establish a price for 
an instrument contributes to the broad functioning of markets.
    With the $10 billion in capital received through the TARP 
Capital Purchase Program, Goldman Sachs has additional capacity 
to inject capital and liquidity, which will contribute not only 
to the stability of financial markets, but to their vitality 
and growth.
    In addition, we play an important role as a co-investor 
with our clients. Goldman Sachs has and will raise funds to 
inject capital across the corporate capital structure. These 
funds will extend needed capital to a variety of companies 
whose growth opportunities would otherwise be limited.
    For example, we recently established a $10.5 billion senior 
loan fund that makes loans to companies in need of capital. The 
fund invests both our own capital and that of our clients. This 
is significant because the normal market mechanisms to 
facilitate the extension of credit in many areas have broken 
down. In the next year, Goldman Sachs expects to launch 
additional funds and deploy capital to various parts of the 
market.
    You also have asked us to discuss the compensation in the 
context of executive compensation standards for financial 
institutions that participate in the Capital Purchase Program 
and how we align compensation with performance.
    First, perhaps an obvious point, since the year is not yet 
finished, no financial compensation decisions have been made at 
Goldman Sachs. We are only now in the process of reviewing 
performance and making recommendations for year-end 
compensation. The Compensation Committee of the Board of 
Directors, which is comprised solely of outside independent 
directors, determines the appropriate compensation for Goldman 
Sachs' executives.
    Second, we have complied and will comply with all executive 
compensation standards and restrictions imposed as a result of 
our participation in the CPP. The CPP executive compensation 
requirements will be a focus at our Board Compensation 
Committee meeting next week.
    I would also note that Goldman Sachs has never had special 
golden parachutes, employment contracts, or severance 
arrangements with its executive officers, and that we have 
always believed that the potential for increased compensation 
should never be an incentive for excessive risk taking.
    Third, and most importantly, I want to make clear that the 
firm's bonuses for 2008 will be paid only out of the firm's 
earnings for 2008, not its capital, and certainly will not 
increase as a result of having received TARP funds.
    Since we became a public company, we have had a clear and 
consistent compensation policy. We pay our people based on 
three factors: the performance of the individual, the 
performance of the business unit, and the performance of the 
firm taken as a whole. And that is a long-term perspective.
    Compensation for each employee is comprised of salary and 
bonus. Generally, the percentage of the discretionary bonus 
awarded in the form of equity increases significantly as an 
employee's total compensation increases. In fiscal year 2007, 
for example, the equity portion of our senior-most executives' 
compensation was 60 percent.
    All of the equity rewards are subject to future delivery 
and/or deferred exercise. This aligns employees with the long-
term interests of our shareholders. In that vein, our CEO, CFO, 
COOs, and Vice Chairmen are required to retain at least 75 
percent of the equity they have received as compensation since 
becoming a senior executive officer.
    Overall, we believe our compensation policy, which is 
consistently and rigorously applied no matter how good or bad 
the market environment, has produced a strong record of 
aligning performance with compensation.
    Since 2000, Goldman Sachs has exhibited a correlation 
between changes in net revenues and compensation of 98 percent. 
I will not dwell on our record over that period because I would 
like to make one final point.
    All that said, while we are on track to deliver positive 
results for year-end 2008 despite remarkably challenging 
markets and events, net revenue for the year will be lower than 
in recent years. As such, compensation also will be down very, 
very significantly this year across the firm, particularly at 
the senior levels. We get it.
    As to mortgage servicing, finally, on the subject of 
modifying home loans, I would emphasize that Goldman Sachs has 
never been a significant originator of residential mortgages. A 
Goldman Sachs affiliate, Litton Loan Servicing, services 
residential mortgage loans. We acquired Litton a little less 
than a year ago. As part of its business, Litton expends 
significant resources to identify homeowners who may be in 
danger of losing their homes and works with them on potential 
solutions, like loan modifications--whether it involves 
lowering the interest rate, changing the principal amount, or 
otherwise. These are all designed to allow the homeowners to 
stay in their homes. Over time Litton has been able to 
demonstrate to loan owners that loan modifications very often 
produce lower losses than foreclosures.
    In the last 12 months, for example, Litton has modified in 
excess of 41,000 mortgage loans totaling approximately $7.5 
billion in principal balance. The number of employees dedicated 
to this effort over this period has increased 400 percent.
    Although modifications to existing mortgage loans are not a 
magic panacea that will cure all that ails the current housing 
market, we believe that thoughtful restructuring of existing 
arrangements to provide homeowners with payment relief is a 
positive step toward combating its decline.
    Mr. Chairman, we look forward to working with you and the 
Committee to accomplish the important tasks set out in the 
Emergency Economic Stabilization Act. I would be happy to 
answer any questions.
    Thank you.
    Chairman Dodd. Thank you, Mr. Palm, very, very much.
    Dr. Wachter, we thank you for being with us this morning.

 STATEMENT OF SUSAN M. WACHTER, WORLEY PROFESSOR OF FINANCIAL 
     MANAGEMENT, WHARTON SCHOOL OF BUSINESS, UNIVERSITY OF 
                          PENNSYLVANIA

    Ms. Wachter. Thank you. Chairman Dodd and other 
distinguished Members of the Committee, it is my honor to be 
here today to provide my perspective on the ongoing mortgage 
crisis and how and why stabilizing the housing market is 
essential to stabilizing the broader U.S. economy.
    The ongoing crisis in our housing and financial markets 
derives from an expansion of credit through poorly underwritten 
and risky mortgage lending. Until the 1990s, such lending was 
insignificant. By 2006, almost half of mortgage originations 
took the form of risky lending.
    The unprecedented expansion of poorly underwritten credit 
induced a U.S. housing asset bubble of similarly unprecedented 
dimensions and a massive failure of these loans and to today's 
system breakdown.
    Today's economic downturn could become ever more severe due 
to the interaction of financial market stress with declines in 
housing prices and a worsening economy feeding back in an 
adverse loop. We have the potential for a true economic 
disaster.
    I do not believe we will solve our banking liquidity 
problems if the housing downturn continues, and the housing 
market decline shows no signs of abating.
    Moreover, despite bank recapitalization and rescue efforts, 
economically rational loan modifications that would help 
stabilize the market are not occurring. We must directly 
address the need for these loan modifications in order to halt 
the downward spiral in mortgage markets and the overall 
economy.
    It is critical to bring stability to the housing market. 
While today prices may not be far from fundamental levels, just 
as they overinflated going up, there is great danger for 
overcorrection on the downside.
    In our current situation, as prices fall, market dynamics 
give rise to further expectations of price decline, limiting 
demand, and supply actually increases due to increased 
foreclosures, causing prices to decline further. A deflationary 
environment with demand decreases due to expectations of 
further price decline was in part responsible for Japan's 
``lost decade'' of the 1990s.
    We cannot rely on a price decrease floor at currently 
market-justified fundamental levels if we rely on market forces 
alone, even, it appears, if augmented by the interventions so 
far of the Federal Reserve and Treasury. In fact, home 
inventories are not declining, and up to half of the inventory 
of homes are being sold through foreclosures at fire-sale 
prices in many markets. The Case-Shiller Price Index reflects 
the massive deterioration of housing wealth so far. Since the 
peak in 2006, housing values have fallen over 20 percent. While 
another 5- to 10-percent fall could bring us to market-clearing 
levels, actual price declines may far exceed this. And as house 
prices decline, these declines undermine consumer confidence, 
decrease household wealth, and worsen the system-wide financial 
stress.
    While banks have been recapitalized through the Capital 
Purchase Program--and there is discussion of the use of this 
funding for acquisitions--as yet, there is little evidence that 
bank lending has expanded. In order for the overall economy to 
recover and for conditions not to worsen, prudent lending to 
creditworthy borrowers needs to occur. Without financing for 
everyday needs, for education, small business investment and 
health, American families are at risk. And today the U.S. 
economy and the global economy are depending on the 
stabilization of their financial well-being. Moreover, the 
plans that are already in place do not appear to be leading to 
the modification of loans at the scale necessary in order to 
assure a market turnaround at fundamental levels instead of a 
severe and ongoing overcorrection.
    Barriers to economically rational loan modifications 
include conflicting interests, poor incentives, and risks of 
litigation to modify loans, particularly to modify loans 
deriving from mortgage-servicing agreements.
    Given the freefall in housing markets and its implications 
for credit conditions and the overall economy, there is a need 
for policies to address these barriers today.
    It is both necessary and possible to take effective action 
now. While housing values may not be far from fundamental 
levels, as housing values continue to fall, resolving the 
problem will become increasingly difficult and costly. Thus, 
solutions that are now possible may not be available going 
forward. Without expeditiously and directly addressing the 
housing market mortgage crisis, the Nation is at risk.
    Thank you.
    Chairman Dodd. Thank you very much, Doctor. That is very 
worthwhile testimony.
    Ms. Finucane, welcome to the Committee, and I want to 
underscore the point that was made by Martin Eakes, the 
appreciation of what Bank of America did. I think it was a 
number like $8.4 billion or something dedicated to foreclosure 
mitigation. That has not gone unnoticed. We welcome you to the 
Committee.

STATEMENT OF ANNE FINUCANE, GLOBAL CORPORATE AFFAIRS EXECUTIVE, 
                        BANK OF AMERICA

    Ms. Finucane. Thank you. Good morning, Chairman Dodd and 
Members of the Committee.
    At the outset, I would like to emphasize Bank of America's 
continued strength, stability, and commitment to serving local 
communities, even during these challenging times. Bank of 
America earned $5.8 billion in the first three quarters of this 
year, reinforcing our position as opposed to one of the most 
profitable financial services companies in the world.
    In recent months, Bank of America has taken three major 
steps that are contributing to the alleviation of the financial 
crisis faced by our Nation.
    First, at the encouragement of the Federal Government but 
with no Government assistance, Bank of America acquired 
Countrywide Financial Corporation at a time when the mortgage 
industry was being viewed with increasing alarm as a risk to 
the broader health of the national economy. Since that 
acquisition, Bank of America has announced providing relief for 
more than $100 billion in loans, enough over 3 years to keep up 
to 630,000 borrowers in their homes.
    Second, with the encouragement of the Federal Government 
but, again, with no Government assistance, in the midst of the 
impending failure of Lehman Brothers, Bank of America announced 
plans to acquire Merrill Lynch.
    Third, despite having completed our own capital-raising 
effort with no Government assistance, Bank of America agreed to 
participate in the TARP Capital Purchase Program. We agreed to 
participate in this program at the encouragement of the 
Treasury, and we do so in the belief that it is in the best 
interests of the national financial system.
    With regard to the Bank of America home loan modification 
program, we are intensely focused on helping borrowers stay in 
their homes. In the last 6 months, Bank of America has 
announced two major home retention programs that together will 
address the needs of up to 630,000 homeowners and $100 billion 
in current home loans. We have more than doubled the number of 
our home retention professionals in the last year to more than 
5,600 individuals who are equipped to serve eligible borrowers 
with this new program, elements beginning on December 1. A 
foreclosure process will not be initiated nor will it be 
advanced for a customer likely to qualify until Bank of America 
has made a decision on a customer's eligibility. Modification 
options will include, among others, FHA refinancing under the 
Hope for Homeowners Program, interest rate reductions, and 
principal reductions.
    Now I would like to address more specifically our 
participation in the TARP program. Under the TARP program, we 
have received $15 billion from the Treasury in exchange for 
shares of preferred stock. This investment by Treasury is 
designed to be a profitable one for the Federal Government. 
With these capital levels, Bank of America is focused on 
serving the financial needs of our customers, so we would look 
at about a 9-percent Tier 1 capital ratio.
    So what are we doing? Well, by example, in the third 
quarter of this year, we have made more than $50 billion of 
mortgage loans and more than $6 billion of home equity loans. 
Further, business lending remains strong, and we have continued 
making loans to States and municipalities in a time of 
extraordinary uncertainty.
    While the fourth quarter results are not available until 
January, thus far this year our total commercial, large 
corporate, and Government commitments have increased by more 
than $33 billion, or 6 percent. The funding of new loan 
commitments this year has increased by 6 percent over the 
previous year. And, in addition, we have committed or 
reaffirmed nearly $23 billion of credit to State and local 
governments thus far in 2008. And with this enhanced capital, 
we are now actively engaged in the purchase of mortgage-backed 
securities contributing to the increased liquidity in the 
market, which was one of the original objectives of the TARP 
program.
    Finally, I would like to address the issue of executive 
compensation, which has been the subject of much discussion 
here today and in relation to the TARP program. Executive 
compensation at Bank of America will not be paid using the 
capital infusion received from Treasury last week. The Bank of 
America Board of Directors instead determines executive 
compensation on an annual basis based on the financial 
performance of our company, and as I stated previously, Bank of 
America has earned $5.8 billion in the first three quarters of 
this year.
    Nevertheless, as these earnings are reduced compared to 
previous years, this year's bonus compensation pool for senior 
managers at Bank of America is expected to be reduced by more 
than 50 percent. While final decisions on our compensation have 
not been completed by the board, executive compensation levels 
are not impacted nor will they be enhanced by last week's 
capital infusion from the Treasury.
    With that, I will conclude my testimony. Thank you, Senator 
Dodd, and Members of the Committee.
    Chairman Dodd. Thank you very much, Ms. Finucane.
    Mr. Campbell, thank you. Welcome to the Committee.

  STATEMENT OF JON CAMPBELL, EXECUTIVE VICE PRESIDENT, CHIEF 
  EXECUTIVE OFFICER OF THE MINNESOTA REGION, WELLS FARGO BANK

    Mr. Campbell. Mr. Chairman and Members of the Committee, I 
am Jon Campbell. I am Executive Vice President of Wells Fargo's 
Regional Banking group. Thank you for allowing me to comment on 
Wells Fargo's participation in the Capital Purchase Program.
    Wells Fargo believes that our financial system is more 
important than any one individual company. We believe the 
Capital Purchase Program is a positive step toward stimulating 
the United States' economy. It is Wells Fargo's intention to 
use the CPP funds for additional lending and to facilitate 
appropriate home mortgage solutions.
    Wells Fargo continues to be one of the strongest and best 
capitalized banks in the world. The investment from the U.S. 
Government adds to our already strong balance sheet and will 
enable Wells Fargo to offer appropriately priced credit at a 
time when several sectors of the financial industry have shut 
down.
    Since mid-September when capital markets froze, Wells Fargo 
has led the industry in lending to existing and new 
creditworthy customers. During this time nonprofit 
organizations, hospitals, universities, municipalities, small 
businesses, farmers, and many others had nowhere to turn when 
their existing capital market channels vanished. We were there 
to provide credit so they could continue to offer the services 
that our communities depend upon.
    We are able to lend through these difficult times because 
of our emphasis on prudent and sound lending which includes 
understanding what our customers do and what their financing 
needs are. As demonstrated over the past several years, we are 
willing to give up market share if a product is not in the best 
interest of our customers. And simply put, those companies that 
didn't put the customer at the center of every decision they 
made are no longer here today.
    We intend to expand lending in all of our markets. As 
demand warrants, we will have more than adequate capital to 
lend to creditworthy customers in an appropriate manner and, as 
required, will pay back the CPP investment with interest.
    Wells Fargo remains a strong lender in areas such as small 
business and agriculture. By volume, we are the No. 1 
commercial real estate lender in this country. In fact, we grew 
commercial real estate loans 37 percent year to date in 2008. 
And our middle market commercial loans--made to Fortune 1500-
sized companies across the country--are up 24 percent from this 
same time last year.
    As far as consumer lending is concerned, we are certainly 
open for business. Our consumer loan outstandings have 
increased almost 9 percent in the third quarter of 2008 in 
comparison to the same quarter in the previous year.
    The Committee has asked whether CPP funds would be spent on 
executive compensation. The answer is no. Wells Fargo does not 
need the Government investment to pay for bonuses or 
compensation.
    Wells Fargo's policy is to reward employees through 
recognition and pay based on their performance in providing 
superior service to our customers. That policy applies to every 
single employee, starting with our Chairman and our CEO. For 
example, the disclosures in our 2008 proxy statement show that 
the bonuses for all Wells Fargo named executive officers were 
reduced based on lower 2007 performance.
    Mr. Chairman, since the middle of 2007 when you convened 
your Housing Summit, Wells Fargo has implemented the principles 
you laid out by working with borrowers at each step of the 
mortgage crisis. With the changes in our economy and the 
continuing declines in property values across many parts of the 
country, even more people do need our help.
    As a number of new foreclosure relief programs require 
capital to implement, the availability of CPP funds will make 
it easier to successfully reach delinquent homeowners. This 
capital, leveraged with the announcement this week of a 
streamlined large-scale loan modification process that applies 
to loans serviced for Fannie Mae and Freddie Mac, will enable 
Wells Fargo to utilize a variety of programs quickly and also 
institutionalize an approach that servicers can rely on going 
forward.
    The strength of our franchise, earnings, and balance sheet 
positions us well to continue lending across all sectors and 
satisfying all of our customers' financial needs, which is in 
the spirit of the Capital Purchase Program.
    Mr. Chairman and Members of the Committee, thank you, and I 
look forward to your questions.
    Chairman Dodd. Thank you very much.
    Last, but not least, Ms. Zirkin. We thank you very much for 
being before the Committee.

    STATEMENT OF NANCY M. ZIRKIN, EXECUTIVE VICE PRESIDENT, 
             LEADERSHIP CONFERENCE ON CIVIL RIGHTS

    Ms. Zirkin. Thank you, Senator Dodd and other Members of 
the Committee. Again, I am Nancy Zirkin, Executive Vice 
President of the Leadership Conference on Civil Rights, our 
Nation's oldest and largest civil and human rights coalition.
    Let me begin by saying why the foreclosure crisis is so 
important to LCCR. Homeownership has always been one of the 
most important goals of the civil rights movement. It is the 
way most Americans build wealth and improve their lives, and it 
is essential to stable communities.
    For decades, LCCR has worked to break down barriers to fair 
housing, as well as the barriers from redlining and predatory 
lending, to the credit that most people need to own a house.
    For these reasons, we have argued for a number of years 
that the modern mortgage system was terribly flawed, that 
countless irresponsible and abusive loans were being made, 
often in a discriminatory way, and that without better 
regulations things would not end well.
    Now, after years of denial, I think it is quite obvious 
that the mortgage crisis is definitely not contained. But to 
date--and despite the best efforts of you, Mr. Chairman, and 
others--the whole collective response, based on voluntary 
efforts, has not done much to actually turn the tide.
    At the same time, there are helpful ideas out there now 
such as the FDIC proposal and the efforts of Bank of America 
and others. However, LCCR remains convinced that the best way 
to quickly reduce foreclosures is to let desperate homeowners 
modify their loans in Chapter 13. It would give borrowers 
leverage to actually negotiate with servicers and give them a 
last resort when the negotiations do not work.
    It does not use public funds, and more importantly, it 
would quickly help other homeowners and our economy by keeping 
the value of the surrounding homes from being eroded, stopping 
a vicious cycle that can only lead to more foreclosures.
    We recognize that the bankruptcy relief has faced intensive 
opposition from industry, which is ironic to us given the 
number of lenders that have obtained bankruptcy relief 
themselves.
    Opponents say that allowing bankruptcy would make investors 
hesitant, limiting ``access to credit'' for underserved 
populations. Well, the fact is right now, because of the years 
of irresponsible lending, there is no access to credit for most 
of the people, anyway.
    We are glad that since your last hearing several banks and 
the GSEs have planned to drastically increase their loan 
modification programs, following what the FDIC is doing with 
IndyMac. We are all for voluntary efforts. Every home that is 
saved is a step in the right direction.
    However, industry efforts have not provided enough 
affordable, lasting solutions for the borrowers. This obviously 
has a lot to do with securitization and second mortgages. Until 
these obstacles can be overcome, industry efforts cannot be a 
substitute for actually helping homeowners directly. The stakes 
are simply too high because the credit drought will not be 
mitigated until foreclosures are controlled.
    While LCCR is disappointed that the bankruptcy relief that 
was blocked earlier this year, we are encouraged by some of the 
recent discussions with FDIC about a new mortgage guarantee 
program. As we understand it, the plan would give new 
incentives for loan servicers to reduce payments to 30 percent 
debt-to-income ratio in return for Government guarantees.
    If the plan can be implemented quickly, and just as 
importantly, if it is quickly used by the servicers, we believe 
it will be a great improvement over existing efforts, including 
Hope for Homeowners Act, moratorium, or even the existing 
IndyMac plan. It also aims directly at the cause of the 
economic crisis--foreclosures. So it is a wise investment, 
especially with the latest controversies over how Wall Street 
has been using our tax dollars.
    For all of these reasons, while we have a few reservations, 
we strongly believe that the FDIC plan is well worth a try, and 
it should be adopted as quickly as possible.
    Before I conclude, I would be remiss, especially because 
this is the 40th anniversary of the Fair Housing Act, if I did 
not note that any measure to implement the financial rescue law 
must be done in a way that is fully consistent with all 
applicable civil rights laws--something I discuss in greater 
detail in my written testimony.
    Again, Mr. Chairman, thank you for the opportunity of 
testifying, and I look forward to answering questions.
    Chairman Dodd. Thank you very, very much, Ms. Zirkin, and I 
appreciate your testimony and the testimony of all our 
witnesses. It has been very helpful this morning.
    I am going to have the clock on for 7 minutes, and we will 
try to keep to that, if we can. We have good participation here 
today, and I want to make sure everybody has a chance to raise 
some issues.
    Let me, if I can off the bat, focus my first question to 
the bank representatives here, and I include Goldman Sachs in 
that because I know you are in the business of becoming a bank. 
You are the fourth largest bank holding company, I believe, and 
so I am going to ask the question of you as well. Let me ask 
the three questions and then ask you to respond, if you can.
    One important tool used by the Federal Government to 
address the freeze in credit markets was the guarantee, as you 
are all aware, of senior unsecured bank debt for all 
maturities. This program covers all lending institutions for 30 
days, after which any bank can opt out of the program.
    So my first question to you, I would like to ask whether 
any of you here at the table this morning have any plans to opt 
out of this program.
    Second, I would like to know from the panelists if their 
institutions have made use of any of these number of facilities 
that were created to help maintain liquidity, and since they 
were created including the commercial paper funding facility, 
as I have said, whether the panelists' intentions are to make 
use of these funds.
    And, third, for those of you whose institutions offer money 
market funds, has the Federal guarantee on those funds been 
helpful to keeping those funds in your institutions?
    Why don't we begin with you, Mr. Zubrow?
    Mr. Zubrow. Thank you very much, Mr. Chairman.
    With respect to your first question about the guarantee of 
senior bank debt and whether or not JPMorgan Chase is going to 
opt out of that program, we are still evaluating that and have 
not yet made a determination on that. Obviously, once we do, we 
are happy to come back to you and let you and your staff know 
how we have decided to handle that.
    With respect to the commercial paper funding facilities, we 
certainly think that those have been very helpful in the 
marketplace, and certainly we have been an active issuer of 
commercial paper, and many of our clients have been active 
issuers of commercial paper. And it is absolutely clear that 
those facilities have been very helpful in bringing back 
investors into that marketplace, and I think that has been a 
very helpful step forward.
    Then with respect to your third question with respect to 
the Federal guarantee program, you know, there again, you know, 
we think that that has been a helpful addition to liquidity in 
the marketplace, and we think that it is going to make a big 
difference for bringing investors back into the market.
    Chairman Dodd. And it has helped keep those funds in your 
own----
    Mr. Zubrow. And it certainly helped keep funds in the money 
market funds. We have certainly seen a significant increase--we 
obviously saw a major increase in inflows into our funds, 
particularly our Treasury funds, with these different 
additional programs both for ourselves and across the industry. 
We have seen a shifting back into what are called the ``credit 
funds'' or the ``prime funds,'' which suggests, you know, 
greater liquidity going into the corporate sector.
    Chairman Dodd. So all of these issues have been very 
helpful to JPMorgan Chase?
    Mr. Zubrow. Correct.
    Chairman Dodd. Yes. Mr. Palm.
    Mr. Palm. With regard to your three questions, first, on 
the opt-out, we have no plan to opt out, but we are still 
evaluating the program. And as I understand it, certainly the 
final details of the program have not been announced, and 
comments have been provided.
    Second, the CP facilities and so on, again, I think those 
have been helpful broadly across markets and certainly for our 
clients.
    And, third, on the money market funds and so on, we believe 
that will ultimately be quite helpful. What we saw at our firm, 
which sounds similar to JPMorgan, was there was a great flow of 
monies out of some of our funds into other funds, i.e., the 
Fed-related funds, and now some of that money has flowed back.
    Chairman Dodd. Because of the guarantee.
    Mr. Palm. I think so, yes. So obviously, indirectly 
ultimately that will be of benefit to the credit markets and 
companies.
    Chairman Dodd. I agree with that as well, but the 
institution--Goldman Sachs has benefited clearly as a result of 
the Federal guarantee.
    Mr. Palm. Yes, we believe it is a benefit to the market.
    Chairman Dodd. Ms. Finucane.
    Ms. Finucane. I think we see it positively on all three 
fronts. Certainly the money market fund insurance has been a 
real positive. We have no plans to opt out. We do need some 
further guidance to fully understand that. And the same on the 
commercial paper, it is a real positive.
    Chairman Dodd. Well, thank you for that as well.
    Let me jump, if I can, I want to--I will exclude Mr. Eakes 
and Ms. Zirkin from the discussion--I am sorry. I apologize. 
Mr. Campbell from Wells Fargo.
    Mr. Campbell. It is OK, Mr. Chairman. I actually was not 
offended at all.
    Chairman Dodd. No, no, no.
    [Laughter].
    Mr. Campbell. Quickly, as it relates to the senior debt 
guarantees, we are still in an evaluation phase, and so I am 
not in a position to answer that. But we would be happy to get 
back to you on that.
    As it relates to the commercial paper guarantee, it clearly 
made a very positive difference in the marketplace. There were 
numbers of companies who had depended upon that market for many 
years for liquidity that were frozen out. That market has----
    Chairman Dodd. Including Wells Fargo?
    Mr. Campbell. To some extent, but actually, my answer is 
more from my perspective as a banker and looking at the 
customers we take care of. And I saw it more there. Since I am 
not part of our treasury group, I do not want to comment on 
what the effect was specifically on Wells.
    And as it relates to the money market fund guarantees, the 
only comment I would offer is that while it has been very 
helpful and it has clearly helped with outflows, there is a 
consideration we all need to be thoughtful of, and that is, 
what is the impact on core bank deposits where we have now 
created basically a similarity between the money market funds 
and deposits? And I just think we have to be careful and----
    Chairman Dodd. That is a legitimate point.
    Mr. Campbell [continuing]. Consider that as we move 
forward.
    Chairman Dodd. But Wells Fargo has benefited itself from 
that guarantee is my point.
    Mr. Campbell. Yes.
    Chairman Dodd. Now, I will exclude Mr. Eakes and Ms. Zirkin 
because you have commented on the FDIC, the Sheila Bair 
proposal, and I appreciate your comments. I have certainly 
expressed myself at several hearings on that idea. But as we 
saw yesterday, Secretary Paulson-while it was dressed up in a 
way of continuing to look at it, the fact is he rejected it 
flat-out, in my view, and I think that is terribly regrettable, 
in my view, in light of the potential benefit here. But I would 
like to ask the other panelists to comment specifically on that 
proposal as to whether or not you think it has merit and 
whether or not your institution would be supportive of such a 
move. And I realize there are details to everything, so I am 
not expecting you to sign off on details. But the overall 
thrust, in light of the fact that the voluntary program, the 
very meeting we had here 2 years ago in this room in which I 
begged the institutions and they promised they would, setting 
up principles to do workouts, then it was the voluntary Hope 
for Homeowners, then it was the Hope for Homeowners Act we 
passed--and all of these measures, frankly, have not produced 
anywhere near the results we all had hoped they would.
    And I do not disagree, by the way, the bankruptcy 
provision. And if we got a chance next week, I may off that on 
the floor of the Senate as part of a package out here. Senator 
Durbin of Illinois deserves great credit for having raised this 
issue for a long time. I do not know how my colleagues feel 
about it, but we have a chance we may raise that one.
    But in light of that--I do not know whether that would work 
or not--this does not require action by the Congress to do what 
Sheila Bair has suggested. It takes cooperation from the 
Treasury to make this happen. So I would like to know from the 
other witnesses here how you react to that proposal. We will 
begin with you, Mr. Zubrow.
    Mr. Zubrow. Yes, Senator. JPMorgan Chase is certainly very 
supportive of the types of programs that Chairwoman Bair at the 
FDIC has proposed. We think that there is a lot of merit in 
some of the suggestions. As you said, there are a lot of very 
important details that need to be worked out, and we are 
certainly actively interested in engaging in discussions with 
her as well as with the Committee on those details.
    I do think that, you know, we certainly think that the 
efforts that we have also taken voluntarily on loan 
modifications are yielding results and are an important part of 
the effort. But certainly taking it further is very important.
    Chairman Dodd. One of my colleagues may raise the issue of, 
boy, this gets into a very--but I recall a lengthy debate we 
had here over the issue of contracts and trust arrangements 
when it comes to securitization. And this really does get 
esoteric, but at some point I hope we would get back to that 
discussion on securitization and whether or not the contracts 
or the trust arrangements pose the problem of new statutory 
authority. But I gather your answer is that basically you think 
the Sheila Bair idea has merit and should be pursued. Is that a 
fair analysis?
    Mr. Zubrow. That is correct, and we are certainly happy to 
also talk about the securitization point.
    Chairman Dodd. I appreciate that.
    Mr. Palm.
    Mr. Palm. As I indicated at the beginning, since we are not 
really a significant mortgage originator--I think our 
subsidiary is the 30th largest loan servicer--probably anything 
I have to say on this topic should be taken as from a level of 
being a novice at some level. But I would say two different 
things.
    One, I think I referred to our subsidiary, Litton----
    Chairman Dodd. You did.
    Mr. Palm [continuing]. Which was a family business created 
back in 1988, and the current CEO who still runs it is the son 
of the original founder. They believe very strongly that loan 
modifications are a way to actually benefit the investor as 
well as the homeowner, because foreclosures really are not the 
most economically best thing to do.
    Having said all that, and, again, not being an expect in 
the program that has been announced--and as Mr. Zubrow has 
indicated, there are a lot of details--I think, you know, we 
are impressed by the fact that there is a program that looks as 
though it may be helpful and, indeed, be supplemental to some 
of the other actions and activities being taken.
    I cannot say that Goldman Sachs is, you know, standing here 
supporting it because it is just not--we are not not supporting 
it, either. It is just that we have looked at it. We would be 
happy to be involved in further commentary and happy to provide 
people to you since, as my colleague Mr. Litton, for example, I 
know is testifying tomorrow before one of the House committees, 
and he truly is the expert in this area.
    Chairman Dodd. I am sure Barney Frank will ask him the 
question, and you can tell him to get ready for it.
    Mr. Palm. Pardon me?
    Chairman Dodd. Tell him to get ready for Barney's question.
    Mr. Palm. Oh, OK. Thank you very much.
    Chairman Dodd. Yes, Ms. Wachter, Dr. Wachter.
    Ms. Wachter. Yes, obviously, I am speaking personally based 
on economic incentives. I do think that Sheila Bair's plan 
absolutely needs to be tried, and I must say I am puzzled by 
why it appears as though the Treasury has, in fact, rejected 
it. I do not quite understand. It seems to me that this will 
provide incentives, it will provide risk sharing, and it will 
at least move toward the resolution of our major problem, which 
is un-economic foreclosures, foreclosures that should not take 
place for the investor or for the borrower or for the 
neighborhood.
    That is not the entire solution, but I do think it needs to 
be tried. Again, the details matter and I am not completely 
familiar with the details.
    Chairman Dodd. Ms. Finucane.
    Ms. Finucane. Thank you, Chairman Dodd. I think we are 
directionally positively disposed. I would say this: that there 
are some of us who have gone ahead with our own programs that 
are very comprehensive and far reaching. So, clearly, we are on 
this path already. And to the degree that we can understand the 
details--the concept is out there, but the details are critical 
for us. I think we are generally positively disposed, and, 
clearly, the more we can do systematically to deal with this 
issue, the sooner, the better.
    Chairman Dodd. Mr. Campbell.
    Mr. Campbell. We would agree with the context that we need 
to do something more broadly than is currently being done. A 
lot of us have done a lot of things, but in terms of a systemic 
response, there is still much to do.
    Chairman Dodd. And this proposal?
    Mr. Campbell. At this point, while we have not seen all the 
details, clearly the things that we have worked hard on in our 
own programs, one of you raised in your opening comments about 
the issue of redefault. And so as we look at the detail, what 
we will clearly want to focus on are the criteria and standards 
being set in whatever large-scale program is set actually set 
up a mechanism that results in long-term sustainable 
homeownership as opposed to modifications that fall apart in a 
short period of time because all the considerations were not 
made at that time.
    Chairman Dodd. I thank you very much.
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    I am going to direct my first question also to the bank 
witnesses. Secretary Paulson said that the Treasury Department 
is exploring the development of a potential liquidity 
facility--and I do not know that we know what the details are 
there--for highly rated, AAA, asset-backed securities. He said 
that he believes this effort would draw private investors back 
to that market and increase the availability of consumer 
credit. I just would like to ask those who are banking 
witnesses to comment on this proposal.
    Do you think it has merit? Mr. Zubrow?
    Mr. Zubrow. Thank you, Senator. I believe that the 
Secretary introduced those ideas in statements yesterday, and 
there are not a lot of details around exactly how he envisioned 
the program might work. So I think it is a little bit difficult 
to really comment on whether or not it will work until there 
are more details.
    I do think that it is important that we find mechanisms to 
bring investors back into the marketplace for asset-backed 
securities. Certainly right now, to the extent that we are 
continuing and do make credit card loans, other types of loans 
that can be securitized, those loans right now are residing on 
our balance sheet, and certainly for the long-term health of 
the financial system we need to re-attract long-term investors 
into structures. And certainly anything that the Treasury 
Secretary, either in conjunction with the Fed or others, can do 
to encourage investors to come back into that marketplace, it 
will be very helpful.
    Senator Crapo. Thank you.
    Mr. Palm.
    Mr. Palm. The reopening of a market for asset-backed 
securities of whatever type, whether you are talking about the 
credit cards area or whether you are talking about, you know, 
simply mortgages themselves, because it is quite clear that, 
you know, the banks at this table themselves do not have the 
capital for those who are in the business to extend all home 
loans that are actually necessary in this country; and those 
markets have to be open.
    Having said that, you know, we read yesterday that 
announcement, too, and we are not aware of any of the details 
yet or exactly how it would work. But it certainly is something 
that really has to be explored because the capital necessary to 
support the extension of credit, whether it is consumer credit, 
whether it is credit to businesses, whether it is credit to 
homeowners through mortgages, in essence, has to be supported 
by a much broader range of investors as opposed to just bank 
deposits, for example.
    So we have to do something to reopen those markets, which, 
as you know, have been almost totally shut.
    Senator Crapo. Yes. Thank you.
    Ms. Finucane.
    Ms. Finucane. Well, I think we are all a little bit new to 
this insomuch as he made these announcements yesterday. There 
was not a preamble to it. I think I mentioned earlier in my 
opening remarks that we are ourselves back into the secondary 
markets, purchasing mortgage-backed securities. We see the 
problem that he has outlined, particularly with credit cards, 
the securitization of credit cards and moving that debt.
    So the issue is clear. I think we would like to understand 
better specifically what he means. So I think you are hearing 
from all of us that conceptually it is interesting. We have no 
sense of what the details are.
    Senator Crapo. Thank you.
    Mr. Campbell. I would say the same. Obviously, we have not 
seen the details. Wells is a bit different in one way, and 
clearly, as it relates to the mortgage market, having a 
securitized market is critical because we cannot fund all of 
those mortgages.
    As it relates to credit cards and student loans, we have 
not securitized those assets. Those are assets that we have 
chosen to hold in our portfolio, and so as it relates to us 
specifically, it would not do much for us, at least in two 
categories. Clearly on the mortgage product, it is very 
important that those markets function effectively.
    Senator Crapo. Thank you. What I hear from all four of you, 
basically, though, is that the notion of going into some type 
of development of a liquidity facility for these highly rated, 
AAA, asset-backed securities is an important focus that we 
should be taking with our efforts right now. Is that correct? 
Did I misunderstand that from any of you?
    [No response.]
    Senator Crapo. I will take that as acknowledgment.
    Is there a no here? Mr. Eakes, would you like to respond to 
that?
    Mr. Eakes. I wanted to put in a word of caution. I think 
until we fix the problems that we have with asset-backed 
securities, we should be careful about trying to promote its 
regrowth. So the ratings agencies were a problem in rating AAA 
paper. We are basically talking about setting up a Government-
owned structured investment vehicle, SIV, that got Citibank 
into trouble. We need to think about the regulatory structure. 
We need to make sure that the loans that are made cannot be 
passed into a structure without responsibility or liability 
passed back to the people who originated it.
    And, finally, I think that by putting $250 billion of 
equity into the banking system, normally that should leverage 
$10 to $12 for every dollar of equity, so we have basically 
enhanced the balance sheet capacity of the banks in America by 
$2.5 to $3 trillion that they can add. The whole credit card 
market, the entire credit card market in America is about $1 
trillion. So we have the ability to have, as the Wells 
representative mentioned, the ability to hold much of these 
assets on bank balance sheets because of the equity we have 
invested.
    So I just think we have some significant problems in the 
asset-backed market as we have heard the technical discussions 
about how do you modify loans once they are in there, what can 
you do; and we have in no way fixed those problems yet.
    Senator Crapo. Those are good cautions. Your answer to the 
question raises another point, though. You indicated that the 
injections of liquidity should have a 10 to 12 factor of 
leveraging in the marketplace. And I would just like to ask any 
of our witnesses: Has that, in fact, occurred? Have we seen 
that kind of----
    Mr. Eakes. It will take time, but that is the normal 
leverage level for banking equity.
    Senator Crapo. But we are not seeing it right now.
    Ms. Finucane. Could I just----
    Senator Crapo. Yes.
    Ms. Finucane. I think it is still premature. We received 
this money a week ago. The investments were made literally a 
week ago. So I think it is premature to be thinking what has 
the effect been other than you are seeing movement, and I think 
that is a positive.
    Senator Crapo. And we are seeing the movement.
    Ms. Finucane. Well, we are seeing the early stages of some 
movement, but it is just so early, 1 week in.
    Senator Crapo. All right.
    Mr. Campbell. I think the other thing----
    Mr. Eakes. The combination of equity and raising the 
deposit insurance means that over time there will be a growth 
of balance sheet capability by the banks who have received 
these equity injections.
    Senator Crapo. OK. I assume what I am hearing is that we 
are seeing movement and that that is positive movement. Mr. 
Campbell.
    Mr. Campbell. The only caution I think we all have to 
remember is that there are two sides of this equation. There is 
clearly the capability that our balance sheets now have, but 
there also needs to be economic stimulation that requires the 
need for borrowings as well. And so I think clearly the 
capacity side has been addressed. I think one of the economic 
issues that we as a country struggle with is how do we move 
from a stagnant environment to a growth environment that then 
can utilize the capacity that has been generated.
    Senator Crapo. Well, thank you. I see my time has expired.
    Chairman Dodd. Thank you very much, Senator.
    Senator Johnson.
    Senator Johnson. For the four representatives of financial 
institutions, beginning with Mr. Zubrow, does your institution 
intend to use capital purchase funds for investor dividends or 
to acquire other institutions?
    Mr. Zubrow. Thank you very much, Senator, for that 
question. Obviously, the money has gone into our capital base. 
We pay dividends out of our retained earnings. So far this 
year, JPMorgan Chase has had profitable quarters in each of our 
quarters, and we anticipate that will be the case for the 
fourth quarter. And so we would anticipate that dividends will 
continue to be paid out of our earning stream and not out of 
our capital base.
    Obviously, we recognize that there is a restriction in the 
CPP which limits our ability to increase or change our common 
dividend policy, and certainly we have no intentions of doing 
that until the funds are repaid.
    Senator Johnson. Do you intend to purchase other 
organizations?
    Mr. Zubrow. You know, I think that there has been a lot of 
debate in the press about, you know, whether or not the CPP is 
going to be used to somehow purchase healthy organizations. And 
I think that, you know, we obviously have participated in two 
very important acquisitions during this year, you know, very 
much in conjunction with Federal regulators, both the 
acquisition of Bear Stearns and the acquisition of Washington 
Mutual, both of which, you know, we would characterize as 
acquiring, you know, failing institutions, and through those 
acquisitions we really think that we helped protect the 
soundness of the financial system, and certainly in the case of 
Washington Mutual, prevented the need for any FDIC funds to go 
into that--you know, against the Deposit Insurance Fund.
    So, you know, when we think about acquisitions, right now, 
you know, it is very much in line with those types of 
situations where we think that we can be helpful to the safety 
and soundness of the system.
    Senator Johnson. There is no intention to purchase healthy 
institutions?
    Mr. Zubrow. Right now, you know, we obviously are presented 
with a number of different types of acquisition opportunities, 
and we will continue to evaluate those based on our historic 
criteria. But, you know, certainly right now there is not 
something that, you know, I would characterize as saying we are 
looking to purchase a healthy banking institution.
    Senator Johnson. Mr. Palm.
    Mr. Palm. First, on the dividend point, I will reiterate 
much of what JPMorgan has said. We pay dividends out of our 
retained earnings. We have had earnings in each of the first 
three quarters this year. We really do not pay dividends in a 
sense out of a certain amount of the TARP capital that has come 
into us at all.
    I would also just like to mention the fact--I think which 
others have alluded to, so I will, too--that in advance of the 
TARP money, we had obviously engaged our own private capital 
raise of over $10 billion literally a week before so that we 
have right now a very healthy and highly capitalized balance 
sheet, which I think, as I said earlier, all augur well for the 
goal of increasing liquidity and capital committed to markets 
and what people want to accomplish in business and otherwise. 
Because one thing I would say is that there is no purpose 
whatsoever for us to sit on money because we pay out returns to 
the Government in the case of the preferred that you have 
purchased, we pay out returns to a variety of other people, and 
our interest is putting money to work, not sitting on it.
    On the topic of acquisitions, I can say two things. One is, 
as you probably know based on our history, our growth has 
basically always been organic as opposed to, you know, major 
acquisitions. We have done a few from time to time, but that is 
just the way we have developed. The most obvious example would 
be our asset management business, which, over a period of 10 
years, we built from $50 billion in assets to almost $1 billion 
in assets, and that was all done basically through organic 
growth.
    Now, we have no acquisition on the table right now, you 
know, involving a healthy bank that we are looking at. In the 
same way as other institutions here, a variety of proposals no 
doubt will be presented to us over time, and I think as you 
also know, we are sort of new to this sector to the extent that 
we are in the so-called classic banking sector and we are 
finding our way.
    Whether or not, for example, we provide liquidity to the 
market by purchasing, you know, we will call it deposits from 
failed institutions or otherwise, I cannot say. But in terms of 
the acquisition point you make, we have no current plan.
    Chairman Dodd. Could I just interrupt for 1 second on that 
point that Senator Johnson has raised? There was a statement 
put out by Goldman last evening, and it says--was this last 
evening? A few days ago, excuse me. But it goes on talking 
about the company, and let me just finish this statement. It is 
``creating a new one, GS Bank USA, that will have more than 
$150 billion in assets, making it one of the ten largest banks 
in the United States, the firm said in a statement last night. 
The firm will increase its deposit base `through acquisition 
and organically.' ''
    Now, that is the statement from Goldman. I want to raise 
that with you.
    Mr. Palm. I think that the acquisition point does not mean 
that we are acquiring or have a current plan to acquire, you 
know, a particular healthy bank. As I think you are well aware, 
there are a variety of situations now where there are failing 
institutions and otherwise where their deposit base, in 
essence, for want of a better word, is being sold. And so we 
may end up acquiring deposits in that way. But it is not a plan 
for the use of the TARP money.
    Chairman Dodd. I apologize, but I just wanted to raise 
that.
    Senator Johnson. What does Bank of America have to say?
    Ms. Finucane. Well, obviously we got the money, and we will 
use the money to strengthen our capital ratios and to invest 
and to loan. So we have already--I think I mentioned earlier in 
my oral testimony that we have already gone into the secondary 
market, so that is some of how we would deploy the money.
    Certainly we would not be using it to increase our 
dividend. Like the others, we pay dividends on retained 
earnings.
    I think relative to healthy banks, we are in the midst of 
our Countrywide transition and soon hope to have acquired 
Merrill Lynch. So I think we are fully engaged, shall we say. I 
think on the longer term, I think the question is more about 
are there troubled assets or troubled banks to which these 
healthier companies can continue to make investments. I think 
it is--we do not know of any, and it would be inappropriate for 
me to comment on that. That is the job of our CEO. But there 
would be no plans in that.
    Senator Johnson. Mr. Campbell.
    Mr. Campbell. Senator, Johnson, three comments. The answer 
as it relates to dividends is, no, we will not use the CPP 
funds to pay dividends. The one caution, I think, we all have 
to be thoughtful on is that continuing to pay dividends at 
appropriate levels, while we maintain appropriate capital 
levels, is critical to investor confidence remaining. And so I 
would just say that while we clearly agree with you that the 
use of the funds is not for dividends, to consider restricting 
dividends could have unintended consequences that we all should 
be thoughtful of.
    Point two as it relates to using the funds for 
acquisitions, just to be clear, we did acquire--we announced to 
acquire Wachovia. We made an announcement 10 days before the 
CPP was announced. And so earlier this week we completed our 
own capital raise to assure that we have the appropriate levels 
of capital to complete that transaction. So, clearly, we are 
not using CPP funds to complete that transaction.
    And, third, as it relates to our plans for further bank 
acquisitions, I would be right beside B of A in saying we are 
fully consumed. It is critical that we do a really good job of 
transitioning the Wachovia transaction for the good of their 
customers, their communities, and all of our shareholders.
    Senator Johnson. My time has expired.
    Chairman Dodd. Thank you very much, Senator.
    Senator Martinez.
    Senator Martinez. Thank you, Mr. Chairman.
    I want to go back to the issue of your efforts to attempt 
to solve families' problems and keeping people in their homes, 
and I specifically want to speak to both of you since you seem 
to be both having active programs in this regard.
    How are you managing or are you able to work out loans in 
which the paper has been securitized? Have we been able to get 
to the point where those--not the paper you are holding, but 
that which has been securitized? Are you working those out?
    Ms. Finucane. Yes, we are having some luck at that. About 
12 percent of our mortgage portfolio we own, and the rest is--
--
    Senator Martinez. Twelve percent you own, so the vast 
majority of it is in the other category.
    Ms. Finucane. We feel that we have the covenants to be able 
to cover about 75 percent of that in terms of in the best 
interest of both the investors and in the best interest of the 
homeowner. But we are making progress.
    Of course, our program does not fully engage until December 
1st, but even heretofore, we have been able to work out about 
200,000 homeowners to prevent foreclosure.
    Senator Martinez. Mr. Campbell, we welcome you to the State 
of Florida. What are you going to do for our homeowners that 
are in trouble?
    Mr. Campbell. Let me respond to that. First of all, our 
portfolio is different than many other peers' portfolios in 
that it is composed primarily of two categories: our own owned 
loans, and then a high percentage of loans that we service for 
Fannie and Freddie. Fortunately, we have not had the same 
degree of negative amortizing loans and some other problem 
assets.
    Having said that, we have always believed that, to get to 
your issue specifically, one of the things that had to be 
accomplished very quickly was to come to some agreement with 
the people who we service for, and in our case that means 
Fannie and Freddie. So this week's agreement to the streamlined 
program with Fannie and Freddie will clearly help us greatly in 
our servicing responsibility and being able to reach 
resolutions that are appropriate for those homeowners that we 
are responsible for the servicing.
    Just a couple statistics in our case. It is all about 
contact. Currently, we are reaching about nine out of every ten 
customers who are beyond 60 days delinquent, so we are having 
good connections at the beginning. And then in about seven out 
of ten situations, they actually do ask us to help them figure 
out a resolution to their situation. And then in about five out 
of ten, we are actually able to mitigate foreclosure and enter 
into some form of modification that we believe increases their 
long-term sustainability of that homeownership.
    Senator Martinez. I guess what you are saying is that you 
are not being hampered in your ability to do that by the issue 
of securitization in your situation.
    Mr. Campbell. It has been challenging in that we had--for 
all the things you have heard, we have had to be extremely 
careful to make sure we were complying with our agreements, 
which in our case are primarily Fannie and Freddie, and the 
fact that we now have agreement and we have institutionalized 
that, it is a strong improvement from where we were.
    Senator Martinez. Mr. Zubrow.
    Mr. Zubrow. I think the issue that you raise and others 
have raised is obviously a very important one across the 
securitization industry. I would note that in the House 
hearings yesterday the ASF organization which represents a 
number of the major investors and securitization pools, you 
know, indicated that they had a much greater willingness to 
work with the industry to devise a methodology to address this 
issue. And so we very much welcome that movement and look 
forward to working with them on this.
    It is absolutely clear that there has to be a balancing of 
what is the value to the holders of the paper to be able to 
have a loan modification and an avoidance of foreclosure. We 
certainly think that that is a balancing which can be done in 
the appropriate circumstances to the benefit of the 
securitization holders, and we certainly look forward to 
working with the different industry groups to devise a much 
more streamlined process to be able to get to that end.
    Senator Martinez. OK. Dr. Wachter, I wanted to ask you if 
you could tell us your view of the bankruptcy issue. I know 
that it is appealing to think that a judge could just modify 
the mortgage. However, my lawyerly sense tells me that if you 
have a contract and all of a sudden it is going to be 
dramatically modified by a judicial fiat, there may be 
something that investors might look askance at, and there may 
be a liquidity issue going forward in terms of mortgage money.
    Can you tell me your view of that? I am trying to stay away 
from those that obviously have a point of view that may be 
different and maybe looking to you as an impartial observer. I 
have no idea. I am violating my own lawyerly world, which is 
not to ask a question you do not know the answer to. But I have 
no idea where you are coming from, and I would love to know 
your thoughts.
    Ms. Wachter. I do believe that the importance of contracts 
that can be relied on is critical to any system that is a basic 
capitalist system because you have to rely on contracts in 
order to determine what the risk is.
    On the other hand, as I said in my oral comments, the 
Nation is at risk, and I do think we need to have loans 
modified that are economically rational to modify at a much 
faster pace than is currently occurring. I do think that the 
Fannie and Freddie announcement yesterday is going to be quite 
helpful, but it does not get to those securitized loans that 
Mr. Zubrow just pointed to, and he said that he was looking 
forward to sitting down and getting some of those issues 
resolved.
    We have been in this crisis for a year now, or more, and it 
is worsening. We need to have those folks at the table. We need 
to get those issues resolved. And I think all options have to 
be at that table in terms of getting people together and 
incentivized to discuss what will happen going forward.
    Senator Martinez. Do you think the IndyMac model that is 
being utilized by the FDIC would be one that could be----
    Ms. Wachter. Absolutely.
    Senator Martinez. [continuing] A more helpful model than a 
bankruptcy model?
    Ms. Wachter. That absolutely appears to be consistent with 
current contracts so that is indeed a solution. But the problem 
is that even that solution does not appear to be formally being 
adopted. In fact, quite the contrary, it appears to be 
rejected.
    Senator Martinez. Maybe we can work on that one first.
    My time is up. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Casey.
    Senator Casey. Mr. Chairman, thank you very much.
    I wanted to address my first question to Mr. Eakes, Dr. 
Wachter, and also Nancy Zirkin, with regard to some of the 
discussion we just heard in this context, this very simple but 
important question, I think, in terms of what we are going to 
do prior to even the next administration.
    What should the Congress do this month to take action--
which I think there is consensus on, I think it is a strongly 
held belief that I have--that we cannot, as so many have stated 
today, deal with this problem adequately unless we address 
directly the question of foreclosures and modifications of 
troubled mortgages? But what should the Congress do this month 
to address that problem?
    Nancy, we will start with you.
    Ms. Zirkin. Yes, it is my pleasure. Thank you, Senator.
    I think, first of all, I am very disappointed about the 
Treasury's decision yesterday because for us, while we do not 
know everything about Sheila Bair's plan, it sounds promising, 
and we have to do something. It sounds promising principally 
because it really gives servicers incentives. It also seeks to 
change the terms of the mortgage, interest first and then 
principal if necessary.
    I invite you all to read a fascinating study by a professor 
of law at Valparaiso University--I believe it is unpublished, 
and I can get you a copy--Alan White. And he makes the point 
that unless you do these things, that is, restructure either 
the interest or the principal, then it is just kicking the can 
down the road. And for our communities they are in desperate 
straits. We cannot afford to have Congress wait. The Bank of 
America is doing a really good job, but it is not going to kick 
in for another month, I am hearing. And the magnitude of this 
problem is so huge that what I think Congress ought to do is 
pressure Treasury into the FDIC plan and pass bankruptcy 
reform, Senator.
    Senator Casey. OK. Thank you.
    Doctor.
    Ms. Wachter. Well, I certainly think we need faster action 
on the potential solutions that are at the table and perhaps 
more understanding why they have not been embraced. If there is 
a good reason, we need to hear it.
    We also need to bring the securitization industry to the 
table to directly ask them the question you have asked us: What 
will it take?
    Senator Casey. Mr. Eakes.
    Mr. Eakes. I know Senator Martinez does not want to hear 
this exactly because he had very legitimate questions about the 
bankruptcy provision. But if there was one thing you could do 
in the next month, it would be to pass that provision, and here 
is the reason why: It was limited in its effect to loans that 
are going to go into foreclosure, so it is not going to impact 
other loans. It is going to only impact those loans that would 
otherwise suffer the loss to the borrower of being out of their 
homes and the loss in the neighborhood of having a vacant home. 
It costs the taxpayer nothing, and actually the State of 
Florida will be the State that has the largest number of 
residential units that are underwater--not the real water, but 
underwater in that their debt will be much higher than the 
value of the property.
    With some of the payment option ARMs, you cannot solve or 
modify those loans without doing both. You have to lower the 
interest rate and you have to lower the balance, or you cannot 
keep the families in those homes. So I think if you had only 
one shot to make in the next month, that is the one with the 
protections that are built into that bankruptcy provision.
    I would also add that if--when we had the discussion about 
the equity investment in the banks, no bank is going to use the 
equity investment to pay dividends or to pay executive 
compensation. That is not really the right question. Normally, 
equity invested in a bank has a return in good years of 20 
percent; in average years, 15 percent. So if you are only being 
charged by Treasury 5 percent and you earn an average year on 
equity of 15 percent, you have got a 10-percent earnings gain. 
So for one of the banks that received a $25 billion investment 
of equity, they potentially will have an earnings attribution 
specifically because of this program equal to $2.5 billion. 
That would just be sort of standard banking numbers.
    So the question would be: Can you use that $2.5 billion 
that is going to be contributed to your operations to enable 
you to support this bankruptcy type provision? When I have 
talked--and I have talked to the CEOs and senior executives of 
virtually all of the banks and this table, and others, their 
major concern was not that they would lose money on the homes 
that would go through the bankruptcy provision, as narrowly as 
it was drafted. They were worried that the other debts, like 
credit card debts or car loans that are in trouble, would 
create an ancillary loss for the bank. My belief, which I 
believe really strongly is that once you have gotten deposit 
insurance protection, once you have had all the liquidity 
benefits that Senator Dodd elicited, and once you have a direct 
taxpayer investment in the company, it should not be too much 
to ask for each and every one of these banks to say, ``We are 
going to take a little bit of loss on our credit cards in order 
to fix the problems that are devastating the coasts of 
Florida.'' We are only halfway through the problem of subprime 
loans alone. You know, the number of loans that have been 
foreclosed that were subprime is less than the number of 
seriously delinquent subprime loans that are still outstanding 
and in trouble. We are only halfway through the subprime, not 
to mention a third of the way or less with the Alt-A and the 
payment option ARM. We are nowhere near the end of this tunnel.
    So I would say that is the No. 1 thing to do quickly, and 
then I mentioned earlier the Sheila Bair/FDIC proposal is just 
an absolute no-brainer. There is just no reason that we should 
not get that done in the next week.
    Senator Casey. Thank you. I think what we have with the 
housing market and the foreclosure problem itself is an ever 
bleeding wound which we have not dealt with. I am out of time, 
but I do want--just for the record, Mr. Chairman, one of the 
missing pieces of information here, it seems, is a very 
definitive number in terms of the number of homeowners that 
have been helped in the last year or two, with all the efforts 
that are made, the voluntary efforts by Treasury and the 
administration, the statutory provisions that you led the 
charge on and our Committee worked on, as well as the recent 
Emergency Economic Stabilization Act. There is no--there does 
not seem to be a fixed number on the record of how many have 
been helped, and I noticed going through the--I did not have 
time to ask this, but with regard to the institutions 
represented here, you go down the list: JPMorgan Chase, 
Goldman, Wells Fargo, and Bank of America. References in your 
testimony to how many homeowners have been helped in the last 2 
years, the last year, how many projections, how many people are 
projected to be helped, and they are all over the lot. And one 
thing, if Treasury is not requiring it, I think this Committee 
should, in terms of amplification of the record, have each of 
your institutions submit for the record of this hearing, for 
this Committee, exactly how many homeowners have been helped 
and the documentation of that, and then also the projection 
that you have of the number of homeowners you will help in the 
next year or 5 years--some kind of very specific report so at 
least this Committee--if Treasury is not requiring it, as they 
should, at least this Committee will have an accurate record of 
what your numbers are, because I see numbers all over the lot: 
250,000 families helped, 41,000, all these numbers floating 
around, and there is no specific reporting requirement.
    So, Mr. Chairman, if there is a way to make that part of 
the record as well as to encourage Treasury to require it----
    Chairman Dodd. You just did. We will make the request, and 
this is a formal request now.
    Mr. Eakes. Could I add one more point to that question?
    Chairman Dodd. Certainly.
    Mr. Eakes. On page 4 of my written testimony, we talked 
about--we look at the actual modifications that have been 
reported through Hope Now, the voluntary industry association. 
And one of the things I want to emphasize is that we need to 
have a system that gives you loan by loan, loan-level reporting 
of the modifications that can be studied, not identifying data, 
because if someone gave you a report and said here is the 
number of modifications I made, you have no idea whether that 
was meaningful or not. So the State Attorneys General have 
reported that of all foreclosures, 80 percent received no 
modification whatsoever in the past year. Of the remaining 20 
percent, the vast majority of the modifications reported by 
good lenders--the good guys--were what are called repayment 
plans, which is where you add to the payment each month and 
actually increase the monthly payment for the borrower. Only 
about 290,000, over all of the lenders in the last year, were 
actually modifications that reduced the payment level.
    And so I am optimistic. I think we have tremendously 
capable banks who have made announcements this week that are 
very encouraging. But I am also a little bit factual that I 
have heard pledges, and the problems are just so intractable 
that if we wait and give it time, 18 more months, Florida is 
going to be a disaster. I mean, it is already hurting, but it 
is going to be even worse than it is now. So we just cannot 
rely on voluntary modifications unless you are going to get the 
data, you know, in a loan-by-loan fashion that says here is 
what the payment was before the modification, here is what the 
interest rate was, here is what the loan balance was, and here 
is what it is after the modification.
    Senator Casey. I am finished, but I would amend my request 
to include that kind of information, because I think you are 
right. Just an assertion of modifications can be, I guess, in 
the eye of the beholder and depending on what information you 
convey.
    Ms. Wachter. And if I may just for a moment, I just wanted 
to encourage that as well. What Mr. Eakes says is absolutely 
right. There are loan modifications and loan modifications, and 
they need to be tracked so that we know actually the loan 
modifications are real.
    Senator Casey. Yes. Thank you.
    Chairman Dodd. Thank you, Senator Casey.
    Before I turn to Senator Brown, I just want to pick up on 
this bankruptcy provision. I appreciate Senator Martinez's 
raising it. This Nouriel Roubini is a noted economist, and just 
to quote him, he said, ``When a firm is distressed with 
excessive debt, it goes into bankruptcy court and gets debt 
relief that allows it to resume investment, production, and 
growth. When a household is financially distressed, it also 
needs debt relief.''
    The lack of debt relief to the distressed households is the 
reason why this financial crisis is becoming more severe, and 
the economic recession with a sharp fall now in real 
consumption spending is worsening.
    The idea that you can go into bankruptcy court and protect 
your boat, if you want to, your car, and your vacation home--
you can do that. Those are all contracts, and you can protect 
those in a bankruptcy court. But you cannot protect your 
primary residence. There is something fundamentally false about 
that notion. Your boat, your car, and your vacation home, I can 
protect. But I cannot protect your primary residence and let 
you get back on your feet, work this thing out, and get on your 
feet again.
    So I just hope--and I do not know whether we are going to 
do it next week or not, but I certainly intend, along with 
others here, to try and raise this. And I hope in the context--
we are talking about distressed mortgages. We are not talking 
about doing it for a limited period of time. But we ought to be 
able to build a bipartisan coalition of support. That is the 
one single thing I know of that I think could make a 
difference, that we could make a difference on, aside from the 
efforts by the Treasury to step forward.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman. Thank you for your 
passionate and very sensible words there.
    Mr. Eakes, I want to follow up on Senator Casey's question 
to you about the loan modification and the FDIC proposal. Do 
you believe if Treasury and FDIC and Sheila Bair and the 
administration can work on that under the provisions that we 
wrote into the bill a month or so ago, do you think that would 
deter banks from participating? And if it did have that effect, 
would it matter? Since this does not seem to trigger Treasury's 
concern about possible----
    Mr. Eakes. What would deter them?
    Senator Brown. Would requiring banks to participate in the 
Capital Purchase Program, engaging in loan modification similar 
to the FDIC proposal, would that deter banks from doing it, 
from participate in the program, in your mind?
    Mr. Eakes. I do not think so. I mean, we have seen the 
banks at this table and others who have announced their own 
programs. So if I missed your question, I will try to come 
back. So the Treasury/Sheila Bair proposal is to help induce, 
so it is offering a benefit that is explicitly tied to doing 
loan modifications that are deeper than what is becoming the 
industry standard. Right now we are at a standard that says if 
a borrower is paying 38 percent of his or her household income 
for a monthly mortgage payment, that is OK. Well, when I grew 
up and most of us grew up making home loans, we thought 25 
percent was the level that was acceptable for housing payment.
    So what is unique in the Sheila Bair plan is that the 
proposal is you would only get this guarantee or public benefit 
if you reduced the payment for the borrower down to 31 percent. 
We have got some lenders whose loans are higher than 38 
percent, which is the standard that we have heard this week, as 
the ratio of payment to income who are making loans now at 50 
percent, 45 percent.
    So what is going to happen? One month later the borrower is 
going to come in and say, ``Well, how about reducing my payment 
to 38 percent?''--which we have acknowledged is the affordable 
level. The banks--unfortunately, the $250 billion is largely 
already committed, and so it would have to be some sort of 
renegotiation or jawboning. There is not going to be new banks, 
I do not think, unless we expand the $250 billion to be a 
larger share of the $700 billion.
    Senator Brown. OK. Thank you.
    Mr. Palm. Senator Brown, could I mention----
    Senator Brown. Sure.
    Mr. Palm. There may be an industry standard, but Litton, 
for example, applies 31 percent and has applied it for a long 
time.
    Mr. Eakes. That is fabulous, and that is why----
    Senator Martinez. What is the name of the entity?
    Mr. Palm. Sorry. Our subsidiary, they use a 31-percent 
level, the one that has been referred to, and that is one of 
the reasons why they think you can actually do something 
positive for both the homeowner as well as the investor.
    Mr. Eakes. And I will bet that Larry Litton's redefault--he 
is a great guy--that his redefault, once you get a borrower to 
the 31-percent level, which is more affordable, is much lower 
than the modification plans that allowed a much higher portion 
of your monthly income to go to the debt. I bet you----
    Mr. Palm. Well, it is conceivable that it would not be much 
lower simply on the basis that if people do not have the income 
to pay more than a certain percentage----
    Senator Brown. OK. Let me shift. Ms. Zirkin, in your 
testimony you discuss the failure of voluntary efforts to 
provide much relief. You recommend we put in place an 
affirmative duty on servicers to engage in sensible loan 
modification. Mr. Eakes pointed out earlier the incentive for 
them to foreclose. Talk to me about your thoughts there, 
expanding on that.
    Ms. Zirkin. What we have seen, Senator, is that the 
voluntary efforts--and I am just going to say it--have not 
worked. Martin Eakes has just outlined research that said, as I 
understand it, very few, relatively speaking, were actually 
helped.
    Senator Brown. So how do we get servicers to do these loan 
modifications?
    Ms. Zirkin. I believe there are two ways. It is the 
bankruptcy bill, bring them to the table--voluntary has not 
worked--and the FDIC plan, because there are incentives, as I 
understand it, in this plan to bring the servicers to the 
table, because they have incentives, they will be able to 
modify loans. But it is a very complicated problem in terms of, 
as we all know, of the securitization problem, and unless 
people are forced to come to the table with all these intricate 
loans all intertwined, it is not going to happen. And yet every 
month, every week, more and more homes are foreclosed on, and I 
believe at this rate it is already a tsunami. But it is going 
to affect not just Florida, not just Nevada, not just a few 
States in major ways, but every single State.
    I hope that answers your question.
    Senator Brown. Do you want to say something, Ms. Finucane?
    Ms. Finucane. Yes, I would. I would just like to say that 
on behalf of the banks, or at least sort of directionally 
speaking, first of all, it is true that traditionally the 
interest rate modifications were not part of these workouts, 
but they are now, and they have been there the vast majority of 
the workouts now, one.
    Two, at least in our case, even though we have not launched 
the $8.4 billion program for what we think will be 400,000 
homeowners, we already have in this year been able to prevent 
200,000 people from foreclosure. So if we had a foreclosure 
potentially of about 300,000, 200,000 of those did not go into 
foreclosure, and the vast majority of those are interest rate 
modifications.
    So I just want to speak on that I think the progress being 
made in the last year is enormous, and I just do not want that 
to go unnoticed.
    Senator Brown. OK. Thank you.
    Let me finish with asking a question of the three bank 
witnesses, Mr. Zubrow, Mr. Campbell, and Ms. Finucane. It is a 
follow-up of Senator Johnson's question an hour or so ago.
    Since none of you, you say, the three banks here, have 
plans to acquire a healthy bank, would you object to a 
prohibition on that activity for CPP recipients? Mr. Zubrow.
    Mr. Zubrow. I think, Senator, one of the issues that, you 
know, obviously has to be considered is that any sort of 
prohibition is, you know, hard to figure out in its actual 
application as to what you would call a healthy bank versus an 
unhealthy bank, and whether or not the funds that were going to 
acquire that were coming from the CPP or from other funds, you 
know, that the banking organizations already have.
    So, you know, I think that while we have certainly made it 
clear that, you know, our interest is, you know, focused on the 
work that we have already done with the unhealthy banks, it is 
hard to figure out how such a prohibition would actually be 
applied.
    Senator Brown. Ms. Finucane.
    Ms. Finucane. Yes, I am not sure we understand exactly what 
the concern is insomuch as obviously that is not where we have 
put our attention. We are in the middle of two acquisitions we 
have made with companies that I think you would consider less 
than healthy, one.
    Two, prospectively, we have talked about that we will put 
this money to work both for our capital ratios for lending and 
for investment in the secondary market.
    So it is just very hard to anticipate what over the next 5 
years might come and whether you would not actually encourage 
us to do that.
    Senator Brown. Mr. Campbell.
    Mr. Campbell. I would say that clearly the intent at Wells 
Fargo is to use that capital to continue to lend and lend more, 
as well as to help remedy the crisis that exists in the home 
mortgage business. And as a result of that, to put other 
provisions on us that would not allow us to pursue normal 
activities that we have pursued over the years, I think we 
would probably would not be in favor of that kind of 
prohibition, because just like others here, while we are 
currently not in a position because of decisions we made to 
pursue acquisitions, in 3 or 4 years we may very well be in a 
position where we would like to do that, and then having agreed 
to a provision that would not allow us to do it would certainly 
not be something we would like.
    Senator Brown. OK. Thank you.
    Thanks, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Brown.
    Let me ask you, I have just been going over the numbers for 
our lending institutions that are here that the capital 
infusion allows. In the case of Wells Fargo, you will be 
receiving or have received $25 billion. In the case of Bank of 
America, it is $15 billion, but I notice that Merrill Lynch is 
getting $10 billion, so I presume that is $25 billion for Bank 
of America. Goldman Sachs gets $10 billion, and JPMorgan Chase 
gets $25 billion.
    Just out of curiosity, there are two sets of issues. 
Obviously, the foreclosure mitigation is a set of issues, and 
then the question is, of course, getting lending, getting 
credit out the window.
    Have any of your institutions set up Committees, forming 
any groups at all within your institutions that are out trying 
to identify creditworthy customers that may be the source of 
some of these billions of dollars, $125 billion that is going 
out to nine institutions; for some of them here today I have 
identified the number. I would be interested in yes or no, we 
have or we have not. Has there been any effort at all to 
utilize this money, this pool of money, to go out and identify 
the kind of borrowers out there that would help begin to 
release the stagnation that is occurring in the credit markets? 
Mr. Campbell.
    Mr. Campbell. I would be happy to comment on that. Wells 
Fargo has demonstrated an ability to generate revenues at 
double-digit levels for long periods of time, and so for us, it 
is not a new endeavor. Our company has always been about 
driving our performance through prudent revenue growth, and so 
for us, this is just what we do for a living. We are constantly 
seeking to increase the levels of credit that we provide to our 
marketplaces, and as I said in my testimony earlier, I think we 
are proud of the amount of lending that we have been able to do 
during these very unprecedented, difficult times.
    Chairman Dodd. So there is no new entity that Wells Fargo 
is creating in light of the $25 billion. How about Bank of 
America?
    Ms. Finucane. I think it is a similar answer insomuch as we 
are focused on what can we do with the $25 billion--or right 
now it is $15 billion for us. We have obviously already gone 
out to the secondary markets. We see some other issues, though, 
Chairman Dodd, which is the interest rates need to come down 
for the mortgage borrower probably to make it more attractive. 
That has not happened yet. Second, that the American public 
really is not borrowing to the degree that it was before 
because of the credit crunch, because of concerns about 
unemployment.
    Chairman Dodd. Is this chicken-and-egg, though? You know, 
one of the things is they are obviously not borrowing because 
credit has seized up, and credit has seized up because people 
are not borrowing. I mean, it seems to me we are going to in a 
circular motion here. I am looking for some proactive kind of 
thing that says, you know, here is a new pool of money for us 
and we are going to go out there and advertise and shop and 
people step up to the plate here, we are ready.
    Ms. Finucane. Right. Well, I think that we are ready, and 
we are certainly there to lend to any creditworthy individual 
or business, but we have got to do it judiciously, as you would 
expect us to.
    Chairman Dodd. Yes. Mr. Palm, or maybe JPMorgan or whoever 
wants to comment on this.
    Mr. Palm. I will go next. We have not established a new 
committee. However, what I would say, as I indicated earlier, 
is our whole business is committing capital and using it, and 
we have got now additional capital, and we have to earn a 
return on it for all of our shareholders, including the 
Government. And in that connection, our whole investment 
banking division is, in essence, there to service corporate 
relationships all around America. And part of the business 
model is to help them achieve whatever they are trying to do, 
and part of that may well be that they have something they need 
to do which will create, you know, productivity, jobs, 
innovation, or however you want to describe it, which will 
require additional capital. If you have more capital now, we 
will be able to commit some of it. That is a natural activity 
which, you know, just is a recurring phenomenon. There is 
nothing new there. But we are certainly active.
    Chairman Dodd. Mr. Zubrow.
    Mr. Zubrow. We actually have set up some new committees. 
There are----
    Chairman Dodd. I should have started with you.
    [Laughter.]
    Maybe we could have gotten a chain reaction here.
    Mr. Zubrow. I was pleased not to be the first speaker for a 
change. But, Mr. Chairman, in fact, several weeks ago our 
Chairman and CEO, Mr. Dimon, tasked two subcommittees of our 
Operating Committee, which manages all the operations of the 
bank, to focus on just this very question. You know, how can we 
much more proactively reach out not only to our existing 
customer base but to, you know, other parts of the economy in 
order to utilize this capital, as well as other capital which 
we have, in order to help stimulate lending activity.
    Chairman Dodd. OK. Well, that is good news. I appreciate, 
by the way, some of the steps that JPMorgan Chase has made as 
well. I should have made that point, as I did about Bank of 
America earlier.
    Let me ask our bankers here as well, you heard the kind of 
debate and discussion like we had just before you walked back 
in again on the bankruptcy provision, and you have heard Mr. 
Eakes describe it. I should have probably done that as well. 
This is only for distressed mortgages, for a limited amount of 
time. And I know historically there has been opposition for all 
the obvious--the cramdowns make you very uneasy, and the point 
that Senator Martinez raised, the discussion about contract 
issues and the like.
    Tell me how you feel now about this. Obviously, we have got 
a serious problem on our hands here, and we are looking for 
ways to move this. Is it still the position of those who are 
here individually--without trying to speak for the universe of 
bankers, Mr. Campbell, we will begin with you. Are you 
adamantly opposed to this idea of trying to do something for a 
limited amount of time under circumstances that might very well 
produce the very results that happened in the farm credit areas 
back a number of years ago? And I understand there are 
differences. I am not going to try and draw analogies that are 
perfect. But the idea here that would actually maybe promote 
the kind of steps that we are all trying to achieve, how do you 
feel about this now?
    Mr. Campbell. Mr. Chairman, I want to start by, again, 
really confirming that we understand the sensitive nature of 
this crisis, and it is clearly in all of our best interests to 
find solutions.
    Having said that, our view is still that while it may be an 
important fix right now, what does it do to the longer-term 
availability of credit to this market?
    Chairman Dodd. But assuming we are doing it for a limited 
amount of time now--this is not in perpetuity. We are talking 
about 3, 5 years, whatever the number was.
    Mr. Campbell. This is a very fragile market, and, frankly, 
one of the things that we have to consider is we have a very 
large inventory of foreclosed and unsold property. And so to 
potentially throw a curve into this segment of the market where 
potentially one of the outcomes, the likely outcomes to 
cramdowns, would be that the markets would--since there is less 
predictability in the market, it is likely that two things are 
going to happen; investors are going to require two things to 
happen to try and offset the uncertainties: one, downpayment 
sum will probably be increased, and, logically, prices would be 
increased to try and offset some of the uncertainties that 
exist by contracts being able to be just crammed down.
    And so while we have got this inventory and we need to find 
a way to stimulate the housing market, do we want to put at 
risk that market by taking that step? is the question I think 
we all have to step back and carefully and thoughtfully think 
through.
    Chairman Dodd. So the answer from Wells Fargo would be no.
    Mr. Campbell. No.
    Chairman Dodd. Ms. Finucane.
    Ms. Finucane. Well, I think we have similar issues insomuch 
as I think we have concerns with what the investor community 
will do if they think they have got a bankruptcy court that can 
do it judge by judge, district by district. And so the 
marketplace can have great--the long-term issues may be greater 
than the short-term gain, one. And it seems like it is a one-
by-one--as I said, district by district, judge by judge. And we 
think there are some very fundamentally big, broad programs 
that each of the banks here have initiated as well as Chairman 
Bair's initiatives that she has laid out that collectively may 
have the greatest impact.
    Chairman Dodd. Again, maybe I am missing something here, 
and you folks work at this every day. How do I make the--when 
one of my constituents says to me, well, you know, the last 
time I looked, the credit availability for vacation homes was 
not bad. How do I explain to someone that you can cram down in 
a bankruptcy proceeding your vacation house and there seems to 
be credit availability? The institutions have worked that out. 
But I cannot do it for the primary residence. How do I explain 
the distinction and difference between one you can work out and 
the other I cannot, two homes?
    Ms. Finucane. Well, I think that is a good point, but that 
is not--I mean, the banks did not set up the bankruptcy laws.
    Chairman Dodd. But that does not explain the difference 
why--I mean, I have got a vacation house and I have got my 
primary residence. Now, one house I can cram down and work out 
a mortgage on because the bankruptcy courts would allow me to 
do that. But on my primary residence, I cannot.
    Just to pick an example out of thin air, just say I had 
eight homes, and so seven of them I can protect in a bankruptcy 
proceeding. But the poor guy with one house cannot. How do you 
explain that to people? What is the justification?
    Ms. Finucane. I think you are asking us something about 
bankruptcy law as opposed to what you began with, which is the 
issue around do we think that is a good solution to the 
foreclosure issue. And we can speak to the foreclosure issue, 
not bankruptcy law.
    Chairman Dodd. OK. Mr. Palm, same question.
    Mr. Palm. Well, I likely misunderstand your question, 
perhaps given where we are in the food chain, because as I 
said, we are not a big mortgage originator.
    Chairman Dodd. I know.
    Mr. Palm. I am assuming one of the issues that they have 
alluded to is simply the issue that the cost of credit to buy 
your single-family home is dependent on the fact that the 
lender thinks that, if all else fails, they at least get the 
property. And I think that is the theory of the lending, which 
is why rates are whatever they are.
    I think for vacation homes, my assumption would be--and you 
should never assume, I realize--the rates would be at a higher 
level simply on the basis that you would not have the same type 
of certainty, and we would perhaps need an economist to verify 
that fact. And having said that, in general, obviously, people 
who have multiple homes and vacation homes or whatever--and 
those are not the people who we are worried about here today--
they would normally also have additional other resources, and, 
therefore, they would probably get--you know, even though the 
differential in interest is still going to be higher for----
    Chairman Dodd. I wish Mel Martinez were still here to talk 
about Florida.
    Mr. Palm. No, no. But I think the problem is, you know, as 
alluded to, there will be an uncertainty created in the market. 
I cannot say sitting here that you cannot do certain things in 
emergency situations if you really need to do them. Even if it 
is only a temporary period of time, the effect on the ultimate 
investors is something you really have to take into account in 
weighing the balance.
    Chairman Dodd. I have saved Mr. Zubrow for last because he 
is going to surprise us again and tell me I am absolutely right 
and JPMorgan Chase supports this.
    Mr. Zubrow. I am sorry to disappoint you, Mr. Chairman. I 
really do not have a lot to add to what the others have said. I 
would emphasize what, you know, you and others on the Committee 
have pointed to, which is that we are really in a very fragile 
market situation today. Notwithstanding all the very good 
efforts that the Committee and the Government have led in terms 
of trying to bring stability back into the markets, the 
marketplace is still extremely fragile. We lack investor 
confidence in many of the important markets that are required 
to really re-liquefy the home lending process. And so I think 
that there is, you know, grave danger to introduce a major 
change in the balance of outcomes that investors might be 
worried about through a major change in the bankruptcy 
provisions, and such change could really elongate the length of 
time that it takes to bring investors back into this 
marketplace.
    Chairman Dodd. I guess my point--and I will end, and I am 
going to ask other witnesses to comment briefly on this. But 
the only point I want to make is I just do not see any evidence 
yet that has been demonstrated to me that allowing a homeowner 
to take bankruptcy protection for a primary residence affects 
generally the credit availability for primary residences 
generally. I mean, that is the argument, and I just do not see 
the evidence of that yet. And that seems to be the point, that 
this would harm credit availability generally if you were to 
make this exception.
    So where is the evidence to support that? I do not see it. 
But I know Ms. Zirkin and Mr. Eakes and you, Dr. Wachter, might 
want to comment on this.
    Ms. Zirkin. I will be very brief because I am sure Mr. 
Eakes has something very important to say.
    [Laughter.]
    But let me say this: I was going to say, Senator, that 
there is no evidence, that we have heard this all the time, and 
I have not seen studies, I have not seen evidence. And we are 
at a point now, markets are fragile; the entire economy is 
fragile. We have markets going down every single day, 400 
points, 300 points. It is very hard to find your way. And that 
includes giving $700 billion to the Treasury.
    Where I am going with this is that people might say that 
they know what the effect of a bankruptcy law is. I have not 
seen any evidence. But we are at the point now where we have to 
put it in, as you said, Senator, restore it to as it was in the 
1970s and 1980s, basically, so that restore it for a year or 2 
years, some period of time so that we can have the empirical 
evidence to see if it works or it does not, because people, as 
I said and as we all know, are out there suffering.
    Thank you.
    Chairman Dodd. Dr. Wachter.
    Ms. Wachter. We do need more evidence. There is small 
evidence, but it does not really go to your more major point, I 
think on your more major point, of what would it do now. We 
really do not know. I think there are tremendous risks on the 
side of doing a legislative initiative in this direction.
    On the other hand, as I said earlier, the Nation is at 
risk, and if we do not take effective action that, in fact, 
leads to a slowdown in foreclosures, this issue will be minor. 
So we have to have all options evaluated at the table. I think 
that if there were such an option seriously being evaluated, 
there might be more movement on other options, such as bringing 
the servicing industry to the table.
    Chairman Dodd. Yes. I would just point out that I mentioned 
at the outset of my remarks that there are over 9,000 
foreclosures a day. This is Thursday. We are going to get 
together here next Wednesday. Between now and next Wednesday, 
some 50,000 homes we put at risk in the country, 50,000 
families adversely affected.
    Mr. Eakes, any point on this you want to make?
    Mr. Eakes. Yes, with all due respect to my friends on the 
panel, it is clear to me not a single one of them have read the 
bill that deals with bankruptcy. Not a single one of them have 
studied the provisions in the way that they would have studied 
the TARP provisions. The bill's proposals that have been put 
forth limit the cramdown, the bankruptcy adjusting the debt 
secured level down to the market appraised value, only to loans 
that will be in foreclosure. Every banker here can tell you if 
they have got the data that less than 1 percent of the loans 
that are in foreclosure now are going to cure.
    So if you are only dealing with the loans that would go to 
foreclosure and you are going to lose more money and have the 
costs of a foreclosure in every case, the bank is going to be 
better off. That is one provision.
    The second provision that is in the bill that details 
matter is that every single lender/servicer has it within their 
control to prevent this cramdown. If you modify the loan to 
make it affordable so that the borrower has the ability to pay 
the mortgage, the provisions in these proposals would not allow 
a cramdown. You have it within your power as the lender, as the 
servicer, to prevent the bad effect.
    No. 3, there is evidence--between 1978 and 1993 half of the 
circuit courts in this country used the bankruptcy cramdown 
because they said this cannot mean what the words seem to say 
in the Bankruptcy Code; it does not make sense. And there was 
no difference in the rates charged to borrowers for the first--
for home loans between the two different districts between 1978 
and 1993.
    My good friend Lou Ranieri, who claims to me that he was 
the person in 1978 that lobbied and helped get this provision 
instituted, the ban on modifications solely for personal 
residences in 1978, is now actively saying there is no way to 
solve the problem of these piggyback second mortgages unless we 
lift that ban.
    So I just crazy, really, when I hear this stuff that is 
going to disrupt the market. We have had proposals at various 
debates that said we will only limit it to existing loans, 
which means that it cannot have any impact on a future loan 
because it does not apply to them.
    So I just--you know, I know I am being overly passionate 
about this, but, you know, I have been watching the 9,000 per 
day, 45,000 people lose their home and go into foreclosure 
every week. We do not have any time to spare. And it just 
drives me berserk, with all due respect.
    Chairman Dodd. Well, I wish you would express yourself on 
the issue.
    [Laughter.]
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    Just one last question for Mr. Eakes.
    You were talking about the limited terms of the legislation 
that has been drafted. What is the term of the--isn't there a 
limitation in the term of the bill?
    Mr. Eakes. No. 1, it limits the loans going backwards. I 
think it was January 1st, 2004 or 2003. So loans that were made 
after that date. In several of the versions, it limited it to 
existing loans, which means that you have an inherent sunset 
because those loans, as they get modified or go through payoff 
or refinance, there are a new loan. And then there was on top 
of that a sunset of--I can't remember exactly, but it was 2 or 
3 years afterwards. So during the current crisis, it is as 
narrowly tailored as any piece of legislation could possibly be 
to this specific problem.
    Senator Crapo. All right. Thank you very much.
    In my questions this round, if I have time for it, I want 
to cover two issues: one, credit default swaps, which I think 
we can talk about very quickly; and then, second, as I 
indicated in my opening comments, regulatory reform. But 
particularly, again, for the banking witnesses, but for anybody 
who would like to, let me just say I strongly support the 
efforts of our financial institutions today and our regulators 
to strengthen the infrastructure for clearing and settling 
credit default swaps by creating a central clearing system. And 
recent events in the credit market I think have highlighted the 
need for greater attention to risk management practices and, in 
particular, counterparty risk.
    A number of private sector initiatives are being developed 
to diminish counterparty risks to credit default swaps by 
achieving multilateral netting of trades and by imposing more 
robust risk controls on market participants. I just want to ask 
a general question to those who are engaged and would like to 
respond to this as to how you feel progress is being made here, 
and when do you anticipate that we might have a central 
clearing system up and operating. Do you want to start out, Mr. 
Zubrow?
    Mr. Zubrow. Sure, Senator. Thank you. I think you have 
summarized very well much of the activity among the major banks 
participating in the credit default swap market to bring a much 
more robust process to it. We are an active participant in the 
Clearing Corporation/IntercontinentalExchange efforts to create 
a central counterparty, and right now the proposal is being 
reviewed by both the Federal Reserve Bank in New York, the SEC, 
the CFTC, and the New York State Department of Banking. Those 
different regulators have been in a meeting with the leadership 
of TCC/ICE, and we would expect to hear back from them sometime 
in the very short future, the next--you know, potentially this 
week or next week, you know, regarding getting the appropriate 
regulatory approvals to allow that organization to be up and 
running as a central counterparty.
    So, you know, we very much are in favor of having central 
counterparty clearing. We think that it will continue to make 
this marketplace a much more robust and safe marketplace. And 
while we cannot predict how quickly we will hear back from the 
regulators, assuming that they do so within a relatively short 
period of time, we would hope to have this activity up and 
running by the end of the year.
    Senator Crapo. Thank you.
    Anybody else want to elaborate there?
    Mr. Palm. Goldman Sachs views this as vitally important 
that the proposals have been put forward, moved forward. We are 
involved in all the same discussions regarding the same new 
institutions, and we think it will be a big assist to the 
market. Whether it gets done by year-end or not is not, you 
know, entirely clear, certainly. It is dependent on a lot of 
things getting done. But it is the thing to do.
    Senator Crapo. Bank of America?
    Ms. Finucane. Yes, we are all active participants in this, 
and I think we are all supportive about the procedure and the 
outcome. And I do not think you will have any disagreement from 
any of us.
    Mr. Campbell. I have to admit that this is beyond my 
capability, but we would be happy to have the people who are 
aware report back to your staff, if that is what you would 
like.
    Senator Crapo. All right. Thank you very much.
    The last issue that I want to get into, as I mentioned in 
my initial comments, is regulatory reform. I have for a long 
time, even before we got into the thick of this crisis right 
now, believed that we need significant regulatory reform for 
our financial system in the United States. And I will not go 
into all the details for why I believe that, but, you know, our 
capital markets I think have needed to be served by a much 
better regulatory system for some time.
    Just yesterday, I believe it was, Walt Lukken, the Chairman 
of the CFTC, made a proposal that we reform and modernize our 
regulatory system. His approach, which I think is very similar 
to the one that Secretary Paulson made last March in his 
framework that he put forward, suggests that we have three 
regulators: one on systemic risk--by the way, my understanding 
is that depending on what kind of business you are in in the 
financial world today in the United States, you could have as 
many as seven different regulators, and that does not count all 
the State regulators and States and other potential impacts. 
And so this proposal is that we streamline it to a system in 
which we have three regulators, I assume some of them with 
increased regulatory strength: one for systemic risk, one for 
market integrity, and one for investment protection.
    I for quite some time have been interested in the one-
regulator approach that we have seen over in Britain with the 
FSA, and my question is really a broad, open-ended question, 
and it has sort of got three parts, but it is all sort of the 
same question, and that is--and I open this to anyone on the 
panel who would like to respond. First of all, do you agree 
that we seriously need a new, modernized regulatory structure? 
Or is the regulatory structure that we have today one that we 
can just fine-tune a little bit and keep moving with? And, No. 
2, if you do believe that we need to have a significant look at 
regulatory reform, what do you think of these proposals, the 
three different regulators or the one regulator based on 
principles rather than what I call the ``gotcha'' approach?
    I think you are all understanding where I am headed with 
this, but what are your thoughts as to where we should head in 
terms of the regulatory system we should have in place for the 
future for the United States financial system? And you do not 
have to answer if you do not want to, if you are not engaged on 
this issue, but I will start here on the left, and we can just 
move down. Mr. Eakes.
    Mr. Eakes. I would think some steps are more urgent than 
others. So, for instance, the OTS, in my view, has outlived its 
usefulness. If you look at Washington Mutual, Countrywide, 
IndyMac, we had institutions that were choosing what they 
perceived to be the weakest regulator in terms of the lending. 
If you look even at AIG--so a lot of the crises we have seen 
have touched through the OTS, and it would not be hard to merge 
the banks that it supervises into the OCC and merge the holding 
companies that it tries to supervise but is not really large 
enough to do into the Federal Reserve supervision.
    Even with AIG, it is not really widely reported, but what 
really brought that company to its knees was the credit default 
swaps that were traded out of an office in London. That office 
was able to get exempted from all of the European regulators 
because nominally AIG's holding company was regulated by the 
OTS because it owned a $2 billion thrift. So owning a $2 
billion thrift enabled this to be--and the OTS is in no way 
capable of looking at the credit default swaps that AIG had all 
over the world. So I feel like that is the most critical case.
    When the difference between thrifts and banks was 
established several decades ago, the thrifts were providing 80 
to 90 percent of mortgage loans. Now it is exactly the reverse; 
70-plus percent, 80 percent of all mortgage loans are made by 
banks. So the two institutions have converged, and having a 
choice of regulator, as Secretary Paulson and his staff have 
said, we should have banks succeed based on their business 
choices, not based on which regulator they happen to choose.
    Senator Crapo. Thank you. Mr. Zubrow.
    Mr. Zubrow. Thank you, Senator. We certainly agree that 
there needs to be changes in modernization to the regulatory 
system in the country. You have certainly highlighted and Mr. 
Eakes has highlighted, you know, many of the failures of the 
existing regulatory structure. We very much believe that having 
a single regulator for the financially systemic important 
institutions is an important part of how the system might be 
reformed going forward. We obviously have not had a chance to 
really go through Mr. Lukken's proposals from yesterday, but I 
think that, you know, our ongoing view as we, you know, 
hopefully work with you and others on regulatory reform is to 
really focus on making sure that there is commonality of 
regulation for these key systemically important financial 
institutions so, as the Treasury Secretary has said, we do not 
end up getting regulatory arbitrage across the different 
groups.
    Senator Crapo. Thank you. Mr. Palm.
    Mr. Palm. Happy to. I think anyone who thinks that the 
regulatory system in the United States and elsewhere is not in 
need of reform has not been around for the last 6 months. That 
would be my first point. We fully support a thoughtful approach 
to putting together a new regulatory system. Whether that is 
one super regulator as described, which you mentioned you might 
be in favor of, or, you know, a tripartite one, one of which 
consists of investor protection separate from I will call it 
the soundness of the particular financial institution, et 
cetera, you know, can be debated. Either system in theory can 
be made to work. I think the current system--and obviously we 
are new to being a bank. One of the things that first struck me 
was the fact that--actually, being a lawyer of sorts, I first 
got a book out which told me all the different types of 
organizations you were regulated by if you were in a particular 
business, and it was mind-numbing, including both regulatory 
arbitrage as well as--it is not even necessarily arbitrage. It 
is just people found themselves regulated by different people, 
having different rules, and so on, and some, from what I can 
tell, not regulated at all, full stop.
    So I think it is very important to modernize and move 
forward. Certainly, the FSA system in London has lots of 
positives to it. On the other hand, if you step back for a 
second, even that system obviously did not save their economy 
from the consequences of what is going on now.
    So I think you want to have functional based regulation, 
and as I think Mr. Zubrow alluded to, systemic institutions, 
i.e., institutions who have global scale, you need to really 
have people who look after them as an entirety and understand 
their overall operations. We think that is important.
    Senator Crapo. Thank you. Dr. Wachter.
    Ms. Wachter. Yes, it is critically important going forward 
for the long run to restructure our regulatory system, and 
there is regulatory arbitrage, and that needs to be part of the 
issue that is addressed. And I do want to here agree again with 
Mr. Eakes. The insufficient oversight and lack of reserving for 
CDS issued by AIG was a critical part of the problem that we 
are facing today.
    I want to make two other points. One point, this is a 
global phenomenon now. We are going to need global cooperation 
on regulation, and it cannot just be in one nation because, as 
we see, capital flows are global.
    Second, again, FSA was not a cure-all. The U.K. had over 
the same period, not as much as we, but erosion of credit 
standards, and FSA did not see that happening or could not stop 
it; and at the same time as erosion of credit standards, a 
housing asset boom. This U.K. crisis is similar to the Japan 
crisis, is similar to the Asian financial crisis. So it is not 
just a better environment for regulation, a better structure, 
but it is better regulation.
    Senator Crapo. Thank you.
    Ms. Finucane. I think I will just reiterate what I think 
you have heard from the other banks, which is we do believe 
that there needs to be greater transparency for a regulator. I 
am not sure that we would support one super regulator. Maybe 
there is too much risk in that, and there are complications. 
Consumer regulation versus capital markets might be too big a 
breadth, so I think we would consider that.
    The last thing I would just say is clearly from the banks, 
I think the bank holding company structure has been what seems 
to be victorious in the long run, so we would start from there 
as well.
    Senator Crapo. Thank you.
    Mr. Campbell. I will only add some thoughts that have not 
been said.
    First of all, we agree that there needs to be a revamping 
of the system. One of the things that I think we all need to be 
thoughtful of is what is the pace of whatever we go to, so just 
being thoughtful of the timing.
    Second, we would encourage this dialog to give us a chance 
to look at, in particular, the unregulated lenders that exist. 
I think that that has proven at this time to have been a 
category that did not get looked at and I think needs to be 
looked at. Certainly the point of around a systemic look is 
also high on our list of things to do.
    And, finally, being clear on what the role of the Fed will 
be in whatever this new regulatory approach might be from our 
perspective is a very important consideration.
    Senator Crapo. Thank you. Ms. Zirkin.
    Ms. Zirkin. I will be very brief, because we have, frankly, 
focused on our communities in distress. Previously, we had 
called for reform of the problem that has actually caused this, 
but I would agree with Mr. Campbell in that we must regulate 
unregulated lenders.
    Senator Crapo. Thank you very much.
    Mr. Chairman, thank you for letting me go over.
    Chairman Dodd. Not at all. Very good points, and it was 
very worthwhile to hear the testimony.
    As I said earlier, Senator Crapo has had a longstanding 
interest in regulatory reform. This is a major thrust of this 
Committee's activities in the coming Congress. We have 
obviously got to grapple with the ongoing situation, but I do 
not intend to let that overwhelm this Committee's 
responsibility, because underlying all of that is the issue of 
whether or not we are going to have a new architecture that 
reflects the 21st century global economy and obviously the 
problems we have entered into.
    This whole idea of regulatory competition for business I 
think has been dreadful and has really hurt us terribly in the 
country, and obviously that is a major point.
    I want to also make the point that I think we have been 
operating under a myth for too long, and I think it has hurt 
our country, and that is that the notion of consumer protection 
and economic growth are inherently contradictory. They are not 
at all. I think what we have learned over the last number of 
months is that consumer protection and economic growth go hand 
in hand. In fact, when you fail to do the first, you end up 
doing severe damage to the latter. And I think we need to get 
over that notion which too often has been the subject of 
testimony, that if you are going to protect consumers, it is 
going to hurt our economy. And I think we have learned, 
painfully, how false that statement is. So I would just add 
that element as we look down the road at this effort, and I 
thank my colleague.
    I just want to end on one question. It has been sort of--
and I listened to all of you when you talked about the Capital 
Program and to what extent various things are--whether it is 
bonuses or dividends or acquisitions. And let me say on my part 
on the issue of acquisitions, again, my general view is I think 
if you are talking about purchasing or acquiring a failing 
institution, as several of you have done, it makes all the 
sense in the world to me. And the question of what is a failing 
institution, I realize you get into a gray area, and so you 
want to be careful about trying to draw too bright a line in 
that area. But, clearly, I think most of us would agree here 
that is a proper utilization of these funds. Acquiring healthy 
institutions with these funds is one that is disturbing.
    But this idea that there are retained earnings and private 
capital coming in, and obviously capital that has come from the 
Federal Government, I am a little nervous about this 
distinction, because money is fungible here, money is money. 
And, obviously, if you are not paying a dividend or you are not 
out there paying a bonus, that is going to increase the 
availability of capital in your institutions.
    So the notion somehow that I am going to be able to 
separate out here the money that I am getting from retained 
earnings or from private investment as opposed to capital 
coming from the Federal taxpayer worries me a bit here, that in 
a sense this notion, as I tried to make at the outset in my 
remarks, it is not just $290 billion. It is over $5 trillion. I 
asked you the question earlier about these various new 
instruments and protections and guarantees and so forth. To 
make my point, the taxpayer is really behind your institutions. 
I do not know if I would go so far as Martin Eakes to suggest 
that some of you might not be here today at this table were it 
not for the fact the American taxpayers contributed 
significantly to your well-being. And the point here is--and, 
again, I respect the notion that a dividend is important for 
investors. But also, we are at such a critical moment that we 
need capital to go out, and the idea that at this particular 
moment your investors would be so adverse to the notion that 
that happen that they would be unwilling to accept the fact 
that there may be a period of time when a dividend does not go 
out.
    I just want to get over this notion somehow that we can 
draw these bright lines between private capital, retained 
earnings, and public monies as we talk about building up our 
capital requirements here to be able to then engage in the kind 
of lending practices that all of us need to see if we are going 
to see the capital and credit markets become unseized and 
unclogged, as they presently are. I just do not think--it flies 
in the face of reality that you can somehow draw these bright 
lines between public monies and private monies and retained 
earnings when it comes to some of these issues.
    I know you are hearing this from others, so I am not saying 
something you have not heard before, but this notion of 
responsibility as well--at this critical moment, none of us in 
this room have ever lived through anything like we are going 
through, and we bear the collective responsibility of getting 
it right, not just for us but for that generation coming along. 
This country deserves far better than it is getting in this 
deal, and we need to make it work right, and everybody has got 
to pitch in, including the investor. Including the investor. 
And I suspect they understand that better than maybe they are 
given credit for.
    So I just urge you today and I thank you immensely for 
spending a lot of time, going on 3\1/2\, almost 4 hours here 
today, but this is extremely important, as I know you 
appreciate. And we do not have a lot of time to get this right. 
The real market, the real economy is suffering.
    I had dinner last evening with a very significant retailer 
in this country, and what is happening to retail sales, when 
you get 8 and 9 and 10 and 11 percent reduction in retail 
sales, that is phenomenal in this country. And so it is 
reaching right down into people out there who depend upon that 
salary coming in every week to sustain not only their mortgages 
but their families. And so we have really got to pull together 
on this now.
    I hope you will go back to your respective institutions and 
share the thoughts we have expressed here today. And I think it 
has been interesting that you have heard it across these party 
lines. It is not just Democrats versus Republicans. You are 
hearing it from Mike Crapo. You are hearing it from Mel 
Martinez, as well as Sherrod Brown and Bob Casey. Chuck 
Schumer, by the way, has some additional questions he wanted to 
raise, as my colleagues may have as well, and we will submit 
those to you.
    Chairman Dodd. I thank you for being here today, and we are 
going to continue calling upon you and asking you for your 
advice and counsel as to how we proceed. But I thank you.
    The Committee will stand adjourned.
    [Whereupon, at 1:16 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM BARRY L. 
                             ZUBROW

Q.1. ``As you can see, many members of this panel are concerned 
that in spite of fresh government capital, banks are pulling 
back and reducing lending at a time when the country is already 
facing a potentially deep and long recession. How do your loan 
volumes for this year compare to the past few years?''

A.1. As you are aware, economic conditions in the US and 
globally have continued to deteriorate since the passage of the 
Emergency Economic Stabilization Act (EESA): the US lost more 
jobs in 2008 than in any year since 1945, home values are down 
13% in the last year alone, and the stock market is down 21%.
    Despite these challenging economic conditions, JPMC 
continues to provide significant levels of credit, and we at 
JPMC have dedicated ourselves to being there for our clients--
whether by making markets and committing capital to facilitate 
client business, investing in infrastructure and other 
projects, or making loans to creditworthy borrowers. At the 
same time, lending decisions must be consistent with prudent 
business practices and underwriting standards, appropriately 
mindful of market and credit risks. Lending activity of all 
types must be conducted according to prudential risk management 
standards, and the challenging economic conditions only elevate 
the importance of operating in a safe and sound manner. We are 
currently gathering data and hope to present information on 
lending activities to the Committee in short order.

Q.2. ``Are you pulling back active lines of credit from 
businesses and consumers? If so, why?''

A.2. In the normal course of business, lenders continually 
evaluate not only whether to make new credit available, but 
also whether to re-examine existing facilities for both 
businesses and consumers. This is particularly true during the 
type of economic circumstance in which we now find ourselves. 
We take seriously our fiduciary responsibility to the funds we 
have received from the taxpayers, as well as all shareholders, 
and we take seriously our obligation to protect these funds 
from losses, which may require that in certain cases we reduce 
lines or exit market segments. Most of small business lines 
were underwritten based on the borrower's stated income. We 
have reached out to borrowers and asked them to supply us with 
updated financials that support their income and their ability 
to manage their existing lines. If borrowers do not provide us 
with their updated financials, or their financial situation has 
deteriorated significantly, lines may be reduced.

Q.3. ``There is a lot of concern on this panel that the banks 
are planning on hoarding rather than deploying this capital. 
What are your forward plans for the use of the TARP funds?''

A.3. TARP funding has helped to bolster JPMC's Tier 1 capital 
ratio, which was already well above regulatory minimum capital 
levels, but has risen following the government's October 28, 
2008 purchase of JPMC preferred shares. This capital position 
has allowed us, notwithstanding deteriorating economic 
conditions and shifting demand patterns, to serve our customers 
through a very broad range of financial activity. Our capital 
position has also allowed us to intensify our efforts to modify 
the terms of residential mortgages to strengthen the US housing 
market by keeping hundreds of thousands of families in their 
homes.
    We believe strongly that American taxpayers deserve to know 
how banks that accepted TARP funding through CPP have been 
operating since October 24, 2008, and for as long as the 
government holds its preferred stock shares. We are currently 
developing metrics to demonstrate JPMC's lending and market 
activity. We are committed to transparency and accountability, 
and look forward to providing Congress, regulators and the 
American people with regular updates about what JPMC is doing 
to merit the trust that has been placed in us through the 
Capital Purchase Program.

Q.4. ``We have been hearing from SBA that the number of banks 
participating in the 7(a) and 504 loan programs has been 
dropping significantly, partly because of a lack of liquidity 
and partly because the fees and cost of funds SBA lenders can't 
break even. What do you see as the main reasons for the decline 
in the number of participating lenders?''

A.4. A lender's ability to originate SBA loans at break even or 
better has been adversely impacted by the SBA's increased fees 
such as Lender Oversight Fees and Yearly Fees (basis point 
remittance). In addition, due to the combination of increased 
funding costs as a result of the disruption in the capital 
markets and the SBA's cap above the base interest rate, the 
lender's interest margin over its cost of funds is shrinking.

Q.5. ``If all of the SBA lender and borrower fees for both the 
7(a) and 504 loan programs were completely eliminated for a 
period of time--not reduced, but completely eliminated--do you 
believe that this would help spur additional lending activity 
in the small business'' marketplace?

A.5. Yes, because borrowers would find SBA loans more 
affordable. In addition, lenders would have an increased chance 
of breaking even on the loan due to no Lender Oversight Fees or 
Yearly Fees.
    In addition, there are other actions that we believe could 
stimulate SBA lending such as:

      Increase the SBA 7(a) loan limit from $2,000,000 
to $3,000,000 and the maximum guarantee from $1,500,000 to 
$2,250,000.

      Increase the SBA Express loan limit from $350,000 
to $1,000,000 and the maximum guarantee to $500,000.

      Increase the SBA 7(a) guarantee percentage from 
75% to 90% and the SBA Express guarantee percentage from 50% to 
75%.

      Create separate mutually exclusive 7(a) and 504 
program limitations.

      Change the SBA 7(a) size standards to mirror the 
current 504 size standards.

Q.6. ``Loan modifications continue to be one of the most 
difficult aspects of this crisis. I's like to ask the entire 
panel, what are the most significant obstacles standing in the 
way of broader loan modifications, especially to the 
securitized loans that no single person really controls, and 
what steps can Congress and the Administration take to overcome 
them?''

A.6. Until recently, the largest single impediment was the 
inability to provide principal forbearance in GSE loans. 
Another impediment is the requirement by some investors that 
only delinquent loans can be considered rather than loans where 
default is reasonably foreseeable. For portfolio loans owned by 
Chase, rather than serviced for others, we enjoy more 
flexibility because, as the ultimate investor, we can readily 
consider more options and make judgments for ourselves 
unimpeded by contractual servicing obligations. While we have 
the ability today to modify and do modify investor owned loans, 
we need to be mindful of our contractual obligations.
    Chase currently is rolling out a consistent loan 
modification toolset across the Chase, EMC and WaMu servicing 
platforms. When the rollout is complete, we will have the 
ability to assess the affordability and NPV of affordable 
modification options versus foreclosures in an automated 
fashion. We will strive to make modifications on those loans 
that we believe are affordable and sustainable to the borrower 
and represent the best NPV alternative to Chase.
    The GSEs have provided a tool for their recently announced 
Streamlined Modification Program (``GSE SMP'') that we are in 
the process of implementing for their loans.
    Programs that promote the use of a standard set of 
assumptions, affordability parameters and NPV analysis will be 
very valuable in accelerating loan modifications.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM BARRY L. 
                             ZUBROW

Q.1. Which homeowners are eligible for the institution's loan 
modification program?

A.1. Chase currently modifies loans of borrowers who are owner 
occupants; however, there are different facets to the program 
that require different qualifications. For example, Chase 
currently modifies owned subprime hybrid adjustable rate 
mortgages (``ARMs'') to the initial interest rate, but the 
borrower must have a history of on-time payments to verify that 
it is the rate shock that may cause delinquency and the current 
payment is in fact affordable.
    Chase is also modifying loans serviced by others and is 
committed to expanding its Foreclosure Prevention program to 
include loans for individual investors or pooled for trusts 
placed in securitization, to the extent allowed by applicable 
servicing agreements. We are pleased to say Chase will be 
actively participating in the new ``Streamlined Modification 
Program'' and ``Early Workout'' programs recently announced by 
the Government Sponsored Enterprises (``GSE'') Fannie Mae and 
Freddie Mac.
    We are also developing a more efficient process that should 
further accelerate the pace at which we can modify loans.

Q.2. How is success through the program defined? What does it 
mean that a certain number of homeowners have been ``helped'' 
through a loan modification program?

A.2. Chase believes in tracking success of our loan 
modification programs by focusing on foreclosures prevented, 
not just modifications made. (This could include a ``non 
retention'' cure such as short sale, which is sometimes the 
best option if a borrower has no income or sufficient income to 
afford a reasonable modification.) Chase also tracks efforts to 
reach borrowers as well as actual foreclosure prevention 
actions taken. This is an important metric because one of the 
most difficult problems we have in helping borrowers is 
actually communicating with them. Accordingly, Chase tracks 
outreach efforts--including borrowers dialed, and mail sent, 
and will begin tracking inbound visits to each of our 24 Chase 
Homeownership Centers set to open in early 2009.
    Most of the activity Chase will track is likely to arise 
from loan modification activities. We will track loan 
modifications by type of borrower (current or delinquent 
borrower) and type of modification. Chase is placing a strong 
emphasis on making only loan modifications that result in a new 
payment level that is affordable to each borrower. Chase will 
be tracking the re-default rate, the rate at which borrowers 
that have been modified default on the loan modification that 
was granted, to ensure that our programs permanently help 
borrowers rather than postpone inevitable outcomes.
    Loan modifications are not the only strategy that Chase 
will be pursuing. Chase believes that for a number of 
distressed homeowners, a refinance into a fully-amortizing FHA- 
or GSE-insured loan with lower payments may be a better 
alternative. So we will track refinances for borrowers we 
believe are at risk of default or are already delinquent, as 
well as the economic incentives (such as principal forgiveness, 
principal forbearance or rate subsidization) required to 
refinance these borrowers.
    In addition, Chase will track other foreclosure prevention 
tactics, such as payment plans (where a borrower agrees to pay 
back arrearages over time), deferments (where a borrower agrees 
to make late payments in the future), borrower stipulations 
(where a borrower agrees to make a set of payments, often as a 
prelude to a modification), and short-sales/settlements (a form 
of principal forgiveness where Chase agrees to accept less than 
the amount of the mortgage in exchange for the underlying 
property or the proceeds of the sale of the underlying 
property). Although short sales and settlements do not result 
in borrowers keeping their home, this may be an appropriate 
solution when the borrower has no interest in remaining in the 
home or where the borrower has had a financial hardship 
permanently impairing the borrower's ability to make any 
payments, even those reduced by a modification. Lastly, Chase 
will track borrowers who become seriously delinquent or enter 
foreclosure but improve their situation by curing their 
delinquency or paying off the loan in full through working with 
our Homeowners Assistance Department.

Q.3. If your program has already been implemented, how have you 
calculated the number of homeowners assisted through the 
programs?

A.3. For our existing programs, the number is calculated based 
on the actual number of homeowners that are assisted through 
loss mitigation efforts which include both home retention 
efforts as well as other foreclosure prevention techniques that 
can assist consumers exit a difficult financial situation 
without impairing future credit. These are further described in 
the response immediately above.
    Although we have been actively performing many of the 
foreclosure prevention tactics discussed above, Chase is 
currently rolling out the program to each servicing platform 
(Chase, Washington Mutual, and EMC Mortgage, formerly of Bear 
Stearns) and extending outreach efforts to borrowers who are 
not yet delinquent but may become so in the future. By the time 
the program is fully established, Chase will provide reporting 
on the number of homeowners helped.

Q.4. If your have more than one loan modification program for 
distressed borrowers, please provide details on each.

A.4. We expect to broaden the loan modification alternatives 
that Chase already offers as part of our Foreclosure Prevention 
program. The enhanced loan modifications tool set will allow 
for more flexibility based on the borrower's current loan type 
and the borrower's specific financial situation. Chase is 
working to finalize the offers and outreach strategy for both 
delinquent and current borrowers, but the offers are likely to 
include those described further below.
    Chase will identify owner-occupant borrowers we believe can 
benefit from a refinance into an FHA or GSE insured loan. These 
borrowers may qualify for principal forbearance, principal 
forgiveness, or below-market rates as part of their refinance. 
Eligible borrowers must be current and have reasonably good 
payment histories, except that delinquent borrowers will be 
screened to see if they qualify for the Hope for Homeowners 
product.
    For owned subprime hybrid Adjustable Rate Mortgages (ARMs) 
scheduled to reset for the first time, those loans will remain 
at the initial rate for life of the loan. To qualify for this 
program, borrowers must have a 2 or 3 year hybrid ARM and have 
a clean payment history. Borrowers do not need to contact Chase 
to benefit from this program--the rate lock will happen 
automatically.
    For subprime hybrid ARMs serviced but not owned by Chase 
scheduled to reset for the first time, we will also use the ASF 
Fast Track program to reduce payment shock. Qualifying 
borrowers will have their initial ARM rate frozen for five 
years.
    For borrowers whose loans are either owned by the GSEs or 
in their securities and that meet the GSE's Streamlined 
Modification Program, Chase will offer a pre-approved 
modification. Similar to the Chase program, term extensions, 
rate reductions and principal forbearance will be used to 
achieve an affordable monthly payment. Borrowers must be 90-
days or more delinquent, in an owner-occupied single family 
home, and have a current loan amount of more than 90% of the 
current value of the home.
    Borrowers not eligible for any of the systematic 
modification programs described above are reviewed on case by 
case basis to determine the suitability of a modification or 
other foreclosure prevention tactic. For example, borrowers not 
eligible for SMP because they are only in early stage 
delinquency, may qualify for the Early Workout Program offered 
by Fannie Mae.
    Loan modifications under the Chase programs are evaluated 
by developing an estimated target affordable payment of 31-40% 
of the borrower's gross income. The percentage depends on the 
borrower's income level--higher income borrowers are allowed to 
have higher percentages. This target payment amount is subject 
to a minimum disposable income requirement. Once the target 
payment is calculated, the borrower is run through a payment 
``waterfall'' where each modification option is tested to see 
if it can meet the affordable payment requirement. 
Concurrently, each modification option is subject to a Net 
Present Value analysis to confirm that the value of the 
modification exceeds the value of pursuing a foreclosure. The 
modification option at which an affordable payment is first 
reached, if yielding a positive Net Present Value to the loan, 
will result in a recommended borrower modification.
    Chase's modification product hierarchy is currently being 
implemented for delinquent borrowers. Chase will be proactively 
reaching out to those borrowers in the coming months with an 
appropriate offer. The components of the modification hierarchy 
may include:

      Elimination of negative amortization for pay 
option ARMs.

      In addition to the above, reducing the interest 
rate to achieve a sustainable payment.

      In addition to all of the above, establishing 
payments based on a new loan term as long as 40 years.

      In addition to all the above, reducing rate to as 
low as 3%. This rate is frozen for three years and then 
increases a maximum of 1% per year until it reaches the 
prevailing market rate at the time of the modification.

      In addition to all of the above, principal 
forbearance to as low as 90%-95%. This forbearance does not 
accrue interest but is due upon maturity or prepayment of the 
loan.

      In addition to all of the above, introduction of 
a 10-year interest only period on the loan.

      Other rate reductions and principal forbearance 
as necessary to meet affordability standards as long as it is 
NPV positive.

    In the near future, Chase expects to issue a similar 
hierarchy for borrowers who are current on their payments but 
are facing imminent financial distress. The modification 
hierarchies will be the basis for a loan-by-loan review of our 
portfolio to develop an offer that can be proactively presented 
to the borrower.

Q.5. How many homeowners do you project will be assisted 
through your institution's loan modification programs, and what 
information do you use to arrive at that calculation.?

A.5. We anticipate our program will prevent 400,000 
foreclosures in the next two years. We base this estimate on 
our historical volume of helping approximately 250,000 
homeowners over the past two years as well as additional volume 
expected as a result of our Foreclosure Prevention program. 
These projections were developed by looking at populations we 
expect will qualify for the programs, estimating how many of 
those we will be able to contact, and of those borrowers that 
we are able to contact, how many will be able to take advantage 
of the program.

Q.6. Please also provide samples of the records and 
documentation you maintain regarding loans that are modified 
through your institution's loan modification programs, with 
appropriate redactions to protect confidential information.

A.6. Please see attached a sample of our reporting format for 
data we provide to the OCC (Attachment 1), a sample 
modification agreement through which we document our agreement 
with the borrower (Attachment 2) and a sample blanket 
modification letter (Attachment 3). Offer letters for the 
expanded program are not yet finalized.

Q.7. Please describe in detail the outreach efforts you have 
made to distressed homeowners to inform them of their new 
options for loan modification under the programs you 
administer. Specifically, what additional measures have you 
taken since the implementation of the program?

A.7. As noted above, we are working to implement enhancements 
to our overall Foreclosure Prevention Program. Since the 
initial announcement, we conducted a national print and radio 
advertising campaign and established a website featuring a 
toll-free number for borrowers seeking information and 
assistance. We have identified the locations of our regional 
homeownership centers and are in the process of hiring staff to 
roll out the openings over the next quarter. We began to 
contact customers eligible for the SMP recently announced by 
the GSEs.
    There are still instances when borrowers contact us and 
expect to learn of an appropriate solution but one is not 
currently available. In these instances, we are recording the 
borrowers' information and will reach out to them when an 
appropriate solution is available. During the implementation 
period of the new initiatives, we have not made any new 
referrals to foreclosure. New program outreach efforts for 
delinquent borrowers will begin in January 2009 and for current 
but at-risk borrowers in February 2009.


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 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM GREGORY 
                              PALM

Q.1. Loan modifications continue to be one of the most 
difficult aspects of this crisis. I'd like to ask the entire 
panel, what are the most significant obstacles standing in the 
way of broader loan modifications, especially to the 
securitized loans that no single person really controls, and 
what steps can Congress and the Administration take to overcome 
them?

A.1. In Litton's experience, the most significant obstacle to 
its loan modification efforts has been lack of customer 
response. Litton expends significant time and resources in 
attempting to communicate with homeowners. Litton reaches out 
to homeowners through numerous telephone calls and letters, as 
well as by often dispatching a representative to the customer's 
home--all in an attempt to engage the homeowner in ways to try 
to save the home.
    Despite these efforts, over the past 12 months at least 25% 
of the loans Litton services that go into foreclosure are 
vacant, which is a 100% increase from 12 months ago. Many times 
these homeowners did not respond to loan modification offers 
and have simply walked away from their homes. In order to 
reduce these numbers, Congress and the Administration should 
encourage struggling homeowners to contact their servicer to 
attempt to work out a solution. Additionally, Litton has found 
that local community groups and other housing-focused 
organizations are often able to help homeowners reach a 
solution with their servicers and Congress and the 
Administration should support this type of local advocacy.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM GREGORY 
                              PALM

Q.1. All four of your testimonies mentioned the efforts your 
financial institutions are making to systematically modify 
mortgage loans to prevent foreclosures and keep homeowners in 
their homes. Several of the witnesses, with the exception of 
Mr. Campbell, supplied estimates of how many mortgage owners 
have been helped or are projected to be helped through these 
loan modification programs. I ask that each of the witnesses 
provide more details on these calculations, specifically:

      Which homeowners are eligible for the 
institution's loan modification program?

      How is success through the program defined? What 
does it mean that a certain number of homeowners have been 
``helped'' through a loan modification program?

      If your program has already been implemented, how 
have you calculated the number of homeowners assisted through 
the programs?

      If you have more than one loan modification 
program for distressed borrowers, please provide details on 
each.

      How many homeowners do you project will be 
assisted through your institution's loan modification programs, 
and what information do you use to arrive at that calculation?

A.1. Litton Loan Servicing LP (Litton), a Goldman Sachs 
affiliate, services approximately 440,000 residential mortgage 
loans. Over the past 12 months, Litton has modified more than 
40,500 loans, representing approximately 11.3% of Litton's 
average portfolio and 35.5% of its average loan population that 
were 60 days or more past due. Litton services these loans but 
it does not own the loans. The responses to your specific 
questions below reflect Litton's experiences as a residential 
mortgage loan servicers.

Q.2. Which homeowners are eligible for the institution's loan 
modification program?

A.2. Litton offers loan modifications and loss mitigation 
opportunities to homeowners throughout the delinquency period. 
Litton does not, however, require a homeowner to be delinquent 
to discuss loss mitigation options. In order to identify issues 
as early as possible and to examine potential workout 
solutions, Litton encourages homeowners to discuss changes in 
their status or circumstances, including loss of income or 
other hardship that may affect their ability to make payments. 
Additionally, Litton does not preclude homeowners whose 
mortgages have been previously modified from requesting 
additional modifications.

Q.3. How is success through the program defined? What does it 
mean that a certain number of homeowners have been ``helped'' 
through a loan modification program?

A.3. A successful loan modification program reduces monthly 
mortgage payments to a sustainable level that allows homeowners 
to remain in their homes whenever possible. When Litton 
modifies loans, it considers writing down principal, waiving 
all or part of arrearage, decreasing the interest rate and 
extending the loan term, among other efforts designed to create 
a sustainable workout solution for the homeowner.
    Historically, Litton's average modification involved a 
payment reduction of approximately $200 per month, which 
resulted in an average housing debt-to-income (DTI) ratio of 
39%. However, in response to deteriorating macroeconomic 
conditions and a weakened housing market, Litton has 
implemented a new DTI standard of 31%, which is consistent with 
FHA guidelines for new loans. Litton expects that after a 
period of making payments on the loan modification many of its 
customers will be able to refinance into a fixed-rate FHA loan. 
Using this standard will allow Litton to do more loan 
modifications with greater payment relief to the homeowner, 
thus providing a more sustainable solution. Furthermore, 
investors will still benefit from modifications which yield a 
better outcome than foreclosures.

Q.4. If your program has already been implemented, how have you 
calculated the number of homeowners assisted through the 
programs? If you have more than one loan modification program 
for distressed borrowers, please provide details on each.

A.4. Litton has implemented multiple loan modification programs 
that seek to help at-risk homeowners stay in their homes. In 
order to pursue any of the loan modification programs described 
below, Litton, as servicer for loan investors, must demonstrate 
that the modification results in a greater net present value to 
investors than a foreclosure.
    For ARM loans in which the homeowners is current but Litton 
believes is at risk of imminent default, Litton begins a 
streamlined modification offer campaign six months prior to a 
scheduled interest rate reset. These modifications extend the 
original terms of ARMs up to 60 months at the introductory 
rate.
    Customers with ARM loans that become 60 days delinquent as 
a result of an interest rate reset will receive a modification 
that locks in the introductory rate of the ARM for the 
remaining term of the loan. This type of streamlined 
modification is offered both to customers with whom Litton has 
active communication as well as those who have proved difficult 
to contact.
    If after receiving either of these types of modifications a 
homeowner experiences hardship in paying the monthly mortgage 
payment at the introductory rate, Litton will evaluate the 
homeowner's specific situation to attempt to create a 
customized modification for that homeowner using the 31% DTI 
standard discussed above.
    For fixed-rate delinquent loans where Litton has active 
communication with the homeowner, Litton comprehensively 
evaluates the homeowner's specific financial situation 
including income and DTI ratio to develop a tailored 
modification plan for the homeowner that attempts to solve for 
affordability. The custom modification will include one or more 
of: waiver of all or part of arrearages, principal reductions, 
decreases in interest rates and term extensions, among other 
efforts designed to modify the loan to achieve a 31% DTI.
    Litton also offers a streamlined loan modification program 
for fixed-rate delinquent loans for homeowners that have not 
responded to its loss mitigation offers. After 60 days of 
delinquency, these homeowners are sent a modification offer 
that is subject to three conditions: (1) sign and return the 
modification offer, (2) promptly provide Litton with proof of 
current income (such as a pay stub), and (3) make one payment 
at the new, lower, modified payment. If a customer meets these 
conditions, that customer has achieved a loan modification. If 
a homeowner responds to the offer but needs further payment 
relief, Litton will evaluate the homeowner's specific financial 
situation and attempt to create a customized loan modification 
as described in the paragraph above.

Q.5. How many homeowners do you project will be assisted 
through your institution's loan modification programs, and what 
information do you use to arrive at that calculation?

A.5. Next year, Litton anticipates to continue, if not 
increase, the number of modifications, but given the 
extraordinary market conditions surrounding the housing market 
and the unprecedented pressures on Litton's customers, it is 
difficult to project the number of loans that Litton will 
modify in the coming months and years. Litton has proven and 
remains committed to constantly examining and re-examining its 
modification programs to best address both the needs of the 
individual homeowner and investors. Additionally, it will 
continue to seek partnerships with strategic community 
organizations, including housing counseling and foreclosure 
prevention programs, to increase its outreach to homeowners.

Q.6. Please also provide samples of the records and 
documentation you maintain regarding loans that are modified 
through your institution's loan modification programs, with 
appropriate redactions to protect confidential information.

A.6. Please see the attached sample modification letter.

Q.7. In over a decade of serving in state and federal 
government, I have learned that even the best consumer programs 
are useless if those they target for assistance do not know 
they exist. Please describe in detail the outreach efforts you 
have made to distressed homeowners to inform them of their new 
options for loan modification under the programs you 
administer. Specifically, what additional measures have you 
taken since the implementation of the program?

A.7. Litton expends significant time and resources to 
communicate with homeowners. Litton contacts homeowners whose 
mortgage payments are past due, whose loans are scheduled for a 
rate reset, as well as those who are not in default but Litton 
believes are at risk for imminent default. Some of Litton's 
strategies include early and active contact with the homeowner 
through telephone calls, letter campaigns, home visits, 
participation in foreclosure avoidance fairs and collaborations 
with nonprofit housing counseling organizations.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM SUSAN M. 
                            WACHTER

Q.1. Professor, in your testimony you mention bank mergers as a 
less than ideal use of the TARP funds. What do you think of 
giving Treasury the authority to approve mergers in order to 
ensure that TARP is only subsidizing mergers that improve 
systemic stability and/or increase lending to consumers and 
businesses?

A.1. Lending is necessary. However, what is necessary to assure 
lending will be long run profitability and financial stability. 
Getting from where we are now to financial stability is 
critical and the role of directive lending, while seemingly 
helpful, could be counterproductive.

Q.2. Professor, you also discuss the need for banks to continue 
lending to creditworthy borrowers. Do you think the 
Administration has done enough to encourage banks to do this 
lending in a difficult environment?

A.2. No, I do not think the administration has done enough to 
encourage banks to lend in this difficult environment. The 
administration has not taken the necessary steps to avoid 
severe housing price overcorrection which will interact with 
the recession in an adverse feedback loop for both.

Q.3. What additional steps do you think the Administration 
could take?

A.3. Similar to the plan Paulson has discussed in the Wall 
Street Journal on Dec. 3rd, it is necessary to lower mortgage 
rates and increase lending through Fannie Mae and Freddie Mac. 
However, I believe it will be beneficial to extend these lower 
rates to refinancing for existing loans, as well as mortgages 
for new home purchases. By reducing mortgage rates, the 
government will provide an opportunity for many to buy into the 
housing market and to purchase a home at low mortgage rates and 
an incentive to pay existing, refinanced mortgages even if the 
home is underwater as opposed to letting the home go to 
foreclosure. This shift would break the cycle of unsold 
inventory and decreasing demand causing house prices to fall.

Q.4. Loan modifications continue to be one of the most 
difficult aspects of this crisis. I'd like to ask the entire 
panel, what are the most significant obstacles standing in the 
way of broader loan modifications, especially to the 
securitized loans that no single person really controls, and 
what steps can Congress and the Administration take to overcome 
them?

A.4. There are legal and incentive barriers to optimal loan 
modifications inherent in contractual private label servicing 
agreements. These barriers, both legal and incentive based, 
need to be addressed. Useful steps would be to adopt a plan 
similar to that proposed by the FDIC for IndyMac (along the 
lines suggested by Sheila Bair) and also to implement REMIC 
legislation that has been discussed. Solutions that provide 
incentives and raise the cost to servicers of not optimally 
modified loans through penalties are both needed to stem the 
adverse loop that leads to further foreclosures and a worsening 
housing market outlook.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM JON 
                            CAMPBELL

Q.1. As you can see, many members of this panel are concerned 
that in spite of fresh government capital, banks are pulling 
back and reducing lending at a time when the country is already 
facing a potentially deep and long recession. How do your loan 
volumes for this year compare to the past few years?

A.1. Wells Fargo has been one of the few banks to continue 
lending through the credit crisis. At the end of the third 
quarter 2008, average loans were up 15% from the previous year 
and 13% (annualized) from the previous quarter. We were able to 
generate such strong growth because of our prudent credit 
discipline and by thoroughly understanding our customers' 
financial needs. After our release of fourth quarter 2008 
earnings on January 28, 2009, we will be able to provide more 
updated information.

Q.2. Are you pulling back active lines of credit from 
businesses and consumers? If so, why?

A.2. Through our ongoing customer management programs, and our 
adherence to prudent lending principles, we modify lines of 
credit on a case-by-case basis and only make reductions when we 
feel it is warranted.

Q.3. There is a lot of concern on this panel that the banks are 
planning on hoarding rather than deploying this capital. What 
are your forward plans for the use of the TARP funds?

A.3. We are scheduled to release our fourth quarter earnings on 
January 28, 2009 but before that time we cannot provide any 
forward looking guidance on our lending for the fourth quarter 
or beyond. We can tell you that we intend to use the Capital 
Purchase Program funds to make more loans to credit-worthy 
customers and to find solutions for our mortgage customers late 
on their payments or facing foreclosures so they can stay in 
their homes. As indicated previously, through the third quarter 
of 2008, Wells Fargo had increased loans by 15% from the 
previous year, strong evidence of our commitment to continue 
lending through this challenging cycle.

Q.4. As you all know, small businesses are the lifeblood of our 
nation's economy. I have been hearing from a number of 
companies in my state that the credit crisis is really hurting 
them not only because they can't get new loans, but also 
because their lines of credit are drying up and they are 
finding it difficult to make payroll. The SBA made a couple of 
important technical changes suggested by Senator Kerry and me 
in a letter last week, but we need to do a lot more to spur 
lending in this sector, or millions more jobs could be in 
jeopardy.

A.4. We believe the point of the statement is what needs to be 
done to get SBA loans moving again and below are three areas 
that if the changes were implemented could result in an 
increase in loan activity:

7a loans

      Raise the threshold to $3 million--the borrowing 
needs of small business have gone beyond the old limit of $2 
million.
      Raise guaranty to 85% for 7a loans no matter the 
size of the loan as added incentive for lenders.
      Adjust the 7a size standards to match 504 program 
standards--this would make more small businesses eligible for 
SBA loans.
      Raise spread over index (Libor or Prime) to match 
SBA Express limits from 2.25/2.75% to match limits set for 
SBAExpress loan program. The current SBAExpress limits are 4.5/
6.5%.

SBAExpress

      Raise guaranty from the current 50% to 75% for 
all lines and loans. This would encourage banks to make more 
use of the line of credit feature of this product. This is 
especially critical now since many small businesses suffer from 
a lack of working capital.
      Raise the current threshold from $350,000 to $1 
million.

Other

     SBA current program for micro-loan funding is 
inadequate for the borrowers under $35,000. This has been a 
long-time source for the funding of very small businesses using 
non-traditional community based lenders as the distribution 
network. The funding organizations provide needed technical 
assistance coupled with the loans.

Q.5. We have been hearing from SBA that the number of banks 
participating in the 7(a) and 504 loan programs has been 
dropping significantly, partly because of a lack of liquidity 
and partly because the fees and cost of funds SBA lenders can't 
break even. What do you see as the main reasons for the decline 
in the number of participating lenders?

A.5. The issue of cost of funds is significant. We and other 
lenders are seeing loan spreads (profit) decline since the cost 
of money has been high/volatile and the interest rates we are 
able to charge on SBA loans are too low.
    --The lack of liquidity in the market is a major problem. 
The secondary market for SBA loans has not been a reliable 
option for most of 2008. Wells Fargo does not sell SBA loans, 
however many lenders rely solely on the secondary market to 
generate the liquidity necessary for making more loans. These 
lenders are now caretaking portfolios and are out of loan 
origination.
    --Fees do continue to be a problem. In particular, the 
ongoing portfolio servicing fee which is currently set at .55 
bps is a big expense for all lenders. Layering on top of this 
are large annual lender oversight fees, for example Wells Fargo 
paid $123,000 in 2008. The combination of these fees does give 
all lenders pause, but it truly pushes many mid-size and small 
lenders out of the SBA program.
    --More and more lenders are getting frustrated with the 
difficulties of collecting on loan guaranties from the SBA. The 
Herndon Center is unpredictable when considering lender 
liquidation requests. Lenders are being second-guessed and 
minor issues are often being used as the basis for refusing 
payment of a loan guaranty. Lenders are questioning the value 
of the guaranty. Many do not want to go through the hassle of 
offering SBA loans because they feel that future collection on 
an SBA loan guaranty is too unreliable.

Q.6. If all of the SBA lender and borrower fees for both the 
7(a) and 504 loan programs were completely eliminated for a 
period of time--not reduced, but completely eliminated--do you 
believe that this would help spur additional lending activity 
in the small business marketplace?

A.6. Yes, anything that can be done to reduce the cost of 
capital via the elimination of fees would provide a significant 
psychological boost for SBA Lending. Right now both borrowers 
and lenders need incentives to once again get money flowing. 
This would be especially helpful for businesses in need of 
working capital, those purchasing existing businesses and for 
commercial real estate transactions. But the elimination of 
fees is only one piece of the puzzle--we need a holistic 
approach that can really give the industry a true shot in the 
arm.

Q.7. Loan modifications continue to be one of the most 
difficult aspects of this crisis. I'd like to ask the entire 
panel, what are the most significant obstacles standing in the 
way of broader loan modifications, especially to the 
securitized loans that no single person really controls, and 
what steps can Congress and the Administration take to overcome 
them?

A.7. Yes, it would be very helpful for Congress to provide 
clear authority to HUD to allow the agency to implement the 
Section 601 Accelerated Claim Disposition Program. This program 
is under review at HUD and would enable servicers to take a 
troubled loan out of a Ginnie Mae pool, apply a loan 
modification to keep the borrower in their homes and replace 
the newly modified loan back into the securitized pool. This 
procedure would be on par with what is permissible for 
conventional loans and would be a very useful companion to the 
Hope for Homeowners program.
                                ------                                


    RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM JON 
                            CAMPBELL

    All four of your testimonies mentioned the efforts your 
financial institutions are making to systematically modify 
mortgage loans to prevent foreclosures and keep homeowners in 
their homes. Several of the witnesses, with the exception of 
Mr. Campbell, supplied estimates of how many mortgage owners 
have been helped or are projected to be helped through these 
loan modification programs. I ask that each of the witnesses 
provide more details on these calculations, specifically:
Q.1. Which homeowners are eligible for the institution's loan 
modification program?

A.1. We have a wide array of various loan modification 
programs. Each has varying eligibility requirements. There are 
very few loans that we service that once the loan is in default 
is not eligible for some form of loan modification. Many 
``eligibility'' requirements relate to specific ``automatic'' 
or ``streamlined'' loan modification programs. Again, the 
eligibility requirements can vary based on investor or 
specifics of the program. With respect to loans owned by Wells 
Fargo Home Mortgage, we recently announced a streamlined loan 
modification program. To be eligible for this program a 
borrower must be 90 days or more past due, the borrower must 
own and occupy the home, the property must be a single family 
residence, and the borrower can not be in bankruptcy.

Q.2. How is success through the program defined? What does it 
mean that a certain number of homeowners have been ``helped'' 
through a loan modification program?

A.2. Wells Fargo Home Mortgage considers a customer ``helped'' 
through a loan modification program if a loan is brought out of 
default status while finding an affordable payment that the 
borrower is able to support on a long-term basis. Success is 
helping eligible borrowers achieve this, reducing the number of 
loans that proceed to foreclosure sale while minimizing losses.

Q.3. If your program has already been implemented, how have you 
calculated the number of homeowners assisted through the 
programs?

A.3. The streamlined program applicable to loans owned by Wells 
Fargo Home Mortgage was implemented on December 15, 2008. That 
is, we put certain foreclosure sales on hold and commenced 
efforts to contact and notify eligible borrowers. It is too 
early to calculate the number of successful loan modifications.

Q.4. If you have more than one loan modification program for 
distressed borrowers, please provide details on each.

A.4. As indicated previously, we have and will continue 
utilizing our case-by-case loan modification program. In 
addition to the streamlined loan modification program for loans 
owned by Wells Fargo Home Mortgage, we have implemented a 
number of programs for loans we service for others. That would 
include the ASF Streamlined loan modification guidance, Fannie 
Mae and Freddie Mac's Streamlined Modification Program. The 
criteria for these programs is similar to what was implemented 
for the Wells Fargo Home Mortgage owned loan program.

Q.5. How many homeowners do you project will be assisted 
through your institution's loan modification programs, and what 
information do you use to arrive at that calculation?

A.5. We estimate that approximately 7 of every 10 borrowers are 
eligible for a Wells Fargo Home Mortgage owned loan 
modification--and that would include the streamlined loan 
modification process. We base this on an analysis of loan level 
data, and an estimation of the number of borrowers who will 
respond to the program.

Q.6. Please also provide samples of the records and 
documentation you maintain regarding loans that are modified 
through your institution's loan modification programs, with 
appropriate redactions to protect confidential information.

A.6. Yes, we are mailing you a packet regarding loan 
modifications and will provide that to you directly.
    In over a decade of serving in state and federal 
government, I have learned that even the best consumer programs 
are useless if those they target for assistance do not know 
they exist. Please describe in detail the outreach efforts you 
have made to distressed homeowners to inform them of their new 
options for loan modification under the programs you 
administer.

Q.7. Specifically, what additional measures have you taken 
since the implementation of the program?

A.7. We send out multiple letters of notification providing the 
borrower with information about the program and urging them to 
contact us. We send tens of thousands of letters each month 
urging borrowers to contact us. Additionally, we attend 
borrower outreach events sponsored by non-profit and other 
agencies.
    We make over 2 million outbound telephone calls each month 
in an attempt to reach borrowers. For customers who do not 
respond to the letters, we follow up with multiple telephone 
calls at various times of the day again advising the customers 
of the program and determining their level of interest in the 
program.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM NANCY M. 
                             ZIRKIN

Q.1. Nancy and Martin, you both spent a considerable portion of 
your time on the bankruptcy issue, so I don't want to make you 
repeat yourselves, but I just want to emphasize one point. 
Isn't it true that despite some improvements, and major new 
programs announced by several lenders at the witness table 
today, that investors and 2nd mortgage holders continue to 
present major obstacles to loan modifications?

A.1. That is correct. For example, many loans are broken apart 
and spread across various tranches of complicated investment 
securities, which means that a wide number of people have 
often-conflicting interests in a loan when a borrower cannot 
afford the payments. The only way to modify such loans, without 
court intervention, would be to put the entire loan back in the 
control of one person who can make the necessary decisions--
which, in the case of securitized loans, has often been 
compared to trying to unscramble an egg.

Q.2. And isn't it also true that the only way to overcome those 
obstacles in a broad-based fashion is through bankruptcy? That 
the bankruptcy courts are the only entity with the power to 
overrule the objections of either group?

A.2. That is also correct. While I'd certainly be interested in 
any alternatives that industry opponents of the bankruptcy bill 
might have for overcoming those obstacles, those opponents 
still haven't proposed any.

Q.3. Loan modifications continue to be one of the most 
difficult aspects of this crisis. I'd like to ask the entire 
panel, what are the most significant obstacles standing in the 
way of broader loan modifications, especially to the 
securitized loans that no single person really controls, and 
what steps can Congress and the Administration take to overcome 
them?

A.3. The key obstacles are--as you noted--the modern 
securitization process, and the complications in many cases 
brought on by the use of piggyback loans. Not all loan 
modification efforts face these obstacles, which is why efforts 
like Hope Now, Hope For Homeowners, and--even better--FDIC 
Chairperson Sheila Bair's loan guarantee idea are all very 
important. But in most case, voluntary modifications just don't 
work, because it takes permission from too many people--making 
the bankruptcy route, which doesn't rely on permission, an 
absolutely essential part of the response.
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