[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

                      TO PROVIDE LIQUIDITY IN THE 
                        CURRENT FINANCIAL CRISIS 



                               BEFORE THE


                     U.S. HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                           FEBRUARY 10, 2009


       Printed for the use of the Committee on Financial Services

                            Serial No. 111-3

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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
WM. LACY CLAY, Missouri                  Virginia
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
JOHN ADLER, New Jersey
JIM HIMES, Connecticut

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                            C O N T E N T S

Hearing held on:
    February 10, 2009............................................     1
    February 10, 2009............................................    61

                       Tuesday, February 10, 2009

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................     5


Prepared statements:
    Bachmann, Hon. Michele.......................................    62
    Price, Hon. Tom..............................................    64
    Watt, Hon. Melvin............................................    65
    Bernanke, Hon. Ben S.........................................    67

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Joint statement of various undersigned groups................    81
    Written statement of the National Association of Realtors....    84
Moore, Hon. Dennis:
    Insert relating to the Limit Executive Compensation Abuse Act    89
Bernanke, Hon. Ben S.:
    Written responses to questions submitted by Hon. J. Gresham 
      Barrett....................................................    91
    Written responses to questions submitted by Hon. Bill Foster.    94
    Written responses to questions submitted by Hon. Gary Peters.   115
    Written statement of the National Association of Federal 
      Credit Unions..............................................   118

                      TO PROVIDE LIQUIDITY IN THE
                        CURRENT FINANCIAL CRISIS


                       Tuesday, February 10, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 1:01 p.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Watt, Sherman, Meeks, Moore of Kansas, Capuano, 
Hinojosa, Clay, Baca, Lynch, Miller of North Carolina, Scott, 
Green, Cleaver, Bean, Moore of Wisconsin, Hodes, Ellison, 
Wilson, Perlmutter, Donnelly, Foster, Carson, Speier, Minnick, 
Adler, Kilroy, Driehaus, Himes, Peters, Maffei; Bachus, Castle, 
Royce, Lucas, Paul, Manzullo, Jones, Biggert, Capito, 
Hensarling, Garrett, Barrett, Neugebauer, Price, McHenry, 
Marchant, McCotter, McCarthy of California, Posey, Jenkins, 
Lee, and Paulsen.
    The Chairman. The hearing will come to order.
    This is a very important hearing because it will begin the 
public discussion of the extraordinary powers granted to the 
Federal Reserve by a statute passed in the depths of the 
depression 60--77 years ago, which had not been used very much. 
As the Chairman of the Federal Reserve points out in his 
statement, it was not much used, and maybe not at all from the 
1930's to recently. And I will tell you, I was surprised myself 
to learn about it, having been on this committee for some time, 
and having been chairman since January of 2007.
    In September of 2008, what we were aware of is, first, 
under the Bear Stearns case, $29 billion seemed like a lot of 
money for the Federal Reserve to have at its disposal; those 
were the good old days. In September, the Chairman of the 
Federal Reserve, accompanied by the Secretary of the Treasury, 
Mr. Paulson, asked to meet with the congressional leadership, 
myself, the gentleman from Alabama, Mr. Bachus, and our Senate 
committee counterparts. And we were told that it was the 
intention of the Federal Reserve, with the full support of the 
Administration, to make $80 billion available for the insurance 
company AIG.
    I remember at the time saying to the Chairman, ``Do you 
have $80 billion?'' And his answer was, ``Well, we have $800 
billion.'' And that is when many of us for the first time 
understood the full scope of this statute. I say that because 
there have been some questions raised about how did this happen 
and what has been the public discussion. People should 
understand that almost all of this money, I guess Bear Stearns 
began it, but almost all of this money that has been made 
available under this authority from the 1932 statute dates from 
late September to October. So much of the time, of course, is 
when we were out of session.
    Now that we are back in session, it did seem to me, and I 
have talked to my colleagues on the Republican side, that it 
was important to begin a public discussion of this from several 
angles. First of all, there was a great deal of interest in how 
the Federal Reserve has used that authority, how much money has 
been deployed, what are the criteria, to what extent are 
taxpayers at of risk for losing money here. It is an ongoing 
    I read just before coming here the Secretary of Treasury, 
the new Secretary of the Treasury's announcement of his plans 
to use the TARP funds. It is very clear that the Obama 
Administration, as did the Bush Administration, is using the 
money in the TARP program in conjunction with the lending 
authority of the Federal Reserve. That is, the TARP money is 
going further than it otherwise might because the Federal 
Reserve has its capacity to lend very much involved.
    So we have the questions of how things have been deployed 
and what the plans are for the future. There are also some 
important questions involving the way in which we govern 
ourselves. The Chairman of the Federal Reserve, indeed, the 
Federal Reserve system, I believe was responding to very real 
needs in this society, and people need not agree with every 
specific decision that the Federal Reserve made, it seems to 
me, to appreciate the sense of very important public purpose 
that has motivated them. This has all been done in the interest 
of avoiding further damage to the economy and a credit 
    We are now still dealing with that crisis. And I am myself 
opposed to doing things that might hinder our ability to 
continue to cope. Going forward though, it does not seem to me 
healthy in our democracy for the amount of power that is lodged 
in the Federal Reserve with very few restrictions to continue. 
And I say that in no way meaning to criticize the Federal 
Reserve. Nobody currently in the Federal Reserve was there when 
they passed the 1932 statute. The responses of the Federal 
Reserve, I believe, have been motivated by a desire to stem 
further bumps in the economy. I think much of what they have 
done has been useful. I think the authority has been very 
responsibly wielded. And in the midst of crisis, we would not, 
I think, be wise to revise it.
    But going forward, the allocation of responsibilities 
between Treasury and the Federal Reserve is a very important 
one. And the question of how, in a self-governing society, you 
allocate these responsibilities is important.
    There are some who have said--including the Heritage 
Foundation--a while ago that they liked the fact that the 
Federal Reserve had this authority rather than the TARP, 
precisely because the Federal Reserve was so much more 
insulated from public opinion, and from electoral processes. I 
understand the desire that some have to diminish the electoral 
intervention, but ultimately in a democracy that is not, I 
think, an appropriate way to go. Certainly not with this degree 
of power.
    So those are the questions we will be discussing not just 
today, but on into the future. The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman. And welcome, Chairman 
    When historians look back at the financial crisis and the 
ensuing economic evil of the last half of the first decade of 
the 21st Century, what will be the story line? I submit it will 
be that while the public was focused on the tax rebate program, 
then on the $700 billion TARP, and finally on the $100 trillion 
economic stimulus package, a much larger drama was unfolding 
below the surface. While the public was distracted and focused 
on these high-profile activities and events, other programs and 
activities, some 5 times larger than those debated and 
discussed in open forums, were being enacted by a select few 
unelected Federal regulators who were making commitments of 
trillions of dollars backed by taxpayer guarantees and loans. 
Perhaps much like the analogy of an iceberg, only the tip of 
which is visible, the public, and we as elected 
representatives, are left merely to speculate as to the exact 
nature and composition of these complex financial transactions, 
which have been made and entered into out of public view.
    By using an obscure and seldom utilized provision of the 
Federal Reserve Act of 1913, the Federal Reserve, with 
Treasury's cooperation, has made unprecedented interventions 
into the financial markets. Not only has there been no 
disclosure or little oversight or accountability, there has 
actually been an active resistance on the part of these 
agencies to explain their actions or disclose the terms. At 
this time, because we know almost nothing about these 
transactions, we can only guess as to their ultimate success or 
    In future years, I am sure those who write of these days 
will be intrigued and captivated by the question, how could 
such an unprecedented action have occurred without the consent 
of the government? In many of these transactions that have been 
undertaken so far, we have been told we could not be given the 
specifics or details or terms because it was proprietary 
information of the companies involved. We have been left to 
guess as to the terms, the conditions, the size in many cases, 
the results expected, the consequences, the criteria for 
eligibility, or even the identity of all the parties. What is 
unknown pales in comparison to what we know.
    Perhaps of all the troubling aspects of these what I will 
call iceberg transactions, I am most troubled by what appears 
above the surface to be a total lack of guiding principles in 
entering these agreements and arrangements. This perception is 
only heightened by a series of ad hoc decisions and seeming 
policy reversals which gives an indication that there is, in 
fact, no detailed plan to navigate us through what we all agree 
are troubling times.
    Let me close by suggesting a missing but essential guiding 
principle. I believe in a democracy it should be a requirement 
in any agreement or transaction involving the government. The 
principle is simple: In the event that our governing officials 
come to the conclusion that a commitment of public funds is 
necessary, if a commitment of taxpayer funds or guarantees 
cannot be disclosed because of the circumstances involved, it 
cannot and should not be made.
    If a private party to a transaction not involving national 
security is unwilling to enter into an agreement open to public 
scrutiny and examination, the agreement should not be made. 
Thank you, Mr. Bernanke, and thank you, Mr. Chairman.
    The Chairman. The gentleman from North Carolina is 
recognized for 3 minutes.
    Mr. Watt. Thank you, Mr. Chairman. Using the authority of 
unusual and exigent circumstances under section 13(3) of the 
Federal Reserve Act, the Fed has set up emergency lending 
facilities to address severe market strains and commercial 
paper by activating a commercial paper funding facility to 
address severe strains related to money market funds by 
activating a money market liquidity facility and announced 
earlier today that it plans a substantial expansion of this 
term asset-backed security loan facility.
    The use of each of these tools will, of course, expand the 
balance sheet of the Federal Reserve and subject the Fed to 
more attention, scrutiny, second guessing, and oversight, 
otherwise as the chairman has indicated we run the risk that 
the authority granted in the 1933 statute could be out of 
control or subject to abuse. The use of each of these tools 
also raises the question, what happens when the unusual and 
exigent circumstances are over? What is the exit strategy for 
winding down the various Fed lending programs when we return to 
normal economic times?
    Today's review of the Fed's power under section 13(3) of 
the Federal Reserve Act is the first in a series of hearings 
and other actions that we must take to evaluate steps that 
certainly appear to be necessary to combat the current economic 
crisis that confronts us.
    I trust that our evaluation will be transparent, open, and 
fair, and I certainly welcome Chairman Bernanke's testimony. I 
yield back.
    The Chairman. The gentleman from Texas, Mr. Paul, for 3 
    Dr. Paul. Thank you, Mr. Chairman. I want to thank you for 
calling this hearing because the issue of transparency of the 
Federal Reserve System is something that is of crucial value to 
us. I rather enjoy the fact that the Federal Reserve has been 
in the limelight lately because that is the source of our 
problems, that is where the inflation comes from, and that is 
where the distortion comes from and that is where the 
malinvestment comes from, and it is a shame we do not know more 
about it. But I don't blame the Chairman of the Federal Reserve 
System for this, because it has already been quoted that 13(3) 
is in the law. So a lot of responsibility falls on us here in 
the Congress.
    Also in Title 13, chapter 7 of subtitle 1, it says that the 
GAO has authority to audit the Federal Reserve Board, the 
Federal Reserve banks as well as the FDIC and the Comptroller 
of the Currency. It sounds good, except you go to the next 
paragraph and it says, except for you can't audit the Federal 
Reserve or any of these organizations for the things that 
matter, such as transactions with foreign banks, transactions 
with foreign governments, transactions with international 
banking organizations. We can't have real access to knowing 
what is happening at the discount window in detail as well as 
how reserves are used, as well as information in what really 
transpires at the FOMC.
    The fact that we have information dribbling out to us, that 
is one thing, but for instance, in the last about 2 years, we 
have been denied the information that a lot of people consider 
rather important, and that is the total money supply. What is 
M3 doing? That for some of us, we think that is important. But 
it indicates that transparency is not always the goal.
    The question we in the Congress have to ask is, why is it 
the Congress is so eager to give up their prerogatives and 
their responsibilities, whether it is foreign policy, or 
whether it is giving the Executive Branch the authority to go 
to war without the Congress saying much, or whether it is 
turning over the monetary system to somebody so they can 
operate essentially in secrecy and deal not with a few hundred 
billion dollars, like $800 billion, but tens of trillions of 
dollars when it adds up. And yet the Congress seems to do very 
    So if we are concerned about transparency, if we are 
concerned about what is happening with monetary policy, believe 
me, the code has to be changed. But I am delighted that the 
chairman of the Banking Committee is interested in this at 
least to put some pressure and we do get bits and pieces and 
dribbles of information. But as to why we turned over this 
tremendous power to actually run the economy, central economic 
planning through the manipulation of prices, the whole problem 
we are facing today is that the Treasury and the Congress and 
the Federal Reserve are trying to price things they are 
incapable of pricing. That is the toxic assets. The illiquid 
assets. So if we only allow the market to operate, we might 
clean up the mess we have brought upon ourselves.
    Mr. Kanjorski. [presiding] Thank you very much. Now, 
Chairman Bernanke, if you will be kind enough to give your 
presentation to the committee.


    Mr. Bernanke. Thank you. Chairman Frank, Ranking Member 
Bachus, and other members of the committee, I appreciate this 
opportunity to provide a brief review of the Federal Reserve's 
various credit programs, including those relying on our 
emergency authorities under 13(3) of the Federal Reserve Act. I 
will also discuss the Federal Reserve's ongoing efforts to 
inform the Congress and the public about these activities.
    As you know, the past 18 months or so have been 
extraordinarily challenging for policymakers around the globe, 
not least for central banks. The Federal Reserve has responded 
forcefully to the financial and economic crisis since its 
emergence in the summer of 2007. Monetary policy has been 
especially proactive. The Federal Open Market Committee began 
to ease monetary policy in September 2007 and continues to ease 
in response to a weakening economic outlook.
    In December 2008, the committee set a range of zero to 25 
basis points for the target Federal funds rate. Although the 
target for the Federal Reserve rate is at its effective floor, 
the Federal Reserve has employed at least three types of 
additional tools to improve the functioning of credit markets, 
ease financial conditions, and support economic activity. The 
first set of tools is closely tied to the central bank's 
traditional role of providing short-term liquidity to sound 
financial institutions.
    Over the course of the crisis, the Fed has taken a number 
of extraordinary actions, including the creation of a number of 
new facilities for auctioning short-term credit to ensure that 
financial institutions have adequate access to liquidity.
    In fulfilling its traditional lending function the Federal 
Reserve enhances the stability of our financial system, 
increases the willingness of financial institutions to extend 
credit, and helps to ease conditions in interbank lending 
markets, reducing the overall cost of capital to banks.
    In addition, some interest rates, including the rates on 
some adjustable rate mortgages, are tied contractually to key 
interbank rates, such as the London Interbank Offered Rate or 
    To the extent that the provision of ample liquidity to 
banks reduces LIBOR, other borrowers will also see their 
payments decline. Because interbank markets are global in 
scope, the Federal Reserve has approved bilateral currency 
liquidity agreements with 14 foreign central banks. These so-
called swap facilities have allowed these central banks to 
acquire dollars from the Federal Reserve that the foreign 
central banks may lend to financial institutions in their 
jurisdictions. The purpose of those liquidity swaps is to ease 
conditions in dollar funding markets globally. Improvements in 
global interbank markets in turn create greater stability in 
other markets at home and abroad such as money markets and 
foreign exchange markets.
    The provision of short-term credit to financial 
institutions exposes the Federal Reserve to minimal credit 
risk, as the loans we make to financial institutions are 
generally short-term, overcollateralized, and made with 
recourse to the borrowing firm. In the case of the currency 
swaps, the foreign central banks are responsible for repaying 
the Federal Reserve, not the financial institutions that 
ultimately receive the fund. And the Fed receives an equivalent 
amount of foreign currency in exchange for the dollars that it 
provides to the foreign central banks.
    Although the provision of ample liquidity by the central 
bank to financial institutions is a time-tested approach to 
reducing financial strains, it is no panacea. Today, concerns 
about capital, asset quality, and credit risk continue to limit 
the willingness of many intermediaries to extend credit, 
notwithstanding the access of these firms of central bank 
    Moreover, providing liquidity to financial institutions 
does not directly address instability or declining credit 
availability in critical non-bank markets such as the 
commercial paper market or the market for asset-backed 
securities. To address these issues, the Federal Reserve has 
developed a second set of policy tools which involve the 
provision of liquidity directly to borrowers and investors in 
key credit markets. For example, we have introduced facilities 
to purchase highly-rated commercial paper at a term of 3 months 
and to provide backup liquidity for money market mutual funds.
    In addition, the Federal Reserve and the Treasury have 
jointly announced a facility expected to be operational shortly 
that will lend against AAA rated asset-backed securities, 
collateralized by recently originated student loans, auto 
loans, credit card loans, and loans guaranteed by the Small 
Business Association. Unlike our other lending facilities, this 
one combines Federal Reserve liquidity with capital provided by 
the Treasury. If the programs works as planned, it should help 
to restart activity in these key securitization markets and 
lead to lower borrowing rates and improved access in the 
markets for consumer and small business credit.
    This basic framework could also expand to accommodate 
higher volumes as well as additional classes of securities as 
circumstances warrant, and Secretary Geithner alluded to that 
possibility this morning.
    These special lending programs have been set up to minimize 
credit risk to the Federal Reserve. The largest program, the 
commercial paper funding facility, accepts only the highest 
rated paper. It also charges borrowers a premium which is set 
aside against possible losses. As just noted, the facility that 
will lend against securities backed by consumer and small 
business loans is a joint Federal Reserve Treasury program. 
Capital provided by the Treasury from the Troubled Asset Relief 
Program will help insulate the Federal Reserve from credit 
losses and the Treasury will receive most of the upside from 
these loans.
    The Federal Reserve's third set of policy tools for 
supporting the functioning of credit markets involves the 
purchase of a longer term securities for the Fed's portfolio. 
For example, we have recently announced plans to purchase up to 
$100 billion of the debt of the Government-Sponsored 
Enterprises, which include Fannie Mae, Freddie Mac, and the 
Federal Home Loan Banks, and $500 billion in agency-guaranteed 
mortgage-backed securities by midyear. The objective of these 
purchases is to lower mortgage rates, thereby supporting 
housing activity in the broader economy.
    The Federal Reserve is engaged in an ongoing assessment of 
the effectiveness of its credit. Measuring the impact of our 
programs is complicated by the fact that multiple factors 
affect market conditions. Nevertheless, we have been encouraged 
by the response to these programs, including the reports and 
evaluations offered by market participants and analysts. 
Notably, our lending to financial institutions, together with 
actions taken by other agencies, has helped to relax the severe 
liquidity strains experienced by many firms and has been 
associated with considerable improvements in interbank lending 
    For example, we believe that the aggressive liquidity 
provision by the Fed and other central banks has contributed to 
the recent declines in LIBOR and is a principal reason that 
liquidity pressures around the end of the year, often a period 
of heightened liquidity strains, were relatively modest.
    There is widespread agreement that our commercial paper 
funding facility has helped to stabilize the commercial paper 
market, lowering rates significantly and allowing firms access 
to financing at terms longer than a few days. Together with 
other government programs, our actions to stabilize the money 
market mutual fund industry have shown some measure of success, 
as the sharp withdrawals from funds seen in September have 
given way to modest inflows.
    Our purchases of agency debt at MBS seem to have had a 
significant effect on conforming mortgage rates, with rates of 
30-year fixed rate mortgages falling close to a percentage 
point since the announcement of our program.
    All of these improvements have occurred over a period in 
which the economic news has generally been worse than expected 
and conditions in many financial markets, including the equity 
markets, have worsened.
    We evaluate existing and perspective programs based on the 
answers to three questions: First has normal functioning in the 
credit markets been severely disrupted by the crisis? Second, 
does the Federal Reserve have tools that are likely to lead to 
a significant improvement in function and credit availability 
in that market? And are the Federal Reserve tools the most 
effective methods either alone or in combination with other 
agencies to address the disruption? And third, do improved 
conditions in the particular market have the potential to make 
a significant difference for the overall economy?
    To illustrate, our purchases of agency debt and MBS meet 
all three criteria. The mortgage market is significantly 
impaired, the Fed's authority to purchase agency securities 
gives us the straightforward tool to try to reduce the extent 
of that impairment. And the health of the housing market bears 
directly and importantly on the performance of the broader 
    Section 13(3) of the Federal Reserve Act authorized the 
Federal Reserve Board to make secured loans to individuals, 
partnerships or corporations, ``in unusual and exigent 
circumstances,'' and when the borrower is, ``unable to secure 
adequate credit accommodations from other banking 
institutions.'' This authority added to the Federal Reserve Act 
of 1932 was intended to give the Federal Reserve the 
flexibility to respond to emergency conditions. Prior to 2008, 
credit had not been extended under this authority since the 
1930's. However responding to the extraordinary stressed 
conditions in financial markets the Board has used this 
authority on a number of occasions over the past year.
    Following the Bear Stearns episode in March 2008, the 
Federal Reserve Board invoked section 13(3) to make primary 
securities dealers, as well as banks, eligible to borrow on a 
short-term basis from the Fed. This decision was taken in 
support of financial stability during a period in which the 
investment banks and other dealers faced intense liquidity 
    The Fed has also made use of the section 13(3) authority in 
its programs to support the functioning of key credit markets, 
including the commercial paper market and the market for asset-
backed securities. In my view, the use of section 13(3) in 
these contexts is well-justified in light of the breakdowns of 
these critical markets and the serious implications of those 
breakdowns for the health of the broader economy.
    As financial conditions improve, and circumstances are no 
longer unusual and exigent, the programs authorized under 
section 13(3) will be wound down as required by law. Other 
components of the Federal Reserve's credit programs, including 
our lending to depository institutions, liquidity swaps with 
other central banks, and purchases of agencies and securities 
make no use of the powers conferred by section 13(3).
    In a distinct set of activities, the Federal Reserve has 
also used the 13(3) authority to support government efforts to 
stabilize systemically critical financial institutions. The 
Federal Reserve collaborated with the Treasury to facilitate 
the acquisition of Bear Stearns by JPMorgan Chase & Company, 
and to prevent a failure of the American International Group or 
AIG. And we worked closely with the Treasury and the Federal 
Deposit Insurance Corporation to help stabilize Citigroup and 
Bank of America. In the cases of Bear Stearns and AIG, as part 
of a strategy to avoid impending defaults by the companies, the 
Federal Reserve made loans against polls of collateral.
    Activities to stabilize systemically important institutions 
seem to me to be quite different in character from the use of 
section 13(3) authority to support the repair of credit 
markets. The actions that the Federal Reserve and the Treasury 
have taken to stabilize systemically critical firms were 
essential to protect the financial system as a whole. And in 
particular the financial risks inherent in the credit extended 
by the Federal Reserve were, in my view, greatly outweighed by 
the risk that would have been faced by the financial system and 
the economy had we not stepped in.
    However, many of these actions might not have been 
necessary in the first place had there been in place a 
comprehensive resolution regime aimed at avoiding disorderly 
failure of systemically critical financial institutions. The 
Federal Reserve believes that the development of a robust 
resolution regime should be a top legislative priority. If 
specification of this regime were to include clear expectations 
of the Federal Reserve's role in stabilizing or resolving 
systemically important firms, a step we very much support, then 
the contingencies in which the Fed might need to invoke 
emergency authorities could be tightly circumscribed.
    I would like to conclude by discussing the Federal 
Reserve's ongoing efforts to inform the Congress and the public 
about its various lending programs.
    I firmly believe that central banks should be as 
transparent as possible, both for reasons of democratic 
accountability and because many of our policies are likely to 
be more effective if they are well understood by the markets 
and the public. During my time at the Federal Reserve, the FOMC 
has taken important steps to increase the transparency of 
monetary policy, such as moving up the publication of the 
minutes of policy meetings, and adopting the practice of 
providing longer-term projections of the evolution of the 
economy on a quarterly basis.
    Likewise, the Federal Reserve is committed to keeping the 
Congress and the public informed about its lending programs and 
its balance sheet. For example, we continue to add to the 
information shown in the Fed's H.4.1 release, which provides 
weekly detail on the balance sheet and the amounts outstanding 
for each of the Federal Reserve's lending facilities. Extensive 
additional information about each of the Federal Reserve's 
lending programs is available online, as shown in the appendix 
to this testimony.
    Pursuant to a requirement included in the Emergency 
Economic Stabilization Act passed in October, the Fed also 
provides monthly reports to the Congress on each of its 
programs that rely on the section 13(3) authorities.
    Generally the Fed's disclosure policies are consistent with 
the current best practices of major central banks around the 
world. With that said, recent developments have understandably 
led to a substantial increase in the public's interest in the 
Fed's balance sheet and programs. For this reason we at the Fed 
have begun a thorough review of our disclosure policies and the 
effectiveness of our communication.
    Today I would like to mention two initiatives. First, to 
improve public access to information concerning Fed policies 
and programs, Federal Reserve staff are developing a new Web 
site that will bring together in a systematic and comprehensive 
way the full range of information that the Federal Reserve 
already makes available, supplemented by new explanations, 
discussions and analyses. Our goal is to have this Web site 
operational within a few weeks.
    Second, at my request, Board Vice Chairman Donald Kohn has 
agreed to lead a committee that will review our current 
publications and disclosure policies relating to the Fed's 
balance sheet and lending policies. The presumption of the 
committee will be that the public has a right to know, and that 
the nondisclosure of information must be affirmatively 
justified by clearly articulated criteria for confidentiality 
based on factors such as reasonable claims to privacy, the 
confidentiality of supervisory information, and the 
effectiveness of policy.
    Thank you. I will be pleased to respond to your questions.
    [The prepared statement of Chairman Bernanke can be found 
on page 67 of the appendix.]
    The Chairman. Thank you, Mr. Chairman. I apologize, but 
there were multiple things going on, so I had to leave.
    The first point I want to make--and I appreciate your 
talking about openness--is that one of the things that we do 
too little of, I believe, in our politics, in our government, 
is when people predict disaster, we don't go back and see 
whether or not the disaster occurred. And sometimes that can be 
    When Henry Gonzalez was the chairman of this committee, Mr. 
Greenspan was the head of the Federal Reserve, probably even 
before. I think he may have taken over when Mr. Volcker was 
Chairman. He pushed hard for more openness. Back then, in the 
1980's, the results of the Federal Open Market Committee (FOMC) 
weren't published, I believe, until the next Open Market 
Committee. People had to guess how the Committee voted. The 
question of the minutes came up. The first response, sadly, of 
the Federal Reserve Chairman was to deny that there were 
minutes, then later they were found in a drawer and made 
    There were serious arguments made that the kind of openness 
that Henry Gonzalez was pushing for would undermine the conduct 
of monetary policy. Despite that, he was able to persuade the 
Fed to make these changes, probably out of fear that if they 
didn't do that, there would have been legislation which would 
have been, from their standpoint, a hardship, and zero 
negatives have resulted. In fact, I think you are better off 
today. I don't know what you think, but if we were still in a 
period where the FOMC voted, and people didn't know how they 
voted, the uncertainty and the ability that you have to 
influence the markets would have been greatly attenuated.
    We had a previous hearing at which one of our colleagues, 
the gentleman from Florida, Mr. Grayson, asked Mr. Kohn, who I 
thought was an excellent witness, forthcoming, thoughtful--I 
congratulate Mr. Kohn on his performance as a witness in being 
constructive. But he said that he couldn't give information 
about who the recipients were. I hope in this study of openness 
that it will be completed quickly and that you will put a very 
severe test against these claims. Historic experience is that 
there was a tendency to claim damage when there isn't any.
    Next, you know, we are in a very difficult political 
situation. We have this problem. We will talk about it again 
tomorrow. It is essential that we reinvigorate the credit 
system. We do not have the option of creating a whole new 
credit system. That means we have to work with the existing 
one. The problem is that there are a lot of people who are very 
angry at the people who are running the credit system, and we 
will have to do things that look like they are helping them or 
may be helping them, because there is no way to reinvigorate 
the system without that. But that creates a political climate 
where we have to be very, very careful.
    Let me ask one of the important questions you touch on 
here, and that is the fear that you are insufficiently 
collateralized. The fear ranges from some people who believe 
that, given the deterioration of assets, with the best will in 
the world, it would be hard for you to be assured of that. 
There are others who think less highly of you than I do, who 
believe that this is some plot to enrich some bad people, but 
you are deliberately taking less collateral than you should. 
There are a whole range of opinions in between.
    Please elaborate. You talk about this. We have had some 
experience with Bear Stearns, and the AIG experience does not 
appear to be as hopeful as some have thought, but what has been 
the experience to date with the collateral, and how much 
assurance can you give the American public that however much 
the money is, whatever the total is, you will be asked about 
that, how much of it is at risk, what loss can we reasonably 
expect to suffer?
    Mr. Bernanke. I thank you, Mr. Chairman.
    I would like to maintain throughout this hearing a very 
clear distinction between the 95 percent of our balance sheet 
which is devoted to regular lending programs, such as lending 
to sound financial institutions or supporting the credit 
commercial paper facility, versus the other 5 percent of our 
balance sheet which has been involved in--
    The Chairman. Fair point, but quantify those. How much does 
the 5 percent amount to?
    Mr. Bernanke. I will. The 5 percent, about $100 billion, is 
commitments that have been undertaken in government efforts to 
prevent the failure of major financial institutions. I want to 
make that distinction. The 95 percent, the bulk of our lending, 
those programs are extremely safe. They are overcollateralized. 
I could go through each one, I did in my remarks, and explain 
why each one is safe, mostly very short term, and very 
    The Chairman. And that would be about $1.9 trillion?
    Mr. Bernanke. That would be at $1.9 trillion, yes. That is 
correct. The other $100 billion, which is related to Bear 
Stearns and AIG operations, is a bit less secure, although our 
anticipation is that we will not lose money on those 
    The Chairman. my time has expired. Let me just say that I 
think that is an important point, and I know you will be asked 
to get back to us.
    What you are saying is that people who extrapolate from the 
Bear Stearns and AIG experience to the rest of your holdings; 
that is too pessimistic. I think that is a very important point 
that you will have to establish to people. The most public ones 
are Bear Stearns and AIG, and I think that is part of it, that 
people do not see those as safe. And then you are going to have 
to make clear that distinction you just made.
    Mr. Bernanke. Thank you.
    If I may, just very briefly, we engaged in those AIG and 
Bear Stearns transactions with great reluctance, because there 
is no existing structure to resolve systemically critical 
nonbanking institutions. If Congress would provide such a 
structure, the Federal Reserve would be more than delighted to 
step aside from such operations.
    The Chairman. That is a very important point.
    The gentleman from Alabama.
    Mr. Bachus. Mr. Chairman, in my opening statement I said 
that we should not enter into arrangements with financial 
institutions if the terms and conditions of those agreements 
cannot be fully disclosed. Would you like to react to that?
    Mr. Bernanke. Yes, sir. The terms and conditions, to my 
knowledge--and if you have any exceptions, I would be glad to 
get information to you--but the terms and conditions of all our 
agreements, to my knowledge, are fully disclosed. There are two 
types. There are the lending programs, such as the discount 
window and commercial paper facility. Those are all public 
information and all on the Web site. The testimony has a list 
of 5 pages of Web sites where information can be obtained. That 
information is fully disclosed. The one-off deals associated 
with AIG and Bear Stearns likewise, to my knowledge, they are 
fully disclosed in terms of--
    Mr. Bachus. Are the assets and the prices paid, the 
valuations, are those disclosed?
    Mr. Bernanke. The categories of securities and loans are 
disclosed and the valuation.
    Mr. Bachus. By categories--
    Mr. Bernanke. Well, one agency MBS is very much like 
another agency MBS, sir. The only distinct assets in the Bear 
Stearns portfolio which are not securities are individual loans 
to companies and so on, and those companies didn't ask to be in 
this portfolio, so we don't want to cast aspersions on them 
because they happen to be captured in that operation. But if 
your staff would like more detailed information, we can arrange 
to have that information provided. We provide quarterly 
information, we require monthly information on the evolution of 
the portfolio and of the arrangements, and we provide quarterly 
fair value accounting the same way banks have to do about the 
valuations of the portfolios.
    Mr. Bachus. You have talked about stabilized, systemically 
critical institutions. What is the criteria between an 
institution that is systemically critical and one that is not? 
I mean, what I have said, you know, you have too big to fail, 
which implies too small to save. To me that doesn't seem to be 
a fair criteria.
    Mr. Bernanke. Well, Congressman, you have two different 
questions there. The first is what are the criteria for 
systemically critical. And in each of the cases we have 
confronted, we have looked very carefully not only at the size 
and complexity of the firm in question, but also at the types 
of markets, counterparties and other transactions it was 
involved in, and tried to extrapolate if this firm failed, if 
it defaulted in the morning, how big would the implications be 
for the entire financial system and for the economy. And those 
cases where the risks for the broad system are just too great 
to take, we have to take whatever measures possible to try to 
prevent the failure.
    Your second point that it is not fair, I agree 100 percent. 
If I was a small banker, I would be very upset. Small bankers 
don't have this protection. The ``too big to fail'' problem is 
a serious, serious problem, and it should be a top priority to 
greatly reduce this problem as we go forward with restructuring 
the financial system.
    Mr. Bachus. And one way to do that would be simply not to 
permit a corporation of that size; is that right?
    Mr. Bernanke. That would be one strategy, but other 
strategies include tougher regulation and supervision, or, as I 
have mentioned before, having a tough resolution regime like 
the prompt corrective action regime already in place for banks 
that would allow the government to come in at a stage before a 
default and resolve the company in a safe and sound manner.
    Mr. Bachus. Let me ask you this: There have been numerous 
reports recently that you have hired Wall Street firms to help 
you value and price assets. So in many cases those are the same 
firms that have relationships and business associations, as 
well as personal relationships, with the very firms that they 
are negotiating with.
    Do you disclose the identities of, say, the negotiating 
teams? How do you deal with conflicts of interest? And how much 
disclosure is there?
    Mr. Bernanke. Well, except for the Bear Stearns case where 
we had only a few hours to operate, we have done, generally 
speaking, an RFP-type process where we accept bids and try to 
make sure that the usual firewalls are in place.
    It is probably impossible to completely separate these 
firms from the other organizations in some sense, but these 
firms are specialists, and they provide services in evaluating 
those difficult-to-value assets. And there are a number of them 
that we have relied on at different times to help us provide 
expertise that we don't have in-house.
    Mr. Bachus. Do you disclose the existence of actually who 
is on each transaction, who these consultants were?
    Mr. Bernanke. Who was involved? Well, typically it would 
be--for example, in the case of New York Fed, it would have 
been the president of the New York Fed and the chief counsel, 
the chief legal counsel.
    Mr. Bachus. No, I am talking about the private parties that 
they get to help them evaluate the deals.
    Mr. Bernanke. Yes. Well, certainly everyone knows who the 
principals and the leading players are in those firms. We can 
certainly ask if more information is needed. But these 
companies, of course, have to establish credibly that they do 
have separations between their different activities, otherwise 
nobody would use them because of concerns about conflict of 
    Mr. Bachus. Thank you.
    The Chairman. The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for coming up here. I think 
already, while listening to your opening remarks and some of 
the questions proposed by the Members thus far, it becomes very 
clear that we don't all have a very clear understanding of what 
has been carried out over the last several months. I am going 
to put it in perspective of myself.
    I became acutely involved in this situation as of about 
September 15th, as you may know, and we have been working on 
various pieces of legislation, obtaining various information. 
Under the prior Administration, I thought that both the 
Secretary of the Treasury and the President, quite frankly, 
were less than able to really spell out what some of the 
problems were, and I recognize that as shortcomings of the 
Administration. But since that time, the new Administration has 
taken office, and the other night at dinner, I listened 
intently to the President describe what his actions would be 
and what he wanted to do. And then I realized why so many of my 
constituents and so much of the news media, regardless whether 
it is specialized in financial affairs or the general news 
media, seems to be talking about questions that are not 
sufficiently clear as to what the problem is. And I realized 
last night when we were briefed by Treasury as to what the 
Secretary of the Treasury's statements would be today that it 
was represented by one of the staffers who sat in the back of 
the room after the briefing was concluded and it was open for 
question and answers, and his question was a very pertinent 
one: What is the plan, and what is the problem?
    I think he succinctly put it, and maybe I would like to 
reiterate what he said. I think all of you, you, sir, from the 
Federal Reserve, to the Secretary of the Treasury past, to the 
present Secretary of the Treasury, to our two Presidents, the 
present President and the past President, have failed for all 
of us, particularly the general public, to enunciate what the 
problem is. And it is very clear when we listen to the debates 
of the various parties and the interest groups that they are 
talking past each other, not to the problem.
    What I am really raising, the question is what can we do, 
what can you do, what can the key players do to take the time 
to define, in as simple terms as possible, what is the problem, 
what are the potential end results of the problem if not 
handled in a correct way or are incapable of being handled, and 
where our glide path is going?
    I am really so sick and tired of listening to you and 
others saying, well, when we evolved this solution 4 weeks ago, 
the economy has materially changed since then, and that is no 
longer operative. That is of little consequence or value to me 
as a policymaker or as a legislator to know that all the work 
we put in for the last 4 weeks is useless because the 
circumstances changed.
    Surely in describing the problem, I think the President 
described it pretty simply the other night; he said we are in 
an accelerating whirlpool. That makes sense to me. I understand 
what that means. Why can we not simply say what that means if 
you take today's circumstances and you extrapolate 4 weeks from 
now or 8 weeks from now?
    But more than that, you know, there was a question last 
night at the President's news conference. One of the reporters 
asked, are there going to be requirements for additional funds? 
I was a little disappointed in our President, because I think 
he is a straight, up-front guy, but he sidestepped the 
    And the reality, unless I am terribly mistaken--and maybe I 
want to pose that question for you to answer--I see no question 
that more funds will be necessary on the side of stabilizing 
the financial institutions of this country. The $700 billion or 
the $350 billion we are working on right now is not going to be 
sufficient enough to resolve this problem. And there is an 
attempt, as I sense it, of Treasury and the Federal Reserve to 
find other conduits for funds to be used or guarantees to be 
put in place that really do represent commitments in funds of 
the United States, but do not have to be passed by Congress or 
openly declared. As a result, every time that is heard, I think 
we lose the support of the American people in understanding how 
serious this problem is and what the end result could be if we 
don't get precipitous action, either today on the recovery bill 
in the Senate or in our next bailout bills, TARP 2, or what you 
may call it, or going down the road as to what may happen. What 
can we do to facilitate identifying and describing the problem?
    The Chairman. The gentleman's time has expired. The 
response will have to come in writing.
    The gentleman from Texas, Dr. Paul.
    Dr. Paul. Thank you, Mr. Chairman.
    In my opening remarks, I mentioned that Title 31 gives the 
GAO authority to audit the Fed, except in the final conclusion 
they exempt the Federal Reserve and the FDIC and the 
Comptroller of the Currency, so there is no authority.
    If Congress ever wants to know what is going on, we have to 
change the U.S. Code. For instance, right now I think it would 
be important for us to know what our monetary authorities are 
thinking about and talking about and planning internationally, 
because this system isn't working, and the new system is going 
to be devised, and I am sure it has been discussed.
    I would like it know if there are plans for another pseudo-
Bretton Woods agreement. It is very, very important to us. It 
is important to our sovereignty and important to our wellbeing, 
but we don't even have the right to know that as Members of 
    In section 13(3), it gives you the authority, and you cite 
the authority, to make loans and bail out individuals, 
partnerships, and corporations. And it hasn't been used much, 
but it is there, and that is congressional responsibility.
    But, you know, transparency is one thing, and I want that 
because it would expose the system as to how it operates, but 
there is more to it than that. To me, it is the power, it is 
the power and the authority that gravitates to the hands of a 
small group of people who can create money out of thin air. 
This is an ominous power. It is the most powerful tool for 
central economic planning around, and that really has to be the 
issue as much as transparency. Once you have this power to 
control money and credit and centrally plan, you can distort 
contracts. So we are talking about distorting contracts, 
rewriting contracts when we get involved in these bailouts like 
we have been.
    But you know, Chairman Bernanke, you have written a lot 
about the Depression, and, of course, there was a famous quote 
that you made once to Milton Friedman about apologizing about 
the Federal Reserve bringing on and creating and prolonging the 
Depression, but you assured him it wouldn't happen again. The 
free-market people agree with you entirely; the Federal Reserve 
is responsible. But the irony of all of this, and the key to 
this discussion has to be, was it too much credit in the 1920's 
that created the conditions that demanded a recession, 
Depression, or was it lack of credit in the Depression that 
caused the prolongation? And that is the debate. Obviously, the 
free-market people say the Fed brought it on by too much credit 
in the beginning.
    But the question I have is the adjustment of real value of 
assets. The Federal Reserve brings on these crises by 
interfering with the cost of money and through interest rates 
and the supply of money, but here we are working frantically to 
keep prices up. Housing prices have to be up; we have to 
stimulate housing.
    To me, from a free-market perspective, we are doing exactly 
the opposite of what we should do. The prices of houses should 
drop. We have 19 million unoccupied houses. Now, why should we 
in Congress stimulate housing? What is so terribly wrong with 
the market dictating this? We are frantic today. We are 
offering a new $1.5 billion program to buy up toxic assets, and 
that is propping up prices. That is illiquid, they are 
worthless; let us get rid of them and get it over with, get the 
pain and suffering behind us. How long are we going to be 
locked into this idea that we have to be involved in this price 
fixing? What is wrong with allowing the market to allow these 
prices to adjust and go down quickly so we can all go back to 
work again?
    Mr. Bernanke. Congressman, that was very interesting. Could 
I respond to a couple of points you made?
    First of all, in the Great Depression, Milton Friedman's 
view was that the cause was the failure of the Federal Reserve 
to avoid excessively tight monetary policy in the early 1930's. 
That was Friedman and Schwartz's famous book. And with that 
lesson in mind, the Federal Reserve has reacted very 
aggressively to cut interest rates in this current crisis. And 
moreover, we have also tried to avoid the collapse of the 
banking system, which was another reason for the Depression in 
the 1930's.
    On the prices of housing and the like, we are not trying to 
prop up the price of housing. What we are trying to do is get 
the credit markets working again so that the free market can 
begin to function in a normal way instead of a seized-up way in 
which it is currently acting.
    And finally, on price fixing of so-called toxic or legacy 
assets, the plan that Secretary Geithner described this morning 
would have as an important component private asset managers 
making purchases based on their own profit-maximizing analysis. 
So that would be true market prices that would free up what is 
now a frozen market to get transactions flowing again and 
should restore real price discovery to those markets.
    Dr. Paul. But so far, every one of these suggestions over 
the past year was more money, more credit, more government 
involvement. Nothing seems to be working. Even today, the 
markets weren't very happy with these announcements. I think 
the market is still pretty powerful.
    The Chairman. The gentlewoman from California, Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I thank you, Mr. Bernanke, for being here today. And I 
suppose I am in awe of the kind of power and flexibility that I 
have learned that you have, particularly in the execution of 
section 13(3).
    Let me just ask, because I don't really know how these 
discussions are made, I don't understand how they are made. You 
participated using your section 13(3) authority with Treasury, 
as you indicated, for the acquisition of Bear Stearns by 
JPMorgan Chase & Company to prevent the failure of American 
International Group, AIG, and to stabilize Citigroup and Bank 
of America.
    Now, I suppose when you all get together, you all have a 
way by which you decide which of these institutions are 
systematically or systemically critical financial institutions. 
In doing that, you make a determination about whether or not, 
for example, Bank of America needs to be stabilized, and 
whether or not their attempt to purchase Merrill Lynch is in 
keeping with being stabilized, and your support of all of that.
    What do you determine about Bank of America, and what are 
you concerned about in terms of using your resources to 
stabilize them? Is the purchase of Merrill Lynch consistent 
with your wanting to stabilize Bank of America?
    Mr. Bernanke. The Bank of America's purchase of Merrill 
Lynch was consummated or was initiated back in September and 
approved by its shareholders in the beginning of December. So 
that was a done deal as far as we were concerned. Our question 
was when Merrill Lynch revealed these very large losses, that 
we saw a risk that the combined company, Bank of America plus 
Merrill Lynch, would come under severe pressure in the market, 
and in some scenarios might fail or default. This is one of the 
largest financial institutions in the world. It has enormous 
numbers of counterparties and participates in many, many 
critical markets, and I don't think many people seriously would 
dispute the view that the failure of that company would have 
had enormously bad consequence not just for Wall Street, but 
Main Street as well.
    Ms. Waters. As you provide these resources under your 
tremendous authority, are you concerned at all about AIG and 
some of the reported ways that they spend money or have spent 
money? Does that concern you at all?
    Mr. Bernanke. Of course. It is critically important that 
taxpayer money be used well and there not be waste or abuse or 
fraud in those companies. But if you want me to take the time 
where I can do it in writing, we have extensive controls, we 
have people on the ground in the company, we attend all the 
board meetings, we have a whole set of policies, we put in our 
own CEO. So we have quite a few checks and balances to make 
sure that the expenses that are incurred at AIG are legitimate 
business expenses that advance the interest of the company. 
After all, if we are going to get paid back as taxpayers, we 
don't want the company to fail.
    Ms. Waters. Didn't AIG continue to have expenditures that 
the average person would consider unacceptable after your 
support and participation with saving them?
    Mr. Bernanke. There may have been a few occasions, but our 
overall view and our overall policy is that they have committed 
to making only expenditures which have a strong business 
    Ms. Waters. Given that it appears that the policy is that 
these institutions are so important that, no matter what, you 
have to save them, because in the description of this kind of 
policy, it is just too detrimental to the overall economic 
system to allow them to fail, what do you think is your 
responsibility to the smaller institutions, the regional banks 
and others, who have been begging for support and assistance 
    Mr. Bernanke. Well, of course, all banks were eligible, for 
example, for the Capital Purchase Program.
    Ms. Waters. Yes, but they must be--again, as you have 
described, they must be stable institutions where you are not 
taking any risk. But the game changes if you are too big to 
fail. How can we correct that?
    Mr. Bernanke. Two comments. The first is when we get 
involved in a ``too big to fail'' situation, usually the terms 
are much more onerous and difficult. For example, with AIG we 
imposed much tougher conditions than we would on an average 
bank taking capital from the TARP.
    The second comment repeats what I said earlier: Too big to 
fail is an enormous problem. We are very unhappy with this 
problem, and it should be a top priority to fix it as we go 
forward so the situation doesn't arise again.
    The Chairman. The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Chairman Bernanke, I have a couple of questions. I think 
the first question is an overall concern that I have. When you 
look at the meltdown in the economy, it is just not a domestic 
issue, it is a global issue, and we are seeing major 
contractions in the Chinese economy, the Japanese economy, and 
the European economy.
    Many of these countries were countries that we enjoyed them 
being able to buy our debt because we had a credit deficit or 
surplus with them. Now, with their economies shrinking and our 
need to borrow more and more money, some of the countries that 
were selling us oil at $150 a barrel, those prices have gone 
down. So a couple of things. One is, what happens when we get 
to the point where there aren't any buyers for Treasuries out 
there and we continue to move down the road of throwing 
trillions and trillions of dollars at this problem and trying 
to borrow that?
    Now, one of the things, when you look at the overall 
bailout of the markets, some people are quoting $7- to $8 
trillion that is committed to this. You have expended your bank 
at a pretty rapid rate. With the balance sheet, you are now 
about $2 trillion with a $42 billion, I guess, net worth.
    The question that I have is, what happens when we can't 
issue debt and there is more pressure then on the Fed to 
intervene in these? And when I look at your balance sheet, I 
see the monies that you have actually advanced, but I know, for 
example, you are on the hook for $37 billion if Bank of America 
has some additional losses; and with Citi, I believe it is $308 
billion. I think with Fannie and Freddie, it is half-a-trillion 
dollars or maybe more we have committed to backstop them. I 
don't see those numbers on your balance sheet. So when I look 
at your balance sheet, you have a 2 percent net worth; you have 
these contingent liabilities out there. You would be on a watch 
list if you weren't the Federal Reserve.
    So I guess the question is, what happens if we get to that 
point, and what is the real number that the Fed is in this 
    Mr. Bernanke. So, first of all, a couple of points. One is 
that even though foreign investments in U.S. securities have 
gone down, the investments have gone down on the private sector 
side, and investments in Treasuries have gone up because 
Treasuries are very safe, so there is still plenty of funding 
for Treasuries.
    But I think it is very important that, even as we run a 
large deficit this year and next year, and the President has 
said the same, that we work very hard to make sure that we 
restore a fiscal balance as soon as possible. So I think that 
is very important, and if we do that, that will make it 
possible for us to finance our way through this emergency.
    On the Federal Reserve's balance sheet of $2 trillion, as 
you point out, there is no government debt involved there. 
There is no borrowing that is not Treasury. And also we have 
nothing to do with the GSEs. We are not lending anything to the 
    You are correct in pointing out that we have a fourth loss 
position for both Citi and Bank of America which under 
extraordinarily severe, unprecedented conditions could cause us 
to lose some money. But, right now, I feel very comfortable 
that we are not on the watch list, that we have plenty of 
capital, that our likely losses are quite small. In fact, while 
I haven't put together numbers, I would guess that the profits 
we make on our lending programs would be a very substantial 
offset to any losses that we might make.
    Mr. Neugebauer. What would you say is growing the Fed too 
much? Would you be comfortable growing the Fed to $5 trillion 
or $10 trillion?
    Mr. Bernanke. The critical issue, sir, is that while the 
interest rate is at zero, there is no real bound, because with 
the interest rate at zero, we can essentially borrow at zero or 
close to zero in order to finance these funding programs. But, 
in practice, we have to worry about the fact that, at some 
point, and I hope it is sooner rather than later, the economy 
will begin to recover, and it will be necessary then for the 
Federal Reserve to begin to raise interest rates. In order to 
raise interest rates, we have to, among other things, there are 
various things we can do, but among other things, we will have 
to bring the balance sheet down to a more normal size. So all 
our expansion taking place at this point has to be very 
carefully planned to make sure we can unwind it and bring the 
balance sheet down in time to raise interest rates in order to 
prevent any insurgence or incipient surge in inflation.
    Mr. Neugebauer. So a $5- or $10 trillion Fed is not 
necessarily out of the question?
    Mr. Bernanke. It would depend on the maturity of the loans. 
Longer-term loans, borrowing, some other mechanism for 
sterilizing the effects on the money supply, we couldn't go 
anywhere like that. But for overnight loans, we can go pretty 
    The Chairman. The gentlewoman from New York, but first, I 
recognize the gentleman from Pennsylvania for a unanimous 
consent request.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    I ask unanimous consent that the following statements be 
made part of the record: a statement from the National 
Association of Realtors; and a joint statement from the 
Commercial Mortgage Securities Association and 19 other 
    The Chairman. Is there any objection?
    There being no objection, they will be made a part of the 
    The gentlewoman from New York is recognized for 5 minutes.
    Mrs. Maloney. Thank you.
    Welcome, Chairman Bernanke.
    Over the past 6 months, the Fed has been tremendously 
proactive in its efforts to preserve liquidity and help our 
economy to recover. By some reports, when you add in the 
stimulus and other activities, our government has spent or 
guaranteed over $7 trillion. The question I am hearing from my 
constituents is not so much transparency going forward, but 
backwards. They would like to know how that money was spent and 
who were the counterparties and what were the guarantees.
    I have been told there have been individual suits and suits 
by news agencies that have sued the Fed in a Freedom of 
Information Act request for disclosure of borrow banks and 
their collateral and that, to date, none of this information 
has been released. And I am not going forward on transparency. 
Everyone is talking about transparency, but what I keep hearing 
from my constituents, they want to know what happened to these 
guarantees. They want to know not just that it went to AIG, but 
then what did AIG do with it and tracking that.
    Is that information available? Can you make that 
information available?
    Mr. Bernanke. Congresswoman, I think these numbers that get 
thrown around like $7 trillion and $9 trillion and $12 
trillion, I think they are adding apples, oranges, bananas, and 
grapefruit all together. They are adding all kinds of 
incommensurate quantities into one big number.
    Mrs. Maloney. Well, they were adding the stimulus plan, the 
TARP plan, and the Fed window. But let's not use numbers. Let's 
say the Fed spending. The Fed spending, what happened to it? Is 
that available now? I have been told there have been suits and 
it is not available to the public.
    Mr. Bernanke. First of all, I want to insist that the Fed 
does not spend. We lend.
    Mrs. Maloney. Lend. Lend and guarantee.
    Mr. Bernanke. We are repaid. We are repaid, without 
exception. We are going to provide as much information as we 
can. But there is a good reason. The one, in particular, you 
mentioned is, why don't we reveal the overnight short-term 
loans we make to banks? In the recent period, almost every big 
bank and many of the medium and small banks in the country have 
borrowed from us for short periods, and we could give that 
list, I suppose. The risk we have is that during periods where 
fewer banks borrow, being put on that list is some sort of 
saying to the market, I had to go to the Fed, maybe there is 
something wrong with me, and that causes trouble for the bank.
    So if we have to give that information, and we will if 
Congress insists, but if we have to give that information, it 
will destroy that program and have a significant adverse effect 
on the liquidity provision and the stability of the financial 
system. So that is one case where I think that there is nothing 
devious going on.
    Mrs. Maloney. Well, that is one case. But in the 
guarantees, sort of the bulk guarantees, certainly to know the 
counterparties and the guarantees there should be made 
    Mr. Bernanke. Which one are you referring to, ma'am?
    Mrs. Maloney. I would say the ones to the major banks, to 
AIG, those.
    Mr. Bernanke. The information about AIG and Bear Stearns 
and Bank of America and Citi is a monthly report which is given 
to Congress. It provides all the information, and we are happy 
to try to make sure that all that information is available to 
the Congress.
    Mrs. Maloney. And that includes the counterparties and the 
guarantees and that information?
    Mr. Bernanke. To whom we make the loans? Yes, of course.
    Mrs. Maloney. What gets me is we keep trying so many 
things, and what I am hearing from the public and what I hear 
from my colleagues in Congress is that the loans are not 
getting out to the public. Now, banks say that they are 
increasing their loans, but there is some type of disconnect. 
Maybe they are long-term loans that were made a long time ago. 
New credit is not getting out into the markets.
    We just came back from a retreat of the Democrats, and my 
colleagues were telling me across the country, in every State, 
they feel that their constituents are telling them they can't 
get access to credit. Very reasonable, respected businesses are 
having their long-term credit cut, and there is no credit for 
commercial loans. There seems to be a huge problem there, and I 
would like to hear your ideas.
    Obviously, the bank system is the wheel that has to get our 
economy going, yet we hear that part of the new program is 
there is going to be a business and consumer loan program 
coming from the Federal Reserve. Why is that coming from the 
Federal Reserve? Shouldn't that be coming from our financial 
institutions? Why can't we get them working properly? Is the 
problem the toxic assets? Do we need to get them off the books?
    I don't think we should have to create a new lending 
system. Why can't we get the lending system that has served 
this country for decades working? Why is credit not getting out 
there to the public, and what can we do about it?
    Mr. Bernanke. Well, Congresswoman, one very important fact 
about the American financial system is that only about half of 
the loans in normal times come through banks. The other half go 
through other kinds of markets, like securitization markets. 
And all the programs I described today are about getting credit 
card lending, auto loans, student loans, commercial paper 
loans, mortgage loans, commercial mortgage-backed securities, 
all those things going again. That program will help get credit 
flowing outside the bank. So that is an important part because 
that is about half of our credit system.
    Then the other part of the program that Secretary Geithner 
talked about this morning is about recapitalizing, taking away 
the bad assets and getting the banks working again. So it is 
really two parts, and I think you have to address both parts or 
else you will not give people the access to the credit that 
they need in order to carry on their lives and their 
    The Chairman. The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Chairman, my constituents have the same problem and are 
questioning, when are we going to return to normalcy so 
consumers and small businesses and everybody would be able to 
get loans?
    But can you describe in more detail why banks are parking 
their excess reserves at the Fed instead of using those excess 
reserves to facilitate interbank lending as well as private and 
consumer and small business lending?
    Mr. Bernanke. Well, in many cases, they don't have--so the 
reserves at the Fed are very, very safe and have a very low 
weight against capital. In many cases, they either don't have 
enough capital, or they are simply worried about the 
creditworthiness of the borrowers or the demand for lending. 
That inhibits their willingness to take those reserves and lend 
them out.
    If they were to lend them out and the money supply began to 
grow, I am sure Congressman Paul would be very concerned about 
that, then the Fed would pull back and let them take the lead. 
But for the moment, their capital, their worries about 
creditworthiness, and their lack of loan demand and uncertainty 
about the economy is causing them to be very reticent.
    Mrs. Biggert. Isn't this a vicious circle then? Because if 
we can't restore confidence of the banks, if we can't restore 
confidence of the consumer or anybody, it is just going to keep 
revolving around that without having the ability to make the 
loans that are necessary?
    Mr. Bernanke. Well, I think at this point the reason the 
banks and the credit markets are frozen is no longer the legacy 
subprime mortgages and those things. It is more concern about 
where the economy is going. So I think we need strong action to 
stabilize the economy and the financial system. If we can do 
that, we will get a virtuous circle rather than a vicious 
circle that will get the economy back to a more normal state.
    But I have to say that this has been an extraordinary 
episode. This is the most severe financial crisis since the 
1930's, and in all honesty, I have to tell you, we can't expect 
immediate results. We have to be patient and keep working with 
    Mrs. Biggert. Well, then I would love to know what specific 
measures could Congress take to further stabilize both the 
short and long term of our financial system. But, at the same 
time, in your January 13th speech at the London School of 
Economics, you talked about a continuing barrier to private 
investment and financial institutions is the troubled hard-to-
value assets that remain on the balance sheets of these 
institutions and that these assets significantly increase 
uncertainty about the underlying value.
    Have you looked at the proposal that AON submitted to the 
Treasury? And how do you or how will you value these mortgage-
backed securities and the toxic assets? And will legislation be 
necessary, further legislation? It seems like we had that 
legislation a long time in the TARP.
    Mr. Bernanke. Well, there are many important legislative 
steps to take, including the resolution regime I mentioned and 
regulatory reform at a minimum. I am not familiar with the 
proposal you mentioned.
    The plan that Secretary Geithner described this morning 
would work to take assets off of the banks' balance sheets at 
market-determined prices, and the way we would have market-
determined prices would be by using the private sector and the 
skill and interest and self-interest of those private sector 
participants in purchasing the assets from the banks, and that 
would reduce that source of uncertainty that is now plaguing 
bank balance sheets.
    Mrs. Biggert. Just for your information, the AON plan was 
really taking what we had originally proposed as the insurance 
in the TARP proposal, and that was just to codify that how that 
would actually work. So it has been enacted, but it has never 
been used. I would hope you would take a look at it.
    Mr. Bernanke. Thank you.
    Mrs. Biggert. Thank you.
    I yield back.
    The Chairman. In defense of the Chairman, I would note that 
the TARP is under the jurisdiction of the Secretary of the 
Treasury, so that is why that would be his. I would also note 
that one of the points that the Chairman has mentioned, the 
question of power to resolve institutions that are in trouble, 
which Mr. Paulson had also talked about, will be on our agenda 
when we get to the whole systemic risk issue.
    The chairman of the subcommittee, the gentleman from North 
Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    Chairman Bernanke, you indicate on page 7 of your testimony 
that many of the section 13(3) steps that you have taken could 
have been avoided or might have been avoided or not necessary 
had there been in place what you call a ``comprehensive 
resolution regime aimed at avoiding the disorderly failure of 
systemically critical financial institutions.'' That is a 
mouthful, but I think I understand.
    Now, some of these systemically critical financial 
institutions have a comprehensive resolution regime in place 
already, do they not?
    Mr. Bernanke. The banks do, yes.
    Mr. Watt. The banks. So the ones that you are aimed--and 
with reference to those banks, whatever regulatory reform might 
include enhancing those steps. But outside the banks are other 
entities that do not have regulators that are systemically 
critical or too big to fail. Is that right?
    Mr. Bernanke. Yes, sir. Examples would be the insurance 
industry, the AIG example, or investment banks like Bear 
Stearns or Lehman Brothers. Primary dealers would be examples.
    Mr. Watt. And as we approach the new discussions that we 
are having about a systemic regulator, I assume the thinking 
then would be to try to put some regulatory framework, or at 
least when those entities posed systemic risk to the broader 
system, a triggering mechanism in place that would avoid things 
getting worse and worse and worse. That is what you are saying?
    Mr. Bernanke. Yes, sir. In the case of FDICIA, there is a 
systemic risk exception which requires majorities of the 
Federal Reserve Board, the FDIC and the Treasury Secretary in 
consultation with the President. So it is a very high bar. But 
if the systemic risk section is approved, that means the FDIC 
could take actions to resolve a bank, for example, that would 
be, not under normal circumstances, would be extraordinary 
    Mr. Watt. It would be in place for an AIG or an insurance 
    Mr. Bernanke. That is what I am thinking of, yes, sir.
    Mr. Watt. Now, it is the Fed that stepped in under 13(3) to 
exercise the authority to keep systemic risk from materializing 
even and getting worse. Would it be appropriate to think of the 
Fed as a potential repository of the authority as the systemic 
risk regulator, or is that something that is really different 
in your mind from what the Fed's real purpose for existence is 
or has been at least historically?
    Mr. Bernanke. I think there are two separate questions. One 
has to do with the resolution of large firms. I would think 
there the natural place for the authority would be in the 
Treasury, because fiscal funds might be used in consultation 
with the Federal Reserve and other agencies.
    The other question you are asking me is about a regulator 
that looks at the broader system and looks at how firms and 
markets interact and doesn't just focus on each individual 
institution, the way our system works now. I think that is an 
important idea. I think we need to work towards having more 
systemic oversight. I think the Federal Reserve would have a 
role to play in that, because we have a long-standing 
commitment to financial stability. We have very broadbased 
expertise. We have the lending authority under the discount 
window. But that being said, I think there are many ways that 
you could structure that that would be satisfactory and would 
be effective.
    Mr. Watt. And can you just identify some of the other 
players that would have a dog in that fight? The Fed, 
    Mr. Bernanke. Some of the other players would be the 
Treasury, the SEC, the FDIC, the OCC, a number of different 
agencies that have broad interests in the CFTC, have interests 
in various aspects of the markets, could work together in some 
way to look for risks that are emerging.
    Mr. Watt. But if you diffuse this too much, I mean, nobody 
has control of it.
    Mr. Bernanke. Yes, sir. I think you would have to think 
hard about what the right governance is, and I think that is a 
very big question.
    Mr. Watt. Thank you, Mr. Chairman.
    I yield back.
    The Chairman. The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Chairman Bernanke, allow me to somewhat 
follow up on my colleague's line of questioning since there is 
some serious discussion within congressional circles of adding 
additional responsibilities to the Fed, that being systemic 
    Clearly you now have the responsibility of monetary policy. 
You could have the responsibility of becoming systemic 
regulator. You have the responsibility in many cases of being 
bank regulator. You have consumer credit responsibilities, and 
somewhere along there, I think, is taxpayer protection as well.
    Do you believe that the Federal Reserve is poised to handle 
what many view as competing interests or goals? Do you believe 
that this can compromise your ability to manage monetary 
    Mr. Bernanke. Congressman, I think the overload issue is a 
real issue. I take it very seriously. Whoever manages the 
Federal Reserve would have to worry about allocating resources 
and so on. As I was saying to Congressman Watt, there are 
probably a number of different ways to organize in this, and 
the Fed might be the principal regulator or it might be 
coordinated with others. It would depend on what is Congress' 
view as the most effective mechanism.
    But I do think the Fed already has substantial systemic 
responsibilities that have gone back to the founding of the 
Federal Reserve. The Fed was founded principally not to manage 
prices or output but to manage financial crisis. That is why 
the Federal Reserve was created, and it has a long tradition of 
being involved in those issues.
    So I think that you would probably not have an effective 
system without the Fed's involvement. But, again, I am very 
open as to exactly how the governance of that would work and 
how resources would be allocated and so on.
    Mr. Hensarling. There has been some discussion as well 
within congressional circles of exploring specific inflation 
targets for the Fed. I am curious about your opinion of 
explicit inflation targets.
    Mr. Bernanke. Well, as you know, Congressman, I have long 
had the view that I think that would be a constructive step. We 
have gone slowly in that direction, and to some extent, we 
would be interested in Congress' views.
    Mr. Hensarling. Not by way of criticism, but by way of 
observation, many economists believe that but for the actions 
of the Federal Reserve earlier in this decade fueling the then 
existing housing bubble, that we would not have the economic 
turmoil we have today. Again, nothing is quite as clear to us 
as 20-20 hindsight.
    But do you have an opinion on, if we had had explicit 
inflation targets earlier in the decade, whether or not we 
might have avoided the present economic turmoil?
    Mr. Bernanke. Congressman, I have a very open mind about 
this, and I think it is very important to understand what went 
wrong, and there are probably many elements that contributed to 
the crisis.
    I do not think the evidence supports the view that Federal 
Reserve monetary policy in the early part of this decade was 
the principal source of the crisis. I think the principal 
source of the crisis had to do with the huge capital inflows 
coming from our trade deficit which overwhelmed our system and 
made risk management inadequate.
    That being said, I think we need to review monetary policy 
and make sure in particular that we don't err in terms of 
leaving policy too easy too long. Now, whether inflation 
targets would have helped, I am not sure. One of the key 
proponents of this view that the Federal Reserve kept rates too 
low explains the worldwide nature of this crisis by saying all 
the other central banks did the same thing, and most of them 
had inflation targets.
    Mr. Hensarling. Let me change the line of questioning. In 
exploring your powers under 13(3) as I have studied this and 
asked experts, and certainly your opinion is a relevant one, 
what is it that Treasury can do under TARP that the Fed cannot 
do under 13(3)?
    Mr. Bernanke. Well, critically, and this is why the former 
Secretary and I came to Congress to ask for the TARP, is that 
the Treasury can inject capital. The Federal Reserve can only 
make loans, and those loans must be secured to the satisfaction 
of the Reserve Bank that makes the loan.
    Mr. Hensarling. That is to your satisfaction.
    Mr. Bernanke. Yes, but we have legal counsel and other 
documentation, which means it is not a trivial requirement.
    Mr. Hensarling. My time is about to run out, but in your 
testimony on page 6, you say that at some point 13(3) will be 
``wound down as required by law.''
    As I read the law, I don't see what requires you to 
necessarily wind it down. Can you cite me the provision?
    Mr. Bernanke. Yes, sir. The law requires that we find that 
conditions be unusual and exigent. So when financial markets 
begin to look more normal, we would no longer have the 
    Mr. Hensarling. But it is your determination?
    Mr. Bernanke. That is correct.
    The Chairman. The gentleman from California.
    Mr. Sherman. Thank you, Mr. Chairman.
    We ask the country to strive toward the best possible 
policy options, not just to joyfully embrace anything on the 
theory that it is better than inaction. This especially applies 
to dealing with collateral benefit for the malefactors of risk 
on Wall Street. We need to work to eliminate the subsidies to 
Wall Street firms and to close the giant loopholes in executive 
compensation limits.
    Transparency is good, but insufficient. We see clearly, 
transparently, that the Federal Government was screwed out of 
$78 billion. We see billions of dollars in bonuses. And Wall 
Street firms are going to keep the $78 billion; the executives 
are going to keep the bonuses. Sunlight may be a disinfectant, 
but it does not kill all pathogens.
    Chairman Bernanke, your statement was good, but it did not 
contain a single dollar figure. I hope you would provide for 
the record in a simple dollar amount the total risk taken by 
the Fed so far. By that I mean, assume that every security that 
you own or have a lien against is worthless except for those 
backed by the full faith and credit of the United States; what 
is the total amount that taxpayers would have lost by actions 
taken so far by the Fed?
    Now, I know that you have told us you believe you are fully 
secured, but Wall Street gave AAA to Alt-A. The Secretary of 
the Treasury overpaid by $78 billion, and he says he was trying 
to pay par. He was just off by 31 percent. So you can imagine 
there is some distrust in the country as to what ``fully 
secured'' means or whether Wall Street and the financial 
establishment is correctly valuing assets and risk.
    Section 13(3) is an enormous grant of power. I know you 
have told us that you can only make loans if you are secured to 
your satisfaction, but as Mr. Hensarling pointed out, in the 
hands of another Chairman of the Board, that could be no limit 
at all. And under desperate circumstances, even you might say, 
well, I am satisfied with bad security; otherwise, the entire 
country is going to collapse, and so I am satisfied to be able 
to do something.
    I cannot think of the words that will really limit you in 
terms of the quality of the loans you make. It is up to you 
what is good security, what is bad security and what is in the 
national interest. So if we are going to limit your power at 
all, we can do so in terms of quantity.
    Mr. Chairman, would you actively oppose legislation that 
limited the total risks that you can take to $12 trillion, to 
say that all of the risks you take, other than the purchase of 
securities backed by the full faith and credit of the United 
States, cannot exceed $12 trillion? And if that is a bad dollar 
amount, what else do you suggest, or is it necessary for the 
quantity of your power to be utterly unlimited?
    Mr. Bernanke. Well, our balance sheet is currently $2 
trillion, of which 95 percent I would say is gold-plated secure 
and the rest is largely secure. So $12 trillion sounds very 
comfortable to me. I don't think that would be a problem.
    But, quite frankly, seriously, we take very seriously our 
obligation to make sure that our loans are well-secured, and I 
think that a loan to a strong financial institution overnight 
with collateral, given that we have never lost a penny in such 
a loan, is not adequately considered as being a highly risky 
    Mr. Sherman. I don't consider it highly risky, but I think 
there should be limits on the low risk that you take.
    Moving on to my next question, the oversight board on TARP 
has documented that the taxpayer got screwed by $78 billion by 
certain institutions who received cash and gave us securities 
worth far less than the cash they received. I believe that the 
taxpayer should be ``unscrewed.'' That is to say that these 
institutions should provide additional securities to Treasury 
to fully compensate us for the cash we have given them.
    Those firms that refuse to unscrew us, those firms that 
say, thanks for giving us $10 billion for $7.5 billion in 
securities and we are keeping the difference, can they do 
business with the Fed as if they were snow-white virgins; that 
they are eligible to participate along with everyone else? Or 
will you join in this effort to say that that $78 billion 
shortfall should be made whole, and that aside from purchase of 
U.S. securities, you will not provide bailouts to the 
malefactors that have underpaid us by $78 billion?
    Mr. Bernanke. I think that $78 billion number has been 
misinterpreted. In the newspapers, it sounds like that is money 
that has been actually lost from the principal, which is not 
the case.
    Mr. Sherman. No, no, no. I think, Mr. Chairman, I do 
understand the report.
    The Chairman. The gentleman's time has expired.
    The gentleman from South Carolina.
    Mr. Barrett. Mr. Chairman, it is good to see you.
    We sent an e-mail out yesterday, Mr. Chairman, to folks in 
South Carolina, and these are just a sample of the questions 
that I had for you to be asked today, because people are 
concerned about what is going on.
    I am concerned. I am concerned about what happened with the 
Treasury and the implementation of the TARP, oversight, 
    In the same breath, I am concerned about the Fed, too. You 
guys have spent hundreds of millions of dollars with a lot less 
oversight. So if you can, Mr. Chairman, let me just ask you a 
couple of simple questions, and I want you to explain these to 
these folks right here in terms that they can understand.
    Number one, after all the stuff that you have done, after 
all the stuff the Treasury has done, why haven't the credit 
markets come back?
    Mr. Bernanke. A two-part answer. First of all, the 
financial crisis has been extraordinarily severe, and those 
financial effects are incredibly powerful. And the 
intensification of the financial crisis in September knocked 
the global economy for a loop, which it is now just beginning 
to get its feet. So I think that the actions that were taken 
prevented a much worse situation, a meltdown that would have 
led to a catastrophic and long-term low level of activity. So 
the fact that we haven't gotten back to normal is just 
consistent with the experience that financial crises are very, 
very serious matters.
    The second answer I would make, though, and I would just 
like to emphasize that all these programs I talked about, the 
program for consumer and small business lending, the mortgage-
backed security program, the interbank lending program that 
affects LIBOR, all these things have already shown up as 
improvements in those credit markets which directly affect 
people in South Carolina. They are not banks and investment 
    The 30-year mortgage rate affects your constituents. The 
commercial paper rate affects the company they work for. The 
rate on auto loans, on student loans, on credit card loans, all 
those rates will be affected by the programs we are 
undertaking. We are doing this, not because we have some 
nefarious scheme; we are trying to help the American economy 
recover, and we are using whatever methods we have to overcome 
what has been an enormous blow from this financial crisis.
    Mr. Barrett. And I hear you, Mr. Chairman.
    A second question: Do you have, the Federal Reserve, do you 
have an overall arching goal that underpins the decisions of 
when and how you intervene into the market, that is what they 
want to know; and number two, when do you stop? When do you 
draw a line? When do you say, okay, no more?
    And I guess that is part of the third question, how much 
more is it going to take?
    Mr. Bernanke. So, as I have tried to emphasize throughout 
the hearing, there are two types of intervention. There are the 
interventions that have involved trying to stabilize 
systemically critical firms whose failure would create 
substantial problems for the financial system and the economy. 
As I have indicated, I am very unhappy about having to be 
involved in those things, and the sooner I can shed that 
responsibility, the happier I will be.
    On the other side, the other type of activities has to do 
with our expansion, trying to create and stimulate credit 
markets where credit markets have broken down. And there, we 
want to keep looking for situations where we believe we have 
tools that can get the markets working again; that will create 
lower rates or better credit availability; and will stimulate 
the economy.
    I think those things are in the interests of the people and 
that it can be explained to them that it is in their interests. 
I don't know how much more, but I think, given the severity of 
the situation, that we do expect to expand somewhat more to 
address the severe dislocations we are seeing in a number of 
key credit markets, including consumer credit markets
    Mr. Barrett. When you are talking about expanding more, can 
you be a little more specific?
    Mr. Bernanke. For example, the so-called TALF, the assets-
backed securities program, was slated for $200 billion to 
support new lending in credit cards, student loans, auto loans 
and small business lending. As part of the plan announced this 
morning by Secretary Geithner, the Treasury and the Federal 
Reserve would collaborate to bring that amount up to $1 
trillion, which would be another $800 billion of credit made 
available to broad categories of consumers and businesses.
    Mr. Barrett. Last question. Yes or no, was the first $350 
billion of the TARP spent well?
    Mr. Bernanke. It was critical to stop the meltdown that 
would have occurred otherwise.
    Mr. Barrett. Was it spent like it was sold to the United 
States Congress? Yes or no?
    Mr. Bernanke. There was a confusion in the sense that there 
was an honest representation of the goals of the program to 
focus on taking assets off of balance sheets, which I believe 
was an appropriate objective and we are now returning to it. 
But shortly after the bill was passed, the global financial 
crisis erupted. The purchase of assets was not fast enough to 
address it, and so capital infusion was the only method that 
would save the situation.
    Mr. Barrett. I will take that as a no.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from New York.
    Mr. Meeks. Thank you, Mr. Chairman.
    Mr. Chairman, I have really two separate questions that I 
want to ask. The first goes toward local municipalities. I 
actually had a big question with my comptroller in the City of 
New York, and we started talking about munibonds that the City 
of New York tries to, has to sell. It is important for them to 
sell the variable rate debt.
    One of the things that they had indicated to me that was 
tremendously important was that, under the numerous programs 
that were designed for banks and security firms to use as 
commercial paper to credit cardholders, that they can continue 
to get access to credit. But the one group of borrowers that I 
am told left out of all this help is State and local 
governments. I am told the conditions in the municipal bond 
market are better than they were 2 months ago but by no means 
back to normal, and many State and local governments want to 
borrow to finance new construction projects. We have a lot of 
new construction projects but cannot access the capital market 
at reasonable terms.
    So the question is, do you think to help these local 
governments and municipalities, would you support initiatives 
designed to make financing more readily available to States and 
localities, such as providing standby liquidity facilities for 
variable rate municipal bonds?
    Mr. Bernanke. Sir, I think that is something that the 
Congress ought to consider if the Congress has close 
relationships to the State and local municipalities, and 
certainly that would be something that could easily be done by 
the Congress.
    It is actually more difficult for the Federal Reserve for a 
number of reasons, technical and otherwise. But one I would 
point out is that the 13(3) authority, as broad as it is, 
excludes loans to municipalities, so we could not do that, at 
least not directly.
    But I do think that addressing the credit issues of State 
and local governments might be one way to help them, even 
though, as you point out, the municipal credit markets have 
improved somewhat.
    Mr. Meeks. Well, what about if--for the new liquidity being 
provided through some kind of receipt of TARP assistance, for 
example to carry a requirement that some of the new credit 
capacity be directed strictly to municipal issuers?
    Mr. Bernanke. Well, I would ask you to direct that to 
Secretary Geithner. It would really be his call.
    Mr. Meeks. Let me then move to another area that I think is 
of critical importance as we move forward. I have also been 
looking at a number of individuals who talk about the lack of 
availability of warehouse lending credit facilities. We had a 
hearing back, I guess it was a couple of weeks ago, and we 
heard testimony that 85 to 90 percent of the warehouse lending 
capacity is gone from the market, and some of the remaining 
warehouse providers may not stay in business. I know that 
lowering the overall rate is one thing. But if there is no 
money available by the warehouse lenders, then there is nothing 
to do at closing, and so people will not be able to take 
advantage. You know, we want to get folks to refinance or to be 
able to mitigate the mortgage they are in, but there needs to 
be some additional money therein.
    So, first, I want to make sure you are aware of this 
problem, and, second, what impact will it have in the 
marketplace if we stimulate demand for mortgages without 
ensuring adequate funding capacity at closing tables across the 
country for the warehouse credit facilities?
    Mr. Bernanke. Well, I need to look into that to give you a 
better answer. But, as I indicated, as Secretary Geithner 
indicated, the TALF program will be looking at other mortgage-
backed securities, including both residential and commercial. 
It is possible that might be included in that category, but I 
don't know.
    Mr. Meeks. So it is possible, but you don't know.
    Mr. Bernanke. No, sir, I don't.
    Mr. Meeks. Could you get back to me or get back to the 
office, because that becomes tremendously important. I know 
Secretary Geithner is coming up next week, was talking about 
the second portion, at least with the TARP money; how are we 
going to take care of those home mitigations. So it is 
important to me I think that it is clear whether or not there 
is going to be that additional money for the warehouse 
facilities. Is there a way that you can--
    Mr. Bernanke. Well, there may be--we need to understand 
exactly how the market works and what technical issues would be 
involved in doing it. So I just don't have the information to 
answer you. But it is certainly something we will put on our 
list and look at and see if it is, you know, something that 
will work. For example, if it isn't securitized through an 
asset-backed securities-type mechanism, it wouldn't fit with 
our structure. But we will certainly look at it.
    The Chairman. The gentleman from North Carolina.
    Mr. Henry. Thank you, Mr. Chairman.
    And thank you, Chairman Bernanke, again, for testifying. 
This is very helpful and constructive, not just for us on the 
committee, but for the American people, to know the actions you 
are taking, and we appreciate it.
    Secretary Geithner's proposal this morning or outline or 
vague outline or bullet points, whatever he offered, it 
mentions the extension of the term asset-backed securities 
lending facility to other types of assets. One area in 
particular that some of us have concerns about are commercial-
backed mortgage securities. That market has dried up in assets. 
There was $270 billion lent in 2007; $12 billion in 2008; and a 
number of loans are coming due in 2009. And so we have seen a 
vague reference to this. If, in fact, the lending will be 
extended or the TALF program will include CMBS, when do you see 
that being up and running and functional?
    Mr. Bernanke. Well, as you know, the initial program is not 
yet quite running. It is still going to be a couple of weeks 
before it is operating, and we are probably going to learn a 
bit about how it works and what other technical issues might 
arise. So I would be a little bit hesitant to give you a very 
precise number. But what I can say is that there is a lot of 
agreement that the CMBS problem is quite serious and that it 
would be a very strong candidate for being included at the 
nearest possible date in the TALF program.
    Mr. Henry. Okay. There is mention that it would only 
incorporate the newer, recently originated CMBS. Is that in 
fact the case, or is this going to be extended to a larger 
array of CMBS?
    Mr. Bernanke. It doesn't necessarily mean that it deals 
only with new buildings. If there is a refinance which is then 
resecuritized and therefore it is resecuritized and then re-
rated, then that would will be eligible for our program. So a 
refinance would be, if newly securitized, would be eligible.
    Mr. Henry. Certainly.
    There is a challenge the Fed has of managing inflation. 
Congressman Hensarling had a question about inflation targets. 
I kind of want to go to the next step here.
    A number of concerns that I and my colleagues have are 
about the long-term economic growth. We saw with the stimulus 
package that the CBO says in the end, this, quote-unquote, 
stimulus spending bill will crowd out capital and in the 
outyears have a negative economic impact. Likewise, some of the 
actions that the Fed is taking as well as the TARP program in 
TARP 2 is this mass infusion of money into our economy, and I 
believe that this will cause inflationary pressures on a mass 
    Now, I am certainly not a Ph.D. and not as learned as you, 
but I would like to have your input on how we avoid rampant 
inflation like we have seen before in this country?
    Mr. Bernanke. That is a very good question and one we take 
very, very seriously. In the near term, inflation looks to be 
very low. In fact, we are seeing disinflation, so we don't see 
inflation as anything like a near-term risk. However, it is 
certainly the case that when the economy turns around, which it 
will, and begins to grow again, that in order to avoid 
inflation, the Fed will need to undo its balance sheet 
expansion, need to bring down these programs, or use other 
methods to sterilize the effects of our programs on the money 
    We understand that. We will look at it very carefully. That 
is one of the chief things we look at at our FMOC meetings. We 
want to be sure that whatever actions we take, which under the 
current circumstances will not be inflationary given how slack 
the economy is and how commodity prices have come down and so 
on, we want to be sure that when the time comes, we will be 
able to tighten appropriately to make sure that inflation does 
not in fact become a problem.
    I am entirely persuaded that stable prices are critical for 
long-term economic health, and we at the Federal Reserve are 
absolutely committed to assuring that.
    Mr. Henry. So you don't have a fear of 1970's-style 
    Mr. Bernanke. Well, I think the main risk for stagflation 
would be if we don't fix the banking system. We saw in Japan, 
for example, or in the 1930's in the United States, that if the 
financial system is badly damaged and left to wither, that it 
is very difficult for entrepreneurs to get credit, for firms to 
invest, and that has a very negative effect on growth. So I 
think that it is absolutely essential that however difficult it 
may be, that we get the financial system running again. That 
will allow the economy to return to a more normal growth path.
    Mr. Henry. In closing, why do you believe the credit 
markets haven't normalized?
    Mr. Bernanke. They haven't normalized, first, because they 
were traumatized by the huge losses and the failures and all 
the factors that have created much risk aversion and caused 
people to pull back from markets. But now, going forward, the 
main concern of many bankers and others is the uncertainty 
about where the economy is going. If the economy is weakening, 
that means that credit quality is going to deteriorate, and 
that makes it harder to make loans and makes you more worried 
about your capital.
    So we need both to stabilize the economy and to stabilize 
the financial system. You have to have both in order to get a 
return to growth.
    The Chairman. The gentleman from Kansas.
    Mr. Moore. Chairman Bernanke, I think a lot of the people 
in our country and I are very concerned about the huge bonuses 
handed out by Wall Street last year; according to the New York 
State Comptroller, $18.4 billion. This is happening at a time 
of national emergency where the Federal Government is providing 
billions of dollars of taxpayer funds to stabilize the 
financial sector.
    Last week, I filed a bill, H.R. 857, the Limit Executive 
Compensation Abuse Act, which would limit the annual executive 
compensation, including salary, bonuses, and stock options to 
the same compensation paid to the President of the United 
States, $400,000, and a couple of days after I filed that, 
President Obama announced new requirements on TARP limiting 
future recipients an executive compensation cap of $500,000.
    I understand the Fed's TALF program utilizes $20 billion of 
TARP funds and perhaps even more after Secretary Geithner's 
announcement today. For firms that receive any of these TARP 
funds, via TALF or other Federal programs, will the Fed or the 
Treasury be responsible for enforcing the new executive 
compensation requirements?
    Mr. Bernanke. Absolutely.
    Mr. Moore. That will happen. You will personally assure 
that is done?
    Mr. Bernanke. We have systems in place that will require 
them to attest that they need it. That will be audited, and we 
will confer with the Treasury and IG to make sure those things 
are followed through.
    Mr. Moore. Thank you, sir.
    The Chairman. The gentleman from New York.
    Mr. Lee. Thank you, Mr. Chairman.
    I appreciate the opportunity to voice the concerns of many 
of the constituents in my district. The Fed's balance sheet, I 
believe, today sits at over $2 trillion. We have authorized 
over $700 billion in TARP 1 and TARP 2. Today, Secretary 
Geithner's new proposal could put several hundred billion 
dollars into play in some form of a TARP 3. On top of that, we 
are sitting at record national deficits, and the budget 
deficit, I believe, this year will be over $1.2 trillion.
    I was an economics major way back when at the University of 
Rochester, and it is hard for me to see this when I look at 
what impact this will have on crowding out investment, the 
potential impact on the staggering amount of borrowing we are 
going to have to do and what impact that will have on interest 
    I am curious, in your view, how are we going to go out and 
borrow unprecedented trillions of dollars into the market and 
what impact that may have?
    Mr. Bernanke. Thank you.
    First, I would like to make the point that the $2 trillion 
Fed balance sheet is not government debt. In fact, the $2 
trillion Fed balance sheet is a source of income for the 
government because we lend at higher interest rates than we 
pay, and that difference, so-called seigniorage, is paid in the 
tens of billions of dollars to the Federal budget every year. 
So that is a profit center, not a loss center.
    With respect to the other issues, though, in terms of the 
deficits, you are absolutely right that the deficits planned 
for this year and next year are extraordinarily large. They 
reflect the severity of the overall economic situation. Partly 
they are caused by the recession itself, which is hitting tax 
revenues and so on. And as the President and others have 
emphasized, it is very important that discipline be regained as 
soon as possible consistent with getting this economy going 
again and getting the financial system going again. Because if 
we leave the system in kind of a stagflation kind of situation, 
without growth, then the debt will be that much harder to 
service in the long term.
    But your point is absolutely right, that the deficits are 
an issue and a concern. It will raise the debt to GDP ratio of 
the United States probably by about 15 percent points. That is 
tolerable for a growing economy, but we do need to make sure, 
first, that we are growing and, secondly, that we have 
mechanisms to unwind these fiscal expenditures and loans as the 
economy improves.
    Mr. Lee. Just one last question as a follow-up. Do you have 
any concerns about the balance sheet of any of that debt not 
being paid back? You mentioned that right now it is a source of 
income. Are there any risks associated with that?
    Mr. Bernanke. So, as I said, the risks are somewhat greater 
in that 5 percent of the balance sheet where we have been 
involved in financial rescues. And specifically, in the Bear 
Stearns portfolio, on a mark-to-market basis, we are now in the 
red on that portfolio. I would defend still the decision, 
because I think the costs of letting Bear Stearns fail would 
have been many, many times greater than whatever costs we may 
or may not yet experience, because that is a mark-to-market, we 
are not selling. But as I was trying to indicate before, the 
great majority of the portfolio, 95 to 98 percent, is extremely 
low risk and is very comfortably considered a source of income 
for the government.
    Mr. Lee. Thank you.
    The Chairman. The gentleman from Massachusetts.
    Mr. Capuano. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman, for being here again. I want to go 
back for a minute when Mr. Meeks--
    The Chairman. If the gentleman would yield, if the Speaker 
doesn't stop expanding this committee, next year you will be 
testifying in the round.
    Mr. Capuano. I thought he already was.
    Mr. Meeks has suggested some assistance for cities and 
towns, and I think, a year ago, most people would have thought 
that the Fed wouldn't be involved with loaning billions of 
dollars to unregulated investment banks, mutual funds, or 
getting into credit card debt, auto debt, student debt. I don't 
think anybody would have really thought you would be doing that 
    You found a way to do that. Find a way to help the cities 
and towns and the States, maybe through insuring their bonds, 
if you can't actually take the bonds. I understand what the law 
says, but I also have absolute and total faith in your ability 
to go around any law that is clear and unequivocal.
    Mr. Bernanke. I appreciate your confidence.
    Mr. Capuano. It is only for the good things.
    Mr. Chairman, I want to talk a little bit about the thing 
that was announced today. I know that in some ways my questions 
should be addressed to Secretary Geithner. But as I read it 
today, you have chosen to now get married, and once you are 
married, you do have to answer for your spouse, as I do, as my 
wife does. When I write a bad check, she has to explain it.
    The Treasury, and, again, I understand this, with the new 
Administration and new Treasurer, there are some things that 
have to begin anew, and that is one of the reasons I voted for 
the second $350 billion; not voted for it, but I understood 
where it had to go and understand that.
    At the same time, there are some people in the same places. 
Mr. Kashkari is still there. To my knowledge, he still believes 
that individual institutions shouldn't report anything. It 
still questions me as to who? Is it going to be you, or is it 
going to be the Secretary of the Treasury who values these bad 
assets when we go out and buy them, because we all know that is 
the real underlying problem we have with the whole issue, is 
valuing these things. Is it going to be you, or is it going to 
be somebody else?
    Mr. Bernanke. We are not married. We are just good friends. 
The Treasury, of course, is responsible for the execution of 
this program. Under the plan which Secretary Geithner expressed 
today, the valuation of the assets would be at least 
substantially done by private parties who are experts in this 
area and who are acting in their own interests. He will be 
discussing that I am sure in great detail with the Congress.
    Mr. Capuano. Well, I would much prefer you do, and the 
reason is, obviously, I believe all you have said thus far. I 
have read all of the documents. I believe that the decisions 
you have made are relatively safe. I feel confident where we 
    We all know that the Treasury, again, not this Treasurer or 
the past Treasury, didn't do such a good job valuing assets. 
And I have a really hard time trusting the private market, who 
actually valued, I assume it is not new people who came in in 
the last 5 months, it is going to be the exact same people who 
got us into the mess in the first place valuing these assets. 
So their professionalism I think is subject to question based 
on the current economic crisis we have. They created the 
economic crisis, number one.
    Number two is their motivation. Your motivation is to save 
this economy, because that is your job. That is who pays you. 
Their motivation is make money. God bless them, it is the 
American way. It is not a problem.
    But I am not interested in private investors making money 
on the backs of taxpayers. I would rather have you do it. You 
have the motivation I trust. You have the professionalism I 
trust. You have the professionalism that, up until this point, 
has proven more accurate than those, and I would strongly 
suggest it is your money they are going to use. Don't write 
those checks unless you are comfortable with those values, 
because otherwise, I don't mean to be disrespectful, but you 
will be back on the hot seat along with them.
    Mr. Bernanke. Sir, I just want to be clear on the joint 
effort on the TALF, the asset-backed securities program, the 
Federal Reserve will certainly take full responsibility for 
    Mr. Capuano. That is exactly what I wanted to hear. Because 
I guess the other question I want to follow up on, in this 
provision, when you had some concerns, some general concerns 
that we can't make private entities do anything they don't want 
to do, report anything they don't want to report, because then 
they wouldn't take the money or something like that, and yet I 
am reading this release today, and it says that ``all 
recipients of capital investments in the new initiatives 
announced today will be required to commit to participate in 
mortgage foreclosure mitigation programs.''
    I happen to think that is a good thing. But if they can be 
required to do that, why can they not be or why should they not 
be required to do things like tell us what they have done with 
the billions and billions of dollars that we have given them? 
If we can do this, why can't we or why shouldn't we do that?
    Mr. Bernanke. As I understand it, sir, the program will 
require them to report on a monthly basis on their loans and 
other activities.
    Mr. Capuano. What about the past money?
    The Chairman. Will the gentleman yield?
    Mr. Capuano. I certainly will.
    The Chairman. The Special Inspector General is in the 
process of imposing that requirement on recipients in the past. 
He ran into some problems with OMB, who declared the Paperwork 
Reduction Act interfered with that. We had some conversations 
about that, and that has been cleared up. So Mr. Barofsky's 
demand that all the current recipients comply with that is in 
the process of being sent out.
    Mr. Capuano. I am a happy, happy guy. Thank you, Mr. 
    Thank you, Mr. Chairman.
    The Chairman. Would the recorder please take note that 
today was a day on which Mr. Capuano was happy. We don't always 
have those.
    Mr. Capuano. Don't get used to it.
    The Chairman. The gentleman from Florida.
    Mr. Posey. Thank you very much, Mr. Chairman.
    This is fairly elementary. But when we were on a gold 
standard, it was pretty easy to tell where we stood. Would you 
agree with that?
    Mr. Bernanke. It was a simpler system, yes.
    Mr. Posey. And off the gold standard now, how would you 
best summarize what substantiates the value of our money, in 
the shortest possible explanation?
    Mr. Bernanke. It is the central bank which establishes the 
money supply which in turn affects the rate of inflation. So it 
is the integrity and professionalism of the central banks and 
their mandates that has succeeded in keeping inflation quite 
low in the world for the last 20 years or so.
    Mr. Posey. But we don't have access to their balance 
sheets, do we?
    Mr. Bernanke. We have done a review of the balance sheet 
disclosures and so on of the major central banks around the 
world, and the Fed is as good as any. But they do provide 
general information about balance sheets, yes.
    Mr. Posey. But we don't have--like the Fed's, we have never 
seen the Fed's balance sheet either, have we?
    Mr. Bernanke. Yes, sir. Every week in the H41 there is a 
breakdown of our lending programs and details on the maturities 
of the different loans, and we are looking to add more 
    Mr. Posey. So why would they be exempt from audit then?
    Mr. Bernanke. They are not exempt from auditing. We have an 
outside auditor that does annual accounting. We have an 
Inspector General. And we have internal mechanisms, internal 
divisions, that look at the practices and management.
    Mr. Posey. What practices were in the statutes that I saw 
that were exempt from audit so they could not be audited?
    Mr. Bernanke. Congressman Paul, and frankly, this was news 
to me, says that certain international types of transactions 
are not subject to the review of GAO. If that is the case, 
again, as I said, I wasn't aware of it, but certainly they 
would be subject to the review of the external auditors and our 
internal audit teams in the IG.
    Mr. Posey. There are three paragraphs, for your 
information, of exemptions. It is not just one international 
audit. We sat here and we heard from Mr. Markopolis who told us 
about the Ponzi scheme that he exposed at the SEC 10 years 
before Madoff basically turned himself in, and with all due 
respect, one can't help but be captivated by the possibility we 
are running the biggest Ponzi scheme in the world right now.
    We are not really trading anything. We are running up 
values. We are borrowing from Peter to pay Paul. But there is 
nothing added to the bottom line. It is just hard to explain or 
it is hard for me to conceive that we are headed in the right 
direction like that.
    Mr. Bernanke. Well, speaking for the Federal Reserve, we 
have a very clear knowledge of our liabilities and assets, and 
they are well matched. We don't have any kind of Ponzi scheme 
or other such thing going on.
    Mr. Posey. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Bernanke, I have a great deal of interest in the 
federally guaranteed student loan programs, so for my 5 minutes 
I will focus on that area.
    The not-for-profit secondary markets for student loans have 
been decimated by the failure of the auction rates securities 
market. These lenders have played a key role in the federally 
guaranteed student loan program as well as have been providers 
of low-cost, consumer-friendly, non-Federal loans to fill the 
gaps between the cost of attendance and what is available 
through Federal financial aid.
    I received the announcement today that the Federal Reserve 
Board is prepared to increase the size of the term asset-backed 
securities loan facilities, better known as TALF, and could 
broaden the eligible collateral to encompass commercial 
mortgage-backed securities as well as private-label residential 
mortgage-backed securities and other asset-backed securities.
    Mr. Chairman, I was going to ask for unanimous consent to 
enter a document into the record of today's hearing. When he 
returns, maybe he will give--
    Mr. Watt. [presiding] Can you identify what the document is 
    Mr. Hinojosa. I wanted to ask for the remarks by Treasury 
Secretary Timothy Geithner, introducing the Financial Stability 
Plan, dated Tuesday, February 10th.
    Mr. Watt. Without objection, it is so ordered.
    Mr. Hinojosa. Thank you.
    Chairman Bernanke, at the last hearing at which you 
testified before us, I asked why the term ``asset-backed 
securities loan facility'' will help these lenders return to 
making the purchasing student loans and was told that you were 
seeking stakeholder input.
    What more can you tell me about all of this?
    Mr. Bernanke. There are several fronts on which the student 
loan issue is being addressed. To begin with, those auction 
rate securities markets have largely dried up. Like many other 
types of securitization markets, they involve short-term 
financing of long-term assets, and that has not proved to be 
stable in the current environment, which is one reason why our 
liquidity provision has been supportive.
    But three things: First, the Federal Reserve, as you point 
out, has included government-guaranteed student loans in our 
asset-backed securities facility and, you know, we stand ready 
to do that.
    Second, using, I believe, the Kennedy-Masterson law, if I 
recall the title, the Department of Education has set up a 
backstop facility to purchase student loans, including legacy 
loans or combination loans, and they are working with that.
    And then third, though, I would just comment that one of 
the problems with the student loan market has been the 
misalignment of commercial paper rates and LIBOR rates, which 
has made it unprofitable for banks, given the formulas in the 
student loan law, to issue new loans. So Congress has a role 
here as well.
    I strongly recommend that you take a look again at the 
compensation formula. If you want private-sector lending 
involved in the student loan market, you need to address the 
problem that, under current rules, the student loan lenders 
would be looking at a negative rate of return, and that has to 
do with the way that their formula is structured, for what they 
earn on their loans. So Congress could do a lot to help that 
    Mr. Hinojosa. With what we are investing in the financial 
sector, and with the fact that approximately 97 percent of the 
federally guaranteed loans are guaranteed by the Federal 
Government, it seems to me that this is probably the lowest-
risk loans that they could possibly make. That they want to 
have a bigger spread, I don't believe that is fair to the 
families who are trying to get their students to be able to go 
to college and afford them.
    Let me ask a second question: What plans do you have to 
ensure that the State and not-for-profit lenders are able to 
continue fulfilling their mission?
    Mr. Bernanke. Sir, I was asked to look at that by a 
previous speaker, but as I mentioned, there are limitations on 
our authorities to lend to governments; and it seems, given the 
longstanding relationship between the Federal Government and 
the State and local governments through block grants and so on, 
that a natural approach would be for the Congress to authorize 
backup facilities or some other support for credit extension to 
nonprofits and municipalities.
    Mr. Hinojosa. Thank you.
    Going to my last question, the troubled asset loan facility 
program aims to create availability for credit cards, auto 
loans, student loans--
    Mr. Watt. Unfortunately--
    Mr. Hinojosa. I yield back, Mr. Chairman.
    Mr. Watt. --the gentleman's time has expired.
    Let me announce that the Chairman has to leave at 4:00, so 
if we keep going fairly quickly, I think we will be able to get 
to virtually everybody. So we will try to keep on a tight 
    Mr. Price from Georgia.
    Mr. Price. Thank you, Mr. Chairman.
    I appreciate your coming again and being with us. You have 
described your role in the current challenges in many ways. I 
think I wrote these down correctly. One of them was to 
stabilize systemically critical firms and that you felt that 
the sooner you could leave that role, the better. Is that 
    Mr. Bernanke. Yes, sir.
    Mr. Price. And is that opinion shared--that desire to leave 
that role, do you know if that is shared by the current 
Administration, the Secretary of the Treasury?
    Mr. Bernanke. I think it is. We have discussed this in the 
past, and I believe he has spoken about this in public as well.
    Mr. Price. And when is it that we will know that you 
believe it is time to leave that role? Will you announce it?
    Mr. Bernanke. No. It will be time when there is in place an 
appropriate legislative framework that allows for a more 
systematic, prompt, corrective, action-type approach that will 
outline exactly how the government wants these firms resolved.
    Mr. Price. So regulatory reform will--
    Mr. Bernanke. Regulatory reform is what we are waiting for.
    Mr. Price. Another item that you said was one of your roles 
in these challenges was to stimulate credit markets where they 
have broken down. Other than the interest rate decrease, which 
is as low as it can go now, and the injecting of capital, what 
else can be done there?
    Mr. Bernanke. Sir, as I have indicated, people sometimes 
argue that once interest rates get to zero that the central 
bank can't do anything else. Well, we have found some other 
ways to try to ease financial conditions, and I have talked 
about three general areas: One is lending to banks, financial 
institutions, increase their liquidity; the second is to buy 
securities, including mortgage-backed securities, which lowers 
mortgage rates and strengthens that market; and then the third 
is to use various tools to try to address specific credit 
markets like the commercial paper market and the asset-backed 
securities market.
    I think we are going to have to explore what the 
alternatives are and see which markets could use assistance and 
whether we have tools available between us, the Treasury, and 
other agencies to address those problems, so I really can't 
tell you now. But our most immediate plans, as discussed this 
morning, would be to expand the TALF to include other types of 
asset-backed securities like commercial, mortgage-backed 
    Mr. Price. In response to a couple of questions as to why 
credit markets aren't working now, you have said, I think on 
two separate occasions today, that initially institutions pull 
back because of the degree of the calamity, and secondly, that 
currently the uncertainty in the economy precludes them from 
moving forward with providing credit.
    My sense is--do you have any sense about the role that the 
Federal Government has to play in that uncertainty?
    Mr. Bernanke. Well, certainly, if policy can be laid out in 
a comprehensive and predictable way, that is going to make it 
easier for firms to understand their environment to make good 
decisions. Again, the effort of the Treasury Department has 
been to try to lay out major elements of a comprehensive plan.
    Mr. Price. What about private capital? If I have private 
capital, and I am sitting on the sidelines right now, agreeing 
with you that there is a huge amount of uncertainty and 
therefore I ought not invest, for if I invest, I don't know 
whether my investment is going to be diluted or whether the 
Federal Government is going to come in and bail out my 
competition, isn't that a degree of uncertainty that we ought 
to address?
    Mr. Bernanke. That is an element of uncertainty. But also 
things like the amount of assets on the balance sheet which are 
very hard to value is a very important source of uncertainty.
    So I agree, you want to have comprehensive, predictable 
policies, and you also want to address the underlying problem, 
which is the losses and the bad assets.
    Mr. Price. But from a private capital standpoint, is there 
any incentive right now for private capital to get back in?
    Mr. Bernanke. There are some cases, but very few.
    Mr. Price. If we agree that markets ought to be allowed to 
work, wouldn't it behoove us to put in place a system or to 
concentrate on a solution that allows or incentivizes that 
private capital to get back in?
    Mr. Bernanke. Absolutely. That should be a top priority.
    Mr. Price. And as a top priority, if that private capital 
is sitting on the sidelines because of governmental 
intervention, isn't it appropriate that we wind down the 
governmental intervention as rapidly as possible?
    Mr. Bernanke. As soon as possible. But I would not want to 
say that the government intervention is the primary source of 
    Mr. Price. I didn't--
    Mr. Bernanke. The primary source of uncertainty has been 
credit losses in the economy.
    Mr. Price. In closing, in the few seconds I have left, you 
mentioned that the debt-to-GDP ratio has increased about 15 
percentage points and that is, ``tolerable in a growing 
    In a contracting economy, what level of ratio is tolerable?
    Mr. Bernanke. In a contracting economy, all else equal, the 
debt-to-GDP ratio will just keep rising. The economy won't keep 
up with it.
    Mr. Price. Is that where we are?
    Mr. Watt. The gentleman's time has expired.
    Mr. Bernanke. We are looking for long-term growth.
    Mr. Watt. The gentleman from St. Louis.
    Mr. Clay. Thank you so much, Mr. Chairman.
    And welcome back to the committee, Chairman Bernanke.
    I, like most Americans, have serious concerns about the 
economy and the remedies that are used to address the problems. 
Americans are concerned that TARP provided money to financial 
institutions to provide liquidity for lending, and after 
investing hundreds of billions of taxpayer dollars, we are 
still seeing a lack of liquidity.
    Many smaller banks declared they needed no bailout as they 
had good paper, yet many of them received tens of millions of 
dollars, some in excess of $100 million, all unsolicited.
    I won't name all of the concerns, but I find some of the 
distributions of funds questionable at best.
    Mr. Bernanke, did you or are you aware of former Secretary 
Paulson's forcing some banks to take TARP money?
    Mr. Bernanke. Well, there was some implicit pressure put on 
the very largest banks, whose stability is viewed critical to 
the economy, but I am not aware of any medium or small banks 
that were forced in any way to take TARP money, no.
    Mr. Clay. And I guess it was either your opinion or 
Secretary Paulson's opinion that the larger banks needed to 
take the money?
    Mr. Bernanke. I think that has been borne out. I think that 
has clearly been the case that many of the largest banks were 
the ones that have had the worst hits to capital and the 
biggest losses.
    Mr. Clay. And they still have not freed-up credit?
    Mr. Bernanke. Everything is relative, sir.
    I mean, the first thing to do was to prevent collapse and 
meltdown, and that is something--people don't realize how close 
we came to that. It was a very, very serious risk.
    We have also mitigated to some extent the contraction, the 
deleveraging of credit. And I think the credit--the capital 
which has already been deployed will be constructive and useful 
in the next stage, proposed this morning by Secretary Geithner. 
In particular, he is proposing to have that first round of 
capital convertible into common equity at the--if the bank and 
the supervisor decide it is appropriate, which may provide 
additional strength for the banks.
    Mr. Clay. Help me with the process here.
    Under Secretary Geithner's plan, we will have private 
investors and money handlers separating good assets from bad 
assets. Will the assets be purchased by the taxpayers?
    Mr. Bernanke. There will be--I need to leave the details to 
Secretary Geithner, but I think the general idea is that the 
private sector and the public sector would share both in the 
cost and in the return. Therefore, the private sector would 
have money on the line, they would have skin in the game, and 
they would have a strong incentive to make good decisions and 
make good prices.
    Mr. Clay. So does that say we will put money up front to 
purchase bad assets?
    Mr. Bernanke. No. I think the idea is that there will be a 
sharing, that there will be a combination of public and private 
money and private purchases. But that is--again, the Secretary 
is going to want to work out details with the Congress. I am 
not trying to front-run him here.
    Mr. Clay. I see. Thank you for that.
    And, Mr. Chairman, what is your opinion of the handling of 
the first $350 billion of the TARP? In hindsight, what changes 
would you have made in the distribution of the money, and what 
are your recommendations for going forward with the second half 
of the money?
    Mr. Bernanke. Well, I think the capital that was 
distributed was very important, as I said. I said I think it 
avoided a global meltdown and has benefits that will show up 
and be important in the second stage.
    I think the biggest mistake was that communication and 
explanation was not adequate, and we should have done a better 
job of explaining to the Congress and to the people exactly 
what we were trying to accomplish--and this point was made 
earlier--and how it would be facilitated through the TARP.
    Mr. Clay. Thank you for your responses.
    I yield back. Thank you.
    Mr. Watt. The gentleman from New Jersey.
    Mr. Garrett. I thank the chairman. Before I begin, let me 
go to the opening comment by the chairman about the need for 
and--the greater transparency by your department and the 
efforts that you made in that regard.
    As other people have said, we received a number of 
questions from our constituents, and I just remind you, though, 
that when we get those questions, we forward them on to you. 
And in the case--of course, we did that last year after Bear 
Stearns; I think it was around in April, and it took us around 
2 months in order to get a response. And we have since--we 
finally did get a response. It was December 4th of last year, 
after everything else has occurred; and we are now 2\1/2\ 
months just about down the road, and we are still waiting for a 
    These are questions not just coming from myself. These are 
questions coming from our constituents, the American public. So 
when we talk about the need for transparency, it is right 
    And if you could--I appreciate the fact that you are able 
to turn on a dime, if you will, when an emergency situation 
happens; and it is often on a Sunday afternoon or a Sunday 
evening that you are able to move like that, to not spend money 
but to lend money. And we would ask that you would be able to 
turn on a dime a little bit quicker to respond back to our 
constituents on these things.
    Secondly, the chairman of the Capital Markets Committee, 
Mr. Kanjorski, said he hears from his constituents as to what 
the plan is. I think that question goes to the questions that 
we have heard from the gentleman from Georgia as to what the 
plan is.
    As we sit here today--and I know the Treasury Secretary is 
over on the other side testifying--I think we are still--
capital markets are still with that question mark out there, 
what's the plan? And the gentleman from Georgia raises the 
point very well, that assets will sit on the sidelines until 
they feel that--the old saying goes, ``Don't just do something, 
stand there,'' might be more appropriate for a period of time 
so the markets could settle down.
    Some of the questions we had is--going to the situation 
with AIG specifically, are you able to tell us who the specific 
counterparties are that specifically benefited from the 
infusion of cash into AIG?
    And secondly, are you able to tell us, in light of the fact 
that the default credit swaps are basically moved off balance 
sheet at this time, and we were told that that was really where 
the systemic risk was and what made it so important, why are we 
so engaged and involved and why do we still have the problem 
with AIG?
    Mr. Bernanke. On the former, that is on the list of things 
we are reviewing to try to make sure that legal, privacy, and 
other concerns are manageable in the context that you are 
asking for.
    On why we are involved in AIG, partly it is that we have in 
some sense reduced the risks associated with AIG by taking some 
of the critical counterparty risk off the balance sheet, as you 
point out. There still are important risks associated with the 
company that have not yet been eliminated by any means--
    Mr. Garrett. So these are other than the default credit 
swaps and the--
    Mr. Bernanke. --other than those.
    But beyond that, obviously we want the company to pay us 
back. So we are watching it.
    Mr. Garrett. That can't be accomplished just by allowing 
the company to--
    Mr. Bernanke. Well, since we now have--since we are now the 
principal creditor and the principal shareholder, we certainly 
have some, I think, responsibility to make sure that the 
company is operating in ways that are consistent with the goal 
of paying the taxpayer or paying the Federal Reserve.
    Mr. Garrett. Well, do you have an obligation that the 
company is sustaining itself or will actually stay as a company 
or actually pay--itself, pay back the taxpayers, that that may 
be not in the current format?
    Mr. Bernanke. We are open to different approaches and we 
are in consultation with the management.
    Our main--we have two objectives. The first is to make sure 
that the company doesn't fail and create systemic risk; and the 
second is to make sure that the U.S. Government is fully repaid 
for the loans and capital that were injected into the company.
    Mr. Garrett. All right.
    Also a question of mine is what the Fed does and what the 
Treasury does. You had made reference here, and I know in the 
past as far as the plans to spend $100 billion for GSEs direct 
obligations, and up to $500 billion in GSEs mortgage-backed 
securities. And I understand what the goal is there, both that 
and also your efforts with regard to the asset-backed 
securities issues.
    In light of all the authority and the money that we have 
appropriated through the TARP program for Treasury, can you 
explain to us why the Fed continues in this action and why both 
of these areas are not relegated to the Treasury to handle? 
Don't they have the authority and the money to do it?
    Mr. Bernanke. Yes, they do. I would add, though, that the 
Fed, in making those purchases, is not using any extraordinary 
authority by any means, not 13(3) or anything else. It is part 
of our usual open market operations to be able to transact an 
agency's securities, and we thought it would be constructive to 
add our purchasing power to this effort to try to bring down 
mortgage rates and try to strengthen the economy.
    Mr. Garrett. Well, you appreciate what Congress went 
through to come up with the $700 billion to authorize for the 
TARP program. You are talking about $600 billion, obviously 
without any discussion of Congress here.
    So I understand you have the authority, but shouldn't it be 
that Congress has already given you direction in those areas to 
take that action?
    Mr. Watt. The gentleman's time has expired.
    Mr. Bernanke. These are acquisitions of Fannie and Freddie 
securities, which is already basically in conservatorship under 
the authority of the U.S. Government. We are not making 
additional--taking additional risks, for example.
    Mr. Watt. The gentleman's time has expired.
    Mr. Lynch is recognized.
    Mr. Lynch. Thank you, Mr. Chairman.
    Thank you, Mr. Chairman, for your willingness to come 
forward and help the committee with its work.
    I understand it is widely known that you are an expert of 
some sort on the Depression, the Crash of 1929. Hopefully, your 
education in that area won't become too relevant. But I have to 
say that there is one response, I think, of Congress and of the 
capital markets back in 1929 that I think we have ignored thus 
    In looking at what happened in 1929 and the years following 
that, I was struck that it appears that Congress and Wall 
Street got together in one regard and said that in order to try 
to stabilize the markets and get them on firm footing, Wall 
Street agreed to transaction fees.
    What they came up with was a formula which was rather 
modest in those days. I think the volume of trades on the major 
exchanges were around 5 million shares a day, at its maximum on 
a good day back in 1929; and they agreed that 1/300 of 1 
percent of each share traded on the major exchanges would go 
into a fund. And essentially it started off funding the SEC and 
some other things that were, I think, very helpful in the 
regulatory framework around the markets at that time.
    We have been giving out money left and right here, and 
there has been no similar effort to ask Wall Street, the people 
who--some of whom caused this major problem, the people who are 
certainly benefiting from the first phase of TARP, the second 
phase of TARP, a lot of the things that you have been doing.
    And I don't discount that you have been on the mark a 
number of times in terms of the relief you have provided, but 
isn't there a place--this Congress is going to consider a 
regulatory reform regime in the coming months. Isn't there some 
place in all of this--rather than ask the American taxpayer to 
pick up every red cent for generations for all the mistakes 
that have been made here, isn't there a rightful place for 
transaction fees to say to Wall Street, ``Look, this was part 
of the solution in 1929; this could be part of the solution 
    There were only 5 million shares a day on the major 
exchanges back in 1929 on a good day. We haven't had a good day 
in a while; on a good day these days, you have 5 billion shares 
a day. So it could be a microscopic, a very small fee, that 
would at least tell the American people that, ``Hey, for those 
of you that don't have money on Wall Street, you can rest 
assured that the people who are trading there, the people who 
are doing business on Wall Street are kicking in a little bit, 
    Is there a role for transaction fees? Might we ask Wall 
Street to help out?
    Mr. Bernanke. I understand your concern. I have a couple of 
issues with the transaction fees. One is that the people who 
trade shares--the cost is actually passed on to the people who 
own the shares, which is people with 401(k)s, and half the 
public own shares.
    Mr. Lynch. I understand. But there are a lot of people in 
my district, probably 40 percent of them don't have any money 
at all, and--you talk about unfair--they are being asked to pay 
for this. And I think there is a way to structure these things 
that you make sure it comes out of the firms, as well as--
opposed to just--and, you know, bond activity is not assessed 
at all; and we could look at that. They haven't been less than 
culpable in a lot of this crisis as well.
    But I am sorry. I didn't mean to interrupt your response.
    Mr. Bernanke. I was just going to make the comment that 
some economists have suggested transaction fees as a way of 
reducing liquidity and speculation in stock markets. I would 
have to say at the moment that liquidity is very short and that 
we are not seeing much of a speculative bubble in shares.
    I understand--I understand your general sentiment that 
trying to find ways to finance some of this cost in the longer 
term from the financial industry, for example, is worth looking 
at. But I don't think that is--that wouldn't be my first 
choice, and I am afraid in the very short run that it doesn't 
make much sense to put in capital and then take it right back 
out for financing.
    But certainly as we go forward, as I said to a number of 
people, it is going to be very important to try to get back to 
fiscal sensibility and fiscal stability; and there are lots of 
ways to get there, and Congress should look at a broad range of 
    Mr. Watt. The gentleman's time has expired.
    The gentleman from Michigan.
    Mr. McCotter. Thank you, Mr. Chairman.
    People in my district woke up one day sometime late last 
year and found out that the world, as they knew it 
economically, was going to end because someone had done 
something wrong to seize up the credit markets. And since that 
time they have witnessed disorder in the sense of the 
government's response.
    They have perceived this to be an unjust appropriation of 
their money, spent on the very people who caused the problem, 
and they see a long-term loss of economic freedom due to 
government intervention. And most importantly, they don't see 
much benefit to their daily lives from all the things that the 
government has done.
    My concern in studying human nature is twofold: one, the 
concept of ``too big to fail.'' When you tell people they are 
too big to fail, they will, because they know there is no 
responsibility to be incurred, no accountability if they do.
    Where is the stigma for the people who failed and put us in 
this mess? Where are the measures taken to ensure that they pay 
a price for their problems that they have put onto us? I don't 
see any. I don't see any at this point.
    And the second part of my question is kind of that these 
people thought they could go on forever doing what they were 
doing, that it would just keep going, that the dot-com bubble 
was replaced by a housing bubble, and it would never end. Now 
we are talking about creating a government bubble to fix the 
housing bubble, but they never thought they were wrong.
    I asked you and Mr. Paulson once, ``What happened?'' The 
answer was, ``Mistakes were made.'' Well, I understand human 
beings are fallible. But the problem is, if people think they 
are too big to fail or they are too important, the hubris that 
enters into the prognostications that they make and the actions 
that they take leads them to make very, very big mistakes.
    So my question is this: If these people were wrong and we 
are suffering the consequences of their bad decisions; if 
people like Mr. Greenspan, who has admitted he was wrong, have 
caused us to suffer the consequences of his bad decisions; if--
as you have written a book about the Great Depression--the 
people at the Federal Reserve were wrong and the people at the 
time had to live with their bad decisions, what in the odd 
chance happens if you are wrong? What is your worst-case 
scenario for the decisions and the actions that you have made 
and taken being incorrect, how will that affect the people who 
sent me here to work for them?
    Mr. Bernanke. Let me just start first by saying something 
about ``too big to fail;'' and I just want to reiterate this 
once again, that the ``too big to fail'' problem is an 
unacceptable problem. It needs to be addressed through tougher 
regulation, through resolution regimes, through other steps 
that will make fewer if--and ideally, no firm is too big to 
fail. That is critically important; I support that 100 percent.
    In terms of my own decisionmaking, I am doing the best I 
can with limited information. This has been an extraordinary, 
unprecedented event. Many things have happened that we thought 
couldn't happen. It has been extraordinarily severe. We have 
not gotten a complete grip on this thing yet. It has been 18 
months already.
    I believe that the policies that the Federal Reserve is 
taking and the steps that the Treasury and others are proposing 
are the best methods for addressing these issues; and it is 
based on, not pure guesswork but on some knowledge of history 
and other countries' experience and so on.
    But certainly it is possible that it won't be enough and 
that there will be further problems down the road. There is no 
way I can guarantee that, but certainly any policymaker, 
yourself included, has to make the best decision given the 
information and experience and knowledge that he or she has.
    Mr. McCotter. On that point, I appreciate that, but when 
you make a decision, you also have to look at the potential 
ramifications of what will happen if you are wrong. Given the 
unprecedented actions of the Fed and the unprecedented amounts 
that are being utilized, leaving aside the unprecedented 
amounts and actions that the Federal Government has taken to 
try to address this, you have to know what happens if you are 
wrong, before you can make a decision to proceed and do what 
you think is right.
    So my question is, if you are wrong, what do you foresee as 
being the consequences?
    Mr. Bernanke. Well, some have raised the concern about 
inflation. If we don't get the balance sheet under control and 
the money supply under control in time, in an appropriate 
moment, we could risk having higher prices down the road. That 
is certainly a possibility. It is one that we are very aware of 
and doing our best to manage.
    But, you know, nothing is certain. So that is one risk that 
I see.
    The other risk I would point out would be just that the 
efforts that are being made, including our attempts to 
stabilize key credit markets, prove insufficient and the 
situation gets further--deteriorates further.
    Those are the things I can foresee. There must be things I 
can't foresee, but by definition, I don't know what they are.
    Mr. Watt. The gentleman's time has expired.
    The gentleman from North Carolina.
    Mr. Miller. Thank you, Mr. Chairman.
    There are two versions of what the problem with the banks 
is, mainly. One is a liquidity problem--and you have spoken 
about a liquidity problem several times in your testimony--that 
banks have hard-to-value assets for which there is no active 
market, and they have persnickety accounting rules.
    The other is that there is an insolvency problem. The 
problem is that--the market is doing a pretty good job of 
valuing the assets. That is what markets do best; that is their 
core competency. The problem is, the assets aren't really worth 
very much and that the banks are really insolvent.
    Without asking you which it is, which I think would take 
all of my 5 minutes, do you agree that there are huge policy 
implications that turns on whether we have, ``principley''--
that is ``l-e''--a solvency problem or a liquidity problem, 
that what we do to address a solvency problem is not what we do 
to solve a liquidity problem?
    Mr. Bernanke. I would--I would make a choice there and say 
that while liquidity is very important, particularly for short-
term stability, that what we have here is a question of 
uncertainty about solvency; people don't know if the banks are 
solvent or not because they can't really value the assets. And 
that is why I think that trying to take the assets off and 
value them at some--at some market clearing price is an 
important component of getting more clarity into the market and 
potentially attracting capital back in from the private sector.
    Mr. Miller. So you agree that if the result of an asset 
purchase program that established an active market and had 
realistic values might be that many banks would be revealed to 
be insolvent, that actually would be a healthy development 
because it would increase confidence in the financial system? 
It might attract private capital because they know that the 
banks--that the books were honest?
    Mr. Bernanke. An interesting historical example is the bank 
holiday of 1933, when Roosevelt shut down the banks for a week 
and said, ``We are just going to check their books and open 
them up only when we think they are solvent.'' And a lot of the 
banks opened up pretty quick. So it is not really clear how 
much they really looked through the books, but when they opened 
them up again, people felt much more comfortable and more 
confident in the banks.
    And part of the proposal that Secretary Geithner put out 
this morning is to have a supervisory review not only of the 
quality of assets, the reserving and the potential future 
losses, but also to ask a very important question: How well 
would the banks do in an even more severe scenario?
    Mr. Miller. A stress test?
    Mr. Bernanke. A stress test.
    Are they able--do they have enough capital that, even 
putting aside whether they are solvent today, they could 
survive an even worse scenario and get enough confidence that 
they could survive that scenario. Putting enough capital in 
that they could survive that scenario should help to restore 
confidence that they are, in fact, solvent; and that would, in 
turn, attract private capital.
    Mr. Miller. Assuming there was confidence in the stress 
test itself.
    Mr. Bernanke. Correct.
    Mr. Miller. Mr. Chairman, we have heard some pretty dire 
estimates of how much banks' values are--assets are overvalued. 
Goldman Sachs economists, just in the past couple of weeks, 
have said that the total losses to American financial 
institutions is probably about $2.1 trillion, and about $1 
trillion of that had been realized now, had been recognized on 
the books, and that meant there was another $1.1 trillion of 
losses yet to be realized.
    Not surprisingly, Nouriel Roubini, ``Dr. Doom,'' put the 
number higher; he said $3.6 trillion, and about half of that 
banks and brokerage houses and that the total capitalization of 
the American banking system is about $1.4 trillion which, he 
said, if his own numbers were right, meant the entire American 
banking system was insolvent.
    The Federal Reserve is one of the principal safety and 
soundness regulators. You have responsibility for safety and 
soundness regulation for most of the Nation's banks one way or 
the other; and you have been taking hundreds of billions of 
dollars of assets, trillions of dollars of assets, as 
collateral for loans.
    So I assume you have been giving some due diligence to what 
the value of assets are. You have paid some attention. Do you 
have a sense of whether American banks are overvaluing their 
assets and by about how much, if they are?
    Mr. Bernanke. Well, it is--how much are the banks 
    Mr. Miller. How much have they overvalued their assets?
    Mr. Bernanke. Well, let me give you a number from the IMF. 
They have raised their loss estimates--I will get this 
approximately right, and we will try to get you the exact 
    But they have raised their estimates for total losses to 
about $2.1 trillion, of which about half, I believe--and again, 
if I am mistaken, I will correct this--are in American 
institutions. I believe that they estimate that about half of 
that has been taken, leaving something like $500 billion or so 
more to take.
    Banks, of course, earn income outside of their asset 
positions, which will offset part of that. So their estimates 
would put the system as losing money still--having losses still 
to come; but I don't think it would come very close at all to 
saying that the system was insolvent. So I think it is safe to 
say that there is very wide disagreement about exactly what the 
amount of losses are; it depends on your views.
    Mr. Watt. The gentleman's time has expired.
    The gentleman from Texas.
    Mr. Marchant. Thank you, Mr. Chairman.
    Mr. Chairman, in this announcement that was released today 
expanding the eligible collateral, do you feel like it also 
expands the definition of those people who are able to come to 
the Fed to post that collateral?
    Mr. Bernanke. Are you talking about the TALF program?
    Mr. Marchant. Yes.
    Mr. Bernanke. Sir, the expansion of the assets that we 
take, it would still work the same way, which is that investors 
would purchase these assets from the issuers of the ABS, and 
then we would lend to the--against that collateral we would 
lend to those investors in an amount between 85 and 95 percent 
of the principal value, depending on the risk that we saw in 
those assets.
    So the participants on the investors side may be very much 
the same, potentially the same group of people, just general 
investors. And on the issuers side, you have banks and other 
institutions which create ABS. The difference would be the 
types of assets which are being securitized, and that would 
affect different markets like the commercial mortgage market, 
for example.
    Mr. Marchant. And one of the largest holders of commercial-
backed mortgages are insurance companies. So are insurance 
companies eligible to come and participate in this TALF 
    Mr. Bernanke. Yes, they are.
    Mr. Marchant. And have they been participating to a high 
degree before--
    Mr. Bernanke. We are not in operation yet. We are still a 
few weeks away from operation.
    Mr. Marchant. But a new part of this will be that insurance 
companies will be--
    Mr. Bernanke. Any investor who wants to purchase ABS on a 
leveraged basis could come to the Fed's program and do that.
    Mr. Marchant. And your goal has been, and you testified 
earlier that about 5 percent of the overall loans are in these 
forms where you consider there to be a higher risk, in the AIG 
loan or--
    Mr. Bernanke. Of the Fed's balance sheet, about 5 percent 
of our loans are related to either AIG or Bear Stearns.
    Mr. Marchant. And is that an internal target? Do you feel 
like the expansion of the collateral and the expansion of the 
definition of who can come and borrow from the Fed in any way 
endangers that ratio that you are talking about?
    Mr. Bernanke. Well, we like that ratio to be as small as 
    It got to where it was because of the actions we had to 
take to preserve those firms. But we are--if we expand the 
balance sheet further, it is not in order to affect that ratio; 
it is in order to make credit available for markets where 
currently the markets aren't working well.
    Mr. Marchant. But you don't think that the expansion of 
this will take that number down to where at some point 10 
percent of the loans would be over in that category?
    Mr. Bernanke. Well, it is 5 percent now, so it will only go 
down, and we want to make it as low as possible.
    Mr. Marchant. Do you feel like--earlier we talked about 
transparency, and you stated that there was some concern if you 
issued a--if you revealed those banks that came in on an 
overnight basis that there would be some kind of reaction to 
thinking that because they were coming in, they might not be a 
safe institution.
    Are there some criteria for banks that are in every night 
with the same assets and you are, in effect, rolling over every 
night the same asset and the same loan? Is that--at what point 
is it not an overnight loan, but it, in fact, is a longer-term 
    Mr. Bernanke. Well, we always make sure of two things: 
first, that the bank is sound, which means that we either have 
our own supervisory staff there or we are in touch with the 
primary regulator of that bank; and the other thing is that we 
reevaluate the collateral each time it comes in. If it declines 
in value, for example, we would insist on a different piece of 
    But otherwise, certainly through--there was a time when the 
Fed would have said, No, stop. But, frankly, through this 
crisis, we feel that we need to make liquidity available to 
banks, that they can feel comfortable that if there is a drain 
on their deposits, for example, that they will have access to 
the Fed's window to make up that liquidity.
    Mr. Marchant. The last question is the AAA rating, and I 
think that the public reached some conclusions about the 
validity of this AAA rating.
    Has the Fed come to where--
    Mr. Watt. The gentleman's time has expired.
    Mr. Marchant. --they feel like the AAA rating is a real AAA 
rating now?
    Mr. Watt. The gentleman's time has expired. You will have 
to answer in writing.
    The gentleman from the other part of Texas.
    Mr. Green. Thank you, Mr. Chairman.
    And it is good to see you again, Mr. Bernanke. I do keep 
you in my prayers.
    Mr. Bernanke. Thank you.
    Mr. Green. Mr. Bernanke, I would like to discuss with you 
very briefly the efficacy of mark-to-market and a possible 
modification. My concern with mark-to-market is when we value 
assets and we write them down as credit losses, which means 
that we assume that they are losses because the borrower cannot 
perform or is not performing, as opposed to liquidity losses, 
which assumes that performance does not necessitate a writing-
down of the asset at the current time.
    My concern is this: If we buy these assets, we do have to 
assign some value. If we utilize mark-to-market to assign the 
value, we can create an even greater problem because there is 
no real market. We write down the assets.
    When we write down the assets, we find ourselves having to 
introduce more capitalization. By introducing more 
capitalization, we find ourselves--also the banks have a 
liquidity problem in the sense that they don't use that 
capitalization to lend money. They use the money that they 
have--they are making on loans to lend money, or they come to 
your discount window and they borrow to lend money.
    Now, having said all of that--and I hope it made sense to 
you--if it did make sense, would you kindly acknowledge so that 
I know--
    Mr. Bernanke. I thought it was a very good question. I 
appreciate it.
    Mr. Green. Okay.
    Having said all of that, one proposal is to split the 
assets--what are called ``troubled assets,'' ``toxic assets,'' 
``bad loans''--split them into credit losses and liquidity 
losses. In so doing, you don't take all of what I will call--in 
highly technical terminology, you don't ``take all of the hit 
at one time;'' you kind of spread your losses over some period 
of time because you only have to now deal immediately with the 
bad credit as opposed to potentially bad credit.
    Your thoughts on that type of modification, such that you 
don't eliminate mark-to-market, but what you do is you modify 
it such that it may be efficacious and not create a bigger 
    Mr. Bernanke. There is an idea very similar to that which 
would have only the credit loss and not the liquidity loss 
going to the income statement and showing up as profit and 
loss. And my understanding is that FASB, the accounting board, 
and the SEC reviewed that proposal late last year and found it 
sufficiently promising that they were going to look at it again 
in 2009.
    So I think it is an interesting idea and it is getting 
attention from the accounting authorities. But it makes--it 
makes sense to try to--particularly for assets which are going 
to be held for a period, to make a distinction between the 
credit losses and the liquidity premium that you are referring 
    Mr. Green. Thank you.
    Now, a quick comment and a response from you. All banks are 
not bad banks; and somehow all banks are getting the rap of 
being bad banks because of what is happening, but they are not. 
Some desire to lend, but they are not fully capitalized to the 
extent that they would like to be, or if they are, they are 
having problems with making loans because of, one, not getting 
good applicants, two, because they don't have the money to 
lend. While they received money to capitalize, to be 
capitalized--the money that we, for example, placed in banks; 
that money was to take an equity position, and they used that 
money for capitalization--they don't use that money for 
    So since they have that money--and the public believes by 
the way, Mr. Bernanke, and I am sure you are aware of this, 
that they could have taken that money and immediately started 
to lend it, which is a mistake; and somehow we have to 
communicate that message that there are rules that require that 
they be fully capitalized or capitalized to the extent that 
they can make loans at a certain ratio.
    So here is my concern: If we don't get this message out--
and I think this is what one of the chairpersons has talked 
about earlier in another way. But if we don't get this message 
out, the public continues to believe that the banks are getting 
money, and they are just holding on to it because they just 
like holding money, which is highly unusual for banks. They 
kind of like to lend at a high rate and borrow at a cheap rate, 
if they have to borrow, and prefer not to borrow if they can 
help it.
    So now would you kindly comment on how we can deal with 
this perception that the public has about banks?
    Mr. Watt. The gentleman may have to submit his comments in 
    Mr. Bernanke. Can I take 30 seconds just to say I think it 
is again a very good question; and that is one of the reasons 
it is hard to judge whether a bank is increasing its lending as 
it should, or not, because it may have funding issues. It may 
have difficulty finding creditworthy borrowers. They may have 
other sources of credit. It makes these kinds of measurements 
very difficult. But it is a very good question.
    Mr. Watt. The gentleman from the Vice President's State is 
    Mr. Castle. Thank you, Mr. Chairman.
    Chairman Bernanke, first of all, I am delighted you are 
here. I am delighted we are having this hearing. I had written 
to the chairman of the committee some time ago asking for it, 
and I think all of us looked forward to it, and I think it is 
very valuable.
    You made a statement earlier--and you have made it before, 
I have seen it before at least; and that is that only half of 
loans at normal times are from banks.
    Can you briefly summarize where the other--what the 
percentages might be on the other half, where they might come 
    And let me tell you why I am asking the question. We are 
concerned about not just the liquidity and the capitalization, 
all of which you are concerned about; it is part of your job. 
But we are also concerned about what is happening in terms of 
lending practices and the economy in general; and I am just 
concerned about what the other lending outlets might be, if you 
know that.
    Mr. Bernanke. Yes, of course.
    There are securities markets basically. You have corporate 
bonds and other kinds of commercial debt like commercial paper. 
A very important category is asset-backed securities where it 
could be that the bank sort of ultimately makes the initial 
loan. It makes an auto loan, for example. But rather than 
holding it on its books against its own capital, it combines it 
with other auto loans, makes a security called an asset-backed 
security, and sells it directly to investors.
    Another big area is mortgages, which are mostly securitized 
either from Fannie and Freddie or from private-label mortgage 
    So a very--something on the order of half of all credit 
goes through either the securitization market or through other 
securities markets; and although banks may be involved at some 
point in the process, they do not hold that--those assets on 
their portfolios, and their capital is not forced to bear that 
    So the closing down of the securitization markets has put a 
lot more pressure on the banks, because they haven't got the 
capacity to make up the difference between the losses in the 
securitization markets.
    Mr. Castle. Thank you.
    What criteria are you looking at to determine the 
effectiveness of the various programs, not only your regular 
lending to the banks, but to the other institutions, the AIGs 
and Bear Stearnses? I mean, do you look at just the 
capitalization and liquidity, or are you looking at what they 
are doing with it and how they are conforming to their normal 
lending practices or whatever?
    What criteria do you look at?
    Mr. Bernanke. Again, we are not involved in TARP-type 
activities to healthy banks. We were involved collaboratively 
with the Treasury and the FDIC in trying to stabilize a small 
number of large, systemically critical institutions; and there 
the major criterion is to prevent them from being involved in 
disorderly failure and to allow them to be stabilized, and that 
was the main criterion in those cases.
    Mr. Castle. So as part of your criteria you are not really 
looking at what they are doing, other than being stabilized 
    Mr. Bernanke. In order to decide if a company is 
systemically critical, we need to look at their books and see 
what kinds of activities are they engaged in and, if they were 
to fail, what would be the contagion effects across other 
institutions and other markets around the world.
    But that, again, as I have said several times, is 5 percent 
of our activity, and 95 percent of our activity is trying to 
get markets going again, like the commercial paper market where 
rates have come down considerably or the mortgage market where 
rates have come down.
    Mr. Castle. Should section 13(3) of the Federal Reserve Act 
be amended to ensure proper oversight of emergency activities 
to require congressional approval or Government Accountability 
Office review, GAO review?
    Mr. Bernanke. Well, there is substantial oversight, 
including a monthly report on each activity to the Congress; 
and the GAO, of course, can evaluate that. We have an IG as 
    But as I have mentioned, this is not a business we want to 
be in. We want to get out of this business, and if Congress can 
develop a good resolution regime to address this issue, the 
Federal Reserve is happy to work with you in any way that can 
be constructive.
    We would like to--we would like to make stabilization of 
systemically critical firms a very rare event; and when it is 
done, it should be done in as systematic and clear and as well 
specified a way as possible.
    Mr. Castle. Thank you.
    I will yield back the balance of my time.
    Mr. Watt. Mr. Cleaver is recognized.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Chairman, very quickly, before I get to my question, I 
think we made a tactical mistake and I think we are making it 
again. When you use the term ``bailout,'' I think that--and I 
know the media connected with that and ran with it, and so you 
automatically are going to have a large number of people 
against a bailout no matter what it is.
    And then we started talking about the ``bad bank,'' and we 
are setting ourselves up again. And I don't know who created 
the word in this context, but whoever did it, it is not 
helpful. I mean, we ought to use something like the ``Damascus 
Road Bank'' where Paul was bad and had an experience, stayed in 
that experience 3 days, and came out good.
    But whatever it is, you ought to get your linguists or 
somebody--we need to--this ``bad bank'' idea is bad.
    Mr. Bernanke. The official terminology is ``aggregator 
    Mr. Cleaver. It won't work, Mr. Chairman.
    Mr. Bernanke. That is not going to make it?
    Mr. Cleaver. It won't work. We need a 3-year-old to come up 
with it.
    I have two automobile manufacturing plants in my district, 
Ford and GM. And the question that I am very much concerned 
about is funding for the auto dealers' floor plans. And in the 
TALF, there does not appear to be funding except for 
securitized activities, which is also troublesome because--and 
Mr. Marchant, the gentleman from Texas, kind of went here, but, 
you know, why should the securities be required to have a AAA 
rating when the agencies that had all the toxic-backed 
mortgages also were AAA rated by the rating agencies?
    So I guess I have a couple of questions. One is auto dealer 
floor plans. And then the second one is securitized activity.
    Mr. Bernanke. Just to interject, the floor plans are 
eligible for the TALF under current rules.
    As far as securitization is concerned, even if the 
underlying credit isn't perfect, the AAA tranche, the more 
senior tranche, would still be eligible for financing through 
the TALF. We really couldn't--just procedurally and legally and 
operationally would have a great deal of difficulty financing 
individual loans. It is much more effective and efficient to 
have them in securitizations; and it is common practice to 
securitize those loans, as I understand.
    Mr. Cleaver. But the AAA rating, is that necessary?
    Mr. Bernanke. Well, I mean, a lot of people here today have 
been concerned about the Federal Reserve taking on too much 
credit risk. So I want to respond to that concern about 
minimizing that risk.
    Again, it doesn't have to be a--the underlying credit 
doesn't have to be, necessarily, AAA so long as the ABS is 
structured in such a way that the AAA component of it is 
    Mr. Cleaver. Let me change direction quickly. What if 
unemployment, God forbid, goes to 12 percent or higher? How are 
the institutions going to pay back their loans to the Fed with 
unemployment soaring and the credit market frozen.
    Mr. Bernanke. Well, I certainly hope that doesn't happen, 
but our collateral, our loans are very short term. Our 
collateral is continually reevaluated. So even if the economy 
gets very bad, banks will almost certainly be able to make 
those short-term loan repayments. We are not concerned about 
that, we are concerned about the effects of such a situation on 
the banking system as a whole.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Watt. The Chairman had advised us that he had to leave 
at 4:00, so I want to inquire of his schedule.
    Mr. Bernanke. You have three more people; is that right?
    Mr. Watt. Four more people; 1, 2, 3, 4.
    Mr. Bernanke. Certainly.
    Mr. Watt. We have to go vote in 10 minutes anyway.
    Mr. Bernanke. All right. I will be glad to stay.
    Mr. Watt. Mr. Royce.
    Mr. Royce. Chairman, I served on the agency subcommittee, 
and there is a history in terms of what happened in Japan that 
was interesting to me. Between 1992 and 1999, you had a series 
over 8 years of stimulus bills that were passed by the Japanese 
Legislature in an effort to get them out of recession, and 
during that period of time, it ended up being about $1.3 
trillion U.S. that they spent on this, but they ended up 
doubling their debt to GDP. It went from something like 60 
percent to 128 percent during that period of time.
    And we had a meeting with Junichiro Koizumi, who was the 
prime minister. He finally pushed through some reforms that did 
two things. He basically privatized a lot of the parastatals. 
But the other thing he did was he leaned on the banks and got 
them to write off their toxic loans, their bad assets, and 
that, he always felt, was what finally in 1999 brought them 
out, rather than the spending stimuluses.
    And in light of that, and also in light of what happened in 
Scandinavia, with the Swedish experiments in the 1990's, when 
they had the subprime problem, and they developed a system 
where they had the aggregator bank take those assets out of the 
system so that their banking management were spending their 
time on generating new loans instead of worrying about these 
assets that were segregated; and then the assets, of course, 
were held, and it was 5 or 6 years or whatever, and eventually 
the price came back up and sort of netted out--I guess it cost 
a couple of GDP points to their economy, but they got through 
it without the type of crash that they had feared.
    And so I was going to ask basically wasn't it the act of 
addressing the toxic assets that really worked for Japan and 
worked for the Swedish government at the time? Getting those 
financial institutions to move those off of their books on to a 
different write-down concept, isn't that what eventually 
probably had most to do with those countries' economic 
    Mr. Bernanke. So specifically under fiscal policy in Japan, 
I won't take you through it, but there is a lot of controversy. 
Some say that it didn't work; others say it wasn't tried in a 
sufficiently sustained way.
    The lesson I do take, and exactly the one you just stated, 
is that if we don't get the financial system working, and that 
involves very likely both taking bad assets and injecting 
capital, that other steps to restore the economy will probably 
not be effective.
    Mr. Royce. I appreciate that.
    I have a second question, and it has to do with a speech 
last month by the president of the Richmond Federal Reserve 
Bank, Jeff Lacker. He said, ``The critical policy question of 
our time is where to establish the boundaries around the 
public-sector safety net provided to financial market 
participants, now that the old boundaries are gone. In doing 
so, the prime directive should be that the extent of regulatory 
and supervisory oversight should match the extent of access to 
central bank credit in order to contain moral hazard 
    And he said, ``The dramatic recent expansion of Federal 
Reserve lending, and government support more broadly, has 
extended public-sector support beyond existing supervisory 
reach, and thus could destabilize the financial system if no 
corrective action is taken. Restoring consistency between the 
scope of government support and the scope of government 
supervision is essential to a healthy and sustainable financial 
    Is this a long-term question of moral hazard, how you 
offset it, how you overcompensate for that? I talked to you 
about that before, but I would just like your thoughts, if I 
could, on that.
    Mr. Bernanke. I think that is a critical principle for the 
longer term, but we are in the middle right now of an 
extraordinary crisis.
    Mr. Royce. I understand that.
    Mr. Bernanke. We need to get through that crisis, but I 
very much agree with Mr. Lacker that we need to clarify 
regulatory responsibilities, and that lending and other such 
interventions ought to be aligned with those authorities and 
with congressional intent.
    Mr. Royce. I thank you very much. My time has expired.
    Mr. Watt. Mr. Perlmutter.
    Ms. Bean, I am sorry.
    Ms. Bean. Thank you, Mr. Chairman.
    And thank you, Chairman Bernanke, for your patience with us 
today. Your testimony has been helpful. Even when we are not 
here, we are watching from our office. It has been very 
    In follow-up to Congressman Royce's comments, given that 
you are an expert in the history around the world in these 
types of situation, wasn't it also true, to go back to Japan, 
that part of the challenges they had were that they were slow 
in their response, and it wasn't sizable enough in what they 
did; that they tightened their monetary policy, where your 
approach has been just the opposite; and that much of their 
stimulus was very transportation- and infrastructure-specific, 
and it was not broad-based, as our own stimulus proposals are?
    Mr. Bernanke. Well, there are a lot of issues there. They 
did have zero interest rates; in fact, they still have 
essentially zero interest rates.
    I do think that speed of response is very important. As you 
have all experienced firsthand politically, it is not easy to 
bring the public along to try to address problems in the 
banking system. And in Japan the political resistance was one 
of the reasons why it took a very long time to address the 
    American people have complained a lot, and I don't blame 
them. On the other hand, I think people understand that 
something needs to be done, and these steps that are being 
taken, as distasteful as they are in some cases, are essential. 
And I think it speaks well of the Congress that you did act to 
take these steps, and that we are moving in a reasonably 
expeditious way, given the speed of events and all that has 
happened, to begin to tackle our problems. We are much better 
off addressing them quickly than letting them fester.
    Ms. Bean. Thank you.
    I have a few other questions. One is you have spoken before 
about the use of tax dollars, both some that have involved 
congressional involvement with TARP, and some of the things you 
have been able to do without our involvement to stabilize our 
system. We have also spoken to the fact that the government has 
the unique ability to hold certain assets that may presently be 
illiquid and undervalued until a point when we might get a 
better return on those dollars.
    How much has that picture changed, in your mind, from when 
you testified in the past about how much of that is likely to 
come back? Are you feeling better, worse moving forward? Are 
you going to have to hold onto certain things longer? What is 
your feeling? 
    Mr. Bernanke. Well, I do think that there are big liquidity 
premiums and risk premiums in the market, and that eventually, 
in all likelihood, those premiums will at least become more 
normal, which would--otherwise everything else being equal, 
would tend to improve asset prices.
    With that being said, I think one of the big issues right 
now is that markets are very uncertain about where the economy 
is going. They have a sense of what is likely to happen, but 
they fear a small probability, a very bad outcome, and that 
makes them very reluctant to take on risk.
    To the extent the government has more capacity to bear risk 
and more capacity to hold assets for a longer period, there is 
some benefit for the government to take assets via the asset 
purchase facility or some similar mechanism.
    Ms. Bean. You also, in response to a question from 
Congressman Miller earlier, talked about Secretary Geithner's 
proposal and how he certainly wants to move what we are now 
calling legacy assets instead of illiquid assets off the book 
of many of our financial institutions so that we can better 
also then evaluate how solvent many of these institutions are.
    I just want to clarify whether I understood your comments 
in response to that; that you felt the good news about that is 
while some institutions will be proven nonviable, and that 
there may be some fallout, it should attract more capital than 
sitting on the sidelines waiting to have better confidence in 
reentering the market.
    Mr. Bernanke. Well, we hope that very few institutions will 
actually be insolvent, but the main issue here is not 
insolvency or solvency per se, but rather the uncertainty about 
whether institutions are insolvent. And clarifying our policies 
and taking bad assets through some mechanism would be one step 
towards making it easier for investors to understand what it is 
they are buying if they invest capital in an institution.
    Ms. Bean. My next question is had the Fed not acted--and 
certainly you can act more quickly than when Congress is 
involved--where would we be now had you not gotten involved?
    Mr. Bernanke. I think we have worked on a number of 
different fronts. I think we were very aggressive in cutting 
interest rates and using expansionary monetary policy. I think 
that that has been helpful. We have worked on a variety of 
markets, like the commercial paper market. We think we have 
seen some progress and stabilization, but obviously it has not 
been enough. I realize it is the most controversial and 
difficult issue, but I do believe--
    Mr. Watt. The gentlelady's time has expired.
    Mr. Bernanke. --that if we had allowed some of the 
systemically critical firms to fail, that that would have had 
very big ramifications.
    Ms. Bean. Thank you. I yield back.
    Mr. Watt. Mr. Perlmutter, I am advised by Ms. Kilroy that 
she has a 1-minute quick question. So if you will be so kind as 
to be expeditious, but you are recognized.
    Mr. Perlmutter. I will be very quick, Mr. Chairman.
    Chairman Bernanke, it has been a heck of a roller coaster 
for the last 18 months. I am just thinking about your testimony 
back last July where you came in and gave the semiannual 
report, and there has been a lot of ups and downs. I just want 
to thank you for your service, sir.
    Mr. Bernanke. Thank you.
    Mr. Perlmutter. It has been a difficult time for all of us, 
but you have definitely been on the front line.
    So here are my questions to you: We have been in triage, we 
have been in the emergency room. We have systemic risk here and 
systemic risk here, and automakers, Fannie Mae, banks, 
investment banks and insurance companies. Is there something 
wrong with the system--not all these little things; is there 
something wrong with the system? And if you could go back in 
time, would you change one thing; Glass-Steagall, branch 
banking, securitizing loans? If you could go back in time, what 
would it be?
    Mr. Bernanke. I would greatly strengthen the public- and 
private-sector risk controls.
    Mr. Perlmutter. Like what?
    Mr. Bernanke. Well, by strengthening supervisory oversight 
over the risk management, making banks responsible for 
strengthening those controls. I think the system just got 
carried away by the credit bubble, and the risk management 
systems didn't succeed in protecting the system from that.
    There are also a lot of gaps in the regulatory system, 
places where there is duplicate oversight, places where there 
is not enough oversight. So we have a lot of work to do.
    Mr. Perlmutter. I am putting it out there. You don't have 
to respond to it, but part of me longs for the good old days of 
smaller banks or institutions, that in the event they were to 
fail, it doesn't affect the system, which is what we have had 
here, and in too many places and in too many spots, number one.
    Second question, and then I will yield to the gentlewoman 
from Ohio. Dr. Price kept talking about private capital on the 
sidelines. I have heard that a lot, private capital on the 
sidelines. It will come rushing in when we do something.
    First of all, I want to compliment you; I think we staved 
off the collapse of a banking system, given what was going on 
in September. But how much private capital is there to come 
roaring in after the economy has dropped by 30 or 40 percent?
    Mr. Bernanke. I think there is a good bit. There has been a 
huge rush away from credit markets in general, money going into 
very safe assets, Treasury bill rates being driven even 
negative for a short period, certainly less than it was before, 
and there have been a lot of losses. But there is still plenty 
of capital if the environment improves in a way that makes it 
    Mr. Perlmutter. I have a million questions, but I yield to 
the gentlelady from Ohio.
    Mr. Watt. Ms. Kilroy.
    Ms. Kilroy. Thank you, Mr. Perlmutter.
    Thank you, Chairman Bernanke, for accommodating us.
    The questions and answers have certainly been instructive. 
And, like Mr. Perlmutter, I would like to engage in a great 
deal more on risk controls or robust resolution regime, 
transparency. But right now the Dow is down over 400 points. 
What can you tell my constituents in Ohio that will increase 
their confidence that their 401(k)s, that their children's 
college funds, that their life savings won't continue to suffer 
because of the uncertainty that you indicated was one of the 
problems and--their concerns, the uncertainty in the financial 
    Mr. Bernanke. Well, I wouldn't make any assessment of the 
Treasury's proposal, for example, based on 1 day's market 
reaction. It is clearly very early. Secretary Geithner and the 
President and the Federal Reserve and other authorities are 
going to work with Congress and try to make sure that this 
thing is fleshed out in a way that will meet all the concerns 
about transparency and efficiency and do the important work of 
stabilizing our financial system. There are many components to 
    I think that this plan touches on the many components: 
removing bad assets; injecting capital; doing something about 
the securitization markets, which is, again, close to half of 
the credit extent in the United States; foreclosure mitigation, 
which will soon be described; increasing the guarantee of 
liabilities. All the key steps that seem to make a whole are 
there, and details need to be worked out, but I believe this 
is, broadly speaking, the right direction. And I know there 
will be a lot of work done over the coming weeks as the 
Treasury, the Administration, and the Congress work together to 
try to figure out the appropriate details.
    Ms. Kilroy. Thank you, sir.
    Mr. Watt. Let me express thanks for the Chair and the full 
committee for your appearance. I don't think anybody can go 
away saying you were not fully transparent in your testimony 
today. So we thank you so much, and we will look forward to 
having you back soon for the Humphrey-Hawkins hearing.
    Mr. Bernanke. Thank you.
    Mr. Watt. The committee is adjourned.
    [Whereupon, at 4:17 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           February 10, 2009