[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
AN EXAMINATION OF THE EXTRAORDINARY
EFFORTS BY THE FEDERAL RESERVE BANK
TO PROVIDE LIQUIDITY IN THE
CURRENT FINANCIAL CRISIS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 10, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-3
----------
U.S. GOVERNMENT PRINTING OFFICE
48-674 PDF WASHINGTON : 2009
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP,
Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
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
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
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
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
February 10, 2009............................................ 1
Appendix:
February 10, 2009............................................ 61
WITNESSES
Tuesday, February 10, 2009
Bernanke, Hon. Ben S., Chairman, Board of Governors of the
Federal Reserve System......................................... 5
APPENDIX
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
NAFCU:
Written statement of the National Association of Federal
Credit Unions.............................................. 118
AN EXAMINATION OF THE EXTRAORDINARY
EFFORTS BY THE FEDERAL RESERVE BANK
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
effort.
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
collapse.
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
Bernanke.
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
failure.
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
minutes.
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
little.
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.
STATEMENT OF THE HONORABLE BEN BERNANKE, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you. Chairman Frank, Ranking Member
Bachus, and other members of the committee, I appreciate 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
LIBOR.
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
liquidity.
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
markets.
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
economy.
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
pressures.
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
helpful.
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
public.
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
constructive.
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
extensions.
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
interest.
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
question.
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
Congress.
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
rationale.
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
forever?
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
game?
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
GSEs.
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
high.
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
entities.
The Chairman. Is there any objection?
There being no objection, they will be made a part of the
record.
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
available.
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
businesses.
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
it.
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
actions--
Mr. Watt. It would be in place for an AIG or an insurance
company?
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,
obviously?
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
regulator.
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
policy?
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
authority.
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
loan.
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,
transparency.
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
banks.
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
scale.
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
supply.
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
stagflation?
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
rates.
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
now.
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
are.
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
valuations.
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.
Chairman.
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
information.
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
and--
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
situation.
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
string.
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
accurate?
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
securities.
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
uncertainty.
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
economy.''
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
response.
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
there.
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
far.
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
now?''
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,
finally.''
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
options.
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
overvalued?
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
numbers.
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
program?
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
possible.
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
commitment?
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
collateral.
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
problem?
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
to.
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
lending.
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
writing.
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
recognized.
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
from?
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
securitizers.
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
risk.
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
and--
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
well.
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
bank.''
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
financed.
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
recovery?
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
effectively.''
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
system.''
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
helpful.
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
problem.
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
attractive.
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
markets?
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
that.
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]