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



 
                       MARK-TO-MARKET ACCOUNTING:

                       PRACTICES AND IMPLICATIONS

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



                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 12, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-12




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                 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
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           SCOTT GARRETT, New Jersey
BRAD SHERMAN, California             TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin                J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
RON KLEIN, Florida                   JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana                RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California            KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi         BILL POSEY, Florida
CHARLES A. WILSON, Ohio              LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 12, 2009...............................................     1
Appendix:
    March 12, 2009...............................................    91

                               WITNESSES
                        Thursday, March 12, 2009

Bailey, Kevin J., Deputy Comptroller for Regulatory Policy, 
  Office of the Comptroller of the Currency......................    19
Bailey, Thomas, Chairman, Pennsylvania Association of Community 
  Bankers, and President and Chief Executive Officer, Brentwood 
  Bank, on behalf of the Independent Community Bankers of America    59
Beder, Tanya S., Chairman, SBCC Group............................    62
Cotton, Lee, Past President, Commercial Mortgage Securities 
  Association....................................................    60
Fornelli, Cynthia, Executive Director, Center for Audit Quality..    57
Herz, Robert H., Chairman, Financial Accounting Standards Board 
  (FASB).........................................................    16
Isaac, Hon. William M., Chairman, The Secura Group of LECG.......    66
Kroeker, James, Acting Chief Accountant, U.S. Securities and 
  Exchange Commission............................................    14
Mahoney, Jeffrey P., General Counsel, Council of Institutional 
  Investors......................................................    55
McTeer, Robert D., Ph.D., Distinguished Fellow, National Center 
  for Policy Analysis............................................    64

                                APPENDIX

Prepared statements:
    Klein, Hon. Ron..............................................    92
    Bailey, Kevin J..............................................    94
    Bailey, Thomas...............................................   112
    Beder, Tanya S...............................................   120
    Cotton, Lee..................................................   125
    Fornelli, Cynthia............................................   131
    Herz, Robert H...............................................   139
    Isaac, Hon. William M........................................   198
    Kroeker, James...............................................   211
    Mahoney, Jeffrey P...........................................   220
    McTeer, Robert D.............................................   304

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Statement of the American Council of Life Insurers (ACLI)....   308
    Statement of the American Bankers Association (ABA)..........   310
    Statement of the Credit Union National Association (CUNA)....   334
    Letter from a variety of undersigned organizations, including 
      the American Bankers Association...........................   337
    Statement of the Group of North American Insurance 
      Enterprises (GNAIE)........................................   339
    Statement of the Mortgage Bankers Association (MBA)..........   349
    Letter from a variety of undersigned organizations, including 
      the National Alliance of Community Economic Development 
      Associations...............................................   353
    Statement of the Council of Federal Home Loan Banks..........   355
    Statement of the National Association of Federal Credit 
      Unions (NAFCU).............................................   360
Bachus, Hon. Spencer:
    Testimony of Federal Reserve Chairman Ben S. Bernanke at the 
      Council on Foreign Relations, dated March 10, 2009.........   362
    Statement of the Financial Accounting Foundation (FAF).......   368
    Excerpt from the book, ``Walking with the Wind, A Memoir of 
      the Movement,'' by John Lewis with Michael D'Orso..........   370
    Excerpt from Bob McTeer's blog, ``My Mark-to-Market 
      Nightmare''................................................   372
    Press release dated March 10, 2009...........................   374
    Excerpt from an SEC report entitled, ``Report and 
      Recommendations Pursuant to Section 133 of the Emergency 
      Economic Stabilization Act of 2008: Study on Mark-to-Market 
      Accounting''...............................................   375
    Letter to SEC Chairman Mary Schapiro, dated March 11, 2009...   380
    Article from The Wall Street Journal entitled, ``Obama 
      Repeats Bush's Worst Market Mistakes,'' dated March 5, 2009   381
    Article from The Washington Post entitled, ``Don't Blame 
      Mark-to-Market Accounting,'' dated October 28, 2008........   383
Garrett, Hon. Scott:
    Letter to SEC Chairman Mary Schapiro from Hon. Gary Miller, 
      dated March 10, 2009.......................................   385
Giffords, Hon. Gabrielle:
    Responses to questions submitted to Kevin Bailey.............   387
    Responses to questions submitted to Thomas Bailey............   389
    Responses to questions submitted to Tanya Beder..............   390
    Responses to questions submitted to Cindy Fornelli...........   393
    Responses to questions submitted to Robert Herz..............   395
    Responses to questions submitted to William Isaac............   399
    Responses to questions submitted to Jeff Mahoney.............   401
    Letter from Alliance Bank of Arizona, dated February 18, 2008   404
Lucas, Hon. Frank:
    Statement of Former Speaker of the House Newt Gingrich, dated 
      March 12, 2009.............................................   407
Price, Hon. Tom:
    Statement of Alex J. Pollock.................................   410


                       MARK-TO-MARKET ACCOUNTING:



                       PRACTICES AND IMPLICATIONS

                              ----------                              


                        Thursday, March 12, 2009

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128 Rayburn House Office Building, Hon. Paul E. Kanjorski 
[chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Ackerman, 
Sherman, Capuano, Hinojosa, Scott, Maloney, Moore of Wisconsin, 
Hodes, Klein, Perlmutter, Donnelly, Foster, Adler, Kilroy, 
Himes, Peters; Garrett, Price, Castle, Lucas, Manzullo, Royce, 
Biggert, Capito, Hensarling, Putnam, Barrett, Gerlach, 
Campbell, Bachmann, Neugebauer, McCarthy of California, Posey, 
and Jenkins.
    Ex officio present: Representatives Frank and Bachus.
    Also present: Representatives Moore of Kansas, Watt, 
Kaptur, and Lee.
    Chairman Kanjorski. This hearing of the Subcommittee on 
Capital Markets, Insurance, and Government Sponsored 
Enterprises will come to order. Pursuant to the committee 
rules, each side will have 15 minutes for opening statements. 
Without objection, all members' opening statements will be made 
a part of the record.
    I want to recognize and welcome the many members of the 
full committee participating in today's hearing who are not 
members of the subcommittee. And I ask unanimous consent that 
Ms. Kaptur be allowed to participate in today's hearing and 
that Ms. Giffords be allowed to submit written questions for 
the record. Without objection, it is so ordered.
    We meet today to examine the much-publicized and hotly-
debated mark-to-market accounting rules. A diverse range of 
opinions has gathered for what I hope will be a thoughtful and 
constructive discussion. Previously, I have taken the position 
that the Congress should not interfere through legislation in 
the area of establishing specific accounting rules. It seemed 
best that such technical work be left to the regulators, 
standard setters, and financial experts.
    We can, however, no longer deny the reality of the 
procyclical nature of mark-to-market accounting. It has 
produced numerous unintended consequences, and it has 
exacerbated the ongoing economic crisis. If the regulators and 
standard setters do not act now to improve the standards, then 
the Congress will have no other option than to act itself.
    To say that the Congress will have to act is not to 
advocate an outright suspension of mark-to-market accounting. 
If we do away with this standard entirely, accounting will 
revert to the very kind of subjectivity and sleight-of-hand 
that made mark-to-market necessary in the first place. The 
standard does not provide transparency for investors, but its 
strict application in the current environment is, in too many 
instances, distorting rather than clarifying the picture.
    Take the case of the Federal Home Loan Bank of Atlanta. 
Last September, the bank estimated that it would lose $44,000 
in cash flows on 3 private label mortgage-backed securities 
starting in about 15 years. The magic of mark-to-market 
accounting required this relatively minor shortfall to be 
treated as an other than temporary impairment loss of $87.3 
million. I find that accounting result to be absurd. It fails 
to reflect the economic reality. We must correct the rules to 
prevent such gross distortions.
    As our witnesses explain the implications of this standard 
and offer solutions to improve its application, we must bear in 
mind that fair value accounting is not one uniform rule 
affecting all parties to whom it applies in the same manner. 
Many industries have been hit hard by the mark-to-market rules, 
especially the financial services sector.
    Moreover, one industry's predicament may require a unique 
accounting treatment or regulatory forbearance that will not 
solve another sector's problems. In pursuing improvements, we 
need to recognize this fact. We also need to recognize that 
these matters are technical and complex. Instead of confining 
our words today to sound bites that too often mischaracterize 
mark-to-market accounting, we need to explore these 
complexities and enrich our understanding of the issues.
    Those following today's proceedings are most interested in 
progress and solutions. Accounting regulators and standard 
setters need to offer us an achievable, concrete idea of what 
they are doing. As I said earlier, they must also tell us 
precisely when they will act. In my view, we can no longer wait 
15 years, 15 months, or even 15 weeks for change. We need 
action much, much sooner.
    Bank regulators must also consider liberalizing regulatory 
capital requirements and granting reasonable forbearance in the 
current economic environment. The Office of the Comptroller of 
the Currency can be of particular assistance on this issue. I 
therefore look forward to the Agency's testimony today.
    Participants on our other second panel will offer us a wide 
variety of views from the private sector. The participants on 
our first panel also need to listen closely to the views 
expressed during the second panel. These comments will help in 
the tailoring of specific remedies to address particular needs. 
One idea worthy of consideration is separating an asset's 
losses due to credit risk from its losses due to liquidity risk 
when using mark-to-market accounting.
    In sum, mark-to-market accounting did not create our 
economic crisis, and altering it will not end the crisis. But 
improving the application of a fundamentally sound principle 
that is having profound adverse implications in a time of 
global financial distress is imperative.
    Therefore, our hearing today is about getting the Financial 
Accounting Standards Board and the Securities and Exchange 
Commission to do the jobs they are required to do. Emergency 
situations require expeditious action, not academic treatises. 
They must act quickly.
    I would like to recognize Ranking Member Garrett for 3 
minutes for his opening statement.
    Mr. Garrett. Thank you, Mr. Chairman. Before I begin, I 
just seek unanimous consent to enter into the record a letter 
by a member from California, Mr. Miller, who cannot be with us 
today because of health reasons. It is a letter to Mary 
Shapiro, Chairman of the SEC.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Garrett. Thank you. Thank you, Mr. Chairman, for 
holding this important hearing. I would like to also begin my 
remarks by noting that I agree with you and Chairman Frank and 
Ranking Member Bachus that Congress should not be in the 
business of writing accounting standards. However, I do believe 
that Congress should perform its proper oversight function.
    It is essential that we examine in greater detail what role 
current accounting standards and the application of the 
standards have made in the continued deterioration of the 
marketplace. Since the formal adoption of Financial Accounting 
Standards 115 in 1993, and continuing with the various other 
standards up to and including FAS-157 in 2006, the U.S. 
financial system has moved away from an historical cost 
accounting system, where assets and liabilities are valued at 
their amortized purchase price, to a fair value accounting 
system, whose financial asset and liability valuations are 
determined by what price they fetch on the open market. This 
system is intended to provide reliable, real-time information 
to the investors about the current market value for the price 
that financial assets and liabilities while minimizing 
management bias.
    I agree that it is a top priority that investors have 
accurate information about a company's earning potential and 
liquidity so that they can make informed decisions. 
Unfortunately, I believe that during the market turbulence over 
the last year, the fair value or mark-to-market accounting has 
prevented investors and the general public alike from obtaining 
a really true value of the money financial institutions, their 
balance sheets. This method of accounting has its merits when 
the market is functioning correctly but has a significant 
downside when the market is broken. Our most profound problems 
occur when attempting to value illiquid longer term assets, 
such as mortgage-backed securities, in an illiquid or non-
functioning market. So attempting to value these types of 
assets in this marketplace has caused severe price distortions, 
totally unrelated to any credit loss in the underlying 
mortgages themselves.
    Another problem with mark-to-market accounting that the 
Federal Reserve Chairman himself, Ben Bernanke, mentioned in a 
speech just the other day, is its procyclical nature. Now, this 
is particularly true when coupled with current regulatory 
capital rules by banks. When the price of assets in a bank's 
balance sheets are written down, the bank has to raise 
additional capital by selling additional assets or stock. These 
sales put more downward pressure on prices and so it is this 
negative feedback loop that is exacerbated by the combination 
of accounting practices and capital requirements. And so I am 
interested to hear from Mr. Bailey what the OCC and other 
banking regulators are considering to address how regulatory 
capital levels are examined during these non-functioning market 
periods.
    Since the financial markets began to rapidly deteriorate 
during the fall of last year, there have been a number of 
attempts by Congress and others to ensure that accounting 
policies set are examined and the concerns raised when making 
these decisions, and I am pleased the SEC has issued their 
report that the Economic Stabilization Act required, but I am, 
as the chairman is, troubled at the lack of speed in these 
areas. And I realize that FASB is currently reviewing these 
things and using much deliberation in their process. I wish the 
Congress would use such deliberation in their processes in a 
lot of these things, but I think the chairman and I wish for 
additional speed.
    So, in conclusion, I look forward to the witnesses' 
testimony and hearing greater detail on these matters. Thank 
you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. Ranking Member. We will 
now hear from the chairman of the full Committee on Financial 
Services, the Honorable Barney Frank of Massachusetts.
    The Chairman. Thank you, Mr. Chairman. You are diligent in 
pursuing this, you have been one of the earliest to spot this, 
and I think this is a very important hearing.
    Mr. Herz, I will address in part. You know I have generally 
been a defender of the integrity of the Accounting Board. For 
example, when there was a great push to alter by legislation 
accounting for stock options, I was one of those who was 
opposed to that. I do feel entitled to say, ``We told you so.'' 
The notion that if you had to expense stock options, this would 
have terrible consequences, that ranks along with same-sex 
marriage in Massachusetts as the recipient of doomsday 
predictions that went nowhere.
    But we do have to have you move now. And it is important 
that we get some speed. I understand sometimes acronyms are 
important. You are the FASB. In this one, you cannot be the 
``SLOWSB.'' We are going to have to have some movement. And the 
movement we have is clearly in your hands. I say this to the 
SEC and the OCC. There are two things, it seems to me, that 
need to be done. First, more realism and flexibility in the 
mark-to-market. And I understand we all react to past things. 
My own view is that the negative impact and reaction to 
allowing Lehman Brothers to fail has had an impact on making 
people more nervous now. Yes, we had irrational exuberance and 
excessive elasticity but this is not a time to make up for past 
mistakes by excessive rigidity, by pretending that there is 
more reality and certainty to mark-to-market than there is. It 
should be applied with flexibility.
    It does seem to me if you were talking about a member of an 
asset class that the particular institution has always held to 
maturity and it is performing and providing an income stream, 
that the case for substantially devaluing that is a lot weaker 
than if it is a tradeable asset, if there is a history that 
that kind of asset is held. I do not think we have had enough 
flexibility in how we apply them.
    Secondly, and this is important for all regulators, we need 
to give you some discretion in how you apply, how you react to 
these things. And I am now asking everybody, the OCC and 
others, if anything in the legislature, and here is where the 
legislative role is, if anything in existing legislation 
deprives you of discretion in how you react in a mark-down to 
market situation, I insist that you tell us. That is our job. 
Our job is to think about the extent to which we give you some 
discretion. There is no point in having these things be so 
automatic. It does seem to me, as the chairman correctly said, 
and he has done a lot of work on this, that if the institution, 
if a bank has to mark down its assets, why it had to do that is 
something to take into account. If they did it because they 
made a lot of stupid decisions, that is one thing. If they had 
to do it because of things that happened in the economy over 
which they had no control, over assets that are still 
performing, that is another. And the consequences of a write-
down should not be identical in very different situations, and 
you have to move quickly.
    I was pleased yesterday, when I talked about mark-to-
market. We got a good reaction from the market. We are not 
driven by day-to-day reactions of the market, but our job is, I 
think, to give you the flexibility you need and to help you 
understand the point. I hope that within a very short period of 
time, working together, we will have a situation in which we 
will not be constantly told by the people who are the 
practitioners that mark-to-market is having undo negative 
effects and is doing more harm than good.
    Chairman Kanjorski. I thank the gentleman from 
Massachusetts. Now, the ranking member, Mr. Bachus of Alabama. 
You have 4 minutes.
    Mr. Bachus. Thank you, Mr. Chairman. I want to share with 
my colleagues on both sides of the aisle and with the panel and 
with the audience a true story. It is a story that happened in 
Alabama over 60 years ago, and it is recorded in a national 
bestseller by one of our colleagues because he was the little 
boy in that story, and that is John Lewis. John was playing at 
his aunt's farm one morning with 15 of his brothers and sisters 
and his cousins when a storm came. I do not know whether it was 
a hurricane or a tornado, but we have all been there on the 
days where it starts pretty sunny and things get dark, the wind 
picks up, and day turns to night. He records what happens there 
and he relates it to years later during the civil rights 
movement.
    And here is what he says, well, he talks about what 
happened that morning, the children, the aunt, his aunt rushed 
him in the office. The house began to shake, the storm blew, 
and one corner of the house actually lifted up. And all the 
kids rushed over to that corner of the house and it settled 
back down. In a few minutes, as we know from storms, and I have 
been through one, the other end of the house began to lift up. 
All the little kids went over to the other end of the house, 
rushing back and forth. He said America sometimes is like that. 
Children in a house rocked again and again by winds, one storm 
after another. The walls around us seem at times as if they 
might fly apart. That is America today. It is quite a storm. It 
is the civil rights in Alabama in 1960. So much tension, so 
many storms but here is what he said, ``But people of 
conscience never left the house. They never ran away, they 
stayed, they came together, and they did the best they could.'' 
``That is America to me,'' he said. ``Not just the movement of 
civil rights but the endless struggle to respond with decency, 
dignity and a sense of brotherhood to all the challenges that 
face us as a nation as a whole.''
    Well, let me tell you this gentlemen: We are in that house 
today, and I see the American people in that house. I see 
lenders and borrowers. I see the Congress. I see the 
Administration. Sometimes we are almost like children, rushing 
from one end of that house to another. We are scared. We have 
anxiety like those little kids that day. But as I look around 
that house, and I say this because the last thing we want to do 
is point fingers because that does not help, it would not have 
helped then, but as I look around the house, I do not see the 
Financial Accounting Standard Board. I do not see the 
engagement. I do not see the urgency. I see the SEC, and I know 
that, as I said in my prepared opening remarks, we ordered a 
study, and the SEC reported that there ought to be changes to 
mark-to-market, and that they were causing distortions in the 
system. And one of the weakest corners of that house is our 
financial system and our banking system. They said it was 
causing real problems there. And back in January, they asked 
the Financial Accounting Standards Board to join the fight. I 
see you here this morning. I am glad you are in the house. Let 
me tell you it is a storm. We cannot just sit around and talk, 
we need action. We need it now.
    Thank you.
    Chairman Kanjorski. Thank you very much, Mr. Bachus. Now, 
we will hear from Mr. Ackerman of New York for 2 minutes.
    Mr. Ackerman. Thank you, Mr. Chairman. In a perfect world, 
with a normal and honest market with real transparency and a 
strong economy, mark-to-market accounting standards make sense. 
Philosophically, I believe it is important for certain assets 
of their fair market value but the key word, Mr. Chairman, is 
``fair.'' We are in the midst of a recession whose tentacles 
have spread along Wall Street and constricted our credit and 
equity markets. In today's economy, the market value of a 
mortgage-backed security may be only 20 cents on the dollar 
even though the underlying mortgage may be paid in full, being 
paid in full with interest.
    Today's market is not a fair market. It is not a real 
market. It is a panic market and it is a buyer's market. 
Companies are forced to mark their markets, their assets to 
market despite the fact that they have no inclination to sell 
them, are watching their company's value disappear. The great 
unraveling of so many firms' balance sheets is not the 
consequence of unsound business practices or even declining 
sales but simply the result of our regulators' unwillingness to 
implement the more effective accounting rule that will not pull 
enterprises under the rising tide of an economic crisis.
    And let's be clear about the scale of the problem, it is 
not just the high-flying Wall Street traders who are suffering 
as a result of the mark-to-market rule. Many of the financial 
institutions that receive TARP funds, taxpayer money provided 
to keep our national credit markets operating, our lending 
institutions that have reserve requirements that they are 
obligated to maintain by law. They are forced to mark their 
assets down to an unrealistic market. They are required to 
raise enough capital to maintain their reserves in this 
economy. Where are the financial institutions, the ones in 
which the taxpayers now have a major stake, going to raise tens 
upon tens of billions of dollars? Certainly, no one from the 
extinct investment banks or trading companies in which they 
used to rely. There is in fact just one place for these banks 
to go to get the money they need to meet their legal reserve 
obligations, from you and me, from the members of the committee 
and the Congress and in the end always from the taxpayers.
    The $700 billion emergency bailout we passed last year to 
revive lending and increase access to credit has been subverted 
in good measure by mark-to-market accounting. The banks are 
holding onto the money, at least in part because as mark-to-
market accounting standards are forcing them to write down the 
value of their assets, they are required to meet their reserve 
obligations. The problem is clear, the solution may be less so. 
But I am pleased we are focused on finding it. The public does 
not expect us to be perfect, but they are right to expect us to 
fix mistakes once they are discovered, and we have discovered a 
big one.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. Ackerman. The gentleman 
from Georgia, Mr. Price, for 1 minute.
    Mr. Price. Thank you, Mr. Chairman. Before I begin, I would 
like to ask unanimous consent to enter into the record 
testimony from Alex Pollock, who is a resident fellow at the 
American Enterprise Institute dated today, ``Reform of Fair 
Value Accounting.''
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Price. Thank you, Mr. Chairman. I congratulate you and 
Ranking Member Garrett on holding this hearing. I join others 
in the belief that Congress should not be in the business of 
writing accounting standards. However, when economic realities 
reveal shortcomings in accounting practices, we all should be 
able to expect that the entities responsible for those 
standards will respond as quickly as possible.
    Process is important, but I believe that the SEC and FASB 
and other regulators have had more than enough time to gather 
information and make determinations to help ailing financial 
institutions. Despite the steps taken by the SEC and FASB, my 
constituent companies and others around this Nation have yet to 
experience any relief. We simply cannot wait any longer for 
some substantive action to be taken to help institutions know 
how to appropriately classify illiquid assets.
    As we are attempting to do everything possible to 
strengthen our banking system and free up capital and increase 
lending and stimulate the economy, we must consider ways in 
which we might be able to do that without expending more 
taxpayer dollars. Importantly, providing additional guidance to 
companies on mark-to-market could considerably ease the credit 
constriction we currently face.
    I look forward to working with the regulators to develop 
positive solutions that will protect the investors while at the 
same time providing confidence and stability to the financial 
system as a whole, and I look forward to doing so rapidly.
    Thank you very much.
    Chairman Kanjorski. Thank you, Mr. Price. The gentleman 
from Texas, Mr. Hinojosa, has 1 minute.
    Mr. Hinojosa. Thank you, Mr. Chairman. I thank you for 
holding this important hearing today. I ask unanimous consent 
to submit my entire written statement into today's record.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Hinojosa. My abbreviated remarks will summarize 
concerns and recommendations for today's record. I have a few 
modifications to the mark-to-market accounting that I would 
like you to take into consideration. I earned an MBA, and I can 
read financial statements, and it seems to me that the current 
mark-to-market accounting is flawed in that only the asset side 
of the balance sheet is examined.
    A well-run banking institution does not have the ability to 
show that many interest rate risks are offset by funding on the 
liability side of the balance sheet. Even in the event that 
there is not an interest rate offset on a bank's balance sheet, 
the fact that securities carry little credit risk should be 
taken into consideration. The day-to-day value of the 
investment should not hinder a bank's ongoing daily operations 
as long as it has enough liquidity to manage the bank's 
operations.
    I do not believe that I can give all of my statement in 1 
minute, Mr. Chairman, but I would like to simply conclude and 
say that this current mark-to-market system should be modified 
so that unused capital can be used by the banking system to 
fund growth and not be squandered into needless collections of 
idle resources.
    I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. Hinojosa. And 
now we will hear for 1 minute from Mr. Castle of Delaware.
    Mr. Castle. Thank you, Mr. Chairman, and Mr. Garrett, for 
this meeting. If anyone thinks mark-to-market is not an issue, 
they should see this room, which is filled both with members 
and spectators, which is highly unusual for a subcommittee 
meeting. There is no question that this is a very significant 
problem. You have investors who want to know what the assets of 
the banks are. You have banks which are worried about their 
capital circumstances, and they feel that mark-to-market is 
injurious to that.
    We talk about going back to cost accounting, which may not 
be the correct way to go, but the bottom line is that I think 
we need to listen carefully to those who are going to testify 
here today. We know we have economic problems. We know banks 
are struggling. There have also been studies about this. The 
SEC has conducted a study on fair value accounting at the 
direction of Congress and made several recommendations. FASB 
has also announced that they will be re-examining these 
problems and will complete their investigation by the end of 
the second quarter in 2009. I believe these studies are 
critical as well. My sense is you are going to have some 
solution in the middle, that is what we need to try to 
ascertain, and we in Congress need to help with that. This is a 
very important issue, I think, to the whole capital structure 
of banking in our country, and I hope we can work this out.
    I appreciate the experts being here, and I yield back the 
balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. Castle. And 
now we will hear from the gentleman from Colorado, Mr. 
Perlmutter.
    Mr. Perlmutter. Thank you, Mr. Chairman. And I want to 
thank the ranking member for organizing today's hearing. And, 
gentlemen, our first panel, I will admit that I think that my 
colleagues have been far kinder than I feel today about this 
particular subject.
    This is a situation, and I just want to start with the 
definition of fair value for fair value accounting. Fair value 
is the price that would be received to sell an asset or pay to 
transfer a liability in an orderly transaction between market 
participants at the measurement date. We have known now for at 
least 6 months, since September, this has been an issue as to 
whether mark-to-market type accounting, fair value accounting, 
was exaggerating and multiplying the cycle that we are in.
    And whether it is the Comptroller of the Currency or FASB 
or the SEC, we have--the SEC did a wonderful study, it is about 
300 pages long already. We have been dithering while this 
patient has been sick, and I think giving the medicine that has 
been making the patient sicker. And I know the chairman does 
not want us to be doing this in terms of sound bites but the 
problem has been apparent now for at least 6 months. Mr. Isaac, 
who is going to be one of our witnesses in the second panel, 
predicted this 12 years ago, that if we went to mark-to-market 
accounting in connection with the banking industry, which is a 
different animal than Hewlett Packard or Colgate Palmolive or 
whatever else you might want to look at, that we would have 
this kind of exaggeration within the system.
    The SEC, I appreciate your role, you look to investors and 
their safety. Okay, but there are two other interested groups 
here that we must consider, and I look to the banking 
regulators for these, and that is the depositors and the 
taxpayers. The taxpayers have been getting clobbered for the 
last 6 months. And we can deal with this. We need to deal with 
this now. This is not a time for more study; it is a time for 
action.
    I appreciate the chairman letting me make an opening 
statement.
    Chairman Kanjorski. Thank you very much, Mr. Perlmutter. 
Now, we will hear for 1 minute from Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman. And before I begin, I 
would like to ask for unanimous consent that written testimony 
from the former Speaker of the House, Newt Gingrich, be added 
to the record.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Lucas. Thank you, Mr. Chairman. And thank you for 
holding this hearing on this critically important issue. It is 
important to the stability of our Nation's financial system 
that we address the effects of mark-to-market accounting rules. 
The goal of mark-to-market accounting is to increase 
transparency and confidence. However, certain mark-to-market 
accounting principles have created unintended consequences that 
have only contributed to the disruption of the markets. These 
practices that are used to value assets in illiquid and 
inactive markets have intensified the economic downturn and 
threatened the health of many of our country's financial 
institutions. The inability to appropriately value these assets 
has resulted in uncertainty and worked to further deepen the 
credit crisis.
    I urge the SEC and the Federal Accounting Standards Board 
to act quickly to make the necessary changes to mark-to-market 
and provide the appropriate relief and guidance to our 
financial institutions.
    Additionally, as we work to stabilize our financial system 
and reform our regulatory framework, it is important that we 
examine all economic policies that pose a systematic risk to 
our financial system, including accounting practices. That is 
why I have joined with my colleague, Mr. Perlmutter, in 
introducing H.R. 1349, to create a Federal accounting oversight 
board to oversee the accounting principles and practices in an 
effort to provide a broader economic perspective on accounting 
rules in the markets. This new oversight framework will provide 
more flexibility in monitoring and reviewing accounting 
practices in the present market conditions.
    Again, thank you, Mr. Chairman, for this very important 
hearing.
    Chairman Kanjorski. Thank you very much, Mr. Lucas. And now 
we will hear from the gentleman from Georgia, Mr. Scott, for 1 
minute.
    Mr. Scott. Thank you, Mr. Chairman. I think to preface my 
remarks I want to mention two distinguished individuals, one 
was William Shakespeare who said, ``The quest before us today 
is to be or not to be.'' Our quest before us today is to 
suspend or not suspend the fair value accounting. The other 
gentleman is none other than Warren Buffett. Warren Buffett, on 
Monday on CNBC, said that mark-to-market accounting should not 
be suspended, and he made some good arguments to that end. But 
he also recognized the problems associated with the effects of 
the impairments taken, especially on assets that are held to 
maturity. Warren Buffet said that the regulators should 
consider not requiring additional capital be held against those 
write-downs. If even an ardent supporter of mark-to-market 
accounting can point to the problems, should not that problem 
be fixed if it can be so? So regulators do not have to resort 
to what amounts to regulatory forbearance. To be or not to be, 
to suspend or not to suspend, that is the question before us 
today.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Scott. Now, we 
will hear from the gentlelady from Illinois, Mrs. Biggert, for 
1 minute.
    Mrs. Biggert. Thank you, Mr. Chairman. I look forward to 
hearing about very near term action the SEC and FASB plan to 
take to correct accounting rules that many believe have failed. 
When I say ``failed,'' I mean rules aimed at transparency, 
which is important and should be preserved, but rules that 
simultaneously have facilitated a downward spiral of skewed 
financial statements, created market volatility and required 
capital adjustments.
    I would like today's witnesses to comment on the idea 
mentioned in the SEC study on fair value. That study and others 
suggest that on the income statement and the balance sheet, we 
should make a distinction between credit impairments versus 
impairments due to other factors. In other words, can we 
preserve transparency and help restore investor confidence and 
calm market volatility by reporting separately the losses 
related to declines in expected cash flow versus all other 
changes in fair value?
    I urge the SEC and FASB to refrain from issuing additional 
meaningless guidelines but instead to get at the root of the 
problem, which is valuation.
    With that, I would conclude, and I look forward to hearing 
from our witnesses.
    Chairman Kanjorski. Thank you very much, Mrs. Biggert. We 
will now hear from the gentlelady from New York, Mrs. Maloney, 
for 1 minute.
    Mrs. Maloney. Thank you, Mr. Chairman, and Mr. Ranking 
Member. Several years ago, FDR suspended mark-to-market, 
calling it a destructive regulation. I am beginning to believe 
that providing reform or flexibility, or reality in the pricing 
in mark-to-market could be one of the most important reforms 
which could help us turn our economy around and help with 
economic growth and stability.
    Even Chairman Bernanke, this week, expressed his concern 
over the mark-to-market rule. And I quote, he first speaks 
about the importance of improved disclosure and greater 
transparency as a positive development but then he states, 
``Further review,'' and I quote, ``of accounting standards 
governing valuation and loss provisioning would be useful and 
might result in modifications to the accounting rules that 
reduce their procyclical effects without compromising the goals 
of disclosure and transparency.'' So I truly do believe that 
there is a way that we can look at it. Certainly assets that 
are held to maturity are a different value than ones that are 
sold today. And we certainly need to look at this.
    I completely respect accounting. I support your 
independence, the need to have an independent body, but this 
needs to be looked at, it needs to be reformed, and needs to be 
more realistic and flexible, and I feel that doing so would be 
one of the most important things we can do to stabilize and 
help our economy.
    I put my statement in the record. Thank you.
    Chairman Kanjorski. Thank you, gentlelady. And now I will 
hear from Mr. Barrett for 1 minute.
    Mr. Barrett. Gentlemen, thank you for being here. In a 
different life, I wore a different hat. I was a small 
businessman, Barrett and Sons Furniture, Westminster, South 
Carolina, 50 years in business. I could not afford my stock so 
I would take a loan with the bank floor plan. And my local bank 
would roll that up, sell it somewhere, and of course according 
to mark-to-market they had to mark it down to hurt--on their 
capital. In 50 years, we never failed to make a payment on 
time. In fact, most of the time, we paid them early. There are 
350,000 small businessmen and women in South Carolina, guys, 
and this is killing them. They cannot get the credit. And they 
are just like Barrett's Furniture, 50 years, 60 years, 70 
years, and we are killing the backbone of this Nation. Listen 
to what you are hearing. I think you are hearing it, but I am 
not sure you are listening. Re-evaluate it. I look forward to 
this hearing.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Barrett. And 
now Mr. Capuano for 1 minute.
    Mr. Capuano. Thank you, Mr. Chairman. Gentlemen, thank you 
for being here. The truth is, I tried to read through most of 
your testimony, but it does not get to where I want to go, and 
where I want to go, and I think all of America wants to go, I 
actually think that you may be the only people in America who 
do not want to straighten out this mark-to-market thing 
yesterday, not tomorrow, no more studying. Just get it done. 
There are a thousand ways to do it. If you are not hearing 
people, I think you will hear from us. Get it done.
    I liked the mark-to-market rule in normal times. It is not 
normal times. Extraordinary measures are necessary. Stop 
dithering with it and just get it done. If you get it done 
right, and you get it done quickly, maybe the taxpayers can 
avoid getting involved in this bad bank nonsense because all 
these bad assets, if properly valued and properly addressed by 
the accountants, can be left on the books of the people who 
took those risks and still not bring their companies down. This 
is not difficult. It was easy to put the up-tick rule in, take 
the up-tick rule out, put it in, take it out. Get it back on. 
You know it is necessary. Do not make us tell you what to do. 
You know what has to be done, just do it. Please.
    Chairman Kanjorski. Now, will you tell us what you really 
believe.
    [laughter]
    Chairman Kanjorski. Now, we will hear from Mr. Campbell for 
1 minute.
    Mr. Campbell. Thank you, Mr. Chairman. There are those who 
would lay the entire problems of this financial crisis at the 
risk of mark-to-market accounting and that is wrong, but it is 
an issue. And there are those who would eliminate mark-to-
market accounting completely and that is also wrong because 
there have been permanent losses experienced in these financial 
assets, and if we do not recognize those permanent losses, we 
will have financial statements which will overstate the value 
and will be artificially inflating the value and health of 
banks, which we certainly do not want to do at this time. But, 
similarly, we cannot be taking a long-term asset and marking it 
to a short-term value, particularly when in the current market 
there is no real market that exists to determine that short-
term value. So, clearly, we need a middle ground. Perhaps that 
middle ground is a net present value of the expected cash flows 
and perhaps we are going to hear some of that today. But we do 
need to get to a middle ground, some fair, actual, best we can 
estimate. I am a CPA, I know it is difficult, but true 
accounting value of these assets, and we need to do it quickly.
    Thank you. I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Campbell. And 
now we will hear from Mr. Klein.
    Mr. Klein. Thank you, Mr. Chairman, for holding this 
hearing. As we all know, it is absolutely essential that 
investors have reliable information when analyzing investment 
opportunities. Fair value accounting principles, including 
mark-to-market rules, are intended to maximize transparency and 
the ability of the investors to accurately evaluate and compare 
the financial statements of different business organizations. 
Yet, in practice, as we know, mark-to-market accounting is 
flawed, particularly in this environment. And what we know is 
that in this downturn, even assets that are still performing 
are facing illiquid markets and determined to have little 
value. In some cases, this unnecessarily slashes the credit 
availability that is so sorely needed today. And, as many of 
the members have said today, we are worried about how small 
businesses and working citizens in our communities cannot get 
loans. I am worried about them and everyone else is about the 
people who are losing their jobs because of this.
    Many of the banks made bad loans and banks should be 
required to deal with this. But we also need to give the 
banking industry, in some cases, time to strengthen its 
financial position and forcing them to mark assets to illiquid 
markets at fire sale prices had wide repercussions for the 
broader economy. I would suggest that a temporary suspension of 
mark-to-market rules should be seriously considered and I look 
forward to your comments on that.
    Chairman Kanjorski. Thank you very much, Mr. Klein. And now 
we will hear from Ms. Bachmann for 1 minute.
    Mrs. Bachmann. Thank you, Mr. Chairman. Thank you also for 
this long overdue hearing. I am very pleased that you have 
convened it. I wish we could rewind the tape back to last 
September of 2008 because during the height of the debate over 
the $700 billion TARP bailout, I, along with 60 other Members, 
wrote the SEC and asked them to suspend mark-to-market and 
replace it with a form of mark to value that could accurately 
reflect the true long-term value of institutions' assets. More 
than 6 months later, we have seen some action on this issue but 
not enough.
    Recently, I read a book that did report on FDR suspending 
mark-to-market accounting. The book concluded that had FDR 
suspended the rule earlier, the country would have been spared 
at least 2 years of the Great Depression.
    Last December, when the SEC released their subsequent 
recommendations, I began hearing from financial institutions in 
Minnesota that more could be done to both preserve the 
transparency of bank balance sheets, something that is 
critical, but also allow them to show a longer term, more 
accurate value of our assets. Much could be said about 
undervaluing and overvaluing. However, our financial system 
needs to find a way to unleash capital sitting on the 
sidelines, both in investor pockets and on bank balance sheets, 
so business and consumers alike could return to a stable 
lending environment.
    I have had numerous conversations with both financial 
service institutions and those in the accounting industry. It 
seems there must be a way forward on this issue, whether it is 
suspending mark-to-market and replacing it with something else 
or altering it in a manner that would help make these clogged 
assets marketable again.
    We agree, both Democrats and Republicans, that something 
must be done.
    I yield back.
    Chairman Kanjorski. Thank you very much, Ms. Bachmann. And 
now we will hear finally from Mr. Manzullo for 1 minute.
    Mr. Manzullo. Thank you, Mr. Chairman. I am going to be 
asking a question: Is mark-to-market best when the market does 
not exist, when there is no market to value the assets? You 
have a tough job, but the IRS certainly does not use mark-to-
market when it comes to valuing the estates of the owners of 
these small factories in the district that I represent. So on 
one hand, they cannot get money to run their factories because 
of mark-to-marketing, and yet some of them die and the IRS 
says, oh, this is worth ``X'' amount, and they ignore those 
same rules. It is the inconsistency of the message. It has 
resulted in the fact that, gentlemen, we could lose hundreds of 
factories, thousands of factories, that are hemorrhaging, that 
simply cannot get money. This Nation will collapse in a long, 
long depression unless something is modified with the formula 
that is being used for the purpose of lending out money.
    One of the experts, Rich Berg, the CEO of Performance Trust 
Capital, asked the question in terms from the consumer, the 
bank manager and the investor the question I am going to ask 
you, and I thank you for being here today, but I ask you to 
keep in consideration the fact that in my district alone, in 
one city, I could lose a couple hundred factories. We are 
already at 14 percent unemployment.
    Thank you.
    Chairman Kanjorski. Thank you very much, Mr. Manzullo. And 
now I will introduce our first panel. First of all, gentlemen, 
thank you for appearing before this subcommittee today. And 
without objection, your written statements will be made a part 
of the record. You will each be recognized for 5 minutes to 
summarize your testimony. First and foremost, we have Mr. James 
Kroeker, Acting Chief Accountant of the Securities and Exchange 
Commission. Mr. Kroeker, I think we have to identify the fact 
that your being here took an act of courage on your part, so 
welcome. We will try and protect you, but if you will summarize 
your statement.

   STATEMENT OF JAMES KROEKER, ACTING CHIEF ACCOUNTANT, U.S. 
               SECURITIES AND EXCHANGE COMMISSION

    Mr. Kroeker. Chairman Kanjorski, Ranking Member Garrett, 
and members of the subcommittee, thank you for the opportunity 
to testify here today on behalf of the SEC on mark-to-market 
accounting, their practices and implications. This testimony is 
presented on behalf of the Office of the Chief Accountant, 
which advises the Commission on accounting and auditing 
matters.
    Our Chairman testified yesterday that these are wrenching 
times and there can be no doubt about the urgency and the 
gravity of this matter today. Accounting did not cause this 
crisis and accounting will not end it, but accounting should 
not make it worse.
    On December 30th, the Commission delivered its staff study 
on mark-to-market accounting to Congress. In this comprehensive 
study, conducted in consultation with the Department of the 
Treasury and the Federal Reserve, we did not recommend the 
suspension of fair value accounting. We do recommend 
improvement.
    Among the study's findings, we found that investors 
generally believe that fair value accounting increases 
financial reporting transparency and facilitates better 
investment decisionmaking. In addition, after careful study of 
the factors that led to bank failures in 2008, fair value 
accounting did not appear to play a meaningful role, but rather 
we found that failures appeared to be the result of growing 
credit losses, concerns about asset quality, and in certain 
cases, the erosion of investor confidence.
    We also observed that the abrupt removal of fair value 
accounting would erode investor confidence, resulting in the 
potential for further instability in our financial markets.
    All of our recommendations are included in my written 
testimony and are fully described in our study, but I would 
like to highlight two of our more significant recommendations:
    First, we recommend additional guidance be developed to 
assist in measuring the value of illiquid securities. And, 
second, we believe that accounting for financial asset 
impairments should be re-addressed. We are working closely with 
the FASB and others to address these and other recommendations 
in our study. Consistent with the Chairman's testimony 
yesterday, the FASB has committed to provide guidance on 
valuing illiquid securities in a matter of weeks, not months.
    Our financial reporting system has long been considered 
world-class and a major national asset. This world-class 
reputation has been earned by our ongoing commitment to provide 
investors with transparency that they need to make better 
capital allocation decisions. This reputation should be 
safeguarded by those charged with the stewardship of our 
capital markets by continuing to hold the needs of investors 
paramount. Interruptions to financial stability caused by real 
economic factors should not lure us into suspending 
transparency and the accompanying clear financial picture and 
investor confidence that our capital markets depend upon.
    To achieve this, we believe an independent accounting 
standard setter is best positioned to promulgate financial 
reporting standards for all private industry. And it is 
important to note that the accounting standards that are the 
subject of this hearing, those related to fair value, are not 
just used by financial institutions but by all industries.
    Of course, open due process, including thoughtful 
consideration in the input and the views of investors and the 
many others who play a critical role in our capital markets is 
crucial to the FASB in fulfilling its mission.
    It is also vitally important to point out that an 
independent standard setter must still be accountable. Thus, we 
continue to believe that the FASB must be responsive to the 
needs of capital market participants, particularly to 
investors. To be responsive, the FASB must continue on a timely 
basis to improve guidance available to assist preparers and 
auditors when making difficult judgments. Further, evaluation 
of the application of existing standards and practice and 
timely improvement where warranted are crucial to the success 
of an independent accounting standard setter. We believe 
responsiveness is enhanced by a collaborative process between 
all parties.
    My written testimony and our study outlines the history and 
the use of fair value accounting in broader detail. However, I 
would like to emphasize today that the use of fair value 
accounting, primarily for derivatives and for investments that 
are not held to maturity, were adopted over many decades and 
after careful consideration, including the evaluation of causes 
of previous financial crises.
    FASB Statement 157, which provides a common definition of 
fair value and improved transparency regarding fair value 
measurements did not increase the use of fair value or mark-to-
market accounting.
    We should not forget that investor confidence is at the 
heart of efficiency and capital formation. Transparency 
increases stability by increasing investor confidence and the 
needs of investors should be the primary focus of financial 
reporting. Despite the call and the recognition for the need 
for improvement, in certain practice areas the current 
standards related to mark-to-market and their transparency 
should not be suspended.
    We at the SEC remain committed to advancing investor 
confidence and transparency in reporting during this economic 
crisis.
    Thank you for the opportunity to appear here today, and I 
will be pleased to respond to any questions. Thank you.
    [The prepared statement of Mr. Kroeker can be found on page 
211 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Kroeker. I 
appreciate it.
    Next, we will hear from Mr. Robert Herz, Chairman of the 
Financial Accounting Standards Board. And, again, we will offer 
the same protection to you, Mr. Herz.

  STATEMENT OF ROBERT H. HERZ, CHAIRMAN, FINANCIAL ACCOUNTING 
                     STANDARDS BOARD (FASB)

    Mr. Herz. Thank you, Chairman Kanjorski, Ranking Member 
Garrett, and members of the subcommittee. I am Bob Herz, the 
Chairman of the FASB, and thanks for letting me participate 
today.
    Our current reporting model in the United States, and 
indeed across much of the world, includes both historical costs 
and fair value measurements. Recently, many have criticized the 
use of fair value in the current environment as overstating the 
extent of losses and capital erosion and as a factor 
exacerbating the crisis and have called for it to be either 
suspended or significantly modified. Others, however, have 
applauded its use as essential in promptly revealing the extent 
of problem assets and deteriorating conditions of financial 
institutions and have urged us not to suspend or weaken the 
current requirements. Indeed, some, and that is investors, have 
urged us to extend the use of fair value to all financial 
assets.
    Clearly, there are very strongly held views on this 
subject. So rather than use my time to debate all the pros and 
cons, what I would like to do is to provide you some 
information about fair value and how it is and is not used in 
financial reporting now. Secondly, on our recent standard 
setting actions on this subject, including how we have been 
responding to reporting issues emanating from the crisis and 
how we are addressing the recommendations in the SEC report. 
And, finally, some observations about the role of financial 
reporting and its relationship to economic and regulatory 
consequences.
    Mr. Perlmutter read you the definition of fair value, thank 
you. Conceptually it is what an asset is worth currently in an 
exchange between informed parties on an arms-length basis and 
not its potential value at some future date under different 
economic or market conditions. And contrary to what some 
assert, it is not the price that would be received in a fire 
sale, a distress sale, or a forced liquidation. The standard is 
quite clear on that point.
    As described extensively in the SEC report, the use of fair 
value by U.S. financial institutions varies considerably, from 
relatively little by many banks to more general use of so-
called mark-to-market accounting by broker-dealers. Mark-to-
market accounting occurs when the items are carried at fair 
value on a continuous basis with the periodic changes in value, 
that is the mark-to-market adjustments included in determining 
reported earnings each period. The use of such accounting is 
generally limited to securities in trading portfolios and 
accepted for qualifying hedges to derivatives.
    Fair value is also used to report securities in what are 
called ``available for sale'' portfolios of financial 
institutions but in such cases, the periodic changes in the 
fair value are included in what is called ``other comprehensive 
income,'' which is outside of reported earnings. Investments 
that are classified as held to maturity are carried on a cost 
basis. Fair value is then used also to recognize in earnings 
what are termed ``other than temporary impairments'' of 
financial assets where there has been a significant and 
prolonged decline in their value as can occur in sustained 
downward markets. Loans held for investment, which comprise the 
bulk of financial assets for many banks, are carried on an 
amortized cost basis with allowances for loan losses that are 
not based on fair value.
    Most of these requirements have been in place for a while. 
Our Standard No. 157 of fair value that we issued in 2006 does 
not require any new fair value measurements. Thus, it is not 
surprising that the SEC report indicates that the extensive use 
of fair value remained fairly constant before and after 
Statement 157 came into effect. FAS-157 provides a consistent 
definition of fair value, a framework for determining fair 
value across varying types of assets and liabilities in 
differing market conditions and requires significantly expanded 
disclosures related to the use of fair value. So fair value is 
not a new concept. Further, the practice of writing down assets 
in periods of down markets is not new and would apply whether 
one used fair value or other age old accounting methods, such 
as lower of cost or market.
    What is new of course are the state of the markets that you 
all commented on. And, clearly, as the crisis has deepened, the 
values of many financial assets have fallen significantly and 
the markets for some complex instruments have become 
increasingly inactive and illiquid. Such conditions pose very 
significant challenges to the valuation process, often 
requiring additional data gathering and analysis and the use of 
sound judgment. It is challenging for the companies that hold 
these instruments and for their auditors but it is important 
for investors to get a reasonable idea of the values.
    While FAS-157 did not specifically contemplate the current 
crisis, it did include guidance on determining fair values for 
illiquid assets for which there may be little or no transaction 
activity. And as the credit markets froze in 2008, our staff, 
together with the SEC staff, provided additional guidance on 
valuing financial assets in illiquid markets, which we then 
quickly supplemented with further guidance.
    Additionally, consistent with the recommendations in the 
SEC report and with the very good input we have received at our 
recent public roundtables and following many, many other 
discussions with constituents, we have recently undertaken a 
series of near-term standard setting actions to resolve 
inconsistencies in the rules relating to impairments of 
securitized assets, which we did in January, to provide more 
guidance on dealing with inactive markets and distress sales 
and also some more disclosures.
    Also, consistent with the recommendations in the SEC 
report, we and the International Accounting Standards Board are 
undertaking a joint project to more comprehensively improve, 
simplify, and converge our standards on accounting for 
financial instruments.
    I would also note that over the course of the past year, we 
have responded to many other reporting issues emanating from 
the crisis, including issuing new standards to improve 
transparency around securitizations, the use of special purpose 
entities, financial guarantee insurance, credit default swaps, 
and other derivatives.
    A few brief comments on the role of financial reporting and 
its economic and regulatory consequences, including assertions 
by some that the use of mark-to-market accounting has caused 
banks to fail and exacerbated the financial crisis.
    We agree with the SEC's conclusion that fair value did not 
cause banks to fail. We also agree with the SEC that suspending 
or eliminating existing fair value requirements would not be 
advisable for the role of accounting and reporting standards is 
to help the investing public in the capital markets with sound, 
unbiased financial information on companies. Its purpose is not 
to determine regulatory capital or capital adequacy. That is a 
matter for the financial institution regulators. But while our 
roles are different, we have longstanding, and I believe very 
productive relationships, working relationships, with the 
regulators wherein we share perspectives, discuss issues, and 
look for ways to complement and bridge the reporting needs of 
investors with those of the regulators.
    Of course, good accounting and reporting can have economic 
consequences, including potentially leading to what some term 
as ``procyclical'' behavior. Reporting the deteriorating 
financial condition of a financial institution can result in 
investors deciding to sell their stock, to lenders refusing to 
lend, to the company trying to shed problem assets, and to 
regulators in the capital markets recognizing the institution 
may need additional capital. Indeed, such procyclical actions 
are being taken by individuals and families as they see the 
falling value of their homes and of their 401(k) accounts and 
decide to spend less, to save more, to sell investments to 
raise cash. But I think few of us would suggest that we suspend 
or modify the reporting to individual investors of the fair 
values of their investment accounts. Thus, to the extent there 
are valid concerns relating to procyclicality, I believe these 
are more appropriately and more effectively addressed through 
regulatory mechanisms and via fiscal and monetary policy than 
by trying to alter the financial information reported to 
investors.
    Finally, I would like to in these very challenging times 
assure all the members of the subcommittee of FASB's continuing 
commitment to work actively and constructively with all parties 
on these very difficult but very important matters.
    Thank you.
    [The prepared statement of Mr. Herz can be found on page 
139 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Herz.
    And now we will hear from the final member of the panel, 
Mr. Kevin Bailey, Deputy Comptroller for Regulatory Policy at 
the Office of the Comptroller of the Currency. Mr. Bailey? We 
will not offer you any protection.

STATEMENT OF KEVIN J. BAILEY, DEPUTY COMPTROLLER FOR REGULATORY 
       POLICY, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Bailey. Chairman Kanjorski, Ranking Member Garrett, and 
members of the subcommittee, thank you for the opportunity to 
be here today to discuss fair value accounting and the 
practical challenges faced by banks and bank supervisors in the 
implementation of those standards.
    The unprecedented disruption in worldwide financial markets 
that we have seen over the past 18 months has raised a number 
of issues about mark-to-markets or fair value accounting, 
including the very important question of how or even whether 
fair value concepts should be used in financial reporting and 
bank regulatory capital.
    Implementation of these standards in the context of the 
current crisis has also caused many to question the extent to 
which fair value measurement has contributed to procyclicality 
in the broader economy.
    As the primary supervisor for national banks, which hold 
nearly 70 percent of the Nation's banking assets, the OCC has 
significant interest in the impact of fair value accounting, 
especially its effect on capital, a key measure of a bank's 
health and ability to lend.
    The OCC and the other Federal banking agencies use current 
accounting standards as the starting point in determining 
inputs to regulatory capital rules but make an independent 
assessment of bank risk exposures and activities in determining 
standards of capital adequacy.
    There are two critical elements in the development of our 
capital adequacy standards that I wish to highlight today:
    First, our capital adequacy requirements must provide an 
accurate and timely assessment of a bank's individual risk 
profile, reflecting a consideration of all material risks. 
Since these regulatory capital rules are the basis for much of 
our supervisory program, including limits on loans to one 
borrower and the prompt corrective action of an early 
intervention program, an accurate capital regime is critical.
    Second, it is also important to limit excessive and 
unnecessary volatility in capital that could disrupt credit 
markets and prevent banks from effectively serving their 
customers. The banking agencies have worked diligently to 
balance these important objectives as they relate to fair value 
measurement. Stated generally, and except for assets that the 
bank intends to trade in the short term, current capital rules 
seek to neutralize the effect of temporary fluctuations in the 
value of financial instruments and incorporate more permanent 
decreases in value in regulatory capital ratios.
    We believe that this approach to fair value measurement 
strikes the right balance between the need for banks to 
recognize more permanent changes in the value of their assets 
and capital, while not subjecting banks to wild swings in 
measured capital levels.
    With that said, we do believe that enhancements to fair 
value measurement can help address a number of legitimate 
issues that have been raised during the current crisis. The 
question in front of us is not whether banks should or should 
not be subject to fair value accounting. Instead, the real 
question is what steps can be taken to address the issues 
revealed by the current crisis so as to improve the application 
of existing requirements and enhance current practices.
    Let me identify two areas for possible enhancement: The 
first issue relates to the narrow question of how to evaluate 
assets which a bank determines to be impaired on a more 
permanent basis. To use accounting terms, these are known as 
assets that are other than temporarily impaired or OTTI. For 
most banks, especially community banks, OTTI is the main issue 
as it relates to fair value measurement. If a bank determines 
that impairment of one of its assets is other than temporary, 
the value of the asset on its balance sheet is written down to 
fair value, with the amount of the write-down reducing current 
earnings and therefore regulatory capital. Many commentators 
have described the dramatic effect such action can have on 
banks and other firms and have raised legitimate questions 
about the appropriateness of the current application of fair 
value principles in this area.
    As I describe in more detail in my written statement, 
alternative OTTI models are currently being discussed to 
address this issue. We believe that such enhancements warrant 
active consideration by standard setters, and we are prepared 
to assist in that process in any way we can.
    The second issue relates to the broader question of how to 
value financial instruments for which there is no active liquid 
market. There is a clear need for additional guidance to 
address the numerous definitions and implementation questions 
that have surfaced in recent months. Such guidance would 
facilitate improvements in the relevance and reliability of 
valuations and benefit financial reporting regulatory capital 
and risk management.
    Mr. Chairman, as you noted in statements prior to this 
hearing, fair minded incremental and achievable fixes to the 
issues with fair value accounting identified in recent months 
are clearly needed. This hearing is an important step in that 
direction, and I look forward to answering your questions.
    [The prepared statement of Mr. Bailey can be found on page 
94 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Bailey. Thank 
you all for your testimony, but I guess I have something to 
confess. And, Mr. Herz, you know I have been a regular 
participant in your yearly visits to my office in discussing 
FASB, and I have been sympathetic to getting a more transparent 
system of accounting so that it can be properly protective of 
investors. But I would make a comment, particularly in the 
financial services field, we do not have any investors anymore, 
the only investors we have are sitting out here and watching 
this on television; they are the taxpayers of the United 
States. And they are sort of saying to us, and you heard the 
comments of this committee, hey, this is our money and every 
time a rule in accounting that drives down an asset and 
requires more regulatory capital, that capital is coming from 
the Treasury or the Federal Reserve backed by the taxpayers of 
the United States. Why would it not be better to find a 
methodology that we would not have to make those immediate 
transfusions, if you will. That is what we are talking about.
    Now, it was interesting, and I am getting more positive on 
the attitude that I hear something happening, as a matter of 
fact, after this panel is finished, so that you can listen to 
the next panel, I think we should put a room aside, a 
conference room and put you all in there with a deadline and 3 
hours to work out the conclusions of what should be done. And I 
want to say that, obviously not that we can do it that quickly, 
but we cannot waste time. I think you have heard the panel. I 
think you have heard the members almost to a person indicate 
that one way or another we are going to find a way to give some 
relief to the assessment of these assets, and we do not want to 
play regulators, standard setters, it is not our role, but we 
want you to do it.
    I was for and supported, as you know, the FASB rule in 
terms of providing for as a protection to mark-to-market and 
what it would do. But that was before December 7th. Oh, I am 
sorry, not December 7th, September 15th. That is what happened. 
Nothing is going back anymore to pre-September 15th just as in 
1941 nothing went back to what existed in the world prior to 
December 7th. I think Warren Buffett is quite correct.
    And I was impressed, this morning I did an interview on 
CNBC and immediately before my interview, they did the national 
news, and it was such a welcome statement that was made. They 
said that there is an ongoing third stage study to cure 
pancreatic cancer and that the success of the study was so 
great that they decided to suspend, the FDA is going to suspend 
the study and make the treatment available to everyone who 
suffers from pancreatic cancer. That is not normal for FDA or a 
bureaucracy that relevantly to the needs of the population, but 
I think it is something that our agencies, the SEC and FASB, 
should model after. We are now at the stage where we have 
people critical, that do not have to suffer, do not have to die 
because of this rule if we can find a margin to bring that 
within conditions.
    So I think I speak for the whole committee on both sides. I 
would have to say you have unified our committee and that is 
not notorious in Congress, but you really brought about the 
strongest bipartisanship I have seen in a number of years and 
everybody is agreeable to that I think on all sides. So you 
have accomplished something. Now, we do not want you to unify 
and make us all bipartisan, we want you to act. And I think the 
message has to be just that clear.
    What I am worried about, let me center it on both Mr. 
Kroeker and Mr. Herz, I still hear a little tinge in your 
testimony that somebody else has to do something, either FASB 
has to do something before SEC does it or SEC has to do 
something before FASB. Can we say that that is no longer 
applicable, that concept and that now you are going to take it 
upon yourselves to do something and even to do something that 
is not common in this City, pick up the telephone and 
communicate directly with one another. Do not be passing a lot 
of paper back and forth. That can follow the conclusion. But if 
we can get you either in the same room or on the same 
communication by telephone or otherwise, I really believe that 
this is a solvable problem. The people on the extremes, that is 
the purists who are in favor of mark-to-market, they are not 
going to be happy. The people on the other side who want us to 
do totally away with the rule of protecting transparency for 
investors, they are not going to be happy. But we may help save 
the jobs of several million Americans and keep the whole 
country out of a worse economic situation than what we 
presently coming or potentially coming.
    So I am not going to ask a particular question because I 
want to give the rest of the panel the opportunity to ask 
questions. I just wanted to impart to you unusually I am trying 
to bring to your attention the fact that this subcommittee, and 
I think the full committee are prepared to act expeditiously, 
but we will not act until after we hear some testimony as to 
how soon. Maybe I could ask, I have 30 seconds left, could 
either of the two of you give us some indication of how long 
you think it will be before this problem could be resolved?
    Mr. Kroeker. I am happy to start. We have a commitment from 
the FASB, particularly as it relates to illiquid securities, 
and they have announced this, to act in a matter of weeks, not 
months. We work constructively with them daily, and our Office 
stands fully ready to address the issues in our study. We 
prefer that the FASB work through that. We stand fully ready to 
assist the Commission in any way in implementing the actions in 
our study.
    Chairman Kanjorski. Very good. Mr. Herz?
    Mr. Herz. Yes, as Mr. Kroeker said, we have announced a 
number of actions, which are detailed in my testimony, around 
more guidance on valuing inactive and illiquid markets, again 
trying to emphasize the need for good judgment. That has been 
one of the kind of frustrating issues in this because I said a 
standard tells you not to look to distress sales or forced 
liquidations, it asks you to get a lot of data if any many 
cases, in these kind of conditions what you ought to be doing 
is doing cash flow projections, which I think Representative 
Biggert and Mr. Campbell did, yet somehow the way it is being 
implemented is kind of on a last trade basis. And that is not 
the intent. The intent is to try to get a reasonable valuation. 
And so we are going to keep on putting more guidance out there. 
I do not know whether at some point we are just basically going 
to have to say for certain situations, do not use a market-
based fair value, just do cash flow projections. And then we 
have to tell people guidance on that and what you would do in 
terms of a discount rate.
    Chairman Kanjorski. Are you going to be a little bit more 
clear in the message you send?
    Mr. Herz. We hope so.
    Chairman Kanjorski. You do understand the message that we 
are sending?
    Mr. Herz. Yes, I absolutely do, sir.
    Chairman Kanjorski. Okay, Mr. Herz, thank you very much. We 
will now hear from the ranking member, Mr. Garrett.
    Mr. Garrett. Thank you. And I begin by associating myself 
with Mr. Campbell's comments with regard to how we got here and 
it was not all due to accounting issues and what have you and 
to Mr. Herz's comments to that extent as well. I do not believe 
though that we got an answer from you, Mr. Herz, as far as a 
timeline, although I think that is going to be the question my 
constituents are going to ask after this hearing. I will give 
you this to keep it in perspective, this Administration 
believes that it, through Congress, can re-write the entire 
financial structure of this entire country in the next 6 weeks 
before they go to G-20. If they can do that in the next 6 
weeks, that is what they tell us, can you do this within the 
next 3 weeks?
    Mr. Herz. We will have a proposal out during that time.
    Mr. Garrett. There you go, I appreciate that. And speaking 
of timelines, Mr. Bailey, I agree with Mr. Herz that a portion 
of this should be looked at from the accounting aspect but it 
sure seems like a portion of this needs to be looked at from 
the regulatory side as well. What sort of timeframe are we 
looking at there to accomplish that?
    Mr. Bailey. I think it is a very important question, and I 
think it is clear that any regulatory regime that is risk 
sensitive is cyclical in that it reflects that broader economy. 
I think the issue, which is the issue that Chairman Bernanke 
raised this week, is whether there is evidence that the 
regulatory capital rules and accounting standards are 
procyclical and that they serve to amplify existing business 
cycles. This is an issue that the OCC, and frankly domestic and 
international bank supervisors have taken very seriously. And, 
in fact, the Basel Committee on Banking Supervision had issued 
in January a proposal that among its provisions would try to 
address some of the procyclicality inherent in this process.
    Mr. Garrett. By?
    Mr. Bailey. Well, it is open for comment right now, and I 
think the comment period ends later this quarter. One other 
thing that I want to highlight--
    Mr. Garrett. That is the end of the game because obviously 
if one of those banks that they are describing over here, they 
are saying the comment period is the end of this quarter, so 
then it gets through the next quarter, so we can go two or 
three quarters before the banks actually get good words from 
you guys?
    Mr. Bailey. What we tried to do, as I noted in my 
statement, is in most cases our regulatory capital regime tries 
to incorporate and reference GAAP provisions. If there are 
provision changes in GAAP, the effect on capital would be 
immediate.
    Mr. Garrett. Okay. You mentioned Chairman Bernanke, under 
TALP, the chairman says, ``The assets investors own will be 
held in a non-mark-to-market account.'' If that is the case, 
what is the Fed saying, and I will throw this out to all of 
you, with regard to the Fed's view of mark-to-market since they 
are asking that these assets not be assessed or valuated in 
that manner? Mr. Kroeker?
    Mr. Kroeker. I think that is consistent with the model that 
we have today for assets that are not held for trading 
purposes, that is we have available for sale, which is not 
mark-to-market, and we have held to maturity. But I think that 
highlights the problem of other than temporary impairment so 
that when there is a decline in cash flows, expected cash 
flows, there is a credit loss that is recognized but then it is 
recognized on a fair value basis that includes all of the 
issues about liquidity. It is one of the issues that we believe 
needs to be re-addressed, that is the accounting for 
impairments and needs to be addressed timely.
    Mr. Garrett. The rest of you for the record are nodding 
your heads yes, in agreement with that. Well, you can answer 
that question, you can also answer the question for me so I can 
understand this better, what is the ability then for an 
institution to move it from one bucket to the other bucket? And 
will not the pressure, once everything gets better, because 
everything is going to get better in this economy because we 
just did the stimulus, we are now going to do another stimulus 
now, the economy is going to be great a year from now, will not 
they be coming back to us and saying, we want to move it from 
one bucket to the other bucket, it is no longer going to be 
held for long-term purposes?
    Mr. Herz. Yes, that is a very good observation. You can 
move from one bucket to another, but if you move into held to 
maturity, which you can do, it then has to be held to maturity, 
subject to a few things. You can sell it, if there is credit 
deterioration, you can sell it. You can sell it if the 
regulator says sell it. But otherwise you have to hold it and 
collect the cash flows.
    Mr. Garrett. Now, Europe has allowed this one-time deal to 
change that, right?
    Mr. Herz. They did it to conform with our rules. They did 
it in October retroactive to July 1st but to conform with our 
rules.
    Mr. Garrett. So can you explain that in 10 seconds?
    Mr. Herz. Yes, in their rules, International Financial 
Reporting Standards, IFRS, did not explicitly address the issue 
of whether you can transfer from one category to another. We in 
the United States, we like lots of details, so we have rules 
relating to that and specifically allow transfers. But when you 
transfer from either trading or available for sale into held to 
maturity, there are constraints around held to maturity saying 
you really do have to hold it to maturity.
    Mr. Garrett. I won't ask a question, but that goes back to 
what Mr. Bailey and the other regulators might be doing 6 
months from now or a year from now, right? Okay.
    Chairman Kanjorski. Thank you very much, Mr. Garrett. We 
will now hear from the chairman of the full committee, Mr. 
Frank of Massachusetts.
    The Chairman. The chairman of the subcommittee correctly 
said there is a very strong contingent here. I will tell you as 
I walk around the Capitol, increasingly trying to avoid 
conversations with people, I am most often ambushed by people 
who want to complain about mark-to-market. So I have a personal 
interest in your resolving this. But the chairman is right when 
he talks about the contingency here. I am also pleased that we 
do have a contingency. Let's be clear, there is no significant 
support for abolishing mark-to-market. There needs to be some 
form of valuation. We all understand that. And we also agree 
that there is a very important function here of information to 
investors, and there is no question, we have investors scared 
out. That is why I think one of our major jobs is to give 
investors confidence. I hope by the end of the year we will. 
And even as we talk about regulation, we are talking about 
giving the investors more confidence, but that does leave us 
two areas where I think there seems to be consensus. Mr. Herz, 
I was pleased that in your statement, you quote Mr. Bernanke. 
You quote his earlier speech, but of course he made a more 
recent one. And you are right, you quote him but you say, ``I 
think the accounting authority would have a great deal of work 
to do to try to figure out how to deal with some of these 
assets which are not traded, but I don't see a suspension of 
the whole system.'' So that is both an affirmation of the need 
for continuation of mark-to-market as the framework but an 
acknowledgment that we have to do two things. So there are two 
things, you have to work on what you're doing.
    Let me ask one question because I think this is very 
important on the whole question of the buckets. You say if you 
put it in the hold to maturity, what would the penalty be? Who 
is penalized? Was the SEC penalized or the OCC? If someone 
appeared to be manipulating, they put it in the sell to 
maturity bucket, and then they prematurely matured, what would 
the penalty be?
    Mr. Kroeker. The guidance that they have, and this is out 
of FASB standards, requires you to hold it to maturity and the 
penalty is that your assertion about other assets that you are 
holding to maturity is no longer recognized.
    The Chairman. Okay, good, so there is a real bite to that. 
I think that is important. I thought the gentleman from New 
Jersey's questions were important. Let me then talk about what 
is clearly within our jurisdiction, and I address here the OCC 
and the absent regulators as well, and I think we ought to be 
clear, and FASB says this, their job is to get the accounting 
right. Yes, it is important we do that and accounting is not an 
exact science, and I think there is a consensus that we can do 
a better job of differentiating but it is also very important 
that we have a recognition of consequences. One of my former 
colleagues is in the room today who was here when we did the 
savings and loan and subsequent, and we toughened up the rules. 
So it may well be that in reaction to the last crisis, 
appropriately, 18 or 19 years ago, we diminished discretion 
that maybe now you ought to have back. So I really want to make 
a very specific request. I am making this as chairman of the 
committee, but I think in full cooperation with almost all--
maybe all the members of the committee, I really want you now 
to tell us, you need to volunteer and we are asking you, so you 
do not have to clear this with OMB or anybody else, we want to 
know what legislative changes would we have to make to give you 
full discretion in how you react to the mark-to-market? I think 
that is absolutely essential.
    And as they are doing that, and I would ask, and I think I 
speak for the whole committee, when I say we want to know those 
things. We may not want you to exercise it, we may. There may 
be other differences, but to the extent that there are any 
legislative mandates which ought to be made a little more 
flexible, I now ask officially that you and the others who are 
paying attention send them to us. And I think those two things 
in parallel will do a great deal to be helpful. I don't know if 
anyone wants to comment on any of what I have said.
    Mr. Bailey. Mr. Chairman?
    The Chairman. Yes.
    Mr. Bailey. I think we would be happy to provide that 
information. As an initial matter, I think there is significant 
discretion on the part of the supervisors to look at and adopt 
those portions of GAAP or not to.
    The Chairman. Right.
    Mr. Bailey. That are inconsistent with our prudential 
safety and soundness.
    The Chairman. Yes, but let me put it, to the extent that 
there is a diminution in the capital because of a mark-to-
market in some ways, I assume do you now have to treat that all 
the same. It seems to me the diminution of capital because 
people have been really stupid and irresponsible than if there 
is a diminution in capital that occurred from a mark-to-market. 
Do you have the discretion to differentiate there in terms of 
what the institutions are allowed to lend or what their capital 
requirements are?
    Mr. Bailey. Mr. Chairman, as I noted in my written 
statement, I think what we try to do in regulatory capital is 
try to neutralize some of the temporary fluctuations.
    The Chairman. So the answer is, you do have that 
discretion?
    Mr. Bailey. Yes.
    The Chairman. Let me just say this in closing, I understand 
that but I want to be clear, no agency, I hope, 2 months from 
now is going to tell us that they would have liked to have 
shown more flexibility but they couldn't because there were 
statutory obstacles because you have our assurance that we are 
ready to remove those excessive statutory obstacles. So this is 
the period. If you think you have the discretion and you are 
not sure, there is one thing I have learned about in 
legislating, redundancy is preferable to ambiguity. Do not 
worry about redundancy. A lot of us are lawyers. We have belts 
and suspenders and lewd and lascivious and etc., etc., we 
always like to say things twice, as you noted from the 
questions. So please err on the side of making sure that you 
have all the discretionary authority you need. Thank you, Mr. 
Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Frank. And now 
we will hear from the ranking member of the full committee, Mr. 
Bachus.
    Mr. Bachus. Thank you, Mr. Chairman. Let me say this to the 
panel, when I first started making inquiries as to mark-to-
market and the distortions in the market, the first reaction I 
had from many at the SEC and FASB and the accounting industry 
was this guy does not know fish buckets from accounting 
buckets, and he does not know bed sheets from spreadsheets. 
There was some truth in that. I'm sorry to say a lot of truth. 
But I had been hearing from bankers. I had been hearing from 
lenders, and I had actually been hearing from bank regulators, 
both State and Federal, that there was a real problem. I 
requested this hearing October the 3rd. Now, that was not some 
coincidental date. That was the date that I received the letter 
from Robert Denham, your former boss, Mr. Herz, which 
basically, as far as I read it, told me to butt out. He 
basically said, we do not need any political interference. That 
was also the same day we passed TARP. And the reason for his 
letter, among other things, was that Roy Blunt and I included 
legislation in the TARP that said study mark-to-market and 
determine whether it is distorting valuations or loan 
provisioning. We also are troubled by, when there is an 
acquisition, purchase accounting.
    As a result of kind of a back and forth, the Washington 
Post on October 28th, quoting accountants, basically said, do 
not blame mark-to-market accounting. I never have. I never 
have. I am not blaming it. And I know the chairman of the 
subcommittee said it is not the cause of the crisis. No one 
thinks it is, but a lot of us think that its application in 
certain respects has worsened us, not only us but Chairman 
Bernanke, Mr. Dugan, regulators, people I respect. I talked to 
the former CFO of a bank that was listed as one of the 10 
safest, he is a former CEO. He says it is a real problem.
    You heard Ms. Bachmann. What many members were advocating 
was suspending mark-to-market. I was not doing that. I told the 
Washington Post, and here is what he said, the guy, he tracked 
down the guy, like I am in a cave and they are pulling me out. 
``The guy who got that provision in the bill, Representative 
Spencer Bachus, the ranking minority member, he told me he 
wasn't trying to politicize accounting.'' I am not. It just 
says study it. It doesn't say study it, study to repeal it, it 
doesn't say do a study to suspend it. But the SEC studied it at 
our request, and they came back and said it is causing some 
real problems and they kicked it to you. And there has been 
nothing done. In fact, from January--well, over 2 months, I 
think December to February, it took 2 months for you to even 
announce you all were going forward with the study. And now you 
are saying it is going to be 3 months. You said you have 
identified some problems, but it is going to be another 3 
months.
    One of the things that disturbs me, and you can answer 
this, you keep saying that you are defending investors, the 
people who want to buy stocks or banks or whatever, these 
assets, I understand that, but what about the investors who 
hold them? What about most Americans who hold those investments 
and are seeing them unduly diminished or distorted in value? I 
have discussed with members of your staff, and let me ask you 
this. I am not an accountant but I went back to an old 
accounting book and it defines fair market value, which is what 
we are supposed to have, right, and it seems to be a little 
different from the mark-to-market. You all use them 
interchangeably but they are not. And I am glad you agree. Fair 
market value accounting, which is what we are supposed to have, 
the price at which property would change hands between a 
willing buyer and a willing seller. When you come in and put 
mark-to-market, I am not an enemy of mark-to-market, you are 
distorting to me the free market because the free market is a 
willing buyer and a willing seller and until you have that, you 
don't have a transaction. And I have really never had a 
satisfactory answer to that.
    You know, mark-to-market assumes that you don't have a 
buyer willing to offer intrinsic or real value or that you have 
a seller who has to sell. If I put up my house today, and I do 
not get an offer for a week, I do not have to sell. But mark-
to-market would presume that I had to sell. If I got in my car 
and it would not crank because the battery was dead, I would 
not call folks over and say, ``Buy this car.'' Well, they would 
say, ``Well, I would like to drive it around the block.'' 
``Well, the battery is dead.'' I do not have to sell it nor do 
I have to take it to an auction tomorrow and sell it at an 
auction. I will just hold on to it. And that is what bankers 
tell me everyday, but mark-to-market reduces their reserves and 
is causing them real problems and distortions.
    And here we are today. I talked about John Lewis' book. I 
would invite you to read those two pages, I really would 
because I want you to buy into this as an urgent situation.
    You knew that I was upset by Mr. Denham's letter, but I did 
not respond going back at him and telling him we are going to 
do something. I requested this hearing in October. I requested 
it again in January. And let me say this, Mr. Garrett, I am not 
giving them 6 weeks. I first contacted you in July of last 
year. And since that time a lot of my constituents have had 
loans called, a lot of the businesses, the people I represent 
have gone under. I would never blame you. I would never blame 
the accounting industry. In fact, let me say this, empower your 
accountants, empower your accountants to value property even 
the way they would like to. Give them some flexibility. And in 
doing this, do not--please remember in my opinion that mark-to-
market, it really interferes with the free market because the 
free market is a willing buyer and a willing seller and until 
you have that, you should not have a transaction. And when you 
assume or force a presumption of a transaction, you devalue 
property, you devalue assets, you devalue loans.
    To the bank regulators, you all have been telling me for 4 
or 5 months there were problems with, I got a letter where we 
swapped a letter back in August where you said it is really 
hard for us to get an acquiring bank to buy now because you 
have to write down the asset. I said, ``Well, why don't you 
change the rules or go to the Accounting Board, why don't you 
go to the SEC,'' because that has cost taxpayers billions of 
dollars because that rule has not changed. And the regulators 
have said since July, it is not the right way to do it. When 
one bank buys another bank, all the assets have to be written 
down.
    We have all agreed for some months now that should not 
happen, but it continues to happen, and taxpayers, sometimes a 
bank is not bought, it fails because of that obstacle. So join 
us in this House. We are not trying to politicize accounting. 
We are not trying to suspend the rules, but I am going to go 
back to what I have always thought, if you do not have a 
willing buyer and you do not have a willing seller, that is 
what--is not that the definition? The price at which property 
would change hands between a willing buyer and a willing 
seller, neither being under any compulsion to buy or sell and 
both having knowledge of the relevant facts. That is basically 
what a lot of banks, they are not going to sell, but what you 
are doing by some of this accounting thing, you are forcing 
them to write down their assets, which devalues their capital. 
It sometimes causes a run on their stock, and then they have to 
sell.
    I appreciate it very much.
    Chairman Kanjorski. Thank you very much, Mr. Bachus. And 
now we will hear from the gentleman from New York, Mr. 
Ackerman.
    Mr. Ackerman. It is not that Mr. Bachus did not make his 
point, but let me tell you what my problem is--if his car 
doesn't crank, and he unloads it because it is a lemon, why do 
I have to mark my car down?
    Mr. Bachus. Would the gentleman yield? I would put a new 
battery in it or I would not have to sell it because it will 
not crank.
    Mr. Ackerman. Yes, but that is not my point, my point is if 
you did sell it, why have you now just established the market? 
And if someone else's wife runs off with the milkman and his 
job goes to India and he is having a bad day, why is my house 
suddenly worth less or why do I have to raise more capital in 
order to keep it? That is the real problem that exists here.
    Let me say this, you have indeed unified the committee. 
Interesting phenomena in a market that was supposed to be down 
today, as soon as we all got together, it seems to have peaked 
over 7,000. Ordinarily, that would not be a big thing to 
celebrate but this morning you might say that.
    I am trying to understand how this is going to work because 
you seem to all agree that we are going to make a change and 
that was going to be my question originally, are you going to 
change? And it seems that you are going to make the change, but 
the real question is, it is like if you had a horrible 
situation and you wound up waiting for an ambulance or you were 
waiting for the fire truck to show up, you only ask one 
question: When? And this issue, which is a huge issue with the 
public, and not just here in the walls of Congress. I hear more 
about this than anything else when I go back to my district, 
when people talk about financial issues, mark-to-market. And it 
is not that it is controversial, meaning that there are two 
sides of issue. Everybody says it has to change, the question 
is when?
    So could you in this timeframe that we are talking about, 
where my constituents think it should be minutes or days, and 
we are not talking months anymore but we are talking weeks, 
maybe 3 weeks, could you walk us through the process so we all 
understand in the context of what Chairman Frank asked for 
also, is there anything that we have to do legislatively. What 
has to happen and how quickly can this happen sequentially? 
Walk us through this process so we can tick off the days on a 
calendar and tell people that help is on its way?
    Mr. Herz. Well, from our side, in terms of the additional 
guidance that I talked about, we will get that out probably in 
early April. It will be out for comment for a very short 
timeframe.
    Mr. Ackerman. In early April? So you are talking about you 
are not going to get that out for another 4 weeks before you 
even get that out?
    Chairman Kanjorski. Will the gentleman yield?
    Mr. Ackerman. Absolutely, Mr. Chairman.
    Chairman Kanjorski. Mr. Herz, I just want to tell you that 
there are three pieces of legislation presently pending in the 
Congress in the House. I guarantee you one of those pieces of 
legislation is going to become law before early April.
    Mr. Ackerman. I think what the chairman said is if you do 
not act, we will. The timeframe that you are starting out with, 
thinking you have the luxury of that much space is not 
acceptable, I do not believe, to the members of this committee 
on either side of the aisle. If you are going to act, and we 
have to respond to what you are going to do, you have to get 
back real quick and let us know. So maybe you want to start the 
answer again?
    Mr. Herz. Okay, I have heard you, I have heard you very 
clearly. We will go back, and we will consider exactly how.
    Mr. Ackerman. Can you do this whole thing in the 3 weeks 
that was referenced before?
    Mr. Herz. We probably could.
    Mr. Ackerman. Will you do this within 3 weeks?
    Mr. Herz. I have to talk to the other members of my board.
    Mr. Ackerman. When will you talk to them?
    Mr. Herz. I will talk to them when I get back tonight.
    Mr. Ackerman. Tonight?
    Mr. Herz. Yes.
    Mr. Ackerman. Mr. Kroeker, with the right cooperation 
between the two of you, can you do this in 3 weeks?
    Mr. Kroeker. We can absolutely work with the FASB in that 
timeframe.
    Mr. Ackerman. Within that timeframe?
    Mr. Kroeker. We expect within in that timeframe and we, as 
I said in my testimony, we expect action within weeks, not 
months. The Commission, the staff, my staff stands ready to 
assist the Commission in any way possible if we do not see that 
action.
    Mr. Ackerman. So if the press wanted to report accurately, 
we could have this fixed in 3 weeks?
    Mr. Herz. We could have the guidance in 3 weeks, whether it 
would fix things is another question. I hope it will.
    Mr. Ackerman. I am not talking about the result out in the 
street, but I am talking about fixing the problem.
    Mr. Herz. Yes.
    Mr. Ackerman. In terms of what we all have been talking 
about.
    Mr. Herz. Yes.
    Mr. Ackerman. That can be done in three--it will be done in 
3 weeks, can and will?
    Mr. Herz. Yes.
    Mr. Ackerman. Can and will?
    Mr. Kroeker. Yes.
    Mr. Ackerman. I yield back the balance of my time.
    Chairman Kanjorski. The gentleman from Delaware, Mr. 
Castle?
    Mr. Castle. Thank you very much, Mr. Chairman. I want to go 
sort of behind the accounting on this a little bit and look at 
the assets that these financial institutions own and get your 
comments about that. Obviously, we are dealing in terms of what 
we have to do with the mark-to-market with illiquid, not active 
assets. And I do not know if either you or any principals in 
your agencies or your agencies in general have commented on 
those particular so-called assets, on whether or not the banks 
or the financial institutions should be holding them? And a 
related question is, is anything being done to set up a market 
for these assets? The real problem is that there is no market 
for them. They are illiquid, and they are not actively traded 
and you sort of based it on some trade that may have happened 
weeks before or whatever it may be, so is any effort being 
made, is there anything we could be doing or anybody could be 
doing to set up some sort of a better market that would give it 
true value so instead of worrying about whether we have fair 
value or cost accounting, we actually can look at something and 
determine the value of it? So I am interested in any comments 
that you know of in your agencies that have been made 
concerning the particular assets and whether the financial 
institutions should even be holding them. And if they are going 
to hold them, what kind of marketing circumstances, either are 
being set up or could be set up or anything we could do to 
encourage that? And I would ask all of you to comment on that 
if you could in any order.
    Mr. Kroeker. With respect to whether these assets should be 
held by financial institutions, I defer to the banking 
regulators. I think that is a policy issue within their 
purview. In terms of improvements to the markets, again I am in 
the Office of the Chief Accountant advising the Commission on 
accounting and auditing policy matters but there are certainly 
steps in place to address the securitization market, 
improvements to the transparency and the disclosure. I am happy 
to work with our legislative affairs group to get back to you 
more fully on that question. It is outside my particular area 
of expertise.
    Mr. Castle. I appreciate it. Mr. Bailey?
    Mr. Bailey. Based on our understanding of the issues facing 
banks and valuations in illiquid markets, I think it is a 
pervasive issue. It may have much more relevance in certain 
contexts to complex financial instruments, but I do not think 
there are any issues we are aware of where there have been 
arguments that the banks have the legal ability to hold the 
asset. And I think it is much more a reflection of the 
marketplace and some of the valuation challenges they have seen 
in dealing where there is no observable market, no observable 
inputs, and no active market for trading. But, again, we are 
not aware that there are legal issues associated with the 
ability of banks to hold those assets.
    Mr. Castle. Mr. Herz?
    Mr. Herz. I would just like to observe that I think 
Chairman Bernanke was exactly right, this whole issue is an 
issue about how do you value very uncertain cash flows. And 
that is what it is all about here. We have uncertain cash flows 
for some of these things because they are inherently complex. 
They were highly financially engineered, some of these things. 
There is considerable--there is not a lot of price discovery, 
as you said. And there is considerable uncertainty about the 
underlying collateral, that is the loans that back these 
securities as to what the economic trajectory is going to be. 
And then finally there is uncertainty right now as to what the 
government's plans are in regard to purchasing those assets. So 
all of those combine to get a very thorny valuation problem. 
That is why part of the issue in giving guidance to people is 
so difficult. Other than say, ``Get the facts, here is the 
objective and do your best.''
    Mr. Castle. Well, I appreciate your answers. Mr. Bailey, I 
am a little concerned about whether or not we should be looking 
at these investments, and they are, as was indicated, highly 
financially engineered, they are leveraged and they have led to 
a lot of problems. And I am not too sure that banking 
regulators should not be looking at that in some way or 
another.
    Mr. Bailey. We have certainly spent a lot of time looking 
at these complex instruments. And you are right, there is the 
valuation of the cash flows and the associated collateral does 
present a lot of challenges, both to banks and to supervisors. 
And we do spend a lot of time making certain there is a 
realistic valuation of the assets which is a particular focus 
of our supervisory program. In fact, in my written statement, I 
do provide and cite two different documents that do try to 
highlight some of the associated challenges on valuation for 
those complex instruments. And what we are trying to do in this 
context is trying to improve best practices within the industry 
about how to realistically value those complex instruments and, 
again, dealing with the issues identified today, dealing with 
the uncertain cash flows and the collateral issues. Again, we 
are happy to engage in that discussion with you more fully. We 
have to make certain that these issues are being conveyed in a 
way that makes sense.
    Mr. Herz. Can I also note, as I did in my testimony, that 
loans, just whole loans, are not mark-to-market at all. The 
accounting for that has nothing to do with either mark-to-
market or fair value unless they are loans that are held for 
sale, then there is a lower of cost or market approach. 
Property normally is not fair valued either, so what we are 
talking about here is a range of securities, particularly 
securitized assets that came out of CDOs and things like that.
    Mr. Castle. Exactly, some of the fair value is something we 
do not know how to evaluate is the problem basically. Thank 
you, gentlemen. I yield back, Mr. Chairman.
    Mr. Ackerman. [presiding] Thank you, Mr. Castle. The 
gentleman from Massachusetts for 5 minutes, Mr. Capuano?
    Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, I do 
not think I can improve on the questions you asked and more 
importantly the answers the gentlemen gave. Three weeks sounds 
good to me. I actually think it is a little late, but I will 
take what I can get. But I do want to take some time to talk 
about some of the comments that were made, ``Accounting did not 
cause the problem.'' I agree, it did not cause it, but it 
certainly was complicit in the problem. The SEC certainly was 
complicit in the problem. The OCC certainly was complicit in 
the problem by a lack of doing anything. Each one of you, just 
one item alone, SIVs. Nobody had anything to say about them. 
Everybody said they were perfectly fine, take these special 
investment vehicles of a regulated bank, take them off the 
books, do not count them, no big deal. Every one of them came 
back to bite us and every one of your agencies was complicit in 
allowing that to happen. Okay, yesterday's news, but my hope is 
that in the next not 3 weeks but at least soon thereafter, 
those are gone forever, forever.
    Accounting not a problem, fair market value, I like the 
concept. I totally agree we need to get to it, but I also know 
that right now I am not painting the house, the house is 
burning. I voted for things here that I do not normally like. I 
do not like some of the things the Fed is doing, but I know 
they are necessary in these times. I certainly do not like the 
Federal Government investing in private companies, but I know 
it is necessary at this time. We are out of the usual, we are 
out of the ordinary. This is not regular accounting issues. You 
would not be here if they were. This is a crisis, we need you 
to help. I do not want Congress to do this, you do not want 
Congress to do this. Do not let us. This is not where we 
belong. Do not make us have to do this.
    And, again, your comments, to Mr. Ackerman particularly, 
the 3-weeks comment is very good. Now, again, I would like to 
see what you do in 3 weeks, and I hope we do not have to have 
you back here, but whatever you want to call it: suspend; 
adjust; amend; clarify. Toxic assets became bad assets and now 
they are ``legacy'' assets. Did any of you come up with that 
term, because if you did, good job, good job. At the same time, 
they are all the same things. What I want, probably I may be 
alone on this panel on this, I want when you finish changing or 
amending or clarifying these rules, I want then our friends at 
the Treasury and the Fed to use these new rules to avoid the 
whole concept of the bad bank. The idea of taxpayers taking 
these assets off the books should not be necessary if you allow 
thoughtful, reasonable, temporary accounting rules to keep them 
on the books of the people who took the risks. Keep them off 
the back of the taxpayers. If you do not do that, my 
expectations will have no choice but to take them off those 
books and it is unnecessary.
    Two of you represent taxpayers, one of you does not, but I 
am sure you do represent taxpayers on the other side of the 
table. Do what you can for us, and again you have already 
answered the questions I had with Mr. Ackerman. You know that 
you will be held accountable to them, and I look forward to 
what you provide us in that three week period.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    Mr. Ackerman. Thank you, Mr. Capuano. Mr. Price for 5 
minutes.
    Mr. Price. Thank you, Mr. Chairman. I apologize, I had to 
step out, but I understand that, Mr. Herz, you said that within 
3 weeks, you will be able to issue new guidelines, is that 
correct? I am over here.
    Mr. Herz. That is what I am going to go back and talk to my 
board members about, remember I have one vote of five. But, 
clearly, I will take back your clear, very clear message from 
today, but I cannot myself do it. I have four other very 
conscientious board members.
    Mr. Price. Do we need to bring the other four in here?
    Mr. Herz. I do not know. I will talk with them. They may be 
watching right now. We will do everything that we can.
    Mr. Price. Let me follow up on that. I am interested in a 
3-week timeframe, I think that is great. I am over here. But I 
am more interested in what guidance is going to come out. The 
guidance that FASB has already given has not been helpful. Tell 
me what kind of guidance you believe you can give that will be 
helpful to my constituents and folks all across this Nation who 
absolutely need a solution to this?
    Mr. Herz. I believe that, and again this is part of the 
frustration also on our part because the fair value measurement 
approach has within it an ability to do cash flow modeling 
rather than just take prices in the market that might have been 
fire sales, that you do not really know. We have told people 
repeatedly it is not a last trade model, particularly in these 
kinds of markets. Yet, for some reason, we are told that that 
keeps on happening.
    Mr. Price. Why do you believe that keeps happening?
    Mr. Herz. Well, we are told that there are kind of 
institutional and cultural aspects in the system. One is that 
from the bank point of view, the preparer point of view, 
unfortunately, many of these institutions do not have the 
internal expertise to do the cash flow modeling of some of 
these complex items. And, unfortunately, because there was no 
market infrastructure set up around these things and periodic 
reporting, like we have for corporate bonds and corporate 
stocks, there is not standardized information always readily 
available.
    Mr. Price. So the examiners are more strict than they 
otherwise need to be?
    Mr. Herz. No, I do not think it is the examiners. I think 
the preparers do not necessarily have the expertise and may not 
want to have to pay for an outside valuation person.
    Mr. Price. Well, the word that we get from back home is 
that the examiners are remarkably strict and want absolutely 
every ``I'' dotted and ``t'' crossed. And, consequently, I 
believe that guidance ought to be more specific for the 
institutions that you are looking at so they know what the 
rules are. Right now, they do not know what the rules are.
    Mr. Herz. Well, I think the rules are pretty clear, but we 
are going to have to give them some more examples, for example.
    Mr. Price. With all due respect, if the rules were clear, 
then you would be able to be fully culpable for what is 
happening because what is happening is not working, correct?
    Mr. Herz. The rules, as I said, there is a second factor 
that I also wanted to talk about, is you talk about the 
examiners, the anecdotal feedback we get also is that there is 
a bias, a little bit of bias in the auditing system to look for 
trades rather than to do the cash flow modeling. And I do not 
know. The SEC study, their data was as of the third quarter of 
last year but seems to back that up a little bit. Either that 
or there are trades going on. Now, I do know that for example 
one major financial institution very recently decided to re-
position itself and get out of a lot of these things and did it 
in an orderly way but at very low prices, very, very low 
prices.
    Mr. Price. My time is about to run out, but I want to get 
to one other issue and that is that we hear that mark-to-market 
protects investors. Tell me other than short traders, how does 
mark-to-market protect investors, especially on mortgage-backed 
securities that are going to be held to maturity, performing?
    Mr. Herz. Well, the securities may be held but investors 
are buying and selling everyday, their decisions are not held 
to maturity decisions.
    Mr. Price. Investors right now are getting killed on this 
stuff.
    Mr. Herz. They are getting killed because the values are 
very low.
    Mr. Price. And the values, is it not true that the values 
are low because of the accounting rules that are being enforced 
right now by FASB and others?
    Mr. Herz. That is a matter of whether you think those 
values are realistic or not. I do have some concerns, again, 
about this last trade phenomena, which is not the intent of the 
standard. I would also say, however, that loan accounting, and 
I think all the supervisors agree with this, nationally and 
internationally, loans are overstated on company's books.
    Mr. Price. Mr. Chairman, my time has expired, but I would 
appreciate it if we might be able to get from FASB and others 
the specific guidelines that you are considering that you 
believe will allow that greater flexibility.
    Chairman Kanjorski. We have an agreement that you will 
supply the members of the committee with that?
    Mr. Herz. Immediately, when we prepare the proposal, we 
will send it to you.
    Chairman Kanjorski. Thank you very much, Mr. Herz.
    Mr. Bachus. Mr. Chairman, can I make a 15-second comment?
    Chairman Kanjorski. A moment for comment is recognized.
    Mr. Bachus. I think sometimes why accountants may be 
applying something is that they are covering themselves. And if 
you can give them--and the regulators sometimes, the examiners, 
they are covering themselves, but if you can give them some 
cover, if you can give them--and we do have lawsuits in this 
country, and I think the fear of litigation, the fear of 
somebody coming back and saying you should have done it a 
different way. And you could give them some cover and a 
reasonable cover or flexibility.
    Chairman Kanjorski. Thank you very much, Mr. Bachus. The 
gentleman from Colorado, Mr. Perlmutter?
    Mr. Perlmutter. Thank you, Mr. Chairman. Gentlemen, I 
appreciate your testimony. I understand that 3 weeks, again I 
am somebody who thinks we have studied this plenty, and I 
appreciate the SEC's voluminous study of this, but this is 
about discounted cash flows giving some kind of recognition to 
the value of these portfolios that is just not there in the 
market because it is illiquid. And it has caused a lot of 
damage and continues to cause a lot of damage by exaggerating 
this. Everybody has been pounding on you, Mr. Herz, but I am 
looking at the regulators on either side of you, and I am not 
happy. I think the mission of the SEC is not to really 
supervise the banking industry, so you have a narrower vision 
than what I think needs to be considered here. And I am afraid 
on the banking side of this that the examiners are not 
exercising the discretion that may be or may be not that they 
have. And the rapidity of the cycle that we have seen is 
something none of us could imagine. Now, on this committee we 
have had so many hearings over the course of the last year that 
now it is obvious to us. And so time is of the essence, 
gentlemen. Three weeks is too much, Mr. Herz. I think you could 
do it now. You all know what is going on here.
    So let's just talk about an example that really was 
disturbing to me involving the Federal Home Loan Bank of 
Seattle, just what I read in the newspaper, an anticipated loss 
of $12 million turns into a write-down of $300 million. And 
then it places whatever covenants they have with the regulatory 
community in jeopardy. So, Mr. Bailey, how does that happen?
    Mr. Bailey. As I understand the example, what you had in 
that situation, and again this is going from memory, was an 
asset that the company deemed to be impaired on an other than 
temporary basis and therefore had to fair value the asset based 
upon existing markets and the marketplace, as we discussed just 
a minute ago, and reflect that change in fair value in 
earnings. One of the issues that we have identified as 
certainly worth additional scrutiny is described in my written 
statement. Identified in the SEC study, and echoed by a letter 
from the Center for Audit Quality, is the issue of whether 
there should be a possible enhancement to the OTTI model to 
address this very issue: to try to differentiate between the 
credit-related impairment and the non-credit-related impairment 
in determining what is the proper accounting. And in that 
context, one of the ideas being circulated is that the credit-
related impairment would continue to go to earnings but the 
non-credit-related impairment, that reflects much of the 
liquidity discount that we have talked about today, would not 
go in earnings but would go in OCI.
    Mr. Perlmutter. All right.
    Mr. Bailey. And from our standpoint, therefore, would not 
affect capital.
    Mr. Perlmutter. Okay, and Mr. Lucas from Oklahoma, Mr. 
Donnelly from Indiana, Mr. Green from Texas, and I have a bill 
to try to give you guys the discretion or create a board that 
is looking beyond just the SEC's vision of investors, which I 
credit them, that is their job. You guys have a broader job. 
Everybody needs to be looking at the whole field because what 
is happening to us, and you have heard it from virtually every 
member who has spoken, is as this credit, as the capital 
collapses, the credit on a leverage basis comes in at 10 times 
or more. So $50,000 needed for capital, nobody is investing 
right now; $500,000 in loans called. And in Colorado, 
businesses then cannot renew lines of credit and people are 
laid off. And between the credit side of this thing and then 
the job layoff side of this thing, it is getting worse and 
worse. Now, we can turn this around. And I think we are. But 
you have to move on this thing. We cannot study it anymore.
    Mr. Herz, I understand that. Frankly, I think it needs to 
be a broader view than the SEC in determining how these 
accounting standards apply to the banking sector because the 
banks have a different role in a vast way. And we have spent 
$700 billion-plus to try to keep the banks moving, so it 
lubricates this economy and credit is extended, and we do not 
lay people off. And it has happened overnight. It is resting on 
your shoulders. It did not start with you, but I will tell you 
this is exacerbating it.
    And with that, Mr. Chairman, I will yield back.
    Chairman Kanjorski. Thank you very much, Mr. Perlmutter. 
Now the gentlelady from Illinois, Mrs. Biggert?
    Mrs. Biggert. Thank you, Mr. Chairman. My question is for 
Mr. Kroeker. In the SEC study on fair value, the report 
indicated that credit impairment could be reported separately 
from impairments due to other factors on the income statement 
and on the balance sheet. Do you think that this alternative 
could benefit investors and the marketplace in general?
    Mr. Kroeker. We had a lot of input in the study on a model 
that would separate the credit, just exactly what Mr. Bailey 
was talking about, the credit aspects of impairment from the 
liquidity or the other components. And I think if displayed 
properly, we can keep the same amount of information while 
showing the illiquid piece of the impairment somewhere else 
other than the income statement. I think that can be done. We 
have heard challenges that banks may face in separating the 
two, but I do not think that that should at all detract us from 
moving forward on that idea.
    Mrs. Biggert. How would that benefit then the investors and 
the marketplace?
    Mr. Kroeker. I think the investors would still have the 
information about both the current value of the asset. They 
would also then have a better understanding of management's 
view of the underlying cash flows, that is how much is credit 
impaired and how much of the decline in value may relate to 
other factors.
    Mrs. Biggert. And then are you aware of any efforts 
underway to implement something like this?
    Mr. Herz. This is something that we are looking at together 
with the International Accounting Standards Board because if we 
change our model, the advice we have gotten from the G-20, from 
the Financial Stability Forum is if you are going to radically 
change the existing model, make sure that it is done on a 
uniform international basis because what happens is all sorts 
of versions of accounting arbitrage start to happen when we 
have different rules in one jurisdiction versus another. So 
that is specifically one of the things we are looking at in 
that effort.
    Mrs. Biggert. Well, I think we certainly have to do 
something and you have not been moving on your guidance. Mr. 
Kroeker, can you give us a commitment to repair OTTI by the end 
of this quarter? Your letter of October 2008 requested that 
FASB repair this expeditiously and that was October of 2008.
    Mr. Kroeker. I can give you a commitment that my staff will 
work as diligently as possible to assist the Commission. I 
cannot commit the Commissioners, but my staff will stand ready 
to commit or to assist in any way necessary.
    Mr. Herz. One of the specific aspects of that was on the 
SEC report related to some inconsistencies in the OTTI rules 
related to securitized assets, which is particularly the 
problem area we are talking about. We dealt with that in 
January.
    Mrs. Biggert. And you have come out with that in writing?
    Mr. Herz. Yes, we issued something already.
    Mrs. Biggert. Okay, could you send that to us, please? All 
right, but it seems the problem is we really have--I am going 
back to Mr. Ackerman's question that you talk about the 
guidance, I do not know if you then agree with this other 
proposal?
    Mr. Herz. I personally do not. I agree with going to my 
personal model of what financial instruments ought to be 
accounted for, is that if you are going to trade them or sell 
them, they ought to be at a mark-to-market basis. If you are 
going to hold them for cash collection, they ought to be on a 
discounted cash flow basis.
    Mrs. Biggert. Well, don't you think that we need to use all 
the tools to address these issues squarely and in an assuredly 
meaningful way? It seems like we are just going on and on and 
on. When Secretary Paulson came to us and said that the whole 
economic industry or the economy was going to crash if we did 
not act immediately, now maybe we did not get it right in all 
aspects, but we really tried to do something. And we just have 
you come in and, okay, we will do it now, we will do it now, 
and we are just not seeing it.
    Mr. Herz. It is reflected in the SEC study, and we have 
held a lot of public roundtables and the views that you will 
hear from bankers and their trade groups is not necessarily the 
views you will hear from investors. And they have urged us not 
to weaken the current rules. Now, providing better guidance to 
get the rules applied in a way we intended is what we are 
trying to do in this very fast period.
    Mrs. Biggert. Well, this is a real hot potato, and I think 
you mentioned taking some action, but I do not think it is 
enough. Maybe you have good intentions, but they have not 
resulted in an adequate response. So I think there is more that 
you can do and can do it much faster, and I would appreciate 
that if it happens.
    Mr. Herz. I have to tell people here on public television, 
the rules--the standard allows for the exercise of appropriate 
judgment. I am going to say that, I am going to say again. It 
cannot with illiquid markets and complex securities be a 
mechanical exercise.
    Mrs. Biggert. Well, we hear a lot about how complicated it 
is, but please move ahead.
    Chairman Kanjorski. Thank you very much, Mrs. Biggert. And 
now we'll hear from the gentlelady from Ohio, Ms. Kaptur.
    Ms. Kaptur. First of all, I want to thank Chairman 
Kanjorski for holding this hearing and allowing me the courtesy 
to sit in. I used to serve on this committee and have not for 
several years, but I think this is the most important hearing 
that this Congress has held in this new Congress. And I want to 
commend the gentleman for his leadership. I want to commend the 
members who are here, Mr. Perlmutter, for the legislation that 
he has offered, Mr. Bachus, who has been a strong voice on 
this, Mr. Campbell, Mrs. Biggert, Mr. Manzullo. It is 
interesting who is in the room. This is a rather difficult area 
for the general public to understand about what is happening in 
our economy. I assume the people gathered here understand its 
significance. It is too bad all of America does not understand 
how important this is. So I really want to thank, and I cannot 
thank Chairman Kanjorski enough for his leadership and his 
knowledge. You are definitely the right man in the right place 
at the right time. And I wanted to put that on the record 
first.
    Number two, I want to say that when I served on this 
committee, I fought against what has happened to our real 
estate finance market and I lost. And they told us back then 
that after what happened with the Resolution Trust Corporation 
and all that debt that was put on the American people, $150 
billion worth financed through our grandchildren, we would 
never have another real estate problem in finance because they 
were going to securitize it. And then, ``Congresswoman, you do 
not really understand, we will never have another real estate 
implosion.'' And people who spent their life in housing said, 
``There are booms and busts. And you in the commercial banking 
world and you investors, you do not understand real estate. Oh, 
no, Congresswoman, we understand housing, we can do it.'' I 
remember those days here and then we moved into interstate 
banking and these institutions got bigger and bigger and more 
irresponsible and lacked prudence and they destroyed our 
community banks, our thrifts, the prudent lending where 
character, collateral and collectability had been the standard 
to Wall Street gambling. That is the way I look at it.
    So, Mr. Herz, you have a difficult job. You have a really 
difficult job. But what I can tell you is that in communities 
like mine, I have told my people to squat in their houses, to 
get a lawyer because we have had 10 percent of our homes 
foreclosed and if something does not happen, it will be 20 
percent. And now people are losing their jobs by the scores 
because whole credit markets are frozen and now they are losing 
their homes because they do not have jobs. So this thing is 
just snowballing to a point that none of us want to happen. For 
the life of me, I cannot understand why last year, Secretary 
Paulson did not suspend mark-to-market. To have this kind of a 
conversation, maybe it happened and nobody knew about it, but 
we have destroyed more capital inside our financial system 
through mark-to-market than we have been able to pour in at the 
top through taxpayer dollars. And every day the hole gets 
deeper, so somehow your wisdom has to factor in. And I hope 
that whatever is done will re-empower eventually local lending 
like we used to know it where the real estate market is not 
relegated to a Robo-dial system where somebody calls you and 
you want to refinance, you do not even know this character over 
on the other side of the country and there is no prudence, 
there is no proper underwriting and appraisal. So you have a 
real knot to unwind here, but all I am telling you is I agree 
with those who want some type of temporary quick action because 
communities like mine, sir, gentlemen, they are falling off the 
edge. And this real estate issue and valuation is absolutely 
critical, critical. In places like Cleveland, and I do not even 
represent Cleveland, entire neighborhoods are now vacant. And I 
want to place in the record a story from the New York Times 
last Sunday regarding what is happening in Cleveland.
    So I have two quick questions, and I appreciate being able 
to say this today: Are you going to fix the OTTI by April 1st? 
You sort of answered that, but give us an absolute sense of 
that. And then I want to ask you, what do you think about the 
fact that over two-thirds or more of the credit instruments 
that were used to finance this real estate are not on the books 
of normal banking institutions? How do you deal with that from 
an accounting standpoint as you think about mark-to-market? 
Could you give us a sense of that? You can possibly fix the 
ones on the books of normal institutions, and we will hear more 
in the next session from those who have actually accomplished 
it in past meltdowns in our real estate market, but how are you 
going to deal with the CDOs and the securitized debt 
obligations and the overledgering? Yes, Mr. Kroeker, and then 
Mr. Herz?
    Mr. Kroeker. With respect to the CDOs and the off-balance 
sheet accounting, it is an area that we identified at the SEC 
very early on. In fact, in January of 2008, we sent a letter to 
the FASB because of concerns that we had with respect to needed 
and necessary improvement in off-balance sheet accounting. The 
FASB has exposed a document that would improve off-balance 
sheet accounting is right now in the midst of re-deliberation. 
And, Bob, or Mr. Herz, I do not know your timeframe?
    Mr. Herz. It should be finalized next month but it would be 
effective next year. And a lot of people have concerns about 
that because although they agree with the notion, they do not 
want the idea of impeding the revival of the securitization 
market, which I take it would not bother you. But the plan is 
to finalize in May and effective January 1st, so that a lot of 
these things that are now in off-balance sheet vehicles would 
be on the books of the sponsoring entity, the bank.
    Mr. Kroeker. In the meantime, you have added additional 
disclosure to address that exact issue because there is a 
tension of putting assets on balance sheet and then the related 
regulated capital impacts.
    Ms. Kaptur. Mr. Bailey, you wanted to comment?
    Mr. Bailey. Yes, we have obviously had discussions with the 
standard setters in the SEC on the changes to FAS-140 and FIN 
46R, which is what is being referred to here. And clearly, 
depending upon the nature of the changes, that will have a 
significant effect on bank capital ratios because essentially 
you are dealing with off-balance sheet activity and bringing it 
on balance sheet, and the issue is what is the regulatory 
capital consequence of bringing those activities back on 
balance sheet? Again, that is an issue that we provided 
comments on in earlier discussions of these changes, and I 
think we are most anxious to understand what these proposals 
are going to be. And, frankly, then we will have to determine 
the regulatory capital effect of this change in GAAP.
    Ms. Kaptur. I did not hear a clear answer. Mr. Chairman, 
will you fix the OTTI, following on Mrs. Biggert's question, by 
April 1st?
    Mr. Herz. The OTTI issue, as I said in January, we issued 
something that dealt specifically with other than temporary 
impairment for securitized assets, which was mentioned in the 
SEC report.
    Ms. Kaptur. Well, are you saying that is applicable by 
April 1st?
    Mr. Herz. It is applicable now. It was applicable at year 
end.
    Ms. Kaptur. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much. Now, we will hear 
from Mr. Campbell for 5 minutes.
    Mr. Campbell. Thank you, Mr. Chairman. I want to go to 
these buckets things that we are talking about. Now, if I am a 
bank, I am a financial institution, and I tell you that this 
bunch of mortgages, mortgage-backed securities, whatever, that 
I am intending to sell it, so you want to value it--potentially 
value it one way. And then I change my mind because I do not 
like the market that is out there, I do not like the price that 
I am getting so I am going to hold it for a while. I guess the 
question I have is the problem I am having these are things 
which help the maturity means potentially 30 years, certainly 
at least 10 years. Somebody can change their minds in that time 
and not trying to manipulate the accounting rules or the 
regulatory process, how do you deal with that or why do you get 
punished for that?
    Mr. Herz. The standard that was developed, this is Standard 
No. 115, which was developed after the S&L crisis. It has the 
three buckets and there is a lot of flexibility. There is more 
flexibility of going into trading or into available for sale 
but once you go into held to maturity, you are kind of chained 
in unless the regulator tells you have to sell. You can sell if 
there is a credit deterioration and a few other things but it 
is basically that. And I think the thinking at that time was 
when you are in held to maturity, you are at cost subject to 
other than temporary impairment. The thinking at that time was 
really at that time, the SEC at that time and the FASB at that 
time really believed that everything should be at fair value 
and not having something have fair value ought to be tightly 
restricted.
    Mr. Campbell. Okay, and as you suggested perhaps in normal 
times, net present cash flow, expected cash flow would be the 
same as what you would achieve in the marketplace but that is 
clearly not the case today. And I guess the problem I am having 
is that, and I understand the complications with getting the 
net present value cash flow, but that is a number which if you 
look at what has happened, it would be declining on an orderly 
basis for the value of most of these assets. And if an 
institution decides that all right we are going to unload this 
thing now for whatever reason, we need the capital, whatever it 
may be, we need the cash, whatever, then they will have a loss 
and they will take a big loss on their fairly short term. I 
guess what is wrong with that kind of approach?
    Mr. Herz. It is again everything gets to the issue of 
uncertain streams of cash flows in these instruments. There are 
ranges of cash flows and the people who, the market prices of 
these, people do not like them but they take into account the 
ranges and the degree of uncertainty around those ranges, and 
that is why you get--the illiquidity is also part of that 
factor, is the inability to put the credit problem in a box. 
And so that is the prices are very, very low because of the 
whole uncertainty around the ranges of future cash flows in 
these things and in this whole economy.
    Mr. Campbell. Are you looking at all at any of those three 
boxes in your review?
    Mr. Herz. Well, we are looking with the International 
Accounting Standards Board to completely revise this model, but 
we want to do it on an international basis so that what we do 
in the United States would be the same as in Europe, as in 
Japan, across all the institutions, and that is what we have 
been asked to do by the G-20, by the Financial Stability Forum, 
by the SEC. If we are going to do a major re-vamp, we should 
not just do a United States only.
    Mr. Campbell. Okay, so even if in 3 weeks you come out with 
a proposal.
    Mr. Herz. A proposal in 3 weeks is more guidance on using 
the existing model.
    Mr. Campbell. Because what you are talking about would take 
some time?
    Mr. Herz. Oh, it will take more than a year on an 
international, anybody working on an international basis will 
appreciate that.
    Mr. Campbell. I will just in my final moments here make a 
comment, which is what we do not want here, I think what you do 
not want, what all of you should not want is for us to set the 
accounting rules. We do not want to politicize the fair 
valuation and the fair statement of accounting and what experts 
believe is the best form of presentation to determine the fair 
value of a company or an asset or whatever it is. We really do 
not want that, and the best way to avoid that is to act 
expeditiously and clearly cautiously but expeditiously so that 
we do not ever want to go down the road of politicizing the 
value, the accounting rules or the accounting value of 
companies. That is not good for anybody anywhere.
    So thank you very much. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Campbell. Now, 
we will hear from Mr. Donnelly.
    Mr. Donnelly. Thank you, Mr. Chairman. And I apologize, I 
had to step out for a meeting. But to give you a little 
background, in my district right now, in Elkart County where 
the President visited, unemployment is 18.3 percent as of right 
now. And the main culprit is a complete lack of credit for the 
products, for the companies, for floor plan financing. And the 
financial institutions are telling us we cannot lend, and we 
cannot lend in large part because of mark-to-market. And so 
this is not an academic exercise for the people who live in my 
area, this is a dad or a mom who lost their job because the 
product is not being built, because people who went to get 
financing for the product cannot get financing. And so to us, 
this is food on the table. And when assets are not intended to 
be sold for 15 to 20 years, and do have some predictable income 
stream, are valued at such a low figure, it goes to more than 
just accounting class, it goes to families who are now going to 
food pantries. And so this is very, very real to us. And I 
wanted to ask Mr. Kroeker what can be done to improve the 
accuracy in determining the risk of these products, to come to 
a fair valuation in your judgment?
    Mr. Kroeker. We talked about a number of--
    Mr. Donnelly. And I apologize if you talked a little bit 
about this, I'm sorry.
    Mr. Kroeker. A number have been talked about, but I think 
partly it is emphasizing and clarifying the objective of fair 
value and that is it is not to peg assets to distressed sales, 
it is not to look at the last trade that was a fire sale and 
mark your asset to that value, it is how--I think the guidance, 
the improvements need to focus on how in illiquid markets, when 
you have distress sales, how do you come to a reasonable 
assessment of what a willing buyer and willing seller would 
transact that, how do you use the cash flows to do that.
    Mr. Donnelly. And there is no desire to do a rush to 
judgment, but we do not have the luxury right now to sit here 
and for the next couple of years argue about mark-to-market 
because it went up two points in the last month, from 16.3 to 
18.3. And I did a conference call yesterday with the companies 
and one CEO after another, ``We just cannot get credit, Joe.'' 
That is what they told me. And the financial institutions who 
were there who used to provide credit said, ``Credit is frozen. 
Mark-to-market is absolutely killing us.'' And so I am a proud 
co-sponsor of Mr. Perlmutter's bill because we just do not have 
the time anymore. We have been at this for 6 months, and I 
respect your bona fide but it is the real deal for us.
    Mr. Chairman, thank you for your time.
    Chairman Kanjorski. Thank you very much, Mr. Donnelly. And 
now we will hear from Mr. Lucas for 5 minutes.
    Mr. Lucas. Thank you, Mr. Chairman. Gentlemen, a study by 
Paul Volcker of the Group of 30, for them, I should say, of the 
Group of 30, said that, ``Mark-to-market accounting was, if 
anything, procyclical, that it exacerbates the ups and the 
downs.'' Would you agree with that, that the system we use now 
presently exaggerate values in good times as well as slam 
things down disproportionately in bad times?
    Mr. Herz. I personally believe that any time you report 
current news, and mark-to-market is you get your 401(k) 
statement or your investment account statement, it is on a fair 
value basis. It shows the current values of your investments. 
If they are going up, you feel real good, there is a wealth 
effect. And if things are bad, you kind of pull in your horns. 
And that is the same with getting the employment information 
and all of that. I think it does have behavioral effects.
    Mr. Lucas. Mr. Bailey?
    Mr. Bailey. As Chairman Bernanke indicated earlier this 
week, there is clear evidence that there are procyclical 
effects from a number of public policy initiatives, including 
accounting and capital. And I think that is a reality that the 
public policymakers have looked at and frankly have tried to 
deal with. For example, the OCC and the SEC are actually co-
chairs of a project of the Financial Stability Forum to address 
procyclicality in current provisioning practices. There are 
other discussions in the Financial Stability Forum to deal with 
procyclicality in capital and valuation and leverage and many 
of those projects are expected to be discussed at the G-20 
summit in early April. One of the efforts of these projects in 
the FSF is to explore the procyclical effects of these various 
initiatives and to see what steps can be taken to mitigate 
those effects. This has been an active issue, and again we have 
worked closely with the SEC on the provisioning issue. That is 
something we have spent considerable time on over the last 6 
months to try to mitigate this problem.
    Mr. Kroeker. I would absolutely agree with that, and I 
think it is important, to Mr. Bailey's point, that there is 
actually a work stream looking at whether or not historical 
cost accounting because many believe that loan accounting, 
which was done at historical costs and the related impact of 
provisioning and when you provide that bad news is equally 
procyclical. So I think studying not only the fair value impact 
of that, and I think there are changes that we have talked 
about, and they need to be done in timeframes that we have 
committed to but bad news has a tendency to foster bad results.
    Mr. Lucas. Well, just remember, gentlemen, we all play by 
the rules in this economy that are laid out for us. You all are 
involved in a very key point of laying out the ground rules. 
The concern out in the countryside is that for a focus on the 
trees, so to speak, that you have missed the forest fire that 
is going on around us all. Ed and I, in the form of H.R. 1349, 
are trying in a responsible way to create a bill that will--a 
board that will bring in many more perspectives or more 
perspectives to help encourage thoughtful policy and help move 
thoughtful policy along a little bit quicker. We cannot stand 
and let the forest burn totally to the ground, and you by your 
actions in the coming days and months, doing what is prudent, 
what is proper, what is in line with your education, your 
background and your experiences, can help fight this fire.
    So, Mr. Chairman, I encourage my colleagues to join Ed and 
I on 1349, encourage our friends at the table here to move 
diligently to do what they know to be the right thing, and 
yield back, sir.
    Chairman Kanjorski. Thank you very much, Mr. Lucas. And now 
we will hear from Mr. Manzullo.
    Mr. Manzullo. Thank you, Mr. Chairman. Do either of you 
three gentlemen have any background in manufacturing?
    Mr. Kroeker. I do not.
    Mr. Herz. I have audited manufacturing companies.
    Mr. Manzullo. Pardon?
    Mr. Herz. I was an auditor in my prior incarnation and I 
audited manufacturing companies.
    Mr. Manzullo. Okay, okay, well, that would make sense. You 
are not a tool and dye maker, you are a CPA by background, is 
that correct? And I appreciate that. So you know what goes on 
in manufacturing. The problems that we see is the, and Mrs. 
Kaptur and I have spent a lot of time on manufacturing, I 
probably have 2,000 factories in our congressional district, is 
that the standard that is used to valuate securities is also 
used to valuate the assets that are used for a loan at a bank. 
It bleeds all the way through. And industry after industry 
after industry, and Mrs. Kaptur could tell you the same story, 
comes to us desperate. Manufacturing companies that have never 
missed a payment, that have assets 7, 8, 9, 10 times greater 
than what their operating loan would be, that even if they were 
closely held, never laid off, they just ate up, did not declare 
a dividend, and now we see a whole new pattern where 
trustworthy business people, retailers and manufacturers, are 
being wholesale destroyed. I am talking about the destruction 
of manufacturing in America that will push this Nation into the 
deepest recession the world has ever seen. If we do not make 
things, we will collapse. That is the impact of the mark-to-
market rule.
    Perhaps you do not see that from your perspective because 
you have to be objective obviously, you have to find out what 
is the best standard to use. But I can guarantee you this, the 
IRS does not use mark-to-marketing. When one of these small 
business people die, the IRS is in, especially now that the 
death tax will come back again, they somehow find a value as to 
these assets. And what is going to be interesting is, and when 
I practice law and I had a situation like that, we oftentimes 
had to get a loan at a bank to take those assets that the IRS 
is taxing so much on that the people could not pay. This is how 
wild this thing is.
    I know we are not here to lecture you because that does not 
do any good because it just does not do any good. I know you 
are concerned about it, but when a system that is in place is 
not working. For example, Mr. Kroeker, you talked about eight 
different recommendations that you came up with the SEC, they 
are just recommendations to make recommendations. You never 
really got into the meat of it. The accounting for financial 
asset impairments should be readdressed. That is what you come 
up with in your December 30th report. That does not help the 
hundreds of thousands of manufacturers, especially the little 
guys, who actually have orders.
    What we have now is we actually have manufacturers with 
real life bona fide orders, they have been praying for orders, 
and now they have been cut off on their line of credit. And you 
know what is happening? Those jobs are going overseas. They are 
going to China, they are going to Korea, they are going all 
over the place. It is so destructive to have an inflexible 
system that you have because what I am explaining to you is 
what these guys are going through. Banks want to lend. The 
community banks have deposits, they are ready to lend. Look at 
the people who have been long-time customers, for 30 and 40 
years, generations of manufacturers. Gentlemen, they cannot get 
any money. What do I tell them?
    Mr. Kroeker. Our study did provide recommendations, but we 
do not expect it to stop there. Those recommendations were made 
to both the FASB, some of those relate to us. As I said, we 
expect action on those recommendations in weeks, not months. My 
staff does not generally set GAAP directly. That authority 
rests with the Commission, and we have looked to the 
independent standard setter, whether it be the FASB or their 
predecessors, the Commission has that ability. My staff stands 
ready to assist the Commission in any way possible in 
implementing those recommendations.
    Mr. Manzullo. Mr. Herz?
    Mr. Herz. At the risk of sounding a little argumentative, 
but the SEC did a study and if you go past the very largest 
banks and look at smaller banks and community banks and all 
that, most of their assets, the great preponderance of their 
assets are not subject to fair value. If you had a community 
bank that just took in deposits and made loans, there would be 
no fair value on it.
    Mr. Manzullo. No, but they are applying the fair value 
standard to the security for the loans.
    Mr. Herz. To the extent that they have purchased 
securitized assets, these problem assets, then they know they 
are subject to fair value if they are not being--
    Mr. Manzullo. It is bleeding all the way through is what I 
am saying because the regulators are, perhaps, Mr. Bailey, you 
have the answer, the regulators are picking that up and the 
examiners are virtually applying mark-to-marketing to the value 
of the assets for these secured loans.
    Mr. Bailey. And we have obviously explored this issue quite 
a bit, but when you look at the average community bank, and 
this is as of year end data, less than 1 percent of their 
assets are in trading assets. In less than 1 percent of their 
assets, these changes in fair value were reflected in earnings. 
However, not to repeat myself, I think that further highlights 
what we said in testimony: The fair value issue for the vast 
majority of community banks relates to the OTTI issue since 
they do not have trading assets. And, again, that is the issue 
presented here--whether the assets are AFS or held to maturity. 
However, there is the potential for the cliff effect that was 
described, I think there are potential opportunities to address 
that problem through adjustments to fair value--to the 
impairment model for OTTI.
    Mr. Manzullo. Well, you better move quickly. They are 
barely hanging on.
    Chairman Kanjorski. Thank you very much, Mr. Manzullo.
    Mr. Manzullo. Thank you.
    Chairman Kanjorski. Now we will hear from the gentleman 
from California, Mr. Sherman.
    Mr. Sherman. I thank the chairman. I have been reluctant to 
see Congress legislate Generally Accepted Accounting 
Principles. And, in fact, I believe we have never done so. I 
think the FASB has made some mistakes. I think we in Congress, 
particularly those of us with a perverse interest in accounting 
theory, have a right to comment, maybe even persuade. I think 
perhaps their biggest mistake, other than perhaps mark-to-
market, but the biggest mistake is FASB No. 2, where you are 
writing off R&D expenses just because it is easier to do so and 
insulates the accounting profession from lawsuits rather than 
because it helps our economy or our markets.
    Today, we have major banks and other regulated companies 
really issue three different income statements. One is their 
tax return. You have tax accounting, it reaches a particular 
answer as to net income. The second is financial accounting, 
set by the FASB and related agencies, Generally Accepted 
Accounting Principles. And the third is not GAAP but rather 
RAAP. This does not mean the accountants involved can be called 
rappers but does the FASB have any objection to this government 
not setting what is GAAP but setting what is RAAP and in fact 
is not that what we have traditionally done in this country?
    Mr. Herz. Well, Kevin would probably know better than me. 
Congressman Sherman, I was disappointed not to see you earlier, 
so I am glad you are here. After the S&L debacle, Congress, as 
I understood it, and I do not know whether it is in FIREA or 
FIDICA, basically said that to the bank regulators that their 
accounting can be no less stringent than GAAP. Those were the 
words I understand were used. But that relates to the 
reporting, not fully to assessments of regulatory capital and 
capital adequacy, which the regulators do have some flexibility 
on.
    Mr. Sherman. So but in terms of the century-long tradition 
of the private sector establishing GAAP, that would not be 
changed if we asked the regulators in determining when prompt 
corrective action was necessary to look at a modified financial 
statement, a RAAP financial statement, and perhaps even reverse 
the policy you just identified.
    Second is I understand the accounting theory of mark-to-
market, but your marking to market only a certain portion of 
the balance sheet while the rest of the balance sheet uses 
traditional historic accounting costs. And I am not sure that 
you improve it. And one of the purposes of accounting is to 
allow you to compare similar companies and to see their 
results. It is my understanding if one bank invests in a bunch 
of business loans that are not securitized, that are not--and 
let's face it, we are in a recession, all that business loans 
are 20 percent less valuable than they were when they were 
made. They use traditional historic accounting to determine, 
and they might write them down a certain amount. If another 
bank, virtually the same economic circumstance, they invest in 
business loans, similar businesses, they are both lending to 
restaurants, for example, but they are investing in a 
securitized package. And they could be identical, one is Burger 
King loans, one is McDonald's loans, that you mark-to-market 
the second bank and if there is a market failure, that is a 
massive write-down. So the question is, does it make sense for 
the FASB--now, in normal times, mark-to-market is not that big 
a deal, two portfolios, one dealt with historically, one dealt 
with mark-to-market. They are going to about the same because 
the market is logical but at this time, when mark-to-market 
gets you a crazy result because there is no market, and where 
you are supposed to mark-to-market only marketable securities 
but instead you are marketing to market securities that used to 
be marketable that are not marketable--they are legally 
marketable now but as a practical matter not marketable, does 
it make sense to have mark-to-market of formerly marketable, 
now no longer practically marketable, securities? How is that 
for a long question?
    Mr. Herz. Thank you. Very good elucidation. First of all, a 
couple of points. One, you are correct that the accounting for 
loans and securitized loans is not the same. I think most 
investors--a lot of investors would say they ought to be the 
same, they ought to both be on fair value. Other people would 
say, no, they ought to all be on cost or cost subject to 
impairment or discounted cash flows.
    Mr. Sherman. Is there anybody who supports the present 
system where apples on one balance sheet and oranges on 
another?
    Mr. Herz. I do not think so and, as I mentioned, we have a 
project jointly with the International Accounting Standards 
Board pursuant to recommendations from the securities 
regulators, the G-20, the Financial Stability Forum, to re-do 
the basic accounting for financial instruments but do it on an 
international basis.
    The second point I want to make is although we might not 
like it, there are transactions going on for some of these 
things, albeit at very low prices. I am aware of a major 
financial institution who recently moved a lot of these problem 
assets at very low prices and they did it in orderly way.
    Mr. Sherman. Which, if anything, just illustrates how non-
comparable those two banks that I described, how your present 
system is indefensible and how your international process if 
probably not going to yield any results any time, which is why 
if you guys cannot act quickly and logically, perhaps the 
regulatory accountants need to act and depart from what is a 
somewhat illogical and certainly slow process that you have.
    I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Sherman. In 
reward for patience, I am going to recognize the gentlelady, 
Ms. Jenkins.
    Ms. Jenkins. Thank you, Mr. Chairman. I, too, have heard 
from a lot of financial institutions in my district on their 
concerns with mark-to-market standards, and I want to proceed 
quickly but responsibly. Both Chairman Frank and Mr. Sherman 
now have touched on this, but I would like to follow-up a bit 
on the issue of regulatory authority. And perhaps Mr. Bailey 
might have some additional insight, and what I would be curious 
to hear is, when assessing the regulatory capital of a 
financial institution, should bank regulators make adjustments 
to reverse write-downs that relate to the illiquid state of our 
markets today? And, more broadly, what authority do bank 
regulators have to impart flexibility in regulatory capital 
requirements. And if the authority exists, to what extent has 
that authority been used?
    Mr. Bailey. That is a very good question, and I tried to 
address that important question in my written statement, but 
let me try to summarize the issues. Obviously, when we 
determine our capital adequacy regulations, we try to use GAAP 
as a starting point in that assessment process in part because 
it does reflect a general market acceptance of how those assets 
and liabilities and equities should be reflected on bank 
balance sheets. We do, however, make our own determination as 
to how those inputs should be reflected in our capital adequacy 
framework. For example, good will is completely recognized 
under GAAP but that is not reflected in bank balance sheets 
because of the clear valuation issues associated with that. So 
we do have a large degree of flexibility, and we have exercised 
it. And, again, as I indicated in my oral statement in the 
beginning, I think what we have tried to do is balance the need 
for a risk sensitive capital framework, which again is a 
critical focus of our attention, while at the same time trying 
to constrain volatility in resulting capital ratios. What we 
have done, and again but for these trading portfolios, we have 
tried to neutralize the effect of temporary fluctuations in 
value from capital but reflect permanent changes in value in 
bank capital ratios.
    We do have a significant degree of flexibility, and we have 
exercised it. But I do want to make one other cautionary point. 
One of the things that we have looked to in this context is 
trying to make certain that bank financial statements, 
including bank capital ratios, have a degree of acceptance in 
the marketplace by both investors and the broader community. We 
have seen some evidence recently that rating agencies and other 
users of financial statements are creating their own metrics to 
determine capital adequacy. What we want to do is make certain 
that our capital adequacy regulations do reflect the reality 
that is relevant both for banks as well as users of financial 
statements, in part because our capital role is the foundation 
of significant parts of our supervisory framework. And, again, 
I think what we want to do is maintain the clear relevance of 
our capital ratios for a broad array of purposes, both 
supervisory and market related.
    Ms. Jenkins. Thank you. If I might just follow up, I have 
also seen some proposals, which I understand would separate out 
credit and non-credit losses. Non-credit losses would be 
recognized as other comprehensive income and not hit the 
regulatory capital. Would any of you like to share with the 
committee your thoughts on that proposal?
    Mr. Bailey. I can start off. We have discussed that issue 
quite a bit, and I think that is appropriate because it is 
perhaps one of the most obvious issues that would warrant our 
attention.
    As it relates to the capital ratio, to the extent that you 
reflect in earnings, and therefore capital, the OTTI impairment 
that is related to credit, while reflecting the other 
impairment--the non-credit impairment that is generally 
associated with liquidity discounts--in other comprehensive 
income, not earnings and therefore not capital, we would 
further reduce the volatility of regulatory capital ratios. 
Again, under that revised OTTI impairment process, you are only 
reflecting the credit-related impairment as a change in 
capital. And, again, the more liquidity based volatility is in 
OCI, other comprehensive income, and therefore not regulatory 
capital.
    Ms. Jenkins. Okay.
    Mr. Kroeker. I agree. I actually think it can provide 
additional transparency to investors by giving them both a 
perspective of the credit impairment, as well as the impact on 
valuation of liquidity.
    Ms. Jenkins. Okay, thank you. Thank you, Mr. Chairman, I 
yield back.
    Chairman Kanjorski. Thank you very much, Ms. Jenkins. And 
now we will hear from the gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman. I appreciate that. And 
I wanted to ask Mr. Bailey a question as we look at this mark-
to-market at the heart of a larger issue that I think needs to 
be addressed by this committee and that is the procyclical 
nature of capital valuation tools that are being used by 
regulatory bodies when they compound or exacerbate the peaks 
and the valleys in the market's performance. And the history of 
this goes back many years, or at least we have some history in 
the 1930's and now we have a recurring problem. But regulatory 
capital, by its very nature, should not take the long view when 
it comes to valuation when you have a situation where the 
market becomes so distressed as it is right now. I think you 
have to take the long view. And day-to-day valuations, when 
they are assessed in this manner, when the markets are going 
up, fair value accounting valuations artificially inflate the 
bank's capital and encourages additional risk taking, 
encourages additional lending and investing and in that sense 
helps create a balloon. And when the markets decline, as we 
have seen over the last year, the very opposite is true.
    We had, I think in 1938, the government suspended this kind 
of--for regulatory capital this kind of valuation because of 
this concern. And it came back in, I think, September of 2007, 
whenever FAS-157 was put into play, and so now we have this 
same problem. The observation has been made that if this rigid 
mark-to-market accounting had been in effect during the 1990's 
when we had our banking trouble, virtually every major 
commercial bank in the United States would have collapsed 
because of the loans they had made in Latin America and in 
commercial real estate. So we would have had the same kind of 
consequence that we had during the Depression. That is not to 
say this caused it but it compounds the problem. And this does 
not go to the question of giving the investors this 
information. You can certainly do this. The question is the OCC 
has the capacity to act on this and so does the SEC. So I just 
wanted to ask about regulatory forbearance on the part of the 
OCC given the current stress that our markets are under and 
what that would mean in terms of providing some respite for 
many of our financial institutions without impacting the extent 
to which these firms disclose their assets because we can still 
have the disclosure for the investors in the financial 
statements. And so, hence, my--I have wondered for some time 
why there is not another standard if you are independent and 
you can make this decision?
    Mr. Bailey. I think you raise a very important question, 
and I think there is an important issue that we are looking at 
in this context and clearly procyclicality is one of those 
considerations. In any risk-based regulatory regime, there will 
be cyclicality because again--
    Mr. Royce. Right, but you are making the capital calls.
    Mr. Bailey. Correct.
    Mr. Royce. And the capital calls are frankly what is 
signaling the market to respond and make these runs on these 
institutions.
    Mr. Bailey. I completely agree. By definition, risk-based 
rules should be cyclical. I think the issue and the problem 
that arises is whether it is also procyclical in amplifying the 
peaks and drops of the normal business cycle.
    Mr. Royce. Right.
    Mr. Bailey. And that is certainly an issue that we are 
exploring in various forums, both domestic and international. 
But I think what we are trying to do in this context is trying 
to make certain that our risk-based capital ratio is just that, 
it is reflective of risk. To the extent we can neutralize the 
procyclical effects of that regime, we are actively trying to 
do that.
    Mr. Royce. I understand that, but the banks are arguably 
twice as well capitalized, well maybe not by these standards, 
but let's put it this way, twice as much cash in the 
institutions and yet under-capitalized as we continue to apply 
this standard. And that is the conundrum I guess we are in.
    And to go back to my other point about the 1990's, in 
retrospect, had we had this standard, we would be in exactly 
this same cascading effect on the market today, right?
    Mr. Bailey. I think the thrift crisis of the late 1980's 
and early 1990's is very informative in this process. And I 
think one of the things that would serve to exacerbate the 
problem and frankly introduce more insidious moral hazard 
issues is when institutions are allowed to simply ignore their 
problems. I do not think anybody wants to do that.
    Mr. Royce. No, I do not either but you have the authority 
here, so I guess just to get back to a pointed question, why 
not use it?
    Mr. Bailey. We have used it. And I think when you look at 
what we have done in terms of those portions of GAAP that we 
have not reflected in our regulatory capital regime, I think we 
can provide you with additional information on that in writing. 
As an example, goodwill, which if recognized would introduce 
additional volatility, especially in today's market, is not 
reflected in capital. And, as I said, generally what we have 
tried to do is neutralize temporary fluctuations in valuations 
from regulatory capital. But, again, I think it is important 
for us to reflect permanent changes in a bank's valuation in 
capital, which we have. But, again, I think what we have 
strived to do throughout this process is eliminate those 
temporary fluctuations that would result in wild swings in bank 
capital ratios from the regulatory capital regime. And I think 
we had done that.
    Mr. Royce. Well, I think at the end of the day, if you see 
the banks with twice as much capital and afraid to loan because 
of the consequences of putting into motion the valuation and 
then the capital calls that the regulators put on the 
institutions and then the raids on the stock, I think you are 
kind of in a vicious circle here, which until it is addressed 
might lead us to the conclusion that maybe in 1938, the 
government was right to lift the rule.
    Mr. Bailey. Let me be clear, I think we certainly 
acknowledge that changes are needed in this broad sphere, 
especially as it relates to how banks need to value and reflect 
instruments that are clearly in an illiquid market with no 
observable pricing.
    Mr. Royce. Right, thank you, Mr. Bailey.
    Chairman Kanjorski. Thank you very much, Mr. Royce.
    Mr. Bachus. Mr. Chairman?
    Chairman Kanjorski. Yes?
    Mr. Bachus. Could I just, for the record, were you talking 
about Long Term Capital Management and the moral hazard that 
arose out of that and the Third World debt crisis?
    Mr. Bailey. Yes.
    Mr. Bachus. And that absolutely, I think, is part of what 
happened more recently.
    Chairman Kanjorski. Thank you very much, Mr. Bachus. And 
now we will hear from the gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman. I wanted to follow up 
on my comments, my opening comments, in case anybody might not 
have followed up on the concerns that Mr. Buffett raised on 
CNBC on Monday. But just prior to getting to that, could you 
clarify something for me? There is FAS 157, which is used, but 
there is also a FAS 114. There is some confusion as to the 
application of FAS 114, especially relative to our smaller 
community banks. In the process of treating FAS 157 as a 
standard, are we going to use FAS 114 and treat it in the same 
fashion that we are treating FAS 157? And if you could just 
briefly just answer that and explain to me the difference and 
why the smaller community banks are concerned about this? Why 
doesn't 157 float across all of them? And what is it about FAS 
114 that has a greater applicability to smaller banks?
    Mr. Herz. Thank you. FAS 114 deals with loan accounting and 
loan loss accounting. You make a loan, the loan is carried on a 
historical cost basis and then when there are probable losses, 
an allowance is created based upon probable losses, what are 
called incurred losses. It has nothing to do with fair value.
    FAS 115, they were both done together after the S&L crisis, 
deals with accounting for securities. And there are essentially 
three buckets: there is held to maturity, which is a cost 
subject to impairment; there is available for sale, which is 
fair value on the balance sheet but not in the income statement 
unless there is an impairment; and then there is a trading 
account, which is mark-to-market, what people refer to as mark-
to-market accounting.
    Mr. Scott. Okay.
    Mr. Herz. The issue, and I think Mr. Sherman got into that 
a little bit, is that you may have loans that become 
securitized into securities and there is a different accounting 
once you securitize them. You go into the 115 accounting rather 
than the 114 accounting. FAS 157 did not introduce any new fair 
value requirement at all. All it did was provide a definition 
and some guidance on how to do it and a lot more disclosures in 
the footnotes of where fair value is used and how it impacts 
the balance sheet and the earnings.
    Mr. Scott. Okay, well, I hope that that certainly clears it 
up for some of our smaller banks. Let me go back then to my 
original point in our conversation with Mr. Buffett, the two 
points were how do we deal with the problems that are 
associated with the efforts or the effects of the impairments 
that are taken on assets that are held to maturity?
    Mr. Kroeker. I have seen accounts of his remarks, and I 
think, as I have seen those accounts, obviously I cannot speak 
for Mr. Buffett, I think he was calling for suspension of mark-
to-market for regulatory capital purposes. As I have seen the 
accounts of the remarks, it was that assets--fair value may be 
good for purposes of general purposes.
    Mr. Scott. Yes, I think what his concern was he was saying 
should not regulators be required to have additional capital to 
be held against the write-downs.
    Let me ask you, loans held in the portfolio and the loans 
that make up a mortgage-backed security perform virtually the 
same for purposes of contractual cash flows and should be 
treated the same for accounting purposes. What are you going to 
do to clarify the valuation of mortgage-backed securities, 
particularly those that are held to maturity in illiquid and 
non-functioning markets as we have today?
    Mr. Kroeker. As we discussed earlier, this is one of the 
key recommendations in the SEC study on off-balance sheet. We 
expect to see action in a matter of weeks. Again, there was 
discussed a 3-week timeframe. We can certainly from our 
standpoint deal with a 3-week timeframe in providing additional 
guidance but much of that rests with Bob, as he has discussed.
    Mr. Scott. Okay. May I ask one final question, Mr. 
Chairman? One of you is the Comptroller General's Office 
represented here.
    Mr. Bailey. Comptroller of the Currency.
    Mr. Scott. Okay, Comptroller of the Currency. Well, Mr. 
Eugene Ludwig, a former Comptroller of the Currency, stated 
that, ``Perhaps the most dangerous aspect of mark-to-market 
rules is requiring the re-marking of other than temporary or 
impaired investments. The impairments are severely driving down 
the values of held to maturity assets. Accounting rules should 
not become a market factor and application of the OTTI has 
become such.'' My question is what are you doing to control 
this?
    Mr. Bailey. I agree with Gene Ludwig's position on that. 
And, again, as it relates to the issue we have talked about 
during this hearing, and frankly probably in each of our 
written statements, is again how do you treat OTTI? And, again, 
I think we have seen, and has been demonstrated very compelling 
stories about significant cliff effects associated with 
valuation issues once an instrument is impaired and then must 
be fair valued. And I think that what that gets to is the issue 
we have talked about today is whether in fact you can 
differentiate within that impairment the credit portion and 
non-credit portion. And if in fact you only put the credit 
portion through earnings, and therefore capital, it would have 
a significant less volatile effect. And I think we have all 
acknowledged that there are operational challenges associated 
with differentiating between credit and non-credit impairment. 
But, frankly, since it is such a focus of the issue and a focus 
of the comments, I think it is incumbent upon us to see if we 
can work through those issues. To me, that is the most 
significant fair value challenge for community banks.
    Mr. Scott. Okay. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Scott. And 
now, Mr. Grayson.
    Mr. Grayson. Thank you, Mr. Chairman. Gentlemen, there 
seems to be a clamoring for changing the mark-to-market rules 
that seems to come largely from institutions that may be 
insolvent, and that is the pattern that I am seeing. And I am 
wondering if we should try to apply this to other situations in 
everyday life. I will give you two examples, if you want. I am 
6'4.'' It is pretty uncomfortable for me to sit in airplane 
seats, and sometimes, to be honest, I bump my head when I am 
going through a tight door passage. I am wondering if we should 
eliminate mark-to-market rules and also make inches larger so 
that I would only be 5'8.''
    We have a lot of traffic on the Beltway, I got a suggestion 
from Freddie Mac recently that if we could just change the 
ratio of circumference to diameter, pi, if we could just change 
that ratio, that would move the beltway further away. So 
Freddie Mac says to me that it wants to eliminate mark-to-
market rules and increase pi to four to alleviate the beltway 
traffic.
    I got another suggestion from AIG. The suggestion is that 
since the Wizards loss to New Orleans this week by a score of 
109 to 98, they want to eliminate the mark-to-market rules, and 
they also want to make sure that 98 is more than 109 in the 
future so that the Wizards will have won that game.
    Gentlemen, does it make any sense to kill the messenger 
when mark-to-market tells you that an institution is insolvent? 
Let's start with Mr. Kroeker?
    Mr. Kroeker. We do not recommend suspension of fair value, 
and so to your direct question, no. But there are issues that 
in our study we think warrant improvement, including the 
operation of the determination of fair value as well as how to 
calculate and report other than temporary impairments. But as 
it relates to the score keeping, if you will, we do not 
recommend the suspension of fair value.
    Mr. Grayson. But isn't that really the heart of the matter, 
isn't it the heart of the matter that people not only want to 
change the rules in the middle of the game, but they want to 
change the rules and the game is already over? Mr. Herz?
    Mr. Herz. I do not know whether the game is over or not, I 
am just a humble accounting standard setter, but I will observe 
a couple of things to that point. The bank stocks continue to 
trade well below their accounting book value. A majority of the 
bank stocks are well below their accounting book value. The 
acquisitions you saw of I think it was National City by PNC and 
Wachovia by Wells Fargo, the prices paid by the acquiring banks 
for the acquired banks was like 30 percent of the recorded book 
value. So if the write-offs are excessive, one would have 
expected not to have that kind of thing. I think some of the 
mark-to-market write-offs may be a little bit excessive but 
remember that the single largest financial asset of most of the 
banks, once you get past the money center banks, are loans and 
loans are carried on a cost basis that does not timely reflect 
the problems that may underlie, the allowance for loan losses 
lags the problems.
    Mr. Grayson. So let's be clear about this, Mr. Herz, what 
you are saying is that the stock market in its infinite wisdom 
is telling us not that mark-to-market rules have made companies 
mark down their book values too much but maybe the accounting 
rules have made them not mark down their book values enough, is 
that what the stock market is telling us right now?
    Mr. Herz. Yes, I think there are two--I think that is 
right, I think there are two aspects to that: One, is that 
there is skepticism, A, over the loans; and, B, there is 
skepticism as to whether or not the OTTI write-offs have yet 
been taken because there is this kind of dam effect and people 
kind of--you get like a year, sometimes more, it has to really 
have been a sustained downward value for a long period of time. 
And so when the problems started to surface in September of 
2007 or August of 2007, the write-downs only really started 
really in the third quarter of 2008, year end, still because 
you get this grace period. There is a cushion.
    Mr. Grayson. So what you are suggesting, Mr. Herz, is that 
there may be institutions that are insolvent, and they have not 
been forced to write down their books to point yet and those 
are maybe the same institutions that are asking us to modify 
the mark-to-market rules so that they will not have to admit 
that they are bankrupt, is that correct?
    Mr. Herz. I share your point of view, and I will tell you 
that I get calls and visits from some of those institutions 
that are now in government hands, usually about 2 weeks before 
they get taken over, trying to get the accounting changed.
    Mr. Grayson. Sorry, would you explain that a little 
further? And then my time is up.
    Mr. Herz. Well, a lot of the people who have been the 
loudest complainers, and there are valid issues and we are 
going to address them, so there are some real valid issues, and 
we are going to try to address them and give better guidance 
and that, but clearly some of the most vocal opponents of fair 
value and mark-to-market have been some of those institutions 
that subsequently failed.
    Mr. Grayson. Thank you.
    Mr. Herz. And they have had to have billions of taxpayer 
dollars put into them.
    Mr. Grayson. Thank you all, and thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Grayson. Well, 
I think we may have hit a spot where we can give some relief to 
this panel and give a little time to the next panel so they can 
adjust their lives accordingly. The situation is that we are 
going to have a series of votes in just a few minutes that will 
probably take up to 1 hour to clear. So when I dismiss this 
panel, we will not seat the next panel until approximately 2:15 
p.m..
    In the meantime, before I dismiss this panel, I just wanted 
to say that we took very seriously the comments today in regard 
to a commitment very seriously to work on the next 3 weeks and 
get that work done expeditiously, I hope as soon as we leave 
here today. And that in order to help that along, and to ensure 
that we can keep tabs that it is occurring, that when the 
Congress returns from the Easter Passover work period, we will 
convene a new hearing of this subcommittee to specifically get 
a report on the success of the progress that was indicated 
today. And that will put a heavy burden on the three panelists 
and their respective organizations, but by that time, if 
satisfactory work has not been reported to the committee before 
the convening of that next session, we will be working on the 
legislation that we will be able to move through the House 
expeditiously to cure the problem. I look forward that it will 
not have to be happening. I look forward to your assistance in 
that. And if there is anything we can do, as the chairman 
originally indicated and several other members of the 
committee, if you need anything, please feel free that you 
communicate directly and immediately. And we have a new gadget 
up here in Washington called the telephone, so it does not 
necessitate a letter, it does not necessitate anything else. We 
can be talking instantaneously, and we are available to do 
that.
    And with that in mind, I thank this panel. You certainly 
have endured a lot of, shall we say, subtle criticism, and not 
too subtle, I suspect. But we look forward to working with you. 
We thank you for your attention to this, I guess particularly 
Mr. Kroeker and Mr. Herz you took the brunt of our session 
today, but we are waiting for you, Mr. Bailey, if you are not 
successful, if you do not put this together and we get a bad 
report back, we will give you equal treatment next time. So 
thank you very much for being a lively first panel, and to the 
second panel, we will convene at 2:15 p.m.
    [recess]
    Chairman Kanjorski. First of all, I want to thank the panel 
for being so courteous toward us to wait over to this hour. We 
will try and move it along as quickly as possible. We have sent 
all the whips out to alert the members to get over here or 
suffer penalty of death and that is possible. We have your 
written statements that will be made a part of the record. You 
each will be recognized for a 5-minute summary of your 
testimony. And, as you may have gathered, I am a little on the 
lenient side but sometimes at this hour of the day, even my 
patience gets tried and I get to be nasty. So if I whip you 
down, I will apologize ahead of time, but I will still whip you 
down.
    First, we are going to have Mr. Jeff Mahoney, general 
counsel of the Council of Institutional Investors. Mr. Mahoney?

 STATEMENT OF JEFFREY P. MAHONEY, GENERAL COUNSEL, COUNCIL OF 
                    INSTITUTIONAL INVESTORS

    Mr. Mahoney. Chairman Kanjorski and members of the 
subcommittee, good afternoon. I am Jeff Mahoney, general 
counsel of the Council of Institutional Investors. It is a real 
honor for me to appear before you today on behalf of the 
Council. I have brief prepared remarks and would respectfully 
request that the full text of my statement and all supporting 
materials be entered into the public record.
    The Council is a not-for-profit association of more than 
130 public, corporate, and labor pension funds with assets 
exceeding $3 trillion. Our members are obviously quite diverse 
and include the Pennsylvania State Employees' Retirement 
System, Johnson & Johnson Corporation, and the IUE-CWA Union 
Pension Fund.
    Council members are generally long-term shareowners, 
responsible for safeguarding assets used to fund the pension 
benefits of millions of participants and beneficiaries 
throughout the country. Since the average Council member 
invests approximately 60 percent of its entire pension 
portfolio in U.S. stocks and bonds, issues relating to U.S. 
corporate governance, including issues relating to financial 
accounting and reporting, are of great interest to our members.
    As an initial matter, the Council's policies reflect our 
members' views that:
    First, the goal of financial accounting and reporting and 
accounting standard setters should be to satisfy the 
information needs of investors, the key consumers of financial 
reports.
    And, second, the needs of investors are most likely to be 
met if the responsibility to promulgate accounting standards 
resides with an independent private sector organization that 
employs a thorough public due process that actively solicits 
and gives preeminence to the views of investors.
    Although we believe that the current U.S. accounting 
standard setting structure and process can, and should be, 
further improved, we would strongly oppose any legislative or 
regulatory effort that would diminish the independence of 
accounting standard setting and provide certain industries with 
direct or indirect control over the outcome of that process. In 
our opinion, we must avoid changes to the accounting standard 
setting that may cater to the short term self-interests of a 
particular industry to the detriment of the short- and long-
term interests of investors and other market participants.
    Second, we generally agree with the findings of the United 
States Securities and Exchange Commission's recent report and 
recommendations to Congress that have been discussed earlier 
today. More specifically, we agree with the Commission's 
findings that existing fair value accounting standards for 
financial instruments, if properly applied, increase the 
quality of information provided to investors about those 
contracts by better reflecting the current economic reality.
    We note that the Commission's findings are generally 
supported by a July 2008 Council-commissioned White Paper 
entitled, ``Fair Value Accounting: Understanding the Issues 
Raised by the Credit Crunch.'' That White Paper is included as 
an attachment to the full text of my testimony for your 
information and review.
    Consistent with the Commission's findings, the White Paper 
concludes that because of its timeliness and relevance, fair 
value accounting reduces uncertainty over time much more 
quickly than other existing accounting measurement approaches. 
As a result, fair value accounting has the ability to assist in 
actually mitigating the duration of a financial crisis. Many 
financial experts agree that Japan's failure to embrace fair 
value accounting for the financial assets of its troubled 
financial institutions back in the 1990's unnecessarily 
exacerbated that country's economic woes for an entire decade.
    Finally, we believe that the most appropriate approach to 
addressing concerns about the procyclical effects of fair value 
accounting is not to change the accounting standards that 
provide information to investors but instead to encourage the 
U.S. financial institution regulators to exercise their 
authority, which Mr. Bailey said today that they do have, and 
which they have done on a number of occasions in the past, to 
modify, if they deem necessary, fair value accounting or other 
accounting principles for regulatory capital purposes. That 
approach allows the regulators to appropriately address their 
responsibilities to foster safety and soundness and financial 
stability of U.S. financial institutions without further 
lowering investor confidence by denying investors the 
information they need to make economic decisions.
    Mr. Chairman, when I receive my quarterly 401(k) statement, 
I see current economic reality. Those who invest in U.S. 
financial institutions, and other U.S. companies, deserve to 
see the same economic reality. Fair value accounting for 
financial instruments gets investors closer to that goal.
    In closing, we look forward to continuing to work 
cooperatively with the Financial Accounting Standards Board, 
the Securities and Exchange Commission, this subcommittee, and 
all other interested parties to further improve financial 
accounting and reporting. Our aim is always to provide 
constructive input and support to ensure that financial 
reporting continues to evolve to better serve the needs and 
demands of U.S. investors, the U.S. capital markets, and the 
U.S. economy.
    Thank you, Mr. Chairman, for inviting me to participate at 
this hearing, and I look forward to responding to your 
questions.
    [The prepared statement of Mr. Mahoney can be found on page 
220 of the appendix.]
    Chairman Kanjorski. Thank you, Mr. Mahoney. I did not want 
to miss that. Next, we will have Ms. Cindy Fornelli, executive 
director of the Center for Audit Quality.
    Ms. Fornelli?

 STATEMENT OF CYNTHIA FORNELLI, EXECUTIVE DIRECTOR, CENTER FOR 
                         AUDIT QUALITY

    Ms. Fornelli. Thank you, and good afternoon, Chairman 
Kanjorski and members of the subcommittee. I am Cindy Fornelli, 
the executive director of the Center for Audit Quality. And you 
have my written testimony, so what I would like to do this 
afternoon is reiterate three critical points that have already 
been made this afternoon--that were made this morning, which I 
suppose is a hazard of being on the second panel.
    First of all, for over 30 years, fair value accounting has 
contributed to increased transparency in financial reporting. 
Fair value's application has room for improvement but, as the 
recently congressionally-mandated SEC study confirms, loan 
losses and runs on the bank caused the current financial 
crisis, not fair value accounting. Therefore, suspending fair 
value accounting will not fix the problem and, as the SEC also 
noted, could further erode investor confidence. Thus far, 
Congress, regulators and standard setters wisely have resisted 
pressure to abandon the basic principles of fair value 
accounting, which is to provide current financial information 
to investors. To suddenly stop reporting current values, 
especially in a time of crisis, could make matters worse by 
adding uncertainty to investors.
    Second, the challenges faced by financial institutions in 
meeting their capital requirements are critical and are 
legitimate policy issues for prudential regulators, but dealing 
with capital adequacy concerns by suspending or significantly 
altering fair value accounting would only serve to obscure 
current realities, further undermine investor confidence, and 
prolong the current crisis. Investors need to know the current 
values of loans and securities in order to make rational 
investment decisions. Regulators need to know the current 
values of loans and securities in order to make rational policy 
decisions.
    The application of fair value standards can and should be 
improved and as quickly as possible. However, as we heard this 
morning from Deputy Comptroller Bailey, banking regulators have 
the authority to determine whether or how current valuations 
affect capital requirements and make adjustments accordingly. 
While accounting standard setters need to improve the 
application of their standards, prudential regulators should 
consider improving application of their capital requirements.
    Third, while we vigorously support the continued use of 
fair value measurements, we believe there are ways to improve 
the application of those measurements. The Center for Audit 
Quality put forward a number of specific recommendations in its 
November comment letter to the SEC during the SEC's fair value 
study, including: number one, how to value an asset in a time 
of changing, disrupted or illiquid market conditions, such as 
we have now; number two, how fair value measurements might 
differ for different types of assets and liabilities under 
various market conditions; number three, how to achieve clear 
and more transparent disclosures about the assumptions and 
methods applied in the fair value measurement process, as well 
as the conditions present in a particular market; and, number 
four, how companies recognize periodic changes related to 
credit losses versus other types of losses in income in their 
financial statements to address the temporary impairment issue 
that was discussed at length this morning.
    Recognition of non-credit-related investment losses, 
outside of income, would help address assertions that fair 
value accounting forces institutions to use overly pessimistic 
market prices to value their assets and liabilities.
    The CAQ and the audit profession stand ready to assist in 
the application of these improvements once they are in place. 
The bottom line is we all want swift and meaningful action to 
address the current crisis, but as we respond to the crisis, we 
should remain true to fundamental market principles. Investor 
confidence and the reliability and transparency of financial 
reporting is critical to our financial system's long-term 
wellbeing. We must pursue only those solutions that do not put 
that confidence at risk, and there are such solutions on the 
table, as we discussed this morning.
    Thank you for the opportunity to share my views, and I am 
happy to answer questions.
    [The prepared statement of Ms. Fornelli can be found on 
page 131 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Fornelli. 
Next, we will have Mr. Thomas Bailey, chairman of the 
Pennsylvania Association of Community Bankers and president and 
CEO of Brentwood Bank.
    Mr. Bailey?

STATEMENT OF THOMAS BAILEY, CHAIRMAN, PENNSYLVANIA ASSOCIATION 
    OF COMMUNITY BANKERS, AND PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, BRENTWOOD BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY 
                       BANKERS OF AMERICA

    Mr. Bailey. Thank you, Chairman Kanjorski, Ranking Member 
Garrett, and members of the subcommittee. I appreciate the 
opportunity to provide a community banker's perspective on the 
current application of mark-to-market accounting. I am chairman 
of the Pennsylvania Association of Community Bankers and also 
testifying today on behalf of the Independent Community Bankers 
of America.
    Chairman Kanjorski, PACB and ICBA salute your leadership in 
calling this important hearing. These rules are exacerbating 
the financial crisis. As president and CEO of Brentwood Bank, a 
$450 million asset bank serving the South Hills of Pittsburgh, 
I can tell you about the impact that these accounting rules are 
having on my marketplace. Through the 9 months ended December 
31, 2008, Brentwood Bank has granted $64 million in business 
loans, mortgages, and consumer loans, while continuing to 
maintain a delinquent loan/asset ratio of less than one quarter 
of one percent.
    Brentwood Bank has taken approximately a $2 million OTTI 
charge, which represents a lost opportunity to finance $20 
million in loans based on a 10 percent equity requirement. This 
represents 30 percent of the loans we have made in the past 9 
months.
    The application of mark-to-market is frozen markets and is 
the heart of the problem. When these rules were developed, this 
unprecedented situation could not have been imagined. FASB has 
not taken action and the problem is getting worse. While total 
suspension of mark-to-market accounting is appealing, we know 
that there are many concerns about how the capital markets may 
respond, which is why we offer an alternative approach which 
conforms with existing accounting rules.
    PACB and ICBA support transparency of financial statements. 
Current mark-to-market accounting rules hinder transparency and 
distort the true condition of financial institutions holding 
mortgage-backed securities, particularly private label 
securities and other debt securities.
    Fair value applications in an illiquid market result in a 
disproportionately greater write-down than anticipated credit 
or economic losses. Here is a real life example, which can be 
found on page 3 of my statement. An institution holding private 
label mortgage-backed securities with initial carrying value of 
$125 million is represented in bar graph one. An analysis of 
future cash flow concludes the securities would suffer a future 
loss of about $16.7 million in a rigorous process described in 
my written statement. However, when fair value is developed in 
today's illiquid market, that institution had to take a $58.9 
million charge, over 3 times as much as the true economic loss.
    What we heard this morning will not help this situation. 
The January guidance did not solve the problem. While this is 
only one example, there are over $400 billion of other 
securities held by the Nation's insured financial institutions 
that could meet a similar fate. These statistics do not include 
debt securities held in other large financial services 
businesses, such as the insurance industry.
    Financial institutions are concerned about the procyclical 
nature of mark-to-market standards in the current environment. 
They are extremely hesitant to risk purchasing assets that 
could result in future material write-downs if an impaired 
credit loss may occur. Thus, mark-to-market creates a self-
fulfilling downward spiral for the prices of MBS, other asset-
backed and debt securities.
    OTTI rules raise the specter of future write-downs that 
could further weaken capital positions. This could contribute 
to the hoarding of capital at many banks. This prudent reaction 
to guard against future accounting-driven losses likely 
inhibits the flow of badly needed credit. OTTI rules also have 
inadvertently thwarted the government's extraordinary efforts 
to replenish the financial industry's capital. This is a paper 
loss and does not reflect economic reality.
    We do not believe Congress should write accounting 
standards; however, continued application of this accounting 
standard based on valuation derived from a dysfunctional market 
only serve to compound the current systemic risk. Therefore, we 
propose Congress must hold FASB accountable and ask the SEC and 
FASB to apply existing accounting rules that apply to loans 
held in portfolio to asset-backed and other securities. The 
determination of whether OTTI exists, as well as the magnitude 
of the loss recorded, should be based on rigorous credit 
analysis appropriate to the characteristics of the security. 
This change would not hinder transparency and would actually 
improve comparability and consistency. Our proposal is similar 
to international accounting standards' rules that apply, FAS 5 
and FAS 114, like treatment of OTTI, of MBS and permit the 
recognition of future gains against recorded OTTI losses.
    Mr. Chairman, this hearing and the recent legislation 
introduced by your colleague, Representative Perlmutter, are 
crucial steps in breaking the logjam associated with mark-to-
market. All of the subcommittee members must be publicly 
commended. I stand ready to answer any questions.
    [The prepared statement of Mr. Bailey can be found on page 
112 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Bailey. And 
next we will hear from Mr. Lee Cotton, past president of the 
Commercial Mortgage Securities Association.
    Mr. Cotton?

 STATEMENT OF LEE COTTON, PAST PRESIDENT, COMMERCIAL MORTGAGE 
                     SECURITIES ASSOCIATION

    Mr. Cotton. Good morning or good afternoon. We did start 
this morning. We would like to thank you and Representative 
Garrett for having us today and for your leadership in this 
process. As you said, I am Lee Cotton and I am the past 
president of the Commercial Mortgage Securities Association.
    CSMA, as we are called, represents all the players in the 
commercial mortgage securities business, from issuers to 
servicers to people who underwrite loans to people who sell 
loans. It is a broad consortium of folks. These participants 
have come together over the last 15 years to try to create a 
very transparent market and in that regard we are proud of the 
investor reporting package that we have put together, which 
provides clear, concise data on all of the securities that have 
been issued. To that end, you can go find a mortgage in your 
districts and you can understand what is going on in that 
mortgage.
    From that point of view, what we are very worried about is 
the application of fair value accounting. By ``application,'' I 
mean the practical application. We urge you, as we saw you do 
this morning, to address this issue, particularly with FASB.
    Today, as you well know, there is no market for commercial 
mortgages, the same as Mr. Bailey's problem. No investors are 
buying securities, which provides no liquidity to the market. 
It is not purely an issue of the banks or regulated banks, it 
is an issue of investors' willingness to buy securities backed 
by commercial mortgages.
    In 2007, over $240 billion in CMBS was issued. In 2008, $13 
billion. And then for the last 9 months, zero. As we approach 
the next 18 months with billions of dollars, hundreds of 
billions of dollars of commercial mortgages coming do, there is 
really at this point no source for those.
    As Treasury Secretary Geithner said, ``No economic recovery 
plan will be successful until it re-starts the securitization 
markets.'' We believe that these rules as applied are going to 
help re-start that market.
    I do have one concern with FASB and that is they are 
seriously considering abandoning the vehicle through with 
securitization can be done, through FAS 140 and FIN 46. That 
would be taking away with one hand what you are so hard are 
getting back in the other.
    The issue this morning that was discussed about procyclical 
activity is the one that I think we can focus on for a minute 
and then we will talk about our recommendations. If an asset is 
sold, and a discussion was held earlier this morning about a 
willing seller/willing buyer, there are buyers who are forced 
to sell because they have been marked. When that sale takes 
place, then there is a cash transaction that you can hang your 
hat on and the pricing has been established, but that seller 
was not necessarily a willing seller, he or she was in a 
position, they had to sell by virtue of being marked down. And 
that marked-down position crystallizes a loss, which then 
further exacerbates as it works through the system. That is the 
problem I think that we all here have.
    We are not against fair value accounting. We are not 
against transparency. As an organization, as I said before, we 
have worked very hard to create transparency. But as it is 
interpreted today and applied, it falls very, very short in 
non-functioning or illiquid markets, and that is the concern 
that we have. The guidance that you all asked for this morning 
from FASB and from the others in the panel this morning will be 
very, very helpful to our industry and other financial 
industries as they approach this issue.
    CMBS as a whole has had a very, very strong function and a 
default history, less than 50 basis points of defaults for the 
last 2 or 3 years, we are now all the way up to 125 basis 
points. There is no question that will increase, but it does 
not increase to the level that the pricing in the marketplace 
is presently showing us. The issue is really how you set the 
price and how you set the price can be done with hard work, 
credit work, credit analysis, understand the cash flows 
available and the assets and come to a conclusion, not just go 
ask for three bids from three bidders who are unwilling to own 
those assets and then assume that that is the value. And I 
heard this morning FASB say that these are these procedures 
that you can go through, and the third one is to go and do the 
hard work, but the accountants have not yet gotten to the hard 
work part.
    I am getting a sum-up sign, so I am going to speed up.
    We are urging clear and strong guidance, as I have said. 
That guidance needs to give, or as someone said this morning 
``empower'' the accountants to be able to go to the third level 
and actually do the credit work, actually understand the 
assets, understand the loans below the securities. The guidance 
needs to be clear and specific in the non-functioning markets. 
Define what a non-functioning market is and then help the 
accountants do their jobs. We are not picking on the 
accountants but help them do their job.
    And, finally, the policymakers must recognize the 
difference, as was discussed earlier today, of impairment 
caused by credit, true losses taken, and impairment caused by 
the market dysfunction and the volatility and the illiquidity 
in the marketplace. We are not opposed to fair value. We 
believe that on paper it works terrifically but in practice, 
particularly today in an illiquid market, it is very, very 
difficult to undertake. Until these issues are addressed, we 
think there will be a frozen credit market in the markets that 
I represent, which is commercial mortgages and other markets as 
well.
    I thank you for your time, and I am willing to take 
questions.
    [The prepared statement of Mr. Cotton can be found on page 
125 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Cotton. And 
next, we will hear from Ms. Tanya Beder, chairman of the SBCC 
Group.
    Ms. Beder?

       STATEMENT OF TANYA S. BEDER, CHAIRMAN, SBCC GROUP

    Ms. Beder. Chairman Kanjorski, Ranking Member Garrett, and 
members of the subcommittee, thank you for inviting me to 
testify today. My name is Tanya Beder. I am chairman of SBCC 
Group. We are an independent advisory firm. We assist firms who 
are bleeding money, and we help firms to seize opportunities in 
the market as well. The firm was founded in 1987, and has a 
broad array of clients. In the current crisis, we have advised 
on multi-billion dollar liquidity runs, on hundreds of billions 
of dollars worth of CDOs and for numerous people who are 
experiencing problems in the current market.
    This is a period of significant global recession and 
prolonged mayhem in the market. In fact, if there is a light at 
the end of the tunnel, it may well be an oncoming train.
    An important aspect of the financial health of this Nation 
is the quality and the integrity of financial information, and 
I applaud this committee's focus on this important topic of 
mark-to-market. I would like to submit my written testimony for 
the record and now summarize my testimony with the following 
statement.
    Mark-to-market accounting should not be thrown out. In 
normal markets, unless there is manipulation, mark-to-market 
represents fair value well. However, in distressed markets 
where only fire sales are taking place and in over-fueled 
markets, often mark-to-market is based only upon one price. In 
such markets, marking to an independent third-party model may 
be a better approximation for fair value.
    I have four recommendations for the subcommittee's 
consideration:
    The first is that the committee should encourage standard 
setters and regulators to provide users with urgent help to 
distinguish between going concern and liquidation valuation in 
an illiquid market. Do not abandon mark-to-market but allow for 
additional measures, such as mark-to-model from independent 
sources. Additional disclosures should be made so that it is 
clear when different approaches are employed.
    We should also distinguish in over-heated markets when 
different approaches are taken. Remember in just about every 
financial disaster we have had, and certainly all of those that 
I have assisted firms with, profits typically precede losses, 
and there were numerous profits in the CDO space and in the 
credit default swap space, among other credit-linked areas 
before we got into these problems.
    The second recommendation is that there should be a more 
flexible approach to defining fair value. None of the single 
measures are the best choice across super-heated, normal, or 
distressed market conditions. The subcommittee should promote 
more supervisory activity and provide the necessary tools to 
the supervisors, both analytic and monetary tools, to keep up 
with the firms they supervise. I would note that in most cases 
this does not mean more regulation but more effective 
regulation. However, in a few cases, and in particular I would 
highlight the work I did in Orange County and Florida's local 
government investment pool, the unregulated investment pools 
could stand additional oversight.
    My third recommendation is to encourage the standard 
setters and the regulators to implement multiple measures and 
to promote their collective value. A prominent feature of the 
gains and losses in the current market, both on the way up and 
on the way down, was tremendous oversimplification.
    The final recommendation is to reduce the procyclical 
impact of the current approach, and I do believe it is quite 
procyclical. It is not just a question of the mark-to-market 
accounting, I also believe it is heavily fueled by the fact 
that everyone uses the same accounting approach. We saw during 
the Long Term Capital Management problems that numerous people 
doing the same things create a herding effect and a common 
reaction. If the same accounting is used for all firms, we also 
risk a situation where reactions are exactly the same, both in 
heavily fueled markets and in markets that are in trouble.
    I will close by saying that one of the things that came up 
this morning is how do you do this in 3 weeks, which is the 
deadline that was tossed out. I add an endnote that one of the 
things that makes it very difficult for firms to operate 
quickly are perceived liability issues that surround mark-to-
market. If firms are forced without addressing that issue to 
pick a price to put on instruments, a safe price may be 3 cents 
because a firm may then only be sued for 3 cents. This needs to 
be in the forefront alongside of the need to address things in 
a speedy fashion.
    Thank you very much, and I look forward to your questions.
    [The prepared statement of Ms. Beder can be found on page 
120 of the appendix.]
    Mr. Perlmutter. [presiding] Thank you very much, Ms. Beder.
    Now, we will hear from Robert McTeer, a distinguished 
fellow from the National Center for Policy Analysis for 5 
minutes. Thank you, sir.

  STATEMENT OF ROBERT D. McTEER, Ph.D., DISTINGUISHED FELLOW, 
              NATIONAL CENTER FOR POLICY ANALYSIS

    Mr. McTeer. When I moved to Texas in 1991 to become 
president of the Federal Reserve Bank there, someone gave me a 
little book of Texas wisdom entitled, ``Don't Squat With Your 
Spurs On,'' and one of the most useful jewels out of that book 
has turned out to be, ``No matter who says what, if it don't 
make sense, don't believe it.'' Well, what has been going on 
with mark-to-market accounting just doesn't make sense to me.
    Much of our recent wealth destruction resulted from slavish 
adherence to an accounting dogma that never should have been 
applied to banks and other regulated financial intermediaries 
in the first place. Thousands of banks, thrifts, insurance 
companies, and credit unions, who had absolutely nothing to do 
with making or securitizing subprime loans, are victims, not 
villains. They invested in mortgage-backed securities because 
they thought they were safe and liquid, as indicated by their 
triple A rating. When subprime mortgages in the pools began 
defaulting at a high rate, the market for the bonds dried up. 
Yet, the rigid application of mark-to-market rules, enforced by 
regulators and gun-shy internal and external auditors, forced 
drastic write-downs even when their owners were both willing 
and able to hold the securities until the market improved or 
even hold them to maturity if necessary.
    Even though the bonds were not traded, most of the 
underlying mortgages were still generating income and still 
are. The larger tragedy not from the write-downs per se but 
from the resulting decline, dollar for dollar, in regulatory 
capital. Hypothetical or potential losses in securities result 
in actual or real losses of capital if the securities were in 
an account labeled, ``Securities for Sale'' rather than 
``Securities Held to Maturity.'' It would be a simple matter to 
change the labels but contrary to what I heard this morning, I 
am told that the accounting rules do not allow it. Fixing that 
would be an easy interim step.
    A closely related question is whether the impairment in 
individual mortgages is classified as ``temporary'' or ``other 
than temporary,'' in which case they must be written off. Logic 
would suggest at least that any excess of capital written off 
that way could be added back to capital or accreted if the 
original judgment is proved too pessimistic. It is my 
understanding that most of the regulators concur with this but 
are hesitant to allow it because it has to be reported back to 
the Congress if they do. Reassurance on that score from you 
would be helpful. They do have the authority I am told, the 
just need a nudge.
    I have heard it said that mark-to-market was considered 
fine for banks until the market turned against them. This is 
not entirely true. Chairman Greenspan wrote a 4-page single-
spaced letter to the SEC urging them not to apply mark-to-
market to commercial banks because their business model is that 
of a trader but involved holding assets on their balance sheet. 
His letter is dated November 1, 1990. A little later, in 1992, 
Treasury Secretary Brady wrote a similar letter to the SEC, and 
in 1992, so did the Chairman of the FDIC. Now, we fast forward 
to 2009 when Paul Volcker, speaking as chairman of the Group 30 
Experts, released the results of their study of the financial 
crisis. His recommendation number 12 says, ``(a) Fair value 
accounting principles and standards should be re-evaluated with 
a view to developing more realistic guidelines for dealing with 
less liquid instruments in distressed markets; and (b) the 
tension between business purposes served by regulated financial 
institutions that intermediate credit and liquidity risks and 
the interest of investors and creditors should be resolved by 
the development of principle-based standards that better 
reflect the business model of these institutions.''
    If a mortgage pool collateralizing a security becomes 
impaired, the negative impact is multiplied. For example, if a 
bank buys a bond with 1,000 underlying mortgages, and a few of 
these mortgages become other than temporarily impaired, the 
bank has to write-down and lose regulatory capital on the whole 
bond, not just on the impaired mortgages. And I believe one of 
you cited this morning the example of the Home Loan Bank of 
Seattle, which expects ultimately to have a $12 million loss on 
a portfolio that it was required to write down by $304 million. 
Now, you cannot unscramble an egg but if the bank that had the 
1,000 mortgages on its books as a mortgage-backed security 
could have the same mortgages on its books individually, the 
write-downs could be much more modest.
    While the original markdowns may not be justified, they do 
tend to be self-fulfilling. The resulting loss of capital may 
attract increased supervisory attention, which perversely may 
lead to higher capital requirements just as capital is becoming 
scarce. The bank's worsened condition may bring higher FDIC 
deposit insurance premiums as well. Restrictions on growth may 
then follow so that the weakened banks cannot try to grow out 
of their problems. The motive here is to preserve and protect 
the insurance fund. The banks after being restricted in their 
accumulation of capital reserves during the good times have 
their requirements increased when they can afford it least. The 
FDIC, after having to keep its premiums low during the good 
times, has to raise them during the bad times. In the present 
case, an alternative needs to be found.
    This whole perverse, procyclical sequence of events started 
in my example with unnecessarily rigid application of mark-to-
market accounting.
    Mr. Perlmutter. Mr. McTeer, if you could wrap up.
    Mr. McTeer. Okay. Well, I will just say this, I started off 
with a little homily out of the book. Another one is, ``If you 
keep doing what you're doing, you'll keep getting what you're 
getting.''
    Thank you, sir.
    [The prepared statement of Mr. McTeer can be found on page 
304 of the appendix.]
    Mr. Perlmutter. Thank you, Mr. McTeer.
    And now our final panel member, the Honorable William 
Isaac, chairman of The Secura Group of LECG. Mr. Isaac, for 5 
minutes?

  STATEMENT OF THE HONORABLE WILLIAM M. ISAAC, CHAIRMAN, THE 
                      SECURA GROUP OF LECG

    Mr. Isaac. Thank you. I really want to commend the 
committee for this hearing, particularly this morning. I really 
enjoyed it; it is a ray of hope that somebody finally is 
focusing on these issues and trying to get FASB and the SEC to 
do something. I raised this issue about a year ago, and I have 
been on it ever since. And I am just appalled that we have 
spent $700 billion of TARP money, the FDIC is asking for 
another $500 billion. We are taking all this taxpayer money 
when the SEC and FASB are sitting on their hands not addressing 
a very fundamental problem in this banking crisis, and I am 
incensed and I am glad you are. I felt better this morning than 
I have felt for a year just watching this committee do its 
work, and I congratulate you. And I hope you hold their feet to 
the fire. I hope on April 1st if they have not gotten this 
thing fixed, that you will do what you have promised to do, 
that you will legislate issue because they just have been 
terribly negligent and arrogant not to deal with this issue. If 
I am sound angry, it is because I am. I am very angry.
    I was chairman of the FDIC in the banking crisis in the 
1980's, and I can tell you that it was a far more severe 
banking and economic problem than we started out with here. 
Now, we are approaching that one, but it did not start out that 
way, it did not need to be that way. The mark-to-market 
accounting is a very, very serious problem. In the 1980's, we 
had a 21.5 prime rate. We had a severe recession with the 
unemployment rate reaching the neighborhood of 11 percent. We 
had massive insolvencies in the third industries, the S&L's and 
the savings banks. We had money center banks that were loaded 
with to their gills with Third World debt. We could have marked 
all of those to insolvency if we had wanted to play by today's 
rules, we would have, and we would have created a depression in 
a crisis, we would not be sitting here talking today because we 
would probably still be in the recession or the depression. We 
had real estate problems all of the country. We had major 
banks, Continental Illinois, the Nation's 7th largest bank went 
down. We had regional banks all over the country, including 9 
of the 10 largest banks in Texas fail. There was not any 
forbearance back there. We did not have to deal with mark-to-
market accounting. We tried to clean up the problems in an 
orderly way, but we had handled 3,000 bank failures.
    And I hear my colleagues down at the other of the table 
talking about Japan. Japan is totally irrelevant. They did not 
have fair value accounting to apply. They did not ignore fair 
value accounting; they did not have it. And the United States 
did not have it in the 1980's. We did not need it. We dealt 
with our problems, Japan did not, but fair value is not a part 
of that discussion. To say that we have had fair value 
accounting for 30 years is not the truth. We have not had fair 
value accounting for 30 years. We may have had some form of it 
on trading accounts but not the kind of fair value accounting 
that they have here.
    I want to talk about the fact that fair value accounting or 
I call it mark-to-market accounting but there is nothing fair 
about this accounting. It is bad accounting. But we have 
destroyed $500 billion of bank capital in the past year through 
this mark-to-market accounting. That is $5 trillion of lending 
capacity that has been crushed by FASB and the SEC. It has led 
to unemployment, and loss of homes by millions of people. The 
harm is just enormous.
    And it is not as if they went into this without warning. In 
1938, President Roosevelt and the Secretary of the Treasury and 
the bank regulators got rid of mark-to-market accounting 
because it was holding us in a downward spiral, we could not 
get out of the Depression and so they abolished it. In 1990, 
when the SEC started down this path of having mark-to-market 
accounting again, they were warned, as Bob said, by the 
Secretary of the Treasury, the Chairman of the FED, and the 
Chairman of the FDIC, do not do it, you are going to have major 
problems if you do. And I think that the Secretary of the 
Treasury was particularly prescient with his comment, it was 
Nicholas Brady and let me read it. This is a March 24, 1992, 
letter to the chairman of FASB. They did not pay any more 
attention back then than they do now. ``Mark-to-market could 
result in more intense and frequent credit crunches since a 
temporary dip in asset prices would result in immediate 
reductions in bank capital and an inevitable retrenchment in 
bank lending capacity. Finally, it is inappropriate to apply 
mark-to-market accounting to only a portion of a bank's balance 
sheet, as would the FASB proposal. This could exacerbate the 
public's perception of systemic instability even when the 
industry's underlying businesses are solid.''
    I came across this last night; I had forgotten about it. 
But I appeared on an FDIC panel in the banking crisis of the 
1980's and the lessons learned, this was in January 1977, I 
found this online--1997. Paul Volcker and I were both on this 
panel. They asked us about mark-to-market accounting, 1997, not 
in the context of today's crises, Paul Volcker said this: ``I 
think pushed to the extreme, mark-to-market is nonsense for a 
bank. The idea that we have to be so precise about mark-to-
market accounting for an institution that is supposed to liquid 
funds and transform it into something longer while we tolerate 
enormous uncertainties in accounting on other parts of the 
balance sheet, and in industry generally, does not make sense 
to me.''
    Here is what I said: ``If we had mark-to-market accounting 
back in that period, in the 1980's, and if we had wanted to, we 
could have closed every savings bank in the country at a cost 
to the FDIC of tens of billions of dollars.'' That is what the 
numbers were. We had documented it in the Savings Bank Task 
Force. So we could have shut them all down. Mark-to-market 
spent tens of billions of dollars. I say the social cost of 
that would have been inordinately high. I think doing 
everything by the numbers without discretion is a mistake. 
People keep on pushing for mark-to-market accounting, prompt 
corrective action and the like, and the next time we have an AG 
bank crisis or a savings bank crisis or a LDC debt crisis, I 
think we are going to regret that we have those laws on our 
books. I think it is going to tie the regulators' hands in a 
way that is going to precipitate a crisis that could otherwise 
be avoided.
    Do not let up on these guys, go after them. If April 1st 
comes, and they have not fixed this, then nail them, please.
    Thank you.
    [The prepared statement of Mr. Isaac can be found on page 
198 of the appendix.]
    Mr. Perlmutter. Thank you, Mr. Isaac. I will begin by 
asking a few questions, and I would start with you, sir. Today, 
what would you have this panel do other than hold those guys' 
feet to the fire, if we were to change the law today, what 
would you seek?
    Mr. Isaac. Enshrine yourselves for this hearing today. I 
think it is just fabulous. I really mean that. It is a ray of 
hope in a really dire economic situation. I am all for good 
accounting, and I want fair accounting, not the kind of fair 
accounting they want, the kind that just looks at a computer 
screen, which is where the prices are dictated by some short 
seller who thrives on chaos. I want somebody to go in and do 
some economic analysis on these assets and nobody is doing that 
now. I think the accountants need to get in there, roll up 
their sleeves, and start looking at the cash flows.
    Mr. Perlmutter. All right, but let me, I want to be the 
devil's advocate here. We listened to the SEC, FASB, one of the 
comments, sort of tangential comments was that the banking 
regulators have the discretion today. Why aren't they 
exercising some discretion to not just blindly apply a 
principle or a standard that does not seem to work in a 
disorderly market like we have today?
    Mr. Isaac. There is a lack of confidence in the system 
right now because nobody knows what is going on. All we know is 
short sellers and other speculators do not want to buy this 
stuff so they mark way it down and we say, ``Okay, that is the 
price.'' The banks say, ``No, it isn't. It really isn't the 
price.'' I have a chart in my testimony I do hope you will look 
at because it gives a really good example of what is going on. 
I think that if you have a bank announce that they have, let's 
say, a $30 billion, Gotham Bank announces a $30 billion mark-
to-market loss and they report that under the mark-to-market 
rules. And then the bank regulators come along and say, ``Well, 
okay, there is that loss but you really do not have to count it 
for bank capital purposes,'' I do not think we solved the 
problem. We still have people asking, what is the price, what 
is the right number? The regulators, the FASB and the SEC are 
saying there is a $30 billion loss, which there really is not, 
but the bank regulators are saying, ``Well, you do not have to 
count it. We will give you forbearance.'' And that does not 
give people confidence in our system. One thing you knew in the 
1980's is when the bank regulators came in and did an 
examination, that they were trying their best to mark the 
portfolio to its actual economic value. And that is what we 
have to restore, is we ought to be dealing with true economic 
value through accountants going in and doing their job and bank 
examiners going in and doing their jobs. It does not do any 
good to have FASB pretending that there is a $30 billion loss, 
there is not, and the regulators saying, ``Well, we are not 
going to honor your pretend numbers.'' That does not restore 
anyone's confidence.
    Mr. Perlmutter. Let me ask Ms. Fornelli, what would you 
have us do today? You have heard a lot of testimony today, you 
obviously have heard from us, and we are not happy about what 
is going on here because you are focused on investors, we have 
to focus on the broader field of depositors and taxpayers on 
top of that. So what would you have us do?
    Ms. Fornelli. I would have you do what I think you have 
heard the majority of your panelists--both this morning and 
this afternoon--say, and that is a two-pronged approach. One is 
on the regulatory capital side with the banking regulators, as 
Mr. Bailey outlined earlier this morning. And then the other is 
addressing these application problems with fair value 
accounting, both in the proposals that FASB talked about with 
how to better apply or give better guidance as to how to apply 
fair valuations in an illiquid or a highly distressed market. 
And also on the OTTI side, that we also heard about this 
morning, which I do not think is a current FASB proposal. So I 
think if you attack the problem from those two prongs, I think 
that that is what you should do. Push us to do those two 
things.
    Mr. Perlmutter. Does anybody else have a specific 
suggestion, and then I will turn the microphone over to the 
ranking member? Thank you all very much, and I will yield now 
to Mr. Garrett, oh, to Mr. Neugebauer?
    Mr. Neugebauer. Thank you, Mr. Chairman. I think as we go 
down this discussion that we have heard today, I think one of 
the thoughts that comes to my mind is it is like going to the 
doctor and the doctor says, ``You have cancer.'' And you go 
home and your wife says, ``Well, how was your doctor's 
appointment?'' I said, ``Well, fine.'' She said, ``What did he 
say?'' ``Oh, he said he had a call.'' And that is not full 
disclosure. Some of our financial institutions, not all of 
them, but some of them have some very cancerous assets in their 
portfolio and some of these are very highly leveraged 
institutions, and their ability to manipulate their valuation 
of those assets can materially impact the value that the 
investment community might place on that institution. While I 
understand there are other institutions that are holding assets 
and they may be a of a different quality, I think one of the 
problems with the whole subprime and all of the securitized 
transactions that we have done, they are very complex, they are 
layered and very hard to identify exactly what is the actual 
risk within those portfolios. So one of the things that I think 
has to happen here is that we have to make sure that we do not 
lower the standards so that we can allow institutions that may 
be should not continue to be able to operate or should not be 
operating, somehow to give them a free pass, while at the same 
time making sure the investment community is rewarding those 
companies out there that are actually managing their business 
in an appropriate way.
    The question I have, I think, Mr. Bailey, you mentioned 
that you had taken a write-down. Do you have a model that you 
used to valuate your mortgage portfolio to determine what the 
value of your portfolio is?
    Mr. Bailey. Yes, sir, we follow the FASB guidelines right 
now but in that instance, we are looking at a mortgage security 
that is basically has some credit issues in it, and as we do a 
rigid credit analysis, we say, okay, using the example, you pay 
a dollar for it, there are credit issues, it may be only worth 
90 cents but because you have to go out and get a market price 
for it and no one is in the market these days and they quote 
you 60 cents, you are taking a charge of 30 more cents, the 
difference between the 90 cents and the 60 cents.
    Mr. Neugebauer. Are you using an internal model or are you 
using a recognized model?
    Mr. Bailey. We are doing the analysis but then the FASB 
guidelines, as I understand them, would require you to write 
down the market value.
    Mr. Neugebauer. Yes, but I want to be clear, you are using 
FASB guidelines, but you are using your own model?
    Mr. Bailey. Correct.
    Mr. Neugebauer. Is that correct?
    Mr. Bailey. That is correct.
    Mr. Neugebauer. And so another bank down the street who 
might be your competitor maybe believes that he is following 
the FASB guidelines and he is using his model or her model, 
that could be a different valuation, is that correct?
    Mr. Bailey. That is correct.
    Mr. Neugebauer. Then how do I know then what, if I have 
both banks side by side, how do I know which is the healthier 
bank?
    Mr. Bailey. I am having the same problem, Congressman. I 
guess one of the examples is we rode down to Washington, we 
were looking at, talking about different banks and their 
financial statements that were out, all big accounting firms 
came out and had analysis, it appeared to me, Tom Bailey, the 
banks that got TARP took big write-offs. The banks who did not, 
did the analysis and came up with a number. All the accountants 
signed off on them, but here is where I see the taxpayers and 
you are footing the bill for the uncertainty in this rule.
    Mr. Neugebauer. Well, I think there is opportunity in the 
marketplace if there was an ability for investors to understand 
the actual condition of a lot of these institutions and maybe a 
lot of these securities. I am told that there are ways to dig 
down into those portfolios and actually determine those, but 
what those people also tell me is that that is the assumption 
that this is as worse as it gets and that where we saw in the 
headlines today is that foreclosures actually increased in the 
month of February and Freddie Mac and Fannie Mae and actually 
had a moratorium on foreclosures. And so what we do know is the 
universe is not static and that things are getting worse.
    I think one of the questions I have to the panel, in the 
short period of time I have left, is if you can use a market 
valuation process that everybody uses, but use a disclosure box 
or an addendum that says this is the assets we hold, we are 
currently valuing these assets internally based on this. Now, 
this is the way we have to disclose them but if on your balance 
sheet you disclosed how many you have, what your default rate 
is, what your projected cash flow was on the security when you 
bought it, what it is today, obviously the industry could 
develop some standards, if that was in your footnotes, then I 
think possibly that would bring some transparency to the 
marketplace where I could then make a decision whether to 
invest in your bank or Mr. Cotton's bank or somebody else's 
bank, would the panel respond to a suggestion like that? Mr. 
Mahoney?
    Mr. Mahoney. Thank you, Congressman. Fair value accounting 
by itself is not sufficient, there also needs to be robust 
disclosures about fair values. So a proposal along the lines of 
your suggestion, we could certainly be supportive of. The White 
Paper that I attached to my testimony does include a 
recommendation about some additional disclosures. So that would 
be something that the investor community would be very 
supportive of, to have more robust disclosures around both 
impairments as well as other changes in fair value. Thank you.
    Ms. Fornelli. Yes, Congressman, I would note that the 
Securities and Exchange Commission currently allows that type 
of disclosure, not in the footnotes to the financial statements 
but in the management's discussion and analysis. So there is 
nothing to prevent management from making those kinds of 
disclosures about the assumptions that they are making about 
their cash flow predictions. And, in fact, one of the 
recommendations that the Center for Audit Quality made in its 
November comment letter was to have the SEC to give even more 
clarity around that so that people are comfortable using that 
mechanism of disclosure.
    Mr. Isaac. If I may?
    Mr. Neugebauer. Mr. Isaac, yes?
    Mr. Isaac. I would like to respond to that. I think that 
first of all, I am all for all the disclosure anybody wants to 
make. The problem we have here is they are running these 
losses, these market losses, through the income statement, 
which scares the public when they see multi-billion dollar 
losses being announced that are not real. The public does not 
know they are not real but they are not real. And they are 
running it through the capital account and for every dollar 
that goes through the capital account, you are diminishing $10 
of bank lending capacity. So I am all for all the disclosures 
you want to make but you do not run the mark-to-market losses 
through the income statement and balance sheet. That is the 
problem with this accounting system. And what we do need is 
bank examiners and accountants in there with their sleeves 
rolled up, giving these assets a true economic value so that we 
can all know what they are.
    But in my chart here, we have a bank that has a portfolio 
that it expects, this is one bank and one portfolio in that 
bank, they have taken nearly a billion dollars of write-offs 
that do not need to be because their belief is, their firm 
belief is based on economic analysis that the losses in this 
portfolio will be zero. Worst case they can come up with is 
$100 million of loss. They have had to take a $913 million 
loss, this is mark-to-market rule. And so we just destroyed $1 
billion of capital in this bank needlessly, which is $10 
billion of lending. And that is just one portfolio in one bank. 
So the problem is we are destroying capital, and we are taking 
it out of earnings and we are scaring the public and making 
them think this problem is worst than it is.
    Chairman Kanjorski. Thank you very much, Mr. Neugebauer. 
Ms. Kaptur of Ohio?
    Ms. Kaptur. Thank you. Mr. Chairman, and again, my 
compliments to you for a great hearing and one for the Nation. 
I hope that some individuals over at the White House and at 
Treasury will be influenced by what is said here today because 
they need to hear this. Mr. Isaac, you are uniquely qualified, 
I appreciate all the witnesses being here, but I do not know 
too many living Americans who have been involved in resolving 
over 3,000 insolvent institutions and who have served 
presidents, both Democratic and Republican presidents, and who 
have a track record that demonstrates they know what they are 
doing and they have a written record existing over 35 years of 
solid and sound financial advice.
    I am going to ask a question and then make a reference to 
something else while you are thinking of the answer, but if 
President Obama were in this room, and you were to advise him 
what to do in order to begin addressing this situation, I know 
you know the answer to that, but while you are thinking of how 
you want to order that answer, let me just say that it is an 
amazing to me as a citizen of our country that the housing 
market is the cause of this downturn and yet we seem uniquely 
unable to get our arms around that with all of the brilliant 
people that we have heard from this morning. And I do not know 
if it is partly a political problem of people being afraid of 
what happened with Enron and being gun shy or afraid with what 
has happened with AIG and therefore we do not want to be 
politically perceived as doing something that is irresponsible. 
But we all have to figure this out together and the lack of our 
ability to do that has created situations in places like I live 
where credit has totally seized up, where our auto dealers 
cannot get loans from banks, where our region is one of the 
three leading solar centers in the hemisphere, we cannot get 
loans to hire people right now to bring up our factory floors 
to meet orders that are pending all over the world. The banks 
cannot make the loans. I see people being laid off in my 
region, and I am saying, why can't all these brilliant people 
in Washington get their act together? And I look at the 
Treasury, Secretary Geithner was up here this week, we met with 
President Obama yesterday on the whole budget problem, why 
can't we get together on this, what is hampering our ability to 
do that? I leave that question hanging out there. Is this a sad 
condition of our age where we have become so individualistic 
and our agencies have become so stove-piped that we cannot seem 
to do this together? Is there something that is really 
fundamentally wrong? But somehow we have to pull together here.
    Mr. Isaac, if President Obama or Michelle is listening, you 
have served other Presidents, you served President Carter, you 
served President Reagan, presidents who actually accomplished 
something when they were in office, what could you add, what 
could you say to the President?
    Mr. Isaac. Thank you. I guess I would have a few things I 
would say and one is that the SEC needs to be brought into the 
solution here, they should not be out on the side sitting on 
their hands the way they have been. And so I would have, if I 
were advising President Obama, I would say, ``Get the chairman 
of the SEC into your office and tell him that they are going to 
deal with the up-tick rule, and they are going to control the 
short selling activity.'' And tell them they are going to 
reform this mark-to-market so that it really is not so 
destructive of the capital in the banking system.
    The second thing I would say is we need to get the 
securitization markets working again. The Fed has a program 
they have started, and I think they need to go faster on that 
and they need to do more. They need to do more and more and 
faster, they have to get on it because we really need to get 
securitizations going again. I would make it more clear than we 
have that the United States stands behind its banking system. 
We are not going to nationalize the banks, but we are going to 
do whatever it takes to right this system and make it work 
because if we do not get the banks working right, the rest of 
it is not going to work. So we really have to start there and 
get that fixed and mark-to-market is an important part of that, 
the restrictions on short sellers is an important part of that. 
I think he has announced a housing program, I support it. I 
think we need to help people who are losing their homes, and we 
need to stabilize the housing markets.
    And then, finally, something I feel, he ran on a message of 
hope and optimism, and I think he needs to get that message out 
there. He forgot it after the election for a while, and I think 
it is time to see--Franklin Roosevelt did it. He said, ``The 
only thing we have to fear is fear itself.'' Ronald Reagan 
said, ``It is morning in America again.'' And we need hope, and 
we need an optimistic president and we need optimistic 
congressional leaders in my opinion, who can give somebody a 
reason to go out and buy a new car or a new washing machine. 
Right now, people are scared. We really have scared the public. 
So those are my thoughts.
    Ms. Kaptur. Thank you.
    Chairman Kanjorski. Thank you very much, Ms. Kaptur.
    Mr. Garrett. I am optimistic. I am going to buy a new car 
actually.
    [laughter]
    Mr. Garrett. And I will get a good deal. And if at the end 
of this if someone will give me a list of the accomplishments 
during the Carter Administration, I will be looking for that.
    laughter]
    Mr. Garrett. Some technical things, can someone talk to 
me--
    Ms. Kaptur. I hope the gentleman will yield on that point.
    Mr. Garrett. Well, when I am done, yes.
    Ms. Kaptur. I think each of you can help answer that 
question for one.
    Mr. Garrett. With regard to OTTI, help me understand some 
of this stuff with regard to that. The trigger right now is 
what, basically a dollar diminution in value that you see as 
far as opposed to some other proposals that are there saying 
that it should not be there but it should be a material 
diminution as a trigger with regard to what the impairment is? 
No? Okay. The second question--Ms. Fornelli, do you know where 
I am going on this?
    Ms. Fornelli. Well, as you know, I am not a CPA, but we can 
get that answer to you.
    Mr. Garrett. Okay. The second question then is with regard 
to gains, and I think someone else on the panel talked about 
this before, and I think the first panel did as well and how it 
should work, whether or not you permit a gain or other positive 
adjustment in the valuation of it which you do not incur right 
now? In other words, normally I think I discussed with you some 
of you before, some of the balance, it just ticks, ticks, ticks 
down but if it is in the accounts that are held for long term, 
you do not see that tick back up again. Mr. Isaac?
    Mr. Isaac. I think that is right. I think you mark down and 
the only way you get that value back is to sell it.
    Mr. Garrett. Sell it.
    Mr. Isaac. And a lot of banks do not really want to sell it 
because they are good yielding investments, they want to hold 
them.
    Mr. Garrett. Right.
    Mr. Isaac. But they are stuck.
    Mr. Garrett. Right, so what do we need to do about that or 
should put it what should we be doing about that?
    Mr. Isaac. Well, I think what really needs to be done, as I 
understand it, and I am not an accountant and do not aspire to 
be one but, as I understand it, the OTTI problem is that you 
have two kinds of things that are causing us to mark down based 
on other than temporary impairment, one is the potential for 
credit loss there. And I would not argue with that. If you have 
credit losses, you ought to mark it down or anticipated credit 
losses, that ought to be marked down, and I do not think that 
is controversial. The issue is we are marking down for market 
swings as well, and that is highly destructive.
    Mr. Garrett. But going forward, if you have, if you are 
holding and you actually see an appreciation of that, right 
now, as you said before, you cannot--
    Mr. Isaac. You cannot mark it up.
    Mr. Garrett. You cannot mark it up.
    Mr. Isaac. --is my understanding.
    Mr. Garrett. Right, and there might be a benefit to that.
    Mr. Isaac. There would be but it would be better not to 
mark it down at all.
    Mr. Garrett. Right.
    Mr. Isaac. And for market moves, just mark down the credit 
losses or the anticipated credit losses.
    Mr. McTeer. Sir, I have been told by a banker that if you 
have been too pessimistic in marking them down, you are not 
allowed to put it back when it turns out that you are wrong. I 
have also been told that the regulators have the authority 
already to change that, but they are somewhat reluctant to use 
that authority, because there is some provision that says if 
they use that authority and do that, they have to report back 
to Congress that they have done it, and they are reluctant to 
do that. That is all I know.
    Mr. Isaac. And my understanding is that if they do bring it 
back, if the regulators allow it to come back, they bring it 
back, the accrete it over time, whereas the hit is taken all at 
once. And so the best thing to do is not to mark it down.
    Mr. Garrett. I understand, I am just trying to think what 
else we may do. Let me go to Mr. Cotton or other people, you 
talked at the beginning of your testimony with regard to the 
application that is going on right now, and I think we are all 
across-the-board in agreement on the application of the current 
rules is not what we would have them. I am concerned even after 
3 weeks from now or 4 weeks from now, we get the new rules, 
whether or not they are going to have enough clarity to 
actually get the application there, so I just appreciate your 
thoughts on that. But even if that does not occur that we get 
to the point where we want to be on this, right, one of the 
other recommendations was is that we deal with the financial 
institutions and deal with what some of the members here have 
talked about as far as the regulators, as far as having them 
basically solve the problem for us, right, that does not do it 
for you folks?
    Mr. Cotton. No, that does not. Most of the conversation 
this morning, and actually at this table, has been about banks, 
and I think there is a missing element here and that is 
investors, like I have been for the last 10 or 15 years. 
Investors who use other people's money through funds that they 
have raised, for instance pensioners from Pennsylvania invested 
with me over the last 15 years, they are being harmed because 
we are unable to value these assets where we see them as 
valued. We, as the people who made the investment, did our 
work, did our analysis, understood the assets that were 
involved, and we have an opinion on value. We give that opinion 
to an accountant who says, ``Well, that is interesting but can 
you get me three bids from the street?'' Well, those three bids 
from the street bear no resemblance to the value. As I said 
before in my comments that commercial mortgages today, if they 
are securitized, have a very low delinquency rate, and the 
portfolio that I used to run, and I retired in December, but in 
that portfolio, it is maybe 1 percent delinquency. And the 
people who manage that portfolio understand what is in it and 
can present the data. They have the cash flows, the rent rolls, 
they understand the assets. They can present that data, but if 
you do not go to the level three, as it is called, in the 
guidance for the accountant and have the accountant have the 
ability to understand what is involved in the asset. As Mr. 
Bailey said, he can look at the loan in his book and he can 
make a determination if he is going to get paid back or not and 
come to a value and take a credit impairment if it is 
appropriate. In our case, we looked at the portfolio and said 
our portfolio has very little losses that we can see coming 
forward, yet when put to bid, the value goes through the floor. 
Commercial triple A CMBS today is trading a dollar price of 65 
cents. That would lead me to believe that the buyer thinks 
there is 35 cents lost in every bond at the triple A level. To 
get to a loss at a triple A level on a CMBS, you would need to 
have over 30 percent of the pool completely written off. In an 
environment of 2 percent delinquencies, in an environment of 8 
percent delinquencies, you are never going to get to 30 percent 
loss. However, the market has priced it there. Why? The buyer 
today is not the buyer who has traditionally bought those 
assets, particularly the buyer recently who is a buyer who 
says, ``I am private,'' or ``I am a hedge fund'' or I am some 
other vehicle that does not report mark-to-market, so I will 
take advantage of you who do report mark-to-market, and I will 
give you a bid. And if you are desperate and you are forced to 
sell, you will actually sell your bond, and I will take 
advantage of that. So that 35 percent loss expectation at the 
triple A level on CMBS, which is so far from the reality, 
becomes the reality.
    Mr. Garrett. For everybody, for the regulator. Thanks, I 
appreciate it.
    Chairman Kanjorski. Thank you very much, Mr. Garrett. Now, 
we will hear from the ranking member of the full committee, Mr. 
Bachus.
    Mr. Bachus. Thank you. Mr. Isaac, you were talking about 
market confidence and fear and optimism, and I agree totally 
with you. I actually issued a statement the day before 
yesterday that said that, ``Warren Buffett's recent comments 
that markets are confused are fearful are right on point. 
Contributing to the current market confusion and fear is the 
constant stream of inconsistent, inaccurate and exaggerated 
statements concerning our economy and financial institutions 
from both the Administration and Congress.'' Everything from 
statements about our large financial institutions are all 
walking dead or zombies.
    I want to apologize to you, when you came to the Hill in 
July of last year and started talking about mark-to-market, 
quite frankly, I was on the other side. And but I did realize, 
I was hearing from bankers and insurance executives and 
everything else that it was causing real disruptions, and I 
knew that it was in valuation. But, as I result, I did respond 
by putting into the October 3rd, when we passed the TARP bill, 
a thing to study it. And as soon as I did, folks came after me. 
The Washington Post, on the 20th, I would like--well, first of 
all, the Financial Accounting Foundation, which is over the 
FASB, they wrote me a letter where they basically admonished me 
and said that Congress ought to stay out of their business and 
not play politics with accounting standards, which I actually 
agree that we should not play politics.
    But I read in January, Mr. McTeer, that you wrote about the 
Fed spending tremendous, extraordinary efforts, hundreds of 
billions of dollar in the Treasury, hundreds of billions of 
dollars of the taxpayers and all the regulators and yet FASB 
and the SEC, which has the right to order them to do things or 
do it themselves, were just missing. They were missing in 
action. And I really thought that the October 3rd provision 
that Roy Blunt and I put in there that said do a study, The 
Washington Post attacked me and said we do not know anything 
about accounting, but we did know that it was causing 
distortions. And the SEC, the amazing thing to me, they came 
back with a report and it said there are problems, there are 
distortions, there needs to be something done. So they agreed 
with much of what you all said today, and they referred it to 
FASB and it was like the dead letter file. Everyday, American 
businesses struggle, American taxpayers, and there was just no 
sense of urgency. I believed really this hearing is a real 
driver towards that. And, Mr. McTeer, I read your article in 
January and said let's invite this guy, and so I appreciate 
your testimony. I have been following your blog, and I am going 
to introduce his article, ``My Mark-to-Market Nightmare.'' I 
wish every member would read that.
    I read a statement at the start of the hearing that John 
Lewis wrote a national best-selling book, he and I are both 
from Alabama, where he said that one of the things about 
America is they confront and overcome challenges but everybody 
is in the house together working hard. And FASB and the SEC, 
they have not been here. People of conscience, he said, coming 
together. And I think after today they will be. I am 
optimistic.
    One thing that has troubled me more everyday is this idea 
that adjusting, and I have a hard time, fair value accounting 
means a willing buyer and a willing seller, so we do not have 
that. So there is a difference between--and some of my staff 
disagrees with me, but there is a difference in that and mark-
to-market because you actually interfere with a bank or 
someone's decision, they will not sell, like I do not have to 
sell my house today, so I do not have to sell my car today, I 
do not even have to take it to an auction tomorrow. But really 
banks, they are being pushed to arbitrarily assuming there is a 
transaction.
    And I know, Mr. Mahoney, you represent some of the investor 
groups, but I want to remind you that I think sometimes when 
you talk about investors, they are really speculators. 
Investors, most Americans are investors for the long haul. They 
have pension plans, they have 401(k)s, and they are really more 
affected by pricing this stuff down everyday than by not. Yes, 
people want to buy, they want to know what something is worth. 
But those are more active markets, so I think that the 
investors ought to get on the side of doing something about 
this because I think they have a whole lot more to lose.
    I have a question for each of you, and I do not know, I 
think we are going to do a second round, and I will actually 
ask questions. I often criticized my members for making 
speeches instead of asking questions, so if we can have a 
second round?
    Chairman Kanjorski. You can take the question now if you 
like.
    Mr. Bachus. We will do that. So I will yield back, but I 
think--
    Chairman Kanjorski. You can take the question now if you 
like?
    Mr. Bachus. I will take the first one. Mr. Cotton, the 
commercial mortgage-backed securities market uses a synthetic 
instrument and the CMBS index to find observable market prices, 
your testimony indicates that the CMBS index has been trading 
at a price that suggests a 99 percent default rate. Should 
accounting rules force CMBS market participants to mark to an 
inaccurate barometer of fair value given the performance of 
CMBS loans? That is what we call a leading question?
    Mr. Cotton. Yes, sir, I feel led at this moment. I believe 
what was said in the testimony, and previous people from our 
organization have said it, there was a time that CMBS priced to 
a 99 percent loss expectation. I think if you heard what I said 
a minute ago, presently the cash bond is pricing assuming that 
there is a loss in the triple A, both of those do not bear a 
resemblance to the underlying performance of the assets because 
the buyer and seller, particularly the buyer and seller of the 
index, he or she is trying to hedge a position one way or the 
other. They are making a bet. It is not a lot different than 
betting on a fly going up a wall, as I used to say when I lived 
in Australia. It is a gamble. The fundamentals do not bear any 
resemblance to either of those at this moment. And I think what 
we are talking about here is trying to get back to 
fundamentals.
    Mr. Bachus. Thank you. Mr. McTeer, I read your blog where 
you advocate an approach that would split impaired assets into 
a credit loss component and a liquidity market component, how 
would this approach mitigate exaggerated hypothetical losses 
that could cause the collapse of a financial institution?
    Mr. McTeer. Well, I think it would mitigate it in the sense 
that it would limit the write-downs, the write-downs that were 
justified by actual credit impairment. If it is done well, it 
would not cause write-downs because of illiquidity and a 
cyclical market.
    Mr. Bachus. I actually had an insurance executive who 
proposed the same thing that you did, I do not think he had 
read your remarks, you had not read his, but he said it is 
important to make those distinctions.
    Ms. Beder, is it, is that pronounced right? In your 
experience, have you seen a reluctance by firms to value their 
assets using level three models because of concerns that those 
valuations would not be accepted by auditors? And, if so, what 
can be done to encourage firms to use level three valuations 
with confidence?
    Ms. Beder. Yes, your question is a common concern of 
people. The difficulty right now in going to level three 
accounting is that distressed market prices exist for some of 
the underlying instruments that are involved in the securitized 
securities. So, for example, there are some dealers who are 
still maintaining prices for residential mortgage securities, 
about 3 cents for BB securities and up to 30 cents for AA, 
which implies that over 70 cents is going to default or that 
the dealers fear the liquidity environment. That being said, 
residential sales in many markets are happening at or near the 
value of 75 cents of peak values, so the loss is maybe 25 
cents, it is certainly not 70 cents on the dollar. The 
challenge is that in going to level three in the model, you 
have to justify often to the audit firms why you are not using 
that ``market'' of 3 cents or 30 cents underneath the 
instruments. This is why the single measure is failing.
    The argument that Mr. Cotton is making and also that Mr. 
Isaac and Mr. McTeer have made is that firms have to be able to 
use judgment and they have to be able to use model prices. 
These must make sense. The concern on the part of the 
accountants and others is how do you ensure that the 
assumptions that are going into those models are valid and that 
they are not pie in the sky in terms of assuming that all is 
well when all is not and how do you get to the right number?
    If you put alongside the mark-to-market number, which I do 
not advocate throwing out, a mark-to-model number that firms 
may use with some type of independent verification, this should 
give the firms information that they need and it will not force 
the unnecessary write-downs that are harming firms.
    Mr. Bachus. All right, thank you.
    Chairman Kanjorski. Thank you very much, Mr. Bachus. And 
now we will hear from Mr. Price?
    Mr. Price. Thank you, Mr. Chairman. And I want to thank the 
panelists for their tolerance and forbearance of our schedule 
today. Mr. Mahoney, you have been around this business for a 
good long time. Have you played any role with any other 
institution prior to coming with the Council of Institutional 
Investors?
    Mr. Mahoney. Yes.
    Mr. Price. And what would that be?
    Mr. Mahoney. I was a staff person at the Financial 
Accounting Standards Board. I actually started off as a project 
manager involved in helping the development of accounting 
standards. And then after that, it was my job to talk about 
accounting standards and explain them to Members of Congress 
and others.
    Mr. Price. So you worked at FASB?
    Mr. Mahoney. Yes, I did, and I am now a co-chair of an 
advisory committee of a group of investors who provide input 
into the FASB process. We try to collect the views of investors 
from across this country. We have a good cross section of 
investors on that group. We try to explain to the FASB how we 
believe accounting standards should be changed to benefit 
investors.
    Mr. Price. I am glad you mentioned one of our letters 
because a letter of October 29, 2008, states that you wrote 
that you believe that FASB staff position issued on October 10, 
2008, was largely responsive to the recommendation that was 
provided, do you still believe that?
    Mr. Mahoney. I am sorry, that was which letter?
    Mr. Price. The letter of October 29th, in your testimony, 
2008 to Ms. Harmon at the SEC?
    Mr. Mahoney. At the time, there were questions about the 
application of fair value accounting in illiquid markets.
    Mr. Price. Do you still believe it?
    Mr. Mahoney. And the FASB provided an example and some 
additional guidance as to how to apply Statement 157 in an 
illiquid market.
    Mr. Price. Did it work?
    Mr. Mahoney. It appears that there are still some 
application problems.
    Mr. Price. Thanks, I am going to try to stick to my 5 
minutes.
    Mr. Mahoney. Sure.
    Mr. Price. And I appreciate that. Mr. Isaac, I share your 
anger, I want to thank you for your perspective, I want to 
thank you for the communication that you brought to our 
conference and to the Congress last fall. If we had followed 
your advice, we would not be in the boat we are in right now. I 
want to ask you why you think that FASB and the SEC have not 
acted properly or promptly, what is driving them, what is their 
motivation?
    Mr. Isaac. I am not a psychologist any more than I am an 
accountant, but I will give you my take on it. I believe that 
it is very difficult to admit when you have done something that 
did not work out as badly as this thing. This has been a major, 
major, major loss of taxpayer money that is attributable and 
great instability in the economy and the financial system and 
it is hard to own up to that when you are an important part of 
the cause. I also think, my impression is the accounting 
profession generally likes the fact that they can look at a 
computer screen and get a price off of that and not have to 
take any risks by actually getting in and valuing assets. They 
would rather do it that way, it takes the heat off of them. And 
so those are my guesses.
    Mr. Price. At some point, you have to quit digging though, 
right?
    Mr. Isaac. It is time for us--I believe it was 
Representative Bachus who said it is time to all get in the 
house. We have a problem, we have to get together and we have 
to do whatever needs to be done to get it fixed. And I do not 
see how we do that without FASB and the SEC being part of the 
solution. Or if they are not part of the solution, finding 
somebody else to do the job.
    Mr. Price. Right, well, we are trying to push them in that 
direction, and we appreciate your input sincerely. Mr. Bailey, 
my bankers are saying the same thing, that they are having huge 
problems. I wonder if you might share with us how the dialogue 
has changed, that is different now than what it was prior to 
the crisis with the regulators between your banks and you, what 
has changed in that dialogue, anything?
    Mr. Bailey. Could you clarify, I am not sure what you are 
asking?
    Mr. Price. In terms of their interaction with you, what 
they are talking with you about, what they are requiring of 
you, how strict they are, has that relationship changed at all?
    Mr. Bailey. It has slightly. In fact, on Monday, I got a 
call from the FDIC, when you file your quarterly report, they 
noticed the mark-to-market adjustment, the dialogue, they 
understood it, they have other banks in fact in the northeast 
region, which is where I am from, they said there are no credit 
issues, loan credit issues in western Pennsylvania, they are 
investment issues. And when they first came in last summer and 
did an exam, it was what is the market price, what is the 
market price? Now, they are listening to the level three 
pricing.
    Mr. Price. So they are moving in a positive direction?
    Mr. Bailey. It appeared, the staff person who called me. I 
do not know if the higher-ups are.
    Mr. Price. Mr. Bailey, I want to follow up with you and, 
Ms. Beder, each of you had very specific recommendations, and I 
wonder, my sense is that the SEC and FASB could institute a lot 
of those recommendations without any action by this committee, 
do you believe that and would you highlight the ones that you 
believe they could institute without legislative action?
    Ms. Beder. Sure. I believe that the one thing they would 
have to do is clarify the definition between what is a liquid 
and illiquid market and when one might move away from the mark-
to-market accounting. Mark-to-market is a fallacy when there is 
no market.
    Mr. Price. And they have the authority to do that right 
now, as I understand it, is that correct?
    Ms. Beder. I believe that they allow those calculations in 
the footnotes, and I think that what would help the market 
tremendously though is not to require just the sole mark-to-
market measure in the accounting statements, that is also part 
of the problem, it is fueling the difficulty in very highly 
liquid markets and in illiquid markets.
    Mr. Price. Great, thank you. My time has expired, Mr. 
Chairman. Thank you.
    Chairman Kanjorski. Thank you very much, Mr. Price. Mr. 
Isaac, I understand you have an appointment, you may have to 
leave. Because we have kept the panel so long, certainly we 
will understand if you have to leave and feel free to do so 
whenever you have to.
    Mr. Isaac. Thank you, sir.
    Chairman Kanjorski. We have about four more members who 
have some questions, and we will try our friend from 
California, Mr. Sherman?
    Mr. Sherman. Thank you, Mr. Chairman. Mr. Isaac, before you 
leave, I could not agree with you more that there is a tendency 
at the FASB to design accounting standards so that whatever is 
being reported is verifiable, incontestable, easy to determine, 
and impossible to sue about rather than reflective of reality. 
And if baseball had been designed by umpires, and umpires faced 
not only video instant replay but lawsuits, there would not be 
a strike zone because you would get sued every time. And you 
were not here earlier necessarily to hear me rail against FASB 
No. 2, which is depressed investment in research, because if 
you do the accounting the right way, accountants have to look 
at which research programs were successful and which were not, 
and it is easier to simply assume that all are not.
    It is hard for Congress to get into the business of 
legislating Generally Accepted Accounting Principles and that 
has always been a private sector function but regulatory 
accounting principles have traditionally been a governmental 
function. If we were to modify mark-to-market for RAAP, while 
leaving GAAP the way it is, I realize that we might not be 
helping CitiGroup share prices, but my goal is to just keep 
banks lending and keep the regulators from taking them over 
when they should not. If we change RAAP without changing GAAP, 
do we solve the problem?
    Mr. Isaac. Mr. Sherman, I think that that is better than 
doing nothing, but I worry about it because if Gotham Bank 
reports a $30 billion loss because of mark-to-market 
accounting, the holding company is a public company.
    Mr. Sherman. Right.
    Mr. Isaac. And it reports a $30 billion loss, I think you 
have created a huge psychological and fear problem in the 
marketplace about that and the regulator can say, ``Well, we do 
not care about that, we are going to count that $30 billion as 
part of capital, we are not going to make them write it off for 
regulatory purposes.'' It does not seem to me that does much to 
restore confidence, you would just have two parties arguing 
about what is the right value. It seems to me that one of the 
reasons why we were able to get through the 1980's with those 
massive banking problems successfully is because somebody was 
in charge. We did not turn it over to the marketplace and have 
it be a free-for-all. And by somebody in charge, I mean the 
bank regulators were in charge. They were in charge of the 
accounting, they were in charge of examining the books and 
deciding who had what amount of capital, what had to be written 
off, and the marketplace could say, ``Well, we do not think the 
regulators are doing a good job,'' or not, but there was 
somebody in charge, there was a way to determine values. And we 
maintained stability and order while we were failing 3,000 
banks.
    Mr. Sherman. If I can interrupt, the other concern is, 
okay, mark-to-market marks things down too low.
    Mr. Isaac. Right.
    Mr. Sherman. Let's say we do away with mark-to-market, what 
is the risk that more traditional accounting methods fail to 
adequately reserve for doubtful accounts and that we end up 
with an accounting statement that is not only--well, that is 
simply too generous even on a hold to maturity basis?
    Mr. Isaac. Our experience during the 1980's was not that 
accountants and bank examiners were being too soft, we had the 
opposite fear, that accountants were being too cautious and 
bank examiners were being too cautious and were causing more 
write-downs than were necessary and therefore we had more bank 
failures than we should have had. That would be my assessment 
of the 1980's, having been on duty, that if anything, the 
system was overly conservative but it was not wild like today 
where we are letting short sellers determine how much something 
is worth, and we are blindly accepting their valuations.
    Mr. Sherman. I believe my time has expired. Thank you very 
much.
    Chairman Kanjorski. Thank you very much, Mr. Sherman. And 
now, we will have Mr. Manzullo.
    Mr. Manzullo. Thank you. I recall in September, Mr. Isaac, 
we were in a room with Dennis Kucinich, and I think Marcy 
Kaptur was there and a lot of other Democrats, a lot of 
Republicans, and we were pleading with Secretary Paulson, 
pleading, screaming at him, ``FDIC has the authority to insure 
any amount of any FDIC institution, please do it immediately.'' 
He said, ``No.'' He went about his bad assets, and you talked 
about your experience. ``No, we do not want to do that.'' He 
talked about exchanging the high-quality commercial paper for 
an infusion of capital. ``No, we do not want to do that.'' And 
we also obviously talked about FAS 157 and no one would do 
anything.
    But I think here is the problem, I can quote from Ms. 
Fornelli's statement, she says, ``The crisis has been caused by 
loan losses and runs on the bank, not fair value accounting.'' 
And then I quote from the man on the street over there, Mr. 
Bailey, he says, ``The application of mark-to-market in frozen 
markets is the heart of the problem.'' I mean either mark-to-
market is a problem or it is not a problem, and I see two 
planes of very honest, distinguished, dedicated people and you 
are simply not connecting. But let me tell you where the 
connection comes in, mark-to-marketing is destroying 
manufacturing in America. Let me say it again: Mark-to-market 
is destroying manufacturing in America. Let me say it 3 times. 
You do not know unless you are on the streets and Mr. Bailey 
knows. You do not know what is happening to manufacturing in 
this country when they are barely holding on with one 
regulation after the other coming from Washington and all types 
of new exotic products coming out of the White House. People 
who have had loans with the same institutions, the same amount 
of sales, the same collateral, are being told by their bankers 
that we cannot give you any more money because of mark-to-
marketing.
    Now, either I have several hundred lawyers on my hands, 
representing several hundred industries in the City of 
Rockford, which had 25 percent unemployment in 1980 and lost 
100 factories and 10,000 highly skilled jobs, or people think 
mark-to-market is some type of philosophy just hanging out 
there. And all I hear is we have to address this, we have to do 
this, and meanwhile no one does a dang thing. Nothing is 
happening. Can't you see how critical this is? If you do not 
understand mark-to-marketing, if all you do is argue about it, 
then throw the damn thing out, excuse me, and put something 
else in place but what is at stake are all these industries. I 
do not think you have any idea how fragile manufacturing is in 
this country. Is mark-to-marketing a part of the problem or 
not, Mr. Bailey?
    Mr. Bailey. Yes, sir, it is.
    Mr. Manzullo. Why is it a problem? You meet these people 
all the time just like I do?
    Mr. Bailey. We heard the gentleman from FASB this morning 
talk about that investments are only a small piece, yet the 
FDIC reports $400 billion of assets are in these securities, 
$400 billion. If we take a conservative estimate, the way 
things are right now in mark-to-market, it would not be 
unreasonable to take say 25 percent of that would be impaired. 
Okay, that is $100 billion; $100 billion hit in capital is $1 
trillion in lending ability from banks.
    Mr. Manzullo. Ms. Fornelli, is mark-to-marketing a cause of 
the problem here?
    Ms. Fornelli. Mark-to-marketing, and I do not just think 
that the SEC found this, Chairman Bernanke, Treasury Secretary 
Geithner, did not cause the credit crisis that we are in but 
certainly, as we all have heard today, and I think that we all 
agree, mark-to-market accounting needs to be improved.
    Mr. Manzullo. I understand that but no one has any exact 
things on how are you going to improve it. It is not working. 
Whatever you do, whatever guidance you give, it is not working. 
Things are locked.
    Ms. Fornelli. But I think there are ways to improve it, and 
we have all put those out.
    Mr. Manzullo. Well, the crisis came in September. This is 
now the middle of March. That is what this man was doing here 
screaming with a bunch of members and no one had done anything 
in 6 months.
    Mr. Bailey. Congressman, I think we have suggested, and I 
think I have heard some other people here, it is more falling 
FAS 114, which would be separate the credit from the market 
price.
    Mr. Manzullo. Well, let's just get it done. Why can't we 
just do it and move on? Value these assets honestly.
    Mr. Cotton. I am not sure it is in the control of the 
people sitting at this table, sorry to interrupt.
    Mr. Manzullo. I understand. Is anybody here from the OCC or 
the SEC, anybody here in the room.
    Mr. Cotton. They were here this morning.
    Mr. Manzullo. No, no, is anybody here in the room now to 
listen to this testimony?
    Mr. Bachus. They are on our side.
    Mr. Manzullo. I do not see anybody there. Thank you.
    Chairman Kanjorski. Thank you very much, Mr. Manzullo. Now, 
our final on the Republican side, Mr. Royce?
    Mr. Royce. Thank you, Mr. Chairman. I would like to ask a 
question just about some of these assumptions that you read in 
the financial press just to kind of weigh this assertion. And I 
suspect that Steve Forbes kicked this off with his argument 
that in the early 1990's with the financial problems, that if 
we had mark-to-market, virtually every major financial 
institution would have been undercapitalized, and we would have 
had a crisis that he argues would have been on an order of the 
Depression in the 1930's if it had really been deployed or 
enforced and argued it was dropped in 1938, partly for this 
reason, in 1938, came back in the fall of 2007, I guess is when 
FAS 157 was implemented. So he would argue that this has 
greatly compounded the problem. I would just like to go to the 
assessment about the early 1990's and just have a little 
reflection and thinking about some of the problems we faced 
then, what would have been the consequences?
    Mr. Isaac. I would be happy to respond to that since I was 
there.
    Mr. Royce. Mr. Isaac?
    Mr. Isaac. And it was really the 1980's, more than 1990's. 
The 1990's were a mop of the 1980's.
    Mr. Royce. Early 1990's is what we remember but, yes, the 
late 1980's was the problem.
    Mr. Isaac. The 1990's were the mop of the S&L problem, from 
1989 forward, we just mopped up the S&L problem. Prior to that 
is when we really had the serious, we were in really serious 
soup in the mid-1980's. We had $200 billion of insolvency in 
the S&L industry, and the savings bank industry if you had 
marked them to market. We did not have to, but that is what you 
would have had is $200 billion of insolvency. All of the money 
center banks were insolvent if you had marked--virtually of 
them were insolvent if you had marked their Third World debt 
portfolios to the then prevailing market prices. The markets 
had dried up and nobody wanted the stuff just like today. There 
is no question that we would have failed thousands, we failed 
3,000, we would have failed thousands of additional banks and 
thrifts during the 1980's and early 1990's, including all of 
the money center banks. We had a stand-by plan to nationalize 
them if we had to, and we would have if we had to, and so it 
was a very, very serious time. And we could not have coped with 
it under today's mark-to-market rules, just could not have 
coped with it.
    Mr. Royce. Mr. Cotton, did you have commentary on that 
front?
    Mr. Cotton. Well, I was a borrower in the 1980's so I was 
probably on the guilty side of that equation at the time. But I 
think what Mr. Isaac saying, and I think what you are hearing 
from all of us is that if you are looking for an immediate 
answer from a screen, you will get an easy answer and that 
screen answer may not be anywhere near the reality. We are 
advocating that the accountants be given the authority to do 
level three work and be encouraged to do level three work, and 
then they have to make a judgment. And I think they have to be 
in some way be comforted that that judgment does not 
necessarily lead to a lawsuit. I thought the metaphor used 
earlier about the strike zone was an interesting one. If the 
auditors are afraid of their shadows, it is easy to go to a 
screen and say there is the price. But if the price is the 
wrong price but it is the easy price and that is where they go, 
I think we make this mistake and we exacerbate this.
    Mr. Royce. Well, let me ask another question because we 
have another debate going on on International Financial 
Reporting Standards and GAAP is very much rules-based, and we 
are tied to those rules. The Brits and others approach this 
from a little different vantage point, principles-based. Would 
going to IFRS standards lead us down a road that in some way 
gets us out of the box that we are in here? I do not know.
    Mr. Cotton. I am not an accountant, so if you are asking me 
that question.
    Mr. Royce. Okay, all right.
    Mr. Cotton. It missed me.
    Mr. Isaac. My concern about that, the international rules 
are actually better than ours on OTTI is my understanding, but 
my fear of going to the international rules is if we think FASB 
and the SEC are slow, bureaucratic, and lethargic, you ain't 
seen nothing yet. I am scared to death of going to--subjecting 
ourselves to an international standard. This hearing today 
would irrelevant if you had international standards because you 
could not do anything about it. So I really think that is a 
dangerous thing and the SEC is headed down that path, and I 
think we ought to get them off that path.
    Mr. Royce. Going back to my original point, I will have Mr. 
Bailey give me your assessment? Last question, your assessment 
going back to the late 1980's, what is your perspective now 
just thinking about that? We have the figure there, $200 
billion insolvency in the financial assessment there, what 
would you--how would you think in respect to that?
    Mr. Bailey. I was just coming into the industry at that 
time so I could not comment, I am sorry.
    Mr. Royce. Okay. Well, anyway, my time has expired, Mr. 
Chairman. Thank you very much.
    Chairman Kanjorski. Thank you very much, Mr. Royce. We have 
a request for a second round, does anybody want to indicate 
what they are in favor of there at the table? But I have not 
had my round so I am going to take at least a portion of my 
round. Look, Mr. Manzullo was somewhat threatening to the table 
but to my knowledge none of you are presently regulators or 
involved in any of the standard setting.
    Mr. Manzullo. Mr. Chairman, I owe an apology to--the 
frustration level is extraordinarily high, and I thank you for 
your indulgence.
    Chairman Kanjorski. I appreciate that. I just wanted to 
make sure that they did not go home for the weekend and feel 
really under the weather because of that. No, the reality is it 
brought something up to me that this hearing really represents 
to me and some of our problems that we have been discussing 
today and some of our responses to those problems. We had our 
first hearing at this committee, not as a committee hearing 
this year, on January 5th. And that was the Madoff scandal that 
occurred over Christmas. Our first opportunity to get to the 
Madoff scandal was January 5th, and some of the members may 
recall that, but it had to be a meeting of the committee and 
not a hearing because we had not formally met in the new 
Congress since the new Congress did not take its oath of office 
until January 6th, and therefore we were not an organized 
committee of the House and could not proceed that way. Some of 
us tend to be formal that way, others would like to say, ``It 
is still the same problem with the same people, let's get at 
it.'' And I think that is the frustration that I am hearing 
from a lot of the members here at the meeting and from the 
panel, that we are sick and tired and we are not going to take 
it anymore, and that we do not care for perfection or idealism, 
we really want to get the job done.
    And I think the message, I hope the message went out to our 
earlier panel, and I know they are watching this in that secret 
room that we have set up, maybe they have resolved this whole 
problem already for us, but I hope they are watching us or they 
are talking about what may have transpired here this afternoon 
because we expect those three gentleman representing three 
distinct agencies of the United States Government to show the 
American people, show the street and show everybody else that 
they can function. And I was very serious when I told them as 
soon as we get back from the Easter break, which will be in 
more than 3 weeks, we cannot meet exactly on the third week 
because we will be out of session in the Congress and not 
available, but we will have a hearing if we are not notified in 
the meantime that there is a change of the rule.
    I think we ought to pursue these matters this way, and 
sometimes stretch the practicality of what we can do and 
sometimes stretch the rules. These are extraordinary times. I 
think sometimes some of us in government and in leadership have 
failed to impart the importance of our economic distress to the 
American people. I have been going about doing that as much as 
I can not only in my district but on a national level because 
if we do not have the importance of the problem, we will not 
direct our attention adequately to the problem. It is probably 
the most serious economic problem in my lifetime that I can 
think of. And since I am older than anybody sitting at that 
panel, I would conclude it is the worst of any of your 
problems.
    Now, I like where this hearing went today, and that is why 
I really want to commend my friends on the Republican side as 
well as all my friends on the Democratic side who are here, 
that we really had a coming together and that coming together 
occurred because we are starting to begin to recognize a very 
important factor. We are only going to survive as a country and 
as an economy if we do realize how important this problem is 
and that we use all our imagination to address it as clearly as 
possible. And I think that may have started today, and I want 
to compliment my friends on the Republican side because if it 
did not start today, I want it to start tomorrow but I think it 
may have. And it is important that we continue this process, 
not only at the next hearing on mark-to-market but so many 
other hearings that we are going to have on reforming 
regulation and doing so many other things that we have 
scheduled.
    I intend to schedule as many hearings as physically and 
humanly possible, and we have one limitation; we do not have 
enough hearing rooms. But if we could, we would appropriate 
sufficient amount of money to double the House size so we could 
have that, but unfortunately, that could not be completed for 
at least 8 to 10 years, maybe with the Architects of the 
Capitol, it would take 20 to 30 years. That being the problem, 
unfortunately we will have to meet at the curbside. And that 
may be the best place to meet, particularly if it is cold 
enough in the winter in Pennsylvania, we will get some action 
done very quickly because it usually works that way in 
Pennsylvania. We will stay out of Florida because all of us 
would love to go down there and spend a whole day at the 
curbside.
    That all being said, we are going to attend to this. We 
appreciate each and every one of your contributions. As I heard 
your contributions today, you have all had really unique things 
to say of how this could be approached. Your first situation 
was maybe we would do it on the regulatory capital side a lot 
easier than doing it on the accounting side. And I seem to 
sympathize with that. But the answer to that or your action, 
using your experience, Mr. Isaac, on the other side, that you 
have had that experience and our people on our side have had 
that experience, and we had a call upon, that is why you are 
here. And we did listen to Marcy Kaptur. She said, ``You want 
an expert in this field, go get Isaac.'' That is why you are 
here.
    And all of the rest of you represent so much of the best 
and the brightest and ablest, and I am proud of you because you 
gave honest responses in your testimony as to what we should 
do. You are going to make it a little easier for us to proceed 
but proceed we will and proceed we shall.
    And I dare say I do not know whether we are going to have 
an effect on the market but the last reports we had on the Dow, 
it was significantly up to--it closed, is that it, at 239.66, 
the third day in a row. That is pretty good. Even if we did not 
have anything to do with it, and I doubt we did, it is going to 
give everybody a nice weekend, 3 days up positive on the Dow. 
And I want to close with that. We can sit around here and 
condemn every practice and every idea and everybody's judgment, 
including the accountants, and damn sometimes they make tough 
judgments that are hard to compliment, but the reality is that 
we can change the economy of the United States if we just are 
getting positive, if we just start realizing that we can do it. 
We may go home tonight and wake up tomorrow, as we are 
preparing to shave, and I do not know what the equivalent is on 
the feminine side but whatever it is, you will see the enemy 
very early in the morning, it will be in that mirror that you 
are looking at. We are the enemy if that is what it is. And it 
is what we can do individually and collectively that can move 
this system along.
    I urge you to join this and in spite of all the comments 
about Republicans and Democrats fighting and the tough 
political system, that is malarkey too. I firmly believe that 
this Congress is going to come together, the Senate is going to 
come together and the Congress is going to come together with 
the President, and we are going to lick this problem and solve 
this problem, but it is going to start with the contributions 
of folks like yourselves who stayed here this late into the 
evening to help us get some idea of what this is all about.
    So I thank you for doing so and before we adjourn, I have 
to make some statements for the record. The Chair notes that 
some members may have additional questions for this panel, 
which they may wish to submit in writing. Without objection, 
the hearing record will remain open for 30 days for members to 
submit written questions to these witnesses and to place their 
responses in the record.
    Before we adjourn, the following will be made part of the 
record of this hearing--questions submitted by Congresswoman 
Giffords and the written statements of the folowing groups: the 
Mortgage Bankers Association; the Group of North American 
Insurance Enterprises; the American Bankers Association; the 
Council of Federal Home Loan Banks; the National Alliance of 
Community Economic Development Associations and other 
signatories; the American Council of Life Insurers; and the 
United States Chamber of Commerce.
    Mr. Bachus. That is all one letter.
    Chairman Kanjorski. It is?
    Mr. Bachus. Yes, it is just one letter.
    Chairman Kanjorski. No, each individual is a statement.
    Mr. Bachus. Oh, is it a statement?
    Chairman Kanjorski. The National Association of Federal 
Credit Unions, the Credit Union National Association. And 
without objection, it is so ordered that they are entered into 
the record.
    And we only have them enter individual comments like that 
so we can keep hiring printers to keep the economy going, so 
you understand that. I know in Alabama you would not 
necessarily know that, Spencer. But anyway this panel is 
presently dismissed, and this hearing is--
    Mr. Bachus. If you will dismiss them, but I have some more 
things to put in the record.
    Chairman Kanjorski. Oh, absolutely.
    Mr. Bachus. Go ahead and let them leave.
    Chairman Kanjorski. If the panel wishes to leave, they are 
free to leave. Mr. Bachus, do you wish to make any motions?
    Mr. Bachus. There are at least six recommendations that 
FASB and the SEC and bank regulators have identified specific 
proposals, and I would like to introduce a document outlining, 
these are things that they have already said need to be done, 
okay?
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Bachus. Second, I would like to introduce the testimony 
of Chairman Bernanke where he said that accounting standards 
were causing valuation distortions and impacting loss 
provisioning and also that it was discouraging lending and it 
had restrained lending, which was the same thing that some of 
our members said.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Bachus. And the procyclicality in the regulatory 
system. Mr. McTeer's, ``My Mark-to-Market Nightmare'' dated 
January 11th. And basically what we have here is that we have 
set on our--on October 3rd, I first put this in the bill and 
asked SEC to study it. It was not until February the 18th that 
FASB even announced they were going forward with a study and 
that is about $1.5 trillion of taxpayer's money in the gap. I 
would introduce his article. Steve Forbes', ``Bad Accounting 
Rules are the Cause of the Banking Crisis.''
    When Mr. Isaac said it in July, and I do not agree with 
this by the way, I do not think they are the cause. I believe 
that they have contributed to there not being a recovery, and I 
know Ms. Fornelli, she was asked by the member do you think it 
caused it, and I think you and I agree it did not cause it, but 
it sure has inhibited some of the interpretations, it has 
certainly inhibited a recovery.
    Ms. Fornelli. And I do think that some of the things that 
this panel talked about, both in our testimony and on the 
panel, the FASB guidance that this subcommittee demanded of 
FASB in the next 3 weeks as well as the other than temporary 
impairment improvements. And that does need to happen, and so 
we stand by that as well. I think those will make immense 
improvements to the application.
    Mr. Bachus. I agree. I would like to introduce The 
Washington Post article talking about where we introduced it 
and put in the bill and also it is titled, ``Don't Blame Mark-
to-Market Accounting.'' They actually talk about the bank 
regulators say it is not a problem but obviously it is now, and 
they all acknowledge it including Comptroller Dugan. My 
statement on, ``Unreasonable Criticism Has Created an 
Atmosphere of Fear and Confusion.'' John Lewis, Congressman 
Lewis, I would like to introduce the two pages of his book, 
``Walking in the Wind,'' which I think ought to be a model for 
every member as we approach this problem.
    And, finally, a letter that Roy Blunt and I wrote to 
Chairman Mary Shapiro, and very similar to what Chairman Barney 
Frank and Chairman Chris Dodd have also written similar 
letters. With that, I would ask that they be introduced into 
the record.
    But I think where we start is where FASB and SEC have 
already acknowledged in their study, that these are problems 
and things that need to be fixed and whether bank regulators, 
including Chairman Bernanke, they have made specific 
recommendations for changes. It seems like those ought to be a 
given. Thank you, Mr. Chairman.
    Chairman Kanjorski. I agree, and without objection, all of 
the documents suggested by Mr. Bachus will be entered into the 
record.
    Anything else good for the order? Mr. Garrett, do you have 
a statement that you would like to make?
    Mr. Garrett. I have a statement.
    [laughter]
    Mr. Bachus. I just have one other one, the October letter 
from the Financial Accounting Foundation.
    Chairman Kanjorski. Without objection, it is entered into 
the record.
    Mr. Bachus. They really admonished us for trying to 
interfere with FASB. Thank you.
    Chairman Kanjorski. It is entered. And now I am not even 
going to ask the question again, the hearing is adjourned.
    [Whereupon, at 4:30 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 12, 2009
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