[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
PERSPECTIVES ON REGULATION
OF SYSTEMIC RISK IN THE
FINANCIAL SERVICES INDUSTRY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 17, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-14
U.S. GOVERNMENT PRINTING OFFICE
48-867 WASHINGTON : 2009
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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
C O N T E N T S
----------
Page
Hearing held on:
March 17, 2009............................................... 1
Appendix:
March 17, 2009............................................... 63
WITNESSES
Tuesday, March 17, 2009
Bartlett, Hon. Steve, President and Chief Executive Officer,
Financial Services Roundtable.................................. 8
Jorde, Terry J., President and Chief Executive Officer,
CountryBank USA, on behalf of Independent Community Bankers of
America (ICBA)................................................. 13
Plunkett, Travis, Legislative Director, Consumer Federation of
America........................................................ 15
Ryan, Hon. T. Timothy, Jr., President and Chief Executive
Officer, Securities Industry and Financial Markets Association
(SIFMA)........................................................ 10
Silvers, Damon A., Associate General Counsel, AFL-CIO............ 17
Wallison, Hon. Peter J., Arthur F. Burns Fellow in Financial
Policy Studies, American Enterprise Institute.................. 12
Yingling, Edward L., President and Chief Executive Officer,
American Bankers Association................................... 19
APPENDIX
Prepared statements:
Bartlett, Hon. Steve......................................... 64
Jorde, Terry J............................................... 91
Plunkett, Travis............................................. 101
Ryan, Hon. T. Timothy, Jr.................................... 115
Silvers, Damon A............................................. 136
Wallison, Hon. Peter J....................................... 159
Yingling, Edward L........................................... 171
PERSPECTIVES ON REGULATION
OF SYSTEMIC RISK IN THE
FINANCIAL SERVICES INDUSTRY
----------
Tuesday, March 17, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Velazquez, Watt, Sherman, Meeks, Moore of Kansas,
Capuano, Hinojosa, Lynch, Miller of North Carolina, Scott,
Green, Cleaver, Ellison, Klein, Perlmutter, Donnelly, Foster,
Carson, Speier, Driehaus, Grayson, Himes; Bachus, Castle,
Royce, Manzullo, Biggert, Hensarling, Garrett, Barrett,
Neugebauer, Price, McHenry, Campbell, Marchant, McCarthy of
California, Posey, Jenkins, Lee, Paulsen, and Lance.
The Chairman. The hearing will come to order. The purpose
of this hearing is to continue to focus even more on a very
broad question, the importance of an effect that has been
undermined by recent events and by the considerably larger
crowd we will have here tomorrow when we deal with the
apparently three most fearsome letters in the English language:
``AIG.'' We will deal with that tomorrow. But what we need to
do is to figure out how we avoid ever again being in this
situation. ``Ever again'' overstates it. How do we make it much
less likely that we are not again in this situation?
So this begins a set of hearings that we are going to be
having on what, if anything, should be done at the legislative
level and then carrying through obviously to the executive
level to prevent some of the problems that we are now dealing
with from recurring. There will be a series of hearings. As you
know, the Secretary of the Treasury will be testifying at our
hearing on March 26th. But we want to hear from a wide range of
people on the consumer side, on the labor side, and on the
financial industry side, former regulators, other commentators,
and people in the industry. We will have a series of hearings
on this. We have several hearings planned between now and the
break. We will resume and continue the hearings, and it is my
hope that we will be able to begin the drafting of legislation
sometime in early May. That is when we come back and have a
couple more weeks of hearings.
I urge people to be thinking seriously about what we are
doing. This will be a lengthy process. It will go through all
of the regular order. The Senate also is engaged in this. The
White House and the Treasury are engaged in it. It is a very
important task, and we will be addressing it with great
seriousness and with full input. I am not at this point going
to get into anything substantive because I really hope that we
will have a full and unfettered conversation with a variety of
people about this, and I would hope people would feel totally
free to make whatever recommendations they may have. Everyone
who is here will, I am sure, be asked again to comment on this,
but you don't have to wait to be asked. We have as important a
task as we have had in this general area, I believe, since the
1930's.
But I will just say briefly what seems to me to be the
situation. We are a society that understands the value of free
enterprise in a capitalist system in creating wealth. Some
political rhetoric to the contrary, that is not in question
now, and won't be in question in the future. No one is
seriously talking about diminishing the role of the private
sector as the wealth creator, and for this committee's
jurisdiction of the financial services industry as the
intermediary, as the entity that helps accumulate wealth from a
wide variety of sources and makes it available for those who
will be taking the lead in the productive activity, that is the
intermediation function, and it is a very important one.
From time to time in economic life, the private sector,
which is constantly innovating, but achieves the level of
innovation that is almost a qualitative change when a very new
set of activities comes forward. Now, by definition, if those
activities do not provide value to the society, they die of
their own weight. Only those that are in fact genuinely adding
significant value thrive. But also by definition because they
are innovative, as they thrive they do a lot of good, but there
is some damage because they are operating without rules, they
are new, and that is why I think the problem here is not
deregulation, but nonregulation. It is not that rules that had
been in place were dismantled, it is that as new activities
come forward there need to be new rules that are put in place
that to the maximum extent possible provide a structure in
which the value of these innovations can continue but some of
the abuses are restricted.
I will give two examples where it seems to me we went
through that process. In the late 19th Century, the formation
of the large industrial enterprises, then called trusts. This
country could not have industrialized. The wealth could not
have spread to the extent that it has here or elsewhere without
large enterprises. But because they were new, there were not
rules. So while they were formed and thrived in the late 19th
Century and on into the next century, the presidencies of
Theodore Roosevelt and Woodrow Wilson were aimed at preserving
the value while containing the damage that could be done. The
antitrust acts, the Federal Trade Act, even the Federal Reserve
Act itself came out of that situation.
Because you had the large enterprises you then had the
stock market become so important, because you had now gone
beyond what individuals could finance. And the stock market
obviously provided an important means of support for this
process, but with some abuses. So in the New Deal period and
then after we had rules adopted that gave us the benefits of
this finance capitalism but tried to restrain some of the
abuses, the SEC and other factors.
I believe that securitization, the ability to use pools of
money not contributed by depositors, and are therefore
relatively unrestricted, to finance activities and to sell the
right to be repaid, obviously has a lot of advantages. If
mortgage loans can be made, securitized, and remade, that money
can support a lot more activities. Securitization greatly
increases the ability to use the money. But like these other
innovations it comes in an area without regulation. And our job
now I believe is in some ways comparable to what happened under
Franklin D. Roosevelt or Theodore Roosevelt and Woodrow Wilson,
to come up with a set of rules that create a context in which a
powerful, valuable tool can go forward in its contributions but
with some restriction on the negative side. And that is never
easy to do and you never do it 100 percent.
I regard it, by the way, as very much a pro-market
enterprise, because one of the problems we have now is an
unwillingness on the part of many who have the money to make it
available. We have investors who are reluctant to get involved.
That is a great problem. It is nice from the standpoint of
calculating our interest costs to have Treasuries be so
popular. But it is not healthy for the economy for Treasuries
to be disproportionately the investment people want to make.
One of the advantages of this being done properly is to get
a set of rules that will tell investors that it is safe to get
back into the business of investing. So we regard this again as
very pro-market, of taking a market-driven innovation, in this
case securitization, and trying to preserve its value while
limiting some of the harm that comes when it acts in a totally
unregulated atmosphere and in a manner that will give a great
deal of confidence to investors so that we can resume this
function of intermediation of gathering up resources and making
them available for productive uses.
The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman. I yield 1\1/2\
minutes.
The Chairman. I am sorry. Whatever time you want; 1\1/2\
minutes.
Mr. Bachus. Thank you.
Mr. Chairman, done in the right way, a systemic risk entity
can be a positive step. However, if done in the wrong way, it
can be a very bad idea. Let me be very clear. It is time that
we extricate ourselves from the cycle of multi-billion dollar
taxpayer-funded bailouts. Before we agree on the creation of a
systemic risk regulator or observer, we need to agree on one
important precondition, and that is that this so-called
systemic risk regulator should not have the power to commit or
obligate billions or hundreds of billions of dollars of
taxpayer money to bailing out the so-called ``too big to fail''
institutions. If it does, I can't support it.
In the event of a failure of one of these too big to fail
institutions, I believe that this newly created entity's role
should be to advance an orderly resolution, not to add taxpayer
funding. If we have learned one lesson in the last year it is
this: When the government tries to manage and run these large
corporations, no one wins. Government ownership and management
of the private sector didn't work in Russia, it didn't work in
China, it is not working in Cuba, it is not working in North
Korea, and it is clearly not working here.
Thank you, Mr. Chairman.
The Chairman. Does the gentleman have a second member,
because I did 5 minutes? You have a minute-and-a-half. The
gentleman from California, Mr. Royce, for a minute-and-a-half.
Mr. Royce. Thank you, Mr. Chairman. I would like to thank
our witnesses for coming and also, considering the topic of
today's hearing, systemic risk, I would like to briefly welcome
Mr. Wallison from AEI who for years warned and wrote about the
systemic risk posed by Fannie Mae and Freddie Mac to our
system. And with trillions of dollars being allocated to prop
up our financial system we must begin to rethink, I think, the
relationship between the Federal Government and private
companies. If we allow this line to be permanently blurred, the
invitation for political and bureaucratic manipulation will
remain, as we saw with the GSEs. Further, the market
distortions caused by the implied government guarantee of
Government-Sponsored Enterprises allowed them to operate as a
duopoly, walled off from forces such as market discipline that
would have significantly lessened the ability of these firms to
play their part in inflating the U.S. housing market and
allowed them eventually to overleverage by over 100 to 1.
With that said, I believe that we have to reevaluate our
financial market's regulatory structure. That is what this
hearing is about. We need a thoughtful reevaluation. We have a
patchwork system put together over the last 75 years in this
country, and we cannot discuss systemic risk regulation in a
vacuum. Duplicitous and ineffective regulatory bodies must be
consolidated or eliminated, and gaps exploited in recent months
by AIG must be filled.
Thank you, Mr. Chairman.
The Chairman. The gentleman from California for 2 minutes.
Mr. Sherman. Thank you. I think the ranking member points
out something interesting, and that is if the Fed is the
systemic risk regulator, or any kind of regulator, they could
see their regulation called into question, ``Oops, you made a
mistake.'' And they could cover themselves by using their
powers under section 13(3) to make unlimited loans from the
Fed. I think we need to divorce the rescue authority from the
regulatory authority or a regulator may do a rescue in order to
cover up the fact that their regulatory authority was not used
all that prudently.
Secondly, if the Fed is going to be a systemic risk
regulator we ought to make sure that all of its officers and
decisionmakers are appointees of the President or appointees of
appointees of the President, that none are appointed by
committees of private bankers. The Fed needs to be clearly just
a government agency and not also an association of banks.
As to systemic risk, it can be prevented perhaps by higher
capital requirements, but when we do confront systemic risk
that has to be acted, this systemic risk regulator needs to be
respond with receiverships, not with bailouts. Never again
should the taxpayer be called upon to bear risks or to bear
costs. And no activity which is too big to be covered by a
receivership should be allowed because nobody should be allowed
to bet if the taxpayer is going to be called upon under the
theory of systemic risk or any other theory to bail them out.
No casino should be too so big that we can't let those who
break the bank deal with it in the private sector.
Finally, and this is off point, I look forward to working
with other colleagues on a tax law that would impose a
substantial surtax on excessive compensation paid to executives
at bailed-out firms, especially AIG. It is clear that we have
until April 15, 2010, to act on the 2009 Tax Code, and I think
we could act on 2008 as well.
The Chairman. The gentleman from Illinois for 1\1/2\
minutes.
I apologize. The gentleman from Texas for 1\1/2\ minutes.
Mr. Hensarling. Thank you, Mr. Chairman. No doubt we would
all love to figure out a way to properly end systemic risk, but
it kind of begs the question who, what, how, and at what cost?
I have a number of questions. Number one, do we have any other
examples where this has been tried before and tried
successfully? Has it worked? And if not, why not? Who are the
so-called experts on the subject? Second of all, what is our
accepted definition of systemic risk? Is it too big to fail,
too interconnected to fail? I note that mutual funds have
worldwide assets of $26.2 trillion at the end of the last
fourth quarter. Are they too big to fail? Are they
representative of systemic risk? Next, which of our regulators
is to be trusted with this responsibility? Should it be the
Federal Reserve that many economists view helped lead us into
this housing bubble in the first place? Perhaps it should be
the SEC, who apparently knew about the Madoff fraud and did
nothing about it. Perhaps OTS, who is responsible for IndyMac,
the largest bank failure in American history. If not them, who?
The next question is to what extent does this become a
self-fulfilling prophecy? Once you designate a firm too big to
fail, then is this not Fannie and Freddie revisited with only
the taxpayers left to pick up the tab?
There are many questions to be asked. I look forward to
hearing from our witnesses, and I yield back the balance of my
time.
The Chairman. The gentleman from New Jersey, Mr. Garrett,
for 1\1/2\ minutes.
Mr. Garrett. Thank you, Mr. Chairman. And while we look at
systemic risk, and there are some who are calling for
consolidating even more regulator power and risk within the Fed
to look at systemic risk, I find myself on the other side
increasingly adverse to the idea. Now, the Fed has already been
the de facto systemic regulator for at least much of our
banking sector, which by the way is already the most regulated
portion of our economy. Institutions like Citigroup and other
large banks have some of the thorniest problems that we are
facing in our financial markets. So instead of giving Fannie
even more problems, despite its regulatory failures, I am
convinced that we should actually reduce the regulatory powers
and maybe at best let it concentrate on its monetary policy.
The Fed's regulatory role, if it were to be increased,
compromises its independence and threatens to undermine the
value of the dollar.
The reason for the Fed's independence in the first place is
its monetary policies duties, not its regulatory role. It is
difficult to see a scenario where the Fed is responsible for
the health of our Nation's largest financial institutions would
be reluctant to raise interest rates in order to assist
financial institutions under its regulatory purview.
Furthermore, in addition to my concerns about the
conflictive nature of the Fed's role, as I mentioned at last
week's hearing, I also have concerns about consolidating so
much additional power in any entity that does not have to
answer to the American people.
Finally, beyond my specific concerns about the Fed, I have
broader concerns, as Mr. Hensarling raises, about a new
systemic regulator. What powers would it have? Would it be able
to say what it is and what it is not allowed to invest in? And
in its zeal to eradicate risk, and remember, this is a
capitalist economy, would it fundamentally alter the nature of
the American economy, the greatest economic engine in the
history of the world by doing so?
I thank you, Mr. Chairman.
The Chairman. The gentleman from Massachusetts is
recognized for 2 minutes, Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, I was
going to comment on your comment about AIG being the word of
the week, and you are right about that, but that is short term.
The biggest word we dealt with for 30 years, and I think the
reason you are here, is the word ``regulation.'' It has been a
swear word in Washington for 30 years. We don't regulate
anything. We haven't overseen anything or anybody, and the few
regulators we have have chosen not to do anything with the
powers they have.
Yet I have to be honest; I think you just heard the major
problem that we in Congress will have. I don't think anybody in
America today thinks there is too much regulation in the
financial services industry except some of my friends on the
other side of the aisle. And I have to be honest, I thought
that debate was over. I think it is over for most of us and for
most of America. What I want to hear today and what I want to
hear from the next point forward is not whether regulation is a
swear word, but how do we do it? Who should be included? Who
should be excluded, if anyone?
I can't imagine any arguments why anybody would say that
bank SIVs, Special Investment Vehicles, should be excluded from
regulation where the bank isn't. I can't imagine anybody today
telling me that hedge funds should have absolutely no
regulation. I can't imagine anybody today telling me that
private equity firms should have absolutely no regulation. I
can't imagine anybody today certainly not telling me that
credit rating agencies shouldn't be regulated by anybody.
Those things are past. The lack of regulation is
unequivocally, clearly, undebatably the reason that we have the
economic crisis we have today. The fair and only question left
is, how do we regulate in a reasonable and thoughtful manner?
No one wants to overregulate, but no one in their right mind
wants to under regulate anymore. It is a fair question and a
moving question as to how to do it in format, how to structure
this, and who should be included, and to what degree. Those
days of lack of regulation, of somehow the government is always
the problem, always in the way, are over, and I would suggest
that anybody who doesn't get that should just read any paper
any day anywhere in America today.
Mr. Chairman, I yield back. Thank you.
The Chairman. The gentleman from South Carolina for 1\1/2\
minutes.
Mr. Barrett. Thank you, Mr. Chairman.
Panel, recently we have been hearing a lot about a systemic
risk regulator, but it is the details, guys, that matter.
Before evaluating any proposal we need to know who that
regulator will be, what the regulator will do, and who or what
the regulator will oversee. We need reform, not more
regulation. And we need to ensure that our current regulators
are fulfilling their current mandates before we assign them new
duties.
I look forward to hearing your insights on how we can
ensure that any changes to the regulatory system can bring
certainty and trust back into the economy, but do not prevent
American families and small businesses from getting the capital
that they sorely need.
I yield back, Mr. Chairman.
The Chairman. The gentleman from Georgia, Mr. Price, for
1\1/2\ minutes.
Mr. Price. Thank you, Mr. Chairman. I am struck by the
certitude of some of my friends on the other side of the aisle
that may only be exceeded by their potential lack of
appreciation for the dangers of a political economy. I would
ask all of us to think about what industry is more regulated
than the U.S. financial industry. Despite layers of regulation,
we still find ourselves in the midst of a major economic
contraction. We ought not lose sight of that fact.
I am extremely concerned with the idea of a systemic risk
regulator. If a specific institution is designated as
``systemically significant,'' it certainly sends the message
that the government will not let it fail. This clearly gives
these institutions a huge competitive advantage over
nonsystemically significant institutions. This classification
takes us even further into the realm of a political economy,
and I would suggest that is the wrong road.
A market-based economy allows institutions to fail for a
number of reasons. Allowing the government to prop up
systemically significant institutions that would otherwise fail
doesn't improve competition or efficiency in our financial
system. This reminder should caution all of us as we consider a
proposal that might potentially completely change the way our
financial system operates, who wins, who loses and who decides.
I yield back.
The Chairman. The gentleman from Texas, Mr. Green, for 1\1/
2\ minutes.
Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, I believe
that our affair with invidious laissez-faire is over. We don't
expect football teams to regulate themselves, we don't expect
self-regulation in basketball. I don't think that we can expect
it in the economic order with reference to economic
institutions. I believe that too big to fail is just right to
regulate, because when we don't regulate too big to fail, the
potential to decimate society exists. We have to have an Office
of Systemic Risk Analysis if for no other reason than to
identify institutions that are too big to fail so that they can
be properly and positively regulated.
I yield back the balance of my time.
The Chairman. And finally, the gentleman from Texas, Mr.
Neugebauer, for 1\1/2\ minutes.
Mr. Neugebauer. Thank you, Mr. Chairman, for holding these
hearings.
A lot of changes are being proposed in the regulatory
structure in our country, and we have to be very careful that
we get this right. One of the questions that comes up is, did
we have systemic risk because we didn't have the proper
regulatory structure in place and the fact that there were
holes in that system created systemic risk within our economy,
or did we have systemic risk because we didn't have a systemic
risk regulator? I will tell you that I believe that we have a
regulatory structure that allowed systemic risk to begin to
transpire in our economy. But quite honestly, I believe that
the actions that we are taking today, unprecedented actions,
are also creating major systemic risk in our economy.
What does this all point to? It all points to the fact that
we must go very carefully and very slowly here as we look at
reforming our financial markets because we have to get this
right. Because some people believe if we get this right we will
take risk out of the market. It is not the role nor can
government take risk out of the market. But we can make sure
that there is integrity and transparency in the market as we
move forward.
And so, Mr. Chairman, I would hope that as we move down
this road of regulatory reform, that we will be extremely
careful here. It is not going to be the speed at which we do
our work, but the quality of the work we do, because it is
important to the American people that we get this right.
The Chairman. We will now begin the testimony in the order
in which they are printed here, which is probably random,
unlike the testimony. We will begin with Mr. Bartlett, Steve
Bartlett, President and Chief Executive Officer of the
Financial Services Roundtable, and a former member of this
committee.
STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, FINANCIAL SERVICES ROUNDTABLE
Mr. Bartlett. Thank you, Mr. Chairman.
Beginning about 3 years ago, the Roundtable began to
examine the questions of our current regulatory system, many of
which are raised today. This dialogue over that time has, over
those 3 years, has evolved into a focus on how the current
system also undermines the stability and the integrity of the
financial services industry. I provided in my written testimony
a format that provides at least our answer to many of the
questions that were raised today and previously questions and
comments. I want to summarize our conclusions as follows:
One, the financial services industry is regulated by
hundreds of separate independent regulators at various levels.
It is a system of fragmentation, inconsistency, and chaos. It
is a fragmented system of national and State financial
regulation that is based on functional regulation within
individual companies, and those companies are also regulated
according to their charter type. There is limited coordination
and cooperation among different regulators even though firms
with different charters often engage in the same, similar, or
sometimes exact activities. No Federal agency is responsible
for examining and understanding the risk created by the
interconnections between firms and between markets. This
chaotic system, our conclusion, of financial regulation was a
contributing factor to the current crisis.
Number two, that is not to say that the fragmented
regulation is the only cause. The financial services industry
accepts our share of responsibility: badly underwritten
mortgages; compensation packages that pay for short-term
revenue growth instead of long-term financial soundness;
failure to communicate across sectors, even within the same
company; and sometimes even downright predatory practices. All
of those and more have been part of this crisis.
Since early 2007, the industry has formally and
aggressively taken actions to correct those practices.
Underwriting standards have been upgraded, credit practices
have been reviewed and recalibrated, leverage has been reduced,
and firms have rebuilt capital, incentives have been realigned,
and some management teams have been replaced. We are not
seeking credit for that. Clearly the horses are all out of the
barn running around in the field. But those are the steps that
have been taken in the last 2 years. But the regulatory system
that was in place 2 years and 5 years ago is still in place. An
absence of coherent comprehensive systemic regulatory structure
did fail to identify and prevent the crisis, and we still have
the same regulatory system today.
Number three, reforming and restructuring the regulatory
system in 2009 should be Congress' primary mission moving
forward to resolve the crisis and prevent another crisis.
Achieving better and more effective regulation does require
more than just rearranging regulatory assignments. Better and
more effective regulation requires a greater reliance on
principle-based regulation, a greater reliance on a system of
prudential supervision, a reduction in the pro-cyclical effects
of regulatory and accounting principles, and a consistent
uniform standard of which similar activities and similar
institutions are regulated in similar ways.
Number four, we are proposing a comprehensive reform of the
regulatory structure that includes clear lines of authority and
uniform standards across both State lines and types of
business. Within our proposal, we recommend: the consolidation
of several existing Federal agencies into single agencies, a
single national financial institutions regulator that would be
consolidated prudential and consumer protection agency for
banking, securities, and insurance; a new capital markets
agency through the merger of the SEC and the CFTC to protect
depositors and shareholders and investors; and to resolve
failing or failed institutions, we propose a creation of the
national insurance and resolution authority to resolve
institutions that fail in a consistent manner from place to
place.
Number five, we also advocate a systemic regulator, what we
prefer to call a market stability regulator. The market
stability regulator would be, as I said in subcommittee
testimony, ``NIFO--nose in and fingers out.'' That means a
market stability regulator should not replace or add to the
primary regulators, but should identify risks and act through
and with a firm's primary regulator. We believe that
designating the Federal Reserve is the natural complement to
the Federal Reserve Board's existing authority as the Nation's
central bank and the lender of last resort. The market
stability regulator should be authorized to oversee all types
of financial markets and financial services firms, whether
regulated or unregulated, and we propose an exact definition of
at least our proposal of that system of regulation of systemic
regulator.
And number six, the U.S. regulatory system should be the
U.S. system of course, but it should be coordinated and
consistent with international standards.
Mr. Chairman, the time to act is now. We believe that these
reforms should proceed in a comprehensive fashion rather than a
piecemeal fashion. The key is to do this correctly, not
rapidly, but to do this with the sense of urgency for which the
crisis calls.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Bartlett can be found on
page 64 of the appendix.]
The Chairman. I do note that our former colleague retains a
respect for the 5-minute rule that we don't always get from
witnesses, and I appreciate it.
Our next witness, a former official, Timothy Ryan, is here
as the chief executive officer of the Securities Industry and
Financial Markets Association.
STATEMENT OF THE HONORABLE T. TIMOTHY RYAN, JR., PRESIDENT AND
CHIEF EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL
MARKETS ASSOCIATION (SIFMA)
Mr. Ryan. Thank you, Chairman Frank, Ranking Member Bachus,
and members of the committee. My testimony will detail the
Securities Industry and Financial Markets Association's view on
the financial market stability regulator, including the
mission, purpose, powers, and duties of such a regulator.
Systemic risk has been at the heart of the current
financial crisis. While there is no single commonly accepted
definition of systemic risk, we think of systemic risk as the
risk of a systemwide financial breakdown characterized by a
probability of the contemporaneous failure of a substantial
number of financial institutions or of financial institutions
or a financial market controlling a significant amount of
financial resources that could result in a severe contraction
of credit in the United States or have other serious adverse
effects on global economic conditions or financial stability.
There is an emerging consensus among our members that we
need a financial market stability regulator as a first step in
addressing the challenges facing our overall financial
regulatory structure. We believe that the mission of a
financial market stability regulator should consist of
mitigating systemic risk, maintaining financial stability, and
addressing any financial crisis.
Specifically, the financial market stability regulator
should have authority over all financial institutions in
markets regardless of charter, functional regulator, or
unregulated status. We agree with Chairman Bernanke that its
mission should include monitoring systemic risk across firms
and markets rather than only at the level of individual firms
or sectors, assessing the potential for practices or products
to increase systemic risk, and identifying regulatory gaps that
have systemic impact.
One of the lessons learned from recent experience is that
sectors of the market, such as the mortgage brokerage industry,
can be systemically important even though no single institution
in that sector is a significant player. The financial market
stability regulator should have authority to gather information
from all financial institutions and markets, adopt uniform
regulations related to systemic risk, and act as a lender of
last resort.
In carrying out its duties, the financial market stability
regulator should coordinate with the relevant functional
regulators, as well as the President's Working Group, in order
to avoid duplicative or conflicting regulation and supervision.
It should also coordinate with regulators responsible for
systemic risk in other countries.
Although the financial market stability regulator's role
would be distinct from that of the functional regulators, it
should have a more direct role in the oversight of systemically
important financial organizations, including the power to
conduct examinations, take prompt corrective action, and
appoint or act as the receiver or conservator of such
systemically important groups.
These are more direct powers that would end if a financial
group were no longer systemically important. We believe that
all systemically important financial institutions that are not
currently subject to Federal functional regulation, such as
insurance companies and hedge funds, should be subject to such
regulation. We do not believe the financial market stability
regulator should play the day-to-day role for those entities.
The ICI has suggested that hedge funds could be appropriately
regulated by a merger of SEC and CFTC. We agree with that
viewpoint.
The collapse of AIG has highlighted the importance of
robust insurance holding company oversight. We believe the time
has come for adoption of an operational Federal insurance
charter for insurance companies. In a regulatory system where
functional regulation is overlaid by financial stability
oversight, how the financial market stability regulator
coordinates with the functional regulators is an important
issue to consider. As a general principle we believe that the
financial markets regulator should coordinate with the relevant
functional regulators in order to avoid duplicative or
conflicting regulation and supervision. We also believe the
Federal regulator for systemic risk should have a tiebreaker,
should have the ultimate final decision where there are
conflicts between the Federal functional regulators.
There are a number of options for who might be the
financial market stability regulator. Who is selected as the
financial stability regulator should have the right balance
between accountability to and independence from the political
process, it needs to have credibility in the markets and with
regulators in other countries and, most importantly, with the
U.S. citizens.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Ryan can be found on page
115 of the appendix.]
The Chairman. Thank you, Mr. Ryan.
Next, Peter Wallison, who is an Arthur F. Burns Fellow in
Financial Policy Studies in the American Enterprise Institute
and with whom I have a connection, because Mr. Burns and I--you
may not know this--are both from Bayonne, New Jersey. So I
claim Mr. Burns as an alumnus.
Mr. Wallison.
STATEMENT OF THE HONORABLE PETER J. WALLISON, ARTHUR F. BURNS
FELLOW IN FINANCIAL POLICY STUDIES, AMERICAN ENTERPRISE
INSTITUTE
Mr. Wallison. Thank you, Mr. Chairman, and Ranking Member
Bachus, for this opportunity to testify about a systemic risk
regulator. There are two questions here, it seems to me. First,
will a systemic regulator perform any useful function? And
second, should a government agency be authorized to regulate
so-called systemically significant financial institutions? I am
going to start with the second question because I believe it is
by far the most important.
Giving a government agency the power to designate companies
as systemically significant and to regulate their capital and
activities is a very troubling idea. It has the potential to
destroy competition in every market where a systemically
significant company is designated.
I say this as a person who has spent 10 years warning that
Fannie Mae and Freddie Mac would have disastrous effects on the
U.S. economy and that ultimately the taxpayers of this country
would have to bail them out. Because they were seen as backed
by the government, Fannie and Freddie were relieved of market
discipline and able to take risks that other companies could
not take. For the same reason, they also had access to lower
cost financing than any of their competitors. These benefits
enabled them to drive out competition and grow to enormous
size. Ultimately, however, the risks they took caused their
collapse and will cause enormous losses for U.S. taxpayers.
When Fannie and Freddie were taken over by the government,
they held or guaranteed $1.6 trillion in subprime and Alt-A
mortgages. These loans are defaulting at unprecedented rates,
and I believe will ultimately cost U.S. taxpayers $400 billion.
There is very little difference between a company that has been
designated as systemically significant and a GSE like Fannie or
Freddie. By definition a systemically significant firm will not
be allowed to fail because its failure could have systemic
effects. As a result it will be seen as less risky for
creditors and counterparties and will be able to raise money at
lower rates than its competitors. This advantage, as we saw
with Fannie and Freddie, will allow it to dominate its market,
which is a nightmare for every smaller company in every
industry where a systemically significant company is allowed to
operate.
Some will contend that in light of the failures among huge
financial firms in recent months, we need regulation to prevent
such things in the future, but this is obviously wrong.
Regulation does not prevent risk-taking or loss. Witness the
banking industry, the most heavily regulated sector in our
economy. Many banks have become insolvent and many others have
been or will be rescued by the taxpayers.
It is also argued that since we already have rescued a lot
of financial institutions, moral hazard has been created, so
now we should regulate all financial institutions as if they
will be rescued in the next crisis. But there is a lot of
difference between de jure and de facto, especially when we are
dealing with an unprecedented situation.
Anyone looking at the Fed's cooperation with the Treasury
today would say that the Fed de facto is no longer independent.
But after the crisis is over, we would expect that the Fed's
independence will be reestablished. That is the difference
between de jure and de facto.
Extending regulation beyond banking by picking certain
firms and calling them systemically significant would, in my
view, be a monumental mistake. We will simply be creating an
unlimited number of Fannies and Freddies that will haunt our
economy in the future.
Let me now turn to the question of systemic regulation in
general. Why choose certain companies as systemically
significant? The theory seems to be that the failure of big
companies caused this financial crisis or without regulation
might cause another in the future. But is the U.S. banking
system in trouble today because of the failure of one or more
large companies? Of course not. It is in trouble because of
pervasive losses on trillions of dollars of bad mortgages. So
will regulation of systemically significant companies prevent a
recurrence of a financial crisis in the future? Not on the
evidence before us. An external shock that causes asset prices
to crash or investors to lose confidence in the future will
have the same effect whether we regulate systemically
significant companies or not. And regulation, as with banks,
will not even prevent the failure of systemically significant
companies; it will only set them up for bailouts when
inevitably they suffer losses in their risk taking.
Finally, the Federal Reserve would be by far the worst
choice for systemic regulator. As a lender of last resort, it
has the power to bail out the companies it is supervising,
without the approval of Congress or anyone else. Its regulatory
responsibilities will conflict with its central banking role,
and its involvement with the politics of regulation will raise
doubts about its independence from the political branches.
We will achieve nothing by setting up a systemic regulator.
If we do it at the cost of destroying faith in the dollar and
competition in the financial services market, we will have done
serious and unnecessary harm to the American economy.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Wallison can be found on
page 159 of the appendix.]
The Chairman. Next, Terry Jorde, the president and CEO of
CountryBank USA. She is here on behalf of the Independent
Community Bankers of America.
STATEMENT OF TERRY J. JORDE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, COUNTRYBANK USA, ON BEHALF OF INDEPENDENT COMMUNITY
BANKERS OF AMERICA (ICBA)
Ms. Jorde. Thank you, Mr. Chairman, Ranking Member Bachus,
and members of the committee. My name is Terry Jorde. I am
president and CEO of CountryBank USA. I am also immediate past
chairman of the Independent Community Bankers of America.
My bank is located in Cando, North Dakota, a town of 1,300
people, where the motto is, ``You Can Do better in Cando.''
CountryBank has 28 full-time employees and $45 million in
assets. ICBA is pleased to have this opportunity to testify
today on regulation of systemic risk in the financial services
industry.
I must admit to you that I am very frustrated today. I have
spent many years warning policymakers of the systemic risk that
was being created in our Nation by the unbridled growth of the
Nation's largest banks and financial firms. But I was told that
I didn't get it, that I didn't understand the new global
economy, that I was a protectionist, that I was afraid of
competition, and that I needed to get with the modern times.
Well, sadly, we now know what the modern times look like,
and it isn't pretty. Excessive concentration has led to
systemic risk and the credit crisis. Banking and antitrust laws
are too narrow to prevent these risks. Antitrust laws are
supposed to maintain competitive geographic and product
markets. So long as the courts and agencies can discern that
there are enough competitors in a particular market, that ends
the inquiry. This often prevents local banks from merging, but
it does nothing to prevent the creation of giant nationwide
franchises.
Banking regulation is similar. The agencies ask only if a
given merger will enhance the safety and soundness of an
individual firm. They generally answer bigger is almost
necessarily stronger. A bigger firm can, many said, spread its
risk across geographic areas and business lines. No one
wondered what would happen if one firm or a group of firms
jumped off a cliff and made billions in unsound mortgages.
Now we know; our economy is in crisis. The four largest
banking companies control more than 40 percent of the Nation's
deposits and more than 50 percent of U.S. bank assets. This is
not in the public interest. A more diverse financial system
would reduce risk and promote competition, innovation, and the
availability of credit to consumers of various means and
businesses of all sizes.
We can prove this. Despite the challenges we face, the
community bank segment of the financial system is still working
and working well. We are open for business, we are making
loans, and we are ready to help all Americans weather these
difficult times.
But I must report that community bankers are angry. Almost
every Monday morning, they wake up to news that the government
has bailed out yet another too big to fail institution. On many
Saturdays, they hear that the FDIC summarily closed one or two
too small to save institutions. And just recently, the FDIC
proposed a huge special premium to pay for losses imposed by
large institutions. This inequity must end, and only Congress
can do it. The current situation will damage community banks
and the consumers and small businesses that we serve.
What can we do? ICBA recommends the following strong
measures: Congress should direct a fully staffed interagency
task force to immediately identify systemic risk institutions.
They should be put immediately under Federal supervision. The
Federal systemic risk agency should impose two fees on these
institutions that would compensate the agency for the cost of
supervision and capitalize a systemic risk fund comparable to
the FDIC. The FDIC should impose a systemic risk premium on any
insured bank that is affiliated with a systemic risk firm. The
systemic risk regulator should impose higher capital charges to
provide a cushion against systemic risk.
The Congress should direct the systemic risk regulator and
the FDIC to develop procedures to resolve the failure of a
systemic risk institution. The Congress should direct the
interagency systemic risk task force to order the breakup of
systemic risk institutions. Congress should direct the systemic
risk regulator to block any merger that would result in the
creation of a systemic risk institution. And finally, it should
direct the systemic risk regulator to block any financial
activity that threatens to impose a systemic risk.
The current crisis provides you an opportunity to
strengthen our Nation's financial system and economy by taking
these important steps. They will protect taxpayers and create a
vibrant banking system where small and large institutions are
able to fairly compete. ICBA urges Congress to quickly seize
this opportunity.
Thank you, Mr. Chairman.
[The prepared statement of Ms. Jorde can be found on page
91 of the appendix.]
The Chairman. Thank you. And next, we have Mr. Travis
Plunkett, the legislative director of the Consumer Federation
of America.
STATEMENT OF TRAVIS PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Plunkett. Thank you, Mr. Chairman, Ranking Member
Bachus, and members of the committee. I am Travis Plunkett,
legislative director of the Consumer Federation of America, and
I appreciate the opportunity to testify today about how to
better protect the financial system as a whole and the broader
economy from systemic risk. I would like to make three key
points:
First, systemic regulation isn't just a matter of
designating and empowering a risk regulator, as important as
that may be. It involves a comprehensive plan to reduce
systemic risk, including immediate steps both to reinvigorate
day-to-day safety and soundness in consumer and investor
protection regulation of financial institutions and to address
existing systemic risk, in particular by shutting down the
shadow banking system once and for all.
Second, systemic risk regulation should not rely only on a
crisis management approach or focus on flagging a handful of
large institutions that are deemed too big to fail. Rather, it
must be an ongoing day-to-day obligation of financial
regulators focused on reducing the likelihood of a systemic
failure triggered by any institution or institutions in the
aggregate.
Third, CFA has not endorsed a particular systemic
regulatory structure, but if Congress chooses to designate the
Fed as a systemic regulator, it must take steps to address
several problems inherent in this approach, including the Fed's
lack of transparency and accountability and the potential for
conflicts between the roles of setting monetary policy and
regulating for systemic risk.
The fact that we could have prevented the current crisis
without a systemic regulator provides a cautionary lesson about
the limits of an approach that is just focused on creating new
regulatory structures. It is clear that regulators could have
prevented or greatly reduced the severity of the current crisis
using basic consumer protection and safety and soundness
authority. Unless we abandon a regulatory philosophy based on a
rational faith in the ability of markets to self-correct,
whatever we do on systemic risk regulation is likely to have a
limited effect.
The flip side of this point, the positive side, suggests
that simply closing the loopholes in the current regulatory
structure, reinvigorating Federal regulators in doing an
effective job of the day-to-day task of soundness and investor
and consumer protection will go a long way to eliminating the
greatest threats to the financial system.
Chairman Frank and several members of this committee have
been leaders in talking about the importance of a comprehensive
approach to systemic risk regulation and have focused on
executive compensation as a factor that contributes to systemic
risk. We agree about the compensation practices that encourage
excessive risk-taking and about the need to bring currently
unregulated financial activities under the regulatory umbrella.
The experiences of the past year have demonstrated
conclusively the ineffectiveness of managing systemic risk only
when the Nation finds itself on the brink of a crisis. It is of
paramount importance in our view that any new plan provide
regulators with ongoing day-to-day authority to curb systemic
risk.
The goal of regulation should not be focused only or even
primarily on the potential bailout of systemically significant
institutions. Rather, it should be designed to ensure that all
risks that could threaten the broader financial system are
quickly identified and addressed to reduce the likelihood that
a systemically significant institution will fail and to provide
for the orderly failure of nonbank financial institutions.
Regardless of which structure Congress chooses to adopt, we
urge you to build incentives into the system to discourage
institutions from becoming too big or too interconnected to
fail. One way to do this is to subject financial institutions
to risk-based capital requirements and premium payments
designed to deter those practices that magnify risks, such as
growing too large, holding risky assets, increasing leverage,
or engaging in other activities deemed risky by regulators.
To increase the accountability of regulators and reduce the
risk of groupthink, we also recommend that you create a high
level systemic risk advisory council made up of academics and
other independent analysts from a variety of disciplines.
Once again, I appreciate the opportunity to appear before
you today and look forward to answering questions.
[The prepared statement of Mr. Plunkett can be found on
page 101 of the appendix.]
Mr. Kanjorski. [presiding] Thank you very much, Mr.
Plunkett. Mr. Silvers.
STATEMENT OF DAMON A. SILVERS, ASSOCIATE GENERAL COUNSEL, AFL-
CIO
Mr. Silvers. Thank you, Congressman Kanjorski. Good
morning, and good morning to Ranking Member Bachus and the
committee. My name is Damon Silvers. I am associate general
counsel of the AFL-CIO, and I am the deputy chair of the
Congressional Oversight Panel. My testimony today though is on
behalf of the AFL-CIO, and though I will refer to the work of
the panel on which I am honored to serve together with
Congressman Hensarling, my testimony does not reflect
necessarily the views of the panel, its chair, or its staff.
The AFL-CIO has urged Congress since 2006 to act to
reregulate shadow financial markets, and the AFL-CIO supports
addressing systemic risk. The Congressional Oversight Panel
made the following recommendations with respect to addressing
systemic risk, recommendations which the AFL-CIO supports:
First, there should be a body charged with monitoring
sources of systemic risk in the financial system. The AFL-CIO
believes that systemic risk regulation should be the
responsibility of a coordinating body of regulators chaired by
the Chairman of the Board of Governors of the Federal Reserve
System. This body should have its own staff with the resources
and expertise to monitor diverse sources of systemic risk in
institutions, products, and markets throughout the financial
system.
Second, the body charged with systemic risk management
should be a fully public body, accountable and transparent. The
current structure of regional Federal Reserve banks, the
institutions that actually do the regulation of bank holding
companies, where the banks participate in the governance, is
not acceptable for a systemic risk regulator.
Third, we should not identify specific institutions in
advance as too big to fail but, rather, have a regulatory
framework in which institutions have higher capital
requirements and pay more on insurance funds on a percentage
basis than smaller institutions which are less likely to be
rescued as being too systemically significant.
Fourth, systemic risk regulation cannot be a substitute for
routine disclosure, accountability, safety and soundness, and
consumer protection regulation of financial institutions and
financial markets. Consequently, the AFL-CIO supports a
separate consumer protection agency for financial services
rather than having that authority rest with bank regulators.
And here we see this consumer protection function as somewhat
distinct from investor protection, which the SEC should do.
Fifth, effective protection against systemic risk requires
that the shadow capital markets, institutions like hedge funds
and private equity funds and products like credit derivatives,
must not only be subject to systemic risk-oriented oversight,
but must also be brought within a framework of routine capital
market regulation by agencies like the SEC. We can no longer
tolerate a Swiss cheese system of financial regulations.
And finally, there will not be effective reregulation of
the financial markets without a global regulatory floor. That
ought to be a primary goal of the diplomatic arms of our
government.
The Congressional Oversight Panel urged that attention be
paid to executive compensation in financial institutions. This
is an issue of particular concern to the AFL-CIO that I want to
turn to now in the remainder of my testimony in relation to
systemic risk.
There are two basic ways in which executive pay can be a
source of systemic risk. When financial institutions' pay
packages have short-term pay horizons that enable executives to
cash out their incentive pay before the full consequences of
their actions are known, that is a way to generate systemic
risk.
Secondly, there is the problem that is technically referred
to as risk asymmetry. When an investor holds a stock, the
investor is exposed to upside and downside risk in equal
proportion. For every dollar of value lost or gained, the stock
moves proportionately; but when an executive is compensated
with stock options, the upside works like a stock but the
downside is effectively capped. Once the stock falls well below
the strike price of the option, the executive is relatively
indifferent to further losses. This creates an incentive to
focus on the upside and be less interested in the possibility
of things going really wrong. It is a terrible way to
incentivize the managers of major financial institutions, and a
particularly terrible way to incentivize the manager of an
institution the Federal Government might have to rescue.
This is highly relevant, by the way, to the situation of
sick financial institutions. When stock prices have fallen
close to zero, stocks themselves behave like options from an
incentive perspective. It is very dangerous to have sick
financial institutions run by people who are incentivized by
the stock price. You are basically inviting them to take
destructive risks, from the perspective of anyone like the
Federal Government, who might have to cover the downside.
This problem today exists in institutions like AIG and
Citigroup, not just with the CEO of the top five executives,
but for hundreds of members of the senior management team.
A further source of assymetric risk incentive is the
combination of equity-based compensation with large severance
packages. As we have learned, disastrous failure in financial
institutions sometimes leads to getting fired but rarely leads
to getting fired for cause. The result is the failed executive
gets a large severance package.
If success leads to big payouts and failure leads to big
payouts but modest achievements either way do not, then there
is a big incentive to shoot the moon without regard to downside
risk. These sorts of pay packages in just one very large
financial institution can be a source of systemic risk, but
when they are the norm throughout the financial services
sector, they are a systemwide source of risk, much like
unregulated derivatives or asset-backed securities.
Consequently, this is an issue that the regulators of systemic
risk ought to have the authority to take up.
I thank you for your time.
[The prepared statement of Mr. Silvers can be found on page
136 of the appendix.]
The Chairman. Thank you.
Finally, Edward Yingling, who is the president and CEO of
the American Bankers Association.
STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AMERICAN BANKERS ASSOCIATION (ABA)
Mr. Yingling. Thank you, Mr. Chairman, Ranking Member
Bachus, and members of the committee. The ABA congratulates
this committee on the approach it is to taking to the financial
crisis. There is a great need to act, but to do so in a
thoughtful and thorough manner and with the right priorities.
That is what this committee is doing.
Last week, Chairman Bernanke gave a speech which focused on
three main areas: First, the need for a systemic risk
regulator; second, the need for a method of orderly resolution
of systemically important financial firms; and third, the need
to address gaps in our regulatory system.
Statements by the leadership of this committee have also
focused on a legislative plan to address these three areas. We
agree that these three issues: A systemic regulator; a new
resolution mechanism; and addressing gaps, should be the
priorities. This terrible crisis should not be allowed to
happen again, and addressing these three areas is critical to
make sure it does not.
The ABA strongly supports the creation of a systemic
regulator. In retrospect, it is inexplicable that we have not
had such a regulator.
To use a simple analogy, think of a systemic regulator as
sitting on top of Mount Olympus, looking out over the land.
From that highest point, the regulator is charged with
surveying the land, looking for fires. Instead we have had a
number of regulators, each of which sits on top of a smaller
mountain and only sees part of the land. Even worse, no one is
effectively looking over some areas.
While there are various proposals as to who should be the
systemic regulator, most of the focus has been on giving the
authority to the Federal Reserve. It does make sense to look
for the answer within the parameters of the current regulatory
system. It is doubtful that we have the luxury, in the midst of
this crisis, to build a new system from scratch, however
appealing that might be in theory.
There are good arguments for looking to the Fed. This could
be done by giving the authority to the Fed or by creating an
oversight committee chaired by the Fed. ABA's one concern in
using the Fed relates to what it may mean for the independence
of the Federal Reserve in the future. We strongly believe in
the importance of Federal Reserve independence in setting
monetary policy.
ABA believes that systemic regulation cannot be effective
if accounting policy is not part of the equation. That is why
we support the Perlmutter-Lucas bill, H.R. 1349.
To continue my analogy, a systemic regulator on Mount
Olympus cannot function if part of the land is held strictly
off limits and under the rule of some other body, a body that
can act in a way that contradicts the systemic regulator's
policies. That is, in fact, exactly what happened with mark-to-
market accounting.
I want to take this opportunity to thank this committee for
the bipartisan efforts in the hearing last week on mark-to-
market. Your efforts last week will significantly aid in
economic recovery. We hope that the FASB and the SEC will take
the final action you clearly advocated.
ABA strongly supports a mechanism for the orderly
resolution of systemically important nonbank firms. Our
regulatory body should never again be in a position of making
up a solution to a Bear Stearns or an AIG or not being able to
resolve a Lehman Brothers. The inability to deal with those
situations in a predetermined way greatly exacerbated this
crisis.
A critical issue in this regard is too-big-to-fail.
Whatever is done on the systemic regulator and on a resolution
system will in a major fashion determine the parameters of too-
big-to-fail. In an ideal world, there would be no such thing as
too-big-to-fail; but we know that the concept not only exists,
it has grown broader over the last few months. This concept has
profound moral hazard and competitive effects that are very
important to address.
The third area of our focus is where there are gaps in
regulation. These gaps have proven to be a major factor in the
crisis, particularly the role of largely unregulated mortgage
lenders. Credit default swaps and hedge funds should also be
addressed in legislation to close gaps.
There seems to be a broad consensus to address these three
areas. The specifics will be complex and in some cases
contentious. At this very important time, with Americans losing
their jobs, their homes and their retirement savings, all of us
should work together to develop a stronger regulatory
structure. The ABA pledges to be an active and constructive
participant in this critical hour.
Thank you.
[The prepared statement of Mr. Yingling can be found on
page 171 of the appendix.]
The Chairman. Thank you all. This is all very useful, and I
think we are having--I mean, we have a crisis, and the crisis
is not conducive to kind of calmness, and I am pleased that we
appear to be able to separate that out, and we deal with the
crisis under a lot of sturm und drang. We can have rational
conversations about where to go forward. I appreciate
everybody's approach.
A couple of brief points. Ms. Jorde, as you know, if we are
able to get through the Senate, and we would then concur an
increase in the FDIC's lending authority to deal with potential
problems up to the $500 billion mark, the increase in the
assessment will be substantially reduced. They are talking now
about a 13-cent increase, and it would go down to a 3-cent
increase.
So that is on the community banks, as you correctly point
out, being hit with the assessment that is based on some
others. Whether or not that should be risk-based, many of us
think it is. If that could be worked out, that is separate. But
we are on track, I think it is now 6.3 cents. Instead of going
to 20 cents, it would go to 10 cents, which is a very
substantial reduction, and we will try to do that.
Mr. Wallison, on the insurance issue, an important one, you
mentioned the problem with the regulated AIG entities, the
insurance companies. Then the money went to an unregulated
entity. And you said an optional Federal charter, and that
would be very much on the agenda of this committee. There are
members who have pushed for it.
But what would you do for those who opted not to opt? Would
you give some Federal power--and you pointed out a problem here
that, with AIG, you had regulated companies but an unregulated
entity on the top. If you had an optional Federal charter and
the entity became a Federal charter that could be federally
regulated, what would you do for situations where the companies
did not opt for Federal charter? Would you extend some Federal
regulation at that top level?
Mr. Wallison. First of all, Mr. Chairman, AIG is regulated.
It is regulated by OTS. It is a thrift holding company. Now, it
might not have been effectively--
The Chairman. Well, I thought you were calling--maybe I
misunderstood your testimony. I thought you were calling for a
change and saying that we should have an optional Federal
charter that should improve regulation of insurance. I
apologize if I misinterpreted that.
Mr. Wallison. I didn't actually speak about an optional
Federal charter. I happen to favor that, but I didn't speak
about it in this testimony.
The Chairman. Oh, it is Mr. Ryan. I apologize.
Mr. Wallison. We look so much alike, I guess.
The Chairman. From here, I apologize then. Let me ask that
to Mr. Ryan. I am sorry, Mr. Wallison.
Mr. Ryan. The direct answer is that if a company did not
opt for a Federal charter, but it was systemically important or
involved in systemically important activities, then under our
proposal the regulator would have authority.
The Chairman. So is that an option of--the Federal charter
would be the Federal insurance regulator, but it would go up.
Let me ask one other issue, and Mr. Silvers made an
important point about the compensation. And I have one other
question that I hear everybody talking about, and that is, it
is my impression that part of the problem--Mr. Yingling
mentioned the subprime loans--if enough bad decisions are made
at the outset, it seems to me it is very hard to recover from
that. The ability to securitize 100 percent of the loans
appears to me to be part of the problem. Should we explore some
limitation on the ability to securitize? Should there be some
risk-retention requirement in that area?
Mr. Bartlett, let's begin with you.
Mr. Bartlett. We concluded--and this is a reversal of our
previous position--that there should be some risk retention. We
think that is going to happen in Europe, and it is the prudent
thing to do, risk retention of some type.
The Chairman. Mr. Ryan.
Mr. Ryan. We think it is practical that, at least here and
in Europe, there will be some risk retention. So we are cozied
up to that requirement. How much, we are still debating.
The Chairman. I agree with both. How much, and is it first
dollar or what percentage? Is it proportional? I mean,
obviously saying that, but that begins an inquiry. Mr.
Wallison.
Mr. Wallison. I think there is good reason to at least make
sure that someone is bearing a risk at every level, but we also
ought to, Mr. Chairman, begin to look at other methods of
financing our mortgage system, covered bonds, for example.
The Chairman. I agree with that, and we will be getting to
that, but I did want to give--and I appreciate that. Ms. Jorde.
Ms. Jorde. I certainly can understand the philosophy of
retaining risk. I think the one caveat would be how that would
affect the community banking industry in terms of servicing.
For example, we don't have the mortgage departments geared up
to handle servicing, so most of the banks of my size will sell
their mortgages with servicing released. I guess it would be
whether or not the economies of scale would be sufficient
enough that community banks would be able to continue to
participate in that market.
The Chairman. Well, thank you. It is theoretically possible
that you could still sell off the servicing but retain a small
percentage of the risk?
Ms. Jorde. Certainly.
The Chairman. Mr. Plunkett.
Mr. Plunkett. Yes. We would support additional risk-
retention requirements for securitization. And Mr. Chairman, on
the question of an optional Federal charter, it just seems like
a valuable lesson of the current crisis. If we have learned
anything, it is that giving the regulated party their choice of
regulator will lead to downward pressure on bank quality.
The Chairman. Thank you. I do want to get to Mr. Silvers.
Mr. Silvers. Yes, I think that risk--retaining some skin in
the game is a good idea, but not just for the originator. I
think there has been a lot of learning about how damaging it
has been that servicers, say in mortgages, are disconnected
from the economics of the mortgage. And I think--
The Chairman. I appreciate it. The gentlewoman from
California is here, and she, early on, focused on the problem
in the servicer model, and over and above the risk retention,
but in dealing with the whole question of mortgages, I believe
we will--it seems to me it is a great mistake for the law to
allow important decisions that have to be made but can't be
made; that they should not be in a situation where nobody is in
charge of some important decisions. And we will approach that.
Mr. Yingling, on the risk retention.
Mr. Yingling. I would agree with your analysis, and I know
you are well aware there are some very thorny accounting issues
that we have to work our way through, but it is something we
definitely all ought to look at to see if we can't make people
have some skin in the game.
The Chairman. I thank the witnesses. The gentleman from
Alabama.
Mr. Bachus. Thank you, Mr. Chairman.
Let me pick up on Mr. Yingling's analogy of the systemic
risk regulator sitting up on Mount Olympus, you know, surveying
the scene, putting out the fires. And one of my problems is
that we are--he wouldn't put out all the fires. He would only
put out the big fires, as I understand it. Is that correct?
Mr. Yingling. That is correct; and more importantly,
identify the fires and then decide who puts out the fires.
Mr. Bachus. The little fires would be allowed to burn?
Mr. Yingling. To some degree; or the regulator on the
smaller mountain would be in charge of that.
Mr. Bachus. But to me, that is one of the really unfair
aspects of too-big-to-fail. It implies--and I have said this
since September--it implies too-small-to-save. And as we say in
Alabama, this is just flat-out unfair, and we seem to be
endorsing, with legislation, a regulatory approach like that.
The other thing is that you have a regulatory agency
sitting up there on Mount Olympus, and they are not only
putting out fires, but they are also repairing the structures
at taxpayer expense. I mean, they go in and they are doing it
with taxpayer dollars. And is that wrong? Or should we--you
know, I said in my opening statement, let's try to agree on
something going in, so that we don't have these multibillion-
dollar taxpayer bailouts.
I ask all the panelists, what is your position on giving
the regulator--and all we are basing that on right now is a
Federal Reserve Act, some language in there, and--but let me
just start with you, Mr. Bartlett. Do you think that we ought
to empower this--the risk regulator to use billions of dollars'
worth of taxpayer money.
Mr. Bartlett. No, Congressman, I don't; other than what we
now have, which is no analysis of systemic risk, no oversight
of systemic risk, no one to notice systemic risk and the
unlimited Federal Reserve dollars. So none of the systemic risk
regulator proposals propose any additional authority on the
solution problem.
What we have proposed is the Federal Reserve as a systemic
risk oversight, but then followed by a coherent, comprehensive
resolution authority to resolve the failures in a coherent,
consistent manner that does not now exist.
Mr. Bachus. I would agree with that and advance a
resolution, but I think we ought to put a provision in there
that they don't use taxpayer dollars.
Another thing that I think--what do you think about
advancing local lending more? In the past several years with
the consolidation, we are getting further away from sort of
Main Street lending. Is that a problem?
Mr. Bartlett. Congressman, I don't see it that way. I think
lending is up. I think that the lending from all sizes of
banks, both largest and smallest, is actually up. Regions in
Birmingham and Compass Bank in Birmingham have, in fact,
increased their lending. Whitney has increased their lending.
So it is not size that either causes more commercial lending or
less. It is the capital underneath at the bank. So I don't see
it as a size issue.
Mr. Bachus. Of course, size is an issue when it comes to
too-big-to-fail I guess.
Mr. Bartlett. We haven't seen--we are not ones who agree
with too-big-to-fail.
Mr. Bachus. Oh, okay.
Mr. Bartlett. Wachovia failed, WAMU failed, National City
failed. The issue is whether we can identify and prevent the
problems earlier and then whether the resolution can be done in
an orderly way.
Mr. Bachus. And I am on board with all that.
Although I have to agree with Mr. Wallison, and I preface
that by saying, could this be an incentive to take even more
risk? I mean, when you have a perception out there that you
have a government agency that is going to make sure that an
institution doesn't fail, as he said, you identify them as
systematically important. You are implying that there is some
sort of guarantee. Now, even if you don't give it, we saw that
in Fannie and Freddie as soon as they began to fail, we all
said there was an implicit guarantee.
Mr. Wallison, do you--is there any way--without just simply
saying that we are not--that the government is not going to
bail these companies out, I don't see any way to avoid at least
an implicit guarantee, which I think we have learned is a bad
thing.
Mr. Wallison. I think you are correct, Mr. Bachus. The
markets are very clear about this sort of thing. And where the
government seems to be backing a company in some way and making
sure that the company will not fail through government
resources, then the market follows that lead, and they will
make it easier for these companies to raise Funds, and at lower
rates than others they compete with. So we will have a Fannie
and Freddie situation to deal with in every market.
Mr. Bachus. I think the government can guarantee things,
and that is Treasury bonds and debt obligations of the U.S.
Government, and that is where it ought to end. And if people
think they are investing in something the government is going
to back, they ought to invest in government bonds or securities
or instruments.
Ms. Jorde. Congressman Bachus, to go back to your fire
analogy, I think really what we are looking at is whether we
need a big, huge, large fire department, and I don't think that
is what we are talking about here. I think we need to figure
out ways to keep these fires from starting.
You know, if you look at the national--at the systemic risk
of some of these largest institutions and the national
dependence on those, I would question whether or not the--on
failure of AIG and Bear Stearns, you know, if they had been
allowed to go down, what would the impact have been on Citicorp
and Bank of America? I mean, I think that is really what we are
talking about is the interconnectedness of these huge financial
institutions that are too large and they can't fail, and if
they do, everything else goes down with them. So we have to
keep the fires from starting.
Mr. Bachus. Sure, and that was his analogy. That was Mr.
Yingling's analogy. But I appreciate that, and I agree with
you.
I think that is the--but once they start, I don't think the
government ought to put them out at taxpayer expense unless we
have guaranteed deposits, and that is where it ought to end. We
ought to guarantee deposits. Whether that level is $250,000 or
$500,000, it ought to end wherever that guarantee ends.
Mr. Kanjorski. [presiding] Thank you very much, Mr. Bachus.
I will take my 5 minutes while we are waiting for the Chair to
return.
First of all, let me thank the panel for their testimony
and for their unanimous support of having skin in the game.
That really is a revolutionary concept that we would have seven
members of panelists, diverse as this panel is, and everybody
agreeing. It is time we do put skin in the game. I think it is
very responsible for us to do that.
Mr. Yingling, I think that you have made an observation to
this committee on these issues that we have attempted to, as
best as possible, remove ourselves from the temptation of
talking to political issues but, in fact, look at these
questions in a much more bipartisan way and I hope that
continues.
And if it does, I would think that to a large extent we may
be able to get some progress yet unappreciated by the general
public.
On that question, though, of systemic risk, I am still one
of the slight doubters. It sounds to me that it is structured
to be able to say, ``so this shall never happen again,'' and
every time I hear that phrase, I shudder because we all know it
is not going to happen in the same way. This is capitalism's
attempt to escape the confines of control and regulation that
proved very healthy for 80 years, until in the last decade the
escape was there. And I think it has a lot to do with the
unregulated banking system that allowed this leveraging to
occur, allowed the situation to get out of hand to the extent
that I think most of us saw this potential happening maybe
2005, 2006, that it was going to be clear something was going
to happen that was not necessarily intended or desirable for
the public.
Now my question is, though, so that we do not run down this
road very quickly to create a ``systemic risk regulator,'' have
you all given deep thought as to what powers a systemic risk
regulator would have to have and how deep could they go, and
what could they inquire into, and that it would not necessarily
be limited just to ``financial institutions,'' it would go into
other institutions?
Because as you all may recall, just several weeks ago, we
had the auto industry in here testifying to the fact that they
were going to be a systemic risk situation, because if any one
of the three American auto manufacturers were to go down, it
would bring the other two down because it constituted systemic
risk insofar as they were coordinated and intertwined with
their dealers and with their suppliers. And it has almost been
a given up until this time that if one company goes down, all
three American companies go down, and possibly even the entire
industry. Even foreign manufacturers in the United States would
be gravely if not totally disadvantaged by that occurrence.
Now that being the case, and adding to that, that there is
a financial structure that exists in the auto industry; that
is, the arms of financing--Chrysler Financial and GMAC and Ford
Financial--again, blend right into the fact--I don't know, is
this--would you all consider the automobile manufacturing
companies just auto manufacturing, or are they financial
institutions, or are they an ugly blend of the two that are
very difficult to separate, if not impossible to separate? That
is just a side question.
But now, how far do you want us to go down this path of
empowering a ``systemic risk regulator'' who would have to have
tremendous information, almost clairvoyance, in terms of
determining what the ambitions of certain people in the
financial market were, to determine whether at some future
event these actions that were contemplated would cause systemic
risk? Anybody who wants to--
Mr. Silvers. Congressman, I think there are three ways of
answering your question.
First, if we are going to be serious about watching
systemic risk across the financial system, in a realm where
people innovate--and the people who do most of the innovating
in this area are lawyers--then you really do have to have a
pretty sort of comprehensive writ of authority to look where
you need to look. GE Capital is clearly an institution capable
of generating systemic risk, although GE is a manufacturing
enterprise.
Secondly, though this is not sufficient, I think much of
the problem here in terms of shadow markets comes from not
giving routine regulators the ability to follow the action, and
I think that it will be very difficult for some of the reasons
you were alluding to, to capture the full range of market
activity if the day-to-day regulators don't have the kind of
broad jurisdiction that they enjoyed in the post-New Deal era
and that was taken away gradually over the last 20 years or so.
But there is a trick here, and I am not sure what the
answer to it is, but I think the committee ought to be well
aware of it. It is one thing to give oversight and surveillance
power; it is another thing to give the systemic risk regulator
the ability to override judgments of day-to-day regulators, and
particularly this is true in relation to investor and consumer
protection. There is a natural and unavoidable tension between
anyone charged with essentially the safety and soundness of
financial institutions and agencies charged with transparency
and investor protection and consumer protection. That tension
has always been there. If you give a systemic risk regulator
the authority to hide things, there is a real danger they will
use it, and that will actually not--that will actually not
protect us against systemic risk but, rather, do the opposite.
Mr. Kanjorski. Mr. Yingling.
Mr. Yingling. First, Congressman Kanjorski, I really want
to thank you for your efforts last week in holding that a
hearing on mark-to-market. It was so important.
I think from our point of view, the systemic regulator has
somewhat limited authority in the sense that they--that the
regulator can broadly look and have information, but we don't
see that as the ultimate authority, the regulator of
regulators. So that primarily it is an information gatherer,
and has some ability to go in and say, okay, we have a problem,
now let's coordinate it.
But one part of this equation that I think gets too little
emphasis is the method for resolving systemic failures in the
future. That is so important. If you look at the mess we are in
today, a lot of it is because we did not have a good system for
resolving--let's take the big example, AIG. We had a system for
resolving Wachovia and WAMU, and I think if we really focus our
efforts on getting that resolution mechanism there in advance,
it not only affects how you resolve institutions, it has ripple
effects back on what it may mean or not mean to be too-big-to-
fail. And so that resolution mechanism is very, very important
in all of this.
Mr. Kanjorski. Very good point. Yes, Mr. Wallison?
Mr. Wallison. Thank you, Congressman. Your point about auto
manufacturers, I think, suggests how plastic and unclear this
whole idea of systemic risk really is. We all talk about it as
though it is something that we understand. But it is highly
theoretical, and we don't really have an example yet of
systemic risk being created by anything other than, as I said
in my oral testimony, anything other than some kind of external
factor affecting the entire market.
The market--the financial system around the world, and
especially in the United States--is seriously troubled now, but
not because of the failure of any particular company; rather,
because of all of the bad mortgages that were spread throughout
the world. Regulation did not prevent that from happening. We
had a very strong regulatory system in place. The banks were
subject to it.
FDICIA, which I think you would remember well from your
service here at the time, was intended to be the end of all bad
banking crises. It is a very strong law, and yet we now have
the worst banking crisis of all time.
So I think before Congress acts on the question of systemic
risk, there ought to be some understanding of what we are
really talking about. Because if an agency is empowered to
regulate systemic risk--it could apply to auto manufacturers as
well as anyone else--Congress is handing over a blank check to
a government agency, and that would be a very bad precedent.
Mr. Kanjorski. Thanks. I know I am taking up a little extra
time, but I think your answers are important for us to get.
Mr. Ryan. I would like to make a comment that goes to the
chairman's question and your comment about the uniqueness of
all of us having a view on retention, and put this in
perspective.
Securitization, as the chairman noted, is an essential
ingredient in how we provide financing for consumers in this
country. In 2007, about $2.8 trillion. We are now inching along
at very little; the business is basically dormant. So when
people are complaining about credit availability for consumers,
a large part of that is because securitization is basically
dormant.
As you approach whatever you are going to be doing on
securitization, I would urge you to think through not only the
retention issue--and retention is very complicated, how much,
by whom--and we all know what we are trying to achieve here,
which is basically to incent people such that they are not
originating or underwriting for assets. But when you look at
retention, think more broadly. Think about transparency. Think
about how these securities are structured, valuation. Think
also about the credit rating agencies, because that is an
integral part of fixing this situation. We need modification
there. Thank you.
Mr. Kanjorski. Thank you. No one else? Oh, yes.
Ms. Jorde. Thank you. I think one more thing that is
important to consider when we look at systemic risk is that it
is being exacerbated as we move toward more mixing of banking
and commerce. We refer to the auto manufacturers, but the auto
manufacturers are also making mortgage loans and financing
their own vehicles. We talk about GE Capital and GE. You know,
as we have moved towards more mixing of banking and commerce,
certainly we are creating more systemic risk. It was what
ruined the Japanese financial system back in the 1990's, and it
is something that we need to look very closely at as we move
forward; close the IOC loophole and keep banking and commerce
separate.
Mr. Kanjorski. Thank you very much. Mr. Royce, I am sorry I
took the extra time.
Mr. Royce. Thank you, Mr. Chairman. I wanted to just start
with the observation that it was Mr. Wallison who warned us
many years ago about the systemic risk to the broader financial
system. In 1992, we passed the GSE Act in Congress, and as a
consequence of passing that Act, we set up goals, affordable
housing goals, and when the Federal Reserve looked at the
consequences of that, they began to see the same thing that Mr.
Wallison saw, and they sought to get Congress involved in this
because, as was observed, banks are regulated and so they can
only leverage 10 to 1, right?
But we were allowing Fannie Mae and Freddie Mac to leverage
100 to 1 and to go into arbitrage, and the reason they were
allowed to do that was because there was an attempt to have
them meet these goals. Somebody had to buy those subprimes from
Countrywide, and it was Fannie and Freddie that had the
requirement in terms of the goals to buy these subprime loans
and these faulty loans.
In 2005, I brought an amendment to the Floor of the House
of Representatives to regulate these GSEs or to allow the Fed
and allow OFHEO, allow the regulator to regulate them for
systemic risk, because the regulator had asked for this ability
to regulate them for systemic risk to the wider financial
system. And at that time that amendment was voted down.
In the meantime, as you know, we also passed legislation
here that allowed the government basically to bully the market,
to bully the banks in terms of the types of loans that they
would make, and to rig the system so that originally what was
20 percent down became 10 percent down, became 3 percent down,
became 0 percent down, because we had to meet those goals for
very-low-income and low-income affordable housing.
Now, the reason I think it is important that Mr. Wallison
be here is because through all of this debate, he and the
Federal Reserve were the ones coming up here warning us that
because of the power they had in the market they were crowding
out the competition. They were becoming the majority holder of
and purchasers of these mortgage-backed securities,
securitization. They were the market. And as a consequence of
the risks they were taking and the excessive leverage, we had a
situation where it was helping to balloon the market and create
a situation where once these standards had been lowered, 30
percent of the market participants were now flippers. In other
words, we did it for a good cause, Congress did it for a good
cause. We lowered these standards. We pushed affordable
housing. But we forgot, or some of us forgot, that flippers
would come in and take advantage of those new 3 percent down or
0 percent down programs and would be able to eventually
constitute 30 percent of the entire market, which is what
happened come 2005, according to the Federal Reserve, 2006,
2007, and that further, of course, you know ballooned up this
problem.
Now, understanding the potential implications of labeling
certain companies as systemically significant, as you explained
in your testimony, Mr. Wallison, do you believe it is important
to take steps in overhauling our regulatory structure because,
you know, the previous Treasury Secretary issued this Blueprint
for Regulatory Reform in March of last year, and in many
respects, at least from my perspective, that would close
systemic gaps in the system. It merged duplicative regulatory
bodies. It ended those who were redundant, who weren't
necessary anymore as a result of consolidating them, and
central in that Treasury plan was that in many respects banks,
security firms, insurance companies, actually represent a
single financial services industry, not three separate
industries, and ought to be regulated as such. And these firms
are all competing with one another and, as long as this is
true, it makes no sense to regulate them separately from the
standpoint of Treasury. While the Treasury Blueprint was not
perfect, I believe it was a step in the right direction.
It is important this this Congress not talk about systemic
risk regulation in a vacuum but, rather, consider the
regulatory framework as a whole. So I would ask if you agree
with this sentiment: Should Congress be looking at the broader
structure that has been in place for 75 years when it debates
systemic risk in looking at a way to give--well, anyway, let me
ask your response, Mr. Wallison.
Mr. Wallison. Yes, I absolutely agree with that,
Congressman Royce. I think it is exceedingly important that we
understand what is happening in the financial services industry
as a whole. Those companies, all the different industries, are
competing among themselves. It makes no sense anymore to try to
regulate them in separate silos. So the Treasury Blueprint was
a very sensible way, I think, for Congress to begin to look at
how the financial services industry would be regulated. And I
certainly agree with everything you said.
Mr. Royce. Thank you. I yield back.
The Chairman. The gentlewoman from California is now
recognized for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. I would like
to thank all of our witnesses who have appeared here today. I
am particularly pleased about the testimony of Ms. Terry Jorde,
president and chief executive officer of CountryBank U.S.A., on
behalf of the Independent Community Bankers of America.
Let me just say, Ms. Jorde, that I heard your testimony
about your bank. The only thing wrong with your bank is it
sounds too much like Countrywide, and you ought to be worried
about that because, despite all of the testimony about Fannie
and Freddie, it was Countrywide who threatened Fannie, that if
they didn't take their products, that they would just kind of
squeeze them out of the market. And of course, Countrywide was
a nonbank that was unregulated by anybody.
I am from California. I think we have at least repaired
part of the problem where we require the licensing of all these
brokers. Countrywide had only had one license, and it had
anybody who could breathe to go out and initiate loans. And
there is a lot of fraud that was involved in that, and I
appreciate the testimony of all of those who understand that it
is not simply a systemic regulator, someone who I think, as was
indicated, sitting on the top of all of this that is going to
make it work.
We really do need consumer protection, and if we think we
are going to get it from the same people who have been in the
system, I don't think so, not because they are evil people,
they just don't think that way.
All of our regulators think about how to notice the banks,
how to warn the banks, how to talk with the banks but they
never talk about how to stop them because of the way that they
think they absolutely believe that you should let the
marketplace work. All of those exotic products that were placed
on the market, whether they were, Alt-A loans or adjustable
rate, option loans, etc., as long as these kinds of products
can be put on the market without any scrutiny, without any real
interference by regulators, we are going to have a problem.
The mailboxes of citizens are being swamped now with new
products because of the foreclosure meltdown. Now, the
insurance companies, many of them I guess owned by maybe some
of these banks, I don't know, are flooding the mailboxes with
mortgage protection. What is it? How does it work? I don't
think the regulators have been here to talk about it. And out
of this crisis that we have, now we have all of the loan
modification companies that have sprang up, and all they need
is $3,500 to start to work to help someone get a loan
modification. No regulator has said a word about this.
And so we sit here and, of course, we think that they know
what they are doing, but I am afraid that if we have a systemic
regulator they are going to come from Goldman Sachs; and it
seems to me Goldman Sachs is everywhere. Not only was it our
past Treasurer, it is our now present Treasurer.
I understand that Edward Liddy over at AIG worked for
Goldman Sachs, and we find that Goldman Sachs was kind of taken
care of when they were brought in to snatch up Bear Stearns for
pennies on the dollar. And then we find that now Goldman Sachs
is taken care of, again, through AIG; and of course we took
care of them in our TARP program with the capital purchase
program, and I guess they are sitting on top of all of this.
Am I to expect that this systemic regulator who will
probably come out of the same market that caused this problem
is going to cure all of this? We need a consumer protection
agency to deal with all of this. Don't forget, it was the
activists and the consumers who went before every bank merger
attempt and went to the hearings held by the Fed and everybody
else, saying, ``Don't do that.'' And they talked about the
problems that would be caused.
Now, I want to ask again the idea of the consumer
protection agency that came from Labor, to please explain what
you are.
The Chairman. We will have time for a brief answer.
Mr. Silvers. The Congressional Oversight Panel recommended
a consolidation of consumer protection and financial services,
by which we meant financial services like mortgages, credit
cards, commercial bank deposits, perhaps insurance; that those
functions should not be with the same institutions charged with
safety and soundness, because there is an inherent tension.
And, Congresswoman, as you put it, the safety and soundness
arguments always win out over the consumer protection arguments
in those institutions.
So we recommended in our report, the AFL-CIO supports that
recommendation strongly. We see that function as distinct from
the kind of work that is done with investments that are at risk
by the SEC. We see those as two separate important functions.
And by the way, with respect to the Paulson Blueprint, though I
have great respect for the former Secretary, that Blueprint
clearly envisioned dismantling investor protection. It clearly
envisioned, in the guise of reregulation, actually weakening
regulation of our financial markets, and in that respect would
be a terrible thing to follow.
The Chairman. The gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Just to set the record straight, if I heard my colleague,
the gentlelady from California correctly, speaking that
Countrywide was not regulated, that will come as news to both
the OCC and the OTS who at different times during Countrywide's
existence regulated those institutions.
Mr. Wallison, you have a lot of your written testimony that
you were unable to speak about in your oral testimony. I thank
you for being here. I thank you for your very thoughtful op-ed
in the Wall Street Journal today. Certainly you bring a wealth
of credibility to this panel as being one to have the clarity
and call that Fannie and Freddie were presenting a huge amount
of systemic risk to our economy.
In your testimony, you say that the design of a systemic
regulator could cause more Fannie and Freddies to take place in
the future. Although I don't remember the exact quote, our
President, in his State of the Union address, said something
along the lines of before we can correct our economy going
forward, we have to understand how we got into this situation
in the first place. That is a paraphrase.
Can you speak exactly how significant was the role of
creating a federally sanctioned duopoly in Fannie and Freddie,
giving them affordable housing goals that ultimately brought
down their lending standards? What role do you believe that
played in the economic debacle we see today?
Mr. Wallison. I think that structure is largely responsible
for the financial crisis that this country is experiencing. And
that is because Fannie and Freddie essentially were a
distortion of the credit system.
Congress had a good idea, it seems to me, in intending to
support homeownership in the United States. There are a lot of
benefits that come from homeownership and it is a good idea to
support it. But Congress chose to support it through Fannie and
Freddie and CRA by distorting the credit system and asking
private organizations--private profit-making organizations--to
bear the cost and hide the cost in their balance sheets and in
their income statements.
And so we never really understood the risks that they were
required to take in order to support this congressional
objective. If Congress wants to accomplish something, it should
accomplish it by appropriating funds so the taxpayers can
understand what the objectives of this government are and what
it is spending on those things, and not push all of those costs
on to private sector balance sheets and income statements.
Mr. Hensarling. So in many respects, in retrospect, the
market viewed Fannie and Freddie as systemically significant
inasmuch as they had an implicit government guarantee which we
all know now is explicit?
Mr. Wallison. Yes.
Mr. Hensarling. Can you elaborate on your fear of having a
systemic regulator designate other firms as--I will try to say
that--as systemically significant, and how that might further
exacerbate future Fannies and Freddies?
Mr. Wallison. It offers the opportunity to create an
unlimited number of future Fannies and Freddies. The essence of
Fannie Mae and Freddie Mac, the reason they became so powerful,
so large, and ultimately were able to take so much in the way
of risk, is that they were seen by the markets as backed by the
government. And no matter what the government said about
whether it was backing them, the markets were quite clear about
this: The government was going to back them if they failed.
Now, that is the kind of situation that we are creating
when we are talking about systemically significant companies,
because if we create such companies, if we have a regulator
that is blessing them as systemically significant, we are
saying they are too big to fail. If they fail, there will be
some terrible systemic result. And therefore, the market will
look at that and say, well, we are going to be taking much less
risk if we lend to company ``A'' that is systemically
significant rather than lending to company ``B'' that is not.
Mr. Hensarling. Mr. Wallison, you may have to have a very
short answer to this question, as I see the yellow light is on,
but the risk of making the Federal Reserve the systemic
regulator, can you elaborate upon your thoughts?
Mr. Wallison. Well, the problem with that is it just adds
credibility to what I just said: the market will believe that
systemically significant companies are backed by the
government. But if they are regulated by the Fed, the Fed has
the money available already, without congressional by-your-
leave, without any kind of further authority, to cover up any
problems that occur in the regulation of these systemically
significant companies by providing the funds under its existing
authority to deal with special exigent circumstances of various
kinds.
So making the Fed the regulator would be the one thing that
would cap the whole question of whether we are creating
companies that are backed by the Federal Government. You would
make it perfectly clear, without doubt.
Mr. Hensarling. Thank you.
The Chairman. The gentlewoman from New York.
Mrs. McCarthy. Thank you, Mr. Chairman. Since we are
discussing a systemic risk regulator, it would be appropriate
to see how systemic risk is being evaluated now by our
government. And most recently, or very much in front of us
today, is AIG which was saved because it was a systemic risk to
the American economy. Yet when we saw the counterparties that
were released this week because of the constant requests from
this committee, we find out that a significant amount, billions
and billions, tens of billions of dollars, went to foreign
banks.
Now I would like to ask the panelists, do you feel that
bailing out foreign banks is important to systemic risk of the
financial institutions of our country? I would think that
bailing out foreign banks would be important to the governments
of their country, but why is our government bailing out foreign
banks?
And the reason I ask this is when we are talking in a
general sense about systemic risk, we have an example before us
in concrete terms of how it is being interpreted by our own
government. I do not believe we should be bailing out foreign
banks. I believe other governments should bail out their own
banks.
I would like to ask the panelists, do you feel that that is
a proper use of taxpayers' money, under the guidelines that it
protects the systemic risk of the financial institutions of
America? Do you believe we should be bailing out foreign banks?
Are they a systemic risk to the American economy?
Mr. Wallison. Let me try to start on that, Congresswoman,
and just say that if you were to bail out any U.S. bank of any
size, you are going to be bailing out foreign banks, because
banks are all interconnected. They make loans to one another.
And that is, in fact, the essence of the financial system;
banks and others are all intermediaries; they are moving money
from one place to another.
Mrs. McCarthy. So are you saying we should be bailing out
all foreign banks because they are interconnected with our
banks?
Mr. Wallison. I am saying the opposite. I am saying that if
we were to create a systemic regulator--a systemic risk
regulator that has the power to bail out U.S. banks, you would
in effect always be bailing out foreign banks, because all
banks, especially at the international level, are
interconnected.
Mrs. McCarthy. My question was not American banks, such as
Citibank and JPMorgan Chase that are international banks.
Obviously we have a huge stake in saving these financial
institutions.
My question is, should we be bailing out the Bank of
Germany, which is owned by the German Government, or a French-
owned bank, in their countries? So personally I don't feel that
is systemic risk to the American financial system. Maybe we
could go down the line and people could give their opinions. To
me, I don't believe that, in my opinion, bailing out a French
or a German bank poses systemic risk to the financial security,
safety, and soundness of financial institutions.
If anyone else would like to speak, Mr. Silvers, Mr.
Plunkett, Mr. Ryan, Mr. Yingling, I would like to hear your
opinion, too.
Mr. Silvers. I think your question raises a somewhat
broader question, which is what do we mean when we say
``saving?'' If we mean by ``saving'' that we are going to make
good on every obligation of a financial institution with
taxpayer dollars and keep the stock of that institution alive,
when left to its own devices it might have to file Chapter 11;
if that is what we mean, we are always in every case talking
about enormous expense and, frankly a transfer of wealth from
the public at large to what are essentially wealthier parties
within our society.
Historically, and I think this goes to the comments of the
panelists here, historically we have had a resolution process
for financial institutions that where we were worried that
there would be systemic or larger societal consequences if they
did not make good on obligations. So we insured deposits and we
have a resolution process for insured depository institutions.
We have the same thing at the State level for insurance
companies.
When we move, as we did last fall, into a world in which we
guarantee everything--and at AIG, we actually didn't guarantee
everything. AIG is not the most extreme example of this. AIG,
we just guaranteed all the fixed obligations. But when we move
into a world where we guarantee everything, we inevitably end
up guaranteeing institutions, such as perhaps foreign banks,
but perhaps we might not be comfortable doing so if we had more
of a resolution process.
Perhaps on a resolution process, it would be possible to
sit down with foreign governments who obviously have a stake in
the same matter and work that out. But when you begin with the
assumption that ``rescuing'' a financial institution means that
everyone gets made good at taxpayer expense, then you have a
problem.
The Chairman. The gentleman from New Jersey.
Mr. Garrett. Thank you, Mr. Chairman.
And I think that the bankers who sit on this panel are
probably astonished and shocked at the opening of today's
hearing when you heard from the other side of the aisle--what
did they say--we don't regulate anything in this country
anymore. You were probably wondering, who are those guys with
green eye shades who call themselves examiners, who come into
your banks every so often? Who are they if we are not
regulating anything? But I digress.
Mr. Silvers, on the line of deregulation and what have you,
you did make a comment to one of the questions that we have
deregulated, and in the last dozen or so years there has been a
taking back of so many powers.
Just very briefly, aside from Gramm-Leach-Bliley, which we
know some people say is deregulation--other people argue it
allowed for the diversification which is helping these big
banks out there to stay afoot--can you just run down four or
five of the major acts of Congress we passed in the last dozen
years that you are referring to where we deregulated the
financial situation in this country?
Mr. Silvers. Well, you certainly mentioned one which is
Gramm-Leach-Bliley. The second was the Commodities Act--and I
can't recall the formal title--which deprived the CFDC of the
ability to regulate financial futures--financial derivatives
and other derivatives. A third was not Congress, at least
Congress didn't act formally. It was the court decision that
took away from the SEC the ability to regulate hedge funds.
Congress then failed to act in response to that.
Fourth was--here is an instance where Congress acted
responsibly but the regulators didn't act, where Congress gave
the Fed the ability to regulate mortgages comprehensively, and
the Fed didn't use it.
The fifth is somewhat older, which is--and I think goes to
the--
Mr. Garrett. Both of these are not taking away. This is not
congressional action. And the action on the hedge funds, which
I think was number three, hedge funds really aren't in as much
problems as all the other areas in the banking sector which
have been continuously regulated.
Mr. Silvers. I don't see it that way.
Mr. Garrett. The losses are certainly less.
Mr. Silvers. They are less because the taxpayers have
propped them up. A key issue in Bear Stearns, for example, was
the interweaving of Bear Stearns' business with some large
amount of hedge fund money. No one really knew for sure how
much because it wasn't regulated. My point about deregulation
is the responsibility doesn't rest solely with Congress in this
matter. The courts have contributed, the failure of agencies to
act when they have been given powers have contributed.
Mr. Garrett. Okay. And I appreciate that. And it is on that
last point on not acting is maybe where I will make my main
point.
Mr. Plunkett, I will just say on your point I was with you
on most of what you were saying. And you are saying that we can
do a lot of this, what we need to do, with the existing
regulations and sharing the information. And I think I was
following you, and I agree with you on a lot of those points.
You lost me when you talked about solving it by regulating
salaries or executive compensation. Up to that point, I was
right with you. But I appreciate a lot of your testimony.
Ms. Jorde, a quick question. The suggestion that was made
here with regard to requiring the banks to hold a portion of it
on their books on securitization. Wouldn't that be actually
problematic for some of your smaller banks who right now have
to sell it all and that is how they are able to lend? Just very
briefly, could that cause a little bit of a problem for some of
the small banks?
Ms. Jorde. And that was my point initially, is that to hold
a part of it, then you are in effect servicing it.
Mr. Garrett. Not even the servicing it. As the chairman
said, you might be able to get rid of that somehow. But even
just the fact you have to hold it, your ability to loan might
be constrained somewhat.
Ms. Jorde. Well, certainly the more that you can sell off,
it leaves your capital available for lending. But for the most
part we are portfolio lenders. It is whether or not you can
give the advantage to the borrower as far as 30-year fixed rate
mortgages, how you price those things, so that a community bank
doesn't end up with asset liability issues. I think those are
the things that would need to be worked out.
Mr. Garrett. I really appreciate that. And finally, Mr.
Yingling, you always have to be careful when you bring in an
analogy like that, because somebody is going to jump on it,
about Mount Olympus. Who was on Mount Olympus was Zeus, And I
came up with the acronym of ``zero errors under supervision''
that this person would have to be providing us with, that there
be no errors anymore.
But the problem is we have all these regulators and they
haven't been able to provide us with that lack of errors. As a
matter of fact, in the Wall Street Journal we have this comment
from Scott Polakoff, who is the Acting Director of the Office
of Thrift Supervision, and he said it is a myth about AIG,
about them not being regulated, that regulation was regulated
by a collage of global bureaucrats and the Financial Products
Division did not slip through the regulatory cracks. He goes on
to say that the agency should have taken an entirely different
approach in regulating the contracts written by their product.
So, this goes back to Mr. Silvers' comments, we have the
regulators there, they were sitting up on high, they were
working with the global folks, as Mr. Silvers also suggested
that we need to do on a global perspective, but still they
couldn't see it, and it is only in retrospect that they were
able to look back now and say, ah, this is what we should have
done.
And I guess, Mr. Wallison, isn't that the ultimate problem
that we are going to get to, that even if you have all this in
place, the regulators will always be saying after the fact that
is what we should have done?
The Chairman. Mr. Wallison, very quickly. We are over time.
So if you want to respond, it has to be very quick.
Mr. Wallison. I will say yes, that is exactly correct.
Mr. Garrett. He said it was exactly correct, I think.
The Chairman. Yes, but your microphone is off.
Mr. Wallison. We keep thinking that we have solved the
problem, like with FDICIA. It is never going to happen again.
But in fact, regulation is not an effective way of preventing
risk-taking.
The Chairman. Thank you. The gentlewoman from California
asks unanimous consent to speak for 1 minute.
Ms. Waters. Thank you very much, Mr. Chairman. I asked for
time so that I could make a correction and a clarification,
that Bear Stearns was actually purchased by JPMorgan, and on
Countrywide, yes, they were formally regulated but they didn't
do a very good job of it.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman. If there is one thing I
am learning pretty quickly about this whole subject area is
this kind of discussion is important and don't necessarily buy
in to the first reaction that you usually have on these issues.
Two examples I can give you right quick. I am not so sure
that I am ready to jump onto the retention of risk, the skin in
the game philosophy. Although it sounded very intriguing
initially, it seems to me at some level there is a tradeoff
between regulating so that people stay out of these risks and
incentivizing people to stay out of it by requiring that they
have skin in the game. And I would hate to think that we would
get to the point where we cease to look at the regulatory side
using as an excuse that you have a market incentive because we
are requiring you to keep skin in the game. It also seems to me
as you go on down the line if you are going to require the
original lender to have skin in the game, you have to have the
first securitizers and the second securitizers, and the impact
of that would be to in some fashion reduce the amount of credit
that is out there in the market.
So I am not going to ask you to comment on that because I
want to go to the second reaction that I initially got to, is
that it might be a good idea to have the Fed be the systemic
regulator, and I am beginning to have second thoughts about
that, too. I don't know how you have a systemic regulator who
also has day-to-day regulatory authority without shielding that
regulatory authority in some way or compromising it. I don't
know how you have a systemic regulator who does monetary policy
without shielding monetary policy, insulating it from the
systemic regulation function. I don't know how you have a
systemic regulator and have that regulator have responsibility
for consumer protection without insulating it. And if you are
going to insulate it to the extent that it seems to me it needs
to be insulated, you basically have taken some department or
part of the Fed if it is all inside the Fed and created a
separate entity anyway. And I am not sure that it wouldn't make
more sense to actually go ahead and create a separate entity.
Mr. Bartlett and Mr. Wallison, react to my concerns about
the prospect that putting systemic regulation on the Fed would
compromise in some way monetary policy responsibilities of the
Fed and consumer protection responsibilities of the Fed.
Mr. Bartlett. Thank you, Congressman. And like you, our
thinking has evolved on this over the course of 3 years, and
specifically in the last 6 months. First, we do not propose to
create additional day-to-day regulatory authority by the Fed.
In fact, we would move--
Mr. Watt. So you take some of the regulatory, day-to-day
regulatory authority from the Fed and give it to somebody else?
Mr. Bartlett. That is right. We would not create additional
regulatory authority. We would take some of it. And then second
is that we would give--
Mr. Watt. But you can't take the monetary policy from the
Fed?
Mr. Bartlett. That was the second point. We see monetary
policy and systemic regulation as quite consistent because they
are both engaged in trying to provide for an orderly economy,
economic issues, and so they have very consistent goals. We
don't see that as inconsistent at all.
Third, I take the point that we specifically reject the
idea that there should be created a list of systemic companies
or a list of firms or we reject a size criteria. We think 6
months ago we were in those same conversations, but I have to
tell you after the same considerations with some of the same
comments made by Mr. Wallison and others, the idea of creating
a list of companies that are systemic is the wrong approach.
Instead it should be those activities and practices that cross
over lines that affect the entire financial sector.
And then last is we think that if you give the power to
regulators who have the safety and soundness power and then you
give them the power and the authority and the mandate to act
for consumer protection, you can profoundly provide a great
deal more consumer protection than we are getting with a
separate agency.
The Chairman. Mr. Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman. I think one of the
things that I want to follow up on, I think some of my
colleagues have made this point and I think it is in a more
simplistic point of view, is you can talk about crime. And you
have a crime problem in your city, and so the first inclination
is we need to add more police officers. And many cities have
tried that model. They added more police officers. But the
bottom line is maybe crime statistics went down but you still
had crime. While other cities have implored a system where they
change the patrol patterns and other activities and basically
got the same results.
And Mr. Wallison, I tend to agree with you. I think what we
have to be careful here is did we just have an oversight
problem in some respects at the regulatory area, but we also
just had quite honestly a corporate governance problem. We had
people taking risk that there didn't seem to be consequences
for. And now what I am afraid of is that we are almost creating
more systemic risk in the patterns and activities that we are
doing right now by showing that the government will step up and
take away the consequences if the bill gets too big.
And so I think I share the same concerns that once you--in
fact I told Secretary Paulson this on a telephone conversation
last fall. I said, Secretary Paulson, I don't want to be a
Triple A credit, I just want to be on your systemic risk list.
Because what that allowed me to do is not to have to behave in
any particular way because the marketplace knew right away if I
was on the big boys list that I was going to be okay and it was
all right to do business with me.
I don't want to recreate that scenario in this country
where people say, you know, our whole business model here is we
are trying to get on the systemic risk list. It needs to be a
punitive list, if anything.
But the question I have to the panel is, isn't a part of
the safety and soundness analysis that the current regulatory
structure should be looking at as these entities get extremely
large and get into extremely complex types of investment
activities, shouldn't that in fact trigger some additional
capital requirements or leverage requirements that in fact
begin to manage that company in a way that we don't let it get
to ``systemic risk.''
And I will start off with you, Steve.
Mr. Bartlett. A quick answer is, yes, it should. And we
think that a systemic regulator then in working with and
through the powers of a primary supervisor could accomplish
exactly that.
If I could take 30 seconds on crime, because when I was
mayor of Dallas we faced something similar, and it is a great
analogy. The City of Dallas had had an increase in the numbers
of violent crimes every single month for 20 years, hadn't
missed one. And it tried everything they thought;
incarceration. But it was more police on the beat and such as
that. And then we tried systemic prevention. We identified the
locations, times of day, times of week, and individuals who
were engaged in crime and went out and talked with them and had
a 42 percent reduction of violent crime within 2 years. So a
systemic approach to these problems can work. It worked in that
case, to use your example, Congressman.
Mr. Neugebauer. Mr. Ryan.
Mr. Ryan. As I have said before this committee before, we
are in favor of a systemic risk regulator so that we have
someone who has the capacity to look over the horizon. Right
now regulators are restricted either by charter or geography.
We need a regulator that has all of the information so that
they can look at all of these interconnected entities,
notwithstanding their charter, what activities or products.
That does not exist today.
Mr. Neugebauer. Mr. Wallison.
Mr. Wallison. I think there is no reason why we couldn't
have some organization that looked over the entire economy and
looked for questions like systemic difficulties. The question
would be whether there is then any authority in that body to
actually regulate, and that I think would raise some very
serious questions. I think we ought to keep our eye on the ball
in one respect, and that is that regulation is not a panacea.
It does not cure problems. We have to regulate all those
companies that are backed by the government. But when you are
not backed by the government, you should be allowed to fail. It
is one of the most important things we have in our economy that
makes sure that the bad managements go out of business, the bad
business models go out of business, and they are replaced by
better managements and better business models.
Mr. Neugebauer. Failure may be the best regulator that
there is?
Mr. Wallison. Exactly.
The Chairman. The gentleman from California.
Mr. Sherman. Thank you, Mr. Chairman.
Mr. Bartlett, you have suggested in your opening statement
principle-based standards, which tends to mean that we just
have vague standards that say do the right thing, don't take
unnecessary risks, treat people fairly. And we rely on the
conscience of the individuals to interpret those terms and
apply them. Do you think that we can get away from explicit
standards and rely on loudly proclaimed broad principles. And
do you think that those who have been attracted to the
financial services industry and Wall Street have evidenced
recently a willingness to just do the right thing and act in
the national interest?
Mr. Bartlett. Well, Congressman, I will review my testimony
to make sure I didn't say it that way. I didn't call for vague
standards. I called for principle-based regulation. So you
establish the principles. Our first principle is treat your
customers fairly. But then the regulations themselves are
promulgated consistent with those principles. So you would
still have regulation.
Mr. Sherman. All regulations should reflect the values and
principles of the country. So you are not suggesting that we
shouldn't also have numerical standards, detailed regulations,
etc.?
Mr. Bartlett. I am suggesting that all regulations should
reflect uniform standards, but they don't because the Congress
has not established uniform standards or uniform principles. I
think that the principles should come from consideration by
Congress and then the regulation should be developed to enforce
those principles.
Mr. Sherman. Okay. Let us move on to Mr. Silvers.
Do you think that it makes sense to have the Fed
simultaneously be the regulator who occasionally will make
mistakes. And I know the chairman has pointed out that
regulators try not to admit mistakes, none of us do, and also
be the agency that can spend billions and trillions of dollars
to rescue firms and in effect sweep the mistakes under the rug,
delay the explosion, and maybe hope for the best.
Mr. Silvers. I think that we should have learned a lesson
from the last year, which is that there are times and
circumstances in which no matter whom is in political power
that certain institutions to some degree, whether that is in a
form of a restructuring or a conservancy or in the form of a
flat out rescue of the kind that we have been offering
recently, that some institutions are going to be rescued in
certain circumstances. And that given that is the case, that
Republicans and Democrats, conservatives and liberals, seem to
do it, that given that that is the case, that we ought to have
clear criteria for when to do it, that the people who make the
decisions ought to be clearly publicly accountable and that
these things ought to be set up in advance and not ad hoc.
Mr. Sherman. I couldn't agree with you more on those
things. Shouldn't we have the same entity be the regulator and
the ``bailer outer?''
Mr. Silvers. And so consequently the Fed as it is currently
structured does not meet those tests. Now, if it was structured
to be a fully public agency, would it still be appropriate for
it to be the regulator and the bailer outer? And my view,
although I don't think there is a perfect answer to this, is
that there are some reasons to have the people who have to foot
the bills have to think about what structures you want to have
in place beforehand to ensure they don't have to pay. In doing
so one runs the risk, and I think, Congressman, you have
pointed that out very clearly, that particularly if you have
government structures that are essentially self-regulatory you
run the risk of essentially a partnership developing between
the failed institutions and the regulator to keep those
institutions--to fully ensure and pay off everyone involved in
those institutions at taxpayer expense and to ignore the
fundamental lesson I think of the last year, which is that
while some institutions may be systemically significant, not
all layers of the capital structure of those institutions are.
Mr. Sherman. Thank you. I am going to try to squeeze in one
more question for Mr. Bartlett.
A number of us are working on tax legislation designed to
impose a surtax on excess executive compensation of those who
bailed-out firms. Now, putting aside how we would define excess
compensation, can you see a reason why we should allow
executives to retain without paying any particular surtax
compensation that you and I would agree is excessive.
Mr. Watt. [presiding] I am afraid the gentleman's time has
expired. Go ahead and answer the question briefly, quickly, if
you can.
Mr. Bartlett. No.
Mr. Watt. I think that is a pretty quick answer.
Mr. Sherman. I will take that as a maybe.
Mr. Watt. If you want to follow-up, you can do so in
writing. Mr. Castle is recognized.
Mr. Castle. Thank you, Mr. Chairman. I will throw up two
questions, and then I will just duck and let you try to deal
with them. And I think Mr. Bartlett touched on this a little
bit in his opening statement, maybe not too definitively. But
it is a little bit off systemic risk regulation, but bank
regulation in general. We have many entities, both at the
Federal level and you have State entities too, who regulate
different financial institutions in this country, depending on
what they do. And my question is, do you believe that there
should be some consolidation in that area? Should there be more
of a reaching out in terms of some of the leverage type of
circumstances that exist today in hedge funds, etc., in terms
of what we are regulating, or are we okay in terms of our basic
regulation?
So that is one question I have. The other question is more
pertinent perhaps to the hearing today. And that is the Federal
Reserve in general. I mean, whenever we talk about systemic
risk regulation, which I basically believe in, we talk about
the Federal Reserve. But I worry about the Federal Reserve in
that they have responsibilities in terms of some regulation now
and they have other responsibilities that relate to our economy
in a great way. First of all, if you have wild objections to
the Federal Reserve, I would like to hear that. And secondly,
if you feel the Federal Reserve perhaps should give up certain
powers if they were to take on a systemic risk regulation
component, I would like to hear about that as well.
So those are my two areas of concern. I open the floor to
whomever is willing to step forward.
Mr. Bartlett. Congressman, let me take them one at a time.
We do think that there should be some basic reformulation and
convergence, that there should be a prudential supervisor that
should supervise banks, insurance, and securities at the
national level with uniform national standard. It should follow
the ``quack like a duck'' theory. If it quacks like a duck,
walks like a duck, and talks like a duck, then it is a duck,
and should be regulated like a duck, the same with banks,
insurance companies, or securities. And today we have a
hodgepodge of chaotic hundreds of agencies that regulate the
same kinds of activities in widely different ways.
We found, and there is nothing perfect, we think that the
Fed is the best equipped to be a systemic regulator, as we have
described it, which is no list of--not a list of specific
firms, but rather the systemic oversight. We think that is very
consistent with their monetary policy, which is the
strengthening and the stability of the economy. We do recommend
that the regulation of State chartered banks be moved over to
the bank regulator. And we have struggled with this. We do
think that the bank holding company regulation should stay at
the Fed. Probably the main reason for that is just they do it
very well and we don't see a reason to change it.
And then last is the Federal Reserve has the breadth and
the scope and the institutional knowledge of almost a century
of understanding both the economy and the financial markets,
and we don't think that that can be duplicated or replicated in
the space of half a dozen years perhaps. So we think we should
use that to the government's advantage.
Mr. Castle. Mr. Yingling.
Mr. Yingling. Mr. Castle, I think as I listen to this panel
and a lot of the concerns of the members, we have to define
what systemic regulation means. And I think a lot of us are
talking not about detailed in-depth regulation, we are talking
about looking out and seeing where the problems are and then
using the regulatory system as it exists to solve those
problems and then supplementing the regulatory system where we
have gaps. So that we would not get into all the problems of
having some super, super regulator out there. That is not what
we are talking about.
Again, I think it is critical to look at that resolution
process because that is going work backward and affect who is
considered too big to fail. And I think I have heard everybody
here say we shouldn't have a list that identifies people as too
big to fail.
One thing I do think the Fed could give up is the holding
company regulation of small banks. It really makes no sense to
have the Fed regulate the holding company of a $100 million
bank that is regulated by the FDIC, the State, or even the
Comptroller. A lot of times they go in and that holding company
is nothing more than a shell. So as they get the new authority
I think they can give up the holding company authority over
smaller institutions.
Mr. Castle. Thank you.
Yes, sir, Mr. Wallison.
Mr. Wallison. Just two points that you made handled very
quickly. The Fed would be a very poor choice as a systemic
regulator if the purpose of systemic regulation is to identify
and regulate individual companies. I think I hear that most
people here do not favor that. But should that happen the Fed
would be very bad from that perspective because it compounds
the problem of making it look as though those companies have
been chosen by the government not to fail and it has the
financial resources that can actually bail them out.
So depending on what the systemic regulator is chosen to
do, the Fed could be a very bad regulator.
The second point you have asked is do we have the right
amount of regulation now, should we extend regulation beyond
the banking industry. And my view is no. That regulation is
appropriate and in fact necessary, essential, when companies
are backed by the government because then there is no market
discipline, there is moral hazard, etc. Where they are not
backed by the government regulation tends to add moral hazard.
And so what we ought to do is leave these companies alone and
let them fail, because that is exactly the way we preserve good
managements and we finance good managements and good business
models, because they survive the tough periods.
Mr. Castle. Thank you. I yield back, Mr. Chairman.
The Chairman. The gentleman from New York, Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
And I want to thank all of you for testifying today. I
think that your testimony lends to the fact that we really need
to think this thing through. It has been very thought-provoking
for me.
And I think that everyone will probably agree to, at least,
surely the way I look at it, that our regulatory system did
work. We now have a problem because we have a new train running
on old tracks. And so it worked for a period of time until now,
and then that train ran off the track.
And what we are talking about now, when we are talking
about a systemic risk regulator or however we are doing it, to
create new tracks for the train. I don't want to get rid of the
train, because capitalism ultimately evolves, and I think that
we are evolving. But we need some type of regulation to make
sure that the train doesn't go off the track, which then causes
damage to society in general.
And so we have to figure out who do we need and what do we
need. Whether it is someone in the Fed or whether it is an
entirely new regulator, a systemic risk regulator, combining
others. You know, I don't know. That is why I find some of your
testimony intriguing, and I want to consider to listen and
learn and move forward.
But, also, I think that--and I think that Mr. Silvers spoke
on this a little bit, and of course Mr. Bartlett also--we are
in this new world that we currently live in. It is global; it
is indeed global. And the question that comes to my mind is,
are there areas--unless we can fix our own system, you know,
create these tracks for our own train, will we be running right
off the track again if we don't have some kind of a global
regulator?
Because I keep hearing consistently how everything is now
intertwined, they are all running into one another at some
point. You are selling one thing to another bank. My colleague,
Carolyn Maloney, was talking about banks across the ocean. And
one of the answers was, well, when you help an American bank,
you are helping a foreign bank, because they are all
interrelated.
Well, if that be the case, then isn't there an urgent need
for also talking either simultaneously or trying to figure out
what a global regulator would be? Do you think that we need to
have one?
I guess I will direct that question initially to Mr.
Silvers and then to Mr. Bartlett and then to Mr. Ryan.
Mr. Silvers. Congressman, I think it is a very good point.
You know, Angela Merkel, the Chancellor of Germany, came to
Hank Paulson in 2007 and suggested that perhaps we ought to
have more regulation of hedge funds. The Bush Administration
didn't like that idea and thought that we didn't need more
transparency. And then they found themselves in the middle of
the night thinking about what to do about Bear Stearns without
the very transparency that they could have had when Angela
Merkel brought it to them.
We are now back facing the G20 meeting coming up where,
once again, the proposition is going to be put on the table by
Europeans, of all people, that we ought to be more serious
about transparency and regulation of shadow markets on a
routine basis. And we have the opportunity not to be the drag
on that process but to lead.
It is not necessary to lead to have a global regulator. A
global regulator is a thing that may be far in the future, but
it is necessary and quite possible to have coordinated action.
And if we don't have coordinated action, poor practices in
other countries may leak into our markets, and we may be
perceived as being the source of poor practices elsewhere, as
we were, say, in Norway when our subprime loans blew up their
municipal finance.
That challenge is right in front of us, and we can lead.
And it ought to be a priority of the Administration, and I am
hopeful it will be, to do just that.
Mr. Meeks. Thank you.
Mr. Bartlett, quickly. I want to have Mr. Bartlett, then
Mr. Ryan.
Mr. Bartlett. Quickly, and then I think that Mr. Ryan might
have something.
I think that we shouldn't have one global regulator, but we
should harmonize our systems, for our benefit as well as the
world's. And, specifically, we should harmonize the accounting
systems of IFRS and GAAP accounting. We have found that to be
an increasingly problematic area.
Mr. Meeks. Mr. Ryan?
Mr. Ryan. Yes, sir. Clearly, we have global financial
institutions, we have global capital markets. We have been
talking about securitization. We spent an awful lot of time in
Brussels and around Europe, talking with regulators. This whole
issue of retention is actually far afield, far ahead in
Brussels. That market is totally globalized.
So we have already seen the effects of global regulation
and impact on some of our markets. And, clearly, we are going
to have to be in sync on a global basis. Whether that means one
regulator, we have not really faced that issue yet. We are more
concentrated on what happens here right now.
The Chairman. The gentleman from Georgia.
Mr. Price. Thank you, Mr. Chairman.
I want to thank the panelists, as well, for their testimony
today and their forbearance with the questions and the time.
I think it is important to remember that our Nation has
provided the greatest amount of freedom and opportunity and
success for more people than any nation in the history of
mankind. And I think it is incumbent upon us to appreciate that
we haven't done that by virtue of excessive regulation. It
would seem that it would be important for us, as Members of
Congress, to attempt to define what has allowed that success--
if you define that as success--what has allowed that success to
occur and attempt to embrace those fundamental principles.
Everybody has talked about systemic risk, but I don't know
that we have a definition of it. Anybody care to give me a
definition of systemic risk?
Mr. Bartlett. Dr. Price, I would share the one that we have
come up with, and this is about our 18th draft:
``Systemic risk is an activity or a practice that crosses
financial markets or financial services firms and which, if
left unaddressed, would have a significant material and adverse
effect on financial services firms, markets, or the U.S.
economy.''
Mr. Price. So somebody has to decide what has a significant
adverse effect on--the rest of that sentence.
Mr. Bartlett. Yes.
Mr. Price. That, you would suggest, ought to be the
systemic regulator.
Mr. Bartlett. Yes, or market stability regulator, yes.
Mr. Price. So somebody in the wonderful buildings around
here will determine whether or not a financial institution
ought to have explicit support of the Federal Government. Is
that what you are saying?
Mr. Bartlett. No, Congressman. We are not calling for
explicit or implicit support of the Federal Government. We are
not calling for identification--
Mr. Price. Excuse me, I only get 5 minutes. Tell me how
that isn't a consequence of that definition.
Mr. Bartlett. Because the outcome of identifying systemic
risk is to go to the prudential supervisor and then supervise
that firm in a different and a better way. That is the outcome.
It is not to provide the implied bailout or the support.
Mr. Price. Anybody disagree with that being the outcome?
So we all agree that systemic risk institutions no longer
get explicit government support. Is that correct?
Mr. Bartlett. Congressman, I guess what I am trying to say
is that we don't see the outcome of this as identifying
systemically significant institutions. We see it as identifying
systemic risk across those institutions so that a poorly
underwritten mortgage is not simply sold up to someone
elsewhere where it is still a bad mortgage.
Mr. Price. No, I understand that. But at some point there
has to be a consequence for the decisionmakers here. We have
determined, somebody has determined that there is an entity
that is a systemic risk. So what ought to occur to that entity?
It has to be something.
Mr. Plunkett. If you keep the entity from becoming a
systemic risk through the kind of regulation Mr. Bartlett is
talking about, then you don't have to face that problem. That
is the prevention strategy.
Ms. Jorde. Well, and I think you are exactly on track. We
first have to design what systemic risk is. We have to figure
out--
Mr. Price. What is your definition?
Ms. Jorde. What is my definition? Well, one is that the CEO
doesn't know what the right hand and the left hand is doing. If
the organization is so large that the very people at the top
and the board of directors has no control over the
organization--
Mr. Price. So you believe it is appropriate for the
government to determine whether or not a CEO knows whether the
right and left hand know what they are doing?
Ms. Jorde. Well, I think it is important that the company
is not so large that their failure will bring back everybody
under the house of cards. That is what I am facing as a
community banker. I am paying hundreds of thousands of dollars
now for FDIC insurance premiums to cover the risks of the
systemically largest institutions.
And I think that, before we figure out who is going to be
the regulator, we need to identify the criteria of what this
regulator is going to do--
Mr. Price. I would agree. And I think that is almost an
impossibility. And I would suggest that community banks,
independent community banks, might find themselves out in the
cold; that the Federal Government may determine that all those
big boys are systemically risky, systemically significant,
community banks aren't, and then, therefore, how are community
banks going to compete.
Mr. Wallison, I would appreciate it if you would just
discuss that unequal or unlevel playing field when one defines
something as systemically significant.
Mr. Wallison. That is the thing that bothers me more than
anything else, and worries me. And that is just from what I
have experienced with watching Fannie Mae and Freddie Mac.
When the government chooses a winner, when the government
chooses an institution that it is going to treat specially,
different from any other institution, then the market looks at
that and decides, quite practically, that I will be taking less
risk if I make loans to such a company. And when that happens,
those companies then become much tougher competitors for
everybody else in the industry.
The result will be a collapse of the very competitive
financial system we have today and the consolidation of that
system into a few very large companies that have been chosen by
the government--whether they are banks, securities firms,
insurance companies, hedge funds, or anything else.
Mr. Price. Thank you, Mr. Chairman.
I think that is a concern that many of us share. Thank you.
The Chairman. The gentleman from Kansas.
Mr. Moore of Kansas. Thank you, Mr. Chairman.
And thanks to the witnesses for testifying.
Like my constituents, I am angry at the recent news reports
of AIG handing out bonuses, or what they call retention
payments, totaling $165 million. And this happens after the
Federal Government has committed $173 billion in taxpayers'
money to support AIG.
As I understand it, these bonuses are going to employees of
the same division that made hundreds of billions of dollars'
worth of very risky credit default swaps that fell apart and
contributed to the financial meltdown.
We also learned this week that Citi's CEO, Mr. Pandit, who
testified before this committee on February 11th, made $10.82
million in 2008. When responding to my questions of how much
the eight CEOs of the big banks made, Mr. Pandit told this
committee that he was to receive a salary of $1 million with no
bonus in 2008, but that he was going to take his salary of just
$1 per year and no bonus until the company returns to
profitability. Mr. Pandit neglected to tell this committee that
he received a sign-on and retention award in January 2008 that
was valued at the time at over $34 million.
Mr. Yingling, Mr. Ryan, and Mr. Bartlett, in the context of
creating a systemic risk regulator, should that regulator
review executive compensation practices and submit guidelines
to ensure incentives are properly administered? What else, if
anything, should this committee consider doing to address this
concern? I would like to hear your thoughts on these.
Mr. Bartlett. Not with regard to Citi, but on the broad
question, one of the items that I think a systemic risk
regulator or other regulator could and are looking at are
short-term compensation strategies that reward short-term
revenue growth, as I said in my testimony, rather than long-
term value to the company. I think boards of directors but also
other regulators are looking at that, and I think we will see a
lot more of that.
I think that is the systemic risk, as opposed to the
outrage over somebody is making more money than you think that
they should. I think it is a systemic risk--there is a systemic
risk question without regard to the politics.
Mr. Moore of Kansas. Very good. Thank you, Mr. Bartlett.
Others? Yes, sir?
Mr. Ryan. I see executive comp as a very complicated issue
right now for you, for the public, for us, specifically for
directors. The real responsibility on compensation lies with
the directors, who have been placed in their job by
shareholders and that is their job.
Mr. Moore of Kansas. Yes, sir?
Mr. Yingling. I would recommend to you a report by a group
called the Institute for International Finance, which is the
large financial institutions all around the world, including
the United States. And they have a chapter on executive
compensation.
And the industry, I think, is committed to addressing these
issues where compensation is just out of line, where the
incentives are wrong, and you need to have a longer-term
perspective so that you don't have incentives that you can get
a lot of money for something that blows up 2 years later.
And I think that is an issue that the industry believes
needs to be addressed. And I would suspect that any regulatory
agency is also going to want to have discussions with members
of the industry on that topic.
Mr. Moore of Kansas. Any other witnesses care to comment?
Mr. Silvers. Congressman, this was the substantial part of
my oral testimony earlier this morning.
There are two directions in which I think Congress ought to
look to a solution in this area. I am not sure what the
solution is to people who mislead you, but I can tell you what
I think the broader policy solutions are.
Mr. Moore of Kansas. Well, I will talk to you later about
that.
Mr. Silvers. First, as was indicated, there is a
responsibility with boards of directors here, but one that
boards don't carry out when they are dominated by the CEOs
themselves. And there needs to be an effective way for long-
term investors to influence who is on those boards. And that is
the proxy access issue with the Securities and Exchange
Commission.
Secondly, with respect specifically to systemic risk and
the issues of short-termism and asymmetry, which were
identified by the representatives of the industry here, these
are matters which, at specific large firms and across the
industry as a whole, must be a subject for which the day-to-day
safety and soundness regulator is aware of and monitors and
which a systemic risk regulator monitors.
I will finally say to you that there is no issue right
now--and I am sure you know this as well as I--there is no
issue right now which the general public, working people, or
union members are more concerned about or are more outraged
about. And statements that we can't somehow get the money back
just don't cut it.
Mr. Moore of Kansas. Thank you, sir.
Any other witness care to comment?
I thank the witnesses for their testimony.
And I yield back, Mr. Chairman.
Mr. Green. [presiding] Mr. Campbell is now recognized for 5
minutes.
Mr. Campbell. Thank you, Mr. Chairman.
And thank you, panel.
Everyone generally is supporting the idea of systemic
regulators, as we discussed. And I would like to pursue
something Mr. Kanjorski talked about and Dr. Price followed up
on, which is, what does this regulator do? If an entity is
deemed to be systemically significant and, thereby, either too
big or too interconnected to fail, what do we do?
Now, Mr. Bartlett suggested, I believe, that there should
be regulation--that what the powers that this regulator should
have would be regulation to keep it from getting too
systemically important or too big to fail. If that is the case,
then my question would be, who do you apply it to then?
If, instead, we determine that some entity is too big or
too interconnected to fail and is systemically important, do we
regulate it, or do we break it up? Do we look at this as an
antitrust situation--and this would address some of your
concerns, Mr. Wallison--do we look at this as an antitrust
situation and say that there are two types of antitrusts now:
There is monopolistic antitrust, which we have had in law for
decades and decades; and now there is a new type of antitrust,
a situation where an entity is so big and so interconnected
that it can't fail, which means that the government would have
to support it, keep it from failing, which means that there is
a moral hazard, some of which we are witnessing out there
today.
And I would welcome comments from any of the panel on those
two alternatives that I see or a third one, if you see one.
Mr. Silvers?
Mr. Silvers. The Congressional Oversight Panel, in looking
at this, took the view that we ought definitely not to name
systemically significant institutions. And what we ought to do
instead is to have a regulatory structure that, essentially, as
you get bigger, as an institution gets bigger, it becomes more
expensive to be there in our financial system, because you
would have to have higher levels of capital and more expensive,
essentially, deposit insurance or perhaps other forms of
insurance that effectively pay into a systemic risk fund.
That approach would not be the approach of necessarily
using legal action to break up firms, but it would be a potent
disincentive, properly structured, for firms to grow to a level
at which we then would have no choice but to rescue them, in
which we would be faced with the Blazing Saddles problem, if
you know what I mean.
And that, I think, is the--that notion, in which becoming
more likely to be a systemically significant institution is
something that is painful, is, I think, the appropriate
approach.
And we ought to recognize, in this respect, that we don't
really know who is systemically significant until the moment
hits; that in very good times very large institutions may not
be, and in very bad times rather small institutions may be.
Mr. Plunkett. There is a hearing this morning by a House
Judiciary subcommittee on this very topic. We are testifying
there. And while in extreme situations a consumer organization
like mine might say, ``Yes, break them up,'' the more effective
approach is what Mr. Silvers is talking about, which is to use
prudential regulation, not antitrust regulation, to keep an
entity from getting too big to have to deal with that problem.
Mr. Campbell. Mr. Bartlett?
Mr. Bartlett. Congressman, I suppose I understand why the
discussion keeps, sort of, trending over towards identifying
specific firms, but let me try to offer some clarity. That is
not the goal. It is a set of practices and activities across
the markets, it is the system that we should focus on. There is
no--at least we don't have a proposal to identify,
``systemically significant firms.'' That should not be done. It
should not be size-mattered. It should be related to whether
their system or the practices create systemic risk.
Now, let me give you a real-life example of one that we
just went through. Hundreds of thousands of mortgage brokers,
not big companies but hundreds of thousands, had a practice of
selling mortgage products not related to whether they were good
mortgages or not, without the ability to repay. Thousands of
lenders--42 percent were regulated banks; 58 percent were
unregulated by anyone--had a practice of originating those
loans, even though they were systemically a major risk, as it
turned out, and then selling them to mortgage-backed securities
on Wall Street, who then put them into pools, who then had them
insured, that were regulated by 50 State insurance
commissioners.
So the system itself was the systemic failure. It wasn't
any one of those firms. And so the goal here, I think, is to
create a regulatory system that can identify those patterns or
practices that then can result in a systemic collapse before it
happens.
Mr. Campbell. Mr. Ryan and then Ms. Jorde?
Mr. Green. We will hear the answer, and the gentleman's
time is expired.
Mr. Ryan. Just as to the role, as we see the role here, it
is really early and prompt warning, prompt corrective action.
The systemic regulator needs a total picture of all of the
interconnected risks. As I have said, this regulator needs to
be empowered with information to look over the horizon. We do
not do that job well as regulators right now. And it also needs
the power to be the tiebreaker, because there are differences
of opinion between primary regulators, and if there is a
systemic issue, we need someone to make that determination.
Just one last comment here. We were talking about failure
of institutions. As Ed Yingling said, we already have a system
set up for banks in this country under the FDIC. We had no such
system for securities firms, we have no such system for large
insurance companies, and we have no such system for other, what
I would call, potentially systemically important entities. And
we need to address that.
Thank you.
Mr. Campbell. Mr. Chairman, can Ms. Jorde answer?
Mr. Green. The time has expired. I am sorry. We will have
to get the response in writing. The Chair wants us to move
along.
We will now recognize Mr. Scott for 5 minutes.
Mr. Scott. Welcome. Let me ask you a couple of questions,
if I may.
If Congress ultimately chooses not to create a systemic
regulator, what suggestions would each of you have for
improving our current regulatory system?
Mr. Bartlett. Congressman, the fastest and the easiest
one--well, one would be for the President's working group to
either obtain statutory authority, which they do not have, or
exert greater executive authority to coordinate the regulation
among the various regulators.
And then secondly is just to provide some type of relief on
pro-cyclical accounting principles, fair value accounting,
which we think is a major contributor to the problem right now.
Mr. Plunkett. I would say empower prudential regulators to
stop these problems before they start through better product-
level regulation to prevent risk from being created, first and
foremost.
Ms. Jorde. And I would add to expand regulation to cover
non-bank financial firms, which really have been largely
outside the banking regulatory system, even those subsidiaries
of banks that were regulated from the banking side but not the
non-bank side.
Mr. Silvers. Congressman, covering the shadow markets and
giving full jurisdiction to the relevant regulators to regulate
those activities, meaning to the extent that shadow markets are
really credit-granting functions; the bank regulators, to the
extent that they are really in the securities markets; the
securities regulators. That is a critical thing to do here.
And, secondly, to create a consumer protection agency so
that we put an end to giving that function to agencies that
don't want to do it.
Mr. Wallison. Congressman, if I can respond, the idea of
regulating additional parts of our economy is a simple idea but
one that seems totally ineffective. The problem is that we have
strong regulation already in the banking area. It has failed.
And why it is that, when we confront a situation like this, the
first reaction that so many people have is to extend a system
that has failed is beyond me. This is something--
Mr. Plunkett. Congressman, we have heard this several times
today, we have heard that we have strong regulation. I just
want to correct the record. When it comes to consumer products,
we have extremely weak regulation--
Mr. Wallison. Yes. I am talking here not about consumer
products--
Mr. Plunkett. --and that creates systemic risk, and that is
why we need an agency.
Mr. Green. Excuse me, please. The gentleman, Mr. Wallison,
is speaking, and we will have to ask, sir, that you withhold
comments until you are requested to speak.
You may continue.
Mr. Wallison. I was responding, really, to the question of
safety and soundness regulation, not consumer products
regulation. And on the question of safety and soundness
regulation, banking regulation has failed completely. And so,
we ought not to have a knee-jerk reaction that says, ``Well, we
have a problem. Let's regulate it.'' We ought to step back and
see what is wrong with the regulation, why it isn't working.
And one of the ideas that I think we ought to look at, at
least, is the notion of making sure that we help the private
sector to understand the risks that companies are undertaking.
And one of the ways to do that is to assure that companies put
out financial information that responds to what the needs of
the private-sector lenders are.
Now, one of the things that analysts can do is to supply
the regulators with indicators or metrics of risk-taking,
because that is the thing that has been causing most of the
trouble. And if the private sector were to have that
information, they could make much better decisions about where
to make their--
Mr. Scott. Okay. Mr. Wallison, I don't want to interrupt
you, but I only have a few more minutes. I did want to get two
more in.
Mr. Plunkett, I know you are itching to get into this
fight, so please do.
Mr. Plunkett. Well, the only thing I would add is I have
heard this now several times, and the flaw in the safety and
soundness approach is that the quality of the product wasn't
evaluated. It turns out that, if you protect consumers, you
will better protect safety and soundness, you will better
protect the economy.
So that is the flaw in looking at this very narrowly in
terms of just what is traditionally defined as safety and
soundness regulation. And that is why we need an agency that is
focused solely on protecting consumers.
Mr. Scott. Good point.
Mr. Ryan?
Mr. Ryan. I am going to take a very different tack. We have
the Group of 30, chaired by Chairman Volcker; we have the Chair
of the Fed, Mr. Bernanke; and we have the new Secretary of the
Treasury; and we have a very unique situation here. We have
most of the people sitting here who represent the industry
asking for something which is really new regulation. That is a
good sign that we need it. And I think we need it in a very
timely fashion, sir.
Thank you.
Mr. Scott. Thank you very much.
Thank you, Mr. Chairman.
Mr. Green. Mr. Cleaver is now recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
The European Union is presently considering establishing a
systemic risk council, the E.U. Systemic Risk Council. And from
all that I have been able to read, it appears as if that is
going to be established.
Do we find ourselves--this is for any of you--do we find
ourselves in an awkward spot as a nation if we fail to connect
in some kind of way with an international systemic risk
operation? I mean, if Europe or maybe then there comes an Asian
systemic risk council, what happens to us if we are over here
in some kind of isolation?
Yes, Mr. Timothy Ryan?
Mr. Ryan. Thank you. That is what my mother calls me
sometimes too, ``Mr. Timothy.''
We think that there is a need for strong global
coordination. The college approach in Europe is principally a
result of an inability of them to agree on one central entity
to be the systemic risk regulator for the entire E.U. or E.C.
So you have the, I would say, unique authority within the
United States to set something up. It would be the first. If
done correctly, it would add an awful lot of value. And part of
its function would be to coordinate with other groups around
the world, whether it is a college or a specific regulator.
Mr. Wallison. One of the reasons, Congressman, I think the
United States is the engine of the world is that we are not
subjecting our businesses to excessive regulation. It is clear
that the E.U. wants more regulation; they can have it. And they
can have systemic regulation, if they want it. But the effect
of that is going to reduce economic growth within the E.U. The
United States--
Mr. Cleaver. Why? I hear people say that all the time.
Mr. Wallison. Because regulation imposes costs, it
suppresses innovation, it reduces competition, all of the
things which make our system work better.
Mr. Cleaver. All of the things you just declared, how do
you know that? I mean, it suppresses creativity and all that--I
mean, how?
Mr. Wallison. There have been lots of academic studies that
have shown that costs are increased by regulation. And it
should be clear that happens, because you have to respond to
the regulator, you have to provide a lot of reports, you have
to make sure that the regulator is approving what you are
doing. All of these things add costs to businesses, which are
ultimately imposed on consumers.
Mr. Cleaver. Mr. Silvers?
Mr. Silvers. I really appreciate that this is my friend
Peter Wallison's religion, but I think that the facts are that
when we had well-regulated financial markets they channelled
capital to productive activity, they were a reasonable portion
of our economy and they were not overleveraged and we did not
suffer from financial bubbles. And that describes the period
from the New Deal until roughly 1980.
And then we started deregulating, and the result was
financial markets that grew to unsustainable size, excessive
leverage in our economy, an inability to invest capital in
long-term productive purposes, an inability to solve
fundamental economic problems, and escalating financial
bubbles.
That is the history of our country. When we had thoughtful,
proportionate financial regulation, it was good for our
economy.
Now we are in a position, pursuant to your question, where
we have global financial markets and where a global financial
regulatory floor is an absolute necessity if we are going to
have a stable global economy. If we choose to be the drag on
that process, it is not only going to impair our ability to
have a well-functioning global financial system, it will damage
the United States's reputation in the world.
This question is immediately before us. And I would submit
to you that while systemic risk regulation is important here,
underneath that are a series of substantive policy choices
which will define whether or not we are serious about real
reregulation of the shadow markets or not. And if we choose to
be once again the defender of unregulated, irresponsible
financial practices and institutions, that the world will not
look kindly upon us for doing so, as they did not look kindly
upon us for essentially bringing these practices to the fore in
the first place.
Mr. Cleaver. Our children won't either. Our children won't
look kindly on us.
Ms. Jorde?
Ms. Jorde. I think the point was made earlier that a vast
majority of the taxpayer funds that went to AIG were used to
make payments to foreign banks, and I don't think anybody here
really understands why. Is it because foreign banks have a big
stake with our U.S. banks? We really don't know.
And I think that, at the end of the day, we need to get to
the bottom of how interconnected is our entire economy, how
much are we dependent on those foreign banks, what stake do
they have with us.
Mr. Green. The gentleman's time has expired. Mr. Ellison is
recognized for 5 minutes.
Mr. Ellison. Let me thank the entire panel, but my first
question is to Mr. Bartlett.
Mr. Bartlett, particularly given that Goldman Sachs and
Morgan Stanley are now holding companies, what are your
thoughts on the recommendation of the G30 report on financial
reform that strict capital and liquidity requirements be placed
onproprietary trading activities?
Mr. Bartlett. I guess I am not familiar with that exact
recommendation. I think the G30 report was, by and large--we
don't agree with all of it--was, by and large, a step in the
right direction.
Those two institutions became bank holding companies. As I
understand, they have several years with their primary
regulator to conform with all the capital requirements. It is
clear that more capital is one of the trends in this, or less
leverage. And that is one of the outcomes of becoming a bank
holding company.
Mr. Ellison. Mr. Ryan, what are your views on this?
Mr. Ryan. Excuse me?
Mr. Ellison. Do you have any reflections on this?
Mr. Ryan. I do have views on this. I think this issue of
rules applying to specific activities or products within bank
holding companies or within systemically important institutions
is within the domain of the existing regulator today, so the
Fed has authority to deal with this, from a bank-holding-
company standpoint. And, under our proposal, the systemic
regulator, who we think is a more appropriate entity, with all
of the information, should be making those determinations.
Mr. Ellison. Thank you.
Mr. Wallison, you know that in 1999, I believe, legislation
was passed in our Congress which exempted credit default swaps
from regulation. Do you agree that it is the fact that these
derivative instruments were not regulated that has created part
of the financial crisis we find ourselves in today?
Mr. Wallison. No, I do not.
Mr. Ellison. Well, let me ask you this question then.
Mortgage originators, who were largely unregulated--as you
know, most of the mortgages, the what we call subprime,
predatory mortgages were not originated by banks but by
unregulated mortgage originators. Do you agree that they
contributed significantly to the problem and were unregulated?
Do you agree with that?
Mr. Wallison. Well, yes, I agree with the fact that
unregulated mortgage originators did originate a lot of
mortgages. But the reason they originated a lot of these
mortgages is that they had a place to sell them, which was
Fannie Mae and Freddie Mac.
Mr. Ellison. Well, do you agree that if they had certain
requirements on, you know, continuing education, bonding, some
standards of behavior, professional standards, that we may not
be in this situation to the degree we are in it right now?
Mr. Wallison. I think that is entirely possible, but--
Mr. Ellison. Oh, so you agree with regulation at least in
that way?
Mr. Wallison. That is consumer product regulation, and,
yes, I think that in many areas consumers need protection, and
that might certainly be one of the areas. But the point is that
all these things were originated because the money was
available through Fannie Mae and Freddie Mac.
Mr. Ellison. Reclaiming my time, Mr. Silvers, are Fannie
Mae and Freddie Mac responsible for this financial crisis we
are in now?
Mr. Silvers. The way Fannie and Freddie were managed,
particularly since 2003--and that date is very important--is a
substantial contributing factor.
However, the narrative that has been put forward by,
essentially, people who have a, sort of, principled
disagreement with regulation, that Fannie and Freddie are the
primary cause of this problem, is completely and utterly wrong.
And specifically, it is completely and utterly wrong because
Fannie and Freddie functioned, for example, for 10 years,
almost, following the strengthening of the Community
Reinvestment Act without bringing on systemic crisis.
They began to do what my friend Peter was talking about
when deregulated mortgage markets began to encroach on their
market share and in a context in which credit was available
broadly without regard to risk because of policies of the Fed
and the Bush Administration. And that began in 2003, and that
is when you saw the explosion of subprime.
Fannie and Freddie were participants in that conduct
starting in 2003. But their existence and the existence of
GSEs, the existence of the Community Reinvestment Act are not
primarily responsible for this crisis, and to assert so is to
fundamentally distort the record.
Mr. Ellison. Mr. Bartlett, in returning back to you, in a
speech that FDIC Chairwoman Bair made recently, she expressed
serious concern about the implementation of Basel II
internationally, and it might allow for reduction in regulatory
capital requirements at the height of a global financial
crisis. To address this concern--I think I am all done there,
Mr. Chairman.
Mr. Green. We will receive a quick answer to the question.
Time is up.
Mr. Ellison. Okay. Can I finish the question?
Mr. Green. Yes, sir.
Mr. Ellison. Okay.
She advocated the application of a global leverage capital
requirement, which we already have in the United States.
Could you express your thoughts on those requirements for
banks both in the United States and internationally?
Mr. Bartlett. I think both we and our regulators--our
government in Basel II has taken a whole new look at Basel II
to determine what to do with it going forward. I think the
world has changed in the last 2 years. And so I think we are
all just taking a brand-new look at it, including Sheila Bair.
Mr. Green. The gentleman's time has expired. Mr. Perlmutter
is now recognized for 5 minutes.
Mr. Perlmutter. Thank you, Mr. Chairman. And I would note
for the record that different regulators, such as yourself now
in the chair, adhere to the 5-minute rule, whereas other
regulators, some of the other Chairs didn't quite adhere to the
5-minute rule.
So I just want to say to the panel, many of you have been
here before. The information you are providing today and the
way you have been thinking about this, the way this has been
evolving, really for all of us, over the course of the last
year, year and a half, I think we are really developing a lot
of agreements.
And now, Mr. Wallison, as much as I want to debate you on a
lot of things, I do agree with you on your point about
regulation can add to cost and potentially the loss of
innovation. But I don't think that is the end of the question.
Because, as we have been here and have had hearing after
hearing on this subject, the banking system, the financial
system, in my opinion, is a different animal that we have to
look at in a different way. Because, as we relieved ourselves
of regulations, whether it was Glass-Steagall or, you know,
change mark-to-market or different kinds of things, people may
have been able to make that last buck, but the bottom fell out,
so that the taxpayers are paying a ton of money, because the
system itself is so critical to how our economy runs and the
world's economy runs. I mean, we are obviously seeing how
interconnected everything is.
So I agree with you. That is why there has to be reasonable
regulation. And the pendulum always swings to too much, and we
have seen too little, in my humble opinion, and it is costing
us a ton of money.
So, having said that--and it may be that I am just going to
give a statement and not ask questions. I generally ask
questions, but I want to say--is it Ms. ``Jorde?''
I think you had--you made a couple of points that, in my
opinion, are critical to this whole discussion. That is, you
know, the product mix, what do banks--what is their trade, what
is their business, and has there been too much commerce and
banking together so that we have products that get outside of a
banking regulator's expertise, and then also the size of the
institution.
And Congressman Bartlett and I have had this conversation,
about the size of the institution. In my opinion, things can
get too big. But within the system--so I think we have to look
at the product mix. The regulator has to look at the product
mix, has to look at the size of the institutions, because they
can get too big and outstrip whatever insurance we put out
there.
And then there is, sort of, the systemic peace of this,
which is the group think, Mr. Plunkett, you talked about, where
in Colorado in the 1980's, the savings and loans were not that
big, but they all started thinking the same way, they all
started doing the same things, and a lot of them got themselves
in trouble. Now, if we had had mark-to-market back then, we
would have lost every bank in Colorado. Thank goodness we still
had at least half of them. So Mr. Yingling's dead on the mark
on the mark-to-market stuff.
Mr. Silvers, your points about the stock options and that
you can go for the gusto because you have no downside, I really
hadn't added that to the whole mix of this. And when it comes
to financial institutions, we may have to look at that piece. I
think that we do need a super-regulator because there are too
many gaps within the system. So whether it is, you know, on top
of Mount Olympus, Mr. Yingling, as you have described, or
something, there are too many gaps within the system. We need
to have somebody looking at this as a whole.
And so all of you have brought a lot of information to us
in a very cogent fashion, and I appreciate it. I mean, this is
what it is going to take for us to develop this.
Yes, Mr. Ryan?
Mr. Ryan. I would just like to comment on this issue of too
large financial institutions.
Mr. Perlmutter. Go for it.
Mr. Ryan. Because I spent a lot of time before this
committee when I was a regulator of the OTS and a director of
the RTC. And we have large financial institutions for a lot of
different reasons. We have them because of consolidation, some
of it voluntary, some of it not. Some of our largest
institutions are really large because we had to resolve small
banks, and the small banks became part of, like, a Bank of
America. Think of it back to NCNB.
The idea that we should not have large financial
institutions will cut into productivity. It will cut into
technology. It will make up us--
Mr. Perlmutter. I understand that. And I agree with you.
And I think Mr. Wallison is on the same--it is the same point,
just a little different. It will cut into it. It will make it
more inefficient. But, on the other hand, smaller institutions
will compete with one another, and it won't be so hard for the
regulator to figure out everything that is going on within the
institution. Even if you had to resolve them all together, at
some point, you know, they are too big, in my humble opinion.
But thank you. I appreciate it.
Mr. Green. The gentleman's time has expired.
Mr. Perlmutter. Yes, sir. Thank you, Mr. Chairman. I am
glad you are keeping watch on the clock.
Mr. Green. We will now recognize Mr. Grayson for 5 minutes.
Mr. Grayson. Thank you, Mr. Chairman.
Gentlemen, if you were interested in increasing lending at
a time when the general perception is that credit is in short
supply and that we need to expand credit in order to keep the
economy afloat, and you had a choice, and that choice was
between bailing out huge institutions that have proven that
they were not good at allocating credit by the fact that they
lost billions upon billions of dollars versus providing
additional credit or even relaxing reserve requirements for
healthy institutions that had shown they could take that money
and make a profit with it, which would you choose?
Mr. Silvers?
Mr. Silvers. Well, you know, one of my observations from
being on the Oversight Panel for TARP, which I think is, sort
of, what you are getting at, is that what is a healthy
institution can be a puzzling thing. Every recipient, with the
exception of AIG, of TARP money has in some respect been
designated a healthy institution by the United States
Government. So perhaps your question is, well, we are just
giving money to healthy institutions already. I am not sure
that is a very plausible statement, but it is, more or less,
what the record shows.
The question of increasing lending, I think, is complex.
There is no question that there is a need for more credit in
our economy right now. On the other hand, the levels of
leverage we had in our economy during the last bubble are not
ones we ought to aspire to returning to or sustaining. Getting
that balance right is extremely important.
And, furthermore, it is also the case, I believe, that
allowing very, very large institutions to come apart in a
chaotic fashion would be very harmful to our economy.
The punch line is I think that we have not learned enough
about to what extent TARP's expenditures have produced the
increased supply of credit that your question indicates and to
what extent that is because of, I think as you put it, the fact
that a majority of that money has gone to a group of very large
institutions. Those are questions that I know the Oversight
Panel is interested in and questions that I am very interested
in. I can't tell you what I believe the answer to them to be
today.
Mr. Grayson. Ms. Jorde, should we be helping healthy
institutions help us, or should we be bailing out institutions
that have a history of failure?
Ms. Jorde. Well, we should be helping healthy institutions
help us, certainly. I don't anybody is advocating that we allow
large institutions to come apart chaotically.
I think that, certainly, if we start to work toward making
these institutions smaller--I am not saying we are going to
have 100,000 community banks with less than $50 million in
assets, but we can certainly make these institutions of such
size that capital will come back into them from the sidelines.
I don't think that investors out there are very anxious to
be investing in these systematically risky institutions. And I
think, going forward, we can have a lot of lending start up
again if we plan this right.
Mr. Grayson. Mr. Plunkett, if our goal is simply to extend
credit and give people the credit that they are used to getting
and the credit that they need and to keep the economy as a
whole afloat, is it more effective to help healthy institutions
expand their lending or is it more effective to give money to
failed banks and see that that money goes directly to having
them meet their already-overwhelming credit needs internally?
Mr. Plunkett. Well, I am going to talk about one aspect of
this issue that hasn't been addressed: the need to assure that
attempts to spur credit availability, whether through larger
institutions or smaller institutions, are offered on a
sustainable basis. The TARP program, the TALF program--we are
concerned, particularly with the TALF program, that it may end
up subsidizing, for instance, credit card loans with terms and
conditions that are not sustainable for consumers.
So I think that is an important aspect to the issue that we
should think about.
Mr. Grayson. I am wondering if there is any way to meet
systemic risk threats that does not involve transferring
hundreds of billions of dollars from the taxpayers to failed
banks.
Mr. Ryan?
Mr. Ryan. Do you mind if I answer the question that you
posed to everybody else just for a second, then I will answer
this question?
Mr. Grayson. Sure, that is fine.
Mr. Ryan. The key to credit availability for consumers
right now is securitization. That market is dormant. That
market provided over half of the funding for consumers. And if
there is anything we could do right now to move that market
back to its vibrancy, that would directly impact consumers.
And I think the government could do something. I think they
should have used TARP for its original purpose. I think they
should have purchased troubled assets, most of which would have
been mortgages. They could have also restructured those
mortgages and resecuritized them, which would have jump-started
this system.
Mr. Grayson. Well, fine, but I still would like, with the
chairman's indulgence, an answer to my question.
Mr. Green. Mr. Grayson, sir, the time has expired. We will
have to receive that response in writing.
Mr. Ryan. And I will do that for you.
Mr. Green. We will now recognize Mr. Himes for 5 minutes.
Mr. Himes. Thank you.
And, to the panel, thank you and congratulations. Unless my
colleagues from Michigan and New York show up, you are done in
4 minutes.
I have a small question and a large question. The small
question is for Mr. Wallison.
Mr. Wallison, I have heard you say on a number of occasions
today, ``Let them fail.'' I wonder, knowing what you know about
the millions of contracts, insurance contracts, written by AIG,
and, of course, now that we know who the counterparties were to
many of their CDSs, would you have applied that advice? Would
you have simply let AIG fail?
Mr. Wallison. Yes. I think the Fed panicked on AIG. They
should have let it fail. They panicked because, right after
Lehman Brothers failed, the market froze, and the Fed thought,
at that point, that they had to step in and stop a further
disintegration of the market by covering AIG.
The facts are not very well-known--but some substantial
portion of what AIG was committed to were credit default swaps.
Others were other kinds of obligations. Most of the newspaper
commentary and media commentary has been about the credit
default swaps.
Now, when an insurance company fails and your house is
insured by that company, what you have to do is go out and get
another insurance company. You haven't suffered any loss yet
until you have that fire or that burglary or whatever it is. So
if AIG had failed, the people who were protected by the credit
default swaps, the companies that were so protected would have
had to have gone out and gotten other credit default swaps if
they still thought they were at risk on particular obligations.
So that would not have caused any serious problem.
Mr. Himes. Thank you. And let me reclaim my time because I
actually have a larger question. I appreciate that explanation.
My larger question is, with the exception of Mr. Wallison,
there is some consensus that we will form and should form a
systemic regulator. I get really interested in the question of,
how do we make sure that that systemic regulator has the
flexibility, the ability to range over the financial landscape,
the ability to adapt to what we know is a very rapidly evolving
industry?
What attributes, what characteristics, what incentives
could we put into the systemic regulator to get it to act in a
way that regulators don't typically act, which is
entrepreneurial?
Given the limited time, I would ask if we have time to hear
from Mr. Bartlett, Mr. Ryan, and Mr. Yingling very briefly on
that question.
Mr. Bartlett. Congressman, I think you give it a broad
mandate, and you make the mandate systemic and not individual
firms.
I think placing this mandate of a market stability
regulator at the Fed is important, because the Fed has that
breadth of institutional knowledge. They count the shipment
of--or the ordering of corrugated containers. So this would be
consistent with the breadth that they look at the economy.
I think those two things: broad mandate and then putting it
at an institution that is big enough.
Mr. Ryan. Our view is that one of the most important things
for this systemic regulator--and you have heard me say this
before--is the ability to see over the horizon, which means
information. They need information about all interconnected and
important systemic institutions so that we can help the system
and help the citizens avoid this type of problem in the future.
And I don't think this is a cure-all for everything, but it
certainly would give us something that does not now exist
anyplace in the world. And I think we need it now.
Mr. Yingling. I think your question is very, very
important, because, as you are pointing out, there is a
tendency in regulatory agencies to fight the previous war.
We talk about the Fed being the systemic regulator. There
is another option, and that is you have a council that is
headed by the Fed. And whether you use that model or the Fed, I
think this needs to be a different group. It needs to be a
smaller group. It needs to be people that are not there to fill
out forms or read forms or read reports. It has to be people
who are looking out and looking at statistics and going out and
talking to people. And a prime example is somebody that would
look at the growth in subprime mortgages and the 3/27s and 2/
28s and look at that chart and say, that is a big fire.
And so, whether it is in the Fed or within a committee
headed by the Fed, it ought to be a group that has that role.
They don't have a regulatory day-to-day role. Their role is to
be entrepreneurial, as you are saying.
Mr. Himes. Thank you.
I yield back.
Mr. Green. The gentleman yields back his time. I will now
recognize myself for 5 minutes.
And, in so doing, let me thank all of the witnesses for
appearing today. I think your testimony has been most valuable
and will surely help us to come to some conclusions.
Let's not talk about a systemic regulator for just a
moment, and simply talk about systemic risk, because I think
there has been some confusion that has developed. I think Mr.
Bartlett, for example, has talked about a methodology by which
we can ascertain whether or not systemic risk exists.
And, Mr. Bartlett, I think you have been a little bit
misunderstood. Now, that may have been by accident, or it may
have been by design. But you have been a little bit
misunderstood, because some have tried to attribute to your
comments the notion that, once you do this, you are somehow
going to bail out an entity or you are going to spend
government money.
I don't think that is what you are saying. Is it at all
what you are saying, sir?
Mr. Bartlett. We Texans listen to each other very
carefully, Mr. Green. No, you have it exactly right. I said
exactly the opposite, that it is identifying the risk so you
can avoid the consequences that we are suffering today.
Mr. Green. And, Mr. Yingling, I think that you, too, have
been a proponent of risk identification. Without simply saying,
``This entity is the entity that poses a risk,'' you, too, have
talked about risk identification.
I think, Mr. Silvers, that seems to be your position, as
well, risk identification.
Is this correct, as it relates to the two of you? If you
have a difference of opinion, kindly extend your hand.
Okay. So, now, given that we have talked about risk
identification, let me just ask this: If we do see that a
systemic risk exists, is there a belief that we ought to take
some action, that we ought to take some action? My suspicion is
that most would say yes.
But I am going to move now to Mr.--and the camera is in my
way--Mr. Wallison, is that correct?
Mr. Wallison. Yes.
Mr. Green. Mr. Wallison, I seem to have concluded that you,
after having identified systemic risk, may not want to take
systemic action.
Mr. Wallison. No. On the contrary, I don't believe that it
is possible to identify systemic risk.
Mr. Green. You don't think that it is possible to identify
it?
Mr. Wallison. No, I don't.
Mr. Green. With AIG--well, let's go back to the GSEs. I got
the impression that you were the person who came forward, and,
while not using this specific terminology, ``systemic risk,''
you identified them as entities that might provide some risk,
significant risk, or considerable risk. Is that true?
Mr. Wallison. I thought they could, in fact, create
systemic risk, of course.
Mr. Green. All right.
Mr. Wallison. Because they were backed by the government.
Mr. Green. Let's pursue this. If you conclude that an
entity can cause systemic risk, as you came forward with your
clarion call, then do you not want to see some action taken to
prevent that cause from moving forward, from becoming the cause
of the systemic risk?
Mr. Wallison. Yes.
Mr. Green. All right. Well, if you conclude that you want--
as you did; you came forward. You, in fact, were sort of a
systemic analyzer, if you will. You performed a systemic
analysis, in a sense. Do you agree?
Mr. Wallison. Yes.
Mr. Green. Okay. If you conclude that you want to do
something about the GSEs, if they may be the cause of systemic
risk, can you not conclude that AIG may have been the cause of
systemic risk, as well?
Mr. Wallison. Yes, it is entirely possible that AIG could
have been a cause of systemic risk.
Mr. Green. All right. And if you realize that AIG is a
cause of or may be a cause of systemic risk, would you not want
to prevent AIG from being a systemic risk, creating a systemic
risk?
Mr. Wallison. If we were sure that any entity is a cause of
systemic risk large enough to have an effect, theoretically, on
the rest of the economy, yes, of course, we should do it. But
the downside of that--
Mr. Green. All right. You are--
Mr. Wallison. Congressman, the downside of that--
Mr. Green. Excuse me, please. I am reclaiming my time.
Mr. Wallison. Okay.
Mr. Green. You are with us, then, because that is what I
think most people are saying today. If we identify an
institution that may pose systemic risk, then we ought to do
something about it.
Which, by the way, is what the taxpayers are saying, too.
We all have our opinions, but the taxpayers will probably have
the last word. And they want to see institutions, for whatever
reasons, that are identified as systemic risks, they want to
see us to do something about that. That is what this is all
about.
Mr. Wallison. Yes, I understand. This is your problem.
Congress--
Mr. Green. I agree. And because it is my problem--
Mr. Wallison. Congress is required to act.
Mr. Green. Hold on, because you have just said something
that is exceedingly important. It is my problem.
Mr. Wallison. Yes.
Mr. Green. And because it is my problem, I cannot allow the
foxes that have allowed the raid on the henhouse to prevent me
from securing the henhouse. It is time for us to secure the
henhouse.
Now, this is not directed at you, sir, but those foxes that
allowed the raid on the henhouse, they will have a voice. But
what I have to do, because it is my problem, is not allow those
voices to prevent us from securing the henhouse.
Sorry I had to go back to my bucolic and rustic roots, but
I thought it appropriate to make that--
Mr. Wallison. I think you ought to be aware of unintended
consequences that--
Mr. Green. And I will be, but I will have to do it and
voice it at another time, because my time has expired.
And, recognizing that my time has expired, I now have to
indicate that some members may have additional questions for
these witnesses that they wish to submit in writing. And,
without objection, the hearing record will be held open for 30
days so that members may submit written questions to these
witnesses and place their responses in the record.
I thank all of you for coming. Your commentary has been
invaluable.
The hearing is adjourned.
[Whereupon, at 1:26 p.m., the hearing was adjourned.]
A P P E N D I X
March 17, 2009
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