[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



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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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