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



 
                        OVERSIGHT OF THE FEDERAL
                      GOVERNMENT'S INTERVENTION AT
                      AMERICAN INTERNATIONAL GROUP

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 24, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-20


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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 24, 2009...............................................     1
Appendix:
    March 24, 2009...............................................    67

                               WITNESSES
                        Tuesday, March 24, 2009

Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................    10
Dudley, William C., President and Chief Executive Officer, 
  Federal Reserve Bank of New York...............................    14
Geithner, Hon. Timothy F., Secretary, U.S Department of the 
  Treasury.......................................................     7

                                APPENDIX

Prepared statements:
    Bachmann, Hon. Michele.......................................    68
    Bernanke, Hon. Ben S.........................................    70
    Dudley, William C............................................    77
    Geithner, Hon. Timothy F.....................................    83


                        OVERSIGHT OF THE FEDERAL
                      GOVERNMENT'S INTERVENTION AT
                      AMERICAN INTERNATIONAL GROUP

                              ----------                              


                        Tuesday, March 24, 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, Ackerman, Sherman, Meeks, Moore of 
Kansas, Capuano, Hinojosa, McCarthy of New York, Baca, Lynch, 
Miller of North Carolina, Scott, Green, Cleaver, Ellison, 
Klein, Wilson, Donnelly, Foster, Carson, Speier, Childers, 
Minnick, Kilroy, Driehaus, Kosmas, Grayson, Himes, Peters, 
Maffei; Bachus, Castle, King, Royce, Lucas, Paul, Manzullo, 
Jones, Biggert, Capito, Hensarling, Garrett, Barrett, Gerlach, 
Neugebauer, Price, McHenry, Campbell, Putnam, Bachmann, 
Marchant, McCotter, McCarthy of California, Posey, Jenkins, 
Lee, Paulsen, and Lance.
    The Chairman. The hearing will come to order, and members 
will be seated.
    This is a very important public hearing. It will not be 
disrupted. There will be no distractions. This is a chance for 
us to have a thoughtful public discussion, both critical and 
negative and positive. And there will be no disruption. If 
behavior becomes disruptive, I will ask the people who are 
causing the disruption to leave. I hope that is understood.
    I will say that my own view is that critical conversation 
questions, indeed whole sentences and even paragraphs, advance 
even a negative view more than bumper stickers, no matter what 
sort of bumper those stickers are worn on. And I will enforce 
those rules.
    We--I will just announce before we start with the time--
have two hearings this week. This hearing is a special hearing, 
an ad hoc hearing, called as the second half of our 
conversation about the question of bonuses paid to the AIG, but 
it is also open to questions on other matters.
    And, on Thursday, the Secretary of the Treasury will be 
here again. So members will have a chance to question the 
Secretary again on Thursday as part of the series we are having 
on the question of regulatory reform--a process, I will remind 
members, that really began in April of last year, when 
Secretary Paulson made a very sweeping proposal for an 
increased degree of regulatory authority. And we have been in a 
conversation since then, and we will be continuing that.
    Today's hearing deals with AIG. And I, in particular, want 
to emphasize the importance of looking both backwards and 
forwards. As we look back at what happened with AIG, the 
context should be clear. And, as I have said, I know there are 
people in the society, with whom I disagree scientifically, who 
believe in a theory that says the world was created some 4,000-
plus years ago. That is not an issue today, but I do think it 
is important to remember that the world was not created on 
January 20, 2009, and there is an historical context. The 
historical context goes back at least as far as the Bear 
Stearns issue. And I think we need to set the stage.
    Bear Stearns was failing, and the Secretary of the Treasury 
and the Chairman of the Federal Reserve last year, Mr. Paulson 
and Mr. Bernanke, together worked out an arrangement so that 
the creditors of Bear Stearns--not Bear Stearns shareholders--
but that the creditors of Bear Stearns were compensated, for 
fear that a failure to compensate them would have severe 
negative consequences in the economy.
    Then Lehman Brothers found itself in the same situation. 
And when efforts to find another private party to step in 
failed, the Bush Administration made the decision at the time, 
I think in part in the context of criticism that had come from 
the intervention with Bear Stearns' creditors, to allow it to 
fail, so that Lehman Brothers failed and none of the creditors 
of Lehman Brothers were aided.
    I recently was visited by two Members of the House, our 
colleague Ms. Speier, and our colleague Ms. Eshoo, because the 
county they represent in California lost a lot of money when 
Lehman Brothers went under. And we have others--we have many, 
many other municipalities that are suffering from that.
    But the decision was made not to intervene in Lehman 
Brothers. And I think it was fueled in part by the view that 
there had been too much intervention in Bear Stearns. People 
said, ``Let's have free enterprise. Let's let it work.'' ``Free 
enterprise'' means the right to fail with no safety net, so 
Lehman Brothers was allowed to fail with no safety net.
    A consensus formed, I believe, fairly soon after that, that 
allowing Lehman Brothers to totally fail had severe negative 
economic consequences. And that is the context which needs to 
be remembered when we think about what was done by the Federal 
Reserve, with the support of the Treasury, in 2008, with regard 
to AIG.
    My own view is that the negative example of Lehman 
Brothers--and that included a number of political criticisms--
as well as a view that it had a severe economic negative effect 
was, I believe, behind the decision to intervene for AIG.
    I will remind people the decision to intervene on behalf of 
AIG was a decision the Federal Reserve took under its statutory 
authority. Unlike the subsequent vote in the House to create 
the Troubled Asset Relief Program, there was no congressional 
involvement, except you might say it was congressional 
involvement when we sit in a room and are told something and we 
say, ``Wow.'' That was the congressional involvement with 
regard to that. We did raise some questions, but we were being 
informed.
    I cite that because the going-forward part--people talk 
about the bonuses, but the going-forward part is this: I 
believe we have two very important negative examples before us 
of how not to proceed. One was the Lehman Brothers example, 
where they were allowed to totally fail and there was no help 
to any of the creditors. The other is the AIG example, where 
there was help for all of the creditors. Neither one is what we 
should be doing going forward.
    The problem is--and I would contrast what we saw with 
Lehman and with AIG with what we saw with Wachovia, IndyMac, 
WaMu, and Countrywide. Banks also failed in 2008. And that was 
not a happy occasion in every case, although those of us who 
will mourn Countrywide are a very small number. But the fact is 
that we have in place mechanisms involving a very well-run 
FDIC, with the cooperation of other financial regulators, that 
contained the damage. So when these banks failed, it was 
neither a Lehman Brothers total negative on the economy or an 
AIG excessive intervention in the minds of some on behalf of 
creditors.
    Our job--and, again, this was first raised by Secretary 
Paulson last year and Mr. Bernanke, and we are now at the point 
where we will be addressing that--is that when nonbank major 
financial institutions need to be put out of their misery, we 
need to give somebody the authority to do what the FDIC can do 
with banks. It is called ``resolving authority.'' But it is 
giving somebody--and it is, as people should understand, a form 
of the bankruptcy power given under the Constitution. It allows 
us to avoid the choice of all or nothing--nothing, in the case 
of Lehman Brothers; all, in the case of AIG--equally 
unacceptable alternatives, and our job is to work together to 
try and find some other way.
    The gentleman from Alabama is recognized for 5 minutes.
    Mr. Bachus. Thank you, Mr. Chairman.
    Mr. Chairman, I am going to distribute our time as follows: 
3 minutes to the gentleman from New Jersey, Mr. Garrett; 3 
minutes to the gentleman from Texas, Mr. Hensarling; and 2 
minutes to the gentleman from Delaware, Mr. Castle.
    The Chairman. The gentleman from New Jersey is recognized 
for 3 minutes.
    Mr. Garrett. I thank you, Mr. Chairman.
    You know, today I look forward to hearing all the 
testimony, as well as the answers to many questions that 
Americans have, I believe, for this panel. Indeed, like many of 
my colleagues, I have questions to pose to our witnesses.
    To Chairman Bernanke, I am interested in hearing more about 
the Fed's ongoing relationship with AIG's leadership as they 
work together in running and also dismantling this entity on 
behalf of its largest shareholder, the American taxpayer.
    I am also concerned, though, about the Fed's transparency 
and its independence in regards to publicly releasing details 
about AIG's counterparties. As the chairman knows, back in 
December, I sent a letter asking for specific counterparties to 
AIG and who would benefit from that if they went insolvent.
    In a reply I received on March 4th, I was told that, ``In 
keeping with normal business practices, CDS contracts had not 
been made publicly available because counterparties and AIG 
considers this information to be commercially sensitive and 
nonpublic information,'' endquote. Then, lo and behold, just 
less than 2 weeks later, this information was released, and we 
found out just who those counterparties were, some being 
foreign banks.
    So, since it is my understanding that AIG doesn't do 
anything without the approval of the Fed these days, why, then, 
did the Fed basically do an about-face on its policy of 
disclosing AIG counterparties? Was it, in part, due to bowing 
to pressure from the Administration in what many would say are 
politically difficult times? And do you feel that there is 
pressure in performing these regulatory functions and that 
those pressures undermine your independence in performing your 
monetary functions?
    But probably more important than that whole issue is, why 
didn't the Fed insist on negotiating with foreign and also 
domestic counterparties for a more reasonable resolution to 
these contracts instead of paying dollar-for-dollar, especially 
when we learned after the fact that many of these 
counterparties had themselves hedged their bets or hedged their 
exposures with AIG anyway?
    Next, I would also like to revisit Chairman Bernanke's 
assertion the AIG problems originated, as he said, with 
unregulated portions of its holding company. But, you know, we 
heard testimony last week from OTS Acting Director Polakoff 
that seems to contradict this assertion. Mr. Polakoff explained 
that OTS was actively regulating that division and was aware of 
AIG's CDS dealings and that they did raise concerns with AIG 
back in 2005.
    From Secretary Geithner, many members of this committee, as 
well as the American people, would like a straight answer on 
the handling of the AIG bonus fiasco. The Secretary has been 
referred to as, ``the original architect'' of the AIG bailout. 
There have also been some questions as to the extent of the 
Treasury Department's involvement in altering provisions in the 
so-called stimulus package, ensuring that the bonuses would, in 
fact, be honored. Moreover, we are told he was informed about 
the bonuses at least a week-and-a-half before they were paid 
out. We also know the Secretary had specific conversations with 
AIG's CEO, Mr. Liddy, about it just a few days before.
    So, as Secretary Treasurer and a representative of the 
United States and the people, which is the largest shareholder, 
again, at AIG, I would like to hear from the Secretary his 
recollection of that conversation with Mr. Liddy, and the 
letter as well, and would like to know if he raised these 
issues with the President before the bonuses were paid and did 
the President sign off on them?
    The Chairman. The gentleman from Texas for 3 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, and thank you, Chairman 
Bernanke, for joining us today.
    Bonuses paid out by profitable companies to outstanding 
employees make sense. Taxpayer-funded bonuses paid out by 
failing companies who owe taxpayers money makes no sense. The 
close to $200 million in bonuses paid out to AIG's employees 
was merely last week's TARP outrage of the week. The outrage, 
however, pales in comparison to the outrage that taxpayers have 
now seen in 4 different bailouts and have pumped $173 billion 
into a failed company with no apparent end in sight.
    It pales in comparison to the outrage that taxpayer money 
is being used to make counterparties whole, many of which are 
foreign financial institutions. They assumed a risk that the 
school teacher in Mesquite, Texas, who is now helping make 
those counterparties whole, did not take.
    It also pales in comparison to the outrage that we have 
seen no convincing plan of sustainability, profitability, or 
taxpayer recoupment that has been presented to us, this 
committee, or the Congress, much less the American people.
    And finally, it pales in comparison to the outrage that we 
should have that the Democrat leadership in Congress and the 
Obama Administration either knew about these bonuses or should 
have known about these bonuses and could have stopped them.
    After we learned a provision in the so-called stimulus 
legislation--which, as a practical matter, the Republicans were 
not permitted to read--ensured that these bonuses would be paid 
out, we witnessed the spectacle of Speaker Pelosi pointing a 
finger at Senator Dodd, Senator Dodd pointing a finger at 
Secretary Geithner, and Secretary Geithner and the Treasury 
staff seemingly pointing a finger at Senator Dodd. In a town 
where few are loathe to brag about legislation they authored, 
this bonus-enabling provision appears to be one of a kind, in 
that it is an apparent orphan.
    The House went to great lengths to cover up this 
embarrassment, passing what many believe to be an 
unconstitutional tax to punish action with which Congress did 
not agree. We could have simply required AIG to pay back 100 
percent of the bonuses before they receive another bailout, 
which we all know is coming. But the majority insisted on 
setting the dangerous precedent of punishing people after the 
fact who engaged in conduct with which they did not agree.
    Secretary Geithner, I hope this legislation has not 
jeopardized your efforts to attract the private portion of your 
public-private investment partnerships.
    There is something else that is needed, Mr. Secretary. The 
public needs a straight answer: What did the Obama 
Administration know, and when did they know it? For your plan 
to succeed, it needs confidence. And for there to be confidence 
restored, there must be openness, accountability, and honesty.
    As one of my colleagues told me last evening, if you like 
the way the government has been running AIG, you are going to 
love socialized health care.
    The Chairman. The gentleman from Pennsylvania is recognized 
for 3 minutes.
    Mr. Kanjorski. Good morning, Mr. Chairman.
    Thank you for working with me to schedule this important 
hearing to hear directly and publicly from those Federal 
entities now responsible for overseeing American International 
Group, or AIG. As I said last week, the Treasury Department and 
the Federal Reserve have much to explain not only to us, but 
also to the American people.
    Since last fall when it received governmental assistance 
for the first time, I have maintained an active, ongoing, and 
strong interest in AIG. Early on, I wrote to the Federal 
Reserve to inquire about its oversight of AIG. I have contacted 
them regularly since then. After AIG's TARP investment, I also 
contacted the Treasury Department about these matters.
    Taxpayers now own 80 percent of AIG. Today, I therefore 
hope that we can learn more about how Federal officials are 
protecting the taxpayers' interest in AIG. I also want to learn 
more about the plan, the people, and the resources dedicated to 
AIG oversight.
    Additionally, because the Federal Reserve was the first to 
intervene in AIG, I would greatly appreciate an explanation 
from them on how and why they made the decision to get 
involved. Further, I want to know the plan to recover the loans 
from AIG so that taxpayers can be paid back in full with 
interest, as quickly as possible.
    During the last week, the American people have rightly 
expressed outrage about the sizable retention bonuses given to 
workers at the very unit that caused AIG to seek Federal aid. 
If Federal officials had exercised effective, proactive 
oversight at the company, we could have prevented this problem. 
Going forward, I would like the Federal Reserve and Treasury to 
be more active and transparent in their oversight of AIG.
    That said, Mr. Chairman, we are in the midst of an economic 
crisis. As a result, the Treasury Department and the Federal 
Reserve have assumed an extraordinary amount of responsibility, 
and they have worked to develop and implement a broad array of 
innovative programs. As such, they may lack the resources and 
attention needed to properly oversee all aspects of AIG.
    During the WorldCom bankruptcy, however, the Securities and 
Exchange Commission and WorldCom agreed to a private, corporate 
monitor to oversee compensation at WorldCom. I would welcome 
the views of our witnesses about whether the Congress should 
consider a similar appointment with respect to AIG now.
    Moreover, I want us to focus our deliberations today on 
whether powers exist in the Federal Government to unwind AIG in 
an orderly manner, if necessary. If not, I would like to learn 
about the powers the government needs to disband and dissolve 
nondepository Federal institutions.
    In sum, Mr. Chairman, I look forward to hearing from our 
witnesses about these important matters, and I yield back the 
balance of my time.
    The Chairman. The gentleman from Delaware for 2 minutes.
    Mr. Castle. Thank you, Mr. Chairman.
    We talk about transparency a lot, and I just don't see the 
transparency here. And I still have a lot of questions about 
all this, some of which relate to the Secretary, and some of 
which relate to the Federal Reserve.
    But we know, Mr. Secretary, that you were very involved in 
the AIG business back in the fall of 2008. In fact, when you 
were head of the New York Fed, that is where the first tranche, 
the first loan came from. And we don't know what you knew at 
that point, but, according to a spokesman for the Federal 
Reserve, the Federal Reserve, the Treasury, and the New York 
attorney general knew about the AIG bonuses in the fall of 
2008. I would assume, with that knowledge, you would have known 
it all the way up until you eventually, apparently, told the 
President.
    Then we have the whole business with Senator Dodd and the 
language change. I don't know who was in the room or who got 
that language changed in the stimulus program, but the new 
language was the prohibition required under clause (i), 
``should not be construed to prohibit any bonus payment 
required to be paid pursuant to a written employment contract 
executed on or before February 11, 2009.'' To me, that is a 
place where it could have been stopped. And I don't know who 
was in that room when that was done or who drafted that 
language. Senator Dodd, I think, originally said he did it, and 
then he pointed the finger at others, not at you necessarily, 
but at others, and that is a matter of some concern.
    Also, I have seen and read anecdotally, at least, that the 
Federal Reserve shared with Treasury all the discussions they 
had since you left, Mr. Secretary, and went on to the position 
of being the nominee and then the Secretary of the Treasury, 
which would raise a concern of when were you reminded about 
these bonuses.
    And we raise all these questions because, could something 
have been done before we passed legislation that probably 
nobody really wanted to vote for last week that may be leading 
to the fact that these bonuses are now being repaid? But the 
bottom line is maybe there wasn't transparency, maybe it could 
have been prevented, and I hope we can get some of those 
questions answered today.
    I yield back.
    The Chairman. We will now begin with the testimony of the 
Secretary of the Treasury, please.

STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, SECRETARY, U.S 
                   DEPARTMENT OF THE TREASURY

    Secretary Geithner. Thank you, Mr. Chairman. Good morning, 
Ranking Member Bachus, and members of the committee. It is a 
privilege to be in this room again, testifying before you. We 
are debating important, consequential issues for the country. I 
welcome the attention you are bringing to it. I am going to try 
to answer as many of your questions as I can in my oral 
statement, but I am sure we will need to go over many of these 
things in more detail.
    I am very pleased to be here with Chairman Bernanke and 
President Bill Dudley of the New York Fed.
    AIG highlights very broad failures of our financial system. 
Our regulatory system was not equipped to prevent the buildup 
of dangerous levels of risk. Compensation practice rewarded 
short-term profits over long-term financial stability, 
overwhelming the checks and balances in the system.
    We came into this crisis as a country--and this is a tragic 
thing--we came into this crisis without the authority and the 
tools necessary to contain the damage to the American economy 
posed by the very severe pressures working through the 
financial system.
    Now, I share the anger and frustration of the American 
people, not just about the compensation practices at AIG and in 
other parts of our system, but that our financial system 
permitted a scale of risk-taking that has caused grave damage 
to the lives of so many Americans. The companies insured by AIG 
in the United States alone employ one in three Americans. AIG 
directly guarantees over $30 billion of 401(k) and pension plan 
investments and is the leading provider of retirement services 
for teachers and education institutions.
    In September, at a time of unprecedented financial market 
stress, losses on derivatives contracts entered into by AIG's 
Financial Products group forced the entire company to the brink 
of failure. The Department of the Treasury, the Federal 
Reserve, and the Federal Reserve Bank of New York acted to 
prevent the collapse of AIG.
    That action was based on a judgment, a collective judgment, 
that AIG's failure would have caused catastrophic damage--
damage in the form of sharply lower equity prices and pension 
values, higher interest rates, and a broader loss of confidence 
in the world's major financial institutions. This would have 
intensified an already-deepening global recession, and we did 
not have the ability to contain that damage through other 
means. And we did not have the authority to unwind AIG.
    For these reasons, with extreme reluctance, on September 
16th, the Federal Reserve Board authorized an $85 billion 
revolving credit facility to provide liquidity and avoid 
default. As a condition of that loan, 79.9 percent of the 
shares of the company were placed in a trust run by appointees 
of the Federal Reserve Bank of New York. The government 
installed a new management team and began the process of 
restructuring AIG's board. And the new management team 
committed to return AIG to its core insurance business by 
winding down its derivatives trading operation and selling non-
core businesses.
    This loan, of course, was only the first step in a series 
of efforts to stabilize the company and provide the funding and 
liquidity necessary to execute that restructuring plan. 
Following that initial action in September, the Federal Reserve 
Bank of New York initiated a broad review, using outside 
experts, of the full range of executive compensation plans that 
exist across this large company.
    In November, as part of the government's infusion of 
capital, the Treasury Department imposed the executive 
compensation conditions and standards that were required under 
the Emergency Economic Stabilization Act.
    Earlier this month, in March, when in response to further 
losses on the company's portfolio we committed additional 
resources alongside the Fed, we made that assistance subject to 
forthcoming conditions on executive compensation that were 
based on both the President's proposals of February 4th and the 
provisions adopted in the American Reinvestment and Recovery 
Act.
    Now, on March 10th, I received a full briefing from my 
staff on the details and extent of AIG FP's pending retention 
payments, including information on the details of payments to 
individual executives. I found those payments, as have so many, 
deeply troubling. And after consulting with colleagues at the 
Fed and exploring our legal options, I called Ed Liddy, the CEO 
of this company, and asked him to seek to renegotiate these 
payments.
    He explained that the contracts for the retention payments 
were legally binding and pointed out the risk that, by 
breaching the contract, some employees might have a claim under 
Connecticut law to double payment of the contracted amounts. He 
committed, however, to renegotiate and reduce future payments 
totaling hundreds of millions of dollars, and that process is 
now underway.
    In addition, Treasury is working with the Department of 
Justice to determine what legal avenues may be available to 
recoup retention bonuses that have already been paid out and 
have not been voluntarily repaid. Treasury will also impose on 
AIG a contractual commitment to pay the Treasury from the 
operations of the company the amount of retention awards not 
recouped. And, finally, Treasury will deduct from the $30 
billion in recently committed capital assistance an amount 
equal to those payments.
    Now, this issue of executive compensation extends beyond 
AIG and requires substantial reform of the incentives and 
compensation throughout the financial sector. As we move 
forward, we need to ensure that taxpayer resources do not 
reward failure but are used to get our financial system back to 
the business of providing credit on reasonable terms to 
American businesses and families.
    I know that much of the public anger has fallen on Mr. 
Liddy, but this is not fair. Mr. Liddy did not create this 
mess; he did not seek this job. He agreed, in response to a 
request by the Government of the United States, to work to 
restructure the company and help us get back the assistance 
provided by the taxpayer. And in taking on what I think is the 
most challenging job in the American financial system today, he 
inherited an enormous range of problems, including these 
retention contracts that are the understandable source of 
public outrage.
    AIG has thousands of employees who are working now, every 
day, to unwind the very business that got us into this 
situation and return AIG to the business of insurance. They are 
working hard to reduce the company's risks and exposures, and 
it is important that we support them in this effort to wind 
down AIG in an orderly way that protects the American taxpayer.
    Now, in addition to the problems with executive 
compensation, this financial crisis has revealed very 
problematic gaps in the regulatory structure of governing our 
financial markets. The lack of an appropriate regulatory regime 
and resolution authority for large nonbank financial 
institutions contributed to this crisis and will continue to 
constrain our capacity to address future crises. I will testify 
before this committee on Thursday and discuss in that context a 
broad set of regulatory reform proposals, particularly those 
related to mitigating systemic risk, to creating a more stable 
financial system.
    The Chairman. Mr. Geithner, will you stop for a moment, 
please?
    Will you please act your age back there and stop playing 
with that sign? If you have no greater powers of concentration, 
then you can leave the room. We are trying to have a serious 
discussion, which will include, as you understand, a lot of 
criticism. We really need people to grow up.
    Secretary Geithner. Thank you, Mr. Chairman.
    As we have seen with AIG, distress at large, complex 
financial institutions can pose risks as dangerous as those 
that led the United States to establish a full framework of 
tools for dealing with banks. We need to extend those 
protections and authorities to cover the risks posed by our 
more diverse and complicated financial system today. And we are 
proposing legislation to provide those tools, and look forward 
to working with this committee and the Congress to pass such 
legislation as quickly as possible.
    The proposed resolution authority would allow the 
government to provide financial assistance to make loans to an 
institution, to purchase its obligations or assets, to assume 
or guarantee its liabilities, and to purchase an equity 
interest. The U.S. Government, as conservator or receiver, 
would have additional powers to sell or transfer the assets or 
liabilities of the institution in question, to renegotiate or 
repudiate the institutions' contracts, and to prevent certain 
financial contracts with the institution from being terminated 
on account of conservatorship or receivership.
    This proposed legislation would fill a significant void in 
the current financial services regulatory structure in respect 
to these large, complex institutions. And implementation would 
be modeled on the resolution authority that the FDIC has under 
current law with respect to banks.
    This an extraordinary time for our country, and your 
government has been forced to take extraordinary measures. We 
will do what is necessary to stabilize our financial system 
and, with the help of the Congress, develop the tools we need 
to make our economy more resilient and our financial system 
more stable and more just. We need to work together to create 
an environment where it is safe to save and invest and where 
all Americans can trust the rules governing their financial 
decisions.
    Thank you, Mr. Chairman.
    [The prepared statement of Secretary Geithner can be found 
on page 83 of the appendix.]
    The Chairman. Mr. Bernanke?

STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Thank you, Chairman Frank, Ranking Member 
Bachus, and other members of the committee. I appreciate having 
this opportunity to discuss the Federal Reserve's involvement 
with AIG.
    In my testimony, I will describe why supporting AIG was a 
difficult but necessary step to protect our economy and 
stabilize our financial system. I will also discuss issues 
related to compensation and note two matters raised by this 
experience that merit congressional attention.
    We at the Federal Reserve, working closely with the 
Treasury, made our decision to lend to AIG on September 16th of 
last year. It was an extraordinary time. Global financial 
markets were experiencing unprecedented strains and a worldwide 
loss of confidence. Fannie Mae and Freddie Mac had been placed 
into conservatorship only 2 weeks earlier, and Lehman Brothers 
had filed for bankruptcy the day before. We were very concerned 
about a number of other major firms that were under intense 
stress.
    AIG's financial condition had been deteriorating for some 
time, caused by actual and expected losses on subprime 
mortgage-backed securities and on credit default swaps that 
AIG's Financial Products unit, AIG FP, had written on mortgage-
related securities. As confidence in the firm declined and with 
efforts to find a private-sector solution unsuccessful, AIG 
faced severe liquidity pressures that threatened to force it 
imminently into bankruptcy.
    The Federal Reserve and the Treasury agreed that AIG's 
failure under the conditions then prevailing--
    The Chairman. Please, with all--no, you understood, you had 
the sign up. The next one to hold a sign--it is distracting to 
people. I understand that there are some people for whom 
rational discussion is not an appropriate means of expressing 
themselves. You are entitled to do that in general but not in a 
way that interrupts those of us who are trying to have rational 
discussions. So the next one who holds a sign will be ejected. 
I do not know how you think you advance any cause to which you 
might be attached by this kind of silliness.
    Mr. Bernanke, please proceed.
    Mr. Bernanke. Thank you, Mr. Chairman.
    The Federal Reserve and the Treasury agreed that AIG's 
failure under the conditions then prevailing would have posed 
unacceptable risks for the global financial system and for our 
economy. Some of AIG's insurance subsidiaries, which are among 
the largest in the United States and in the world, would have 
likely been put into rehabilitation by their regulators, 
leaving policyholders facing considerable uncertainty about the 
status of their claims.
    State and local government entities that had lent more than 
$10 billion to AIG would have suffered losses. Workers whose 
401(k) plans had purchased $40 billion of insurance from AIG 
against the risk that their stable value funds would decline in 
value would have seen that insurance disappear. Global banks 
and investment banks would have suffered losses on loans and 
lines of credit to AIG and on derivatives with AIG FP. The 
banks' combined exposure exceeded $50 billion. Money market 
mutual funds and others that held AIG's roughly $20 billion of 
commercial paper would also have taken losses. In addition, 
AIG's insurance subsidiaries have substantial derivatives 
exposure to AIG FP that could have weakened them in the event 
of the parent company's failure.
    Moreover, as the Lehman case clearly demonstrates, focusing 
on the direct effects of a default on AIG's counterparties 
understates the risk to the financial system as a whole. Once 
begun, a financial crisis can spread unpredictably. For 
example, Lehman's default on its commercial paper caused a 
prominent money market mutual fund to break the buck and 
suspend withdrawals, which in turn ignited a general run on 
prime money market mutual funds, with resulting severe stresses 
in the commercial paper market. As I mentioned, AIG had about 
$20 billion in commercial paper outstanding, so its failure 
would have exacerbated the problems of the money market mutual 
funds.
    Another worrisome possibility was that uncertainties about 
the safety of insurance products could have led to a run on the 
broader insurance industry by policyholders and creditors. 
Moreover, it was well-known in the market that many major 
financial institutions had large exposures to AIG. Its failure 
would likely have led financial market participants to pull 
back even more from commercial and investment banks, and those 
institutions perceived as weaker would have faced escalating 
pressure.
    Recall that these events took place before the passage of 
the Emergency Economic Stabilization Act, which provided the 
funds that the Treasury used to help stem a global banking 
panic in October. Subsequently, it is unlikely that the failure 
of additional major firms could have been prevented in the wake 
of a failure of AIG. At best, the consequences of AIG's failure 
would have been a significant intensification of an already 
severe financial crisis and a further worsening of global 
economic conditions. Conceivably, its failure could have 
resulted in a 1930's-style global financial and economic 
meltdown, with catastrophic implications for production, 
income, and jobs.
    The decision by the Federal Reserve on September 16, 2008, 
with the full support of the Treasury, to lend up to $85 
billion to AIG should be viewed with this background in mind. 
At that time, no Federal entity could provide capital to 
stabilize AIG, and no Federal or State entity outside of a 
bankruptcy court could wind down AIG.
    Unfortunately, Federal bankruptcy laws do not sufficiently 
protect the public's strong interest in ensuring the orderly 
resolution of nondepository financial institutions when a 
failure could pose substantial systemic risks, which is why I 
have called on the Congress to develop new emergency resolution 
procedures. However, the Federal Reserve did have the authority 
to lend on a fully secured basis consistent with our emergency 
lending authority provided by the Congress and our 
responsibility as the Central Bank to maintain financial 
stability.
    We took as collateral for our loan AIG's pledge of a 
substantial portion of its assets, including its ownership 
interest in its domestic and foreign insurance subsidiaries. 
This decision bought time for subsequent actions by the 
Congress, the Treasury, the FDIC, and the Federal Reserve that 
have avoided further failures of systemically important 
institutions and have supported improvements in key credit 
markets.
    Having lent AIG money to avert the risk of a global 
financial meltdown, we found ourselves in the uncomfortable 
situation of overseeing both the preservation of its value and 
its dismantling--a role quite different from our usual 
activities. We have devoted considerable resources to this 
effort and have engaged outside advisors. Using our rights as 
creditor, we have worked with AIG's new management team to 
begin the difficult process of winding down AIG FP and to 
oversee the company's restructuring and divestiture strategy. 
Progress is being made on both fronts.
    However, financial turmoil and a worsening economy since 
September have contributed to large losses at the company, and 
the Federal Reserve has found it necessary to restructure and 
extend our support. In addition, under its Troubled Asset 
Relief Program, the Treasury injected capital into AIG in both 
November and March.
    Throughout this difficult period, our goals have remained 
unchanged: to protect our economy and preserve financial 
stability; and to position AIG to repay the Federal Reserve and 
return the Treasury's investment as quickly as possible.
    In our role as creditor, we have made clear to AIG's 
management, beginning last fall, our deep concern surrounding 
compensation issues at AIG. We believe it is in the taxpayers' 
interest for AIG to retain qualified staff to maintain the 
value of the businesses that must be sold to repay the 
government's assistance. But, at the same time, the company 
must scrupulously avoid any excessive and unwarranted 
compensation. We have pressed AIG to ensure that all 
compensation decisions are covered by robust corporate 
governance, including internal review, review by the 
compensation committee at the board of directors, and 
consultations with outside experts.
    Operating under this framework, AIG has voluntarily limited 
the salary, bonuses, and other types of compensation for 2008 
and 2009 of the CEO and other senior managers. Moreover, 
executive compensation must comply with the most stringent set 
of rules promulgated by the Treasury for TARP fund recipients. 
The New York attorney general has also imposed restrictions on 
compensation at AIG.
    Many of you have raised specific issues with regard to the 
payout of retention bonuses to employees at AIG FP. My reaction 
upon becoming aware of these specific payments was that, 
notwithstanding the business purposes that might be served by 
this action, it was highly inappropriate to pay substantial 
bonuses to employees of a division that had been the primary 
source of AIG's collapse.
    I asked that the AIG FP payments be stopped but was 
informed that they were mandated by contracts agreed to before 
the government's intervention. I then asked that suit be filed 
to prevent the payments. Legal staff counseled against this 
action on the grounds that Connecticut law provides for 
substantial punitive damages if the suit would fail. Legal 
action could thus have the perverse effect of doubling or 
tripling the financial benefits to the AIG FP employees. I was 
also informed that the company had been instructed to pursue 
all available alternatives and that the Reserve Bank had 
conveyed the strong displeasure of the Federal Reserve with the 
retention payment arrangement.
    I strongly supported President Dudley's conveying that 
concern and directing the company to redouble its efforts to 
renegotiate all plans that could result in excessive bonus 
payments. I have also directed staff to work with the Treasury 
and the Administration in their review of whether the FP bonus 
and retention payments can be reclaimed. Moreover, the Federal 
Reserve and the Treasury will work closely together to monitor 
and address similar situations in the future.
    To conclude, I would note that AIG offers two clear lessons 
for the upcoming discussion in the Congress and elsewhere on 
regulatory reform:
    First, AIG highlights the urgent need for new resolution 
procedures for systemically important, nonbank financial firms. 
If a Federal agency would have had such tools on September 
16th, they could have been used to put AIG into conservatorship 
or receivership, unwind it slowly, protect policyholders, and 
impose haircuts on creditors and counterparties as appropriate. 
That outcome would have been far preferable to the situation we 
find ourselves in now.
    Second, the AIG situation highlights the need for strong, 
effective, consolidated supervision of all systemically 
important firms. AIG built up its concentrated exposure to the 
subprime mortgage market largely out of the sight of its 
functional regulators. More effective supervision might have 
identified and blocked the extraordinarily reckless risk-taking 
at AIG FP.
    These two changes could measurably reduce the likelihood of 
future episodes of systemic risk like the one we faced at AIG.
    Thank you, Mr. Chairman.
    [The prepared statement of Chairman Bernanke can be found 
on page 70 of the appendix.]
    The Chairman. Thank you.
    Mr. Bernanke, let me go back again. The context is 
important, and I do want to be clear. There was some reference 
earlier to TARP--excuse me.
    Oh, I am sorry. Mr. Dudley hasn't given his statement yet. 
I didn't realize--I hadn't looked at the agenda, and I didn't 
know Mr. Dudley was going to give a statement.
    Go ahead, Mr. Dudley.

 STATEMENT OF WILLIAM C. DUDLEY, PRESIDENT AND CHIEF EXECUTIVE 
           OFFICER, FEDERAL RESERVE BANK OF NEW YORK

    Mr. Dudley. Good morning, Chairman Frank, Ranking Member 
Bachus, and other members of the committee. Thank you for 
giving me the opportunity to appear before you today. I 
appreciate having this opportunity to discuss the Federal 
Reserve Bank of New York's involvement with AIG.
    At the outset, it is important to note that before the New 
York Fed became involved with AIG as a lender on September 16, 
2008, the Federal Reserve lacked any kind of authority to 
oversee AIG. The lack of effective, consolidated supervision 
over AIG was a critical contributing factor to the debacle that 
occurred at the company.
    The Federal Reserve made its decision to lend based on a 
judgment that a failure of AIG would cause dramatically 
negative consequences for the financial system and the economy, 
consequences worse than what occurred in the aftermath of the 
failure of Lehman Brothers. We stand by that judgment today.
    In the case of Lehman, some of the most severe 
repercussions related to the difficulties in coordinating 
crossborder insolvency regimes and in coordinating the 
insolvency regimes among different types of institutions within 
the organization's corporate structure. In light of AIG's 
unparalleled global footprint, operating in more than 130 
countries around the globe, the multiplicity of different types 
of financial service entities within its structure--including 
insurance providers, foreign banks, consumer lending companies, 
and over-the-counter derivatives affiliates--the factors that 
proved unmanageable in the Lehman insolvency threatened to be 
much more severe in AIG's case.
    The fact that no effective emergency resolution procedures 
exist under U.S. law to reconcile these difficulties heightened 
the need for quick, effective action by the Federal Reserve in 
consultation with and supported by the U.S. Treasury.
    From the outset, the New York Fed has been sharply focused 
on addressing two overarching goals with respect to AIG: one, 
the stabilization of the company so that it no longer poses a 
disruptive threat to our financial system and the economy; and 
two, obtaining full repayment of government funds that had been 
extended to AIG.
    In light of the exceptional size and scope of AIG's 
operation, with over 110,000 employees in more than 130 
countries, spanning hundreds of legal entities, it was clear 
from the beginning that the New York Fed, which has never been 
engaged in any regulatory oversight of this company, was not in 
a position to exert day-to-day management control over it.
    Rather, the New York Fed's actions have consistently been 
directed at securing its objectives as lender. As any lender in 
our position would do, the New York Fed has put into place a 
loan agreement that contains covenants designed to help ensure 
ultimate repayment of the loan. But these creditor rights do 
not create an ability on our part to manage AIG. Responsibility 
for AIG's day-to-day affairs continues to rest with AIG's chief 
executive officer, Edward Liddy, under the oversight of AIG's 
board of directors.
    Mr. Liddy, who has only become involved with AIG in a 
public-spirited attempt to resolve its troubled affairs, has 
made strides in dealing with AIG's opaque corporate structure, 
lack of centralized controls, and complex risk exposures, but 
much remains to be done.
    In light of the inherent conflicts that would arise from 
either the U.S. Government or the Federal Reserve exerting 
ownership control over the world's largest insurer, the Federal 
Reserve, with support of the Treasury Department, directed in 
the loan agreement that an approximately 77.9 percent equity 
interest in AIG would be issued to an independent trust 
established for the sole benefit of the U.S. Treasury.
    The trust, which now holds that controlling equity 
interest, is overseen by three independent trustees, who are of 
the highest integrity and who have considerable experience 
leading major companies. These trustees have a legally binding 
obligation to exercise all their rights as majority owner of 
AIG in the best interest of the U.S. taxpayer, with the 
proceeds of any ultimate sale of shares going directly to the 
Treasury of the United States.
    As has been widely noted, the activities of AIG's Financial 
Products group were a principal cause of the losses that drove 
AIG to the brink of bankruptcy in September 2008. Risks of 
substantial magnitude, including derivative positions with a 
current total notional value exceeding $1 trillion, still 
remain in force at FP, meaning that not millions, but billions 
of taxpayer dollars are potentially at stake today as the 
orderly wind-down of FP continues to progress. The winding down 
of these risk positions at FP is a delicate and complex matter 
with systemic implications for the U.S. and global economy. Our 
oversight of this risk-reduction process remains a top 
priority.
    With respect to the retention awards owed to FP employees 
under their preexisting contracts, we believe that Mr. Liddy 
weighed a number of factors in deciding not to attempt to 
prevent payment. These include: the likely negative effects of 
disruption in staffing at FP in managing its multi-billion-
dollar exposures; legal advice that the contracts were valid, 
meaning that breaking them would likely increase the amount of 
company funds ultimately paid to the cover employees; and the 
negative consequence to AIG's business that could result from 
public abrogation of these contracts.
    In conducting our oversight as lender, the New York Fed did 
not see any reason to disagree with Mr. Liddy's judgment from a 
risk perspective. Equally important, we did not think it was 
legally permissible or within the proper role of the New York 
Fed to attempt to substitute our judgment for that of Mr. 
Liddy's in this circumstance, even though we found the payment 
of these retention awards extremely distasteful.
    The broad public disapproval of sizable retention payments 
being directed towards the unit most responsible for last 
fall's downfall of AIG is understandable. Americans naturally 
feel outrage when confronted with news of such payments to an 
entity that worsened the financial crisis and that is dependent 
on taxpayer funds to stay out of bankruptcy court, where these 
contracts would not have been fully honored. Moreover, the 
payments occurred during a time when so many Americans are 
struggling to find jobs, seeing their wages reduced, or 
watching their retirement savings plummet as a result of a 
crisis they had no hand in creating.
    This feeling of outrage underscores the urgent need to 
reform the system of compensation at our financial institutions 
in order to more closely align the incentives of executives, 
owners, and taxpayers. Congress saw fit to impose appropriate 
compensation restrictions on recipients of Troubled Assest 
Relief Program funding. We think it is crucial for Congress and 
the U.S. Department of the Treasury to continue to craft 
effective and sensible policies in this area.
    Although oversight of TARP-related compensation matters 
rests with the Treasury Department, the New York Fed has played 
a role since September in reviewing the adequacy of AIG's 
corporate governance procedures. This review has helped to 
identify longstanding deficiencies with respect to compensation 
committee governance, compensation benchmarking, and a lack of 
a centralized control over compensation policy. We will 
continue to work with our colleagues at Treasury and the 
independent trustees to ensure that AIG's management properly 
addresses these deficiencies.
    The total package of assistance that the Federal Reserve 
and Treasury Department have committed to AIG has established a 
more durable capital structure for the company that gives AIG 
greater time and flexibility to execute its assets disposition 
plans to repay government funds. Notably, we have recently 
agreed in principle to accept preferred interest in two of 
AIG's large, foreign life insurance subsidiaries, AIA and 
ALICO, in order to make repayment of our loan less dependent on 
forced divestitures into what is now a depressed acquisition 
market. Although it will take time, we still expect that the 
proceeds from asset sales should enable AIG to repay the New 
York Fed in full.
    In all that we have done, we have been motivated by two 
goals: one, to preserve the stability of the U.S. economy; and, 
two, to protect the U.S. taxpayer. The threat of a major 
systemic risk event has been averted by honoring all of AIG's 
contractual obligations around the globe, from insurance policy 
obligations owed to individuals, municipalities, and businesses 
across the United States, to the posting of collateral under 
credit default swap arrangements with the full range of 
counterparties that has been recently disclosed. As 
unattractive as certain aspects of this treatment may be, these 
negative aspects have followed unavoidably from the decision to 
avert a systemically disruptive bankruptcy.
    I look forward to your questions today and, in the longer 
term, to working with you and your staffs on the broader public 
policy questions, such as a formulation of a resolution regime 
for institutions like AIG and consideration of the appropriate 
supervisory structure for OTC derivatives that are posed by 
events at AIG.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Dudley can be found on page 
77 of the appendix.]
    The Chairman. As I was saying, I want to begin with Mr. 
Bernanke, but first an announcement--stop the clock, please--
that is going to be very important. Restart the clock, please, 
when I am through with this.
    We have a lot of members here; it is a very important 
hearing. I wish we didn't have the 5-minute rule, and I wish we 
didn't have so many members, and I wish I could lose weight 
without dieting. In the absence of the reality of any of those, 
the following will happen:
    At the conclusion of each member's 5 minutes, whomever is 
speaking will be allowed to finish the sentence, and then that 
will be it, and they will have to not have too many dependent 
clauses. Members should understand that. If they want answers 
to questions, leave time for the answers. It simply isn't fair 
to the more junior members for us to abuse the 5-minute 
principle. So that will happen. I will probably also gain 
weight, since we are talking about what will happen.
    Now I will begin with my 5 minutes.
    Mr. Bernanke, again, I think it is important to remember--
because I think an unfortunate partisan effort has slipped in 
here--that this is a decision made by yourself, I presume in 
consultation with the Secretary of the Treasury, last 
September, and it was not one that required any congressional 
involvement. That came a couple of days later with the TARP.
    When you made the decision to intervene, to deal with the 
creditors of AIG, was that in consultation with Secretary of 
the Treasury Paulson?
    Mr. Bernanke. It was in full consultation with the 
Secretary and full agreement with the Secretary. And we both 
came in and informed--obviously we did not get approval--but we 
did inform in advance of this final decision a large number of 
Members of Congress.
    The Chairman. No, I remember, I was one of those. And I 
remember the Secretary and you were there, and he was fully in 
support of this. I do remember raising, myself, the question of 
why there was no foreign participation, since one of the 
arguments that we were given for the need for this was to 
maintain foreign confidence. And I certainly don't shrug that 
off. People who thought we could take that for granted, I 
think, got a little bit of a start from the Prime Minister of 
China on that subject. But it is important that this was fully 
supported by the Secretary of the Treasury acting for the 
President. And when you came up and informed us, that was 
clearly the case.
    Let me now ask, on the question of compensation, Mr. 
Dudley, you talked about the need to reform compensation. I 
assume you were talking about reforms that go beyond recipients 
of capital funds under the TARP, is that correct?
    Mr. Dudley. That is correct. We have looked at the 
compensation governance arrangements at AIG, and we have put 
considerable pressure on the company to improve those corporate 
governances.
    The Chairman. Well, I understand. But are you talking about 
outside of the context of people who receive funding?
    Mr. Dudley. Pardon me?
    The Chairman. When you talk about the need to improve 
compensation, I thought you were talking about more than just 
AIG.
    Mr. Dudley. No, this is with respect to AIG.
    The Chairman. Just with AIG.
    But, Mr. Bernanke, you talked about compensation in the 
broader context. Would you elaborate?
    Mr. Bernanke. Yes, sir, I have. I do think it is very 
important that compensation that links performance and reward 
appropriately and, in particular, does so in a way that does 
not incentivize excessive risk-taking, that makes sure that we 
don't get short-term compensation for long-term outcomes, and 
that in general is more consistent with both appropriate 
proportionality but also with maintaining the appropriate 
incentives for safe and sound behavior. And that was missing in 
AIG.
    The Chairman. And you think that should be done across-the-
board with large financial institutions, whether or not they 
are receiving Federal monies.
    Mr. Bernanke. Yes, sir, I do. We have already undertaken 
that through the supervisory process.
    The Chairman. So you think that lessens the possibility 
that people will get into trouble?
    Mr. Bernanke. It is an important issue for avoiding a 
future systemic crisis.
    The Chairman. Well, I appreciate that, because, in 2006 and 
2007, I was involved with legislation. We had a hearing on it 
in 2006, when my Republican colleagues were in the Majority, 
and we petitioned under the rules for a hearing. And then, in 
2007, we brought forward legislation dealing with executive 
compensation, at that point more of a restraint on pay. And it 
became a very partisan issue.
    So I do want to say we are probably going to revisit this. 
We ran into a great deal of opposition. And it is apparently 
something that divides the parties. There is a considerable 
view, particularly on the Republican side, that we should not 
intervene at all in the questions of compensation, unless we 
are talking about people getting Federal money. We all agree 
that is a different category.
    I was pleased to hear you say what you said, because it 
does seem to me that--and we are not talking now about the 
amount of compensation, although you do mention 
proportionality, but the incentive structure of the 
compensation; that compensation which incentivizes top 
decisionmakers to take risks unduly adds to the risk in the 
system.
    I solicited that comment because that is one of the things 
we will be returning to. And there will be a debate this year 
in the Congress, as part of our effort to diminish systemic 
risk, on whether or not the structure, the incentive structure, 
of compensation be included. As I said, the last time that came 
up, there was a partisan debate. I hope there is a less 
partisan debate the next time.
    Now, on the resolution authority, again, let me ask this 
directly, Mr. Bernanke: If the resolution authority had existed 
on September 1, 2008, would AIG have been handled differently?
    Mr. Bernanke. Quite differently. It could have been taken 
into receivership or conservatorship. This bonus issue would 
not have arisen because all the contracts could have been 
adjusted by the conservator. As necessary, we could have taken 
haircuts against some of the counterparties without creating a 
default or disorderly situation.
    So it is very similar, as you pointed out, to the way the 
FDIC would now handle an IndyMac, for example, and with some 
disruption obviously but not nearly the consequences of a 
failure, of a disorderly failure of a large insurance company.
    The Chairman. Thank you.
    The gentleman from Alabama.
    Mr. Bachus. Thank you.
    Secretary Geithner, on September 14th, you and Secretary 
Paulson met with AIG to discuss Lehman's failure and their 
worsening condition?
    Secretary Geithner. We had a series of meetings in the days 
preceding the action by the Fed on the 16th--
    Mr. Bachus. On the 16th, okay.
    Secretary Geithner. --with AIG and a range of other 
financial institutions. As the chairman said, you know, the 
world is going through a--
    Mr. Bachus. Yes, I understand that. But you met with him. 
And, as a result of those meetings, there was a government 
intervention supervised and coordinated and led by the New York 
Fed. And you were president of the New York Fed.
    Secretary Geithner. I was president of the New York Fed.
    Mr. Bachus. On September 16th, the government became the 
79.9 percent owner of AIG. Is that correct?
    Secretary Geithner. That is correct.
    Mr. Bachus. Then there was an $85 billion government 
guarantee that went to AIG, or funds. Is that correct?
    Secretary Geithner. That is correct.
    Mr. Bachus. Then, on October the 8th, a good amount of that 
money was paid to the counterparties. Is that correct?
    Secretary Geithner. Well, again, the purpose of the 
intervention was to prevent default by AIG, because our 
judgment was the consequence of default would have been 
catastrophic to the American economy.
    Mr. Bachus. Sure, I understand that.
    Secretary Geithner. So AIG was able to, as a result of the 
intervention, to meet a full range of its obligations as a 
large, complex financial institution.
    Mr. Bachus. Sure, I understand that. But what I am saying 
is that you took over on September 16th, then on October the 
8th, began to pay the counterparties off.
    Secretary Geithner. Well, again, throughout that period of 
time--and this was critically important to the stability of the 
financial system--we wanted to make sure AIG was able to meet 
its commitments.
    Mr. Bachus. I understand that. To pensioners, to retirees, 
to--
    Secretary Geithner. Municipalities.
    Mr. Bachus. Municipalities.
    Secretary Geithner. Banks.
    Mr. Bachus. But what I am saying is, within about 2 weeks, 
these payments--or 3 weeks--payments were made to the 
counterparty. I am not--
    Secretary Geithner. Well, I think probably within hours, 
technically, within minutes probably.
    Mr. Bachus. All right, within hours.
    There has been now a total somewhere over $50 billion worth 
of these payments to counterparties. I am very interested in 
that. I mean, these payments to counterparties, these were 
parties that took a risk and entered into agreements with AIG, 
were they not?
    Secretary Geithner. Absolutely.
    Mr. Bachus. Okay. And these were credit default swaps, 
securities lending, things of that nature, which you can lose 
money on.
    Secretary Geithner. Well, any insurance contract written by 
AIG poses a risk to the person who bought that insurance 
contract.
    Mr. Bachus. Sure. And a credit default swap is sort of a--I 
guess you could call it a form of insurance. But what I am 
saying is it was an agreement between two parties. And AIG 
defaulted or was on the verge of defaulting.
    Secretary Geithner. Well, AIG was on the verge of default. 
So, again, any of the contracts AIG had with millions of people 
who bought insurance from it--
    Mr. Bachus. Well, I understand those people and those 
contracts with people, you know, retired teachers, etc. But now 
I am focusing on the counterparties. They were paid 100 percent 
of everything AIG owed them. Is that correct?
    Secretary Geithner. I am not sure if technically that is 
right, but, again, the purpose of the intervention was--
    Mr. Bachus. No, I am not talking about the purpose of the 
intervention. I am--
    Secretary Geithner. So the result of the intervention was 
AIG was able to meet its obligations under--
    Mr. Bachus. But what I am saying, Mr. Secretary, is that 
AIG's counterparties were paid 100 cents on the dollar.
    Secretary Geithner. The people who had contractual 
obligations from AIG, from the person who bought an insurance 
protection product or a basic insurance product, were paid--
    Mr. Bachus. Well, we are not talking about insurance 
policies here. I am talking about--
    Secretary Geithner. No, but this is very important.
    Mr. Bachus. I am talking about the foreign banks, Goldman 
Sachs. They were paid 100 cents on the dollar, were they not?
    Secretary Geithner. Again, that was the purpose and result 
of--
    Mr. Bachus. Well, I am not talking about whether--I am just 
saying they were paid 100 percent of what they were owed.
    Secretary Geithner. AIG was able to meet its commitments 
and met its commitments.
    Mr. Bachus. At 100 percent.
    Secretary Geithner. It fully met its obligation, yes.
    Mr. Bachus. Sure, fully met its obligation.
    Well, my question to you--and I am not--was there any 
discussion about a haircut, or 95 percent, taking 95 percent or 
90 percent as full payment?
    Secretary Geithner. We explored, at that time, every 
possible means to reduce the drain on their resources, 
including what you referred to. But, again, because we have no 
legal mechanism in place for dealing with this like we deal 
with the bank, we did not have the ability to selectively 
impose losses on their counterparts.
    Mr. Chairman. I am sorry. The gentleman has now exceeded 5 
minutes. As I said before, the last person speaking during the 
5 minutes will complete a sentence, and we will move on.
    Mr. Geithner, do you want to complete the sentence?
    Secretary Geithner. I have forgotten where I was in my 
sentence, but--
    The Chairman. Well, that is all right.
    Then we will now go to Mr. Kanjorski. There are too many 
members here for those of us in the top row to abuse the 5-
minute privilege.
    The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you very much, Mr. Chairman.
    Mr. Geithner, it is interesting to note, just in the 
questioning of the gentleman from Alabama, how we are not sure 
of what happened, when, and under what circumstances.
    Have you understood yet that the American people's reaction 
last week to a large extent was due to the fact that they feel 
that they are boxed out of knowing what is really going on in 
this economic crisis, and they are not well-informed?
    Secretary Geithner. Absolutely, Congressman. I think that 
the American people are deeply frustrated and concerned and 
angry and skeptical, frankly, that they understand what is 
happening and whether taxpayers' moneys are being used wisely 
to deal with this. I completely understand it, and it is a 
completely reasonable reaction to the damage caused by this 
crisis.
    Mr. Kanjorski. Do you feel that ultimately the Federal 
Reserve and yourself will have to come up to Congress and ask 
for additional authority in a ``rescue II'' to replenish the 
capital of some of these banks after we get rid of the asset 
problem, and whether or not the activities of the last several 
weeks and this lack of information as to what the problem is, 
and what the potential solutions are, will cause grave question 
as to whether or not the Congress will authorize further rescue 
money?
    Secretary Geithner. Of course, I understand that. I think 
there are--it is clear that we are going to need to ask them. 
We will ask for broader authority to deal with future AIGs. 
That is in the interest of the country. We will do that.
    Now in the President's budget, as you know, we have put in 
a reserve fund against a contingency that to solve this crisis 
adequately, we may need to come back to the Congress and ask 
for additional resources. We have not made that judgment yet, 
but I completely understand the scale of skepticism and the 
public opposition to the provision of additional resources.
    But our responsibility is to recommend to the Congress what 
is necessary to help get the economy back on track, and if that 
requires more resources, it will be our obligation to come to 
you and make the case for that. But we recognize it is going to 
be extraordinarily difficult, particularly in the wake of not 
just the last 2 weeks, but the last 9 months, frankly.
    Mr. Kanjorski. Well, that being the case, I assume that you 
recognize that there is not an awful lot of sympathy up here to 
necessarily provide additional funds, not going on the merits 
of whether the funds are necessary. I, for one, am absolutely 
convinced that for orderly process we need additional funding, 
and probably will, as we did back in September and October, 
vote in favor of that funding. But it is not going to be an 
easy lift on behalf of the Congress.
    In light of those facts, what are you designing or what are 
you putting in place so that we could adequately inform the 
American people as to what the real problems are and what the 
potential solutions to those problems are so there are more 
partners in this act that we are going through?
    Secretary Geithner. That is a very important question. 
Thanks for asking it.
    Within the first weeks of taking office, we put in place a 
set of clear commitments to put in the public domain the 
precise terms of all the financial contracts that my 
predecessor entered into and that we would enter in the future 
that would provide taxpayer assistance to financial 
institutions under the Emergency Economic Stabilization Act. 
Because of that commitment, the American people will be able to 
see, as I said, the precise terms for the first time of those 
commitments.
    In addition, we are going to require extensive reporting by 
any recipient of TARP assistance to go into how they are going 
to use those resources, what it is going to do to their lending 
capacity, and what is actually happening to lending. We have 
proposed very strong conditions on compensation, on dividends, 
and a range of other things.
    But I completely agree that the American people deserve to 
see much higher standards for transparency and accountability 
over the use of these resources, and they are understandably 
skeptical that they are going to see enough benefit from these 
resources, in part because of the decisions you have seen made 
across the financial sector in the wake of Congress passing 
that exceptional authority back in September.
    Mr. Kanjorski. Would you call this putting together rules 
of engagement that in the future, as you move down this track, 
that you are--the people you are dealing with, the companies 
you are bailing out, and also the American people will know the 
rules of the road?
    Secretary Geithner. I think that is a very important thing. 
I mean, it is very important that the American people 
understand we are going to devote these resources to things 
that are going to get credit flowing again, get interest rates 
down, and improve the access for businesses and consumers to 
credit. That is the central obligation and purpose of this 
authority.
    And if you look at what we have done over the last several 
weeks, you can see we have moved quickly to put in place very 
substantial measures to address the housing crisis. You are 
seeing the actions of the Fed and the Treasury together bring 
down interest rates, allow Americans to refinance and take 
advantage of lower interest rates. You have seen us move to put 
in place very important new programs to help support small 
business lending, to get lending flowing again across the 
financial system as a whole. Those are very important things. 
But as part of that, we need better clarity on the rules of the 
game going forward. I completely agree.
    Mr. Kanjorski. Thank you very much.
    The Chairman. Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman.
    Mr. Chairman, I appreciate your opening response to the 
chairman with regard to your first involvement with the 
bailout, saying that it was in consultation with Treasury, but 
also, if I heard you correctly, also in consultation but not 
with the approval of the chairman of this committee as well; is 
that correct?
    Mr. Bernanke. Secretary Paulson and I informed a large 
group of congressional leaders about the issue, and also the 
President, prior to the final signing of the agreement.
    Mr. Garrett. Did the chairman or anyone else ask the 
question at that time whether or not bonuses or pay or anything 
else should be considered at that point in time?
    Mr. Bernanke. I don't recall any discussion of bonus or 
pay.
    Mr. Garrett. Thank you.
    Mr. Geithner, I really do appreciate sincerely your opening 
comment--one of your comments with regard to Mr. Liddy and 
saying that some of the comments about him were over the top, 
and some of the vitriolic comments coming out of this 
committee, as well, were certainly over the top. I appreciate 
very much the fact that we are not going to get people like him 
to come in under circumstances like this. And I also appreciate 
the fact that, with all due respect, you are having a difficult 
time in the Treasury as far as filling all the spots that you 
need.
    I think it is difficult, with that sort of action going on 
in Congress, for you to be able to do that. And I think it is 
also difficult for all of you to get your job done in light of 
what was done in Congress last week imposing impediments, if 
you will, in the legislation that we passed as far as 
accomplishing what you need to accomplish.
    With all that said, I appreciate that.
    Mr. Chairman, going back to your comments, you knew about 
this to some extent, and you elaborate on page 5 of your 
testimony, which I think is very insightful, as far as the 
litany of your involvement and who you are looking at on the 
loss side and what have you. There was a filing with the SEC at 
the beginning of September at that time which laid out of some 
that information. I presume both of you, Mr. Geithner is 
nodding, and Mr. Bernanke, I presume you knew as well, saying 
at that time as far as the compensation packages that were out 
there that would have to be considered, I presume that one or 
both of you knew about that filing at that period of time, at 
least laying out the information? Yes or no?
    Mr. Bernanke. Congressman, I knew that there were general 
compensation packages throughout the company. I did not know, I 
was not informed about the specific payments to AIG FP.
    Mr. Garrett. If you had that information, would that have 
been germane to your discussion of this?
    Mr. Bernanke. It would have given us more time to talk, 
negotiate, and look for options, but, frankly, we still would 
have faced the same legal obstacles that we are currently 
facing.
    Mr. Garrett. Likewise, Mr. Geithner.
    Secretary Geithner. May I just say something? This is 
hugely important.
    Mr. Garrett. Sure.
    Secretary Geithner. A huge amount of information was 
available in the public domain. We knew from the beginning that 
we had a mess on our hands, a very complicated mess we were 
going to have to work through. We were spending every minute, 
every molecule of oxygen to contain this fire.
    Mr. Garrett. I appreciate that. I only have 5 minutes, but 
let me finish the question.
    Secretary Geithner. But on the specific question you 
asked--
    The Chairman. The gentleman from New Jersey has the time. 
Remember he has the time.
    Mr. Garrett. If I go around again, I will let you elaborate 
on that.
    The Chairman. In your dreams.
    Mr. Garrett. And I do dream about this stuff, oddly enough.
    The Chairman. I yield the gentleman an additional 10 
seconds, please.
    Mr. Garrett. While some of this was in the public domain, 
clearly Congress was not thinking about this during that period 
of time. Was it in the consideration of either one of during 
that period of time, while you were discussing it--I do 
appreciate the fact how you were discussing it and weighing all 
the legal considerations, what have you--was not conveyed to 
Congress in a formal manner, one way, shape, or form? Was that 
ever considered that you would discuss it with Congress, both 
of you?
    Mr. Bernanke. Congressman, one mechanism is congressional 
letters, and, as you know, we have received a large number of 
letters. We have responded in great detail, not often as 
quickly as we should have, and I apologize for that. But we 
have provided lots of information about governance, about 
compensation and other issues through that mechanism. Also, we 
report on the financial issue.
    Mr. Garrett. Well, to be candid with you, I don't remember 
any letters from September on between that time and now, or 
just a few weeks ago, discussing these particular issues, as 
far as compensation and the bonuses, what have you.
    Was it ever your consideration, either one of you, at that 
period of time that if this information was discussed more 
publicly, that Congress may be hesitant about going forward 
with their voting in favor of the additional TARP monies? That 
was never a discussion, never an issue?
    Mr. Bernanke. As I said, I was not aware of the specific 
set of payments until basically the same day, the 10th of 
March, I believe it was.
    Mr. Garrett. Right, but between that time forward, we have 
not been advised of this on the committee in a formal matter. 
We have? You are shaking your head yes.
    Secretary Geithner. You are saying from March 10th forward?
    Mr. Garrett. From March 10th, we were.
    Finally, we only have about 15 seconds left. With regard to 
the disorderly--or the not disorderly, but the orderly winding 
down of AIG, what can you tell us in about 15 seconds? If there 
are no prospects of parties out there to pick up the good 
assets of AIG, what are the prospects of additional taxpayers' 
dollars having to go into AIG to prop it up for a continued 
length or period of time while you continue to wind it down?
    Mr. Bernanke. It is going to depend very much on how the 
economy evolves and asset markets evolve, but contrary to what 
has been alleged, we have a very substantial and detailed plan 
for the unwinding, which involves selling off noncore assets 
and winding down the risky parts of the company.
    The Chairman. The gentleman's time has expired.
    The gentlewoman from California. I ask her for 15 seconds 
to respond.
    The gentleman from New Jersey raised some questions about 
what I was told. We were told, not asked, but told that they 
were going to make this loan. I did, without a lot of time to 
react, raise one question, which is why there was not an effort 
to get foreign participation. I was told by Mr. Paulson and Mr. 
Bernanke that they did not think that was possible.
    Two days later, we were asked by the same two gentleman to 
do the TARP money. At that point, at that meeting, I did raise 
questions of compensation and continue to make that a high 
priority.
    The other thing I would say, I do notice, again, it seems 
to me, an unfortunate partisan tint. I was there at the same 
time as the ranking member. We were both there. We were both 
informed at the same time. We were not given any indication 
that our input was going to have any impact on what happened.
    The gentlewoman from California. I appreciate her yielding 
to me.
    Ms. Waters. I would like to ask Mr. Geithner about the way 
that they have arranged to do the asset management for the new 
program that had been rolled out. You mentioned that there are 
five fund managers to manage the program for Treasury, and you 
set out the qualifications. Who will these five fund managers 
be?
    Secretary Geithner. We don't know yet. We have to see who 
applies.
    Ms. Waters. Is it possible Goldman Sachs could be one of 
them?
    Secretary Geithner. It is possible. If they are qualified, 
we would consider them--
    Ms. Waters. Were they included in one of the managers--when 
Mr. Paulson first rolled out the asset management program, 
before he pulled it back, was Goldman Sachs one of those five?
    Secretary Geithner. I don't know, but I would be happy to 
go back and check.
    Ms. Waters. I will check it.
    Let me tell you why I asked that. You hear a lot about the 
dissatisfaction about the bonuses, etc., but underneath all of 
this is a conversation about the linkages and the connections 
of the small group of Wall Street types that are making 
decisions. And I just want to ask you, because you may be able 
to clear some of this up, it is true that Goldman Sachs 
received money from AIG; is that right?
    Secretary Geithner. That is true.
    Ms. Waters. How much was that?
    Secretary Geithner. I don't have--I don't know exactly, but 
I would be happy to make sure--
    Ms. Waters. Okay, we will find out.
    And also, they received money from the TARP Program, 
Goldman Sachs; is that right?
    Secretary Geithner. That is correct.
    Ms. Waters. And Goldman Sachs is where Mr. Paulson really 
spent some time of his career, right?
    Secretary Geithner. Absolutely.
    Ms. Waters. Your CEO that you hired to work with you is 
from Goldman Sachs also?
    Secretary Geithner. My CEO.
    Ms. Waters. Well, whomever works for you. I don't want to 
get the nuances to the point where we misunderstand each other. 
Do you have--your chief of staff, is your chief of staff from 
Goldman Sachs?
    Secretary Geithner. My chief of staff, who is an honorable 
person--
    Ms. Waters. Just tell--
    Secretary Geithner. But, Congresswoman, my chief of staff 
did spend a brief period of time working in the past for 
Goldman Sachs, that is correct.
    Ms. Waters. Okay. That is all I want to know.
    Then I want to know, was Goldman Sachs involved with the 
decision that was made that weekend before they came to the 
Congress--
    Secretary Geithner. No.
    Ms. Waters. --to ask for money on the sale of Bear Stearns?
    Secretary Geithner. No.
    Ms. Waters. Was anybody from Goldman Sachs involved in that 
discussion that weekend?
    Secretary Geithner. Well, let me go back on this. At the 
time when Bear Stearns was on the brink of default, and the 
Federal Reserve then acted to try to avoid default, there were 
a range of institutions that considered buying and assuming the 
obligations of Bear Stearns.
    Ms. Waters. I really wish I had time for you to go into it, 
but Goldman Sachs was involved in some way in that decision 
based on whether or not they were considering the purchase 
themselves or they were advising about it; is that correct?
    Secretary Geithner. No, not in the decision and not 
advising us.
    Ms. Waters. In some way.
    Secretary Geithner. Certainly not advising us, no.
    Ms. Waters. Well, in some way. In some way, they were 
involved.
    Secretary Geithner. Well, there were a whole range of 
institutions that Bear Stearns approached--
    Ms. Waters. Were they also involved in the decision not to 
support Lehman Brothers?
    Secretary Geithner. No.
    Ms. Waters. In no way?
    Secretary Geithner. No.
    Ms. Waters. All right.
    Secretary Geithner. Those are decisions made by your 
government.
    Ms. Waters. I am just asking the questions, because the 
talk is, underneath what you may not know about, is this small 
group of decisionmakers at the center of it is Goldman Sachs, 
and that is what is causing a lot of the distrust, because 
people are thinking or believing that Goldman Sachs, because of 
the connections, have had a lot to do with the decisions that 
are being made.
    Now, on the big fund, is there some reason why you only 
have to have 5 managers involved in this fund, with at least 
$500 million in private capital? This eliminates a lot of firms 
being involved, and we believe that Goldman Sachs will again be 
one of those who will be the beneficiary.
    Secretary Geithner. Well, as I said, we are going to run an 
open, competitive process so that the taxpayers of the United 
States enjoy the best type of expertise in managing these 
funds. And there are some obvious practical concerns about why 
we can only have a limited number to do it.
    But can I just come back to your basic premise, 
Congresswoman? Of course I am aware of this concern. I think it 
is deeply unfair to people who are party to these decisions to 
suggest they were making judgments that in their view were not 
in the best interests of the American people. But I understand 
that concern. I understand that concern.
    The Chairman. The gentleman from New York, Mr. King.
    Mr. King. Thank you, gentlemen. I thank each of you 
gentlemen for your testimony today.
    Secretary Geithner, I would like to follow-up on some of 
the questions by Congressman Kanjorski, and I would like to 
address the AIG bonus issue in the context of lessons learned 
and how what occurred with AIG would impact the toxic asset 
plan which you announced yesterday, because for that plan to 
succeed, there must be cooperation between the government and 
the private sector. There must be trust, and there must be 
assurance that rules are in place, and the rules won't be 
changed in the middle of the game.
    Now, based on your experience with AIG, as painful as that 
may have been over the last several weeks or months, what can 
you do to assure the private sector that if they do 
participate, and they are profitable, and for whatever reason, 
justified or not, there is a public outcry, and we see the type 
of hysteria and hyperbole and histrionics, hyperventilating and 
conspiracy theories and retaliatory legislation that we saw 
last week, that these private institutions will not have their 
profits confiscated?
    I am speaking now specifically especially of marginal 
institutions who may be deciding whether or not to participate.
    I also ask in the context of your testimony today and 
recent comments regarding excessive compensation. Now, if the 
government gets involved in setting compensation, that is going 
too far. If you are setting standards, could that be too vague? 
And would private institutions, will they have--will they be 
protected from their compensation being subjected to ex post 
facto moralizing and judgments?
    Secretary Geithner. Those are thoughtful questions. Let me 
just go quickly through them.
    Mr. King. Sure, take your time.
    Secretary Geithner. I think it is absolutely right that we 
are not going to get through this financial crisis unless this 
system is willing to take risks, unless banks and private 
investors are able and willing to take risks again. That does 
require some confidence and clarity about the rules of the game 
going forward, and I think it is an important obligation we 
share with the Congress to try to make sure we are providing 
Congress with that level of competence and clarity.
    Also important, though, is to make sure that we reassure 
the American people that the taxpayers' money is not going to 
go to reward failure and to encourage excessive risk-taking in 
the future.
    Mr. King. Well, if I could just interrupt here a second, 
obviously all of us agree the AIG bonuses were wrong. But how 
do we protect against that without going too far?
    Secretary Geithner. It is a difficult judgment. As the 
chairman said in response to a previous question, the choices 
we faced were very constrained by the fact these were legal 
contracts, and we are a nation of laws, and we have to be very 
careful about the circumstance in which we raise questions 
about the government intervening with respect to legally valid 
contracts.
    But we do have an obligation now to go back and try to 
recoup those payments, and we are going to do that carefully 
and explore legal avenues in that context.
    Now, looking forward, I do think it is important for the 
country to put in place strong standards that govern 
compensation practices across the financial community as a 
whole, because, as we have seen, those can have systemic 
consequences, creating a more fragile and unstable system.
    You are right, it is a difficult balance. The government 
should not be setting detailed or prescribing detailed 
regulations to govern amounts of compensation and their 
distribution. We have to hold to broad standards that again 
make sure that we are not encouraging short-term risk-taking at 
the expense of long-term stability.
    And here is one other example. You want to make sure that 
people responsible for running the checks and balances in these 
firms, for running risk management, for doing the audit 
process, those people, too, are compensated adequately so you 
attract strong talent to run the checks and balances that our 
system depends on.
    Mr. King. What is the timeline as to when you expect to 
have these guidelines in place and your legacy asset plan goes 
forward?
    Secretary Geithner. Our immediate priority is to lay out 
guidelines to apply the new legislative requirements on 
compensation that were passed as part of the American Recovery 
and Reinvestment Act, but we are going to move quickly, we 
hope, to lay out broad standards that help govern compensation 
practices in the future, beyond those that would apply to 
institutions that receive taxpayer assistance.
    Mr. King. On the legacy asset--toxic asset plan, do you 
intend to implement changes in mark to marketing?
    Secretary Geithner. As you know, I believe the SEC, or the 
relevant legal authority, has put out for comment some 
important new clarifications to the fair-value accounting 
regime.
    Mr. King. What would Treasury's opinion be on that?
    Secretary Geithner. I want to be careful on how I respond 
to that, but I will give you my initial reaction, which is they 
are a constructive set of changes. They provide a right balance 
between preserving confidence in the quality of public 
disclosure, which is very important to getting through this, 
but still address some of the complications of applying those 
experiences in a market like we are experiencing today.
    Mr. King. Thank you, Mr. Secretary.
    The Chairman. The gentlewoman from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you, and I thank all of the panelists.
    I received a report from AIG that they presented to our 
government during this critical time where they outlined the 
need for a bailout. They claimed that they were America's 
largest insurance company, and if they failed, the entire 
economy would fail. They more or less put a gun to our heads 
and said, if you don't bail us out, the economy will fail.
    I would put it another way. If we bail out firms every time 
someone says it, our economy will collapse.
    And since I have their detailed explanation, I would like 
to request from the Federal Reserve, Treasury, and the New York 
Fed the analysis that the government did that AIG needed to be 
saved. I would like to study that and also request the analysis 
that was made that Lehman should fail. I think the opportunity 
we have now is to study what happened so that we can make 
better decisions going forward.
    So, Mr. Bernanke, does such a document exist, and could we 
receive copies of both the Lehman analysis and the AIG analysis 
from the government? Surely we did not just take AIG's 
analysis--
    Mr. Bernanke. We certainly did not take AIG's analysis. We 
have done our own analysis and had substantial discussions 
about the systemic risks associated with AIG. We will find what 
we have and try to provide it for you.
    On Lehman, we did not choose to let it fail; it failed 
because we could find no solution. But our strong preference 
would have been to avoid failure, because we have seen the 
consequences of the failure.
    Mrs. Maloney. And, likewise, AIG came back several times 
for more money, and at each point we could have put 
restrictions on the executive compensation or management, or a 
number of ways. Each time they came back, we could have 
analyzed the systemic risk more, and I would like to request 
the documentation that was done during those three periods that 
they came back for more money.
    Mr. Bernanke. We did impose considerable restrictions on 
executive compensation and the process for setting it. So did 
the TARP, when that became part of it.
    The problem with the AIG FP bonuses was they were set by a 
contractual agreement prior to the government taking over the 
firm.
    Mrs. Maloney. Well, contracts can be changed. We change 
contracts all the time. Contracts are being renegotiated now 
with General Motors and with mortgage, housing, and all kinds 
of places, so they can be changed.
    But when we saw the counterparties, it included one firm 
that has publicly said that they could have managed the default 
of AIG and been whole, so clearly there was no systemic risk 
with that company and possibly with others. I am sure you are 
aware of those public statements.
    And, also, when you looked at the counterparties, there 
were municipal governments. Do you consider municipalities 
systemic risk?
    Mr. Bernanke. As I discussed in some detail in my 
testimony, the systemic risk goes well beyond specific 
counterparties. In the case of the company you are referring 
to, perhaps they were hedged, but then it means that some other 
party that hedged them would have lost. But more important than 
the specific losses associated with the counterparties would be 
the loss of the confidence in the system as a whole and the 
likelihood that we would have seen a run on banks, given that 
markets would not know ultimately who was exposed to AIG.
    Mrs. Maloney. And, likewise, it had counterparties that 
were a number of foreign banks. Do you consider bailing out 
foreign banks systemic risks to the American economy?
    Mr. Bernanke. I think it is essential that AIG meet its 
obligations. Otherwise it would have created substantial 
problems, yes.
    Secretary Geithner. Congresswoman, could I add to that?
    Mrs. Maloney. Yes.
    Secretary Geithner. We did not act because AIG asked for 
assistance. We did not act to protect the individual 
counterparties from the consequences of their defaults. We did 
not act to help foreign banks.
    We acted because, in our judgment, the consequences of a 
default for the American people would have been catastrophic in 
ways that go directly to the value of their pension plans, and 
their capacity to borrow.
    If you look at what happened across the source of the fall, 
you can see concrete evidence of exactly what would have 
happened in the wake of a failure of AIG.
    It is very important to understand this. I don't believe 
there is any plausible argument that AIG was not systemic then, 
or that its failure today would not be systemic. I think all 
the judgments that went into that very difficult judgment in 
September still apply today.
    And our obligation, the three of us here today, is to do 
what we believe is in the interest of, using the authority you 
have given us, to protect the American economy from the kind of 
catastrophic damage that could come with default by a major 
institution like this.
    Mrs. Maloney. Reclaiming my time, basically, could the 
systemic risk have been contained at a much lower cost, Mr. 
Bernanke? Obviously--
    The Chairman. The Chair was distracted. The gentlewoman 
completed her sentence. The time has expired.
    The gentlewoman from Minnesota.
    Mrs. Bachmann. Mr. Chairman, thank you for this 
opportunity. These truly are extraordinary times in our 
financial services sector since 1 year ago the Federal Reserve 
opened the Fed's discount window in the amount of $29 billion 
for Bear Stearns.
    The American people are looking at the actions of both the 
Federal Reserve and the Treasury Secretary, and they are 
wondering if their government is making an historic shift, 
jettisoning the free-market capitalism in favor of centralized 
government economic planning.
    I wonder, Mr. Secretary, if you would comment on that.
    Secretary Geithner. I do not believe that concern is 
justified. I understand why people would be worried about this. 
But what we are doing is using the authority the Congress gave 
us, authority that was designed to help protect the American 
economy from these--
    Mrs. Bachmann. Reclaiming my time, Mr. Secretary. What 
provision in the Constitution could you point to to give 
authority for the actions that have been taken by the Treasury 
since March of 2008?
    Secretary Geithner. Oh, well, the Congress legislated, in 
the Emergency Economic Stabilization Act, a range of very 
important new authorities.
    Mrs. Bachmann. Sir, in the Constitution. What in the 
Constitution could you point to, to give authority to the 
Treasury for the extraordinary actions that have been taken?
    Secretary Geithner. Every action that the Treasury and the 
Fed and the FDIC has been using authority granted by this body, 
by the Congress.
    Mrs. Bachmann. And in the Constitution, what could you 
point to?
    Secretary Geithner. Under the laws of the land, of course.
    Mrs. Bachmann. And if I could move to the Federal Reserve 
Chair, if you could point to what provision in the Constitution 
would give authority to the Federal Reserve? This has been over 
$10 trillion that we are talking about.
    Mr. Bernanke. I don't know where $10 trillion comes from. 
The Congress has the right to authorize funds, which is what 
they did in the TARP Program. And in the 1930's, they gave the 
Federal Reserve the power for emergency lending as a means for 
addressing financial crises, which is what we have done.
    Mrs. Bachmann. And for the Federal Reserve Chair, do you 
believe there are any limits on the authorities that the 
Federal Reserve has taken since last March of 2008?
    Mr. Bernanke. The loans we make have to be fully secured 
and collateralized. We have practical limits in terms of our 
ability to manage monetary policy. So there are, obviously, 
limits.
    We have reported extensively to the Congress on all the 
actions that we have taken, and the actions we have taken have 
been solely and entirely for the purpose of protecting the 
American economy from the effects of financial collapse.
    Mrs. Bachmann. We have seen both China and Kazakhstan make 
calls for an international monetary conversion to an 
international monetary standard as soon as the G-20, and I am 
wondering, would you categorically renounce the United States 
moving away from the dollar and going to a global currency, as 
suggested this morning by China and also by Russia?
    Mr. Secretary?
    Secretary Geithner. I would, yes.
    Mrs. Bachmann. You would, categorically?
    And the Federal Reserve Chair?
    Mr. Bernanke. I would also.
    Mrs. Bachmann. Could you tell me why AIG was not put into 
receivership as opposed to conservatorship?
    Mr. Secretary.
    Secretary Geithner. Again, no legal means existed under 
U.S. law to resolve AIG using the kind of powers available to 
the FDIC to resolve a bank. Because of the absence of 
authority, your government was faced with no good options, and 
we chose the best option available at the time to help protect 
the economy from systemic damage. If we had different 
authority, we would have had different choices.
    Mrs. Bachmann. And to the Federal Reserve Chair, the 
Federal Reserve has denied giving information to the American 
people about the overnight loans that are made to the companies 
in terms of the bailout. Bloomberg had initiated a lawsuit, and 
the Federal Reserve has rejected. Twenty Members of this 
Congress have written a letter to the Federal Reserve asking 
that the American people be given the information about which 
banks made the loans, what the collateralization is.
    Can you tell me why the Federal Reserve does not want the 
American people to know who these loans are made to on an 
overnight basis?
    Mr. Bernanke. First of all, it has nothing to do with the 
bailout. This is short-term lending done by the Federal Reserve 
to banks, as has been done by central banks around the world 
for hundreds of years. The purpose is to provide short-term 
liquidity to these banks.
    Hundreds of banks, both large and small, come to the 
discount window. They provide collateral for their loans. We 
have never lost a penny on this program.
    Mrs. Bachmann. Mr. Chairman, why would the American people 
be disadvantaged for knowing this information?
    Mr. Bernanke. They would not be disadvantaged necessarily--
well, they would in the following sense: the concern is that if 
banks were revealed to be borrowing and others were not, 
inference might be drawn that they were in weaker condition 
than they, in fact, might be.
    The problem is what is called stigma, so that if banks are 
being perceived as weaker, if they have to come to the Fed, 
then others might not wish to deal with them, and they might 
not come to the Fed.
    In fact, that was the problem we had at the beginning of 
this episode, that no one wanted to come borrow, even though it 
was clear that the banking system needed to get liquidity from 
us. So we have tried to make sure that their information is 
protected so they will, in fact, come and take the liquidity 
they need--
    Mrs. Bachmann. Mr. Secretary, as I understand it, 
approximately 90 to 95 percent in the new program that you have 
just announced yesterday of the funding would come from the 
taxpayers; is that true? Or perhaps the leveraging is a 6 to 7-
to-1 leveraging on the purchasing of the public-private 
partnership, the toxics assets that are available.
    When the returns come back to the American people, will the 
American people be receiving 90 to 95 percent of the benefit, 
or will it be another figure?
    The Chairman. The gentlewoman's time has expired.
    Mrs. Bachmann. Mr. Chairman, could I have an answer from 
the--
    The Chairman. No. As I explained, members control the time. 
You cannot extend your time into somebody else's time and then 
get an answer. As I said, the person speaking at the expiration 
of the time will be the last person speaking.
     You cannot--if members use their time to extend the 
discussion, then members lower down will not get a chance to 
question. When the time expires, the person speaking will be 
the last person speaking.
    The gentlewoman from New York.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Bernanke, in September when you established the credit 
facilities for AIG, what sort of specific restriction did the 
Fed impose at that time on compensation to AIG management and 
employees?
    Mr. Bernanke. Well, President Dudley might be able to help 
me, but first of all, we replaced the CEO and other top 
management. We imposed very tough restrictions on the pay to 
the top executives. In fact, three of the top executives are 
working for zero or $1 a year right now.
    Then when the TARP money came in, the strictest terms of 
the TARP compensation restrictions were imposed, and, in 
addition, the company agreed to go well beyond the legal 
requirements imposed by the TARP law.
    So, throughout the top executive ranges, there have been 
very substantial restrictions on compensation.
    Bill, did you have anything else there?
    Mr. Dudley. In addition to that, we have worked on the 
governance of the compensation structure at AIG to basically 
firm it up so that they do a better job in terms of 
coordinating how compensation is done throughout the company. 
AIG is a company with a very weak core and lots of big business 
units spread all over the world. And so compensation was not 
done on a consistent basis across the company, and we are 
working to improve that with AIG.
    Ms. Velazquez. So if you imposed all those restrictions, 
how can you explain the types of bonuses that were provided by 
AIG?
    Mr. Bernanke. Those restrictions, as have been the case in 
most of the TARP activities, for example, apply to the top 
management of the firm. These were not bonuses at the top 
management of the firm. They were bonuses to individuals 
working in the AIG FP division. They were highly compensated 
because they were using very complex financial derivatives and 
applying their knowledge.
    But, and, again, as we have discussed, the contracts were 
signed prior to the takeover.
    But I certainly agree. I mean, to be very clear, I think 
that the bonuses were disproportionate. And we are doing all we 
can to claw them back and to reduce any further bonuses to that 
division.
    Ms. Velazquez. So, did you have any--did you or any senior 
Fed official have discussions or e-mail communications 
regarding AIG's intention to make these bonuses not to the top 
level, but to the other employees that were given?
    Mr. Bernanke. As I mentioned, I was not personally informed 
about this specific set of payments until March 10th. I then 
checked the various options that we had, legal and otherwise, 
and President Dudley communicated with CEO Liddy, as did the 
Treasury Secretary, and President Dudley wrote a letter 
expressing our deep concern about these bonuses.
    Ms. Velazquez. Mr. Chairman, the Fed directly, through 
special purpose entities, has extended AIG nearly $100 billion 
in loans. For the record, are you confident that AIG will fully 
pay back its loan to the Fed?
    Mr. Bernanke. I am very confident. First of all, half of 
the $100 billion is now no longer directly on the credit of 
AIG. It is secured by other types of securities, which we are 
assured will likely, very likely, pay us back and perhaps 
provide some profit.
    The remainder, $50 billion, half of it is directly owed, by 
AIG; the other half is secured by senior preferred positions in 
two of their strongest subsidiary insurance companies.
    Ms. Velazquez. Given everything that we have seen, in the 
event of a default by AIG on its government loans, the Fed will 
seize AIG assets. Given the massive lapses made in the area of 
executive compensation, I want to make sure that the Fed is 
planning for the worst-case scenarios.
    What plans has the Fed established to recover the funds 
lent to AIG in the event it defaults on its loan from the Fed?
    Mr. Bernanke. Well, as I have indicated, we have collateral 
for all of our loans, including for the $25 billion, for 
example, a senior lien essentially on all the assets of the 
company. So we are quite confident that we will be repaid.
    Ms. Velazquez. And so you are confident. Do you have 
anything written to that matter that you can provide to this 
committee?
    Mr. Bernanke. We provide information regularly by law. I 
think section 129 reports. We have given all of our 13(3) 
lending, which provides in detail the arrangements we will 
have, and we will be happy to provide you more information if 
you would like to have it.
    Ms. Velazquez. Thank you.
    The Chairman. The gentlewoman from Kansas, Ms. Jenkins.
    Ms. Jenkins. Thank you, Mr. Chairman, and thank you all for 
your testimony today.
    My constituents in Kansas have bailout fatigue, and just 
last night, I had a telephone townhall meeting where folks 
expressed a lot of frustration, especially regarding AIG 
spending their tax dollars on these bonuses and for sending 
some of their dollars to foreign counterparties.
    So I am just curious, at what point did the Federal Reserve 
or the Treasury Department realize that such a large sum of 
American tax dollars would be sent to foreign financial 
institutions, and is there a point at which European central 
banks or other foreign governments have or will step in to 
help?
    Mr. Bernanke. Well, as we have discussed, it goes well 
beyond the counterparties. The critical issue was AIG going 
into default and creating enormous chaos in the financial 
markets, or was it going to meet all of its obligations, 
including those to foreign counterparties?
    I would point out that the Europeans have also saved a 
number of major financial institutions, and the issue of 
whether those institutions owed American companies money has 
not come up.
    So I think that there is a sense that we all have the 
obligation to address the problems of companies in our own 
jurisdictions. In particular, the Europeans can appropriately 
point out that it was under U.S. regulation or lack of 
regulation and U.S. law that AIG failed, and in their sense, we 
do bear some responsibility.
    But our appropriate objective, I believe, was to avoid the 
default of the company, which would have led to very severe 
consequences in financial markets.
    Ms. Jenkins. All right. Thank you.
    And then finally, very simply, how much more money is AIG 
going to need, and when can the American taxpayer expect to 
start recouping their money?
    Mr. Bernanke. Is there a timeframe that you would like to 
talk about, Bill?
    Mr. Dudley. Obviously, what happens to AIG going forward is 
going to depend on the state of the economy and the state of 
the financial system. And if we can get the financial system 
repaired, then the outlook for the economy is going to improve, 
and, therefore, the prospects for AIG will improve as well.
    So we cannot say unconditionally what sort of money AIG is 
going to need or not need in the future, but if we make the 
right steps in terms of fixing the financial system, we will 
improve the economy, and that will benefit AIG and protect the 
U.S. taxpayer.
    Ms. Jenkins. Thank you.
    I yield back the balance of my time.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman.
    Mr. Dudley, it seems to me the other two gentlemen keep 
punting the questions on AIG up to you, so I want to ask you to 
provide, because I think the committee would benefit from 
having an analysis of what the upside potential of the 79 
percent ownership in AIG and the various other ownership 
interests that we are taking in various other entities 
associated with AIG.
    I assume at some point we will divest that, but it would be 
helpful to have a written analysis, I think, for the committee 
of what that upside potential is; I know it is to some degree 
speculative.
    Mr. Geithner, Secretary Geithner, all of these questions 
that I am asking are really forward-looking. I want to go to 
your proposal for resolution authority.
    We found out in the midst of this crisis that there was 
emergency exigent circumstances authority given to the Fed to 
do a lot of things that have been very important and 
productive, but have also created a substantial degree of 
discomfort going forward, with one entity having such 
substantial authority to do what Chairman Bernanke has done, we 
think, admirably, but creates some angst.
    The effect of the resolution authority that you proposed in 
your opening statement seems to me to suggest that basically 
the Secretary of the Treasury would be the de jure interim 
systemic regulator for things outside the banking system. Am I 
misreading that?
    Secretary Geithner. I did not mean to imply that, but you 
are right that I think if you think about what is the right 
balance for the country going forward, we can't put all of this 
on the Fed.
    Mr. Watt. Okay. But to put it on a political appointee, as 
opposed to somebody who is not subject to political pressures. 
Theoretically at least, Chairman Bernanke and the Fed is not 
subject to those, the politics of the day. We know it is at 
best, somewhat a theoretical statement.
    But I guess the concern I would raise is about the prospect 
of either making that a political appointee who has that 
substantial authority, making it someone who has not 
affirmatively been given the responsibility for--as a systemic 
regulator, and the prospect that that, in an odd sort of way, 
might even slow down our urgency to do this on a more permanent 
basis.
    I assume the authority you are talking about is authority 
that you and Chairman Bernanke would think would be appropriate 
to be given to whoever the systemic regulator is; is that 
correct?
    Secretary Geithner. There are two separate things. One is 
where regulatory authority lies for containing risk in the 
financial system.
    Mr. Watt. I am not talking about the one you talked about 
today; I am talking about outside the regulatory authority.
    Secretary Geithner. Our resolution authority, our judgment 
is we want to use a mechanism built on the current FDIC model 
where a judgment to intervene, in some sense, requires a 
judgment by the President and the Secretary of the Treasury, by 
the Chairman of the Fed and by the Board, in a case--it is 
likely to be also in the case of the Board of the FDIC.
    Mr. Watt. But isn't that authority that you ultimately 
would think would be appropriately vested in whoever has the 
responsibilities for systemic regulation?
    Chairman Bernanke, I would like your opinion on that, too.
    Mr. Bernanke. No, those could be separated. The FDIC or 
some other body could be in charge of resolution and deals with 
those specific issues. And then in the oversight and financial 
stability regulation, it could be done.
    Mr. Watt. Even the decision about whether to exercise it?
    Mr. Bernanke. The decision should be a joint decision, and, 
in particular, the President should be involved.
    Mr. Watt. Thank you, Mr. Chairman. My time has expired.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. Thank you, Mr. Chairman.
    Mr. Geithner, there are many reports that back in 
September, when all this was done, you were president of the 
Federal Reserve Bank of New York, that you were heavily 
involved in this, and you probably had knowledge of the bonus 
payments, at least that they may occur, at that point.
    Can you tell us when you first really knew that these bonus 
payments to AIG would be made?
    Secretary Geithner. Congressman, I was deeply involved in 
the decisions to intervene in AIG and the initial restructuring 
decisions made. I knew that we had a big mess on the 
compensation side to deal with, but I did not have--I should 
have had, but I did not have detailed knowledge of these 
particular legally contracted retention bonuses for AIG FP 
until I was, as I said, briefed by my staff on March 10th.
    Even though there was a lot of information that was in the 
public domain, I was not aware of the details then until March 
10th, but it would not have affected our choices at that time 
because of the legal nature of those contracts.
    Mr. Castle. There was also some discussion that you learned 
in January, but you did not, about the bonuses?
    Secretary Geithner. As I have discovered, a lot of this was 
in the public domain earlier and in January, too. Although I 
don't believe--well, in any case, I was not aware of the 
details of the payments or their legal nature until March 10th.
    Mr. Castle. Looking at the time around the time the 
stimulus passed in the Senate, February 11th or 12th, whenever 
it was, the Dodd language has been very much put into question. 
I read it before, but, quickly, it shall not be construed to 
prohibit any bonus payment required to be paid pursuant to a 
written employment contract executed on or before February 11, 
2009.
    A lot of finger pointing is going on there.
    My question is, were you involved in the writing of that, 
or in the room? Was anyone who answers to you involved in the 
writing of that or in the room? And do you know who might have 
been in the room? Because Senator Dodd has indicated that there 
were others in the Administration who were actually urging that 
language.
    Secretary Geithner. Treasury staff expressed concern, as 
part of the legislative process, about that particular 
provision as originally drafted. Because of concerns it was 
retroactive, it could be vulnerable to legal challenge. I know 
many other people who are part of that process expressed a 
similar concern.
    But the bill that emerged was a very strong bill, and it 
did create an obligation on me, in a specific constructive set 
of words in the public interest, to try to recoup those 
payments. And that was the balance that was struck in the 
legislation.
    Mr. Castle. But you were not personally there when all that 
occurred; is that correct?
    Secretary Geithner. No, I was not. But as I said, the 
Treasury Secretary did express concern about this specific 
provision, and we did consult with Senator Dodd and his other 
colleagues about a range of other dimensions of that 
legislation in draft.
    Mr. Castle. Mr. Bernanke, you indicated in your opening 
about some of the pure lessons. There is an urgent need for 
systemic regulation on nonbanks. And I am not sure exactly what 
you meant by that, but I think of investment banks and hedge 
funds and private equity insurance companies, and maybe people 
like Warren Buffett, for all that matters, and maybe other 
corporations. But exactly what did you mean by that in terms of 
the kind of regulation that could be imposed?
    Some of these are unregulated entities altogether at this 
point. So if we were to have a systemic regulator, what should 
we be doing in that capacity?
    Mr. Bernanke. Congressman, there is a great deal to be 
discussed here, but I would point to at least two elements. One 
would be that every systemically critical firm, particularly 
those organized as holding companies, should have a 
consolidated regulator looking at the entire firm.
    Now, in the case of AIG, for example, the OTS was nominally 
the holding company supervisor because they had a small thrift, 
but they were focused, presumably, on the actions relative to 
the thrift. And it was obviously a poor match for them to be 
looking at the activities of AIG FP.
    What is needed would be a strong oversight regulator who 
would be able to deal with all the aspects of the company for 
all systemically relevant companies.
    The second part, I believe, that would be important would 
be to have some general authority to look at the system as a 
whole, to look for weaknesses in regulation, to look for 
problems in payment systems, to look for buildups of risky 
positions, to look for issues with derivatives and so on to try 
to provide an overview of problems in the financial system as a 
whole, as opposed to focusing solely on each individual 
institution in isolation.
    Mr. Castle. Well, I tend to agree with you, although I 
think it is very, very complicated. I know a lot of the credit 
in this country shifted from banks to some of these other 
entities, and we do need to have some control over it. But I 
would hope we can all work together on making sure that is done 
and done correctly at some point. It is relevant in the near 
future.
    Thank you. I yield back, Mr. Chairman.
    The Chairman. The gentleman from New York.
    Mr. Ackerman. Thank you, Mr. Chairman.
    The furor last week on the part of the public, the media, 
and the Congress over the outrageous bonuses was very, very 
understandable, but the truth of the matter is the bonuses did 
not create the problem. And even if all those people gave back 
double the amount that they got in bonuses and spent the week 
in the public pillory, which I presume they did, it wouldn't 
fix the problem.
    The real problem is greed, and I think that with all of the 
roaring and chest beating that we did, and are continuing to 
do, we are not really fixing the problem here.
    I am sorry to say that some of us are learning that we have 
hurt a lot of otherwise innocent and decent people who just 
fulfilled their contractual obligations in different parts of 
some of this massive company, having nothing to do with the 
real problem that took place in the financial products 
division. And we probably owe them an apology. And maybe, even 
more than that, we owe them some kind of a remedy to the damage 
that it looks like we have been engaging in. And we have to 
start looking at that, too.
    The problem is greed, assisted by innovation. And I think 
part of the solution has to be that we have to exert a little 
bit of common sense into the process, and I don't know that we 
can legislate that or you can enforce it. But certainly there 
are regulations and changes that we should be looking at, and 
one of them should be expressed in a legal regulatory way that 
says gimmicks are not financial products, and credit default 
swaps, although they might have some value somewhere, are 
really not insurance.
    Looking forward, we should know that AIG is not the only 
company that used credit default swaps. How big is that market? 
How many other companies are out there, and are we looking at 
them, and are we going to stop pretending that they are issuing 
insurance and get those products back into the range of 
reality, rather than letting people think they are insured and 
then having to bail out all those other companies?
    Mr. Bernanke. Secretary Geithner can speak about this 
because he has done a lot of the work involved in trying to 
strengthen the CDS market.
    It was a particularly intense problem at AIG because they 
were essentially using these swaps to sell insurance against 
which they neither had capital nor hedging. And so when the 
insured event occurred, then there were enormous losses. So 
that was clearly a bad situation.
    So one approach would be to make sure, from a regulatory 
perspective, that those who use CDS instruments have 
appropriate hedging or other protections to make sure that they 
can pay off.
    The other approach, complementary approach, is to trade CDS 
not bilaterally over the counter, but through some kind of a 
clear central counterparty.
    Mr. Ackerman. We are in a crisis mode right now. You know, 
if we discover that an airplane has a faulty flycam, whatever 
that might be, you know, they usually ground the whole fleet 
that has them, because of obvious reasons.
    Are we looking at doing that, these other companies with 
credit default swaps, to a large extent to see if we can ground 
them until we fix the mechanism?
    Mr. Bernanke. Well, that would have negative as well as 
positive effects, because some companies use the credit default 
swaps in order to hedge, that is to protect themselves, as 
opposed to taking gambles, in the case of AIG.
    Mr. Ackerman. I just want to suggest that we take a very, 
very close look at that, because there is a clear and present 
danger here that just like we are finding that there are many 
Madoffs, there are many AIGs out there, and before we have to 
start bailing them all out, maybe we should ground some of 
them, too.
    I yield back the balance of my time.
    The Chairman. The gentleman from California.
    Mr. Royce. Thank you, Mr. Chairman.
    On the front page of the Wall Street Journal, Mr. Bernanke, 
there is a headline titled, ``AIG's Rivals Blame Bailout for 
Tilting Insurance Game.''
    Now, this is something that a number of insurance companies 
have talked to us about. I originally opposed the concept of 
bailouts, and one of the reasons I thought it was important to 
let AIG fail is the fact that now that the government is behind 
them, they have extra power in the market.
    Anyway, the story says, ``In the 6 months since the 
government stepped in, AIG at times has slashed insurance 
prices by more than 30 percent in some cases to fend off rivals 
and to keep or win contracts, according to public documents, 
insurance buyers, execs and others in the industry. This tack 
has helped AIG ensure customers ranging from the U.S. Olympic 
Committee and an Arizona airport, to an Illinois nursing home 
and a Florida town government, as examples.''
    Now, I raise this issue for two reasons. First, the obvious 
competitive advantage AIG would gain within the market, if they 
are, in fact, undercutting their competitors; and second, if 
AIG is not offering actuarially sound rates on their insurance 
products, it could result in more losses taken on down the road 
by the owners of AIG, in other words, taxpayers, since 
taxpayers now own 80 percent of AIG.
    Can you verify to the markets within which AIG is operating 
that AIG's subsidies will not have the full faith and credit of 
the Federal Government in the future? And how confident are you 
that the domestic insurance subsidies that have been put into 
the process with respect to the subsidiaries of AIG are not 
using the systemically significant label within the market to 
undercut their competitors?
    Mr. Bernanke. Well, on the competitive side, I am of two 
minds, because AIG is losing business because of the taint and 
the other problems with the reputational problems, and so you 
would expect them to be more aggressive to try to retain some 
of that business. So it is not clear whether that is an 
undercutting or not. I am more concerned about the possibility 
of underpricing in the second sense that you have mentioned.
    There are investigations of this issue going on, or have 
been undertaken. I believe that at least one or two of the 
State insurance regulators who testified before Congress last 
week suggested that they had looked into this, and, as far as I 
understand, they have not found any substantial evidence of 
this underpricing.
    I believe the GAO is also looking at the issue, and I am 
not sure exactly what stage that investigation is, but we will 
obviously be very interested in that outcome.
    Mr. Royce. Well, how can we assure down the road that AIG 
and other recipients of government assistance are not being 
viewed as being backed by the Federal Government? And this is 
the concern that I have about your overall plan, that at the 
end of the day we undermine market discipline because we 
telegraph the message to the market that the government is 
behind these institutions, and, therefore, as a consequence, 
they are going to end up someday being overleveraged. They are 
going to be able to borrow far more because the market 
discipline won't be there, at far less interest rates, because 
they are going to be perceived basically as borrowing at near 
government rates.
    And, you know, we saw this with Fannie Mae and Freddie Mac 
that borrowed at very close to government rates and reported 
profits to their shareholders, while the Federal Government 
held the risk that eventually materialized last September. And 
we saw them, basically, go into the business of arbitraging, 
borrowing at near government rates, and then building up those 
portfolios to $1.7 trillion and taking those risks that you 
couldn't have taken in the market. But they became the biggest 
player in the market because of the perceived government 
backing of the institutions.
    That is what I worry about in terms of the proposal that 
you are making today, in terms of the impact of converting 
other institutions basically into, shall we call them, 
government-sponsored enterprises in a way, because you would 
have the concept of the government behind them.
    Mr. Bernanke. Congressman, I gave a speech, I believe, last 
week exactly on the issue of too-big-to-fail, which I consider 
to be a critical issue. And I addressed a number of approaches 
to eliminating or reducing this problem, including, among other 
things, having tougher regulations and supervision of these 
companies, making sure they are not taking advantage of any 
implied government backing to take risks and so on, and also 
having the resolution regime that we have discussed that would 
allow us to resolve these companies and to perhaps take 
haircuts on creditors so that they will not be assured that 
they will be protected.
    Mr. Royce. Mr. Geithner, I would ask you the same question, 
very quickly.
    Secretary Geithner. I think you are absolutely right to be 
concerned about this. I share that concern very much. That is 
why the reform effort we are going to have to work with the 
Congress on is going to have to address the moral hazard 
created by these extraordinary interventions.
    You are absolutely right to be worried about it. We need to 
dial back this assistance when we get through the crisis, and 
we have to put in place much stronger restraints on future 
risk-taking.
    Mr. Royce. But if you let them go bankrupt, you would 
actually then have market discipline, and you wouldn't have to 
worry about this, offsetting all of this.
    The Chairman. The gentleman's time has expired.
    The gentleman from California.
    Mr. Sherman. Thank you.
    What I fear here is that we are doing a Kabuki theater in 
three acts. In the first act, Washington tells the American 
people, we understand your anger at Wall Street. In the second 
act, we nitpick to death any proposal that actually adversely 
affects Wall Street. And then in the third act, we bestow 
another trillion dollars on Wall Street under extremely 
favorable terms.
    Chairman Bernanke, in the hands of a maniacal Fed, section 
13(3) could be used to make trillions of dollars of highly 
risky loans. Fortunately, you have interpreted the law to say 
that you are only going to buy paper that is triple A and 
similar instruments. But let us say a year from now, Wall 
Street comes to you and they say they need another trillion 
dollars, and the TARP money has run out, and Congress is a 
bunch of buffoons and populists and they won't provide 
additional money, and they are idiots, so don't listen to them. 
And Wall Street is unanimous in telling you that only you can 
save the economy, and the only way you can do it is to buy 
double-A paper or single-A paper and subject the Fed to that 
higher level of risk. Would you then change your interpretation 
of the law?
    Mr. Bernanke. The law requires that we lend on a fully 
secured basis; in other words, to be comfortable that the 
collateral we are taking will allow for repayment of the loan. 
That is why in the TALF and in the program that Secretary 
Geithner just announced, we are not only taking a variety of 
protections, including haircuts and the like, but we are also 
having TARP capital to stand between us and the credit risk, so 
we will be very, very careful not to take any credit risk.
    Mr. Sherman. No credit risk; is that correct?
    Mr. Bernanke. You never can go literally to zero, but very, 
very little credit risk.
    Mr. Sherman. Well, that is what triple A is, as little as 
you can get.
    Mr. Bernanke. Right.
    Mr. Sherman. Mr. Geithner, you promised transparency, but 
what the American people want to know is about the compensation 
packages. Will you publish a list of all the TARP recipients, 
the companies that got the money, and how many of their 
executives--I don't want any person's name, just how many of 
the executives earned more than $1 million in 2008, how many of 
them got bonuses of over half a million dollars; and likewise 
for 2009, how many of them are earning salaries of over $1 
million a year, and how many of them have what appear to be 
contractual rights to receive a bonus in excess of a quarter 
million dollars? I don't think it is just about AIG 
compensation, and I don't think the American people should be 
blindsided and find out about bonuses on a Saturday that are 
about to be paid on a Sunday. Can you give us a chart for each 
TARP recipient?
    Secretary Geithner. Congressman, you are absolutely right, 
this goes well beyond the AIG. And the President proposed on 
February 4th a range of reforms to broad compensation 
practices, including proposing that boards of directors 
submit--
    Mr. Sherman. Mr. Secretary, it is my time, and I will 
reclaim it. Are you going to give us the chart, or are you 
going to hide the ball?
    Secretary Geithner. I am not going to hide the ball.
    Mr. Sherman. Are you going to give us the chart?
    Secretary Geithner. I will reflect on the suggestion you 
made and--
    Mr. Sherman. In other words, you won't commit to telling 
the American people how many folks at Goldman Sachs or AIG are 
going to make $1 million this year?
    Secretary Geithner. Congressman, I will think carefully 
about your proposal.
    Mr. Sherman. Thank you for thinking. Let me move on. I will 
move on to the next question.
    The law says the TARP bill--we said that the Treasury shall 
require that the financial institutions that you invest in meet 
appropriate standards for executive compensation. That is the 
law. You are supposed to write the regulations. Not to your 
credit, you have kept on Assistant Secretary Kashkari to honcho 
this program. He came before this committee, and I asked him, I 
said on December 10th--and I mailed a copy of this transcript 
to you just as soon as you got sworn in, I am asking about 
AIG--is a $3 million bonus an appropriate standard of executive 
compensation, or has the law been violated? And your 
quarterback said that he didn't think that a $3 million bonus 
was necessarily inappropriate compensation. Then I asked him 
about $30 million bonuses to AIG executives, and his response 
was, well, I can't opine that wouldn't be appropriate 
compensation.
    Is this the guy who should be running the TARP program, and 
when are you going to give us the regulations required by law, 
and are those regulations going to prohibit million-dollar 
bonuses and million-dollar-a-year salaries?
    Secretary Geithner. Congressman, we are committed to 
putting out those regulations. We will do so as soon as we can. 
Mr. Kashkari, who is an excellent public servant, it is not his 
job to make those judgments. That is my job. I am accountable 
for making those judgments.
    The Chairman. The gentleman may finish his sentence.
    Secretary Geithner. And we are working on putting those out 
so that we will have some clear standards to the American 
people to govern these compensation practices going forward.
    The Chairman. The gentleman's time has expired. The 
gentleman from Oklahoma, I believe, is next.
    Mr. Lucas. Thank you, Mr. Chairman.
    Let us continue to look at the process of cleaning up 
behind this parade. In Oklahoma, in the 1980's, we went through 
a twin agriculture and energy resource boom and bust. And it 
was fascinating after the FDIC got done stomping through the 
arena how 5 and 10 and 15 years later, amazingly there were 
some millionaires made of dealing and disposing of these 
assets.
     Could we talk for a moment about the public-private 
investment fund? And if you could, just let me give you a real 
world--from a perspective of the real world. For a typical 
investor who might participate in this kind of a thing, this 
effort to clean up the legacy assets, the toxic assets, for 
$100, it could be $100 million, it could be $100 billion, but 
for $100, how many dollars' worth of assets, Secretary, do you 
envision that controlling or being worth?
    Secretary Geithner. In the model we laid out, $1 of capital 
from the government would come with $1 of capital from a 
private investor, and they would be able to get borrowing from 
the government in a range that is yet to be determined. But it 
is potentially up to 6-to-1 leverage in this basic structure, 
substantially less leverage than the bank normally operates 
with, but that is the broader magnitude that is possible.
    Mr. Lucas. So potentially the investor's dollar might 
conceivably get them as much as $6 worth of assets, if the 
assets--some assets would be a different value. Some would be 
good, some would be bad, some would be totally worthless. If 
the assets turned out to be bad, of that dollar put into the 
fund, what is the investor's potential loss? Can he or she lose 
it all?
    Secretary Geithner. Yes.
    Mr. Lucas. And the upside?
    Secretary Geithner. The upside would be shared in portions 
of the capital they put in. So the taxpayer will share in the 
upside alongside the private investor.
    Mr. Lucas. So my mighty dollar might get me 6 in assets; I 
could lose it all if they turn out to be a bad portion of the 
program. If they turn out to be good assets, as was observed in 
Oklahoma in the 1980's, sometimes those ag properties and those 
energy-producing properties are so dramatically undervalued 
that a decade later--so there is a potential for it not only of 
a complete loss of investment, but a potentially tremendous 
gain then for the investor.
    Secretary Geithner. For the taxpayer, too. The taxpayer 
would share equally in those gains.
    Mr. Lucas. As you envision the program, what dollar 
amount--what level of player are we talking about? I am sure 
this is not something that the small investor will be able to 
be a part of.
    Secretary Geithner. We want this designed so that the 
potential gains can be shared as broadly as possible.
    Mr. Lucas. So does that mean the buy-in is $100,000, $1 
million, $5 million?
    Secretary Geithner. We laid out some details proposed for 
minimum investments. But, again, people will be able to 
participate through--as the general asset management companies 
that manage the pension assets of average Americans. So the 
idea is to allow the American people the benefit alongside the 
government of any potential gains, and the taxpayer, of course, 
ultimately gets a better deal with this kind of structure than 
they would if the government simply took on all the risk.
    Mr. Lucas. And the reason I bring all this up, of course, 
is potentially there will be some tremendous winners on down 
the road, ones who have either picked wisely or by good 
circumstance.
    Let me flip to one more question. We have been very focused 
on AIG compensation, the bonuses and all those sorts of things. 
One other subject. A lot of compensation--and I am not a part 
of corporate America, but a lot of compensation is not just 
bonuses and outright salaries, it is things like stock options, 
correct? As this economy picks up, how many of these financial 
institutions--and I am asking a question that may not be 
answerable, of course, but are we going to see at some point a 
year or 2 or 3 or 5 years from now, the really big sums of 
money made when these stock options that might be worth pennies 
now or dollars now become tens or hundreds of dollars in the 
future? Is that something that we should be prepared for as a 
public official to explain to the folks back home 2 years, 3 
years, or 5 years down the road?
    Secretary Geithner. Technically, I think most of those will 
have to be fundamentally renegotiated for the risk you are 
raising to materialize. But it is very important that 
compensation practice across the industry be fundamentally 
reformed so that compensation is tied to long-term performance 
of outcomes by the firm itself. And what the President proposed 
on February 4th is that compensation above a certain limit, 
particularly in cases where the firms are getting assistance 
from the government, be it in the form of restricted stock that 
is at risk, only pays back over time only after the taxpayer is 
repaid. And for all firms that participate in these markets, we 
want them to subject their compensation proposals to a 
shareholder vote, so the shareholders will have the opportunity 
to look at these compensation practices and make their own 
judgment about whether they are appropriately rewarding risk 
and not incenting excessive risk-taking at the expense of the 
system as a whole.
    Mr. Lucas. Have we ever had these kind of standards before, 
just as a question?
    Secretary Geithner. No. I think this is a necessary, 
important part of a reform agenda. I think it is not possible 
to run an effective risk-management framework without looking 
also at compensation incentives, because they, as we have seen, 
overwhelm all the checks and balances and limits that were set 
by supervision and risk managers.
    The Chairman. The gentleman from New York, Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    I want to thank all three of you for your testimony today. 
I think it has been very enlightening for me.
    I want to just touch on a couple of things. First, one of 
Mr. Ackerman's questions was about credit default swaps. Do you 
think that we in Congress and you should work on some further 
regulations, specific regulations, in regards to credit default 
swaps? And if we do that, what effect do you think it will have 
on the global financial system, and how can we work that out in 
that regard?
    Secretary Geithner. I think it is very important that 
through a mix of law and regulation, we bring these markets 
into an oversight framework that provides better protection for 
the financial system. As part of this, I think it is very 
important that the standardized part of these markets be moved 
onto central clearinghouses and exchanges, and that we also put 
in place much better reporting disclosure requirements. And as 
the chairman just said, it is critically important that people 
who get exposure to these instruments hold enough capital or 
reserves or cushions against the risk those instruments 
present. But I think comprehensive reform bringing these under 
oversight should be a critical part of the reform agenda we 
hope to work with the Congress on.
    Mr. Meeks. Now, one of the--and we all--and sometimes we do 
this often in Congress, we react to a situation, and all of us 
reacted to the bonuses by AIG last week. And one of the things 
that I heard when I got back home from some, coming from New 
York, we are very concerned, because, of course, the financial 
Wall Street is in New York. It contributes to a lot of jobs, a 
lot of our economy, etc. One of the things that often was heard 
was, when I got home, that a lot of jobs could leave New York 
and go elsewhere, elsewhere being not in the United States; in 
London.
    My question to you is, what is your reply to that? I mean, 
is that just talk because Wall Street tried to protect itself? 
Is that a reality of something that could possibly happen? And 
what should we do or could we do to try to make sure that as we 
recover, we don't lose those jobs in the United States, and New 
York, for example, remains the financial capital?
    Secretary Geithner. The best thing we can do for New York 
and the U.S. financial system is create a much stronger system, 
a more stable system for the future. But to do that, we need to 
make sure we bring the world with us, and the world as a whole, 
all those other financial centers, London, Asia, continental 
Europe, also put in place higher standards for protection, 
because without that, there is a risk that capital will move, 
business will shift from the United States, and we will end up 
with a weaker system overall, as we have seen.
    So the best defense for us is to make our system stronger, 
not to wait for the world; make our system stronger, but try to 
encourage them to move with us to put in place higher 
standards, and that is what the President has committed to do.
    Mr. Meeks. And I was wondering--and I know that there is 
time for you to come with your standards that you are talking 
about with reference to executive compensation and bonuses, but 
I was wondering if there is a framework of which or reference 
of which you are working on to make that determination, because 
that is part of what the problem is here. Folks feel that there 
has been the greed, or others feel that there has not been a 
system put in place that they can understand and follow and 
say, okay, this is what the rules are. Basically when people 
say, tell me what the rules are, we will play by the rules; 
don't change the rules in the middle of the game.
    So is there something that you are putting in place so that 
the markets and others can understand what the rules will be or 
what you are governing by so we can have that confidence in the 
market so we can move again in the direction that we should be?
    Secretary Geithner. Yes, we share that objective. And just 
to come back to the point you made before, even in this area, 
there is broad support internationally to having standards that 
apply to compensation, so that, again, there is more of a level 
playing field generally across the financial system.
    Mr. Meeks. I think my time has expired. I yield back.
    The Chairman. The gentleman from Texas.
    Dr. Paul. Thank you, Mr. Chairman.
    When the chairman of the committee opened up the committee 
today, he suggested that we look backward as well as forward, 
and that all our problems didn't come from January 20th on, and 
I agree with that. As a matter of fact, just looking back at 
the last Administration isn't quite enough. And in order to 
understand the problems that we face and understand the cause, 
we have to look back possibly even several decades.
    The debate today, so much of the discussion has been on 
technical aspects, which I think are very important, but, quite 
frankly, I think that deals a lot with the symptoms rather than 
the basic cause, and I would like to deal more with the cause, 
so I have a question for the entire panel, and the question 
keys around this cause.
    Right now, I think the Congress and the Treasury as well as 
the Fed operate on the condition that the free markets failed, 
and we didn't have enough regulation. Others will say that we 
got into this mess because we have been living with a condition 
of crony corporatism, inflationism, and interventionism. We had 
inbred into this system a lot of moral hazard which encouraged 
a lot of risk and a lot of guarantees, and that we would have 
the lender of last resort, and we really didn't have to worry. 
And it created, once again, a phenomenon that has been known 
throughout history. It is called the ``madness of crowds.'' And 
that certainly--that is nothing new. But there was certainly a 
lot of madness going in the economy and in the marketplace.
    But the question really comes out, who should allocate 
capitalism, the free market, or should the government? And I 
think that we had a system where the free market wasn't 
working, and we didn't have capitalism. The allocation of 
capital came from the direction of the Federal Reserve and a 
lot of rules and regulations by the Congress. We had 
essentially no savings, and capital is supposed to come from 
savings. And we had artificially low interest rates.
    So looking at all that, then this means we would have to 
look differently at what our solutions should be. Everybody 
loves the boom. That was great. Nobody questions all this. But 
when the bust comes, everybody hates it, and then they quickly 
to have decide what to do.
    Unfortunately, I don't see that we are addressing the real 
problems. We are not addressing--what we are dealing with is 
trying to find a victim. Who is going to soak up the 
derivatives, who is going to soak up the debt, who is going to 
be penalized? And right now it looks like Wall Street is 
getting bailed out, and the little guy and the middle Main 
Street America and all are going to pay the penalty. And I 
think this is--we are absolutely going in the wrong direction, 
whether it is AIG or the rest. So we failed because we didn't 
follow the marketplace, and then we do the same thing over and 
over again, and we don't seem to improve anything.
    So my question is this: How do the three of you operate in 
your own minds? Do you operate with the idea that capitalism 
failed, and they need us more than ever before to solve these 
problems; or do you say, no, there is some truth to this? As a 
matter of fact, a lot of truth to it is that we brought this 
upon ourselves, that we had too much government, too much 
interference in interest rates, too much risk, moral risk, 
built into the system. Because if you come from the viewpoint 
that says that the market doesn't work, I can understand 
everything you do, but if I see that you have totally rejected 
the market, and that we have to do something about it, I can 
understand why we in the Congress and you in Treasury and you 
in the Fed continue to do this.
    So where do you put the blame; on the market or on crony 
capitalism that we have been living with probably for 3 
decades?
    Mr. Bernanke. Congressman, I certainly do not reject 
capitalism. I don't think this was a failure of capitalism per 
se. And I also think the free market should be the primary 
mechanism for allocating capital. Markets have shown over many 
decades that they can allocate money to new enterprises, to new 
technologies, very effectively. And so we want to maintain that 
free capital market structure.
    It is nevertheless the case that we have seen over the 
decades and the centuries that financial systems can be prone 
to panics, runs, booms, and busts. And for better or worse, we 
have developed mechanisms like deposit insurance and lender of 
last resort to try to avert those things. Those protections, in 
turn, require some oversight to avoid the buildup of risk.
    Dr. Paul. May I interrupt, please?
    Mr. Bernanke. Certainly.
    Dr. Paul. Isn't that what creates the moral hazard though? 
Isn't that the problem rather than the solution?
    Mr. Bernanke. Well, the reason the Fed was created in 1913 
was because in 1907 and in 1914 there were big financial 
panics, and there was no regulation there, and people thought 
that was a big problem. Back in the 19th Century as well.
    Dr. Paul. But they usually lasted about a year. And now we 
are determined to make our corrections last 10 to 15 years, and 
that is what we are working on right now.
    Any other answers, please?
    The Chairman. Not on this round, because the time has 
expired.
    The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    To Secretary Geithner and Chairman Bernanke, the Special 
Inspector General for TARP, Mr. Neil Barofsky, testified before 
the Financial Services Oversight and Investigations 
Subcommittee a few weeks ago that he estimated the total 
exposure of the taxpayer was $2.875 trillion if you count all 
the programs authorized by the Treasury Department, FDIC, the 
Fed and others. Is that number still accurate, or do you have a 
different estimate of how much taxpayer exposure we currently 
have in all of these financial rescue programs; and do you 
expect, can we expect, that the taxpayers will be fully repaid?
    Mr. Secretary?
    Secretary Geithner. Congressman, that, I suspect, 
represents the total loans outstanding and capital extended by 
the government. It does not reflect the risk to the taxpayer. 
That requires a more careful judgment about the level of 
collateral backing behind those loans. That requires a--that is 
a hard judgment to make, but we would be happy to come back to 
you and give you our best sense of what the components are in 
that $2.875 trillion number and how you should think about 
ultimately the risk to the taxpayer. But we are being very 
careful to make sure these are designed in a way that they come 
with very strong protections against the taxpayer.
    I want to conclude, though, just with a sense of the 
importance about our candor in this. The government is going to 
take risk in this. There is no way we are going to get through 
this financial crisis without the government taking risk the 
markets can't take. So I cannot stand before you, nobody in my 
business can stand before you, saying there is no risk of loss 
to the taxpayer here, but we are going to do our best to 
minimize that risk of loss.
    Mr. Moore of Kansas. Mr. Chairman?
    Mr. Bernanke. Speaking for the Federal Reserve, less than 5 
percent of our lending is associated with the Bear Stearns and 
AIG episodes. We believe that we will be fully repaid for those 
loans, but concede that they are riskier than the other loans 
we make.
    The other 95 percent of our balance sheet is extremely 
safe, mostly very short term. We have never lost a penny in any 
of those programs. So even though it is true that the Fed has--
in one capacity or another--lent out a great deal of money, we 
believe it is quite safe and that the taxpayer will, in fact, 
make money, because the Federal Reserve through its profits 
sends to the Treasury every year tens of billions of dollars.
    Mr. Moore of Kansas. Mr. Chairman, I believe it was you who 
testified and told a group of Members of Congress, myself 
included, that if--and I think this was September of last 
year--that if Congress didn't pass the legislation you were 
looking for, there might not be a market the following week. 
That strikes fear right there. I voted for both of the so-
called rescue recovery programs, and I told people back home, I 
have been here 10 years, and those were probably the most 
uncomfortable, hardest votes I have had, but I didn't see that 
we had an option. And I take it you still believe that was the 
right option.
    Mr. Bernanke. Everything we have seen since then suggests 
that the effect of the financial effects on the global economy 
are extraordinarily powerful.
    Mr. Moore of Kansas. Mr. Secretary, any further comment?
    Secretary Geithner. I think that was an enormously 
difficult act, but a brave, important act. I think without that 
action and authority we would be in a much greater, much deeper 
peril today, much deeper recession causing much more damage to 
the American people, and facing a much more protracted period 
before we have the chance of getting growth back, and it would 
have been much more expensive ultimately to deal with it. So I 
think that was a necessary act, and it helped prevent a much 
more catastrophic outcome.
    Mr. Moore of Kansas. Thank you.
    I yield back my time, Mr. Chairman.
    The Chairman. The gentleman from Illinois.
    Mr. Manzullo. Thank you, Mr. Chairman.
    Secretary Geithner, on page 1, paragraph 5, line 4, and, 
Chairman Bernanke, page 2, line 3, of your respective 
testimonies, you state that 401(k) plans, and presumably IRAs, 
purchased insurance from AIG; is that correct?
    Mr. Bernanke. Yes.
    Mr. Manzullo. And the purpose of insurance was so that the 
value would not fall precipitously; is that correct?
    Mr. Bernanke. Correct.
    Mr. Manzullo. So they bought insurance, and because of the 
bailout, their requirement plans did not get cut in half; is 
that correct?
    Mr. Bernanke. They avoided the losses.
    Mr. Manzullo. That is right.
    What about the rest of the Americans; what about the rest 
of the Americans who lost half of their savings in retirement 
plans, plus had to put up $40 billion so other people could be 
made whole because they bought insurance at AIG? Does that seem 
fair?
    Mr. Bernanke. Most of that decline has occurred since 
Lehman Brothers failed in September. If we had been able to 
avoid the failure of Lehman Brothers--
    Mr. Manzullo. Wait a second. Most Americans have lost 40 to 
50 percent of their IRAs and retirement plans. And in addition 
to that, they have had to spend $40 billion in order to honor 
the insurance plan of AIG so that the people who bought 
insurance with them wouldn't lose any of their retirement 
plans; isn't that correct?
    Mr. Bernanke. These are loans which we expect to get paid 
back.
    Secretary Geithner. Congressman, could I try to answer 
that?
    Mr. Manzullo. I think that is an improper answer. The 
American people have lost 40 to 50 percent of their retirement 
plans.
    Mr. Bernanke. The purpose of the action we took with AIG, 
as I discussed in some detail in my testimony, was not to help 
any specific counterparty.
    Mr. Manzullo. But you did, you did. That is what happened.
    Mr. Bernanke. It is unavoidable. We are trying to address 
the entire--
    Mr. Manzullo. No, I understand. You did not address the 
entire issue because most Americans still lost 40 to 50 of 
their retirement--
    Mr. Bernanke. We are working hard to get--
    Mr. Manzullo. --plan.
    The Chairman. Mr. Chairman, the rule is that we get to talk 
whenever we want. That is the rule.
    Mr. Bernanke. Sorry.
    The Chairman. The gentleman from Illinois.
    Mr. Manzullo. And they are paying $40 billion so that other 
people don't lose any of their retirement plan. That is what 
your testimony says, and that is what happened, isn't it?
    Secretary Geithner. Congressman, those losses to the 
American people--
    Mr. Manzullo. Give me a yes or a no, please.
    Secretary Geithner. --would have been far greater--
    Mr. Manzullo. No. I am asking the questions. Did the people 
who took out insurance with AIG to insure their retirement 
plans get reimbursed 100 percent so they suffered very little 
loss, yes or no?
    Secretary Geithner. It depends on the nature of those 
specific contracts, it depends on each of those contracts. But 
what the critical thing is the damage to the average American 
pension fund--
    Mr. Manzullo. But you did not answer the question. The 
average American person has already lost 40 to 50 percent of 
their insurance plan.
    The Chairman. If the gentleman will withhold.
    I would ask the people in that second row to stop the 
gesturing and the conversations. People are here to listen. 
Conversations are going on. They will end, and if there is any 
further disruption, I will ask the officers without any further 
intervention to simply escort people out.
    Please continue.
    Mr. Manzullo. Thank you.
    The American people have lost 40 to 50 percent of their 
retirement plans; IRAs and 401(k)s. But people with retirement 
plans who bought insurance from AIG did not suffer that loss; 
isn't that correct?
    Mr. Dudley. If I could just make one point here?
    Mr. Manzullo. Can't anybody just say yes or no?
    Mr. Dudley. Could I make one point?
    Mr. Manzullo. If you can give me a yes or no.
    Mr. Dudley. The insurance was on the stable value funds. If 
the investors in the stable value funds had taken losses in the 
AIG case, this would have destabilized stable value funds 
broadly--
    Mr. Manzullo. The answer is yes, isn't it?
    Mr. Dudley. --broadly throughout the U.S. economy.
    Mr. Manzullo. The American people paid $40 billion so 
people with retirement plans that had insurance with AIG did 
not have to lose; isn't that correct?
    Mr. Bernanke. They lent $40 billion to avoid a catastrophic 
collapse to the system.
    Mr. Manzullo. Can you give me a yes or no, anybody there, 
please?
    Mr. Bernanke. You said it was the purpose. That was the 
purpose.
    Mr. Manzullo. I have 14 percent unemployment back home. We 
could lose lots of factories. People are desperate. Half of the 
people have lost half their retirement, or most have lost half 
of the retirement, and not one of you three can give me a yes 
on that answer or no.
    Mr. Bernanke. Because it is a poorly posed question.
    Mr. Manzullo. Well, then it is poorly written in your 
statements. The question is very simple. Maybe I should make a 
statement that American people had to bail out AIG so that they 
could honor the insurance plans with people who bought 
insurance on their retirement plans, but most Americans still 
lost 40 to 50 percent of their retirement plans.
    Mr. Bernanke. If we had not made that action, they would 
have lost 70 percent.
    Mr. Manzullo. The AIG people lost 70 percent?
    Mr. Bernanke. No, the American people.
    Mr. Manzullo. Well, thank you for that correction. That 
makes me feel even better.
    But the point here is that American people had to pay $40 
billion in order to make sure that people in AIG got 100 
percent of their retirement plan, and that is why American 
people are really upset.
    The Chairman. The gentleman from Massachusetts.
    Mr. Capuano. Thank you, Mr. Chairman. Thank you, gentlemen.
    I am not going to focus too much on the AIG issue because I 
think most of it has been said the other day when Mr. Liddy was 
here. I think Congress has spoken. I think you understand how 
we feel and what we would like to do. And I also think that in 
comparison, the proposal that was put out today is much more 
important to the general economic wellbeing of this country.
    I guess I want to start with a couple of things. I heard, I 
think, at least two of you say, maybe three of you, that you 
didn't have the authority to do something earlier. Well, I 
would respectfully disagree with that legal. I understand. I 
don't want to rehash it, but you have used the term ``exigent 
circumstances'' to a fare-thee-well to get into things the Fed 
never got into before, no one would have thought they could 
have gotten into: auto loans; student loans; mutual funds. And 
the truth is I have supported that because I think it is 
necessary at the moment. I believe you could have used the same 
term to get into these issues beforehand to have avoided these 
issues had you tried. Again, past history, but nonetheless I 
still believe that you can do it.
    I want to talk about the plan. I have a few questions. I am 
trying to figure out the last 24 hours or so. And I guess I 
want to, first of all, understand. I see the FDIC as 
effectively a taxpayer-funded organization. I know it is not 
technically through taxes, but it is, because we all know that 
if the FDIC failed, we would bail it out. I don't think anybody 
really doubts that, number one.
    Number two is taxpayers pay it through fees, if not through 
taxes. I know the fees aren't assessed to them directly, but 
effectively we all pay it through higher bank fees or lower 
interest paid by the bank. It is all passed through. If the 
FDIC is included, it is not a 6-to-1 ratio, it is a 13-to-1 
ratio. Every dollar that is spent on this new program through 
the FDIC and the taxpayers directly will be 93 percent paid by 
taxpayers. So it is a 13-to-1 ratio, not 6-to-1, if you count 
the FDIC. If somehow you don't count them, I guess it is 6-to-
1, but if the FDIC fails, it is on us.
    I guess a couple other questions I have, we are targeting 
about $1 trillion of these toxic assets. Am I wrong to think we 
have anywhere from $20 trillion to $50 trillion of these assets 
sitting out there someplace? Is that a wrong number?
    Secretary Geithner. Well, that is large. The total assets 
of the banking system are roughly the size of the annual GDP, 
which is roughly $14 trillion now. So that is too big a number. 
Global financial assets are much larger than those held by U.S. 
banks.
    Mr. Capuano. So globally, all right. But it is higher than 
a trillion?
    Secretary Geithner. True. But the assets that this program 
targets--
    Mr. Capuano. I understand that. I understand what it 
targets. It targets all the triple A stuff, which, of course, 
amazes me. You are using ratings by the very credit rating 
agencies that have now been completely undermined. And anybody 
with faith in these ratings, I guess, hasn't been paying 
attention the last year. But so be it, you have to draw the 
line somewhere, and I guess that is all we have.
    I want to ask specifically about the FDIC's role here. The 
FDIC, as I understood it, but, again, without getting into 
glorious words, was there to protect me as a depositor up to 
$100,000, now $250,000. We are trying to extend that. That is 
what they are there for. And yet in this case, they are being 
used to finance the purchase of toxic assets, nothing to do 
with what anybody would have thought the FDIC was supposed to 
be used for. And they are being used, as I understand it, and 
correct me if I am wrong, to basically float collateralized 
debt obligations backed by these very toxic assets in order to 
fund the purchase of these toxic assets, getting them off the 
books of the investors and putting them on the books of the 
taxpayers. What am I missing?
    Secretary Geithner. First, FDIC fully supports this 
program. It uses an existing--
    Mr. Capuano. I don't care whether they support it.
    Secretary Geithner. But it is important because this is 
based on an existing mechanism that they use in design as a 
normal part of what they do as the principal resolution 
authority in the United States today. So they have broad 
experience doing this well, and they helped design this, fully 
support it.
    The reason we are doing this, Congressman, is because we 
think it is the best way to protect--
    Mr. Capuano. No, I understand why you are doing it. Answer 
my question. Are they going to fund these things by floating 
collateralized debt obligations?
    Secretary Geithner. No.
    Mr. Capuano. Then why is it that on your Web site? You say, 
the buyer would receive financing by issuing debt guaranteed by 
the FDIC. The FDIC-guaranteed debt would be collateralized by 
the purchased assets. What am I--is this not right, or am I 
reading it wrong?
    Secretary Geithner. I just wouldn't call that a CDO.
    Mr. Capuano. Okay. But it is a collateralized debt somehow 
backed by a toxic asset.
    Secretary Geithner. But, Congressman, it is good for the 
FDIC borrowing to be secure.
    Mr. Capuano. No, no, no, no. We can disagree on what is 
good or bad. That is what it is. And I understand that you 
think it is good; otherwise you wouldn't have proposed that.
    First of all, I want to make it very clear, I think you 
gentlemen are well-intended, intelligent men who are trying to 
save the economy. I think your motivations are fine. I just 
think you are dead wrong on this one. I think you are 
jeopardizing the FDIC. I think you are taking it--in this 
particular case, yes, taxpayers may benefit if there is a 
profit, 50/50 benefit, but if there is a loss--
    The Chairman. The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    I think that from the very beginning we have always said we 
need to restore confidence in the market and to provide the 
taxpayer with protection. But I think we also--and I think what 
has happened in the last week or so, that we need to restore 
investor confidence and confidence in our government, in the 
Federal leaders, rather, and the regulators that if Americans 
work hard and run a solid company, they are not going to be 
subject to punishment from the government if they do well.
    And on that note, I think that we need to work together 
really to focus on this economy, and I am afraid that we are 
just not doing it, or not getting all the information. What 
came up at our hearing last week was I asked the question of 
Mr. Liddy about the three trustees that were appointed to--I 
believe to represent U.S. taxpayers' interest on the AIG Board. 
We never even heard, or at least I hadn't, and I suspect most 
of the members hadn't even heard, about these trustees and how 
did they--you know, how did they--what happened with informing 
the taxpayers about the bonuses and things?
    And I think we need to move ahead, and I hope that we are 
going to really take a holistic look at all of these 
provisions. We are talking about executive compensation without 
looking at the whole picture. Now we have a new plan, and we 
see that there seems to be some increase in confidence here.
    So I have just a couple of questions. Number one, how 
many--Secretary Geithner, how many actual--what are your 
resources in the Treasury Department to do this right now?
    Secretary Geithner. We have a very strong overview; we are 
working very hard. We are going to need some more people, 
though, and we are working very hard to bring in enough talent 
to help us get through this.
    Mrs. Biggert. And I think that should be a focus. I mean, 
it is going to be difficult to find these people, isn't it?
    Secretary Geithner. We are finding a lot of people willing 
to come serve their country in this moment of challenge, and I 
think that is very encouraging.
    Mrs. Biggert. So can you give me a number of people?
    Secretary Geithner. A number of people that we need?
    Mrs. Biggert. A number of people who are actually working.
    Secretary Geithner. Across the entire Treasury?
    Mrs. Biggert. Yes.
    Secretary Geithner. Oh, I can't do that today.
    Mrs. Biggert. No, no, no. I meant that you are relying on 
to do this.
    Secretary Geithner. In the domestic finance part of the 
Treasury, I would be happy to give you the exact numbers of 
staffing today. And again, these are terrific people working 
very hard, but we are going to need more.
    Mrs. Biggert. Thank you.
    And then, Mr. Chairman, how many are working on this issue 
in the Federal Reserve?
    Mr. Bernanke. Which specific issue?
    Mrs. Biggert. Well, working on AIG right now.
    Mr. Bernanke. AIG is being managed by the Federal Reserve 
Bank of New York, primarily President Dudley, who is here. He 
has about 10 of his people in the firm every day all the time, 
and they are supported by analysts both at the Federal Reserve 
Bank of New York and at the Board.
    Mr. Dudley. We also have some outside consultants that we 
have hired to help us in certain areas where we don't have the 
expertise internally.
    Mrs. Biggert. I saw an ad in one of our local newspapers 
just asking for someone who could unravel the mortgage-backed 
securities. Which brings me to the next question. So I have an 
investor in my district, and they want to be part of this and 
purchase some of these legacy assets, as you are calling them 
now. How would they go about doing that? Can an individual 
apply if this program goes through to purchase this, or do they 
have to be part of this five or six management group?
    Secretary Geithner. Individuals will most realistically 
benefit through the professionals who manage their pension 
funds or other financial assets. That is the most direct way 
they are going to be able to benefit.
    Mrs. Biggert. Well, what if they are an investor, and they 
have private equity?
    Secretary Geithner. Well, it depends on whether they meet 
the broad conditions we are going to establish to try to 
protect the American taxpayer. Again, we want to make sure that 
the investors and the asset managers meet the highest standards 
for care and competence.
    Mrs. Biggert. Then, Chairman Bernanke, could you answer the 
question about the three trustees? Are you in touch with them?
    Mr. Bernanke. Yes. They have only been appointed relatively 
recently, and their job is basically to oversee the voting 
interest of the U.S. Treasury. They are very high-quality 
people, and they will be involved in our discussions.
    Mrs. Biggert. And Secretary Geithner?
    Secretary Geithner. Yes.
    Mrs. Biggert. Are you working with the three trustees?
    Secretary Geithner. Yes, although I haven't had the 
opportunity to do so since I took on this post, but I am sure I 
will have the chance.
    Mrs. Biggert. And you were doing that, working with one of 
them when, you were the trustee or in the New York Fed.
    Secretary Geithner. Well, this structure was designed in 
cooperation with the Treasury and the Board when I was 
president of the New York Fed, and the selection process for 
those trustees, I believe, concluded before I left the New York 
Fed. And as the chairman said, these are very capable public 
servants.
    The Chairman. The time has expired.
    The gentleman from Massachusetts.
    Mr. Lynch. Thank you, Mr. Chairman.
    Thank you, gentlemen, for trying to help the committee with 
its work. The AIG situation is a special case. I want to ask 
you about an agreement that I tried to question Mr. Liddy about 
last week. But AIG was a special case because of, as you said 
in your opening testimony, Mr. Secretary, that they were 
basically on the brink, and that you did act with greater 
urgency at a very precarious moment. We also--as the taxpayer, 
we stepped up in a very big way, taking a 79.9 percent share, 
call it 80 percent. We became the rescuer of AIG. But for the 
presence and intervention of the American taxpayer, I don't 
think anybody would argue this company was going under.
    And, in fact, I handed out copies of the retention bonus 
that is at the source of a lot of this hearing. The language in 
the retention bonus agreement drafted in December of 2007, 
basically covering the AIG financial products employees, 
anticipates this in a way; not in a way, specifically. It 
clearly says that the impact of the credit default swaps and 
underlying collateral debt obligations will not affect the 
bonuses.
    This infuriates me that employees at the firm in this 
business saw that these things were so weak and said, okay, 
what are we going to do here, we are going to build a firewall 
between the damage that is going to affect the taxpayer--they 
didn't know it was the taxpayer, but their creditors--and we 
are going to protect our bonuses. It makes me crazy that they 
did this. It also, in fact, reserves a certain part of the--
well, $67.5 million, I think it was--that regardless of what 
happened to the company, they would get their bonuses.
    And it just seems to me that there are grounds in that for 
repudiating these contracts. The fact that as they saw 
bankruptcy looming, they said, okay, the creditors are going to 
come in here at any point now and lay claim to our assets, so 
what we are going to do is we are going to make a special 
agreement to take care of ourselves. And that is why I made the 
analogy last week of the captain and the crew reserving the 
lifeboats.
    This is completely objectionable. And I just want to ask 
you, you know, I think we have a cause of action here as 
shareholders. You know, I don't dispute bonuses generally. I 
think they can work. But in this special case, is there not, in 
essence, a fraudulent conveyance here to escape the creditors 
who are the people we represent, the people who stepped up and 
did the right thing, rescued this company? And what did we get, 
you know? We get this. So if you just talk to me about this. 
And I know about the Connecticut law, and I still think that 
these are supervening incidents that could delete the contract.
    Mr. Secretary?
    Secretary Geithner. Congressman, I say it well, and I 
completely share your frustration. Think of the position I am 
in. I feel more strongly than you do. And we are looking very 
carefully working with lawyers in the Executive Branch at all 
legal avenues to go back and see if we can get this back. And I 
am sure that we are looking through at exactly the argument you 
are making, but I can't tell you today that we found a way to 
do it in a way that is going to be effective for us. But we are 
on it, and we are looking at it.
    Mr. Lynch. Well, look, if you are not going to go forward, 
then this committee needs to know that so that we can go 
forward, because I certainly think the argument needs to be 
made. And I also know that Connecticut law gives discretion to 
the judge. I don't think our case is arbitrary or capricious; I 
don't think it is unreasonable. I think it is well-grounded. It 
is not made in bad faith. We are actually looking at 
circumstances that we didn't see when these agreements were 
made.
    Mr. Chairman.
    Mr. Bernanke. We will check this with our legal advisors, 
or we will work with the Secretary as well. I am hopeful that 
you are right. We would like to explore every possible option. 
And this is a perfect example of what I was talking about 
before where compensation is not related to the risk-taking in 
an appropriate way.
    Mr. Lynch. Mr. Dudley?
    Mr. Dudley. I agree with what you just heard from the 
Treasury Secretary and the Chairman. It is pretty egregious, as 
you have noted, and we will look into what can be done on that 
basis.
    Mr. Lynch. Mr. Chairman, I yield back.
    The Chairman. Let me make an announcement. The Secretary of 
the Treasury has to leave at 1:00, but he will be back on 
Thursday. So I will announce that on the Democratic side, any 
members who wish to pass in this hearing now will go at the 
head of the list on Thursday. Mr. Bernanke can stay a little 
longer. But members who wish to ask the Secretary of the 
Treasury after 1:00, there will be a few more we can get in. On 
the Democratic side, we will begin with any member who is here 
and passes up his chance, a lot of people aren't here, and then 
we will go back to the regular order.
    The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Secretary Geithner, I would like to understand the AIG 
bonus timeline a little better, if you could comment upon it. 
It was September 16th, when you were president of the New York 
Fed, that the first intervention took place, correct?
    Secretary Geithner. That is right.
    Mr. Hensarling. And then I think you said in earlier 
testimony, you knew there were--there were public filings. You 
were not personally aware of them. As I understand, on 
September 22nd, AIG filed its AK, which discusses a retention 
program, but you were not--is that correct?
    Secretary Geithner. I was not aware of those filings then. 
Again, I knew at that point, we all knew, that there was a 
whole range of compensation issues we were going to have to 
deal with.
    Mr. Hensarling. Okay. But you were not personally aware of 
this public disclosure? I understand in November of 2008, a 
spokesman for the Federal Reserve, Calvin Mitchell, stated that 
the Federal Reserve, the Treasury, and the New York attorney 
general all knew about the AIG bonuses in the fall of 2008. Do 
you have any knowledge of that?
    Secretary Geithner. Well, I am sure what he said is 
correct. But again, there is an enormous number of compensation 
plans that crossed this entity, and they have required--we had 
different approaches for dealing with them. They had different 
basic challenges for us, as you have heard. And the particular 
challenge we are dealing with today is these legally 
contractual commitments.
    Mr. Hensarling. Mr. Secretary, AIG, representatives of AIG, 
have alleged--and I may mispronounce her name--Sarah Dahlgren, 
who was one of your top aides when you were heading the New 
York Fed--they state that on November 11th, she was personally 
briefed on the AIG bonus plan in New York. Do you have any 
knowledge of that?
    Secretary Geithner. Well, again, I am sure that those 
dedicated public servants were looking at a whole range of 
compensation that we are dealing with.
    Mr. Hensarling. I am just asking, were you personally aware 
of it, yes or no?
    Secretary Geithner. I don't know if she was briefed on that 
particular moment, no.
    Mr. Hensarling. And then again on November 24th, AIG again 
disclosed in a Form AK about these retention programs, but, 
again, you did not specifically read that AK?
    Secretary Geithner. About these specific retention 
programs?
    Mr. Hensarling. Yes.
    Secretary Geithner. No.
    Mr. Hensarling. Okay. And then on February 28th, according 
to Time Magazine, the New York Fed informed Treasury staff that 
the bonus payments were imminent.
    Do you have any personal knowledge of Time Magazine's 
assertion in this regard?
    Secretary Geithner. Again, I did not know of the details, 
timing, or precise nature of these things until March 10th. 
But, Congressman, as I said, that is my responsibility. The 
question is whether we had better options than the ones we were 
confronted with on March 10th, and I do not believe we did.
    Mr. Hensarling. Let me ask you another question, Secretary 
Geithner. In your testimony, I believe on page 2 you talk about 
AIG's financial products division, ``This division was an 
unregulated entity operating an unregulated market.''
    Several days ago, the head of OTS testified before this 
committee, and we had an opportunity to question him. He 
testified under oath, and I asked him if he had the power to 
regulate the financial products of this division that brought 
AIG down. And I will give you the specific question and answer.
    So this is myself: ``So again, in retrospect, it wasn't the 
lack of authority, it wasn't the lack of resources, it wasn't 
the lack of experience; you just flat made a mistake; is that a 
correct assessment?''
    Mr. Polakoff: ``Yes, sir. In 2004, we failed to assess how 
bad the mortgage economy, the real estate economy would be in 
2008.''
    Now, he testified under oath. So did he perjure himself, 
did he make a mistake, or are we talking about apples and 
oranges here when you said that this was an unregulated entity? 
Because the head of the OTS seems to think it was a regulated 
entity.
    Secretary Geithner. I believe that neither the entire 
entity nor that particular division was subject to an effective 
framework of oversight with broad authority and appropriate 
sophistication in the exercise--
    Mr. Hensarling. So it was effective regulation, not 
necessarily lack of unregulated entity.
    Secretary Geithner. Congressman, I am not going to disagree 
with what my colleague at the OTS said, but I don't believe you 
can look at the system today we have in the United States and 
say that there was an effective framework of regulation over 
that entire entity, not just this particular division.
    Mr. Hensarling. I see my time is running out. We will see 
if we have time at least for the question, perhaps not the 
answer.
    In today's Wall Street Journal it says that various 
Administration officials, including yourself, have called 
various folks on Wall Street to apprise them of the plan that 
you announced yesterday. And part of it says, White House aides 
returned to some key Wall Street fundraisers who had helped 
give credibility to Mr. Obama's Presidential campaign.
    Do you agree with what the Wall Street Journal said, and if 
so, did these people receive any advantage from knowing about 
the program?
    Secretary Geithner. I have not read that report, and I do 
not agree with the implication you are drawing from it. But as 
part of designing these programs, we normally do have to do 
some consultations, carefully designed consultations, with 
market participants. But those are all carefully managed to 
prevent against the risks you were referring to.
    The Chairman. The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    I understand that Ed Liddy is working for $1 a year. I 
don't doubt that he took the position to serve his country. I 
don't suspect for a second that he has personally profited in 
any way by any decision that he has made. And I know he took 
harsh questions last week, including from me. But he was also, 
at the time he accepted the position on the board of Goldman 
Sachs, and had been for more than 5 years--he had been chairman 
of the audit committee, and presumably was involved in 
decisions about valuing counterparty positions on credit 
default swap contracts with AIG FP.
    Was there any discussion about whether appointing Mr. Liddy 
created issues of appearances, and about whether he really 
brought in the detachment and the fresh eyes that were needed? 
To either Secretary Geithner or Chairman Bernanke.
    Secretary Geithner. I want to say one thing is important 
about this. I would never, and I don't believe anybody at this 
table would ever, make a judgment because it would benefit a 
specific firm in this context, either AIG or any of the 
specific counterparties in this context. I would never do that, 
never put my Department in the position of doing that.
    Now in that particular case, with respect to Mr. Liddy, the 
choice of the chief executive and the suggestion that he be 
appointed was not made by the Fed, the New York Fed. I was 
presented with him as a possible candidate. I did an 
independent assessment of whether he was qualified for that. In 
my judgment he was an excellent choice and brought us the 
extraordinary benefit of having somebody very experienced and 
capable come in and run this company. Now, and I don't believe 
that anything he has done since then is vulnerable to criticism 
that he has been doing so in a way effective--anything but 
serving the interest of the American taxpayer and helping that 
company dig out of this mess.
    Mr. Miller of North Carolina. Secretary Geithner, there is 
a concept called the appearance of impropriety; not 
impropriety, but the appearance of impropriety. He was on the 
board of directors of the company that had--Goldman Sachs, 
which had the most exposure to credit default swap contracts 
with AIG FP.
    Now, I was very careful in saying I am not suggesting that 
he has personally profited, but there may be a natural tendency 
to think of the public interest in terms of the interest of 
people you actually know. And there might be a tendency to 
think of the public interest and Goldman Sachs' interest as 
being more interrelated than other Americans would see them. 
And that appearance is what I am getting at.
    Was there not any discussion of whether there was a problem 
with the appearance?
    Secretary Geithner. We have to make choices in this 
context. It is about alternatives. In our judgment that was the 
best choice at the time.
    Mr. Miller of North Carolina. So there was no discussion of 
any appearance, any issue of appearances, or whether by virtue 
of his own having been involved in decisions about valuing 
credit default swap positions that he would be pretty 
sympathetic to people who are counterparties?
    Secretary Geithner. No concern about that particular issue. 
But, of course, we knew where he was coming from and what his 
experience was, but that broad mix of experience made him an 
exceptionally qualified person to take this job.
    Mr. Miller of North Carolina. Okay. I have been assuming 
all along that we had smart, aggressive, mean lawyers looking 
at possible personal liability claims against people who have 
been involved personally in these decisions; that, yes, these 
companies are now unable to pay their bills, unable to pay 
their debts, but a couple of years ago were doing fabulously 
well. That money is now gone. In the words of the country music 
song, it is in a bank in someone else's name. And we have 
showed very little interest, Mr. Liddy showed no interest, in 
pursuing personal liability claims against officers or 
directors or employees based upon breach of fiduciary duty, or 
other fraud, fraudulent conveyance, negligence, any other 
theory. Are we looking at personal liability claims against the 
people who are involved in these decisions and have profited 
fabulously from them?
    Secretary Geithner. As I said, we are looking at a range of 
legal avenues with lawyers, smart and aggressive lawyers. I 
don't think they are mean lawyers, but smart and aggressive 
lawyers.
    Mr. Miller of North Carolina. I know some mean lawyers.
    Secretary Geithner. Maybe we could use some mean lawyers at 
the Treasury and the Justice Department. And I promise you, we 
are exploring all available legal avenues.
    Mr. Miller of North Carolina. Thank you. No further 
questions.
    The Chairman. The gentleman from South Carolina, Mr. 
Barrett. And this will be the last question for Mr. Geithner.
    Mr. Barrett. Gentlemen, thank you for coming.
    Secretary Geithner, last year Secretary Paulson came to the 
United States Congress and sold the TARP, the Troubled Assets 
Relief Program, and they were going to buy toxic assets. Was 
the Treasury's assistance to AIG consistent on how he sold the 
TARP originally?
    Secretary Geithner. Congressman, I don't think I can answer 
that question. I was not Secretary of the Treasury then, was 
not present in that context.
    Mr. Barrett. I understand. But you understand how he came, 
the last Administration came and sold it to the United States 
Congress. And I think it is really simple: Do you think it was 
consistent with how it was sold to the United States Congress?
    Secretary Geithner. I do know that the legislation you 
passed did provide this very important authority for the 
government to put capital into the financial system. And I 
think he did use that authority appropriately and very quickly 
to help save the system.
    Mr. Barrett. I understand that.
    Mr. Chairman, what would you say?
    Mr. Bernanke. Yes, I think it was appropriate. The 
legislation allowed for purchase of financial securities--
    Mr. Barrett. You said appropriate, but was it consistent? 
Was it consistent with the way it was sold to the United States 
Congress?
    Mr. Bernanke. The emphasis that the Secretary put was on 
purchases of assets, and it is true that he did not follow 
through on that. But it was still part of the discussion and 
part of the legislation to use the money to support failing 
institutions or to provide capital to healthy institutions.
    Mr. Barrett. Secretary Geithner, I applaud you on your 
statement yesterday about going to buy the toxic assets. I 
think that is something we should have done months ago. But 
because of Congress' action last week with the AIG bonuses, who 
in their right mind in the private sector would want to enter a 
contract with the United States Government and say, hey, yes, 
we are going to help you, and not expect some type of the full 
weight of the Federal Government going to come down on them if 
they make the wrong decision?
    Secretary Geithner. Well, you are right to express that 
concern, and we are going to have to make sure that we design 
these conditions carefully to help mitigate that risk. And we 
are going to have to come to a better balance with the Congress 
as again we try to figure out how to respond to the reasonably 
perfectly understandable public outrage. We are not using 
public assistance to reward failure, but still get our system 
working again, and that is going to require people taking risk, 
be willing to take risk so the government doesn't have to 
assume all the losses in solving this financial crisis. And we 
are going have to get to a better place, both the Congress and 
the Executive Branch, on this very complicated question.
    Mr. Barrett. And I would hope before we do that, we have 
some very clear guidelines from both sides. If I am in the 
private sector, and I am thinking about buying one of these 
toxic assets, I think somebody has something in my water, there 
is no way.
    Mr. Chairman, would you agree with that? I mean, are we 
going to have some problems in the private sector with that?
    Mr. Bernanke. I do think we have to provide assurances to 
participants and say the TALF and the PPIF, that their 
involvement will not be retroactively penalized in some way.
    Mr. Barrett. Yes.
    Secretary Geithner, undated letters of resignation, I know 
you know what those are. Have we used any of these with AIG? 
Have we used any of these with other organizations, you know, 
when the Federal Government steps in? Do we have a letter that 
says, ``Hey, you sign it, and I will date it?'' Are we doing 
anything like that to make sure that people are held 
responsible for their actions?
    Secretary Geithner. Good question. Absolutely, we will hold 
people responsible for their actions. And, again, just 
remember, on that day in September when we acted, right away we 
changed management, brought in a new management team and began 
a process of changing compensation, because we wanted to ensure 
there was accountability for the judgments they made that 
brought this company to the brink where it was going to 
threaten the basic framework of the U.S. financial system.
    Mr. Barrett. Specifically with undated letters of 
resignation?
    Secretary Geithner. I don't know that we used that tool, 
but I am not sure we need that tool, Congressman. But I think 
you are right to insist we need to make sure there is 
accountability in these cases.
    Mr. Barrett. I guess the last question I have, which is the 
$64 million question--or I guess maybe I should say the $64 
trillion question--is, what is the backup plan? I mean, if 
everything fails, what do we do? Where do we go from here?
    Mr. Geithner?
    Secretary Geithner. Congressman, this plan will work. This 
plan, because of the authority provided by the Congress, not 
just to the Treasury but the Fed, gives us broad ability to do 
what you need to get through a financial crisis like this. It 
just requires will. It is not about ability. And we just need 
to keep at it. And we will need to work with Congress to make 
sure we can do this on a scale that is going to make it work.
    But the program we need to lay out, which will help make 
sure that there is capital available to financial institutions, 
that these institutions have confidence that they can meet 
their commitments, have access to funding liquidity and allow 
them to play their role in providing credit in these programs 
to get credit markets working again--you can already see, where 
we are doing this, you can see interest rates come down in ways 
that benefit small businesses, working families across the 
country. We just need to keep at it and make sure people 
understand we are going to get through it and we are going to 
do what is necessary.
    Mr. Barrett. Thank you, Mr. Chairman. I know my time is up. 
Thank you, Mr. Chairman.
    The Chairman. I would ask the gentleman for a second to 
yield to me to say that, in the legislation we are dealing 
with, we are being very clear that we want to restrict this to 
people who get the capital program. And we will work with the 
gentleman to make it very clear that we do not intend to ever 
extend that.
    We advised the Ways and Means Committee of that. We didn't 
write that legislation. In the compensation legislation we will 
be marking-up, it is very clearly--it is one thing to be in the 
Capital Purchase Program to be the recipient of funds, but in 
the other programs, I do not think we should put those 
restrictions on. I think the gentleman and I would agree, and 
we will work together on that.
    The Secretary gets tomorrow off. We will see you Thursday.
    Mr. Bachus. Mr. Chairman--oh, he wanted to say something.
    Secretary Geithner. Just, I look forward to Thursday. Thank 
you.
    The Chairman. Well, you weren't under oath when you said 
that, so I am going to go by--
    Mr. Bachus. As he leaves, could we ask that he and his 
staff get up, but that everybody else will remain seated--
    The Chairman. Yes. We are going to go two more rounds with 
Mr. Bernanke, if we can do that.
    And we now have the gentleman from California.
    No, if you are going to leave, you leave right away, and 
you don't come back. If you are leaving, you leave right away.
    Mr. Bachus. Well, let--I think, if everybody will remain 
seated until they get out.
    The Chairman. The gentleman from California, I believe, is 
next, Mr. Baca. Do you wish to question?
    Mr. Baca. Yes, I guess along the same lines--I know that 
Mr. Geithner just left--but we are still very much concerned 
with the financial institutions receiving large payouts for 
AIG, including nearly $12 billion each for Societe Generale in 
France and Deutsche Bank in Germany, as well as $8.5 million 
for Barclays in the United Kingdom.
    How were these payouts meant to stabilize the United States 
economy, and how can we recoup the American tax dollars?
    Mr. Bernanke. Well, Congressman, again, many of the issues 
and concerns that people have raised and are appropriate ones 
boil down, again, to the lack of a resolution regime, which 
means that we had really no alternative but to make good all of 
the obligations of AIG, else they would have been in default 
and in bankruptcy with the chaos that would have followed.
    In this particular case, as I argued before, though, the 
Europeans have also protected financial institutions. They have 
not distinguished between American and European creditors. And 
I think we need to work collaboratively with our partners 
around the world to try to stabilize the global financial 
system.
    But, again, it is really a much broader issue of 
stabilizing the overall system, not the specific 
counterparties.
    Mr. Baca. Right. And many of the people are really so 
outraged with, I believe, $85 billion that has gone to AIG 
executives receiving bonuses, whether it is in London or a 
foreign country. What, if anything, is being done to reclaim 
the American tax dollars? What are we doing? Can anything be 
done to reclaim the tax dollars right now? And this is why the 
public is outraged about. What is it that we can do? Why didn't 
we have the oversight? Why didn't we have the accountability 
before this even happened? It seems like we saw it, but we 
didn't take any action. What can be done now?
    Mr. Bernanke. Well, in terms of the collapse of AIG itself, 
we didn't see it. Our regulatory system was not adequate, and I 
believe it was not adequate to find the problem and identify it 
and stop it in time.
    I think, going forward, we need a stronger, comprehensive 
holding company supervision plan, together with resolution 
authorities that would allow us to wind down a firm like this 
in this kind of circumstances. So I think there are important 
financial reforms that need to take place.
    With respect to getting the money back, again, we have put 
a lot of money into AIG, it is absolutely true. But speaking at 
least for the Federal Reserve, we think we have good 
collateral; we expect to receive that money back.
    Mr. Baca. You just mentioned that we were not adequately, I 
guess, prepared. Why not?
    Mr. Bernanke. Well, what we found in this crisis is that 
through many, many parts of our financial regulatory system and 
in our financial institutions we simply were not adequately 
prepared for a crisis of this magnitude. And--
    Mr. Baca. Why not, if we knew that there was loopholes?
    Mr. Bernanke. I don't know the answer to that, Congressman. 
And I guess it had to do with the design of the system and 
omission of certain important areas.
    Mr. Baca. Were we turning our ears or our nose and just 
allow this process to happen? I mean, it seems like we knew it 
was still coming, we weren't adequately prepared. We should 
have been adequately prepared. Why is it that it still 
happened? I mean, this is what is puzzling to the American 
people.
    Mr. Bernanke. So I think an absolutely critical part of the 
deal here is that, if we are going to put out the fire in the 
financial system, we also have to promise the American people 
we are going to take the steps necessary that this will not 
happen again. And that requires a very extensive rethinking of 
our financial regulatory system as well as elements of our 
financial system more broadly.
    So I absolutely agree with you that we have to fix the 
system, but it was broken and it did not succeed in the context 
of this crisis.
    Mr. Baca. When was it broken?
    Mr. Bernanke. Well, evidently, in this particular case, I 
think that, notwithstanding Mr. Polakoff--I admire him for 
standing up and saying that it was his responsibility--but the 
Office of Thrift Supervision is a small agency that specializes 
in addressing the problems of thrifts. It was, in this case, 
involved only because AIG owned a small thrift. Its main 
concern is the protection of the thrift.
    It is true, as he said, that he looked at some of these 
elements in the AIG FP division, but I do think that, given the 
size of the company and the risk being taken, a larger, more 
effective, stronger, better-funded regulatory effort would have 
been needed in order to identify these problems.
    Mr. Baca. I understand where we need to go, but when was it 
broken? Approximately when was the system broken, that it was 
inaccurately--I mean, do we have a rough year, as to when?
    Mr. Bernanke. Many different aspects of the system just 
proved inadequate under the pressure of the crisis. And I can't 
identify one specific cause for the crisis.
    Mr. Baca. No, I am just trying to--because, you know, this 
Administration is trying to clean up its act and I know, under 
the leadership of our chairman, has come up with regulations, 
accountabilities, and oversight. We never had this in the past 
because we always stated that we didn't want to be 
overregulated. But yet, in this case, we needed to be regulated 
because the American people are the ones that are hurting right 
now.
    The Chairman. The gentleman from Florida.
    Mr. Posey. Thank you, Mr. Chairman. And thank you for your 
judicious handling of this committee in some kind of rough 
words here.
    The Chairman. Thank you.
    Mr. Posey. You know, I don't want to beat a dead horse any 
more. We have beaten a lot of dead horses today. I think what I 
am looking for and really what my colleagues are really looking 
for and our people back home are looking for is probably just a 
big-picture approach, you know?
    I think everybody is upset with what at least some of us 
perceive is a crisis-of-the-day management of the situation. 
They think this is a solution, and then, ``Oops, that is not 
it; it is over here.'' And now we are going to have son of 
TARP, grandson of TARP, great-grandson of TARP. You know, when 
will it ever stop?
    Most businesses would approach this, and I think most 
prudent people, with a long-term plan, you know, a plan that 
maps out the contingencies and just doesn't walk around every 
day looking for more land mines, more bad reports, and more 
changes in adjustment. And I haven't ever seen that.
    You know, hopefully somewhere there is a flow chart that 
says, ``Here is the direction we want to go. Here is what we 
want to accomplish. And here is the way that we measure if we 
are on task or not. If we have reached this point, we need to 
do this. If we don't reach that point, these are the 
contingencies.''
    I think everybody would be so much more comfortable dealing 
with this if we saw a real, legitimate plan, a timeline that 
would let everyone note, the public as well, would provide a 
transparency with where we have been, we know where we are, and 
where we hope to go. But just shooting in the dark every day, 
you know, crisis du jour, what is it today, what is the next 
new plan that is going to solve all these problems, you know, I 
really don't have much comfort in that, and I can't imagine how 
anybody would.
    So do you all--are you familiar with the plan, or are you 
prepared to help us set forth on a plan? I mean, you know, we 
wouldn't take a vacation without a road map. We wouldn't try to 
leave the District, even try to get around the District right 
now for me, without a road map. But we have no roadmap for the 
financial future of this country, and it is really pretty 
scary.
    Mr. Bernanke. Well, Congressman, that is a very good 
question. I am sure you appreciate how complex and difficult 
this whole situation has been. I do think there is a plan.
    First, I should mention the Federal Reserve has been very 
aggressive on a lot of fronts, both in terms of lowering 
interest rates, both short-term and long-term interest rates, 
and providing liquidity to the system.
    Secondly, the Treasury now has essentially a five-point 
plan. It includes supervisory review and putting in capital, 
buying assets off of balance sheets, the foreclosure mitigation 
plan, and then the joint program with the Federal Reserve, the 
TALF, which will help get the securitization markets going. 
That covers all the major elements needed to get the banking 
system going again.
    But then, to make this all work for the future, in order to 
avoid an AIG or a similar situation, we also have to very 
seriously undertake a financial reform program. The Federal 
Reserve has developed some proposals, which I talked about last 
week. I know Secretary Geithner will be here on Thursday to 
talk about the Treasury's proposals.
    So I think there is a plan. If you have ever read books on 
battles and warfare, you know that a lot of battles are very 
chaotic at the beginning until the situation becomes clear and 
the smoke starts to clear. I think we have gotten to the point 
now where we can see the terrain, and we are taking the steps 
necessary to stabilize the situation and get out of this 
downturn we are in.
    Mr. Posey. And I appreciate that, and I hope that most 
betters are one with a good plan. But a five-point plan I kind 
of see is just like we are going to throw these five Hail Marys 
and we hope to make a touchdown or maybe five touchdowns. But I 
would really like to see more detail. In other words, you know, 
if the receiver, for whatever reason--your fault, my fault, 
God's fault, his fault, nobody's fault--drops the ball, that 
plan is out of the way. Now, where are we going to move that 
plan, with that first Hail Mary--you know, what is the 
contingency plan? And that is what I haven't seen unfold.
    The lack of accountability--and a large part of the reason 
that we are not here is we didn't measure stuff properly. 
Usually, what doesn't get measured doesn't get done. It is the 
same with production. If you don't measure something, it 
usually means it is not important and it doesn't get finished. 
And if we set out on a path to solve this crisis--and I believe 
you all have the brains and the wisdom and the experience to do 
it if we stay on task--the less politicized it is, the better, 
and the less politicized it will be, the more clear your path 
is.
    But I think everyone needs to know what we expect to happen 
tomorrow and the next day and the next week and the next month.
    The Chairman. The gentleman's time has expired, and so has 
the hearing.
    I thank the Chairman and the president for their 3 hours 
and 15 minutes.
    We will begin with those members who stayed going first on 
our side, in terms of Mr. Geithner on Thursday.
    Mr. Bachus. Mr. Chairman, I would like to say that, 
President Dudley, you did an outstanding job fielding all those 
difficult questions today.
    Mr. Dudley. Thank you, sir.
    Mr. Bernanke. He is a fine man.
    The Chairman. The hearing is adjourned.
    [Whereupon, at 1:15 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 24, 2009


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