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




 
                        ADDRESSING THE NEED FOR
                    COMPREHENSIVE REGULATORY REFORM

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 26, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-22

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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 26, 2009...............................................     1
Appendix:
    March 26, 2009...............................................    47

                               WITNESSES
                        Thursday, March 26, 2009

Geithner, Hon. Timothy F., Secretary, U.S. Department of the 
  Treasury.......................................................     6

                                APPENDIX

Prepared statements:
    Carson, Hon. Andre...........................................    48
    Geithner, Hon. Timothy F.....................................    49


                        ADDRESSING THE NEED FOR
                    COMPREHENSIVE REGULATORY REFORM

                              ----------                              


                        Thursday, March 26, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 11 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Maloney, 
Gutierrez, Velazquez, Watt, Ackerman, Sherman, Meeks, Moore of 
Kansas, Capuano, McCarthy of New York, Baca, Lynch, Miller of 
North Carolina, Scott, Green, Cleaver, Bean, Moore of 
Wisconsin, Hodes, Ellison, Klein, Wilson, Perlmutter, Donnelly, 
Foster, Carson, Speier, Childers, Minnick, Adler, Kilroy, 
Driehaus, Grayson, Himes, Peters, Maffei; Bachus, Castle, King, 
Royce, Lucas, Paul, Manzullo, Jones, Biggert, Capito, 
Hensarling, Garrett, Barrett, Gerlach, Neugebauer, Price, 
McHenry, Campbell, Bachmann, Marchant, McCotter, Posey, 
Jenkins, Lee, Paulsen, and Lance.
    The Chairman. The Committee on Financial Services will now 
convene for the purpose of the hearing with Secretary Geithner. 
I have an announcement to make regarding the order on the 
Democratic side when Mr. Geithner and Mr. Bernanke were here 
the day before yesterday; and, I apologize for not having Mr. 
Geithner here on Wednesday, but sometimes we have to do other 
things.
    The following Members on the Democratic side were here at a 
time when he and Mr. Bernanke had to leave, and I said at the 
time that they would get priority in questioning. After myself 
and the chairman of the subcommittee, we would go to the 
following Democrats:
    Let me just read them in the normal, seniority order: Mr. 
Ellison; Mr. Scott; Mr. Green; Ms. Kilroy; Mr. Donnelly; Mr. 
Klein; and Mr. Grayson. They will be the first ones to ask 
questions. .
    We will now proceed to the opening statements using the 
rules for hearings with a Cabinet member. The rules are 5 
minutes for the chair and the ranking member; 3 minutes for the 
chair and ranking members of the subcommittee, and I apologize 
for the disruption of the transition. We will now begin. I 
think the announcements are over.
    We have before us the job of dealing with whether or not 
there is existing in the Federal Government today sufficient 
authority to deal with systemic risk. There are several aspects 
to that. We talked considerably about one of them on Tuesday 
with the Chairman of the Federal Reserve and the Secretary of 
the Treasury; namely, the need to have somewhere in the Federal 
Government the ability to use the bankruptcy authority given by 
the U.S. Constitution to wind down an important, non-bank, 
financial institution.
    We have long had in our laws an adaptation to bankruptcy to 
wind down banks; and, when banks have failed, while it has been 
sometimes painful, it has not been as disruptive as when the 
non-bank financial institutions have failed. The two glaring 
examples are Lehman Brothers, where nothing was done, and AIG, 
where everything was done. I believe we are looking for an 
alternative method to avoid those two polar extremes. That is, 
a bankruptcy authority which can honor some and not honor 
others. It has some discretion.
    The question of compensation is part of that, as is the 
question of whether or not people should continue to be allowed 
to securitize 100 percent of loans. Today--although obviously 
members are free to bring up whatever they wish--our focus will 
be on whether we need to increase the authority of some entity 
or entities in the Federal Government to restrict excessive 
leverage.
    We are talking in the resolving authority about what 
happens when there is a failure on the part of an institution 
that is so heavily indebted to so many parties that simply 
allowing it to fail without intervention could cause 
magnifying, negative effects. But, obviously, the preferential 
situation would be to keep that from happening, and this 
subsumes a lot of other issues, whether or not people are too-
big-to-fail, or too-interconnected-to-fail.
    The goal should be--and obviously no system is going to 
prevent all failures, because it would then be too 
restrictive--to minimize the likelihood that entities will get 
so heavily indebted, so heavily leveraged with inadequate 
resources in case there is a need to make the payments, that 
their lack of success threatens the whole system.
    I believe that we are in a third phase here of a set of 
phenomena we have seen in American economic history. It is a 
phenomenon in which the private sector innovates. Innovations 
which have no real value die of their own weight, but 
innovations that add value thrive as they should, because we 
are dependent on the dynamism of the private sector to increase 
our wealth.
    But, by definition, when this comes from significant 
innovation, there aren't rules that contained abuses. The goal 
of public policy is to come up with rules that set a fair 
playing field that constrains abuses, and that protects 
legitimate and responsible entities from irresponsible 
competition, that can draw them away from good practices, while 
having as little effect as possible on diminishing the value. 
Thus, in the late 19th Century, the trusts were created, and 
they were very important.
    We would not have industrialized without those large 
enterprises such as oil, coal, and steel, and a number of other 
areas. But because they were new, the operated without 
restraint, so Theodore Roosevelt and Woodrow Wilson were more 
help, I think, than they get credit for from William Howard 
Taft. Set rules, the Antitrust Act, the Federal Trade 
Commission, the creation of the Federal Reserve, those were 
rules that tried to preserve the large industrial enterprises.
    Indeed, they were people who tried to get Woodrow Wilson to 
break them up. And he said, ``No.'' They gave a valuator that 
we need, but we need rules. That led to a great increase in the 
importance of the stock market, because you now had enterprises 
that could not be financed individually. And the job of 
Franklin Roosevelt and his colleagues during the 1930's was to 
set rules that allowed us to get the benefit of the finance 
capitalism, the stock market, but curtailed some of the abuses.
    I believe that securitization and the great increase in the 
ability to send money around the world that comes from both the 
pools of liquidity and the technology, CDOs and credit default 
swaps, these are a set of innovations on a par with the earlier 
set, and they have had great value. Securitization, which 
allows money to be relent and relent and relent without it all 
having to be repaid, greatly magnifies the value of money; but, 
there are problems, as there were with the trusts or with the 
stock market when there are no rules. Our job is to craft rules 
as did Theodore Roosevelt, Woodrow Wilson and Franklin 
Roosevelt that allow the society to get the benefit of these 
wonderful, value-added financial innovations while curtailing 
some of the abuses.
    The gentleman from Alabama.
    Mr. Bachus. Secretary Geithner, earlier this week, we had a 
hearing on AIG's bailout, and at that hearing, you acknowledged 
that AIG fully met its obligations to foreign banks and certain 
U.S. banks, our financial companies. In fact, at that time, you 
said that throughout this period of time, and this is 
critically important to the stability of the system, we wanted 
to make sure AIG was able to meet its commitments.
    I said to you--pensioners and retirees--and your response 
was also to municipalities and banks, and that you considered 
they had met the full range of their obligations. Since that 
time, I have been informed that AIG is now attempting to force 
many of its U.S. bank creditors to accept severe haircuts of 
more than 70 percent on the total debt owed to them. This 
disparity and the treatment of foreign banks, which, as you 
said in your response to my question, were paid dollar-for-
dollar within hours of the bailout, and U.S. banks have yet to 
receive any payment and are being asked to accept 70 and 80 
percent haircuts.
    This disparity in treatment between foreign banks and U.S. 
banks is very concerning to me. This morning, I sent a letter 
to the chairman regarding this development and a hearing will 
be scheduled so that the committee can get to the bottom of 
this. And he has assured me that he will fully cooperate and I 
think agrees with my concern.
    Now, let me talk about this hearing. In the last year we 
have witnessed unprecedented interventions by the government to 
commit trillions of taxpayer dollars to save too-big-to-fail 
institutions. The taxpayer continues to be given the bill as 
the government continues a cycle of bailouts. One way to end 
the cycle would be to allow for an orderly liquidation of 
complex financial institutions that are not subject to the 
statutory regime for resolving banks administered by the FDIC.
    At a hearing last July, I stated that our regulators must 
strive for a system where financial firms can succeed or fail 
without threatening the whole financial system and placing 
taxpayers at risk. By creating this process of which non-banks 
whose failures would have systemic consequences could be 
unwound in an orderly fashion, we would restore balance and 
force firms to face the consequences of their actions. It is 
essential that any new regime for resolving or liquidating non-
banks not rely on taxpayer funding. However, the Treasury 
legislative proposal released yesterday suggests the 
Administration is considering using taxpayer funding to pay the 
cost of resolving these failed financial firms. This to me is 
unacceptable and would serve only to promote moral hazard and 
perpetrate a too-big-to-fail doctrine that the American people 
have squarely rejected.
    The proposal also leaves it to the Secretary and the FDIC 
to decide whether the firm will receive financial assistance or 
be placed in conservatorship. This empowers Federal regulators 
with incredible discretion. And some of the past experience 
that I have witnessed in the case that this discretion is not 
always administered fairly or evenhandedly. If the goal of the 
resolution process is to end the too-big-to-fail premise, why 
is the potential taxpayer subsidy part of the Administration's 
solution?
    Mr. Chairman, there are many more unanswered questions, 
like which firms will be designated as systemically important, 
and why? When will a liquidation be triggered? What happens if 
there is a disagreement between regulators on the need for a 
conservatorship? How will the regulators determine whether to 
provide financial assistance or place a firm in 
conservatorship? The details are important, even more important 
is that we develop the right solution and not rush poorly 
vetted legislation.
    I do commend you and agree with you that we do need a 
resolution process. The modernization of our regulatory 
structure will be the most important task this committee 
undertakes this Congress. The complex and interconnected nature 
of our financial markets require us to engage in thorough 
analysis with all the major stakeholders.
    I conclude by saying I hope that the committee will have 
additional hearings on this proposal so that we can hear from 
the stakeholders and regulators on their views, identify any 
unintended consequences in advance, and take a look at some 
past resolutions which have caused real questions and issues, 
which I think have not been resolved.
    So I appreciate your attendance today.
    The Chairman. The gentleman from Pennsylvania.
    Mr. Kanjorski. Good morning, Mr. Chairman.
    The committee will today consider the Treasury Secretary's 
ideas related to regulatory reform, focusing in particular on 
his legislative proposal vesting the Executive Branch with a 
new power to wind down troubled financial institutions. 
Specifically, this resolution authority would permit the 
Administration to place into receivership or conservatorship 
failing non-bank entities that pose systemic risk to the 
broader economy.
    During the last 7 months, the entire global economy has 
often stood in the balance as our government resorted to 
erratic 11th hour efforts to prevent a catastrophic economic 
collapse. Without a guidebook, policymakers could only rely on 
hurried, ad hoc solutions. Such options, however, are 
inherently flawed and regularly produce unintended 
consequences. As we deal with the current financial crisis, we 
find ourselves facing the very difficult task of fixing a leaky 
regulatory roof while it is raining.
    We therefore need to provide the Administration with a 
bigger hammer, a larger tarp, and the other tools needed to 
step in sooner when institutions are unhealthy, but not as 
close to death. Establishing resolution authority for all 
players in our financial markets has the potential to help 
lessen the severity of not only the present crisis, but also to 
prepare us for as yet unknown calamities down the road.
    Today's forum must also include a discussion of what to do 
about those entities that presently operate in the shadows of 
the financial system. Hedge funds, private equity pools, and 
other unregulated bodies have the potential to unleash 
devastating consequences on our broader economy. Long-term 
capital management and AIG financial products are two obvious 
examples here; and, while the extent of regulation required is 
debatable, we must begin this crucial examination today and we 
must include them in the resolution authority.
    We must also consider how the creation of a new Federal 
power to wind down troubled financial institutions will affect 
insurance, which is currently only regulated at the State 
level. Insurance is part of our financial services system, and 
is increasingly part of the global market, especially when it 
comes to products like reinsurance.
    Because insurance is a piece of the puzzle that we must 
have in order to complete the picture, I am very interested in 
discerning how the Treasury Secretary currently envisions the 
resolution authority working in this market. In sum, we now 
expect regulatory reform to play with at least three acts: 
establish a resolution authority; create a system of risk 
regulator; and overhaul our regulatory authority. The gravity 
of this situation requires that the Congress deliberate and 
exercise patience so that we lay a thoughtful regulatory 
structure that will establish the basis of a strong economy for 
many years to come.
    The Chairman. The gentleman from New Jersey, the ranking 
member of the subcommittee.
    Mr. Garrett. Thank you, Mr. Chairman.
    And before I begin, Mr. Secretary, in light of the comments 
by both Russia and China with regard for a new reserved 
currency, I would think today might be a good opportunity for 
your issue just a clarification on your past marks.
    Today's hearing, though, is on the issue of addressing the 
need for comprehensive regulatory reform. And I think it's 
important that we keep this in mind that it's a comprehensive 
approach as opposed to a piecemeal approach, because both the 
Chairman and the Secretary have expressed support for a new 
systemic regulator for our markets. But I really think that 
before we move forward on such a proposal on a separate track, 
we really need to have a comprehensive reform in place, because 
they are really linked together.
    How could we possibly assign powers to a systemic regulator 
if we haven't fully examined the appropriate roles for the 
existing regulators? And, even more fundamentally than that, 
before we get too far down the road of fixing certain problems, 
how do we do so before we actually identify what those problems 
are?
    I think we should be mindful of advice offered by one of 
the President's other economic advisors, and that's Paul 
Volcker. He stated in reference to financial regulatory 
reforms, ``All this will take time if the necessary consensus 
is to be achieved in a comprehensive, rather than a piecemeal 
approach is to be taken.''
    And, Mr. Secretary, I know you have talked about the need 
for an FDIC-like resolution authority for large, non-bank, 
financial institutions. And I look forward to trying to delve 
into that a little bit more, but I think this authority needs 
to be really carefully structured to avoid a lot of unintended 
consequences. Because if the entities which are a subject of 
this authority were seen to be as too-big-to-fail without clear 
signals indicating what the consequences are for the creditors 
and the counterparties, we could really end up doing a heck of 
a lot more harm than good.
    Getting back to the systemic regulator, time after time in 
history we have heard the promise that, oh, if we had more 
regulation, we wouldn't find ourselves in the situation that we 
are in today. In fact, in your testimony the other day you 
said, ``We must ensure that our country never faces this 
situation again.''
    We all agree with that. But, you know, the Federal Reserve 
itself was created to ensure that acid bubbles and panics, like 
we have right now, don't happen, but they do. And, more 
recently, we had FISA, which was passed in 1990-91, I think, 
and that was supposed to tighten regulations after the savings 
and loan situation and they said it was never supposed to 
happen again, but it does.
    So, forgive me if I'm still a skeptic when I hear, if we 
only have a systemic regulator, this will never happen again, 
especially, if moral hazard is instutionalized with an entire 
new designation of systemically risky institutions, that it 
will never happen again. We will only be encouraging that it 
will happen again in some future time.
    I thank you and I yield back.
    The Chairman. Mr. Secretary, please begin your testimony.

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

    Secretary Geithner. Thank you, Mr. Chairman, Ranking Member 
Bachus, and other members of the committee. I am pleased to be 
here before you today, again, and to testify about this 
critical topic of financial regulatory reform.
    Now, over the past 18 months, we faced the most severe 
global financial crisis in generations. Some of the world's 
largest institutions have failed. Confidence in the overall 
system has eroded dramatically. As in any financial crisis, the 
damage falls principally on Main Street. It affects those who 
are conservative and responsible, not just those who took too 
much risk.
    Our system today is wrapped in extraordinary complexity, 
but beneath it all, financial systems serve an essential and 
basic function. Institutions and markets transform the earnings 
and savings of American workers into the loans that finance a 
first home, a new car, a college education, or a growing 
business. They exist to allocate savings and investment to 
their most productive uses.
    Our financial system still does this better than any 
financial system in the world, but still our system failed in 
basic fundamental ways. Compensation practices rewarded short-
term profits over long-term return. Pervasive failures in 
consumer protection left many Americans with obligations they 
did not understand and could not sustain. The huge, apparent 
returns to financial activity attracted fraud on a dramatic 
scale.
    Market discipline failed to constrain dangerous levels of 
risk-taking throughout the system. New financial products were 
created to meet demand from investors, but the complexity out-
matched the risk management capabilities of even the most 
sophisticated institutions in the world.
    Financial activity migrated outside the banking system, 
relying on the assumption that liquidity would always be 
available. Regulated institutions held too little capital 
relative to their exposure to risk. Supervision and regulation 
failed to prevent these problems. There were failures where 
regulation was extensive and failures where it was weak and 
absent.
    Now, while supervision and regulation failed to constrain 
the build-up in leverage and risk, the United States came into 
this crisis without adequate tools to manage it effectively; 
and, as I discussed before this committee on Tuesday, U.S. law 
left regulators without good options for managing the failure 
of systemically important, large, complex financial 
institutions.
    To address this will require comprehensive reform, not 
modest repairs at the margin, but new rules of the game. And 
the new rules must be simpler and more effectively enforced. 
They must produce a more stable system, one that protects 
consumers and investors, rewards innovation, and is able to 
adapt and evolve with changes in the structure of our financial 
system.
    Our system, the institutions, and the major centralized 
markets must be strong enough and resilient enough to withstand 
very sever shocks and withstand the effects of a failure of one 
or more of the largest institutions. Financial products in 
institutions should be regulated for the economic function they 
provide and the risks they present, not the legal form they 
take.
    We can't allow institutions to cherry-pick among competing 
regulators and shift risk to where it faces the lowest 
standards and weakest constraints. And we need to recognize 
that risk does not respect national borders. Markets are global 
and high standards at home need to be complemented by strong 
international standards enforced more evenly and fairly.
    Building on these principles, we want to work with Congress 
to create a more stable system with stronger tools to prevent 
and manage future crises. And, in this context, my objective 
today is to concentrate on the substance of reform, rather than 
the complex and sensitive question of who should be responsible 
for what.
    Now, our framework for reform will cover four broad areas: 
systemic risk; consumer investor protection; eliminating gaps 
and streamlining our regulatory framework; and international 
coordination. But today, I want to discuss in greater detail 
the need to create tools to identify and mitigate system risk, 
including tools to protect the financial system from the 
failure of large, complex, financial institutions.
    Before I go into that, though, I just want to briefly touch 
on the critical need to reform in these other areas. Weakness 
in consumer and investor protection harm individuals, undermine 
trust in our system, and can contribute to the kind of systemic 
crisis that shakes the foundations of the system. We are 
developing a strong plan for consumer and investor regulation 
to simplify financial decisions for households and to protect 
people much better from unfair and deceptive practices.
    We have to move to eliminate gaps in coverage, and end the 
practice of allowing banks and other finance companies to 
choose the regulator simply by changing their charters. Our 
regulatory structure must assign clear regulatory authority, 
resources, and accountability. As I said, we need a simpler, 
more streamlined, more consolidated, broader supervisory 
structure; and, to match these increasingly global markets, we 
must ensure that global standards for regulation are consistent 
with the highest standards we will be implementing here in the 
United States.
    And we have begun to work with our international 
counterparts to reform and strengthen the role of the financial 
stability forum and enhancing sound regulation, strong 
standards, strengthening transparency, and reinforcing the kind 
of cooperation and collaboration we need. In addition to this, 
we are going to launch a new initiative to address prudential 
supervision, tax savings, and money laundering issues in weekly 
regulated jurisdictions.
    President Obama will underscore in London on April 2nd at 
the leaders summit the imperative of raising standards globally 
and encouraging a race to the top, a race to higher standards, 
rather than a race to the bottom.
    Now, on systemic risk, I want to focus on this today, not 
just because of its obvious importance to our future economic 
performance, but also because these issues about systemic 
stability will be at the center of the G-20 summit agenda next 
week. This crisis has made clear that large, interconnected 
firms and markets need to be brought within a stronger and more 
conservative regulatory regime. These standards cannot simply 
address the soundness of individual institutions, but they must 
also focus on the stability of the system as a whole.
    The key elements of our program to reduce systemic risk in 
our system have six elements. I am going to summarize these 
briefly. My written statement goes into them in somewhat 
greater detail, and then I'll conclude and look forward to 
responding to your questions.
    Let me just go through these quickly, these six key points:
    First, we need to establish a single entity with 
responsibility for systemic stability over the major 
institutions and critical payment and settlement systems and 
activities.
    Second, we need to establish and enforce substantially more 
capital requirements for institutions that pose potential risk 
to the stability of the financial system that are designed to 
dampen rather than amplify financial cycles.
    Third, leveraged private investment funds with assets 
under-management over a certain threshold should be required to 
register with the SEC to provide greater capacity for 
protecting investors and market integrity.
    Fourth, we should establish a comprehensive framework of 
oversight, protections, and disclosure for the OTC derivatives 
market, moving the standardized parts of those markets to 
central clearinghouse, and encouraging further use of exchange-
traded instruments.
    Fifth, the SEC should develop strong requirements for money 
market funds to reduce the risk of rapid withdrawals of funds 
that could pose greater risks to market functioning.
    And sixth, as we have all discussed, we need to establish a 
stronger resolution mechanism that gives the government tools 
to protect the financial system and the broader economy from 
the potential failure of large complex financial institutions.
    Let me just conclude by saying that these are very 
complicated, very consequential, very difficult sets of 
questions. You are absolutely right that we have to look at 
these together. Their interaction is important, and it is very 
important we have a comprehensive approach.
    The President has made it clear that we are going to do 
what is necessary to stabilize this system to get credit 
flowing again and restore the conditions for a strong economic 
recovery. And I look forward to working closely with the 
Congress to modernize our 20th Century regulatory system and 
put in place a system that meets the needs of our much more 
complicated, more risky 21st Century financial system. And, 
working together, I am confident that we have an opportunity we 
have not had in generations to put in place a stronger, more 
resilient system.
    Thank you, Mr. Chairman.
    [The prepared statement of Secretary Geithner can be found 
on page 49 of the appendix.]
    The Chairman. In the order of seniority, I'm going to start 
with the Democrats who were here at the end of the last hearing 
and did not get to ask a question. The gentleman from Georgia.
    Mr. Scott. Thank you very much--
    The Chairman. I will also announce, as I did before, with a 
very full membership, 5 minutes is going to mean 5 minutes. At 
the conclusion of 5 minutes, whomever is speaking will be 
allowed to finish a sentence or two, and that will be it.
    Mr. Scott. Thank you very much, Mr. Chairman. Welcome, Mr. 
Secretary. It is good to have you back. You have quite a task 
before you. Let me just ask you this because I think it's very 
important that we move in a way that we do not--as we rush to 
save our economy, that we do not suffocate our economy. And I 
commend you on the move that we have made to, with a private/
public partnership, in terms of getting the toxic assets off 
and getting our credit markets, our credit forces unclogged.
    But I do have some questions about this expansion of power, 
which I think is at the heart and soul of your efforts here. 
And, as I said before, in our rush to save our economy, we 
certainly don't want to suffocate it. One example would be, and 
I want to ask my first question, you use the AIG as an example 
of why we need this expansion of power. And in AIG, the problem 
that happened in AIG was not in the insurance area, but it was 
in the special division that they had set up dealing with sort 
of the hedge fund-like operations, credit default swaps, and so 
forth that truly fall beyond the bounds of regulation. And we 
do need to move on that and I applaud you for that.
    But here we come with the insurance companies, and 
insurance companies are already regulated by the States, so is 
there a conflict? How are you going to handle that conflict in 
dealing with the insurance companies, particularly in view of 
the fact that it is not been insurance that has caused the 
problem?
    Secretary Geithner. Excellent question. Let me just start 
by saying, you know, what we need is better, smarter, tougher 
regulation. Because we have seen that the costs of these 
weaknesses and gaps are catastrophic for the system as a whole. 
And we have an enormously complicated system in the United 
States with regulation at the Federal and State level, multiple 
bank supervisors, multiple authorities, and it just didn't 
work. It did not deliver what it has to deliver.
    And I think that we have to start by making sure we have in 
place effective consolidated supervision over those entities 
that could pose potential risks to the system. Now, that does 
not mean that we should supplant and take away the existing 
authorities that State insurance companies, that State 
insurance supervisors have over those institutions, or that the 
bank regulators have over depositories.
    And so what we're suggesting is fully compatible with 
maintaining their important role in supervising insurance 
companies. But again, for these core institutions, you need to 
have much stronger, more effective supervision applied on a 
consolidated basis if you're going to get better results in the 
future.
    Mr. Scott. Okay. Well, let me ask you also this, a part of 
your approach is to rein in the hedge funds in some of these 
areas that say they are unregulated. How do we respond to hedge 
fund operations so they are regulated? Could you very briefly 
explain how it will change from where we are now, in terms of 
the regulations we have with, say, hedge funds, and how it 
would be under your plan?
    Secretary Geithner. Well, this is really the provence of 
the SEC, but our proposal is built on something that the SEC 
has considered for some time, which is to require registration 
for hedge funds, similar institutions, if they get to be above 
a certain size. And that, we believe, will give the SEC more 
ability to do what they exist to do, which is to protect 
investors, contain the risk of fraud, and make sure that they 
are more able to enforce the rules of the road on market 
integrity. That's the objective of it.
    We are not suggesting that they be regulated like banks are 
regulated. They are different institutions in this context. And 
I think it is the right balance.
    Mr. Scott. And in terms of this power that we are asking 
for, which is this great expansion of power to seize non-bank 
companies, where in the Federal Government should that power 
rest? Should it be with you in Treasury, should it be in the 
Fed, or perhaps in FDIC?
    Secretary Geithner. Well, what we're proposing to do is 
build on the model established for the FDIC for banks and 
thrifts. That model, we have a lot of experience with it. 
There's a whole range of important checks and balances in that 
system to limit discretion so the existence of this does not 
increase moral hazard, as your colleague said. And we think 
that model offers a lot of promise. And we're basically 
suggesting a model that would substantially rely on the FDIC, 
itself, to run this new regime. But you have to have some 
checks and balances in the system, like that system has, and so 
you don't want to vest in any single institution such broad 
powers.
    So the FDIC mechanism, for example, has this great virtue 
of, an action requires a majority of the Board of the FDIC, a 
majority of the Board of Governors, and a judgment by the 
Secretary of the Treasury on behalf of the President. And our 
suggestion is to build on that basic framework and put in place 
a similar set of checks and balances to limit discretion, again 
because of the concern your colleague raised about the risks 
you create too much uncertainty and moral hazard in putting in 
place a stronger resolution authority.
    The Chairman. The gentleman from California, Mr. Campbell, 
on the list provided by the minority.
    Mr. Campbell. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary. On Monday, you released a plan to leverage, bring 
private capital in to deal with the toxic assets. I'm generally 
supportive of that plan. The question I have is, it's 6:1 
leverage ratio. How did you come up with that number? Why did 
you come up with that number? As you just stated, a lot of the 
problem that we had was because there was too much risk-taking 
too much leverage. It seems to me that that 6:1 ratio 
encourages more risk-taking, more leverage, and perhaps just 
moves the problem from bank to non-bank entities but doesn't 
necessarily help it that much.
    Secretary Geithner. A very important concern. You're right. 
That basic concern shaped the proposal we made. And the 
suggestion for that leverage is really what the FDIC suggested, 
based on the range of experience they have with their existing 
mechanism. Now, it is substantially less leverage than banks 
run with today. And you are right, you want to get the balance 
carefully right.
    What we have put forward was a framework that, we think, 
leaves the taxpayer much better protected than the 
alternatives. And we're trying again to stretch taxpayer 
resources prudently and, you know, use private investment 
effectively and still limit those risks to the taxpayer.
    Mr. Campbell. So you're open to a little less leverage, 
then?
    Secretary Geithner. Well, you know, again, we want to get 
the balance right. We're not suggesting that we got it perfect. 
We'll try to figure out a program that's going to, again, what 
we want to do is help free up credit flows in ways that protect 
the taxpayer the best we can.
    Mr. Campbell. Okay. When we talk about the authority, this 
receivership authority that you have discussed, are you asking 
for that authority now prior to a new systemic, prior to the 
comprehensive reform that, I think there is universal agreement 
we all want, there is not agreement on what it should look 
like, but is that something, this authority you're asking for, 
prior to that reform?
    Secretary Geithner. You're raising a very important 
question and I think that realistically you need to look at 
these provisions for better emergency powers for the 
government, resolution authority for the government, in the 
context of the proposals we're making for vesting more 
accountability and authority, responsibility, in a single arm 
of the government for dealing with systemic risk.
    They need to be viewed together, which is why we're 
presenting these together to you today to evaluate, but we'll 
work with the committee and with the Congress on what the best 
legislative vehicle is for looking at this as a whole. I 
completely understand the judgment many people share, that you 
can't do this piecemeal. You can't do it just element by 
element. Everyone's going to look at how they all fit together, 
but we'll be open to whatever process works best for the 
committee and the Congress as a whole.
    Mr. Campbell. Yes, because my concern, Mr. Secretary, would 
be that if you have, that's a pretty extreme authority of 
receivership. And if you have that authority without the 
complete information and perspective of a full regulatory 
framework, wrong decisions could be made.
    Secretary Geithner. We designed this proposal to fit within 
current law so that, I mean, within the current regulatory 
structure. So, you could move on this proposal alone and once 
you do the broader regulatory redesign we're proposing, you 
could come back and make sure they fit, you could do it that 
way, but you want to be able to see what we're proposing on the 
broader framework as you consider this specifically.
    Mr. Campbell. Why would you want us to move on it 
separately and more quickly? Are you expecting some additional 
non-bank failures? Are you concerned about that?
    Secretary Geithner. Look, you know, we are, as I said, I 
think it's a great tragic failure of the country that we came 
into this crisis without anything like the broad authority 
governments need to manage financial crises effectively and 
protect the economy from the trauma that comes. This is not 
just in the case of resolution authority. You know, until 
Congress acted in the summer and the fall, the Executive Branch 
had no meaningful authority to put capital into a financial 
institution where that was necessary to protect the economy, to 
provide broad guarantees insurance.
    And, you know, we're still in the midst of a very 
challenging period, and so, I think it would be in the interest 
of the country for Congress to do everything they can to make 
sure we get broader tools so we can manage this effectively. 
You know there is a good, I think as quickly as you can, 
because, again, this will be less costly for the economy, less 
costly for the taxpayer if we're able to contain this more 
effectively now.
    Mr. Campbell. Okay, one last really quick question. You 
have talked about an exchange for CDO's or whatever. Are you 
talking about for fixed income instruments, in general, which, 
because of their lack of homogeneity have not had an exchange 
in the past?
    Secretary Geithner. No, our proposal is really concentrated 
on the over-the-counter derivatives market, not just credit 
derivatives, but a full range of other types of products where 
there has been a huge amount of sanitization. And we think the 
system would be safer if those standardized products were moved 
into clearinghouses. There was greater trading and exchange 
traded instruments in that context, but that would still 
preserve the capacity for the more specialized, tailored 
products which our system relies on to manage risk effectively. 
You want to have protections for those, too, but I think we're 
at the moment where we have enough maturation and sanitization 
that we can get a more stable system by moving these things on 
to the central counterparties and to exchanges.
    Mr. Campbell. Thank you. I yield back my time.
    The Chairman. All right. I thank the gentleman for his 
precision. And the gentleman from Texas is now recognized for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman, and I thank the 
Secretary for appearing today, 2 times in one week. I know that 
you have many other things to do, but we're grateful that 
you're here. Mr. Secretary, let me start by saying that you're 
doing the right thing. You're doing the right thing because the 
American people understand that, too-big-to-fail is the right 
size to regulate.
    Some things bear repeating. Too-big-to-fail is the right 
size to regulate. And I'm concerned about a moral hazard, as 
well. I'm concerned about the moral hazard associated with what 
Dr. King called the ``paralysis of analysis.'' Analysis of 
paralysis. And I'm concerned about the notion that we may 
analyze to the point that we may become paralyzed. I think that 
we have to consider what happened with long-term capital. Long-
term capital was a clear indication that we needed to do 
something. But the paralysis of analysis prevented us from 
taking the action that would have prevented AIG.
    AIG is, if you will, a prodigy of long-term capital. And if 
we had taken corrective action with long-term capital, and I 
remember when the chairman had us, when were at a hearing 
concerning long-term capital, and I remember one of the 
comments that I made was that, before there was long-term 
capital, there was no long-term capital. Because there were 
many people who wanted to convince us that long-term capital 
was an aberration. That it was not something that could happen 
again. That systems were in place. That we didn't need 
regulation. Well, I'm here to tell you, Mr. Chairman, Mr. 
Secretary, in a metaphorical sense, the foxes have raided the 
AIG henhouse.
    And the foxes don't want us to secure the henhouse. Now, I 
know a fox when I see one, and I want to let you know, that 
there are no foxes in this room. No foxes in the room, but the 
foxes that exist don't want us to secure this henhouse. Mr. 
Chairman, Mr. Secretary, I'm elevating you to a lofty position, 
I assume, but Mr. Secretary, it's our job to secure the AIG 
henhouses of the world. We cannot allow the financial order to 
become disrupted when we had it within our power to make a 
difference and we did not.
    It is time for us to act. Don't allow the moral hazard 
associated with the paralysis of analysis to prevent us from 
acting. More specifically, when it comes to these hedge funds, 
many of the employees are owners of the hedge funds. How are 
they acting in the best interests of persons who are non-
employees who have an interest in the hedge funds, when they 
have to take actions with regard to the hedge funds? We have to 
deal with that. Many of these hedge funds have pensions in 
them. Hedge funds were designed for sophisticated investors. 
Many people who have their monies in pensions are not 
sophisticated investors. I'm not sure that they understand, in 
toto, what it means to have their monies associated with a 
hedge fund.
    We have to make some decisions about how pensions are going 
to be a part of hedge funds such as they are safe and secure. 
And again, I want it done such that we don't allow the 
paralysis of analysis to prevent us from acting.
    Finally, I share this with you, Mr. Secretary. When we have 
this opportunity to make a difference, there will be naysayers. 
We need naysayers. There is safety in the counsel of the 
multitudes. The naysayers are part of the multitudes. But we 
cannot allow the naysayers to prevent us from doing what we 
know is the right thing for the American people and what the 
American people know is the right thing for this country.
    Mr. Secretary, I salute you for what you're doing. God 
bless you, and I yield back the balance of my time.
    Mr. Chairman. Mr. Secretary, do you have any response?
    Secretary Geithner. Well, I do want to underscore, we have 
a moment of opportunity now. We don't want to waste this 
opportunity. And I do think we need to act. But, this is a 
complicated set of question. We're going to do it carefully, 
but we need to move.
    Mr. Chairman. I thank you. I would just say, the gentleman 
has 13 seconds left, so I'll take his time to say that when he 
says, the foxes don't want us to protect the henhouse, I have 
been watching television some and I think that's right. Now, 
the other gentleman from New Jersey, on the list given to me by 
the Republicans.
    Mr. Lance. Thank you, Mr. Chairman. Good morning to you, 
Mr. Secretary. Let me say from my perspective, I wish the 
President well, and I wish you well in your incredibly 
responsible positions and I certainly wish you well next week 
in London. My questioning regards two matters in your 
testimony, credit default swaps and other OTC derivatives and 
money market mutual funds.
    You indicate, regarding credit default swaps, that in our 
proposed regulatory system, the government will regulate the 
markets for credit default swaps and over-the-counter 
derivatives for the first time. Mr. Secretary, can that be done 
by regulation, or will that require statutory change, and does 
it also require regulation or statutory change in London and in 
Asia and in other places in the world?
    Secretary Geithner. We're examining right now the questions 
about what requires legislation in this area, what we can do 
with existing authority. We actually can do quite a lot with 
existing authority. But, right now, broad authority for the 
centralized parts of our payment systems are segmented and 
separated. No one is really accountable for looking at the 
whole thing and that's something we have to fix.
    I do think it's very important that in these markets, which 
are global markets, you want to have a global solution. You 
don't want to have separate nationalist solutions--
    Mr. Lance. I agree completely.
    Secretary Geithner. And our hope is that we can work with 
Europeans on a global framework, a global infrastructure which 
has appropriate global oversights so we don't have a balkanized 
system at the global level like we had at the national level.
    Mr. Lance. My concern, of course, is that if we engage in 
regulation or statutory change here and this does not occur in 
London and in Asia, that money will go to those centers of 
commerce and we will be back in the situation where we have 
found ourself.
    Secretary Geithner. I completely agree with you, and at the 
center of our agenda is, again, a recognition that we can move 
here alone.
    Mr. Lance. And then regarding money market mutual funds 
which I had thought were safe, and I think the American people 
felt safe regarding that instrument, clearly different from the 
sophistication of credit default swaps, after the collapse of 
Lehman Brothers, we discovered, and certainly I discovered for 
the first time, that they could not be safe.
    And you indicate in your testimony that we believe that the 
SEC should strengthen the regulatory framework regarding money 
market mutual funds and my question there is, can we do that 
alone or does this also have to occur in London and in Asia?
    Secretary Geithner. Excellent question. My sense is that we 
can do a lot here that would leave our system more protected, 
but of course, as in every area of this, on the capital 
requirements and everything else, we'll look at whether there 
would need to be complementary changes elsewhere.
    Mr. Lance. And you will be discussing this, I assume, Mr. 
Secretary, next week when you are in London?
    Secretary Geithner. Well, I'm not sure how detailed in each 
of these provisions we're going to go, but absolutely we're 
going to be discussing with our colleagues a common approach to 
efforts at the global level that focus on the stability of our 
national systems.
    Mr. Lance. Thank you very much, Mr. Secretary, I yield back 
the balance of my time.
    The Chairman. The gentleman from Minnesota, Mr. Ellison.
    Mr. Ellison. Thank you, Mr. Chairman. Mr. Secretary, thank 
you for your testimony and your work today. Will the stress 
test that the Treasury plan is considering be a way to 
effectively require banks without adequate capital to sell 
their troubled assets into the Administration's public/private 
investment program?
    Secretary Geithner. No, I wouldn't frame it that way. Could 
I step back and frame the broad objective? You know, right now, 
we have a very resilient, diverse financial system. Parts of 
the system have a lot of capital. Parts of the system, in the 
eyes of the market, need some more capital. And what this 
assessment is designed to do, and this assessment is run by the 
Fed, not by the Treasury, is to assess what potential losses 
these institutions might face in the event we faced a deeper 
recession.
    And to make sure the government's willing to give, able to 
provide capital to help backstop the system through this period 
of time. Most institutions want to go raise any additional 
capital they may need from the markets, but we're going to make 
sure that the markets understand that the government will be 
there with capital if that's necessary.
    In our judgment, that will help reduce the risk that the 
system pulls back more from providing the credit that recovery 
needs. We don't want the system sucking more oxygen out of the 
economy just as we're trying to lay the foundation for recovery 
and providing capital to the system is an important part of 
that.
    Giving these banks a chance to sell assets into a market 
will be helpful to restoring confidence in their financial 
soundness and make it easier, in our judgment, for them to go 
out and raise private capital, as well.
    Mr. Ellison. In your testimony, you indicated that capital 
requirements for systemically important firms must be more 
robust than other firms. How many systemic entities like hedge 
funds currently face no capital requirements whatsoever? Could 
you discuss in greater detail how a capital adequacy regime 
would work for these firms?
    Secretary Geithner. We did not propose to establish capital 
requirements for hedge funds. What we are saying, though, is 
that the large institutions, principally the banks and the 
major large complex regulated financial institutions, are held 
to a set of requirements on capital liquidity reserves risk 
management, which are commensurate with the risks they pose. 
And because their risks are greater, and because the 
consequences of their failure is greater, they need to be 
subject to a higher set of standards and greater constraints on 
leverage.
    But we're not proposing to establish capital requirements 
for the broad universe of hedge funds and private pools of 
capital that exist in our markets. We want them to register 
with the SEC if they reach a certain scale, and in the future, 
if some of them individually reach a size where they may be 
systemic, then at that point, we believe they should be brought 
within a regulatory framework that's similar to that which 
exists for banks.
    Mr. Ellison. Thank you. Could you explain how you think 
that consumer protection should be incorporated into 
comprehensive regulatory reform?
    Secretary Geithner. You know, we're not at the position 
today where we want to lay out any details on the consumer 
side. I just want to underscore that will be a critical part of 
our reform agenda. You know, the failures there were very 
consequential, not just for the lives of millions of Americans, 
but for the whole system. They will be a critical part of what 
we propose.
    Mr. Ellison. Are you familiar with Elizabeth Warren's 
concept of a financial product safety board?
    Secretary Geithner. I am. And I think that's a--
    Mr. Ellison. Could you offer us your thoughts on it?
    Secretary Geithner. I think it's an interesting proposal. 
That's one of the many things we're looking at.
    Mr. Ellison. Could you tell me why the Treasury would be 
given resolution authority over systemically significant 
financial institutions such as bank holding companies, hedge 
funds, and large insurance firms? Why would the Treasury be 
given such resolution authority?
    Secretary Geithner. We're actually proposing a structure in 
which the FDIC would have a central role in managing this 
regime, but as is true now, in the existing process for banks 
and thrifts, the judgment by the Treasury is necessary. The 
concurrence of the Treasury is necessary for a range of 
actions, as you would expect because, you know, the Treasury is 
responsible in some sense for guarding the interest of the 
taxpayer.
    Mr. Ellison. But why not an independent regulatory 
authority for those things?
    Secretary Geithner. Well, again, in our structure, like in 
the structure of our banks now, there's a complicated set of 
checks and balances. So, there's an important role for the 
independent regulatory authority supervisor and for the FDIC 
and the Fed but that's not authority that the Executive Branch 
can delegate or separate because ultimately it relates to 
hugely important consequential judgments about the risks the 
taxpayers are exposed to and the degree of moral hazard in the 
financial system. And the Treasury has to be responsible for 
those judgments.
    Mr. Ellison. Well, given that the FDIC already has 
resolution authority, wouldn't such authority be better suited 
for that--
    Secretary Geithner. Well, as I said, what we're proposing 
to do is to expand the role they would play with respect to a 
broader range of institutions and within its set of checks and 
balances that are similar to what now exists for banks.
    Mr. Ellison. Okay. I think I am about out of time. Thank 
you, Mr. Secretary.
    The Chairman. The gentleman from Texas, Mr. Marchant.
    Mr. Marchant. Thank you, Mr. Chairman. Secretary Geithner, 
I would like to spend my time talking about the new public-
private partnerships you have announced, which I am generally 
in favor of. My concerns are that as it has been discussed, it 
has been announced now that PIMCO and I think Black Rock and 
several of the large institutional money managers are now 
emerging as some of the people who will be managing those 
funds.
    Secretary Geithner. Not yet. They have expressed interest, 
but we haven't made any of those judgments yet.
    Mr. Marchant. My concern is that given the ratios of 
leverage involved here, my concern is that the actual investors 
have more skin in the game than is proposed here, because if 
they in fact just take their hedge fund partners out in America 
and put all of their money in, and then they pull management 
fees off of that, then they--they don't have, in my opinion, 
don't have adequate incentive to make sure that those funds--
they don't have enough skin in the game if you absolutely 
follow the hedge fund model and putting this money in. I'm very 
concerned about that.
    Secretary Geithner. We have the same concern, and we want 
them to have enough skin in the game that their interests are 
aligned with our interests. But we have the objective, 
recognize that we have to find the right balance. But I think 
this is a better way of protecting the taxpayer than the 
alternatives.
    Mr. Marchant. The concept I agree with. I'm concerned about 
how the money gets raised for the equity partner. The second 
thing I'm concerned about is the potential gap that is created 
if indeed once the auctions begin to take place and you begin 
to discover prices that you--that there will be gaps created 
between bid and ask. And when those gaps are created in those 
banks, and those deals are made, then you're going to have 
losses. You might have some gains to the banks. But I suspect 
we'll read more about the losses, and that those banks will 
then immediately have to put monies into the loan loss reserve, 
and so they're going to have immediate needs for capital.
    Now is it in the plan, is there enough TARP money if 
necessary to plug that hole? And are you going to allow, if a 
gap in fact is created, are you going to allow there to be a 
response time between the bank and the FDIC or the regulating 
entity to where that bank then says, okay, if I sell this at 
this, I have a buyer, then it's going to create this gap, are 
you going to close me down instantaneously, or are you going to 
give me--or can we give you a plan as to whether we can raise 
additional capital or whether we're going to get TARP money? 
Because if we do this, we can't do the deal, and you may end up 
freezing the whole system up.
    Secretary Geithner. Right. A very important concern, and 
you said it exactly right. So we're going to establish a 6-
month window in which these institutions will have the ability 
to go raise capital from the markets or take capital from the 
government. Throughout that period of time, they would have the 
ability, if they choose, to sell assets into, both loans and 
securities, into these type of new funds. And so they would 
have the ability to make a choice about what mix of asset sales 
with what implications for capital and how they would meet the 
capital needs created by that. So that is how we would work. 
And you're right that you need to--any institution looking at 
this would have to do the--make those judgments together at the 
same time.
    Mr. Marchant. And the last concern is, will you have the 
ability--will the market have the ability to take a look back 
and say--will the regulator have any ability to say this sale 
can't take place? This sale is--this auction, this is too 
devastating to the government or the FDIC fund. I mean, the 
FDIC is going to be insurer here. Does the FDIC have function 
in saying this is a sale that we can't bear the loss of in the 
fund? This is not--because the FDIC fund actually, insurance 
fund, is going to actually be the ultimate insurer here, right?
    The Chairman. Could I say, if the gentleman wants an 
answer, probably we ought to end the question. It's an 
important question. I want to make sure we have time for the 
answer.
    Secretary Geithner. I think this probably requires a bit 
more thought and care in responding to, and we would be happy 
to have our staff with the FDIC come up and walk you or your 
colleagues through the details of this. And your concerns are 
right in this case. But the FDIC will manage and operate the 
auction process for the loan piece of this. They have had a lot 
of experience in doing this. They have a huge interest in 
making sure they're not too exposed, just as I have a huge 
interest in making sure they're not too exposed. And we'll try 
to work out the right balance in this case. But your questions 
are good questions, thoughtful concerns. We share those 
concerns. We would be happy to walk you through it in more 
detail how we manage those concerns.
    The Chairman. If the gentleman would permit me, and the 
Secretary had suggested this to me, because the gentleman from 
Texas has a very important point. This clearly calls for the 
cooperation and participation of all of the regulators. And on 
his suggestion, I will be consulting with the minority about 
having a hearing when we come back with all of those who will 
have a piece of the action here, so that we don't want anyone 
to think that one agency is being left out or being committed 
over its objection. That was the Secretary's suggestion. It 
will be consulting, and we'll have them all here precisely for 
the purpose of making sure that no agency's specific mission 
will be in any way impinged upon by this. So I appreciate the 
gentleman's question.
    Next, the gentleman from Florida, Mr. Klein.
    Mr. Klein. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary. Good morning. First I want to join the gentleman 
from Texas in his comments about the interrelationship between 
the markets overseas. A number of us in a few weeks are going 
to be meeting with the TransAtlantic dialogue with European 
Union countries, so as we progress through this, I would like 
to make sure we're all up to speed and can have those 
conversations with them so that we can obviously get at the 
rate we want to get at, but at the same time, they're not doing 
something inconsistent.
    We're obviously talking today about the importance of 
handling the insolvency of non-bank and financial institutions, 
and I fully support first of all the notion of an integrated 
system that looks at a systemic way of doing this, but I also 
note that, as I think you're correctly presenting, every day 
that passes and we don't do--take the necessary action or have 
the clear authority for agencies to take the necessary action, 
more money is being spent, more--or less confidence is in 
place, and those are the things that need to happen as quickly 
as possible. We want to get it right, and I think we want to 
get a systemic point in place, but I fully support the notion 
of working quickly to get this organized.
    One of the points I want to make is, as we get into the 
breaking down, the merger or the acquisition, the selling off 
and liquidating, I want to make sure that--there's been some 
criticism in the past that sometimes no-bid contracts were 
used. Certain organizations were given priority.
    It is very important to the American people in terms of 
confidence that there is an open, competitive bidding process; 
there are a lot of qualified companies around the United States 
that can help assist in this area, and if you can make it 
absolutely clear that will happen, and if you can comment on 
that.
    Secretary Geithner. Oh, I completely agree, and I think 
that you're right. Confidence in the basic integrity of that 
process is critically important. And again, I really think the 
FDIC has great experience in designing procedures that meet 
that test. They are very sensitive to that concern, too. We 
want to build on that model, and of course are open to any 
suggestions of how we can do a better job of assuring that.
    Mr. Klein. I appreciate that. And secondly, I think from a 
taxpayer point of view, everyone in the United States is 
concerned. They heard about the AIG payouts. It was--yes, it 
was the amount of money, but it was also the principle of 
fairness.
    Secretary Geithner. Yes, it was.
    Mr. Klein. This just struck people as totally unfair. 
They're struggling in their own businesses and their own 
personal lives, yet these payments took place. It's very 
important that these contractors, these parties that will 
assist us in helping this orderly liquidation, which in time 
will save taxpayer money. It's also important that, yes, there 
will be fees paid to these organizations. They should get a 
reasonable compensation, but the taxpayers have to feel there 
is an upside in the sale and liquidation of these assets so 
they don't see money getting paid to a private, you know, 
organization, which they're entitled to, but at the same time, 
taxpayers feel it's on our dime. We're not getting anything out 
of this. Assets don't have zero value. They have some value. We 
need to make sure that taxpayers feel like they're getting 
their fair share on the upside.
    Secretary Geithner. I agree with you completely, and that's 
why in our proposal there's a dollar of taxpayer capital 
alongside a dollar of private investment, and so the taxpayer 
will share in any gains that come from the purchase of these 
assets management over time.
    Mr. Klein. And if we can make sure that's very clearly 
articulated every step of the way. The next step I would like 
to bring up is the whole notion of too-big-to-fail, which is 
nauseating to most Americans, this idea that businesses were 
allowed to get so big they couldn't fail, and yet you have 
smaller banks, for example, that can't get TARP money, can't 
get assistance, and they're on the edge. And yet other 
companies just on the click of a dime, they get a huge check.
    This notion probably goes back to the chairman's comments 
about antitrust laws were created many years ago based on 
consolidation of economic power which drove anticompetitive 
activity. Antitrust laws by and large, many of them, have not 
been as enforced as many people would like to see, and that 
allowed for large consolidations to occur, which in free 
enterprise we understand is fine, as long as there aren't 
adverse consequences. Adverse consequences to anticompetitive 
activity, in this case adverse consequences was this notion of 
a disaster that we have to put money into.
    As we move forward with the systematic regulation, there 
has to be a notion of definition of how we avoid organizations 
getting to the too-big-to-fail category. Do you have some 
thoughts on how we're going to integrate that into our law and 
the regulation?
    Secretary Geithner. We are a nation of 8,000 to 9,000 
banks. We're a much stronger country because of the hundreds 
and thousands of smaller institutions that operate in our 
communities across the country. This is--they were not, mostly 
not part of the problem. They're going to be part of the 
solution going forward. It's very important they have access to 
capital on the same terms the large institutions do, and we're 
moving very, very quickly since we came into office to try to 
make sure that we're accelerating the procedures at the 
Treasury to make sure they can have access to capital.
    Now in our proposal, as you saw, we want to hold the large 
institutions to stronger, tougher, more rigorous standards, 
tougher constraints on leverage. That will help counteract this 
risk that we have further consolidation over time to leave the 
system more risky. But you're absolutely right to underscore 
the importance of effective antitrust enforcement, and we have 
significant--we have these caps now on the scale of share of 
deposits that any single institution can have across the United 
States. We want to keep those in place, because we want to have 
a system that still relies on not just a few large 
institutions, but hundreds and thousands of smaller 
institutions across the country.
    And, again, if you look at what's happening across the 
country, they're bearing a lot of the burden for filling the 
gap left by those institutions that have to pull back now and 
get smaller because they took too many risks.
    Mr. Klein. Well, I look forward to working with you on that 
notion to make sure we don't have another too-big-to-fail 
scenario, but we allow a free enterprise system that is healthy 
and allows banks and others to thrive. I thank you, Mr. 
Chairman.
    The Chairman. The gentleman from Alabama.
    Mr. Bachus. Thank you. Secretary Geithner, Mr. Klein talked 
to you about too-big-to-fail, and you want to get away from 
that as quickly as possible?
    Secretary Geithner. I do. And I think that, again, the 
critical test for any system should be, is our system strong 
enough that we can handle failure, even of the largest 
institutions? That is a critical objective that's to underpin 
everything we do.
    Mr. Bachus. Thank you. Your draft legislation authorizes 
the FDIC to spend an unlimited amount of money, of taxpayers' 
cash, to prop up or unwind a supposedly systemically important 
firm. Or actually the words are ``such sums as are necessary.'' 
Isn't that what we have been doing that the taxpayers and 
American citizens are so upset about?
    Secretary Geithner. You said in your opening remarks, and 
you're saying again now that this question about who bears the 
losses, how you pay for these things, is very important and 
complicated. And we are going to have to look carefully at how 
the costs of these interventions are shared across the system.
    Right now, in the current system, it is fundamentally 
unfair, because smaller banks are forced to absorb a 
disproportionate cost of interventions needed to protect the 
system from often mistakes made by larger institutions. We 
would like to change that and put in place a fee structure that 
is a bit more just and fair in that context.
    Mr. Bachus. But wouldn't a fair structure be not to prop 
them up with any taxpayer money?
    Secretary Geithner. Well, I think, again, is as this crisis 
reveals and as the crisis of the thrift and loan crisis, the 
S&L crisis in the early 1990's revealed, there are 
circumstances in which it is cheaper for the taxpayer over time 
and less damaging for the country over time for the government 
to take some risk in preventing greater cost not just to the 
deposit insurance fund, but to the rest of the system. That's 
the balance we have to strike.
    Mr. Bachus. Well, I'm talking about, is there really no 
alternative than saddling future generations of Americans with 
perhaps hundreds of billions of dollars worth of losses for the 
mistakes of a few institutions that grow too large or too 
complex?
    Secretary Geithner. What has to guide what we do is how do 
we protect the system at least cost to the taxpayer? And in 
emergencies, in extremis, as we have seen, letting institutions 
fail can cause far greater damage. You know, acute, 
catastrophic damage to the fortunes of all Americans.
    Mr. Bachus. All right. But--
    Secretary Geithner. And so there may be circumstances in 
which with carefully designed constraints that it is more 
effective for the country and for the taxpayer for there to be 
carefully designed emergency authority to step in and prevent 
failure.
    Mr. Bachus. I would submit to you that ``such sums as are 
necessary'' is too open-ended, but Secretary Geithner, in my 
opening statement, I talked about that within hours--you said 
within minutes of the AIG intervention, billions of dollars 
went to the foreign banks.
    Secretary Geithner. But--can I just clarify that?
    Mr. Bachus. Yes.
    Secretary Geithner. What I said is, the purpose of the 
action was to ensure they can meet their commitments, and 
therefore that had impacted immediately--
    Mr. Bachus. AIG?
    Secretary Geithner. Immediately on their ability to meet 
their commitments. I don't actually--didn't mean to say in 
minutes, they were making payments, but--
    Mr. Bachus. Sure. Okay. Within minutes they were--or, you 
know--
    Secretary Geithner. --they were able.
    Mr. Bachus. I said hours, and you said minutes, but, you 
know, even if it was a few days, it was to allow them to not 
default on their obligations.
    Secretary Geithner. That was the purpose of the action.
    Mr. Bachus. Right. Now they have obligations to a lot of 
American banks. In fact, you know, I said pensioners and 
retirees, you added municipalities and banks. How about the 
U.S. banks that their obligation of AIG, they're in default 
today, they were in default then?
    Secretary Geithner. Mr. Bachus, I heard your question, and 
I need to understand a little more the precise examples you're 
referring to. I would be happy to look at that and get back to 
you.
    Mr. Bachus. Sure. Well--
    Secretary Geithner. I understand if it seems unfair, we'll 
have to fix it, but I want to take a more careful look at what 
you're suggesting.
    Mr. Bachus. Sure. And what I'm talking about, let me tell 
you. What was paid off dollar-for-dollar were these risky 
credit default swaps agreement in most cases, which were the 
financial products subsidiary that wrote those. That's what you 
paid off dollar-for-dollar. What is still not being paid off is 
the more traditional loans to AIG of actual money. And do you 
not--do you understand my concern?
    Secretary Geithner. I completely understand your concern, 
but I want to look in more detail at the precise examples 
you're speaking of. Because they don't--I need to understand 
those better, and I'll give you a thoughtful response.
    Mr. Bachus. Yes. And I'm talking about U.S. banks, 
federally insured U.S. banks, that made secured loans to a 
subsidiary of AIG, and they're being told--they're being 
offered 20 or 30 cents on the dollar, U.S. companies doing 
business in Florida, Alabama, Tennessee.
    Secretary Geithner. As I said, I'll work with the chairman. 
We'll come back to you and give you a detailed response.
    The Chairman. Thank you, Mr. Secretary. The gentleman from 
Indiana, Mr. Donnelly.
    Mr. Donnelly. Thank you, Mr. Chairman. Mr. Secretary, thank 
you for being here. When you read the papers today, you see 
there is continued work on getting General Motors and Chrysler 
squared away, trying to get across the finish line. And as I'm 
sure you know, if the dealers aren't working, nobody's working. 
And so that brings up the issue of floor plan financing, and I 
know the Treasury has been working on a solution. Could you, 
for all the dealers out there, whether they're RV or marine or 
automotive, could you tell us where you are and if there's a 
ray of hope for us?
    Secretary Geithner. As I said, we're working on it. We have 
been looking at this very carefully over the last several 
weeks. We're exploring a range of options. I can't tell you 
today whether we have found a way to solve it, but we agree 
it's important. We think it would be helpful as a part of the 
overall solution, and I certainly will be able to tell you and 
your colleagues in the next couple of days what we think is 
possible and what is not possible.
    Mr. Donnelly. Okay. Because, as I said, and I know I'm 
repeating myself, but if the dealers can't get floor plan 
financing, the whole point of General Motors and Chrysler 
working their way through this and other companies, there's no 
point to that if we can't fix this portion of it.
    Secretary Geithner. Right. And as you have seen, you know, 
we have tried to--we found something we could do on the 
supplier side. There are other things we need to do to make 
this work. But, again, we want there to be--we want to take our 
best shot at trying to see if there's a basis for a broader 
restructuring would leave these firms viable in the future 
without government assistance.
    Mr. Donnelly. When the chairman gave his opening statement, 
one of the things he said was that we want to have innovations 
with value added. We saw naked credit default swaps cause 
extraordinary devastation to our economy. And I know regulation 
is coming. Do these naked credit default swaps provide any 
value added, or is this simply just gambling?
    Secretary Geithner. I know there are strong opinions on 
this issue, so I say this with some trepidation. My own sense 
is that banning naked default is not necessary and wouldn't 
help fundamentally in this case. It's too hard to distinguish 
what's a legitimate hedge that has some economic value from 
what people might just feel is a speculative bet on some future 
outcome.
    If we could find a way to separate those two types of 
transactions from each other, we could do that--we would have 
done that a long time ago across a whole range of financial 
innovations. But it is terribly hard to do, and--but we will 
listen carefully to any ideas in this area and understand why 
people feel so strongly about this.
    Mr. Donnelly. I would love to see if there is something we 
can do in regulation in this area, because to me, those are 
just simple bets. And the American people have been required to 
take money out of our truck drivers' pockets, our waitresses' 
pockets, to pay off bets on Wall Street. And it's not that 
there was any real product there. It was simple, at least to 
me, from the Midwest on Main Street, it just seems like 
gambling.
    Secretary Geithner. Well, our issue is not whether we want 
to protect the American economy from these things in the 
future, which we do. The only question is how best to do that. 
And our view is that the absolutely essential thing is to make 
sure there is more capital held against those positions so that 
we never again face a situation where those type of judgments 
could imperil the system and therefore leave Americans in the 
position where they're facing, you know, much lower pension 
values, higher borrowing costs, much greater risk of losing 
their job.
    That is our basic objective. The only question is whether 
alongside what we do for capital and margin and these broad 
efforts to bring these things into central clearinghouses, 
whether we need also to look at banning certain instruments. 
And my own judgment is that we don't need to do that, very, 
very hard to do that, but understand there are other views on 
that and would be happy to listen to any suggestions.
    Mr. Donnelly. And we have seen IRA and 401(k) amounts 
significantly affected. People open their envelopes at the end 
of the quarter, and it takes their breath away. With the steps 
we're moving forward with, from what I understand and what I 
have read, mutual funds will be allowed to participate. Is that 
correct? Because that gives every one of the people in our 
country a chance to try to get back some of the money that they 
have lost. And so if mutual funds can participate in the 
programs that you have as opposed to just hedge funds and such, 
then actually the American people are part of it, and it should 
go in their pockets first.
    Secretary Geithner. Absolutely.
    Mr. Donnelly. Okay. Thank you.
    The Chairman. The gentleman from New Jersey, Mr. Garrett. 
At the conclusion of Mr. Garrett's questions, we will break for 
the votes. There are a lot of votes, but we will do the best we 
can in coming back. Mr. Garrett.
    Mr. Garrett. Great. Thanks. And I appreciate your comment 
with regard to the need for the comprehensive regulator going 
forward. I'm just sitting here thinking, if we had something 
like that in place, a systemic regulator, and also this idea of 
being able to wind things down as well, prior to what happened 
with the GSEs and the problems that we have today with them, 
would we be here where we are? Would they have done something 
different or what have you with the GSEs?
    Secretary Geithner. GSEs were allowed--talk about moral 
hazard.
    Mr. Garrett. Right.
    Secretary Geithner. GSEs were allowed to build up huge 
exposure to risk with inadequate oversight of their risk-
taking. We got the balance of moral hazard and constraints 
completely wrong in that context.
    Mr. Garrett. Right. I agree.
    Secretary Geithner. And that's one reason why Congress 
acted to put in place a stronger framework of supervision going 
forward with a stronger conservatorship authority. And I think 
that like in many things, and I think it's true in lots of 
other parts of the system, I believe it would have been better 
for the country for that to happen sooner.
    Mr. Garrett. Right. And--now there's a case where I give 
credit where credit is due to the Federal Reserve was here many 
times, past Administrations, this Administration, and this 
chairman as well, worked as well, tried--we didn't get it done 
as quickly as some of us would like, but we did work together 
to try to get that done, but it didn't happen soon enough. So 
you're saying that had we had what you're looking for in place 
10 years ago, this new entity, whether it's the Federal Reserve 
or this, I'll call it an uber regulator, or what have you, they 
could have taken some sort of action and put it into 
receivership or done something else to get us not where we are 
today?
    Secretary Geithner. I see where you're going, but let me 
just make a broader point. Across the financial system--
    Mr. Garrett. I'm just looking at that.
    Secretary Geithner. No, I understand. But it is a bigger 
issue.
    Mr. Garrett. I know. But I'm just looking at that.
    Secretary Geithner. Right.
    Mr. Garrett. Would they have done something different than 
what Congress did with regard to the GSEs?
    Secretary Geithner. You know, this is kind of a hard 
question to answer in some sense.
    Mr. Garrett. Okay.
    Secretary Geithner. Because it's easy with hindsight to go 
back and say that if only ``X,'' then ``Y.''
    Mr. Garrett. They should have. But you can say that they 
probably should have?
    Secretary Geithner. More generally, I would say that, 
again, this country, our Nation, did not have effective means 
to prevent the buildup of risk that would be threatening to the 
system nor to protect the economy from the consequences of the 
unwinding of those big bubbles.
    Mr. Garrett. Okay. Let me just go to a second area, and I 
always apologize, but the time is short. With regard to setting 
up something like FDIC, FDIC has a set class of people you're 
trying to protect, the depositors, right? Here you're trying to 
do something else.
    It's really not a set class of depositors for these other 
institutions. It could be the equity holders, bond holders, 
what have you, that are not just like them, so you have a 
situation there where it's not so clear who exactly it is that 
we're trying to protect, it's the systemic risk. If that's the 
case, when it's not so clear which values or who you're going 
to weigh over, doesn't that potentially create some inverse or 
perverse incentives and create even more moral hazard? I'll 
just throw one last little twinge to that, too.
    Secretary Geithner. Right. Okay.
    Mr. Garrett. And that--I'll watch my time--is this. Someone 
over there said we regulate hedge funds now. I don't think we 
do. But if you set up a system like that and they come into it, 
right, even if it is to regulate them, and even if you regulate 
just the big guys, again, don't you say now we create an 
inverse, perverse incentives there because now there may be the 
same GSE implicit guarantee, which is now explicit?
    Secretary Geithner. Yes. I completely agree. There is real 
risk that if you identify some class of institutions as 
systemic, imply they're too-big-to-fail, imply they will get 
support in extremis, that would create a huge amount of moral 
hazard, perhaps leaving our system more vulnerable even than it 
is today.
    Mr. Garrett. Right.
    Secretary Geithner. So we need to make sure we design this 
in a way that mitigates that risk. On the other hand, and I 
think you're right to be worried about that. The question is 
how we balance that. On the other hand, it is true that, as we 
have seen, firms can develop to the point where their fate--
    Mr. Garrett. I understand that.
    Secretary Geithner. --could threaten systemic stability. 
And I think--and that creates moral hazard itself.
    Mr. Garrett. Right.
    Secretary Geithner. And so what we have to do is to make 
sure that those institutions are subject to a more effective 
set of constraints on leverage and risk-taking. I don't see any 
other way to do it, because market discipline alone is not 
going to protect a system from that. But you're exactly right 
that you can do this in ways that will make the problem worse.
    Mr. Garrett. One really quick question. And moving too 
quickly on this, yes--AIG--with regard to AIG, that's a company 
that has foreign subsidiaries, right?
    Secretary Geithner. Right.
    Mr. Garrett. And if we today set up a situation that says 
we're going to have to have a way to wind down companies where 
they have foreign subsidiaries, might it be--I know you want to 
go global, but if we don't do the global thing at the same 
time, might the other countries look at it and say, wait a 
minute. We're going to wind down these companies that are in 
the United States but they're over here in other foreign 
countries, those countries might say we're going to seize these 
assets here before the United States does--
    Secretary Geithner. Part of the international agenda is a 
more effective globally coordinated approach to resolution of 
globally active firms.
    Mr. Garrett. So we have to do that at this exact same time 
before we have a wind down system, don't we?
    Secretary Geithner. Well, you know, we don't want to leave 
our country vulnerable because of the time it takes to build 
consensus globally. So we need to do these things together. But 
ultimately, we have interests as a country we have to protect, 
and we can't be hostage to the difficulty of getting the rest 
of the world to move. We need to move as much as we can in this 
case, but an important part of the international agenda is more 
effective cooperation around the resolution of large, globally 
active financial institutions.
    Mr. Garrett. Thanks for squeezing in that one.
    The Chairman. The gentlewoman from Ohio.
    Ms. Kilroy. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary, for returning here. You know, certainly we have 
talked a little bit about what happened last fall and whether 
or not things could have--what you're proposing now could have 
prevented what happened then.
    And certainly at that time, you know, I was not here. Along 
with other citizens, we sort of watched and listened to the 
issues with Lehman, the failure with Lehman, Bear Stearns, and 
AIG, and we saw government officials scrambling to try to 
prevent collapse. So, you know, what seemed to me is that 
Treasury at that time had no Plan B, had no preparation for 
what to do in that sense, and were winging it, were scrambling.
    So I appreciate the fact that you are engaging in this kind 
of process, taking a bigger picture look at it about what we 
need to do so that we don't get into a situation of housing 
bubbles and egregious credit default swaps and overleveraged 
institutions, and even fraud on a dramatic scale, as you said 
in your earlier remarks. And I certainly look forward to 
working with you on these issues of systemic risk and capital 
requirements and over-the-counter oversight, and like some of 
my colleagues here, take a stronger view on credit default 
swaps.
    And I also appreciate the public-private partnership that 
you announced with addressing the issue of toxic assets and 
cleaning up that mess. But I think as we heard from Mr. Klein, 
you know, the AIG bonus uproar did offend a sense of justice 
that's ingrained in the American people, that those who broke 
their own company, broke the system and caused such anguish and 
real hurt out there on Main Street, are also continuing to 
benefit from that. And what I think we need to hear a lot more 
is how this will help the taxpayer, how this will help Main 
Street; the car dealer, the restaurant owner, the dry cleaners, 
and the hardworking people here who are planning to retire and 
seeing their 401(k)s that they had hoped to use in a couple of 
years disappear.
    So what would you say to them, that this is going to 
benefit them?
    Secretary Geithner. ``This'' being the program of reforms 
we're announcing today?
    Ms. Kilroy. Right.
    Secretary Geithner. This will make our system more stable 
in the future, with better protection for consumers and for 
investors. So it's much less--we want to make it much less 
likely in the future that a working family, in your district or 
anywhere else, could be taken advantage of by a mortgage 
broker, could be sold a mortgage loan or some other type of 
financial product which they did not understand, and could not 
afford to meet in a sense, leaving them vulnerable to losing 
their house, that we have to prevent. We have a deep moral 
obligation to prevent that more effectively in the future. We 
won't be able to save all people from making bad judgments 
about their financial health, but we can try to do a better job 
of making sure they're not taken advantage of by predatory 
behavior at the basic level of the mortgage consumer lending 
market.
    That is necessary, but it's not sufficient. Because even if 
we did that well, but we still had large institutions taking on 
such risk that when we go into a recession, they suck the 
oxygen out of the overall economy, and pushing smaller 
businesses to the brink of failure, then we'll still leave the 
system as a whole more vulnerable in the future. So we have to 
prevent that, too, and that's going to require smarter, 
tougher, better designed constraints on risk taking at the core 
of the financial system as well. You need both of those two 
things.
    And just finally, because we won't be able to prevent all 
financial crises, nothing we do here today over the next 6 
months will offer the prospect of preventing all future 
financial crises, we can make sure that when they happen in the 
future, we can act more quickly, more effectively to contain 
the damage, to put a firebreak around the most weaker parts of 
the system, to not allow the fire to jump that firebreak and 
spread to parts of the economy that were more prudent and 
careful in their decisions. That's the core objectives that 
have to guide what we do.
    Ms. Kilroy. One of the issues that arose in the wake of our 
financial distress in terms of getting the toxic assets off of 
banks' books was the issue of pricing them. And the proposal 
that you made earlier this week has had some criticism that we 
could be overpricing some of the toxic assets and that it would 
be a windfall for some of the hedge funds. Would you address 
that issue for us, please?
    Secretary Geithner. There are two tests of concerns people 
raise: One is this is going to be too generous to the bank; and 
the other is that it is too generous to the investor. Both 
can't be true. So you could design a proposal which is very 
generous to the bank, has the government overpaying for these 
assets, leaving the taxpayer bearing all the risk. We're not 
going to do that.
    You could also design a proposal that leaves the investors 
out there, private investors, getting more reward than we're 
going to give the taxpayer. We're not going to do that. So our 
proposal has a balance, leaves the taxpayer better protected, 
makes sure that private investors are taking risks alongside 
the taxpayer, and that we share in those returns. We think 
that's the better approach, better balance.
    The Chairman. We will reconvene after the votes.
    [recess]
    The Chairman. Would someone please close that door?
    Mr. Secretary, thank you. And I now recognize for 5 minutes 
the gentleman from Delaware, Mr. Castle.
    Mr. Castle. Thank you, Mr. Chairman. And thank you, Mr. 
Secretary, for being here and for your judgment on all this. 
And let me say that I by and large agree with what you have 
stated.
    But I want to talk about what you didn't talk about a 
little bit, and that is what you referred to as the complex and 
sensitive questions on who should be responsible for what. I am 
not trying to pin you down; I am trying to sell you something, 
actually.
    You may--I am sure you probably did see or read about 
Senator Collins' proposal, which I have also introduced here in 
the House, forming a Financial Stability Council. And I am not 
suggesting that is magic. Who knows. But I have looked at this 
issue, and I am very concerned about where this all may rest.
    I think there is majority agreement, if not unanimous 
agreement, we need to do something. And the question then 
becomes, who is going to do it, and I think what you have 
outlined substantively is about what we have to do. But I am 
worried about the powers we are going to give to any one entity 
in doing this.
    And I thought that this council, which would have an 
outside chairman but would bring in the different agencies that 
do the regulating now, would be a good way to go. And the word 
in the media is that the Federal Reserve is the natural entity 
to run this. And that is fine, and I have a lot of respect for 
Mr. Bernanke and the Federal Reserve.
    But they have some regulatory authority now in a certain 
aspect of the economy. They also have other responsibilities 
for the economy. And I just worry about potential conflicts 
there. On the other hand, having them at the table, having the 
other regulatory entities, including Treasury and FDIC and the 
others, I think is important.
    So I would hope that when we get down to that important 
question of how this is going to be organized, that careful 
thought is given--and for all I know, you have already given 
careful thought to this--but careful thought is given to being 
inclusive, even having an advisory council, perhaps some of the 
entities that are going to be regulated to help with this. I 
mean, after all, you know, the AIG people may have been a 
little more thoughtful if they had been at the table hearing 
some of this.
    So there is a variety of things perhaps we can do. And I 
just don't want it to be so closed that all of a sudden you 
have that iron-fisted hand making all these decisions, perhaps 
without consultation with other people or groups, and maybe 
unintentionally, but in conflict with itself in terms of other 
things that they may have to do.
    So I pose all that to you, and I would be interested in 
your comments on it. Again, I am not asking you to reveal 
something that you are not ready for yet. But I just want to 
make sure that the Administration is paying attention to the 
breadth of this issue as well as the substance of it in terms 
of how we are going to manage it.
    Secretary Geithner. Thank you. I think there are three 
different issues involved here. One is the division of labor 
and the checks and balances on this resolution authority.
    And as I said in response to earlier questions from your 
colleagues, I think in that context, as is now the case under 
FDICIA with respect to the FDIC, the decisions involved are of 
such consequence to the system that you can't vest authority 
for that within one entity.
    And I think, again, as FDICIA reflects now, it requires a 
judgment by the Majority Board of the FDIC, the Majority Board 
of Governors of the Fed, as well as the Secretaries--the 
President has designated me in this context. And I think there 
is a lot in that basic structure that is similar to what you 
might think a board might do.
    There is another set of issues, which is just trying to 
make sure there is cooperation across regulatory authorities, 
so that we are doing more even, more evenly enforced, more 
economically sensible, incentives and constraints across 
financial advisory.
    So it is very, very important, particularly given how 
balkanized and segmented and siloed our system is today, that 
we have much more integration brought to bear across setting 
the rules of the game and enforcing them across those systems. 
And we do not want to design a system where we are going to 
invest all that authority in one place, one concentrated 
agency.
    Can I go on to one--
    Mr. Castle. Yes. Please do.
    Secretary Geithner. There is a third question about who 
should be responsible for what we are calling here the 
systemic, core responsibilities in the system. And as I said in 
my opening statement, there are a range of issues we are going 
to have to look at to deliver a more streamlined consolidated 
financial oversight framework.
    And we want to make sure that we have the right division of 
labor. There is clarity about responsibility. The 
responsibility is matched with authority. And the guys who are 
responsible are competent to execute that.
    We are open to looking at a range of suggestions for how 
that authority should be framed and where that should be lodged 
in the system. But let me just give you a few basic principles. 
And this is, again, the authority we are calling the Systemic 
Risk Authority.
    It should not be the Treasury. It needs to be vested in an 
independent supervisory authority. I do not believe it should 
be pulled together in one independent agency. I think too much 
concentrated power for all that regulatory authority would be 
not a sensible thing for the country. I think it is probably 
best to build on the existing authorities that we have for 
holding companies under the current statute.
    And I want to end with just one basic example, which is 
that, you know, in a fire, the fire station needs to understand 
the neighborhood. It needs to know the neighborhood it is 
operating in. And you don't want to have to convene a committee 
before it can get the engines out of the station.
    So it has to be able to move very, very quickly in extremis 
with the knowledge so it can make sensible judgments. And there 
is a good pragmatic case, I believe, looking at the lessons of 
crises in our country and around the world, to try to have that 
authority for crisis management matched with the authority for 
mitigating systemic risk.
    Not too much concentration. Not vested within the Treasury. 
Appropriate checks and balances. But there is a range of those 
three different areas we have to make some judgments about 
responsibility.
    The Chairman. Thank you. That was obviously a very 
important question, so we let it go on a little bit.
    The gentleman from Florida.
    Mr. Grayson. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. I think we all understand how 
difficult the decisions are that need to be made these days. 
And these are not decisions that we ever wanted to make. 
Sometimes we are probably afraid to know if we are right or 
wrong. But in any case, I have to ask you a few questions.
    On the balance sheet of AIG that was submitted earlier this 
month in their 10-K-, the balance sheet showed that AIG had an 
exposure to the yield curve of $500 billion, which is 5 times 
greater than it ever had in equity. At what point is enough, 
enough? Why didn't anybody stop AIG from accumulating that kind 
of risk and then turning it over to the taxpayers?
    Secretary Geithner. Well, that is the great question. I 
mean, under the laws of the land, AIG was allowed to build up, 
through a variety of complex structures, huge amounts of risk 
relative to the capital they put up. And there was really no 
accountable competent authority overseeing that broad process. 
And that is what put us to the point where, again, the 
government had no choice but to come in and try to unwind this 
in a sort of carefully measured way.
    Mr. Grayson. Well, if you look at the last 10-Q that Fannie 
Mae filed, the last 10-Q shows that Fannie Mae accumulated just 
in the last 6 months before that 10-Q, from the beginning of 
last year to the beginning of last year, over $250 billion in 
exposure to derivatives.
    Again, at what point do people say enough is enough? This 
is too dangerous for the system to be allowed?
    Secretary Geithner. Well, but again, this is not something 
I could respond to carefully and thoughtfully without looking 
at the particular issues in this context.
    In the context of Fannie and Freddie, now, they are very 
large institutions. They have a very complicated set of risks 
they have to hedge. They have an elaborate risk management 
framework over them with a much more powerful supervisor now 
looking over those basic judgments.
    But I wouldn't infer from looking at that one piece of 
their 10-K whether that set of risks are leaving--they are 
designed to make them safer, not more risky.
    Mr. Grayson. Well, in fact, the total exposure at that 
point, in June of last year, for Fannie Mae was over a trillion 
dollars, about $1.5 trillion of exposure to derivatives.
    Is it fair to say that contributed to its failure? And if 
so, at what point should someone have said, enough is enough?
    Secretary Geithner. Again, Fannie and Freddie were also not 
under an appropriately sophisticated oversight framework with 
adequate powers prior to the legislation Congress passed last 
summer. But again, I don't think you can measure the risk and 
their exposure by looking at that piece of the balance sheet.
    Mr. Grayson. If one's priority at this point were to say 
there should be no more need for taxpayer bailouts, that the 
way to deal with systemic risk is to prevent that risk from 
happening in the first place, what kind of substantive rules 
would you see being imposed on these kinds of institutions to 
prevent the taxpayer from being on the hook?
    Secretary Geithner. That is our objective. Again, the most 
simple way to frame it is capital. Capital. Capital. Capital 
sets the amount of risk you can take overall. Capital ensures 
you have big enough cushions to absorb extreme shocks.
    You want capital requirements to be designed so that, given 
how uncertain we are about the future of the world, given how 
much ignorance we fundamentally have about some elements of 
risk, that there is a much greater cushion to absorb loss and 
to save us from the consequence of mistakes in judgment and 
uncertainty in the world.
    In a simple way, that is the best solution to these things. 
And that is not going to be something the market is going to 
provide on its own. That is something we have to impose through 
standards set in regulation.
    Mr. Grayson. Is it fair to say that if an organization like 
AIG had been subject to margin calls, things never would have 
gotten as far along as they did and we wouldn't have had this 
kind of exposure today?
    Secretary Geithner. I am not quite sure that is fair. But 
you are right, you want to make sure that the margin regime, 
too--margin is like capital, just to use a simple thing. You 
want to make sure that institutions like AIG hold much more 
capital against the risks they are underwriting and are exposed 
to. And you want to have--in derivatives in particular, you 
want to have a margin regime that is also much more 
conservative.
    Mr. Grayson. Give us some idea of the substantive rules 
that you see being put in place for, let's say, hedge funds if 
hedge funds reach the size of posing systemic risk.
    Secretary Geithner. If an entity that is not now a bank 
were to rise to the point in the future where, because of its 
structure, because of how connected it is to the system, 
because of its relationships and role in these markets it could 
pose systemic risk, then in our judgment they should be brought 
within a framework similar to what we are going to impose on 
large, complex, regulated financial institutions.
    And that means a fully elaborated set of capital 
requirements, requirements on liquidity, on risk management, 
that are applied and enforced on a consolidated basis by a 
competent authority.
    Mr. Grayson. And does enforcement really mean that at some 
point, somebody is going to say to an institution like AIG, 
enough is enough?
    Secretary Geithner. Absolutely. That is what the--the great 
virtue of a capital requirement is it does constrain the amount 
of risk you can take. And the great virtue of the elaborate 
structure we have in place for banks in FDICIA is it forces 
intervention if they get to the point where capital erodes.
    Mr. Grayson. Thank you, Mr. Secretary, and Mr. Chairman.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Yes, Mr. Geithner, I think part of the issue here is the 
wind-down power, the sheer enormity of it, that would be given 
here because actually, you would be able to take over any firm, 
any large firm. You would have basically permanent TARP 
authority. I wasn't a fan of TARP; I didn't vote for it.
    But if you would have had this authority, let's say, in New 
York when Lehman or AIG were an issue, what would you have done 
differently at that time? Because what we are doing here is 
setting the rules, presumably for many, many years to come. We 
have to be very clear so people would know what to expect.
    So how would you have handled, let's say, the creditors, 
the counterparties at AIG? Would you have bailed out AIG? Would 
you have done specific actions? Because if you just would have 
guaranteed it, you would have done the same thing that 
basically was done anyway.
    Secretary Geithner. Exactly.
    Mr. Royce. Go ahead with your analysis on that for a 
minute, if you will.
    Secretary Geithner. You are raising a very important point, 
which is that the resolution authority we are proposing, like 
what exists for banks under FDICIA, gives you two types of 
authorities.
    One is to intervene, wind down the entity, separate the 
good business from the bad, and figure out the best way to 
absorb losses, allocate those losses across the parts of the 
capital structure. But in the event default would cause 
systemic consequences, under FDICIA, FDIC also has the 
authority, subject to the set of constraints I outlined 
earlier, to take actions to put in capital to guarantee 
liabilities, to protect all creditors.
    But that judgment has to be made as a very, very high 
threshold. You have to be able to demonstrate that the 
consequences of default would be systemic.
    Mr. Royce. Right. And--
    Secretary Geithner. So in any of those cases, like Lehman 
or AIG or Bear Stearns or any large, complex institution, you 
would have to look at the state of the world at that point. You 
would have to look at whether the costs to the economy as a 
whole would be so severe in the event of default that it was 
cheaper for the taxpayer ultimately to intervene to protect 
creditors from the consequences of default.
    Mr. Royce. And of course, the one thing the economists have 
really been fretting about in terms of the scheme is all of the 
moral hazard that goes with it, the overleveraging that could 
occur, all the borrowing that would be presumed in the market 
that any large institution could suddenly obtain because the 
concept would be, hey, at the end of the day, this is going to, 
you know, be under the auspices of this systemic risk 
regulator.
    And so at the end of the day, part of our investment here 
is going to be guaranteed, or our loan. And so they are going 
to be borrowing at a lower rate. They are not going to have the 
market discipline, as you said. They are going to be 
overleveraging. So it makes things more complex.
    Let's take GE, you know, GE Capital, if you have a problem. 
They own NBC, CNBC, MSNBC. Just to discuss for a minute the 
consequences of this becoming a political issue over at 
Treasury, and now you do have this power. You have this power 
over any large firm. You have this permanent TARP authority.
    How do you handle--have you thought through how you handle 
these decisions should this arise?
    Secretary Geithner. You are exactly right. These are very 
complicated situations, and we have to be very careful that 
what we are doing is not going to add to moral hazard in the 
system.
    So the regime has to come with clearly established rules 
for prompt corrective action, like what exists for banks, so 
you constrain the discretion of the supervisor to let an 
institution slip towards the edge of the cliff without 
intervention.
    You have to have very high thresholds for judgment that 
would allow the government to put in capital. It requires, you 
know, elaborate checks and balances to limit discretion there, 
too. And you have to look at this alongside what we are 
proposing, to raise, fundamentally, capital requirements and 
leverage constraints on the system as a whole.
    But you are right that you have to be very careful that 
this mechanism does not add to moral hazard. And I think that--
but the virtues of this is exactly that, that we are reducing 
moral hazard in the system because we are giving ourselves more 
choices. The system we have today has the opposite risk because 
today, people fear that with no resolution authority, our only 
choice if it is systemic is to come in and guarantee.
    Mr. Royce. I understand how you perceive this, but I don't 
think the market will perceive it the same way. And my 
presumption is that, instead, what we are going to do is 
guarantee basically that large firms borrow at a lower price 
than their competitors. I think that the consequence is going 
to be that they are going to crowd them out of the market.
    But in any event, let's move to a different issue I wanted 
to ask you quickly about because in the text of the bill, you 
have the FDIC as the appropriate Federal regulator for 
insurance companies. However, the FDIC has very little 
authority over the insurance market. As you know, the 
regulatory structure overseeing the market is comprised now of 
50-plus State regulators focused on their individual 
jurisdictions.
    Would it make sense to establish a single Federal 
regulatory alternative for insurance to coordinate with when it 
comes to unwinding these institutions?
    The Chairman. That question is going to have to be answered 
in writing since we started right at the limit. So, Mr. 
Secretary, please answer that one in writing for the record.
    The gentleman from Idaho.
    Mr. Minnick. Mr. Secretary, two questions.
    As you are aware, the House Agriculture Committee passed 
H.R. 977, which conveys to the Commodities Futures Trading 
Commission, the SEC, and other qualified regulatory authorities 
some of the oversight, the clearing, and the regulatory 
authority that you were talking about that would be subordinate 
to those exercised guidelines from a systemic regulator.
    Do you think that the regimen proposed by that legislation 
would be consistent with the regimen you are attempting to--
that the Administration will be attempting to implement?
    Secretary Geithner. I would have to take a careful look and 
get back to you in writing. But what we are trying to do is to 
provide a delicate balance, which preserves the existing SEC 
and CFTC authority over those centralized markets, but still 
provides, in an entity with broader systemic responsibility, 
the capacity to look across these entities, make sure there is 
a level playing field, and that we are protecting the system as 
a whole by ensuring there are stronger safeguards in place 
where those risks are concentrated.
    But as I said in my remarks, there are a lot of complicated 
jurisdictional issues we will have to sort through, and we 
wanted to start by proposing things that will guide the 
substance of regulation. We will have to step back at the end 
of this process and look at what the right division of labor is 
across the existing functional authorities.
    Mr. Minnick. Yes. Please do because there is an attempt, I 
think, to give you tools that would accomplish what I heard you 
say this morning.
    My second question is, with respect to the new mechanism 
for creating liquidity of asset-backed securities that you have 
discussed yesterday and will continue to discuss, I am 
concerned that given the need for capital, which financial 
institutions of all types--a critical need right now if they're 
going to become functional, that this regime not underprice 
these assets. They need to be fairly priced but not 
underpriced.
    And the question I had for you: Under this regulatory 
scheme, if your initial auctions produce prices that in your 
judgment are at the low end of fair market value in a freely 
functioning market, are you prepared to provide additional 
leverage into the system which would have the impact, I think, 
of increasing bid prices to a point where the solution to the 
problem doesn't exacerbate the situation we have today, where 
these institutions tend to be badly under-capitalized, if they 
are going to perform effectively?
    Secretary Geithner. You are right. Providing more leverage 
would help against that risk. But we have to worry about the 
other risk, that we are not leaving the taxpayer too exposed in 
this context.
    But this--like about alternatives, you have to think about 
this relative to the alternatives. This proposal is better than 
what exists today because today, you have a market where there 
is a very stark absence of financing, absence of leverage from 
private sources, and that is leaving at least some of these 
markets with a large liquidity risk premium. And this will make 
that substantially better.
    Mr. Minnick. Yes. We all want to make sure the taxpayer is 
treated fairly.
    Secretary Geithner. Right.
    Mr. Minnick. But to the extent that the taxpayer--the 
desire to ensure the taxpayer receives maximum price leads to 
the financial institutions receiving less than a fair price. It 
will increase the need for you to induce capital directly.
    Secretary Geithner. Right.
    Mr. Minnick. And I think the taxpayer is going to be stuck 
with that alternative as well. And this strikes me as a better 
balanced and market-tested vehicle for providing the capital 
than a direct subsidy, and it has the advantage you are not 
nationalizing the system.
    And I would encourage you to look at your leverage and the 
experience of these initial auctions to see if it is yielding a 
fair to the taxpayers but nevertheless full price to the 
institutions.
    Secretary Geithner. Well, you have the tradeoffs right. I 
mean, you exactly understand it. And we have to figure out a 
delicate balance for those things. But you have it exactly 
right.
    Mr. Minnick. Thank you, Mr. Secretary.
    The Chairman. The gentleman from Texas.
    Dr. Paul. Thank you, Mr. Chairman.
    The chairman in his opening statement talked about the 
problem being excessive leverage, and I certainly agree with 
that. And others refer to that as pyramiding of debt. And then 
we run into trouble, and we come up with the idea that 
regulations will solve this without asking the question: where 
did all this leveraging come from and how much of it was 
related to easy money from the Federal Reserve and artificially 
low interest rates?
    So I am very skeptical of regulations per se because I 
don't think that solves the problem. And of course, everybody 
knows I am a proponent of the free market, and this is not 
certainly free markets that got us into this trouble, and this 
certainly won't solve it.
    But, you know, in other areas we never automatically resort 
to regulations. When it comes to the press, if we had 
regulations on the press, we would call it prior restraint and 
we would be outraged. If we wanted to regulate personal 
behavior, we would be outraged and call this legislating 
morality.
    But when it comes to economics, it seems like we have been 
conditioned to say, oh, that is okay because that is good 
economic policy. I accept it in the first two but not in the 
third, and therefore I challenge the whole system.
    And it hasn't been that way forever. It has really been 
that way since the 1930's, about 75 years, that we in the 
Congress have deferred to the Executive Branch to write 
regulations, which are essentially laws. And yet the 
Constitution is very clear. All legislative power shall be 
vested in the Congress.
    So we write laws and we transfer this power. So 
essentially--we have done this for years--we have reneged on 
our responsibility. We have not met our prerogatives. And 
therefore, we participate in this.
    But in your position, you have been trained throughout your 
life to be a regulator, and that is something I know you can't 
deal with. But there is one area that I think that you might be 
able to shed some light on and work toward the rule of law 
because, you know, traditionally under common law--our system 
has always assumed that we are innocent until proven guilty.
    And yet when it comes to regulations, first we allow the 
Executive Branch to legislate as well as the court. But in the 
administrative courts, we are assumed to be guilty until proven 
innocent. You are in charge of the IRS.
    So this is someplace where, if there were a reasonable 
respect for the rule of law, that we could change that tone and 
assume that the taxpayer and the person that is on the 
receiving end of these regulations could say, hey, at least now 
the burden of proof is on the government to prove that somebody 
broke these regulations. And yet look at what we are doing 
endlessly. And yet I see that as the real culprit in all this 
because we are assuming the citizen is guilty.
    Could you comment on that and tell me what you might be 
able to do in changing the direction?
    Secretary Geithner. That was a very thoughtful set of 
questions. I just want to correct one thing. I have never been 
a regulator, for better or worse. And I think you are right to 
say that we have to be very skeptical that regulation can solve 
all these problems.
    We have parts of the system which are overwhelmed by 
regulation, overwhelmed by regulation. It wasn't the absence of 
regulation that was a problem. It was, despite the presence of 
regulation, you got huge risks built up.
    But in banks, because banks by definition take on leverage 
and transform short-term liabilities into long-term assets for 
the good of the system as a whole, they are vulnerable to runs. 
Because they are vulnerable to runs, governments around the 
world have put in place insurance protections to protect 
against that risk.
    Because of the existence of those protections, you have to 
impose standards on them on leverage to protect against the 
moral hazard created by the insurance. That is a good economic 
case for regulation--
    Dr. Paul. Excuse me, but I only have a couple of seconds 
left. But see if you can address the subject of giving more 
respect to that individual who is accused of a crime. Can't we 
assume that the government has the burden of proof?
    Secretary Geithner. You are talking in the criminal 
context?
    Dr. Paul. Well, any way. I mean, any time a regulator comes 
in and says that you are guilty of something, why doesn't the 
government have to prove he is guilty? Why can't we assume--
    Secretary Geithner. Guilty of a criminal violation or of 
a--
    Dr. Paul. Civil or criminal. Why not? I mean, that is a 
principle that has been around for more than 1,000 years, or at 
least 800 years.
    Secretary Geithner. I am neither a regulator nor a lawyer, 
unfortunately, so I am not sure I can give you an adequate 
answer to that. But I would be happy to think about it a little 
bit and get back to you with a view on--
    Dr. Paul. Well, I don't think it is complicated to think 
about the principle of innocent until proven guilty. How about 
the IRS? Can't you advise the IRS and say, don't assume 
anything until you prove these guys did something wrong before 
we prosecute them and say that they owe $500,000? I mean--
    Secretary Geithner. Mr. Chairman, again, if this is about 
the IRS, I would be happy to come talk to you about that.
    The Chairman. The gentleman's time has expired.
    The gentleman from Pennsylvania, the chairman of the 
subcommittee.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Secretary, I am going to actually give you an 
opportunity to answer Mr. Royce's question. But I just want to 
preface it a little bit.
    One, I want to congratulate you on your resolution 
authority suggestion here. Of course, it will need some work 
and whatnot. But I think there is no question in my mind it is 
a tool that is necessary in this convoluted world that we live 
in, and certainly will be in the future, maybe the immediate 
future.
    Unfortunately, there are some gaps in there, and I think I 
see the gaps because there has been a decision made that it is 
going to be publicly announced, I guess, April 30th, when you 
come back with a Blueprint.
    But in your news release announcing the proposed 
legislation, you talked about covered institutions. And 
insurance companies were one of those add-ons, but not quite 
clearly defined. And then when we go over to your proposed 
legislation, you again use insurance as an add-on.
    And the suggestion in the legislation is that it will not 
significantly change from what the present status is because 
you are not giving us the idea of what you propose in terms of 
maintaining State jurisdiction or Federal jurisdiction, whether 
it be optional, whether it be involuntary, whether it be 
determined by size or product or location or amount.
    And if you do have the opportunity, I would appreciate the 
answer to Mr. Royce's question.
    Secretary Geithner. Let me make sure I understand the 
question. This is with respect to, are we proposing through 
this to change the existing regulatory treatment of insurance 
companies?
    Mr. Kanjorski. Will you have a position on the Federal 
treatment of insurance companies? And if so, when, and what do 
you see as the likely parameters of that question? Simply 
because we are going to be undertaking hearings now and 
preparing, and I would like to have some understanding of where 
Treasury will be.
    Secretary Geithner. We will come back soon in the context 
of the more detailed proposals around the rest of the 
complicated issues that matter in this case. I think there is a 
good case for introducing an optional Federal charter for 
insurance companies. But we have to look at each of these 
things in the context of the broader whole, and I would welcome 
a chance to talk to you about those sets of questions in as 
much detail as you would like.
    Mr. Kanjorski. Okay. Is there anyone in the Department now 
who is designated to handle the questions of insurance, or are 
we still in a hiatus there?
    Secretary Geithner. Oh, right now we have a terrific team 
of people working on all these kind of questions. We are trying 
to fill out our team. But I would be happy to give you an 
individual you can talk to directly about not just the 
insurance questions, but how they fit into this broader 
structure.
    Mr. Kanjorski. In the last Congress, we almost succeeded in 
getting through the House a piece of legislation which would 
have established the Office of Insurance Information. And it 
would be needless to do that if we are going to be able to get 
to insurance legislation very quickly, but I doubt we are going 
to get to it that quickly.
    Would you be opposed to our pushing that legislation now, 
early, so we have some repository of insurance information to 
deal with? Or would that--
    Secretary Geithner. Would that be in the Treasury, that 
office?
    Mr. Kanjorski. Yes. In Treasury.
    Secretary Geithner. We would not be opposed to that. 
Anything you can do to help us get more resources and talent in 
this area would be terrific.
    Mr. Kanjorski. Very good.
    The Chairman. If the gentleman would yield, can I just 
ask--because that is something we talked about, how you respond 
to these important questions. I would also be interested if you 
think there is any difference as to how we deal with life 
insurance on the one hand and property and casualty on the 
other because that would be helpful. I thank the gentleman.
    The gentlewoman from Illinois, by process of elimination.
    Mrs. Biggert. Thank you, Mr. Chairman. Last, but not least, 
right?
    Mr. Secretary, I want to go back to the legacy loans for a 
minute, and then I have another question. But the FDIC, as I 
understand your plan, is going to have the five or six groups 
set up, you know, for managing the loans?
    Secretary Geithner. Well, this program has a program for 
loans on bank balance sheets, and it has a program for 
securities that are held across a range of market participants.
    Mrs. Biggert. Right.
    Secretary Geithner. There are different models for each of 
those because of the complex issues involved. But the proposal 
you are referring to, which is to have five asset managers 
raise equity income is on the securities--
    Mrs. Biggert. This is with the FDIC?
    Secretary Geithner. That is on the securities side. On the 
loan side, we are going to use an existing mechanism the FDIC 
now runs as part of the resolution process, where they would 
give a bank the right to identify a pool of loans and to sell 
that into a fund. And the FDIC would run an auction process to 
give a chance for investors to come in and participate in 
taking an equity stake in that pool of loans.
    Mrs. Biggert. Okay. Then the bidding, would that be--how 
would the competition work? Would there be--would these 
investors have to have an ability to successfully manage the 
legacy loan or the legacy--
    Secretary Geithner. Congresswoman, I think it would 
probably be best--this is a very complicated set of questions. 
I think the best thing for me to do is to maybe, as the 
chairman suggested, is we get the range of entities that are 
going to be responsible for managing and designing this process 
to come before you in whatever session you would like and walk 
you through the details.
    Mrs. Biggert. Okay. All right.
    Secretary Geithner. Because these are very complicated. 
Consequently, they are hard to do in 5 minutes.
    Mrs. Biggert. Okay. And I don't even have 5 minutes left, 
so I will move on to the next question.
    I think that Mr. Castle mentioned the council rather than 
just having the regulator for the systemic risk over that. I 
would wonder if--it seems like so much of our problem was the 
fact that the regulators didn't really catch it, and it could 
have been a lot of regulators, and they didn't communicate with 
each other. And so I think it is a failure of communication.
    But we have seen sort of the same thing in Homeland 
Security. We saw it in Hurricane Katrina with--I know that we 
had--I was involved with FLEC, and we asked all of the 
agencies--with the Treasury, to ask all of the agencies come 
together. And they discovered that there was a lot of 
duplication in what they were doing, and how important the 
communication was.
    How about having, rather than just the agencies in a 
council, also having--making it a private-public partnership, 
where you would have representatives from, let's say, the large 
financial institutions, and then maybe the small financial 
institutions and the insurance, and have it be where they 
rotate representatives in there? Because it seems to me when we 
have asked the questions, like of Chairman Greenspan, we didn't 
get the answers. And he really, you know, didn't know, and he 
said he didn't know, everything that was going on.
    And these are the people who are really in the industry and 
dealing with that. And it is not--you know, it is set up so 
that they can bring their concerns, and then that can be 
addressed. And maybe there are a lot of others who realize 
that, under different regulation, that they are having the same 
concerns.
    Secretary Geithner. Mr. Chairman, do I have time to respond 
to that question?
    The Chairman. Yes. You have actually 57 seconds.
    Secretary Geithner. Fifty-seven seconds? Excellent.
    The Chairman. And a little extra.
    Secretary Geithner. I don't think you can let the regulated 
be part of the regulation, which is not quite what you are 
suggesting. But you can't put in a body that is designed to set 
the regulatory standards in which these companies operate and 
have people who are regulated part of that body. I do think, 
though--
    Mrs. Biggert. What about an advisory council that would 
then work with the regulators? But to have that communication 
that is lacking?
    Secretary Geithner. Well, I don't think our problem is a 
lack of communication between the regulators and the regulated, 
although I am sure people can do better in this context.
    But let me just come back to emphasize one thing which I 
agree with you on. And maybe I agree with you on this, too, but 
just I am sure that I agree with the basic premise that you 
need these regulatory agencies working together. You need 
somebody who is responsible for looking at the whole, not just 
the pieces, because a big part of our system was nobody was 
really looking at the whole and pulling it together.
    And there is a very strong case for trying to make sure 
there is better coordination and cooperation across the people 
who have expertise and experience that they could bring to bear 
in this process.
    The Chairman. I thank the Secretary. I would just add to 
the gentlewoman: If anybody suffers from an absence of 
communication with those people who are regulated, I envy them. 
I wish I suffered from a lack of communication with them.
    We are going to be able to--because the Secretary has 
agreed to give us an extra 15 minutes--hear from the 
gentlewoman from California and the gentleman from Missouri. To 
my other colleagues, the gentlewoman from California, somehow 
things have worked out. She will be first with--
    Mrs. Biggert. Mr. Chairman?
    The Chairman. Yes?
    Mrs. Biggert. If I could just have 1 minute to--
    The Chairman. Certainly.
    Mrs. Biggert. I think it was a lack of communication among 
the regulators that I was talking about, not--
    The Chairman. Oh, I apologize. Among the regulators. Yes. 
Well, as a matter of fact, one of the things I mentioned, I 
think that is absolutely right. And, you know, and I think it 
is not--people get busy and they just do the wrong stuff.
    That is why the Secretary suggested, and I think it is a 
very good idea, when we come back, we will have all the 
regulators who will have a piece either of the resolution or of 
the impaired assets or the--all of them here so that we can 
start out that conversation. That was a good suggestion by the 
Secretary.
    The gentlewoman from California will then be able to 
question--
    Ms. Waters. Thank you very much, Mr. Chairman.
    The Chairman. Well, I meant the other gentlewoman will be 
first when we come back because we are going to lose him at 
1:15. So the gentlewoman from California.
    Ms. Waters. Thank you, Mr. Chairman, for all the hard work 
that you are putting in all of these hearings. They are so very 
important. And I would like to thank the Secretary for coming 
back. He is holding up well. And we are appreciative for the 
time that you are putting in.
    I want to ask about the products that are on the market, in 
the various markets. I don't quite understand why it is we 
don't talk about the elimination of certain products. We talk 
about regulation. Whatever product somebody can dream up, we 
say, okay, we will regulate it.
    Why don't we talk about Alt-A? Why is Alt-A a good product? 
Why are credit default swaps good products? Is there such a 
thing as elimination of products, or not allowing certain 
products to come on the market after careful scrutiny, rather 
than saying, anything can come on the market and we will 
regulate it?
    Secretary Geithner. Well, I think it is a very good 
question. I think that, you know, people will always innovate 
around what the government prohibits. And you will always be 
chasing the next thing which is designed to get around just 
that new piece of legislation designed to ban some particular 
product.
    So probably the more effective way to regulate, in some 
sense, is again to make sure the institutions are strong enough 
to survive a very bad storm, and that people are protected from 
predatory behavior, because the predation can come in all sorts 
of forms. People will be endlessly innovative in how to take 
advantage of people if they think there is some gain at stake.
    So I think that you need to have, you know, clearer 
standards regulated and enforced much more effectively across 
our country, and not allow people to come and get around those 
standards and offer people products that don't meet with those 
broad regulatory standards. But if you just do it by banning 
specific things, you will always be chasing the next 
innovation.
    Ms. Waters. Well, I am not so sure that we shouldn't look 
at opportunities to give more scrutiny to products before they 
come on the market, and really disclose to consumers that this 
is particular maybe as it relates to your economic health.
    So let me go to the next one on asset management. I started 
out the other day talking about the five firms that are 
indicated in the plan. I am concerned about women-owned and 
minority-owned businesses. You know, we are dumping a lot of 
money out into the economy, and we want everybody who has 
something to offer that is legitimate and competent to 
participate in all of this money that we are putting into the 
economy to create jobs and opportunities.
    Why can't we look at this a little bit closer and figure 
out how we can get more women and small firms and minority 
firms involved in this asset management, rather than having to 
go and knock on the doors and beg the five?
    Secretary Geithner. We can look at it, and I will commit to 
look at it more carefully and come talk to you and your staff 
about how best we can do that.
    Ms. Waters. Okay. All right. One other thing that I would 
like to ask about is in terms of how the dollars have been put 
out there. FDIC has a guarantee program, and the banks are 
doing their own underwriting.
    Is that unusual? Rather than putting that out there for the 
firms, all of the small firms, to get a crack at underwriting 
with this guarantee that comes from FDIC?
    Secretary Geithner. You know, there is a lot I don't 
understand about how the FDIC operates. But I would be happy to 
pass on that request to Chairwoman Bair and ask her to come 
back and walk you and your staff through their basic approaches 
in that area.
    Ms. Waters. And lastly, let me just ask about credit 
default swaps. Why can't we just eliminate them?
    Secretary Geithner. We could, but I don't think it would 
help anything. And I think it would deprive people from the 
ability to do things that are probably going to make the system 
safer.
    What we are proposing to do is to bring them within a 
framework of oversight, to put them onto clearinghouses and 
exchanges, which will help contain the risk, help people manage 
their risk better, provide much more transparency and 
disclosure about those risks. And we think that will do a lot 
to make the system safer.
    I am not sure this is worth going into, but if you just ban 
them, something else will develop like that. The better 
approach is to try to bring them into a framework where their 
risks are better managed.
    Ms. Waters. Well, Mr. Secretary, I wish that in the 
thinking that goes on about all of these markets, I wish that 
some deeper thought would go into not allowing some products to 
come on the market rather than talking about regulating 
everything because I think even though you talk about how 
creative people can be and how innovative and they will come 
with something else, it is better that you look at that than 
let something get out there that causes us a lot of pain that 
we haven't been able to control. Thank you.
    The Chairman. Two more. We have time for two more. The 
gentleman from Illinois and the gentleman from Missouri, Mr. 
Cleaver, who has been through and got our commitment to go. 
Members who were here will get priority the next time around, 
as we have done before.
    The gentleman from Missouri--no, I am sorry. The gentleman 
from Illinois and the gentleman from Missouri. And we will hold 
to a very strict 5 minutes, Mr. Secretary. Thank you.
    Mr. Manzullo. Thank you, Mr. Chairman.
    Mr. Secretary, would you agree that the Fed's authority to 
government mortgage instruments and to govern the documents 
that would be necessary to prove the income of an individual 
applicant are extremely important powers?
    Secretary Geithner. The Federal Government's or the Federal 
Reserve's?
    Mr. Manzullo. The Federal Reserve.
    Secretary Geithner. I guess I believe they're important, 
although I'm not--I'm the Secretary of the Treasury, not the 
Chairman of the Fed. But I agree they are important powers.
    Mr. Manzullo. Okay. Thank you. They do have those powers. 
They did that by regulation, and the reason I bring that up is 
that here we have a very powerful Federal agency that could 
have curbed a lot of the subprime abuse by eliminating the 3/27 
and the 3/28 teaser mortgages and by eliminating the so-called 
``cheater'' mortgages by requiring proof that a person has the 
income that he states on his mortgage application, yet they did 
not act.
    And the reason I bring that up is you are wanting to start 
yet another large powerful Federal agency and give it 
additional powers and yet I just gave an example of a situation 
where a Federal agency with the powers to have stopped a lot of 
the subprime bleeding had the power but simply did not act.
    Secretary Geithner. You are right across this regulatory 
framework.
    Mr. Manzullo. So I'm not asking for an answer because 
it's--
    Secretary Geithner. Okay. All right.
    Mr. Manzullo. --more of a comment. But it leads into the 
next question, is that now you want to set up this super 
regulatory system, give it the additional powers to even seize 
institutions.
    My question to you is, is how many entities or companies 
would you--can you envision having to be at a--in a position 
where they could be seized because of their size? Would it be 
100, 1,000, 10,000? Do you have any idea?
    Secretary Geithner. No answer. I have no answer to that 
question, again because as we lead out in this suggestion, the 
Congress would have to establish broad standards that would 
describe--
    Mr. Manzullo. Right.
    Secretary Geithner. --what type of institute would impose 
these type of risk.
    Mr. Manzullo. But you're talking about generally all 
insurance companies, all large insurance companies?
    Secretary Geithner. Well, no. Again, what we're trying to 
do is to make sure that those largest institutions or those 
that are so connected or pose grave risks--
    Mr. Manzullo. Right.
    Secretary Geithner. --are subject to a framework which 
protects the economy from those risks.
    Mr. Manzullo. So you're going to have to go through company 
by company--
    Secretary Geithner. No.
    Mr. Manzullo. --to see if they're important enough--
    Secretary Geithner. No.
    Mr. Manzullo. --as to whether or not they should--they 
could be seized because you want to set their executive 
compensation, so you already have your eyes on them?
    Secretary Geithner. Congressman, we have to do better. The 
system we have today--
    Mr. Manzullo. No. I--
    Secretary Geithner. --does not work.
    Mr. Manzullo. I understand that, but what I'm--what I'm 
trying to ask you is how many new companies would be involved 
in this, how intimate would be the relationship that's so 
intimate that you're going to determine what the executive 
compensation is?
    So I would think that before you came out with this plan 
you would have some idea of the number of companies that would 
be subject to this new regulation.
    Secretary Geithner. We laid out a broad set of proposals in 
the legislation and a broad set of principle standards for 
determining what a systemic risk authority would cover--
    Mr. Manzullo. No.
    Secretary Geithner. --in that context and those are things 
that we'll have to work out in consultation with the Congress.
    Mr. Manzullo. No. No. I understand that, but, I mean, you 
realize how radical your proposal is?
    Secretary Geithner. It's not a radical proposal.
    Mr. Manzullo. Oh, it's just absolutely--you're talking 
about seizing private business--
    Secretary Geithner. No, it's not.
    Mr. Manzullo. --and you don't consider that to be radical?
    Secretary Geithner. No. This is a prudent, carefully-
designed proposal to protect our financial system from the--
    Mr. Manzullo. If it's prudent and carefully designed, Mr. 
Secretary, then you would have the answers to some of my 
questions, such as what size business would be subject to this.
    I'm not giving you a hard time because I appreciate the 
fact that you came out with--with a guideline, with a framework 
and it's a discussion framework and--and those are good points. 
I'm just raising the concern that so many people in America 
have because of more intrusion.
    Illinois does not regulate insurance rates. We are 
terrified, terrified that the Federal Government will get 
involved and so mess up Illinois insurance, that we will have 
to go with some grand scheme, perhaps worldwide, as to what the 
insurance rates should be. That's the big concern of the people 
that I have and--and I want to thank you for your time. It 
doesn't require an answer, but I just wanted to share the 
concerns with you.
    Did you have a response to that? It's not necessary.
    Secretary Geithner. I was going to say the great strength 
of our legislative process is we'll together be able to work 
through those concerns. We don't get to decide. We'll have to 
work through those concerns with you.
    Mr. Manzullo. Okay. Thank you. I yield back.
    The Chairman. I will take the remaining time to reassure 
the gentleman that I think I'm due to be chairman until at 
least December of next year, and there will be no legislation 
empowering anybody to regulate the insurance rates while I'm 
the chairman of the committee.
    I will say to the gentleman, having been in the 
Massachusetts Legislature, I have a particular aversion to 
being responsible for the driving habits of my fellow citizens 
in Massachusetts and as long as I'm here, we never will.
    The gentleman from Missouri will be the final questioner.
    Mr. Cleaver. Mr. Secretary, the day has been long. I have 
one question.
    Earlier, someone said they were reading from the 
legislation. I just want to make sure that people who are 
watching this understand that there is no legislation. They 
were reading from a document, probably either your speech or 
something else. There is no legislation.
    The other--there have been pieces--people have asked pieces 
of this and to the degree that you can answer this question, 
understanding that you don't have the--the specifics at this 
moment that--that some would like to see, as specifically as 
you can, can you let me know about the PDIF process of pricing 
the assets in each asset pool and--and whether or not the bid 
process can be conducted in a way that--that is arbitrable and 
verifiable and fair?
    And then, secondly, how--how do we handle the settlement 
process in a way that makes it transparent?
    Secretary Geithner. Again, this is an issue where the best 
thing is to have the FDIC come up and walk you through all 
that. You know, they do this for a living.
    Mr. Cleaver. Yes.
    Secretary Geithner. They have a lot of experience doing it. 
They have an established mechanism, and I really should let 
them walk you through that.
    Mr. Cleaver. That's good enough for me.
    Secretary Geithner. Okay.
    Mr. Cleaver. Let's go to lunch.
    [laughter]
    The Chairman. The hearing is adjourned, and the members who 
are here at the end will be given priority.
    Mr. Sherman. Mr. Chairman, can members submit questions for 
the record?
    The Chairman. Members may always submit questions for the 
record and members may always submit documents for the record.
    [Whereupon, at 12:20 p.m., the hearing was adjourned.]


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