[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
U.S. GOVERNMENT PRINTING OFFICE
48-875 WASHINGTON : 2009
-----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001
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.]
A P P E N D I X
March 26, 2009
[GRAPHIC] [TIFF OMITTED] T8875.001
[GRAPHIC] [TIFF OMITTED] T8875.002
[GRAPHIC] [TIFF OMITTED] T8875.003
[GRAPHIC] [TIFF OMITTED] T8875.004
[GRAPHIC] [TIFF OMITTED] T8875.005
[GRAPHIC] [TIFF OMITTED] T8875.006
[GRAPHIC] [TIFF OMITTED] T8875.007
[GRAPHIC] [TIFF OMITTED] T8875.008
[GRAPHIC] [TIFF OMITTED] T8875.009
[GRAPHIC] [TIFF OMITTED] T8875.010
[GRAPHIC] [TIFF OMITTED] T8875.011
[GRAPHIC] [TIFF OMITTED] T8875.012
[GRAPHIC] [TIFF OMITTED] T8875.013