[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE ROLE OF INSPECTORS GENERAL:
MINIMIZING AND MITIGATING
WASTE, FRAUD, AND ABUSE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MAY 5, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-27
U.S. GOVERNMENT PRINTING OFFICE
51-586 WASHINGTON : 2009
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES 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
Subcommittee on Oversight and Investigations
DENNIS MOORE, Kansas, Chairman
STEPHEN F. LYNCH, Massachusetts JUDY BIGGERT, Illinois
RON KLEIN, Florida PATRICK T. McHENRY, North Carolina
JACKIE SPEIER, California RON PAUL, Texas
GWEN MOORE, Wisconsin MICHELE BACHMANN, Minnesota
JOHN ADLER, New Jersey CHRISTOPHER LEE, New York
MARY JO KILROY, Ohio ERIK PAULSEN, Minnesota
STEVE DRIEHAUS, Ohio
ALAN GRAYSON, Florida
C O N T E N T S
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Page
Hearing held on:
May 5, 2009.................................................. 1
Appendix:
May 5, 2009.................................................. 25
WITNESSES
Wednesday, February 00, 2009
Coleman, Elizabeth A., Inspector General, Board of Governors of
the Federal Reserve System..................................... 8
Rymer, Jon T., Inspector General, Federal Deposit Insurance
Corporation.................................................... 10
Thorson, Eric M., Inspector General, U.S. Department of the
Treasury....................................................... 6
APPENDIX
Prepared statements:
Moore, Hon. Dennis........................................... 26
Coleman, Elizabeth A......................................... 28
Rymer, Jon T................................................. 42
Thorson, Eric M.............................................. 56
THE ROLE OF INSPECTORS GENERAL:
MINIMIZING AND MITIGATING
WASTE, FRAUD, AND ABUSE
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Tuesday, May 5, 2009
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2128, Rayburn House Office Building, Hon. Dennis Moore
[chairman of the subcommittee] presiding.
Members present: Representatives Moore of Kansas, Lynch,
Driehaus, Grayson; Biggert, Lee, and Paulsen.
Chairman Moore of Kansas. This hearing of the Subcommittee
on Oversight and Investigations of the House Financial Services
Committee will come to order. Our hearing this afternoon is
entitled, ``The Role of Inspectors General: Minimizing and
Mitigating Waste, Fraud, and Abuse.''
We will begin our first subcommittee hearing of the year
with members' opening statements up to 10 minutes per side, and
then we will receive testimony from our 3 witnesses. After
that, members will each have up to 5 minutes to question the
witnesses.
Without objection, all members' opening statements will be
made a part of the record. I now recognize myself for up to 5
minutes for an opening statement.
There have been a few signs recently that our economy may
be slowly nearing the bottom of the decline. I believe our
economy will eventually stabilize, recover, and grow once
again, but despite a few glimmers of hope, my constituents
remain anxious and I share their concern.
In March, the U.S. economy lost 663,000 more jobs, bringing
the unemployment rate to 8\1/2\ percent, the highest since
November 1983. Since the recession began in December 2007, a
total of 5.1 million Americans have lost their jobs. That is
nearly double the entire population of my home State of Kansas.
Last Friday, regulators shut down 3 more banks, bringing
the total number of U.S. banks that have failed in the past 17
months to 57. The FDIC has estimated that one of those banks,
Silverton Bank in Georgia and the biggest bank to fail this
year, will cost the Deposit Insurance Fund $1.3 billion.
There are some painful lessons that we need to learn from
this financial crisis so we can strengthen the rules and
improve the oversight of our broken financial sector. In
addition to modernizing the regulatory structure to prevent
another financial meltdown, Congress must ensure there is tough
oversight and transparency of the extraordinary actions the
Federal Government has taken to the stabilize the financial
sector.
Some examples include the Treasury Department's use of $700
billion in TARP funds, the FDIC's debt guarantee program, and
the Federal Reserve's intervention with AIG and their $1
trillion TALF program. To that end, I appreciated the
opportunity to work recently with Ranking Member Biggert,
Congressman Driehaus and Congressman Paulsen of the
subcommittee to enact our Special Inspector General of TARP, or
SIGTARP, bill that President Obama signed into law on April
24th.
Just last month, the SIGTARP reported that he has already
launched 20 criminal investigations. He previously indicated he
did not have the staff he needed to track down every lead. The
new law gives the SIGTARP stronger oversight over the TARP
program as well as the expanded authority he requested to hire
the necessary auditors and investigators to provide tough
oversight.
This afternoon, the Oversight and Investigations
Subcommittee will have the Inspectors General from Treasury,
the Federal Reserve Board, and FDIC testify about their ongoing
efforts to expose and eliminate waste, fraud, and abuse. For
example, the Treasury's Office of Inspector General reported
investigations leading to 13 arrests and nearly $400,000 in
court-ordered fines, restitution, and recoveries during a 6-
month period last year.
The FDIC's Office of Inspector General reported
investigations leading to 61 convictions and nearly $353
million in fines, restitution, and other monetary recoveries.
As a former District Attorney for 12 years, and the
chairman of this Oversight and Investigations Subcommittee, one
of my top priorities is to make sure that our Inspectors
General have all the tools and resources they need to continue
this important oversight work.
One issue of concern I would like to focus on today is
material loss reviews, or MLRs, which are required to be
completed by the Inspectors General whenever a failed bank
costs the Deposit Insurance Fund over $25 million.
In January, our three witnesses wrote Chairman Frank
expressing their request that Congress raise the MLR threshold
from $25 million to between $300 million to $500 million. In
addition to a higher threshold, they suggested a requirement
for failed banks falling below the new threshold that an
initial assessment still be taken to ensure that unusual or
potentially significant situations are not missed.
I was disturbed to learn recently that the failure of
Washington Mutual, the largest failure in U.S. history, did not
trigger a mandated material loss review because there was no
cost to the Deposit Insurance Fund, given that JPMorgan Chase
acquired the institution after it failed. I understand the
voluntary review is underway, but we need to update the MLR
system so that a review of a bank failure like WaMu would be
required.
I was also disturbed to read the Inspectors General's
letter to Chairman Frank claiming that without a modernized MLR
system the current system would limit their ability to
effectively oversee many of the new and significant programs
and initiatives that the Federal banking agencies are
undertaking to address current economic conditions. We must
address this problem.
I look forward to hearing the testimony from our witnesses
discussing this MLR concern and then working with members of
our committee on both sides, Republicans and Democrats, to
quickly address this concern so we can provide the best
oversight effort possible.
I now recognize for 5 minutes the ranking member of this
subcommittee, my colleague and friend from Illinois, Mrs.
Biggert.
Mrs. Biggert. Thank you, Chairman Moore, and thank you for
holding this important hearing.
I would like to start by thanking today's witnesses and
their staffs for tackling waste, fraud, and abuse in our
regulatory and financial system, which I believe is at the
heart of our financial crisis.
A couple of years ago, the Chicago Tribune published a
series of articles that revealed that gangs in the Chicago area
were increasingly turning to mortgage fraud. They found it more
lucrative than selling drugs. It turns out the gangs were not
alone. Everyone, it seemed, was in on the act. In March, the
U.S. Attorney in Chicago, Patrick Fitzgerald, brought mortgage
fraud indictments against two dozen players, brokers,
accountants, loan officers, processors, and attorneys.
Mortgage fraud comes in all sizes and shapes. Scam artists
inflate appraisals, flip properties, and lie about information,
including income and identity on loan applications. Some use
the identity of deceased people to obtain mortgages, and other
desperate thieves bilk the most vulnerable homeowners and
seniors in dire financial straights out of their homes and home
equity.
Let's face it; I think this is the tip of the iceberg. And
as we in Congress work to get the economy back on track and
credit flowing again we have to address what was at the root of
the mortgage meltdown in the first place, and that, I believe,
is mortgage fraud.
As Inspectors General of three of the most important
banking regulators, today's witnesses, I think, hold key
positions to investigate mortgage fraud and really get to the
bottom of the turmoil that plagues today's financial markets.
What went wrong, who broke the law, were the laws enforced,
were the laws and regulations adequate to restore confidence in
our markets and address any failing in our system of
regulation, including enforcement? We must determine the
answers to these questions.
On that note, it is important that our financial Inspectors
General have the resources to do their jobs. That is why today
we will examine the role and capability of the Fed, Treasury,
and the FDIC Inspectors General. In addition, we will focus on
a provision in current law that requires IGs to review and
report on any failed banks that cost $25 million or more
material loss to the Deposit Insurance Fund.
I think we will hear from today's witnesses that the
material loss review is that the lower end of the threshold
make up the bulk of their cases, but don't result in
significant findings beyond what was revealed when an
institution closed. However, we will hear that these low end of
the threshold cases take up considerable time and resources.
Due to the high level of bank failures and more on the way,
this MLR requirement with the current threshold level promises
to become increasingly burdensome to the IGs and to continue to
divert them from other important work, including oversight of
TARP and other Federal financial assistance programs, aiding
law enforcement in its efforts to crack down on illegal
behavior and identifying failing of financial regulators,
regulations, and laws.
For example, today's Wall Street Journal indicated that
some banks may be disproportionately laden with commercial real
estate loans and other banks need to increase capital to have
enough of a cushion for anticipated losses.
The sooner we get back to the root of these matters, the
sooner we can get financial institutions off of the Federal
dole and our financial markets and economy back on track.
I would like to conclude by reiterating my continued
commitment to working on these matters. In the past, I worked
on the FDIC Enforcement Enhancement Act, and recently, the
Fight Fraud Act. For two Congresses, I introduced a bill, the
Stop Mortgage Fraud Act, to increase Federal law enforcement
funding to investigate and prosecute mortgage fraud. In
addition, I supported reforms of numerous financial services
regulations and programs, and I and others here today care
deeply about getting this right.
So with that, I look forward to working with my colleagues
and look forward to hearing from today's witnesses. I yield
back.
Chairman Moore of Kansas. Thank you. I recognize the
gentleman from Massachusetts, Mr. Lynch, for 3 minutes.
Mr. Lynch. Thank you, Mr. Chairman. Thank you for holding
this very important hearing, as well as Ranking Member Biggert
for her work on this as well. I would like to thank our
witnesses, not only for the good work that you do every day,
but also for your willingness to come before the subcommittee
and help us with our work.
There is a natural alliance, I think, between our
Inspectors General and the Oversight Subcommittee. We each
search for transparency and we each hope to inject
accountability, I think, to the governmental process and make
sure that the various efforts of government are carried out
properly. But part of our problem that we address here is
really part of a larger problem, which is the complexity in
some of these issues, and I know with each of you, you are
dealing with some of these new financial iterations that are
extremely difficult to follow. We on the Oversight Subcommittee
have had a difficult time getting information back from our
TARP expenditures and just some of the dealings between the
Federal Reserve and the SEC with some of these so-called
rescued companies.
It is part of a larger problem for the reason that while
technology has changed drastically at lightning speed, and
industries are rebuilt continuously, we in government are still
operating with the same set of rules basically, and you are
really our eyes and ears out there. We got rid of the powdered
wigs, but that is about all we have done to update our response
to some of the changes around us.
And so what I would like to hear today is, since we are
partners in this, how we might better allow you to do the job
you need to do, and also how we might better equip you and
support your efforts out there. Rather than just throwing out
criticisms because things aren't going the way we want, we
should really be working in a better way with our Inspectors
General to accomplish the job that we all want to have done.
So I would be really interested in hearing your thoughts on
that, how we can do it better, and how Congress can be more
helpful.
Mr. Chairman, I yield back the balance of my time.
Chairman Moore of Kansas. Thank you. Next, I recognize the
gentleman from Ohio, Mr. Driehaus, for 2 minutes.
Mr. Driehaus. Thank you, Mr. Chairman, and I just want to
echo your comments. Obviously, this is a very important
hearing, and I want to thank the Inspectors General for the
tremendous work that you already do. I know a tremendous amount
is being asked of you, especially at this time, and we, as Mr.
Lynch has said, are very concerned about making sure that we
get it right. We share a common goal in trying to get to the
bottom of any fraud and abuse that might be occurring. And so I
am very interested also in hearing your testimony.
I think at some point, Mr. Chairman, we are going to break
here for votes, and then I will be doing special orders on the
Floor. However, I do have several questions that I would like
to either submit to you in writing that I might get answers to
or hopefully ask if I am still here.
I am particularly interested in following up, as the
chairman noted, from your letter to Chairman Frank in January
in terms of increasing the threshold for material loss reviews.
I am very sympathetic to that request. I understand it is about
allocation of resources and appropriate allocation of
resources. However, I think there are questions about how you
might still identify fraud that exists in those cases that fall
below the threshold and how we might be ensuring consumers that
they are still safe as we move forward.
So I would like to further discuss that, and I hope in your
testimony you will spend a little bit of time talking about any
increase in that threshold and what that means in terms of
ongoing investigations, as well as how you might otherwise
identify fraud for those institutions falling below the
threshold.
Thank you, Mr. Chairman.
Chairman Moore of Kansas. I thank the gentleman, and I am
pleased to introduce the witnesses for this afternoon's
hearing. First, we will hear from Eric Thorson, Inspector
General for the Department of the Treasury. Mr. Thorson was
sworn into office on August 12, 2008. Before joining Treasury,
Mr. Thorson worked at the Small Business Association, where he
also served as Inspector General. He previously served as the
Chief Investigator for the Senate Finance Committee and Chief
Investigator for the Senate Permanent Subcommittee on
Investigations. Mr. Thorson also served as Deputy Assistant
Secretary and Acting Assistant Secretary of the Air Force and
earned the Distinguished Flying Cross during his service as an
Air Force pilot.
Our second witness is Beth Coleman, Inspector General for
the Board of Governors of the Federal Reserve System. She was
appointed Inspector General for the Board, effective May 6,
2007. Ms. Coleman joined the Board's Office of Inspector
General in 1989 as a Senior Auditor and worked her way up. In
2004, she was appointed the Assistant Inspector General for
Communications and Quality Assurance. Prior to joining the
Board's Office of Inspector General, she was employed by the
Government Accountability Office.
And finally, we are also glad to have with us Jon Rymer,
Inspector General for the Federal Deposit Insurance
Corporation. After being appointed by former President George
W. Bush and confirmed by the Senate, Mr. Rymer was sworn into
office July 5, 2006. From 1981 through 1997, Mr. Rymer was a
bank executive at two different banks and also was employed by
the accounting firm of KPMG to provide internal auditing,
assurance processes, and process improvement guidance. Mr.
Rymer has served for 28 years in the active and reserve
components of the United States Army. His awards include the
Meritorious Service Medal (with Oak Leaf Cluster) and the
Humanitarian Service Medal.
Without objection, your written statements will be made a
part of the record. You will each be recognized for a 5-minute
statement summarizing your written testimony.
Mr. Thorson, you are recognized for 5 minutes, sir.
STATEMENT OF ERIC M. THORSON, INSPECTOR GENERAL, U.S.
DEPARTMENT OF THE TREASURY
Mr. Thorson. Chairman Moore, Ranking Member Biggert, and
members of the subcommittee, I want to thank you for the
opportunity to be here this afternoon. I know we all appreciate
the subcommittee's interest in this important topic.
It is a privilege to appear before you with my colleagues
Jon Rymer and Beth Coleman. Over the years, our respective
Offices have forged strong bonds in addressing numerous matters
of mutual interest and what I consider one of the best
professional working relationships between agencies in the
Federal Government.
Our Office provides independent audit and investigative
oversight of the Department of the Treasury, which includes
numerous departmental offices as well as the eight non-IRS
bureaus. Our oversight includes the Office of the Comptroller
of the Currency (OCC), and the Office of Thrift Supervision
(OTS), Treasury's two financial institution regulators.
The material loss review requirement was enacted as a part
of the FDIC Improvement Act of 1991 following on the heels of
the S&L crisis. It calls for the IG of the appropriate
regulator for a failed bank to perform a review within 6 months
when the failure results in a material loss to the Deposit
Insurance, that material loss being defined as the greater of
$25 million, or 2 percent, of the banks assets. That threshold
has not changed since 1991.
In conducting an MLR, the OIG ascertains the causes of the
failure, assesses the regulator's supervision, and makes
recommendations in an effort to prevent similar failures in the
future. Material loss reviews are some of the most resource
intensive audits performed by my Office.
MLRs can also lead to other important areas of work. Last
year, for example, during our review of IndyMac, we learned
that a senior OTS official had approved the backdating of a
capital infusion made in May so that the thrift could report
its condition as well capitalized in March of 2008. Less than 4
months later, IndyMac failed, costing the fund some $10
million. As a result of our inquiry into this matter, OTS
removed the regulator who had approved the IndyMac backdating
contribution.
As a result of further investigation, we found another
instance of backdating, one that found that OTS, the regulator
itself, had directed the bank to take such action. The Acting
Director of OTS has been placed on administrative leave,
pending a Departmental review.
Last January, as you mentioned, my colleagues and I sent
you a letter recommending that the Congress consider raising
the threshold from $25 million to between $300- and $500
million. In that letter, we also summarized the tremendous
demands that the current threshold has placed on our office in
light of the current economic crisis.
The concerns we expressed in January are just as compelling
now as they were then. Since September of 2007, 16 OCC and OTS
banks and thrifts have failed that met the material loss review
threshold, and we are obviously concerned that this unfortunate
trend could continue.
To meet the material loss review requirements, we had to
shift nearly all of our discretionary audit resources to this
work. We have either shut down or indefinitely deferred most of
our audits in other Treasury high-risk programs. This includes
work in Treasury's anti-money laundering and terrorist
financing programs.
Another area where we are deferring work is whether
offshore operations of U.S. banking institutions are being
effectively supervised. Also, we should be looking at OTS's
role in supervising large financial institution holding
companies such as AIG and GE Capital. I consider our oversight
of such high-risk programs to be truly urgent.
Based on all these factors, I endorse your amendment to S.
383 to increase the threshold for material loss reviews to $400
million. I also support, as a prudent measure, the amendment's
proposal that we look at all losses over a 6-month period for
the purpose of determining if any warrant an in-depth review.
This provides us with the flexibility to perform a review
whenever we feel it is necessary, despite the size of the loss.
In conclusion, I would like to take 1 minute to acknowledge
Dennis Schindel, Marla Freedman, and Bob Taylor, who are with
me this afternoon. It is under their strong leadership and
expertise that our excellent audit staff have been able to
timely complete the many MLRs that I have mentioned earlier.
These achievements are possible only through the dedication of
these fine people, and I am very proud of them for that.
This concludes my testimony, and I will be happy to answer
any questions.
[The prepared statement of Inspector General Thorson can be
found on page 56 of the appendix.]
Chairman Moore of Kansas. Thank you, sir.
Ms. Coleman?
STATEMENT OF ELIZABETH A. COLEMAN, INSPECTOR GENERAL, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. Coleman. Chairman Moore, Ranking Member Biggert, and
members of the subcommittee, I appreciate the opportunity to
testify today about the ongoing oversight efforts of my Office,
including how material loss reviews affect our efforts to
strengthen oversight and accountability to the Congress and the
public.
As you are aware, the Federal Reserve System, the Nation's
central bank, consists of the Board of Governors in Washington,
D.C., the 12 Reserve Banks, the Federal Open Market Committee,
and several advisory groups. While the Board is an agency of
the Federal Government, the Reserve Banks combine public and
private elements.
Consistent with the IG Act, my Office conducts independent
audits, inspections, evaluations, and investigations of Board
programs and operations to promote economy, efficiency, and
effectiveness and to prevent and detect fraud, waste, and
abuse.
Currently, about 75 percent of our audit resources focus on
mandated work, which includes contracting for the annual
financial statement audit of the Board and reviewing failed
State Member Banks that result in a material loss to the
Deposit Insurance Fund. In fact, about 40 percent of our audit
resources are working on 3 material loss reviews, and we are we
are just beginning a fourth. If the current pace of State
Member Bank failures continues, and materiality threshold
remains at $25 million, our workload will be heavily
concentrated on material loss reviews at a time when actions
related to the current economic crisis demand our full
attention.
My colleagues and I endorse the legislation proposed by
Chairman Moore to increase the material loss threshold and to
provide the IGs with needed flexibility to ensure that bank
failures receive appropriate attention, while meeting our
strategic objectives.
In light of the financial crisis, the subcommittee has
asked about oversight of the Federal Reserve System. As the IG
for the Board, we are authorized to audit or investigate any
Board program or operation, and our work spans the Board's
mission areas. While we are not authorized to directly review
Reserve Banks, we can assess how well the Board carries out its
general program oversight and supervision of the Reserve Banks,
and review any Board-delegated function conducted by a Reserve
Bank.
The Federal Reserve has taken a number of actions to
address the current economic crisis. The Office of Inspector
General is reviewing these actions. We are auditing the Board's
role in the TARP Capital Purchase Program and have initiated a
broad review to identify risks in the Federal Reserve's new
lending facilities. Furthermore, we are conducting a review of
the Federal Reserve's consolidated supervision of bank and
financial holding companies.
Our criminal investigators are leading and participating in
a number of multi-agency investigations. For example, they have
joined a nationwide effort by the FBI and the United States
Attorney's Office to investigate and prosecute mortgage-related
crimes in the States considered hotspots for such crimes. Most
recently, we referred information to the Detroit Mortgage Fraud
Task Force, and we are working with the FBI on a south Florida
mortgage fraud case.
I have joined other financial regulatory IGs on the TARP IG
Council and have also coordinated with SIGTARP in forming the
Term Asset-Backed Securities Loan Facility Task Force, a
proactive effort to prevent and detect fraud and abuse in the
TALF.
Additional oversight of the Federal Reserve System is
provided in a variety of ways. The Board contracts for an
annual independent financial statement audit of the Reserve
Banks, including an evaluation of internal controls over
financial reporting. The independent public accounting firm
also audits the financial statements of the consolidated
limited liability companies that the Federal Reserve
established in 2008.
The Reserve Banks are also subject to Board oversight and
each Reserve Bank has a general auditor who reports to the
audit committee of that bank. Furthermore, GAO, which is the
investigative arm of Congress, has audit jurisdiction over the
entire Federal Reserve System (both the Board of Governors and
the Reserve Banks) and SIGTARP has audit cognizance over TARP-
related activities pertaining to the Federal Reserve.
While our Office and GAO share oversight functions in
certain areas, we also have noteworthy distinctions,
particularly in the area of monetary policy. Our Office is
authorized to audit the monetary policy programs and operation
of the Board with potential limitations under specifically
defined circumstances. While GAO has greater authority to
directly audit the Reserve Banks, legislation precludes it from
auditing all monetary policy matters and actions. Currently,
GAO is conducting about 20 reviews of the Federal Reserve
System, which includes 17 congressional requests.
Maintaining Federal Reserve independence, particularly in
monetary policy matters, remains critical in assessing whether
GAO's audit coverage should be expanded to include the areas
that are currently restricted. According to the legislative
history on the Federal Reserve Act, ``it cannot be too
emphatically stated that the committee regards the Federal
Reserve Board as a distinctly nonpartisan organization whose
functions are to be wholly divorced from politics.''
In closing, Chairman Moore, I would like to thank you,
Ranking Member Biggert, and the subcommittee for your interest
in the Inspector General's oversight role. I would also like to
thank my colleagues from the Treasury and FDIC for their
ongoing professional coordination on material loss reviews and
other issues of common interest. My Office takes its mission
and authority very seriously and remains committed to promoting
integrity, efficiency, and effectiveness.
I would be pleased to respond to any questions you may
have.
[The prepared statement of Inspector General Coleman can be
found on page 28 of the appendix.]
Chairman Moore of Kansas. Thank you, Ms. Coleman. And
finally, Mr. Rymer, if you would like to testify, you have 5
minutes, sir.
STATEMENT OF JON T. RYMER, INSPECTOR GENERAL, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Rymer. Thank you, Mr. Chairman, Ranking Member Biggert,
and members of the subcommittee. Thank you for the opportunity
you have provided us to participate in this very important
hearing. We appreciate your interest in the challenges that the
IGs of the Federal financial regulators face.
Briefly, I would like to speak for a moment about the
condition of the banking industry. As you know, there are 8,300
FDIC-insured financial institutions in the U.S. banking system.
The FDIC is the primary regulator for 5,100 of the State
nonmember banks.
It is important to note that the vast majority of these
institutions remain viable, notwithstanding the current
economic crisis. However, banks have been failing, and we are
experiencing a dramatic upswing in a number of those failures.
In 2008 alone, 25 institutions failed. During the first 4
months of this year, another 29 institutions have failed. In
total, this amounts to an over $21 billion loss to the Deposit
Insurance Fund.
Next, I would like to talk for a moment about our MLR
coverage. As I detailed in my written statement, the landscape
has not changed from the one we described in the letter to
Chairman Frank we sent back in January 2009. In short, our
predictions have become reality. The current volume of MLR work
and the time and resources this work demands puts at risk my
Office's ability to effectively oversee core activities at the
FDIC. Expending our scarce resources on these reviews also
limits our ability to oversee the new initiatives that the
banking agencies are undertaking.
My Office of Audits is principally responsible for
performing MLRs. Each MLR usually involves a team of 2 or 3
auditors and takes around 2,000 staff-hours to complete. We
have 36 auditors in our Office. To supplement the Office of
Audits, we have temporarily reassigned a number of staff from
other OIG component offices to carry out our mandatory
workload.
We currently have 20 MLRs underway; we have completed 6,
and we will issue 3 more this month. At this level, we are at
capacity, and assuming no further increase in failures, we can
manage this workload through September of this year.
As IG, my first priority is to complete all statutory
requirements. An equally important priority includes the audit
and evaluation coverage of the FDIC's new and expanded
programs, which include receivership and resolution activity.
This activity involves all the business processes associated
with selling an entity and winding up its business. We will be
looking at controls FDIC has in place over the contracting and
legal services functions and the loss share provisions to
ensure compliance with all related terms.
The Temporary Liquidity Guarantee Program is a new program
that was established to help address unprecedented disruptions
in the credit markets. Shortly after the program was
established, we performed, with the use of an independent
professional services firm, a risk assessment on key aspects of
the internal controls of the program.
As part of the TARP's Capital Purchase Program, the FDIC
was responsible for processing applications from FDIC-
supervised banks. We performed a review of the program and
found that the FDIC had established effective controls for
application processing, and the Corporation was in compliance
with the Treasury's guidelines.
We have other work, however, that needs to be done. We
believe there is a need for audit and evaluation coverage of
loan modification programs the FDIC had entered into and
oversight of the WaMu and IndyMac failures. There will be
additional work as well on the Legacy Loan Program that is
currently being developed. The Public-Private Investment
Program was announced 6 weeks ago by the Department of the
Treasury, and the FDIC was tasked with establishing the Legacy
Loan Program as part of the Public-Private Investment Program.
The Chairman of the FDIC has requested that we, along with the
Special Inspector General for the TARP, review the preliminary
control structures that are being designed into the program.
Unfortunately, difficult work decisions have been made and
there are certain areas of work we are having to defer.
In conclusion, given our resource limitations, I will
continue to review and evaluate our work to provide the most
appropriate coverage of the FDIC programs and operations while
maintaining our statutory responsibilities. Based on the number
of problem banks, we anticipate the number of MLRs required to
be completed will continue to grow. Depending on the level of
this growth, my office may not be able to keep up. Considering
our other statutory responsibilities and the high-risk
activities I have just noted, we are challenged to provide
sufficient oversight.
Thank you again, and I look forward to answering any
questions you may have.
[The prepared statement of Inspector General Rymer can be
found on page 42 of the appendix.]
Chairman Moore of Kansas. I thank the gentleman, Mr. Rymer,
and we will now turn to members' questions. I recognize myself
for 5 minutes.
While it seems the intent of Congress nearly 2 decades ago
was to prioritize the work of IGs by putting in place a $25
million threshold in material loss reviews, it does not appear
that standard has kept up with the times and is restricting the
ability of our IGs to investigate higher priority items.
Starting with Mr. Thorson, your testimony underscores the
need to adjust the MLR requirements. You can focus on oversight
priorities like the public debt programs, payment systems, and
the Office of Thrift Supervision's regulation or lack of
supervision of AIG. Would adding flexibility to the MLR--and I
think you maybe already answered this in your comments
earlier--requirements permit you to do strong oversight of the
other priorities as well?
Mr. Thorson. We included a table in our statement that
showed the difference it would make in changing the threshold,
and I believe from a difference of 16 going back to January of
2007 to 6. So it would give us a great deal of flexibility to
be able to redirect some of our assets to be able to pick up
some of the normal audits--I call them normal for what our
Department normally would be experiencing. So for us, it would
make quite a difference.
Chairman Moore of Kansas. Thank you, sir. Mr. Rymer, do you
have any comments?
Mr. Rymer. Yes, sir, I would agree with Mr. Thorson. I
think we provided a table as well. The table would indicate
that raising the threshold to $100 million would provide
significant relief for us, reducing the number of MLRs required
at the moment from 29 to 18. At the $400 million, the level
that was originally discussed, that would put us down to three.
Mr. Chairman, if I could just go on just a moment and give
the committee some comfort in the fact that even if the
thresholds are raised, and noting some of the concerns raised
earlier about potentially not investigating fraud in closed
banks, let me give you the assurance that regardless of whether
we are performing an MLR, we respond to any suspicious
activity, either as entered through FinCEN or noted by our bank
examiners when a bank closes. So those banks, even if they are
not subject to an MLR, will certainly, if there is suspicious
activity or suspected fraud in the bank, be reviewed by our
Office of Investigation.
Chairman Moore of Kansas. Thank you, sir. Ms. Coleman, do
you have any comments?
Ms. Coleman. Yes. I recognize that in raising the
threshold, a lot of the banks that the Federal Reserve
supervises are generally the smaller commercial banks. In fact,
about 90 percent of the State Member Banks under our
jurisdiction are really less than $1 billion, so clearly,
raising the threshold would pretty significantly reduce the
number of MLRs that we are currently conducting.
Nevertheless, having the ability to have the resources that
we have dedicated to that area would really help us in terms of
taking a more in-depth look at some of the broad areas that we
are looking at, the lending facilities and clearly the bank and
financial holding companies.
Chairman Moore of Kansas. Thank you.
Ms. Coleman, someone suggested that given the Federal
Reserve's recent use of emergency 13.3 powers, and the scale of
the facilities it has established during the financial crisis,
Congress should eliminate restrictions on the GAO from doing a
complete audit of the Fed, but others have expressed strong
reservations about that approach and say that by granting GAO
such sweeping oversight by the Fed, Congress would be
jeopardize the independence necessary for the Fed to conduct
monetary policy without fear of political pressure.
I appreciate your testimony, but to get to the heart of
this matter, Ms. Coleman, should Congress grant you more
oversight authority of the Federal Reserve System perhaps given
your oversight of the Federal Reserve Banks instead of just the
Board? Is your Office better equipped to provide strong
oversight while balancing the need of the Fed's independence?
Ms. Coleman. Actually, the Office of Inspector General and
GAO do share responsibility in certain areas, and I think that
is to the advantage of the system. I would say that the
Inspector General for the Board, with the authority that we
currently have, is able to do quite a bit of oversight
regarding Federal Reserve programs and operations. We are able
to look at the Fed's oversight at the Reserve Banks and go out
and collect the information that we need.
Nevertheless, you are correct in pointing out that we are
not able to directly go out to audit a Federal Reserve Bank,
and I certainly would be willing to spend some time with the
committee to talk about possible options in that area.
We do have one restriction on our jurisdiction, which I
would also like to bring to your attention. The Chairman can
restrict our work in certain areas in policy and policy
deliberations, if he determines it is necessary to prevent the
disclosure of deliberations or policy decisions that would
significantly harm the economy or market behavior. But if that
restriction is used, the Chairman would have to send a letter
detailing the reasons to the Inspector General, who would then
forward the letter to Congress. So I think there are some good
protections that would come into play.
Chairman Moore of Kansas. Thank you.
I recognize the vice chair, Mrs. Biggert, for 5 minutes.
Mrs. Biggert. Thank you, Mr. Chairman. I think this is for
all of you, my first question. What are the potential negative
ramifications, if any, of increasing the MLR trigger? It seems
like most testimony mentions that with the lower threshold
level reviews they result in no significant findings beyond
what was found at closing of the institution, but why did the
institutions close in the first place and was it a failure of
management, a failure of regulators to initiate prompt
corrective action measures? What would be the negatives?
Mr. Thorson. As long as we have the flexibility to look at
any of the bank failures regardless of the loss to the fund, I
don't really see any negatives. If it were precluding us from
doing a certain MLR or one that for some reason stood out to us
as important, then that would be a big negative. But we will
still have the ability and the right to go in and do one any
time. So I don't really see that there is any negative in
raising this at all. It just becomes more our discretion.
Mrs. Biggert. Yes. So it is kind of if you get the feeling
that there is something wrong here that you need to
investigate, you would have the flexibility?
Mr. Thorson. Right.
Mrs. Biggert. Inspector Coleman, do you have any other--
Ms. Coleman. I think that the proposal that the committee
presented does include some provisions that would involve
taking a look at all failures at a certain level of review,
which I think would give us enough information to make a
determination as to whether or not the failure was as a result
of perhaps the conditions in that particular geographic area;
for example, a concentration in commercial real estate or if
there were other issues. If we see indications of fraud perhaps
or other areas that raise our concern, we certainly would feel
free to begin a review at that point.
Mrs. Biggert. Inspector Rymer?
Mr. Rymer. Yes, ma'am. I would agree with my colleagues
that we do have the discretion to conduct an evaluation or an
audit of any activity of the FDIC. And as I mentioned a moment
ago, I think we would certainly look at, at a very high level
at least, every failure to determine if there were unique
circumstances; for example, if there were fraud involved in the
institution, particularly by senior officials in the bank.
Another example of unusual circumstances in the failure, as
Ms. Coleman mentioned, could include concentrations of
particular types of lending, out-of-territory lending, or
generating wholesale deposits. A number of the issues, though,
we really have already looked at and gathered information from
the 20 MLRs that we have ongoing. Thus far, we have really
learned a lot, particularly as to the causes of some of the
small bank failures.
Mrs. Biggert. Well, are the existing laws and regulations
missing the mark? Are they too prescriptive and not giving
regulators enough flexibility to shift resources and adapt to
market conditions? There is no problem? You have the
flexibility now?
Mr. Rymer. Yes, ma'am, we do. We do. Whether it is an MLR
or other programs that the FDIC is involved in, I have the
flexibility to audit or evaluate any of those programs.
Mrs. Biggert. And you think that the regulators are expert
enough? You know, when we look back and with all of these
things that we have seen, particularly with hedge funds and the
credit default swaps, we kind of wonder with all these new
products whether the regulators were expert enough. Are they
expert enough now to be able to judge whether there is a
problem or if there is any corruption?
Mr. Thorson. One of the things that we want to do is--we
look at the MLRs as really they are looking backwards in time.
And one of the things that would address what you are talking
about is trying to make sure that they begin to take on a more
perspective nature, that the regulators basically start to look
for emerging risks in financial markets and other products. And
this is really what happened here with the subprime mortgage
crisis, is that we would have liked to have been involved in
looking and seeing how they are doing their work currently so
that we know whether they are better prepared to head off these
kinds of risks.
Mrs. Biggert. Do you think we need to look at the controls
and concentrations of certain types of loans, like the
commercial mortgage loans that were mentioned in today's Wall
Street Journal? Anybody had time to see that?
Mr. Rymer. Yes, ma'am, I can speak to that. I think we have
seen concentrations in the half dozen MLRs we have completed.
We will be doing subsequent work on identifying loan
concentrations, particularly in commercial real estate
development loans and some of the interest reserve processes
that have been going on, in particular in the de novo banks, or
the new banks.
In my view, although we haven't completed the work yet,
there are certainly indications that concentrations in young
banks or de novo banks can lead to problems. And not just on
the loan side, but we also see similar things when generating
wholesale deposits and allowing banks to grow very rapidly
without market deposits, and then those deposits essentially
being used to fund high concentrations in commercial loans.
That is something we definitely need to look at.
Mrs. Biggert. Thank you. I yield back.
Chairman Moore of Kansas. Thank you. We have been advised
that votes will be called sometime between 2:45 and 3:00 p.m.,
and I believe there were 3 votes. I was saying to the members
that I would like us to go for another 7 or 8 minutes after
votes are called and that will give us plenty of time still to
get over there.
Mr. Lynch, you are recognized for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman.
Mr. Thorson, one of the other hats I wear in Congress is I
am the co-chair of the Task Force on Terrorist Financing and
Nonproliferation, so I work directly with FinCEN, the Financial
Crimes Enforcement Network. In my humble opinion, those folks
are doing some of the most wonderful work on behalf of our
country. They get very little credit for the work that they do.
I work with them in Afghanistan, I work with them in Jordan,
helping to stand up the new financial intelligence unit there.
I work with them; they just cut the ribbon on the new financial
intelligence unit in Morocco. Those folks are doing
unbelievable work on behalf of this country. I have regularly
tried to increase funding to the Financial Crimes Enforcement
Network because I see the work that they are doing.
How does this--in your position, do you get to review their
contributions? I know there are some changes here that you have
looked at, some deferments that have had to occur. Is this
effort diminishing the ability of FinCEN to do its job?
Mr. Thorson. As I mentioned, we have pretty much tabled
everything other than MLRs in our office, specifically with
FinCEN and dealing with their responsibilities under the Bank
Secrecy Act and the PATRIOT Act. FinCEN relies a lot on
Treasury and other non-Treasury agencies to do their work. We
want to be able to take a look at what they are doing and how
they are doing it. Previous audits and even congressional
hearings have shown that there have been regulatory gaps in the
detection of violations and also enforcement action against
financial institutions for Bank Secrecy Act and related
violations. We would like to be involved in that. We would like
to pick up that work that we have sort of left behind for a
while.
Mr. Lynch. That would be helpful, I think, not only to
FinCEN, but also to some of the other responsibilities within
Treasury, you know, the opposite of thrift supervision and some
others. There is a real patchwork of coverage and there are
some gaps as you have noticed. I am just very, very concerned
about resources being so limited in that very important area.
If we don't get the suspicious activity reports, if we don't
get the cash transaction reports, and if those reports aren't
analyzed, as well as all the other data we get in, that is
really the basis of a lot of operations that choke-off or at
least limit the ability of terrorists to use legitimate
financial systems to conduct their business, and I think that
is a huge issue for us.
So I just want to sound the alarm on behalf of FinCEN that
if they are not going to get the money they need to do their
job, then it may be happening away from the spotlight--
Mr. Thorson. Right.
Mr. Lynch. --but it greatly affects--you know, it will be
one of those situations where after something happens, we will
read about the fact that this system wasn't allowed to conduct
the oversight that it was mandated to because of unbalanced
funding priorities. So I am worried about this.
Mr. Thorson. Your point is a very good one, and people
could misunderstand as well. You know, why are you looking at
failed banks as opposed to things like you are describing that
clearly relate to anti-terrorism? We have to prioritize the
office based on those things that are mandated, such as the
financial audit of the Department, those kind of things we have
no choice in.
Mr. Lynch. Yes.
Mr. Thorson. The other is that, of course, in doing those
things, we are not there to strictly just to try and find fault
with them. The truth is in everything we do and all the bureaus
that we look at we are trying to help the Department and to be
a positive influence in their work. So it really has two
different aspects of it. But clearly, the prioritization is one
that we feel is a bit out of kilter right now because we just
don't have a choice in what it is we are going to do.
Mr. Lynch. I appreciate that, and I am not blaming anyone.
I realize if there is anybody to blame, it is probably us up
here. We have priorities that are set sometimes by public
opinion or the newspaper headlines, and so I appreciate the
struggle that you are having.
Thank you, Mr. Chairman. I yield back.
Chairman Moore of Kansas. Thank you. The gentleman from New
York, Mr. Lee, is recognized for 5 minutes.
Mr. Lee. Thank you, Mr. Chairman. I appreciate that you
have a monumental task ahead of you in terms of trying to
protect the taxpayer. It is one of the reasons I am here as
well. I came from the private sector, and I look at these
numbers sometimes and my concern is I think people get numb to
them because at a $25 million threshold, that is an awful lot
of money, and to actually create that kind of money as a profit
itself is astronomical. To make 5 percent net profit on $25
million, you have to have $500 million in sales. That is an
awful lot of money. And my concern here is we are now talking
about raising this threshold before you look at an MLR to $400-
or 500 million. I just frankly think that is too high a
threshold. If we look at the inflation rate over the last 16 or
17 years, even using 4 percent, I can't up come up with a
number higher than potentially $100 million that you would even
look at. I would like to hear some of your basis. My concern is
that we keep throwing good dollars after bad. And I know you
are short staffed here, but I would like to hear your thoughts
if you are short staffed. Do you use a different method;
instead of using 2,000 hours to go after or to look at a bank
failure, do you use a lesser amount if it is a smaller dollar
amount? If it is $25 million, do you use 1,000 hours? I mean,
trying to get creative on the approach?
And also, there was a comment from Mr. Rymer in terms of
private auditors for work currently being done by the MLR team;
there are concerns due to potential conflicts of interest. But
I would be curious to hear if you exhausted all opportunities
to look outside of potentially even regional firms that may not
have a conflict of interest rather than to continue to grow the
Federal ranks here.
So with that, maybe Mr. Rymer could start.
Mr. Rymer. Yes, sir. Those are very good questions. The
$300- to $500 million figure was arrived at based on GAO's
determination of materiality within the Deposit Insurance Fund.
That number was $500 million. So that is where the starting
point came from.
But let me explain a little bit about my reluctance to
use--I think you really asked two questions. One was the 2,000
hours, and are there opportunities to perform an ``MLR lite.''
Yes, sir, we explored that actually when we started with these.
The first one or two were in the 2,500 to 3,000 hour range. So
we are very conscious of trying to do them more efficiently and
more effectively. We have experimented with doing these, rather
than GAO yellow book audits, with doing them in our Office of
Evaluations to see if we can squeeze down the time. And I think
we can improve, but I don't really see, given yellow book
requirements and professional standards, getting much below
1,500 hours with those.
Your second question was the potential use of perhaps
smaller regional accounting firms. That is something we have
considered and there are opportunities even to use other
auditing agencies within the Federal Government that are not
IGs that we can use as well. So we believe largely,
particularly the bigger banks, that determining the cause of
failure is something that I feel more comfortable having
government auditors do, but there are opportunities for us to
do some of the other work with contract firms, and we are doing
that.
Mr. Lee. What do you think is a minimal level you would be
able to work with on an MLR standpoint, a threshold?
Mr. Rymer. Minimal level, anything would be an improvement,
sir, but I think I would feel comfortable with anything around
$200 million.
Ms. Coleman. I would just like to add on to what Inspector
General Rymer noted.
In our Office, we have, as I mentioned, three MLRs and we
are just adding on a fourth, and we have a relatively small
audit staff. What we have done is to try and keep our teams
fairly small, only 2 or 3 people. We are actually leveraging
them to work on a couple of MLRs at one time.
In addition, I compliment Tony Castaldo, our Assistant
Inspector General for Inspections and Evaluations. He and his
team have come up with, I think, a pretty good way to array the
data, to gather information, so that we can look at it fairly
quickly, look across the data, and get what we think are very
good data points that we need.
Nevertheless, even with those efficiencies, we are still
finding that if the pace of these MLRs continues, I think that
it will be increasingly difficult for us to carry on our other
statutory work while also completing these material loss
reviews.
And in terms of the actual threshold, a minimum threshold,
because a lot of our State Member Banks that we supervise are
relatively small, I would agree with Inspector General Rymer
that $200 million, I think, would be a reasonable threshold,
and coupled with the fact that we would still look at closures
below that threshold when we feel it is warranted. And we
actually have, in our past, looked at a very small bank, but we
did so because we thought it was warranted by the amount of the
failure, even for a small bank, and the fact that fraud was
very much involved.
Chairman Moore of Kansas. The gentleman yields back.
Next, I will recognize Mr. Driehaus for 5 minutes.
Mr. Driehaus. Thank you, Mr. Chairman.
Just to follow up on the conversation that we are having
regarding this potential ``MLR Lite'' issue, you know, whether
the threshold is $300 million or $200 million, could we
identify certain characteristics that might be evident in a
cursory review that would indicate that further review needs to
take place?
I guess some of the concern that I am hearing and when I
look at raising the threshold is that there is a tremendous
amount of subjectivity involved, in terms of whether or not we
go forward with the full MLR if the loss is below the
threshold. And I guess I am wondering, is there some way where
we can add some objectivity to this by identifying certain
characteristics in the language that would trigger a more
thorough review?
So I realize that you still have the discretion to conduct
material loss reviews if, in fact, it falls below the
threshold. But are there characteristics that might be present
that we could be more explicit about in the language in the
bill as we move forward?
Ms. Coleman. I would almost encourage the committee to
consider having us take a risk-focused approach. That is
something that we are very familiar with on a lot of our audit
work and inspections and evaluations, where you take an initial
look at any topic and, based on your knowledge and experience
in that area, identify factors that you think would point to
potential areas that warrant further review. And I think that a
lot of our auditors and evaluators are all experienced in that
type of model and could work, you know, fairly quickly to
identify areas.
So, from that perspective, that would allow us to look at
things that one might not normally see when you are looking at
these reviews, so it kind of gives you a broader definition of
areas. It could include any factors that seemed out of the norm
for an institution of that particular size.
Mr. Driehaus. I assume that is what is done, you know, in
order to determine whether or not an institution falling below
the threshold is worthy of a full investigation. I assume that
type of analysis is already done.
I guess the question is, how do we make that a little less
subjective and a little more objective when it comes to the
criteria that we put forward in legislation and whether or not
that is necessary? Do you prefer the flexibility? Do you prefer
the subjectivity? Or would you prefer more specific guidelines
along the lines of, you know, the characteristics involved in a
risk-focused review?
Mr. Thorson. I think we would prefer the flexibility, but I
will give you, I hope, what is a pretty good reason for that.
The people who do these and who go into these banks and
look at their documents, the supervisory memo, the legal memo,
etc., and review them, they are really very good at this. So,
to give us the flexibility of doing that helps a great deal,
because the people who are going to be actually doing the work
are not going to miss much, is what I am really saying. And we
would be able to trust their judgment on whether or not there
is something here.
And that would be--really, the depth of the review is going
to, of course, depend upon the complexity of how the bank was
structured, how the loss shapes up. But the situation really
becomes one of the ability of the people who are actually doing
the work to recognize what it is they are looking for, to spot
something that would get their attention, and then, no matter
what the amount of the loss was, above or below the threshold,
we would be making decision to go in and look at it.
And that is a very nice convenience to have. But you should
also feel some reliance on the fact that the people who do this
work are really excellent at what they do.
Mr. Rymer. Yes, sir, if I could just offer one suggestion.
Rather than becoming overly prescriptive, perhaps, with
something that is more rules-based, it may be an option in any
contemplated legislation that you have something along the idea
that the IG be required to report to the Congress why they
elected not to do a review.
That might be something that we would incorporate in, say,
our semiannual reports by listing the bank that failed along
with the IG's rationale for electing not to do a review of that
failure.
Mr. Driehaus. Thank you, Mr. Chairman.
Chairman Moore of Kansas. Thank you.
And next, Mr. Paulsen is recognized for 5 minutes.
Mr. Paulsen. Thank you, Mr. Chairman, and thank you, also,
for holding this hearing.
I know the folks on the panel before us play a very, very
important role in terms of the importance of the current
financial crisis that has been gripping the country, with your
powers and review.
I wanted to just ask a couple of questions. Mr. Thorson,
your Office has conducted some of the initial audit work for
the TARP program prior to the Special Inspector General for
TARP being appointed to oversee the program.
Can you tell the committee anything about how you are
coordinating now with SIGTARP, that Office, in terms of
ensuring effective oversight of the TARP program in general and
some of the more complex components that might apply to that?
Mr. Thorson. I am sorry. Are you asking about the
coordination between the SIGTARP and our Office? Is that what
you are asking?
Mr. Paulsen. Correct.
Mr. Thorson. For the most part, I think it is pretty well-
defined. I think there are areas where it gets a little bit
cloudy. And, for our part, we feel that when it comes
especially to the area of whatever--the Department itself, the
employees, the regulators, and those kind of things, and the
bureaus that we oversee, I would say that is a fairly clear
line.
Part of it gets--when I mention it gets a little cloudy, it
is only because of the fact that one jurisdiction is defined by
a block of money and our jurisdiction is defined by the
Department that we serve. But, for the most part, it works
fine.
Mr. Paulsen. Okay. And then just to follow up a little bit,
too, when auditing now, have you done anything with the Office
of Thrift Supervision in regard to their admitted failed
oversight of the AIG Financial Products subsidiary?
Mr. Thorson. I am sorry. What was the last part?
Mr. Paulsen. Just in terms of oversight with AIG, have you
done anything with regard to the Office of Thrift Supervision,
with regard to their admitted failed oversight of AIG in
general?
Mr. Thorson. Well, one of the things that I mentioned
earlier was we would like to be able to look at, for instance,
OTS's role and the piece of AIG that they oversee, as well as
something--you know, the large ones like GE Capital. But we
have not been able to do that at this point.
Mr. Paulsen. Okay. Would you plan on conducting or
undertaking an audit, then, in regard to AIG in particular?
Mr. Thorson. Depending on how our workload shapes up, that
is definitely something we would like to do and that has been
planned.
But, again, as I mentioned before, a lot of this work,
especially MLRs, is mandated, and we really have no real
flexibility in how we do them. Because, right now, it is pretty
much taking all of the audit resources we have.
Mr. Paulsen. Thank you.
And, Ms. Coleman, I was going to ask too--Neil Barofsky,
the SIGTARP Inspector General, essentially has reported that
several components of that program do pose significant risks
for waste, fraud, and abuse. Do you think the recently created
Fed holding companies, in general, the lending facilities,
could also pose any significant risks for waste, fraud, and
abuse that have not been discovered?
Ms. Coleman. Well, first of all, I did want to mention that
we are coordinating with SIGTARP on several fronts, including
the Inspector General Council for TARP. We also have joined
forces with him in creating the TALF Task Force, which is a
proactive effort to get ahead of any fraud, waste, and abuse in
one of the Federal Reserve's largest programs, which is the
Term Asset Liquidity Facility, the TALF.
In addition, I would say that we are currently conducting
fairly high-level reviews of all of the Federal Reserve's
lending facilities. This is really to gather information to
identify specific areas of risk. So I would probably be in a
better position after we complete some of that work to respond
to your question about the lending facilities as well as the
bank and financial holding company area.
Because we are, in part, with the other mandated work that
we have ongoing and the fact that we are working in the MLRs,
we are looking at these areas at a fairly high level, with the
intent of getting additional resources and zeroing in more to
look at the internal controls more specifically.
Mr. Paulsen. Thank you.
And I will yield back in just a second, but, Mr. Chairman,
I want to thank you for holding this hearing, because I think
as much flexibility as we can provide to these Inspectors
General is really critical to ensuring not only the confidence
of consumers and those in the financial sector but also of
getting down to the real nuts and bolts of where some of the
problems lie.
Thank you. I yield back.
Chairman Moore of Kansas. Thank you, sir.
And finally, Mr. Grayson, you have 5 minutes, sir.
Mr. Grayson. Thank you very much, Mr. Chairman.
Inspector General Coleman, you are the Inspector General
for the Federal Reserve, right?
Ms. Coleman. That is correct.
Mr. Grayson. Okay. Have you done any investigations
concerning the Federal Reserve's role in deciding not to save
Lehman Brothers, which led to shockwaves that went through the
entire financial system?
Ms. Coleman. In that particular area--you know, I don't
generally comment on specific investigations. But we do not
currently have an investigation in that particular area.
Mr. Grayson. All right. What about the $1 trillion-plus in
expansion of the Federal Reserve's balance sheet since last
September? Have you conducted any investigations regarding
that?
Ms. Coleman. Right now we have a--we call it a ``review.''
The term ``investigation'' may have different connotations. So
we actually are conducting a fairly high-level review of the
various lending facilities collectively, which would include
the TALF, a variety of the different programs that are in
process. We are looking at them at a fairly high level to
identify risk.
Mr. Grayson. Well, I understand that, but we are talking
about events that started unfolding 8 months ago. Have you
reached any conclusions about the Fed expanding its balance
sheet by over $1 trillion since last September?
Ms. Coleman. We have not yet reached any conclusions.
Mr. Grayson. Do you know who received that money?
Ms. Coleman. For the--? We are in the process right now of
doing our review, and--
Mr. Grayson. Right. But you are the Inspector General. My
question is specifically, do you know who received that $1
trillion-plus that the Fed extended and put on its balance
sheet since last September? Do you know the identity of the
recipients?
Ms. Coleman. I do not. No, we have not looked at that
specific area at this particular point on those reviews.
Mr. Grayson. What about Bloomberg's report that there are
trillions of dollars in off-balance-sheets transactions that
the Federal Reserve has entered into since last September? Are
you familiar with those off-balance-sheet transactions?
Ms. Coleman. You know, I think it may be important at this
point, too, just to bring up a certain aspect related to our
jurisdiction and just to clarify, perhaps, some of my earlier
comments.
We are the Inspector General for the Board of Governors,
and we have direct oversight over Board programs and operations
and are also able to look at Board-delegated functions to the
Reserve Banks as well as the Board's oversight and supervision
of the Reserve Banks. We do not have jurisdiction to directly
go out and audit Reserve Bank activities specifically.
Nevertheless, in our lending facilities project, for
example, we are looking at the Board's oversight over the
program and to the extent that extends out to the Federal
Reserve Bank of New York.
Mr. Grayson. Well, I have a copy of the Inspector General
Act here in front of me. And it says, among other things, that
it is your responsibility to conduct and supervise audits and
investigations relating to the programs and operations of your
Agency.
Ms. Coleman. That is correct.
Mr. Grayson. So I am asking you, if your Agency has, in
fact, according to Bloomberg, extended $9 trillion in credit,
which, by the way, works out to $30,000 for every single man,
woman, and child in this country, I would like to know, if you
are not responsible for investigating that, who is?
Ms. Coleman. We, actually--we have responsibility for the
Federal Reserve Board's programs and operations, audits--to
conduct audits and investigations in that area.
In terms of who is responsible for investigating--would you
mind repeating the question one more time?
Mr. Grayson. What have you done to investigate the off-
balance-sheet transactions conducted by the Federal Reserve,
which, according to Bloomberg, now total $9 trillion in the
last 8 months?
Ms. Coleman. I will have to look specifically at that
Bloomberg article. I don't know if I have actually seen that
particular one.
Mr. Grayson. That is not the point. The question is, have
you done any investigation or auditing of off-balance-sheet
transactions conducted by the Federal Reserve?
Ms. Coleman. At this point, we are at the very--we are
conducting our lending facility project at a fairly high level
and have not gotten to a specific level of detail to really be
in a position to respond to your question.
Mr. Grayson. Have you conducted any investigation or
auditing of the losses that the Federal Reserve has experienced
on its lending since last September?
Ms. Coleman. We are still in the process of conducting that
review. Until we actually, you know, go out and gather the
information, I am not in a position to really respond to the
specific question.
Mr. Grayson. So are you telling me that nobody at the
Federal Reserve is keeping track on a regular basis of the
losses that it incurs on what is now a $2 trillion portfolio?
Ms. Coleman. I don't know if--you are telling me that
there--you are mentioning that there are losses. I am just
saying that we are not--until we actually look at the program
and have the information, we are not in a position to say
whether there are losses or to respond in any other way to that
particular point.
Mr. Grayson. Mr. Chairman, my time is up, but I have to
tell you honestly, I am shocked to find out that nobody at the
Federal Reserve, including the Inspector General, is keeping
track of this.
Chairman Moore of Kansas. I thank the gentleman.
And I want to thank our witnesses for the testimony here
today. This hearing gives us a better sense of the oversight
work being done by these Inspectors General and the importance
of their work to expose waste, fraud, and abuse. We need to
address the concerns discussed today, of the concern on MLR
requirements and how to improve it for stronger oversight.
The Chair notes that some members may have additional
questions for this panel. And, sir, if you have additional
questions, you are certainly welcome to submit those in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
The hearing is adjourned, and I thank the witnesses.
[Whereupon, at 3:15 p.m., the hearing was adjourned.]
A P P E N D I X
May 5, 2009
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