[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







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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

                              ----------                              
                                                                   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

                              ----------                              


                          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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