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

    ,
    TOO BIG TO FAIL: THE ROLE FOR BANKRUPTCY AND ANTITRUST LAW IN FINANCIAL
                           REGULATION REFORM (PART I)

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                       COMMERCIAL AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                OCTOBER 22, 2009

                                   __________

                               Serial No. 111-60

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

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    52-942                    WASHINGTON : 2009
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                           COMMITTEE ON THE JUDICIARY

                     JOHN CONYERS, Jr., Michigan, Chairman
    HOWARD L. BERMAN, California         LAMAR SMITH, Texas
    RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr.,
    JERROLD NADLER, New York                 Wisconsin
    ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
    MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
    ZOE LOFGREN, California              BOB GOODLATTE, Virginia
    SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
    MAXINE WATERS, California            DARRELL E. ISSA, California
    WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
    ROBERT WEXLER, Florida               STEVE KING, Iowa
    STEVE COHEN, Tennessee               TRENT FRANKS, Arizona
    HENRY C. ``HANK'' JOHNSON, Jr.,      LOUIE GOHMERT, Texas
      Georgia                            JIM JORDAN, Ohio
    PEDRO PIERLUISI, Puerto Rico         TED POE, Texas
    MIKE QUIGLEY, Illinois               JASON CHAFFETZ, Utah
    JUDY CHU, California                 TOM ROONEY, Florida
    LUIS V. GUTIERREZ, Illinois          GREGG HARPER, Mississippi
    TAMMY BALDWIN, Wisconsin
    CHARLES A. GONZALEZ, Texas
    ANTHONY D. WEINER, New York
    ADAM B. SCHIFF, California
    LINDA T. SANCHEZ, California
    DEBBIE WASSERMAN SCHULTZ, Florida
    DANIEL MAFFEI, New York

           Perry Apelbaum, Majority Staff Director and Chief Counsel
          Sean McLaughlin, Minority Chief of Staff and General Counsel
                                     ------

               Subcommittee on Commercial and Administrative Law

                        STEVE COHEN, Tennessee, Chairman

    WILLIAM D. DELAHUNT, Massachusetts   TRENT FRANKS, Arizona
    MELVIN L. WATT, North Carolina       JIM JORDAN, Ohio
    DANIEL MAFFEI, New York              HOWARD COBLE, North Carolina
    ZOE LOFGREN, California              DARRELL E. ISSA, California
    HENRY C. ``HANK'' JOHNSON, Jr.,      J. RANDY FORBES, Virginia
      Georgia                            STEVE KING, Iowa
    ROBERT C. ``BOBBY'' SCOTT, Virginia
    JOHN CONYERS, Jr., Michigan
    JUDY CHU, California

                         Michone Johnson, Chief Counsel

                        Daniel Flores, Minority Counsel

                                C O N T E N T S

                                  ----------

                                OCTOBER 22, 2009

                                                                       Page

                               OPENING STATEMENTS

    The Honorable Judy Chu, a Representative in Congress from the
      State of California, and Member, Subcommittee on Commercial and
      Administrative Law.............................................     1
    The Honorable Steve Cohen, a Representative in Congress from the
      State of Tennessee, and Chairman, Subcommittee on Commercial
      and Administrative Law.........................................     1
    The Honorable Trent Franks, a Representative in Congress from the
      State of Arizona, and Ranking Member, Subcommittee on
      Commercial and Administrative Law..............................     3
    The Honorable John Conyers, Jr.,, a Representative in Congress
      from the State of Michigan, Chairman, Committee on the
      Judiciary, and Member, Subcommittee on Commercial and
      Administrative Law.............................................     5
    The Honorable Jim Jordan, a Representative in Congress from the
      State of Ohio, and Member, Subcommittee on Commercial and
      Administrative Law.............................................     9
    The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
      Congress from the State of Georgia, and Member, Subcommittee on
      Commercial and Administrative Law..............................     9

                                   WITNESSES

    Mr. Michael S. Barr, U.S. Department of Treasury
      Oral Testimony.................................................    18
      Prepared Statement.............................................    20
    Mr. Michael Krimminger, Federal Deposit Insurance Corporation
      Oral Testimony.................................................    26
      Prepared Statement.............................................    28
    Mr. Harvey R. Miller, Weil, Gotshal & Manges LLP
      Oral Testimony.................................................    63
      Prepared Statement.............................................    64
    Mr. David Moss, Harvard Business School
      Oral Testimony.................................................    95
      Prepared Statement.............................................    98
    Mr. Christopher Sagers, Cleveland-Marshall College of Law
      Oral Testimony.................................................   105
      Prepared Statement.............................................   107
    Mr. David A. Skeel, Jr., University of Pennsylvania Law School
      Oral Testimony.................................................   128
      Prepared Statement.............................................   130
    Mr. Robert Weissman, Public Citizen
      Oral Testimony.................................................   140
      Prepared Statement.............................................   142

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Prepared Statement of the Honorable John Conyers, Jr., a
      Representative in Congress from the State of Michigan,
      Chairman, Committee on the Judiciary, and Member, Subcommittee
      on Commercial and Administrative Law...........................     7
    Prepared Statement of the Honorable Lamar Smith, a Representative
      in Congress from the State of Texas, and Ranking Member,
      Committee on the Judiciary.....................................    11
    Prepared Statement of the Honorable Henry C. ``Hank'' Johnson,
      Jr., a Representative in Congress from the State of Georgia,
      and Member, Subcommittee on Commercial and Administrative Law..    12
    Material submitted by the Honorable Steve Cohen, a Representative
      in Congress from the State of Tennessee, and Chairman,
      Subcommittee on Commercial and Administrative Law..............    13

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Material submitted by the Honorable Lamar Smith, a Representative
      in Congress from the State of Texas, and Ranking Member,
      Committee on the Judiciary.....................................   162
    Material submitted by Michael S. Barr, U.S. Department of
      Treasury.......................................................   260
    Material submitted by Christopher Sagers, Cleveland-Marshall
      College of Law.................................................   319
    Material submitted by Harvey R. Miller, Weil, Gotshal & Manges
      LLP............................................................   329

    TOO BIG TO FAIL: THE ROLE FOR BANKRUPTCY AND ANTITRUST LAW IN FINANCIAL
                           REGULATION REFORM (PART I)

                                  ----------

                           THURSDAY, OCTOBER 22, 2009

                  House of Representatives,
                         Subcommittee on Commercial
                                and Administrative Law,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Subcommittee met, pursuant to notice, at 11:05 a.m., in
    room 2141, Rayburn House Office Building, the Honorable Steve
    Cohen (Chairman of the Subcommittee) presiding.
        Present: Representatives Cohen, Conyers, Maffei, Johnson,
    Chu, Franks, Jordan, Coble, and King.
        Staff present: (Majority) Eric Tamarkin, Counsel; Adam
    Russell, Professional Staff Member; and (Minority) Daniel
    Flores, Counsel.
        Mr. Cohen. Thank you. Thank you. This hearing of the
    Committee on the Judiciary, Subcommittee on Commercial and
    Administrative Law will now come to order.
        Without objection, the Chair will be authorized to declare
    a recess of the hearing. Before I start I would like to
    recognize Ms. Chu, who is our new Member of the Subcommittee,
    and we welcome her to the Committee, and we would like to
    recognize you for any opening statement you would like to make
    or hear the Bruin fight song.
        Ms. Chu. Well, I am very pleased to join this Committee and
    to have this as my first Committee hearing, so thank you very
    much.
        Mr. Cohen. You are welcome, and we are honored to have you.
        I will recognize myself for a short statement. Today we
    meet to consider the critical question of whether the
    Administration has met its burden of demonstrating that the
    bankruptcy code should be set aside with respect to large, non-
    bank, financial institutions that are critical to the Nation's
    financial system--too big to fail. In place of the regular
    bankruptcy process the Administration proposes that Congress
    grant enhanced resolution authority for such institutions,
    similar to the authority that the FDIC currently has with
    respect to banks.
        This Subcommittee has not yet formed an opinion on the
    merits of the Administration's resolution authority proposal.
    Given, however, that this Subcommittee is charged with ensuring
    the effective functioning of the Nation's bankruptcy system and
    the three-part system of government that we have had for 200-
    and-something years, we take a keen interest in any move to go
    outside that system.
        Additionally, a resolution authority proposal raises some
    antitrust concerns that my distinguished colleague, Hank
    Johnson, the Chairman of the Courts and Competition Policy
    Subcommittee will probably address in more detail. I thank
    Chairman Johnson for his willingness to allow this hearing to
    take place before this Subcommittee for scheduling purposes.
        Proponents of enhanced resolution authority contend that
    the bankruptcy process is inadequate to handle insolvent but
    systemically important financial institutions. These proponents
    assert that bankruptcy law is too slow to address the imminent
    collapse of a systemically significant financial institution
    and that this lack of speed creates dangerous uncertainty in
    financial markets. Nevertheless, this is what the Constitution
    and the past statutes have dictated as the proper course.
        They also contend that the mere act of a bankruptcy filing
    by a large, interconnected financial institution could have a
    destabilizing effect on the financial system because markets
    and investors react very badly to news of such filings.
    Proponents of resolution authority point to the chaotic
    aftermath of Lehman Brothers' bankruptcy filing as well as the
    ad hoc government financial assistance given to AIG to avert
    its imminent collapse. They maintain that what transpired
    served as proof that resolution authority for non-bank
    financial institutions in financial trouble is needed to
    provide a mechanism for the orderly restructuring, sale, or
    liquidation of such entities.
        In response there have been some criticisms leveled at the
    proposed resolution authority. The President's critics contend
    that granting resolution authority to those financial firms
    deemed to be systematically significant may be interpreted as a
    guarantee of a future government bailout should those firms run
    into financial trouble, thereby encouraging continued
    irresponsible risk-taking by such firms.
        Others, including Harvey Miller, one of our distinguished
    panelists, Lehman's bankruptcy council, note that some tweaks--
    with some tweaks the bankruptcy code is perfectly capable of
    dealing with insolvencies of systematically important, non-bank
    financial institutions. Additionally, according to Mr. Miller,
    the creation of a new resolution regime may, in fact, raise a
    host of transparency and due process concerns, all of which
    have constitutional issues involved.
        A resolution mechanism independent of bankruptcy, if
    carefully crafted to avoid the creation of moral hazard and
    with sufficient elements of transparency and due process might
    be an effective way to save the systematically important
    institution, or also creating a means of orderly wind-down,
    should that be necessary.
        The burden remains with the proponents of the resolution
    authority, however, to demonstrate to the satisfaction of
    Congress and this Subcommittee, in particular, that the
    bankruptcy system truly does not offer such a mechanism already
    with respect to non-bank financial institutions and that any
    actions of this creation would not violate constitutional
    authorities that have long held this country in great esteem
    and which are the basis of our oath of office.
        I hope that this Subcommittee, which is charged to oversee
    the Nation's bankruptcy system, can gain some useful insight
    from our witnesses as it considers the merits of the resolution
    authority proposal. Accordingly, I look forward to receiving
    today's testimony.
        I now recognize my colleague, the distinguished Ranking
    Member of the Subcommittee, Mr. Franks, for his opening
    remarks.
        Mr. Franks. Well, thank you, Mr. Chairman. You know, Mr.
    Chairman, I know in many areas of this Committee, just the
    nature of the Committee means that we often have starkly
    different perspectives, and I am sure that there are going to
    be some of those things exhibited here today, but I want you to
    know that I appreciate you for holding this unusually important
    hearing.
        I want to salute you for your leadership and that of the
    Chairman of the full Committee, because I really sense that
    there has been an effort to try to get at what is right rather
    than who is right here, and I am really grateful for that. And
    now I have to make a statement that seems to completely
    countermand everything I just said, but it doesn't change the
    sincerity of it in any----
        Mr. Cohen. You don't have to do that.
        Mr. Franks. Mr. Chairman, on the Judiciary Committee we, as
    I said, often grapple with issues that are among the most
    important in Congress, but even among those matters the issue
    today is singularly important. The question is, how will
    Congress respond to the near financial meltdown of 2008?
        That crisis vaporized trillions of dollars in Americans'
    wealth. Through our globally interconnected economy it affected
    people all across the world. The wisdom of the Federal response
    to date still hangs in the balance.
        Second guessing over the choices the executive branch and
    the Federal Reserve have made, particularly in September 2008,
    will of course continue for decades. But, Mr. Chairman, we
    don't really have the luxury of waiting for decades for those
    details to be manifested and sifted by time. Another crisis may
    come before we know it.
        So we must choose. We must ask ourselves, what reforms
    should Congress press to guard the Nation against future
    calamity? And to help with that decision, Mr. Chairman, you
    have called this hearing, and once again I commend you for
    that.
        Now, on what basis should we make this choice? I believe
    the answer is fairly clear: Unless we understand what triggered
    the crisis we cannot hope to answer it with the right reform or
    solution. And if we don't answer it with the right reform we
    may only launch the Nation toward the next crisis.
        What, then, caused the financial crisis of 2008? And boiled
    down to the simplest answer, in my sincere opinion the answer
    is fairly straightforward: It was human errors of judgment in
    our government when faced with the choice of whether and how to
    intervene in our economy.
        Beginning in the 1990's and continuing into this decade,
    Washington laid the conditions for financial disaster. Through
    the Community Reinvestment Act and its implementing policies
    our Federal Government fueled an unsustainable housing bubble.
        Responding to government rules, government pressure, and
    easy Federal monetary policy, our financial system spread the
    bubble's risk throughout our economy and the world. It did so
    through risk-laden mortgages and secure ties to mortgage
    instruments that were built from and upon them.
        In 2008 and 2007 the piper, unfortunately, came to call. As
    economic conditions deteriorated institutions realized that
    vast majority of vast mortgage-related instruments they held
    might not be worth the paper upon which they were written.
        Financial institutions holding or responsible for insuring
    these interests were exposed to being called to honor debts
    they simply couldn't pay. In response, they hoarded their
    capital. Lending began to freeze up and the financial system
    began to grind to a halt.
        As the crisis intensified, the government of the Treasury--
    the government, the Treasury, and the fed took upon themselves
    the unprecedented step of bailing out Bear Stearns. The market
    took note and began to believe the government would bail out
    any institution that was as large or larger.
        When Lehman Brothers hung on the brink in September of
    2008, the Treasury and the fed refused to bail them out. Now
    this, obviously--that expectation was dashed at that point.
    When Treasury and the fed reversed course days later to bail
    out American International Group, dashed expectations then
    changed to widespread confusion.
        Then, when the Treasury and the fed declared that the
    financial system was on the verge--the edge, as it were--of the
    abyss and ran to Congress with only a two-and-a-half-page
    outline of a rescue plan, full-blown panic began to ensue. And
    we still, of course, are trying to recover to this day.
        Now, the Obama administration proposes in response to
    revamp our system for resolving failing financial institutions
    like Bear Stearns, Lehman, and AIG. But instead of responding
    to what actually happened in 2008, the Administration rests on
    the myth that Lehman's insolvency and the simple need to deal
    with it in bankruptcy triggered the entire crisis, and acting
    on the myth, it would take the largest non-bank financial
    institutions out of the bankruptcy system, create a new
    authority for Federal agencies to intervene with them, and let
    those agencies--like the Treasury and the fed did in 2008--
    decide who survives and who does not. To fund the endeavor it
    gives the agencies a new bailout checkbook.
        Now, Mr. Chairman, I really believe that this is a recipe
    for supercharging the disaster. It institutionalizes
    vulnerability to human error in the executive branch. It
    institutionalizes the temptation for large firms to take
    excessive risks, banking on government bailouts. And it
    concentrates risks in those same institutions by encouraging
    their consolidation and extending the competitive advantage of
    a safety net smaller firms will simply not have.
        Mr. Chairman, that is exactly the wrong direction in which
    to lead this country. It is imperative that we on the Judiciary
    Committee press for the clear alternative option: strengthening
    the bankruptcy code so that fair, transparent, and impartial
    courts can be relied upon without question to resolve these
    firms' insolvencies.
        Precisely that option is embodied in H.R. 3310, in which I
    join Ranking Member Smith as a cosponsor. Now, I look forward
    to discussing the bankruptcy option in depth with you today and
    to working together on the right path forward for America.
        And thank you, Mr. Chairman, for your indulgence.
        Mr. Cohen. Thank you, Mr. Franks, and thank you for your
    working with us on this. I was surprised you didn't have the
    section we agreed on, that ACORN was not going to be able to
    use this resolution authority at any time in the future.
        Mr. Franks. I forgot that. We will get her in there.
        Mr. Cohen. Right. And no abortions will be provided either.
        Mr. Franks. Absolutely.
        Mr. Cohen. That is right.
        I now recognize the Chairman of the Committee, the
    distinguished Chairman from the State of Michigan and the city
    of Detroit, the Honorable John Conyers, for an opening
    statement.
        Mr. Conyers. Thank you, Chairman Cohen. We are privileged
    to have the distinguished panelists--the witnesses that are
    coming to help guide our discussion this morning. We are very
    pleased to have them both here--Mr. Barr, Mr. Krimminger, and
    the others that are coming afterward.
        You know, Jim Jordan and I are in a very similar situation.
    As representatives of Ohio and Michigan we have been
    particularly hard hit by this downturn, and I want Trent Franks
    to know that we are looking very carefully at H.R. 3310.
        And I would like to meet with you about it as soon as my
    staff has digested all of the intricacies of that measure. And
    I thank you for bringing it forward.
        Last fall, our Nation's economy was on the edge of a
    financial meltdown. There is some that say we still are. I
    mean, this is not like a piece of history that has gone by and
    now everything is okay.
        What caused the crisis was the mistaken belief shared by
    Republican and Democratic administrations in the past that the
    financial industry could be relied upon to regulate itself
    without significant government oversight. We had to learn this
    painfully before in 1929, which ended the Roaring '20's and
    ushered into a depression that has never been comparable to
    anything else our economic system has sustained.
        In an oversight hearing last fall, our former colleague,
    then the SEC chairman, Chris Cox, finally admitted that
    voluntary regulation doesn't work. Well, that is wonderful,
    Chris. We had to take a nation to the edge and we made this
    profound economic discovery.
        At the same hearing was the distinguished Alan Greenspan,
    who made a similar confession--admission--that you can't rely
    upon the industry to police itself. Well, that is wonderful. He
    apologized.
        Who can you really, seriously rely on to police itself,
    anyway? Now, instead of demanding change from the financial
    industry and insisting that it work cooperatively with the
    regulators, we in the legislature did something amazing: We
    turned around and gave--and this was a string of multibillion
    dollar bailouts--we gave the first one at $700 billion.
        Taxpayer funded, no strings attached, no requirement to
    even explain what you did with the money. $700 billion. Well,
    thanks, Chairman Paulson.
        I voted no on it too, Trent, and it is now a part of
    American history.
        He summoned the leaders of the Senate and the House into
    that room at night and laid down three sheets of paper and
    said, in effect, the following: Sheet one, I want new Treasury
    powers never before given to a treasury secretary in history--
    that is me, he said. Sheet two, I want $700 billion right now.
    And sheet three, if you can believe the arrogance, he said this
    sheet requires that there be no review in the courts or even
    the Congress over what we are doing.
        Do you know, they signed that? This is what started us off.
        And so the financial system, from this humble perspective,
    was temporarily stabilized on the backs of the American
    taxpayer. Your kids will be paying for that and they will be
    saying, ``Hey Dad, why did you guys do that?''
        ``Well, we were at the edge. Don't you know, the whole
    system was going to fall. We had to. We didn't have any
    choice.''
        In the meantime, we said, now, would you folks hold up on
    the bonuses? They said, ``We can't. We are contractually
    obligated to reward the people that have driven us to the edge
    of the precipice--$1 million bonuses, at that.''
        And so most of the institutions that caused the crisis--
    many of them--shared in the bailout and are now working against
    the proposals of consumer protection and efforts to crack down
    on predatory and abusive lending practices, and also any
    additional regulatory oversight, while we are at it. I mean,
    let us continue business as usual.
        And at the same time, the money is still drying up at the
    bottom. You still can't get loans. You still can't get--the
    credit is stuck. People with good credit cannot get small
    business loans right this minute, after trillions of dollars
    have been shoveled out.
        And as the Troubled Asset Relief Program oversight panel
    reported, nearly--right now--2 million homes have already been
    lost to foreclosure in the United States. Five million
    mortgages are either in foreclosure or default. And the panel
    predicts another 10 million homes can or could be lost to
    foreclosure.
        In Detroit, in the County at Wayne--I had to check the
    figure just now--it was 147 families every day go into
    foreclosure--they are served with eviction. It said here on my
    remarks 195, so I turned to Attorney Tamarkin. I said, ``195?
    It is 147.'' He said, ``It has gone up.''
        Every day, Monday through Friday, every week, 195 families
    in my city are served with eviction or foreclosure notices
    because they are behind in their mortgage payments. And so what
    the Committee on Commercial Administration Law is doing here
    today is raising the question of, how can we return fairness to
    the economy and how can we unwind out of this insolvency that
    surrounds financial institutions and how we can get the credit
    flowing again in our Nation, not just my state or Jim's state,
    across the country? It is not much different--it may not be as
    bad as we are getting hit.
        These massive financial institutions--this was caused--yes,
    the government should take some of the blame, but the
    government didn't plan the risky, risky, unregulated credit
    transactions that they dreamed up with exotic instruments.
        And here is, Trent, where the government does kick in. We
    came up with a theory that you are too big to fail. Why do you
    have to give these people that caused the problem taxpayer
    money?
        Well, Chairman, they are too big to fail. You have got to
    do it.
        Well, I think that theory has been reexamined much more
    carefully. And then we hastily arrange a merger for Bear
    Stearns, but we said, ``Oh, Lehman Brothers, let them go.'' And
    then turned around and hand $180 billion cash infusion to AIG.
        And since you had to be big and powerful to get on the
    preferred treatment list, small banks failed at a rate not
    since seen since the savings and loan crisis in the 1980's
    while the 19 largest banks in the country were all deemed too
    big to fail. And I want our witnesses to comment on these
    theories that Chairman Cohen and Trent Franks and I have put
    forward.
        And what did some of the big boys do? They bought out the
    healthy small banks. They had enough money, thanks to us, to go
    out and buy the biggies--to go out and buy the little ones.
        Well, I will put the rest of my statement into the record
    and I thank the Chairman for his generously allowing me to take
    this time.
        [The prepared statement of Mr. Conyers follows:]
    Prepared Statement of the Honorable John Conyers, Jr., a Representative
      in Congress from the State of Michigan, Chairman, Committee on the
     Judiciary, and Member, Subcommittee on Commercial and Administrative
                                      Law
        Last fall, our Nation's economy was on the edge of a financial
    meltdown. What essentially caused this crisis was the mistaken belief
    shared by past Administrations--both Republican and Democrat--that the
    financial industry could be relied upon to regulate itself without
    significant government oversight.
        Unfortunately, the lessons our Nation had painfully learned in the
    market crash of 1929, which ended the Roaring 20s and ushered in the
    Great Depression, were forgotten over the intervening years.
        At an oversight hearing last fall on the financial meltdown, the
    then SEC Chairman finally admitted that ``voluntary regulation does not
    work.''
        Also testifying at that same hearing was former Federal Reserve
    Chairman Alan Greenspan, who likewise admitted he made a ``mistake'' in
    relying upon the industry to police itself.
        But, instead of demanding change from the financial industry, and
    insisting that it work cooperatively with the regulators, Congress gave
    the industry a $700 billion taxpayer-funded, no-strings-attached
    bailout.
        And with the financial system now stabilized on the backs of the
    American taxpayer, Wall Street is poised to hand out another round of
    hefty bonuses.
        Meanwhile, most of the institutions that caused the crisis and then
    shared in the bailout are working against the Obama Administration's
    consumer protection proposals to crack down on predatory and abusive
    lending practices.
        Many of these same institutions have been woefully slow in granting
    reasonable mortgage modifications to struggling homeowners facing
    foreclosure, while strenuously opposing my legislation to allow market-
    based judicial modification of mortgages.
        As the TARP Congressional Oversight Panel reported earlier this
    month, nearly 2 million homes have already been lost to foreclosure,
    and more than 5 million mortgages are either in foreclosure or default.
    The Panel predicts another 10 to 12 million homes could be lost to
    foreclosure.
        Let me put these numbers in some perspective. In my district, about
    195 homes in Wayne County, Michigan are being foreclosed or entering
    into the foreclosure process each day.
        With this worrisome backdrop, I am pleased that the Commercial and
    Administrative Law Subcommittee is considering how we can return
    fairness to the economy, and find ways to unwind insolvent financial
    institutions that present a systemically significant risk to our
    Nation's economy.
        These massive institutions were allowed to precipitate an economic
    meltdown with their risky and largely unregulated credit transactions,
    then were all-too-often sheltered from the consequences of their
    behavior as ``too big to fail.''
        The last Administration took an ad hoc response. They financed a
    hastily-arranged merger for Bear Stearns, then let Lehman Brothers
    collapse into bankruptcy, then handed a $180 billion cash infusion to
    mega-insurer AIG.
        Since you had to be big and powerful to get on the preferred
    treatment list, small banks failed at a rate not seen since the savings
    and loan crisis in the 1980s, while the country's 19 largest banks were
    all deemed too big to fail.
        FDIC Chairman Sheila Bair recently testified that big banks were
    able to use their size and reach to essentially ``blackmail'' the
    government.
        The ironic result is even bigger banks, in an even more
    concentrated financial market.
        So the Obama Administration's resolution authority proposal is a
    welcome response to the ad hoc approach and the financial blackmail.
        It is a welcome response to the perverse incentives for too-big-to-
    fail entities to take on excessive risk, yet avoid moral hazard.
        It promises to provide a practical mechanism to allow systemically
    significant companies to fail, while managing the ripple effects.
        We can all agree that the current ad hoc system, where the American
    taxpayer is used as a backstop for too-big-to-fail corporations is not
    working.
        However, as we consider next steps, the first question we have to
    answer is whether the Administration's resolution authority proposal is
    the best approach for addressing insolvent systemically significant
    nonbank financial institutions, or whether the Bankruptcy Code can be
    amended to handle failures of these institutions.
        The Lehman bankruptcy, the largest in U.S. history, has been cited
    as the primary rationale for the need to create a new resolution
    authority.
        Some have argued that bankruptcy procedure is too slow in the time
    of a fast-moving financial crisis. They have also argued that the
    bankruptcy process is ``messy,'' and has a destabilizing effect on
    markets and investor confidence.
        They have supported a resolution regime largely modeled on the
    FDIC's current authority to resolve failed depository banks.
        Others maintain that the Lehman bankruptcy demonstrated that the
    bankruptcy process has unique flexibility that makes it better equipped
    to handle resolution of these companies.
        With a few tweaks, they say, the bankruptcy system can handle the
    resolution of nonbank systemically significant financial institutions
    far better than an FDIC model.
        I hope that our witnesses today will help Committee members better
    understand which approach would be the more effective.
        Second, if Congress decides to pursue the Treasury's resolution
    authority approach, we should ensure that antitrust considerations are
    given their full account, so that the problem of institutions becoming
    too big to fail doesn't just get worse, with larger institution, less
    competition, and higher prices to consumers.
        The Administration's draft resolution authority legislation would
    vest the FDIC and SEC with authority to seize and resell the assets of
    certain business entities. However, the draft proposal is unclear about
    the role of antitrust oversight by the Justice Department and the
    Federal Trade Commission.
        In an environment where a few banking giants are dominating the
    market, it is important that we keep the antitrust laws at the
    forefront.
        Third, if Congress decides that the bankruptcy process is the
    better course, then we must revisit which aspects of the Code should be
    amended to provide a better framework to deal with institutions too big
    to fail.
        For example, we should scrutinize the use of the netting and safe
    harbor provisions, which were inserted into the Bankruptcy Abuse
    Prevention and Consumer Protection Act of 2005 at the behest of
    financial industry associations.
        These provisions created a safe harbor that put derivatives, swaps,
    and securities transactions beyond the jurisdiction of the bankruptcy
    court.
        Giving banks and brokers a free hand to offset mutual debts against
    each other through netting might sound like prudent risk management, it
    has been described as ``chaotic'' in practice, as evidenced by the
    Lehman case.
        On the day before its Chapter 11 bankruptcy filing, Lehman utilized
    the netting provisions to offset various financial contracts it had
    outstanding.
        Instead of resolving these financial contracts in a transparent
    manner under the framework of the Bankruptcy Code, Wall Street
    conducted a private trading session without any oversight. During this
    session, Lehman's assets were ravaged by its creditors.
        We remain at a momentous crossroads in our economic recovery--the
    big banks propped up by the taxpayers are back to prosperity, but
    everyone else has been left behind.
        I commend the collaboration between Commercial and Administrative
    Law Subcommittee Chairman Steve Cohen and Courts and Competition Policy
    Subcommittee Chairman Hank Johnson in putting together an important and
    thought-provoking hearing, and I look forward to the testimony.
                                   __________

        Mr. Cohen. Thank you, Mr. Chairman. Your remarks are always
    welcomed.
        And before I recognize my fellow Chairman, I think the
    opposite end of the Big 10 axis here, Michigan, Ohio State
    should be recognized for a statement. Mr. Jordan?
        Mr. Jordan. I thank the Chairman.
        Thank the Chairman of the full Committee for his comments
    about the economic situation in the Midwest and Ohio and
    Michigan, and frankly across the country.
        Let me just make this point: As the Chairman was going
    through the history of the TARP program, I do think it is
    important to remember, as well, that, you know, we gave this
    unprecedented authority to the government and the results have
    not been what we expected, not been--well, I guess some of us
    maybe expected, those of us who voted against it.
        But think about what took place. That whole package was
    sold to the United States Congress that they were going to get
    this money and go in and purchase the troubled assets, free up
    the dollars that need to be put to use right now in our
    economy. And to date, they still haven't purchased the first
    troubled or toxic asset.
        In fact, I would almost argue that--and we had hearings on
    this in another Committee--that when the program was sold to
    the Congress of the United States you wonder if there was any
    misleading going on, because 9 days after--this came out in
    testimony during the Bank of America hearings--9 days after the
    program passed the Treasury and the fed had already changed
    directions and simply went to injecting capital into these
    institutions.
        And so I would be concerned about any new power we start
    giving to government in light of what took place in that whole
    scenario, which I think was just a wrong move and the wrong
    kind of approach to a tough situation we had to deal with last
    year.
        And with that, Mr. Chairman, I would yield back.
        Mr. Cohen. Thank you, Mr. Jordan. I appreciate your
    remarks.
        We have got votes but we have got time for the opening
    statement from the Chairman of the Committee that has been so
    kind to work with us today, Mr. Johnson, of Georgia.
        Mr. Johnson. Thank you, Chairman Cohen. Thank you for
    holding this important hearing. And I am glad that this
    Committee is taking the opportunity to look at the role of
    bankruptcy reform in financial regulatory reform.
        And I think one of the things that I am most proud of as a
    congressman in my sophomore term is my vote against the Wall
    Street bailout, also known as the TARP program. And the reason
    why I voted against it was because yes, I felt that there was
    a--our economy was freefalling, but I thought that the best way
    of addressing the issue was to start not on Wall Street but on
    Main Street.
        Main Street needed the bailout. So many people suffering
    from foreclosure, suffering from medical bills that they could
    not pay, so many people had already lost their jobs, and I
    thought that we could put together a package that would help
    those people. And then once Main Street was stabilized, then we
    could address some concerns about Wall Street.
        Used to be, in the old days I guess, that you preside over
    a company, you make billions of dollars in profit, and if
    something goes wrong your company goes into bankruptcy and your
    leadership resigns or is fired, either one. But that process
    was usurped by a new process in this Wall Street bailout
    situation. The very people who led us to impending doom were
    allowed to remain on board of their companies, continue to lead
    their companies, while at the same time they were given
    taxpayer money with no strings attached.
        And with that money, instead of cleaning up toxic assets,
    cleaning up balance sheets, and getting rid of toxic paper, as
    it was called--and that would have, by the way, cleaning up
    that toxic paper probably should have entailed the Main Street
    stopping the foreclosures. That was what made the securities in
    which they were bundled valueless.
        And so it was when people figured that out that, you know,
    we started to have these failures of these financial
    institutions. And so we didn't handle the $700 billion sudden
    request very well, in my opinion, and that is why I am proud of
    not having voted in favor of that.
        And I will say that as Chairman of the Subcommittee on
    Courts--by the way, still find folks who made the billions of
    dollars, millions of dollars individually, presiding over the
    industry and its big players are the same people that are now
    prospering from the $700 billion that they have been given
    relatively few strings and in some cases no strings attached.
    And then, instead of buying up the toxic paper and doing the--
    clearing out balance sheets and that kind of thing, they used
    the money to acquire smaller entities, smaller financial
    entities.
        So now it is like you have got three big great white sharks
    swimming in a body of water that is not that great and then all
    of the lesser fish, you know, they are getting ate up, or eaten
    up with reckless abandon. And it doesn't look good long-term
    for the great white sharks because they won't have any food to
    eat if they keep going at this pace.
        And what they need is to be regulated, but not by a new
    entity. The bankruptcy laws, I believe, and--in other words,
    you fail, you file bankruptcy, you resign, you get terminated.
    Company then either comes back or it is permanently dead,
    liquidated.
        And as Chairman of the Subcommittee on Courts and
    Competition Policy I consider the competition aspect or the
    antitrust aspect to be of great national importance. In fact,
    my Subcommittee held a hearing on this ``too big to fail''
    issue, which we have multiplied now with the $700 billion
    bailout. We had a hearing on that and in that hearing we looked
    at whether antitrust laws should have prevented these ``too big
    to fail'' institutions from becoming so big and whether
    antitrust law was sufficient to review the competitive
    implications of the ongoing consolidations of the banking
    industry.
        And to make a long story short, I want to--I look forward
    to hearing the testimony today from those pro and con as to
    this new entity that is being proposed. And I thank Chairman
    for this time.
        Mr. Cohen. I thank Mr. Johnson.
        Before we leave--adjourn--for about 35 minutes I want to
    recognize and accept the statement into the record, Mr. Lamar
    Smith. That will be done without objection. We will return in
    about 35 minutes, and we are in recess.
        [The prepared statement of Mr. Smith follows:]
     Prepared Statement of the Honorable Lamar Smith, a Representative in
    Congress from the State of Texas, and Ranking Member, Committee on the
                                   Judiciary
        The 2008 financial crisis riveted the world's attention on
    America's federal response to large, insolvent financial institutions.
    This response lurched from Bear Stearns to Lehman Brothers to AIG as
    one linchpin after another failed in our financial system.
        Led by the Treasury Department and the Federal Reserve, the
    reaction to the crisis was driven by fear of a systemic, financial
    meltdown. Treasury's and the Fed's interventions, however, were hardly
    helpful. They were ad-hoc, inconsistent and left the federal government
    with unprecedented ownership of banks, insurance companies and other
    major institutions.
        With the benefit of hindsight, few would say that the strategy
    Treasury and the Fed adopted ought to be repeated today. America needs
    to put in place a better strategy to address the next crisis, if one
    comes.
        Before Congress acts, however, we must understand two issues
    clearly--what caused the 2008 crisis and what corresponding strategies
    may help prevent a future financial meltdown.
        Many assume that it was the bankruptcy of Lehman Brothers that
    triggered the worst of the panic. As a result, some commentators
    advocate that we should not look to the Bankruptcy Code to deal with
    similar institutions in the future.
        As the committee with jurisdiction over the Bankruptcy Code, the
    Judiciary Committee has a responsibility to dispel this myth.
        Leading economists and academics have concluded that it was not
    Lehman Brothers' bankruptcy that caused the panic. Instead, the actions
    of government were at the root of the crisis.
        An eminent Stanford University economist has pinpointed the
    immediate cause of the panic. It was not Lehman's bankruptcy filing--
    the market absorbed that event.
        Instead, it was Treasury's and the Fed's subsequent actions that
    signaled to investors that the government anticipated a market
    collapse, but did not yet have an adequate plan of action.
        First, Treasury and the Fed hastily announced a broad financial
    rescue package without revealing the details. Then, their officials
    appeared before Congress and demanded $700 billion with no more than an
    initial sketch of their legislative plan.
        Though Congress criticized the plan and demanded more details and
    oversight protections, the Administration urged Congress to act
    immediately to prevent a collapse of America's financial institutions.
        In a self-fulfilling prophecy, it was only after the Treasury and
    Fed spun everyone up into a panic that the market, indeed, panicked--
    not after Treasury's and the Fed's earlier decision to let Lehman
    Brothers go into bankruptcy.
        The government's inconsistent treatment of Bear Stearns and AIG--
    which it bailed out--and Lehman Brothers, which it did not--added to
    the uncertainty that gripped the market, while underscoring the flawed
    approach of ad hoc government intervention decided behind closed doors.
        Finally, of course, other government distortions of the market,
    from the Community Reinvestment Act to Fannie Mae and Freddy Mac and
    on, helped produce the 2007-2008 credit crisis that set the stage for
    panic.
        The lesson of this history is not that America should avoid the
    Bankruptcy Code as a means to resolve failed financial institutions. It
    is that America should renounce government authority that lets federal
    agencies and government employees determine who lives and dies in our
    economy.
        H.R. 3310, House Republicans' Consumer Protection and Regulatory
    Enhancement Act, takes both of these lessons to heart. It brings an end
    to billion dollar bailouts and establishes a new chapter of the
    Bankruptcy Code to resolve failed financial institutions other than
    banks.
        Through its bankruptcy reforms, H.R. 3310 keeps the resolution of
    these firms in the transparent, predictable and fair arena of the
    bankruptcy courts.
        It removes these cases from the closed-door world of government
    agencies and prevents back-room political favoritism towards struggling
    institutions. And it adds special provisions to better handle the
    bankruptcies of financial institutions so all that is possible to avert
    future crises may be done.
        The Obama Administration has a different proposal, which only
    threatens to hasten our next crisis. The Administration
    institutionalizes billion dollar bailouts and the idea that some firms
    are ``too-big-to-fail.'' Its special treatment of the biggest firms
    gives them competitive advantages, consolidates excessive risk-taking
    and lays the groundwork for the next meltdown.
        And, once again, the Administration mistakenly gives government
    agencies--and the political appointees who head these agencies--the
    power to determine who survives.
        Rather than abandon our bankruptcy system, Congress should
    strengthen it.
                                   __________

        [Recess.]
        Mr. Cohen. This is not working--there it goes. Good. Good.
        We are back, and if any other Member would like to have an
    opening statement entered in the record, so will be allowed and
    have 5 days to enter that statement.
        [The prepared statement of Mr. Johnson follows:]
     Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, Jr., a
       Representative in Congress from the State of Georgia, and Member,
               Subcommittee on Commercial and Administrative Law
        Chairman Cohen, Thank you for holding this important hearing. I am
    glad that CAL is taking the opportunity to look at the role of
    bankruptcy reform in financial regulation reform.
        As Chairman of the Subcommittee on Courts and Competition Policy, I
    consider this an issue of national importance. In fact, I held a
    hearing on the ``too big to fail'' issue, from a competition
    perspective, in March 2009.
        In that hearing, we looked at whether antitrust law should have
    prevented theses ``too big to fail'' institutions from becoming so big
    and whether antitrust law was sufficient to review the competitive
    implications of the ongoing consolidations of the banking industry.
        In fact, these proposals raise competition concerns because they
    would give the FDIC and the SEC the authority to seize and resell the
    assets of business entities.
        Compounding the problem is that the seizures would not be subject
    to any specific competitive review; in fact competition concerns are
    only one of several factors.
        The agencies are directed to focus on keeping the market stable
    which could actually harm competition in the banking industry in the
    long run.
        DOJ, the experts in evaluating mergers, is only given an advisory
    role and it is unclear whether DOJ will be able to challenge these
    transactions after the fact.
        Our economy remains unstable. Hundreds of billions of taxpayer
    dollars have been spent and will be spent trying to revive our economy.
    Congress must act in conjunction with the Administration to help
    America recover.
        But we must be cautious that we do not allow our antitrust laws to
    be trampled on in our attempt to fix the economy. If we do, we may face
    additional problems down the line.
        I yield back the balance of my time. Thank you.
                                   __________

        Mr. Cohen. We have a letter that we have received from--to
    Mr. Conyers--from Mr. Bernanke concerning this subject matter,
    and he has a different approach than several of the opening
    statements concerning the need for some type of resolution
    authority for the financial systems, and I will enter the
    letter in the record as delivered; he is unable to attend.
        [The information referred to follows:]

                                   __________

        Mr. Cohen. Unlike everybody else, I think, that is here, I
    voted for the TARP, but the continued egregious and--conduct of
    the companies that received it in getting these bonuses so that
    Mr. Johnson's fish can be served at Masa and Nobu and be
    consumed through their salaries does make it difficult to
    continue to support such actions. But the letter will be
    admitted.
        I would like to thank all the witnesses for participating
    in today's hearing. Without objection, your written statements
    will be placed into the record and we would ask that you limit
    your oral remarks to 5 minutes.
        You will note we have a lighting system that starts with a
    green light. At 4 minutes it turns yellow, and then red at 5
    minutes. When it gets to red you should have concluded your
    remarks or be wrapping them up. After you have presented your
    testimony Subcommittee Members will be permitted to ask
    questions, again with the 5-minute limit imposed.
        I am pleased to introduce our first witness, Mr. Michael
    Barr. Mr. Barr was confirmed by the United States Senate on May
    21 to serve as the Department of the Treasury's Assistant
    Secretary for Financial Institutions. As such, he is
    responsible for developing and coordinating Treasury's policies
    on legislative and regulatory issues affecting financial
    institutions.
        Mr. Barr previously served during the Robert Rubin Treasury
    period as a special assistant and a special advisor to
    President Clinton, as an advisor and counselor on the staff at
    the State Department as well, and as a law clerk to the
    esteemed U.S. Supreme Court Justice David Souter, who I think
    the world of.
        Thank you, Mr. Barr. Will you proceed with your testimony?

                     TESTIMONY OF MICHAEL S. BARR,
                      U.S. DEPARTMENT OF TREASURY

        Mr. Barr. Thank you, Chairman Conyers, Chairman Cohen,
    Ranking Member Franks, Members of the Committee. I appreciate
    the opportunity to testify today.
        Just over a year ago the collapse of Washington Mutual,
    Wachovia, Bear Stearns, Lehman Brothers, and the extraordinary
    intervention in AIG severely tested our ability to respond to
    the financial crisis. In the panic that followed, our financial
    system nearly ground to a halt and the crisis revealed deep
    weaknesses in our financial system.
        I want to begin today by briefly outlining how President
    Obama's comprehensive approach addresses the challenge of those
    firms whose failure could threaten the stability of the
    financial system and then focus on the Administration's
    proposed resolution authority.
        In recent decades we have seen the growth of--significant
    growth of large, highly leveraged, substantially interconnected
    firms. These firms benefitted from the perception that the
    government could not afford to let them fail.
        Of course, during the financial crisis the Federal
    Government did stand behind many of these firms. That action
    was necessary, but there is no question that unless we act
    meaningful reform of our financial system the problem will have
    been made worse. We must end the perception that any firm is
    too big to fail.
        First, the biggest, most interconnected firms must be
    subject to serious accountable, comprehensive oversight and
    supervision. Second, we need tougher standards. The largest,
    most interconnected firms should face significantly higher
    capital and liquidity requirements. Through tougher prudential
    regulation we aim to give these firms a positive incentive to
    shrink, to reduce their leverage, their complexity and their
    interconnectedness, and we aim to ensure that they have far
    greater capacity to absorb their own losses when they make
    mistakes.
        We need to make clear that being among the largest, most
    interconnected firms does not come with any guarantee of
    support in times of stress. Indeed, the presumption must be the
    opposite. Shareholders and creditors should expect to bear the
    cost of failure.
        That presumption needs to have real weight. That means the
    financial system itself must be stronger and made more able to
    handle the failure of any financial firm. In this last crisis
    it was not.
        And as part of our proposal we have also called for firms
    to prepare what have been called living wills, a credible plan
    for their rapid resolution in the event of distress. This
    requirement will leave us better prepared to deal with the
    firm's failure and will provide another incentive for firms to
    simplify their organizational structures and improve risk
    management.
        By building up capital and liquidity throughout the system,
    by increasing transparency in key markets, our plan will make
    it easier for the system to absorb the failure of any given
    financial institution. In most circumstances, these precautions
    will be enough. Moreover, in the event that these firms do
    fail, we believe that these actions will minimize the risk that
    any individual firm's failure will pose a danger to broad
    financial stability, which is why bankruptcy will remain the
    dominant option for handling the failure of a non-bank
    financial institution, even very large ones.
        The last 2 years, however, have shown that the U.S.
    government simply does not have the tools to respond
    effectively when failure could threaten financial stability.
    That is why our plan permits the government, in very limited
    circumstances, to resolve the largest and most interconnected
    financial companies outside the traditional bankruptcy regime,
    consistent with the approach long taken for bank failures.
        This is the final step in addressing the problem of moral
    hazard. To make sure we have the capacity, as we do now for
    banks and thrifts, to break apart or unwind major non-bank
    financial firms in an orderly fashion that limits collateral
    damage to the system.
        The resolution authority we have proposed allows the
    government to impose losses on shareholders and creditors
    without exposing the system to sudden disorderly failure that
    puts everyone at risk. Our approach is modeled on the
    longstanding regime for bank failure.
        There are significant and tested safeguards in placed,
    modeled on the bank failure law to protect creditor rights.
    Creditors in the resolution process, moreover, are protected by
    the same system of judicial review that has existed for the
    FDIC and its predecessors for its receivership authorities for
    more than 75 years.
        In our view, we need to have humility about the future and
    our ability to predict or prevent every systemic failure of a
    major financial firm. In a severe crisis if major firms fail
    and prudential measures and capital buffers prove inadequate,
    special resolution should be available.
        Our proposals provide a way to end the firm, to wind it
    down without contributing to system-wide failure. Our proposals
    represent a comprehensive, coordinated answer to the moral
    hazard challenge posed by our largest, most interconnected
    firms, and the plan protects taxpayers and enables shareholders
    and creditors to take losses.
        Thank you very much, Mr. Chairman.
        [The prepared statement of Mr. Barr follows:]
                     Prepared Statement of Michael S. Barr

                                   __________

        Mr. Cohen. Thank you, Mr. Barr. I appreciate your staying
    within your 5 minutes and pardon your microphone. We will work
    on it.
        Second witness is Mr. Michael Krimminger, Special Advisor
    for Policy to the Chairman of the FDIC, especially involved in
    issues involving regulatory restructuring and resolution
    authority, mortgage market developments, banking charter and
    capital, international and large bank resolution initiatives,
    derivatives, and other similar financial contract developments
    and assorted issues. He chairs the Basel Committee on Banking
    Supervision's Cross-Border Resolutions Working Group, which
    recently issued a recommendation for international
    infrastructure improvements and the international working group
    that developed core principles for effective deposit insurance
    systems.
        Mr. Krimminger, proceed please.

                   TESTIMONY OF MICHAEL KRIMMINGER,
                 FEDERAL DEPOSIT INSURANCE CORPORATION

        Mr. Krimminger. Chairman Cohen, Ranking Member Franks, and
    Members of the Subcommittee, thank you for the opportunity to
    testify on behalf of the FDIC today.
        The current crisis has caused tremendous hardships for
    millions of Americans and shaken confidence in our institutions
    and financial system. Our system has proven resilient, but at
    great cost.
        To restore market discipline and prevent future bailouts,
    we must adopt reforms with the goal of ending ``too big to
    fail.'' These reforms must focus on strengthening market
    discipline while protecting the public, and this should include
    strengthened oversight and capital requirements for our largest
    and most interconnected financial firms, creation of an
    oversight council to identify and address emerging systemic
    risk, more effective protections for consumers, and tightened
    regulation of derivatives.
        However, improved supervision and regulation alone cannot
    prevent the next crisis. Fundamentally, we must end ``too big
    to fail'' as an approach for dealing with the largest financial
    firms when they are failing. We need a resolution process for
    these firms that can be used in a crisis to close the firm
    while a receiver maintains critical operations to prevent a
    broader catastrophe for innocent businesses and consumers.
        This new process would only apply after a systemic
    oversight council decided that an exception to bankruptcy was
    essential to prevent systemic risk to our financial system.
    This is no bailout. In fact, shareholders and creditors absorb
    the losses and the firm's assets are later sold to private
    firms. However, the ability to preplan the resolution, transfer
    key contracts to a bridge institution, and temporarily maintain
    critical financial operations will prevent the market disarray
    that could occur if the firm collapsed.
        To underline our goal of preventing future bailouts, we
    would recommend that the law ban special assistance targeted to
    specific open institutions. In a free economy there are winners
    and losers. When a firm cannot continue it should be closed.
        However, today we have a system in which the largest
    financial firms appear immune to market discipline. Bankruptcy
    provides the right process for the vast majority of insolvent
    companies. However, the current crisis has reminded us that
    there are fundamental differences between our largest financial
    firms and commercial or industrial companies. Large financial
    firms fulfill critical functions in providing financing for
    businesses and individuals, settling cash payment,
    intermediating liquidity and access to capital markets, and
    even providing the infrastructure and financing for the
    government securities market.
        The functioning of our markets depends on ready liquidity,
    confidence among market participants, and financial assets
    whose value is tied to the intermediation of market, credit,
    and other risks. To end ``too big to fail,'' we must have a
    resolution process that market participants know can be
    implemented without causing disarray in the markets. They must
    know the process will actually be used in a crisis.
        What the solution should entail, first and foremost, is the
    swift and orderly closing of the firm while keeping its key
    functions operating. Like the bank resolution process, this
    requires extensive preplanning and developed expertise in
    dealing with complex financial operations.
        The immediate power to take charge of the firm and pass
    critical operations to a newly-created bridge financial
    institution will protect the public by avoiding market
    uncertainty and ensuring continuity. This will allow the
    receiver to stabilize the market, retain going concern value,
    and avoid dumping financial contracts in already illiquid
    markets. The well-established checks and balances that protect
    stakeholders in the bank receivership process should apply here
    as well.
        In conclusion, the proposed resolution process is not a
    challenge to the important role that bankruptcy plays in the
    U.S. system. It simply offers an alternative in a financial
    crisis so that regulators can realistically close the largest
    firms while protecting the public from a market collapse and
    from future bailouts.
        I would be happy to answer any questions. Thank you.
        [The prepared statement of Mr. Krimminger follows:]
                    Prepared Statement of Michael Krimminger

                                   __________
        Mr. Cohen. Thank you, Mr. Krimminger. I appreciate your
    testimony.
        And I now recognize myself for 5 minutes of questioning.
        First thing I want to ask, I guess, is Mr. Barr, and I am
    not sure if you can answer this or not, but a lot of people
    feel that Mr. Paulson chose his friends at Goldman Sachs and
    other friends in the financial market to take care of and let
    other friends die. The laws are supposed to be applied fairly,
    and the bankruptcy code is a fair, due process, transparent
    system where people--there are laws and the judges are supposed
    to work in that.
        How can you assure the public and those of us who voted for
    the TARP, although reluctantly, that if we have such a
    resolution authority formed that there will be fairness and
    transparency rather than favoritism played when it is outside
    of the bankruptcy system, which has fairness build into it?
        Mr. Barr. Thank you very much, Mr. Chairman.
        Under the regime that we have proposed--the resolution
    regime we proposed--it is modeled on the long history under the
    Federal Deposit Insurance Act, that if the FDIC acts as
    receiver under such cases, under the Administration's proposed
    approach for the largest, most interconnected firms, the same
    process would be used.
        So the FDIC would act as receiver, there would be judicial
    review as there is today of the FDI's decision with respect to
    the appointment of a receiver, there would be judicial review
    with respect to the FDIC's decisions with respect to the
    payment of claims, and so there are important safeguards very
    much built into the basic structure of resolution in our
    regime.
        Mr. Cohen. Thank you.
        And Mr. Krimminger, maybe you would answer this but maybe
    Mr. Barr would if--it is just it is FDIC. In FDIC, when a bank
    needs protection does every bank have the same--is dealt with
    the same way, or is there any subjectivism on the judgment on
    the part of the FDIC on which banks and how they deal with
    them?
        Mr. Krimminger. Well, the banks are dealt with--under the
    FDIC's current law we are required to apply the least cost
    test. In other words, we have to choose the resolution process
    for that particular bank that is the least costly to the
    deposit insurance fund. So in other words, it is determined in
    some ways by the assets of the bank, but not by the character
    of the bank management or any other types of influences. We
    simply bid the bank out to resolution and then the winning
    bidder--the highest bidder, essentially, then acquires the
    bank's assets.
        The proposal we are talking about here would essentially
    create the same process so that you might have to temporarily,
    with the largest firms, create a bridge financial institution
    in order to bridge that process so that there wouldn't be an
    immediate collapse, but nonetheless there would be a bidding
    process that would be open and transparent so that other
    financial firms could bid for the assets and operations of that
    bank once it were stabilized--for that institution once it were
    stabilized.
        Mr. Cohen. Mr. Barr, I might have missed it, but I think
    you said something about the largest financial institutions. Is
    there a definition of what the largest financial institutions
    would be so that they would all be within the same class and
    not be determined by favoritism?
        Mr. Barr. So, under our proposal, Mr. Chairman, the Federal
    Government, through the agencies, the Federal Reserve, with
    input from the counsel of all the regulators, would make a
    determination that a firm that is large, interconnected, and
    highly leveraged such that its failure would pose a threat to
    financial stability could be designated for stricter, tougher,
    more stringent forms of supervision with higher capital
    standards, higher prudential requirements, the requirement of
    the living will, the tougher set of standards I outlined very
    quickly in my testimony.
        That designation itself would have due process protections
    in it. It would have a provision with respect to notice and an
    opportunity to be heard and to rebut the designation. And that
    process would be open.
        Mr. Cohen. It may not be--it is not directly relevant to
    this, but Mr. Barr, do you have anything to do with the
    Treasury's decisions on bonuses and this outrageous system that
    we have now?
        Mr. Barr. I do not. That is not directly within my
    responsibilities. I am certainly aware that the Treasury is
    involved in such cases, but it is not core to my
    responsibility.
        Mr. Cohen. Okay. Mr. Miller, who is going to testify later,
    has suggested Lehman's biggest problem was lack of liquidity
    and a need for stay protection. Have you read Mr. Miller's
    testimony, Mr. Barr?
        Mr. Barr. I have, just before this hearing.
        Mr. Cohen. And what do you believe about his suggestion
    that the problem was its lack of liquidity and the suggestion
    that the Treasury's authority be expanded in certain
    circumstances and that we needed to amend the bankruptcy code
    to eliminate safe harbor provisions for derivatives and other
    types of transactions?
        Mr. Barr. In our judgment, whatever is done with respect to
    the bankruptcy code, it is absolutely essential that we have
    resolution authority for the failure of the largest, most
    interconnected firms that might pose a risk to the system. The
    resolution authority is designed to meet different objectives
    from the bankruptcy code. The bankruptcy code, as you know far
    better than I, is focused on the process with respect to
    creditors. The resolution regime is really designed to protect
    all of us, to protect the economic system from the collapse of
    a significant financial firm that blows through its capital
    buffers.
        So we think whatever the Committee decides to do with
    respect to bankruptcy, it is absolutely essential that we have
    resolution authority.
        Mr. Cohen. Thank you, Mr. Barr.
        And before I recognize Mr. Franks, the problem we have
    got--and I concur with much of what you have said and what Mr.
    Bernanke says and Mr. Geithner--but when you said that the
    resolution authority is to protect all of us, with that as a
    belief, you know, I tepidly push the green button. But it is so
    difficult to do that when you see what the people on Wall
    Street are doing with the money, and how well they live, and
    how arrogant they are, and it is hard to think it is really us.
    It is about them; it is their crowd, it is not our crowd.
        Mr. Barr. If I would, Mr. Chairman, I think that people are
    rightly outraged at that kind of behavior. I know I certainly
    am as well. I think, though, that it is incumbent on us to
    design a system in the future that protects us from excessively
    risky behavior, that requires firms to pay their own way, and
    by that I mean having big capital cushions so they take their
    own losses, and I also mean if there is any financial trouble
    in the future that the largest firms are the ones that pay for
    it, not us.
        Mr. Cohen. And do you think there should be something in
    your legislation--in the legislation so we don't have to come
    back later and fight another special interest group when we
    have it as an individual bill to have some control over
    executive compensation maybe in the bill, when somebody comes
    into your authority that it has already drafted as part of that
    law that there is no allowance of these particular types----
        Mr. Barr. We have made legislative suggestions with respect
    to executive compensation. Those have passed in the House with
    respect to stay on pay and the independence of compensation
    committees, and we have been strongly in favor of regulators
    taking into account compensation in the firm not just for the
    highest paid executives but throughout the firm in judging the
    firm's risk management practices. So I do think those are
    important principles.
        Mr. Cohen. They are important principles, and I think there
    ought to be something specifically in your legislation if you
    hope to pass it that makes the public realize it is not going
    to be another fight.
        Mr. Barr. I would agree, Mr. Chairman, and there are these
    two provisions that would be essential to the reform package we
    have put forward in a legislative manner.
        Mr. Cohen. Thank you, Mr. Barr.
        I now recognize the Ranking Member for 5 minutes, Mr.
    Franks.
        Mr. Franks. Well, thank you, Mr. Chairman. Mr. Chairman,
    the Chairman of the full Committee asked, I think, a very
    pressing question related to how organizations police
    themselves. And I think he is right; I think it is very
    difficult for any group to police themselves even though I
    think they have a responsibility to do so. But ultimately it is
    wise to have a third disinterested party as referee.
        And I am concerned that what I am hearing here would put an
    awful lot of power into the executive branch or into your
    bureaucratic branch of government to the extent that it would
    be difficult for them to police themselves any better than
    anyone else. I mean, in this week's news the White House pay
    czar is slashing corporate pay by 90 percent. The TARP
    inspector general says we won't get our TARP funds back.
    Unemployment is up in 49 of 50 states, and kind of the surreal
    events in our economy, the list sort of goes on.
        And now what I hear--an all due respect, because I know you
    guys are here to advocate a position and there is no personal
    disrespect intended--but what I hear is that you are asking us
    now to give the government new power to seize Citigroup and the
    Bank of America and the rest of the largest financial
    institutions we have. And I just think on the basis of both the
    Bush and the Obama administrations in the last year I don't
    know how we can possibly trust government--the bureaucratic
    aspect of government--to use that authority without blowing it
    up again in everyone's faces.
        And I guess I am convinced that unless we get back to some
    basics and make sure that these financial institutions have
    basic requirements to where they are the ones that are at risk
    when they make these decisions there will never be enough
    policemen to take care of it. The way to get organizations to
    police themselves, as Chairman Conyers said, I think is to
    create a tremendous incentive on their part--selfishly on their
    part--to do so.
        Now, in 2008 two of the ostensibly foremost financial
    authorities in the world--Ben Bernanke and Hank Paulson--I
    think they made a critical mistake when they were inconsistent
    in responding to Bear Stearns and Lehman Brothers. Later I
    think they made another mistake when they came to Congress and
    declared that the financial system would collapse if they were
    not granted this rescue authority. But they failed to present a
    full, thought-out rescue plan, in my judgment; two-and-a-half
    pages is what they brought us.
        Now, John Taylor, of Stanford, and other eminent economists
    say that those two mistakes played a major role in triggering
    the all-out financial panic after September 19. So if we
    couldn't trust these two experts to make two decisions in the
    course of a month to avoid a systemic panic, how do we entrust
    the entire future to the same experts again working with lesser
    experts in the FDIC and the SEC? I know that is kind of a
    convoluted question, but I am just suggesting--what I hear Mr.
    Krimminger saying, you know, about the process of how you would
    administer the end-of-life decisions of a major company, as it
    were, they sound an awful lot like the bankruptcy process.
        And I am just wondering, how does the executive branch feel
    like that without any practice in regard all of a sudden that
    they are going to be able to handle it better than the
    bankruptcy process?
        So I guess I will start with you, Mr. Krimminger. Take a
    shot at it.
        Mr. Krimminger. Well, I appreciate the chance to respond. I
    mean, I think the--what we have developed over the last 75
    years is a fairly stabilized process, or a very stabilized
    process for dealing with failed banks. What we are suggesting
    with the resolution authority is that when an institution is at
    the point of death, where it is in default on its obligations,
    or would be subject to a Chapter 11 proceeding, that the
    council or that the, you know, key authorities would have the
    ability to take that institution and put it into a resolution
    process that is very much like the bankruptcy process.
        The difference is that we would have this process designed
    to make sure that you could have the continuity that is
    available at times during a Chapter 11 reorganization but have
    the access to the liquidity resources that would allow that
    continuity through a bridge financial institution and would
    allow it to continue while you are in the process of selling
    off the assets----
        Mr. Franks. I don't want to interrupt you, Mr. Krimminger,
    but why can't that process--what you are talking about sounds
    good, but why can't that occur under bankruptcy?
        Mr. Krimminger. Well, right now one of the difficulties
    with the largest financial institutions is that you need to
    have preplanning, build up a level of expertise in dealing with
    the types of financial contracts we are talking about, that you
    need to be able to have the ability to continue those without
    having to rely upon debtor in possession financing, which at
    times, as in the crisis last fall, can be difficult to acquire.
    So this would allow for some backup liquidity financing.
        But let me emphasize one point that I think is very
    important--it is very important to us. We would not be
    allowing, under what we would propose, would not be allowing
    open bank assistance or assistance for specific open
    institutions. This would be a situation where you would close
    the institution, put it into a receivership or a resolution,
    but make sure that the public interest was protected by
    continuing those key financial operations.
        Mr. Franks. Mr. Chairman, I guess I would just--my time is
    up but I would just like to suggest that if I am a financial
    source to one of these companies and they are going into this
    process I would be much more likely to give money or to
    encourage the process to continue under a bankruptcy setting
    than I would on sort of an uncharted, untested bureaucratic
    takeover of the process.
        It simply doesn't make a lot of sense to me because I think
    that the whole process becomes politicized and those critical
    resources that are necessary to even animate a process like
    this become completely uncertain about doing anything, and I
    think they take a hands-off approach. That is just my opinion,
    and I yield back.
        Mr. Cohen. Thank you, sir.
        I now recognize the gentleman from Wayne County, Michigan,
    Wayne State University, dean of the Judiciary Committee, Mr.
    Conyers.
        Mr. Conyers. Thank you, Mr. Chairman.
        I appreciated the line of questions that you engaged our
    distinguished witnesses in, and for Trent Franks I want to say
    that I appreciated his line of questioning especially. We are
    making momentous decisions about how we get out of the problem
    that we are in. And so it is very critical to minimize finger-
    pointing because that always deteriorates down to
    personalities.
        But there are a lot of apologetic bureaucrats, economists,
    government officials that are lining up here, Trent. Chris Cox
    was very sorry about how he misapprehended the problem in his
    executive branch position. Alan Greenspan, the guru of American
    economic policy for decades, apologized about how he
    misunderstood it. Hank Paulson has made some remarkable about-
    faces about things that he has done.
        But wait. There is Ben Bernanke, who now--you know, these
    guys just didn't drop out of the sky. They have been in this
    business for a long time. Do you know what Tim Geithner was
    doing before he came to Washington? He was in New York. What
    was he doing there? Heading up the Federal Reserve.
        And what about Larry Summers? You think he has been the
    head of Harvard? Is that all you think he has done? No.
        You know, there have been--it would be very interesting for
    us to track all the about-faces that have been made in their
    careers, and it is not to say that if you find out that you are
    wrong and you admit you are wrong--I think it is the thing to
    do. I have had to do it. But I didn't affect the American
    economic system when I made a mistake.
        Who among us hasn't cast a vote that, on reflection, you
    might have not voted that way at all? So, you know, this
    father-knows-best attitude, this know-it-all approach--and I
    want to say here and now that the resolution authority risks
    creating a new generation of companies that are too big to
    fail. Now you can't find anybody in Washington that doesn't
    realize that this ``too big to fail'' crap was just that.
        Oh, we all know that now. We didn't know it until just very
    recently, though. And so for one, I haven't heard anybody yet
    suggest that the Department of Justice controlling antitrust
    questions, bankruptcy questions, should be given at least equal
    authority to block any asset sale that would harm competition.
        Look, you don't have to agree with me, but not to discuss
    it--it is one thing if we have a discussion and we don't reach
    agreement. It is another thing that it is not even on the table
    for discussion. None of you have indicated--of our
    distinguished witnesses--have indicated anything like the
    direction that the Chairman, the Ranking Member, myself are
    moving in, and I would like you to explain this difference of
    economic analysis that we are in.
        Mr. Barr. Mr. Chairman, if I could just try. I think first
    I would agree with both Chairman Conyers and Ranking Member
    Franks that the absolutely essential first step, important
    step, is that firms pay their own way. We need to have firms
    taking risks, having big capital buffers so in the event that
    they fail their owners suffer. We need to make sure that we
    have a system of tough prudential supervision of the largest
    firms with respect to their capital positions, their liquidity
    positions, their activities, engagement with merger and
    acquisition activity, management interlocks, the full range of
    tools available to address the problem of too big to fail.
        We do need to end the perception of too big to fail. It is
    an absolutely critical element. I think we are in agreement on
    that. I think we need to have tougher standards to do that.
        The question is, what do you do in the event of extremists
    in a crisis? And I think our judgment is, consistent with
    Ranking Member Franks' earlier statement, we need to be humble
    about the ability of regulators; we need to be humble about the
    ability of managers of large firms. People are going to make
    big mistakes and you need to have big buffers in the system
    when they do so that taxpayers aren't on the hook.
        So in our resolution regime, this is a regime to end big
    firms if they have made big mistakes, but to do it in a way
    that doesn't bring down the system. And if any financing is
    needed to do that, the industry--the large firms in our
    industry, in the financial industry have to be on the hook for
    it. They have got to be--in the legislation there has got to be
    an assessment on them so that in the event any financing is
    required or any working capital is required, that the largest
    firms are required to pay, not the taxpayer. That is an
    essential part of our reform.
        That also means those other big firms are going to have a
    big incentive not to have any firm go into resolution, because
    they are going to pay. So you get the system right, the
    incentives are right, you have people watching each other.
        I would agree with both Chairman Conyers and Ranking Member
    Franks that we don't want to have a system where we just trust
    the regulators or trust the banks. You know, I think Ronald
    Reagan famously quoted the old Russian proverb, ``We need to
    trust, but we have got to verify, too.'' And that is why we
    have to have a system of rules, we have to have transparency,
    we need judicial review of the like that has existed for the
    FDIC for the last 75 years.
        Mr. Krimminger. If I could just note in kind of
    continuation of that point, that at least looking at it from
    the perspective of the FDIC, in our current resolution
    authority there is a process, of course, where Department of
    Justice review of the antitrust implications of mergers and
    acquisitions as a result of a resolution. That is something
    that we have applied for many, many years.
        There certainly are checks and balances that are put into
    place to make sure that shareholders have the opportunity to
    object to the appointment of a receiver. It is not purely an
    administrative process.
        There are checks and balances in place so that if someone
    disagrees with our decision on their claim they have the right
    to go for a de novo review before Federal district court so
    that we are not in any way making the decision about claims
    willy-nilly but are subject to oversight as well as, of course,
    the totally appropriate oversight from the Congress and from
    our inspector general and others. But there is judicial
    oversight of the decisions on claims and the decision to
    appoint the receiver.
        Mr. Cohen. Thank you, Mr. Chairman. I appreciate your
    questions.
        And I now recognize Mr. Coble, the distinguished gentleman
    from the Tar Heel state. He will not take his 5 minutes because
    he never does. Thank the gentleman.
        Mr. Coble. I thank the gentleman from the Volunteer State.
    Thank you, Mr. Chairman.
        It is good to have you on with us today, Mr. Barr. When can
    we expect the TARP to wind down and our reimbursements to TARP
    being used to pay down the national debt?
        Mr. Barr. I am sorry, sir. I couldn't hear the end of your
    question.
        Mr. Coble. And our reimbursements to TARP being used to pay
    down the national debt?
        Mr. Barr. Let me just say, Mr. Coble, that the TARP program
    is not directly within my responsibilities. The department has
    begun to wind down many of the major programs in the TARP with
    the recognition that we are beginning to see some signs of
    financial stability.
        I think there are important--it is important to maintain
    the flexibility to act in the future. I do believe that--I do
    believe that we will be able to protect taxpayers in that
    process and help over the long haul in deficit reduction, but
    we need to make sure that we have the flexibility while the
    financial system is still recovering and don't want to take any
    precipitous action in that area.
        Mr. Coble. Thank you, Mr. Barr. Now, Mr. Barr, when you say
    wind-down, is that synonymous with reimbursement?
        Mr. Barr. Again, I don't want to spend too much of your
    time on this because it is not directly within my area of
    responsibility, but we are seeing repayments coming into the
    Treasury Department.
        Mr. Coble. Okay. Thank you, sir.
        Mr. Krimminger, what is the current fiscal health of FDIC
    and is its solvency expected to increase or decrease in the
    coming years?
        Mr. Krimminger. The FDIC deposit insurance fund--I am
    sorry, did I interrupt you, Congressman?
        Mr. Coble. No.
        Mr. Krimminger. Okay. The FDIC's insurance fund today, as
    of the end of the second quarter, and those are the most recent
    numbers we have, including the DIF balance, deposit insurance
    fund balance, as well as our loss reserves has about $42.4
    billion in it. We are taking steps, of course, to replenish the
    fund and have put out for public comment a plan to have the
    fund replenished by having institutions pay in advance some of
    their deposit insurance assessments to provide additional
    liquidity to the fund.
        We do expect that the fund will continue to have the
    liquidity to meet all of its obligations, but very important to
    note is that we have the ability to immediately draw on $100
    billion line of credit from the Treasury as well as additional
    authority that was granted by Congress to pull down a total of
    $500 billion with the consent of the secretary of the Treasury.
        Mr. Coble. I thank you, and I will put this question to
    either or both: What is the rationale, if you know, for
    proposing a permanent TARP-like program and why has the
    Administration selected the FDIC to oversee the program in lieu
    of the Treasury, if you know the answer to that?
        Mr. Barr. Maybe I might just say a word and then Mr.
    Krimminger could, of course, join. We in no way have made that
    kind of proposal. The proposal that we have is a proposal
    designed to make firms pay their own way, to internalize the
    cost they pose on the system, to make sure that taxpayers are
    protected, to cause assessments to be paid by the largest firms
    in the event that financing is needed.
        And we have a system of checks and balances in our proposal
    among the FDIC, the Federal Reserve, and the Treasury designed
    to ensure that resolution is only used in rare circumstances.
    And when it does, the FDIC has a 75-year history with
    resolution and we thought it was appropriate to ask them to
    take on the responsibility of resolving these firms.
        Mr. Coble [continuing]. Mr. Krimminger?
        Mr. Krimminger. Yes. Congressman, we would in no way
    support a proposal that would provide for open bank assistance,
    we call it, or assistance for open institutions, and I think
    that was kind of one of the key elements of the TARP program.
        What we have proposed, or what we have supported--and
    Chairman Bair has stated this in testimony--is a resolution
    process that literally does close down the institution and
    terminates its existence going forward so that--but one that
    allows for the continuation of critical financial services
    during a bridge financial institution.
        So as I said, we have made very clear in our testimony
    before other Committees that we would not support open bank
    assistance or that type of support but would support a closing
    process that, as Assistant Secretary Barr mentioned, was
    designed to make the firms pay their own way and that they
    would pay any sums that were necessary.
        Mr. Coble. Thank you, gentlemen.
        And I see my red light has appeared, and I will yield back.
        Mr. Cohen. Thank you, sir. Let me follow up and use
    Chairman's prerogative.
        Mr. Barr, I think what Mr. Coble asked about is the TARP
    money being used to pay down the debt--I think he was--I know
    it is not your area, but I think the answer is, ``No, it is
    not. It is going back into the TARP.'' Would that not be
    correct and you all are continuing to use the money that is
    being repaid for other TARP-type ventures?
        Mr. Barr. The funds that come back into the TARP program,
    to the extent that they are not used for financial assistance,
    are held at the Treasury Department and the response I gave to
    Mr. Coble was to say those funds, to the extent that they are
    not needed in the event of financial crisis, would help reduce
    the debt. But in our judgment it is important to retain some
    flexibility while the system is still recovering.
        So I do think that--I do think that there will, in the long
    term, be advantages for debt reduction from the program, but in
    the short term we are quite focused on making sure that there
    is an ability to act, if necessary.
        Mr. Cohen. Right. And about the whole program, is that just
    because of the whole approach that this is going to make the
    economy better and save us from disaster or is it because you
    think there will actually be some dollars reserved--returned to
    the Treasury to be used for debt reduction?
        Mr. Barr. There will be, unless we see a significant
    further crisis point in the coming year, which is possible but
    certainly doesn't seem likely right now, but if there is such a
    downturn then you would want to have flexibility available. If
    we don't see that additional crisis then there would be
    remaining funds, both through repayment as well as unexpended
    amounts, that would be available to help reduce the debt over
    time.
        Mr. Cohen. Do you have any idea how much is unexpended?
        Mr. Barr. I am sure that the department would be happy to
    respond to the Committee with that. I don't have that figure in
    my head.
        Mr. Cohen. Okay. And you don't have an idea about how much
    has been repaid either, do you, and how much interest has been
    accrued?
        Mr. Barr. I would have to have the department respond to
    you, Mr. Chairman. It is just not within my area of
    responsibility. I have rough senses of sizes, but not enough to
    really be able to answer for you in a thoughtful way and I
    would prefer the department respond.
        Mr. Cohen [continuing]. Mr. Barr, thank you.
        Mr. Johnson, you are recognized.
        Mr. Johnson. Thank you, Mr. Chairman.
        Federal Reserve Chair Ben Bernanke earlier this month noted
    that the bankruptcy code does not sufficiently protect the
    public's strong interest in ensuring the orderly resolution of
    a non-bank financial firm. Do either one of you know exactly
    what problems that Mr. Bernanke sees in the bankruptcy process
    insofar as these large non-bank financial firms are concerned?
    And also, does the United States government have power to force
    a--such an institution into an involuntary bankruptcy?
        Mr. Krimminger. Let me address, if I may, Congressman,
    address the first question first. One of the issues that exists
    under the current bankruptcy code is something that has been
    highlighted by other witnesses before this Committee and I
    think is highlighted by the second panel, is that under the
    current bankruptcy law there is a provision that provides for
    the immediate termination and netting of derivatives contracts
    or other types of financial contracts upon the filing of the
    bankruptcy petition.
        There is also the need to have access to immediate
    liquidity funding for continued operations, so in the past in
    the bankruptcy that could be obtained through debtor and
    possession financing. Of course, last year after the Lehman
    Brothers insolvency debtor in possession financing became very
    difficult or very costly if you could obtain it at all.
        So the primary reason that we have supported suggestions
    for a resolution authority or resolution process for the very
    largest systemically significant financial firms is simply to
    make sure that you could impose a process that would have the
    credibility to be imposed while making sure that the
    shareholders and creditors absorb the losses from that
    insolvency, just as they should in bankruptcy, as well as
    making sure that you maintain continuity in some of those
    critical functions. For example, many----
        Mr. Johnson. Okay. Well, now before you go off there I am
    trying to stick within my 5 minutes. Any ability of the
    government to force an involuntary bankruptcy?
        Mr. Krimminger. Under current law I do not believe so. The
    proposal that Treasury has provided would provide for the
    authority of the secretary of the Treasury, with the
    concurrence of two-thirds majority of the board of the FDIC and
    the Federal Reserve to create or to decide that an institution
    should be placed into this kind of special systemic authority,
    and it would be triggered by, effectively, the same
    circumstances that will lead to a filing of bankruptcy.
        Mr. Johnson. All right. There is no reason why that could
    not be done to the bankruptcy process to enable it to be of
    service in these kinds of situations. Yes or no?
        Mr. Krimminger. I would respectfully indicate that I think
    the difficulty with the bankruptcy process would be two-fold.
    Number one, we believe we need a process that focuses on the
    public interest of maintaining these systemic functions while
    also making sure that the losses would be imposed and making
    sure that you have the ability to create bridge financial
    institutions so that there could be the continuity to avoid a
    liquidation of assets.
        Mr. Johnson. Well, that can be done within the context of a
    regulatory entity and let bankruptcy do its thing, in my
    opinion. I haven't heard why that would not be a viable
    alternative to setting up a new public agency, another layer of
    government.
        How do you respond to critics who would suggest that with a
    resolution authority acting in a sudden emergency situation
    would be able to provide for the transparency and things like
    notice to creditors, an opportunity to be heard--not
    necessarily by creditors, but--who are interested parties? How
    would that be worked out?
        And last, but not least, I am concerned about the
    competition concerns of your proposal that would give the FDIC
    and the SEC the authority to seize and resell the assets of
    business entities. And with the fact that we have only a few--
    we have only a few great white sharks in the pool, wouldn't
    that process cause them to get bigger because they would be the
    entities that would be eligible and able, financially, to take
    over one of these competitors?
        Mr. Krimminger. If I could just respond to--I will start
    with the first part of your question first. I think that the--
    we need to make one thing very clear: We, the FDIC, are not
    supporting nor do I think Treasury is recommending the creation
    of a new agency or a new authority. The proposal would be that
    it would be an obligation that the FDIC could take on for most
    entities, similar to its resolution authority.
        As far as transparency, similar, again, to the bank
    resolution process. There is full transparency with regard to
    that process. The benefit of the bank resolution process
    compared to the bankruptcy process for banks in part is the
    ability for the receiver to act quickly, to be able to sell
    assets and be able to continue the business operations so that
    communities are not deprived of credit, are not deprived of
    deposits, et cetera.
        The transparency is provided because there is a full
    right--there is a full claims process that is provided so
    people can file claims with the receiver, and if the claim is
    determined against their interest or they don't like the
    decision they have the full right to go to Federal court to
    litigate that claim with a complete new look at that case
    without any deference at all to the FDIC's receiver's decision.
    So there is tremendous transparency there, plus we, of course,
    provide reports to Congress on what we are doing with
    receiverships; we, of course, provide reports to our inspector
    general's office as well----
        Mr. Johnson. What would be the difference in a sudden
    emergency?
        Mr. Krimminger. In a--I am sorry----
        Mr. Johnson. A sudden emergency. What would be the----
        Mr. Krimminger. There would be no difference. The key thing
    is to be able to move quickly to make sure there is not a
    collapse of the markets that might be caused by the lack of
    liquidity or the lack of completing certain transactions.
        But you would still have the ability, as a creditor, to
    challenge the claim decision by the FDIC in court. You would
    still have clear checks and balances so even the shareholders
    could challenge the appointment of a receiver in court. That is
    the way it is today under existing law. So all those
    protections and checks and balances on what we do would still
    be in place.
        Mr. Johnson. And the last question?
        Mr. Krimminger. I think your last question was relating to
    the competition----
        Mr. Johnson. Yes.
        Mr. Krimminger [continuing]. Issues. We do have, under
    banking law today, the obligation when we are doing a bank
    resolution to consult with the Department of Justice for an
    antitrust review, or a competition review, of the merger and
    acquisition transaction.
        I think one of the key things that we believe is crucial
    and one of the reasons for proposing a new resolution regime is
    to make sure that market discipline is actually brought to bear
    on the largest great white sharks out in the financial sector
    so that, indeed, they will have to bear the same risk as the
    smaller fish they are swimming with.
        I think that is going to have a much greater impact because
    they are now--the pricing of their debt, the pricing of their
    equity, the pricing of their liquidity and credit is going to
    be subject to market impacts in a way that they, in many cases,
    are immune today because they are not expected to be closed.
        Mr. Johnson. All right. Thank you.
        Mr. Krimminger. Thank you.
        Mr. Cohen. Thank you, Mr. Johnson.
        I now recognize our rookie Member for her initial
    questioning, a historic moment, Ms. Chu.
        Ms. Chu. Well, I certainly would agree that after the
    Lehman and AIG experiences there is little doubt that we need a
    third option that--between the choices of bankruptcy and
    bailout for non-bank financial firms and that we have to end
    the expectation that certain financial institutions are too big
    to fail. But my question is, what would be the threshold for
    intervention by the resolution authority? I am assuming that
    you are not suggesting that there be intervention for every
    non-bank financial firm that fails, and who would determine
    that threshold?
        Mr. Barr. That is a terrific point, and I think that it is
    absolutely critical, as you said, that the resolution authority
    that we are proposing is not supposed to be used, won't be
    used, can't be used broadly in the economy for non-bank
    financial firms. It is a narrow authority. It is only to be
    used for the largest, most interconnected, highly leveraged
    firms. It is only to be used in the event that no other option
    is going to be able to work for the financial system to
    preserve financial stability for the system.
        It is designed to be, again, a proposal that in the main,
    the largest firms will have their own capital buffers, pay
    their own way, and go into receivership in the bankruptcy
    system. The resolution authority is really just for the cases
    where the criticality to the system of what is going on, the
    fact that the capital buffers and prudential requirements have
    not been sufficient--in that rare circumstance you would be
    able to place that firm into special resolution to prevent
    widespread harm to the American economy.
        The decision would be made with checks and balances between
    the Federal Reserve, the Treasury, and the FDIC, as receiver,
    in order to make sure that it is only used in the rarest of
    circumstances.
        Ms. Chu. I heard Mr. Krimminger say that the FDIC should be
    this authority, but Mr. Barr, I didn't hear what your opinion
    was on that.
        Mr. Barr. We think the FDIC is the natural place to play
    the receivership function. They have had 75 years experience
    acting as receiver of the largest firms. There may be
    circumstances when it is absolutely critical for the SEC also
    to be involved with respect to a broker dealer, but the
    expertise with respect to receivership really does lie with the
    FDIC.
        There would be no need to create a new entity or a new
    bureaucracy or a new group of individuals involved; the FDIC is
    there, it is in place, it is a well respected, well trusted
    institution and I think Americans have come to see the
    important role that the FDIC has been playing for three-
    quarters of a century. So I think that is how we would proceed.
        Ms. Chu. How would the Administration's resolution proposal
    guarantee that stakeholders would be no worse off by
    regulators' use of this authority than would be in the case of
    a liquidation?
        Mr. Barr. We would put a floor on recovery at liquidation
    value, so it would just, by operation of law, require that
    system.
        Ms. Chu. Okay. Thank you.
        Mr. Cohen. Thank you, Ms. Chu.
        Let me ask a question of Mr. Krimminger--a couple. I was
    the initial person to suggest we should raise our FDIC rates
    here in Congress. We did it. Would you concur that it was a
    good idea and that it should be continued on to give
    investors--depositors assurances that their money is safe?
        Mr. Krimminger. You are referring to the guarantee of the--
    --
        Mr. Cohen. Two-fifty.
        Mr. Krimminger [continuing]. Level? We think that certainly
    that has been extended now through 2013. We would want to look
    at that point as to whether that is appropriate to continue. We
    have not made any recommendation on that thus far.
        Mr. Cohen. Can I ask you why it would possibly not be
    important to continue when it was set at $100,000 in 1981 and
    then if you take the--you know, figure it out pro rata, it
    should be at least $250,000 now. Why would it not be
    appropriate to keep it at the same level as it was in 1981?
        Mr. Krimminger. Chairman, I wouldn't want to really express
    an opinion on that, but certainly we have looked--we have done
    some analysis and looked and yes, there has been, obviously,
    quite a bit of inflation since 1980 when it was raised to
    $100,000 initially. We initially felt that it was appropriate
    to put it up to $250,000 during the crisis, and we just simply
    want to work with Congress and do some analysis to support
    whether $250,000 is the appropriate level or some different
    level.
        We have certainly talked about it in the past, even
    before--long before the crisis--about having it be $100,000
    level adjusted based upon inflation changes in order to make
    sure that it provided appropriate protection.
        Mr. Cohen. And let me ask you another question: Major
    financial institutions move ungodly amounts of money--trillions
    of dollars--across global economies and affect--in many
    countries. Considering the amount of money that these major
    financial institutions move and across so many countries, does
    the FDIC have the capacity to resolve all these big
    institutions if they get into a crisis situation?
        Mr. Krimminger. Well, we certainly would believe that we
    have. This is something that we have been doing for a long
    time, is resolving banks. Banks are involved in many of these
    complex financial transactions. We were very heavily involved
    in helping to resolve several very large banks last year.
        I will fully agree with you that the types of institutions
    we are talking about are much more complex and much larger in
    size. But the type of expertise related to the derivatives
    products, which we have dealt with quite a bit in bank
    failures, and other types of financial contracts, we believe
    put us in a good position to help deal with the resolution of
    the largest banks and bank holding companies.
        That is the area that we think is most crucial that we
    would be involved in, and we think that we do have the
    expertise to move forward----
        Mr. Cohen. And adequate personnel as well?
        Mr. Krimminger. We have a long history, Congressman, of
    increasing size if necessary. We would increase size somewhat
    with this authority. We are now about 6,300 employees; we have
    increased the size of our staff by a little over 1,500
    employees in the last year. And I think we have the ability to
    call on the expertise of many others outside of the FDIC
    through contracts in order to provide special expertise for
    particular institutions, which we have used quite a bit with
    some of the bank failures we have already had.
        Mr. Cohen. Thank you, Mr. Krimminger.
        Does the Chairman have additional questions?
        I recognize Mr. Conyers.
        Mr. Conyers. Thank you. Thank you, Chairman Cohen.
        Am I correct to assume that you two gentlemen, from your
    respective authorities, have created this new resolution
    authority idea?
        Mr. Barr. Mr. Conyers, Mr. Chairman, the Treasury
    Department submitted a proposal to the Congress with respect to
    resolution authority that is under--will be under consideration
    by the Congress. The FDIC is an independent agency and reaches
    its own judgments with respect to any legislation it might
    support or would not support. And certainly I was quite
    involved in that process, but it is ultimately a departmental
    decision.
        Mr. Conyers. Your modesty is appropriate, but this is
    largely your idea.
        Mr. Barr. Mr. Chairman, I can say not only with humility
    but with honesty that there are a lot of people who worked on
    this proposal, and it is really a departmental judgment about
    the appropriate path forward with respect to resolution.
        Mr. Krimminger. If I might just simply--I could even claim
    more modesty, because it was primarily something developed
    through the Treasury Department. Certainly we have had a lot of
    contact with Treasury and other regulators----
        Mr. Conyers. I will get to your modesty in just a minute.
    Let us go into the secretary's modesty.
        You are the secretary for financial institutions for the
    Department of the Treasury.
        Mr. Barr. Yes, sir.
        Mr. Conyers. Right. Well, who would be putting this kind of
    thing together--somebody over you did this and gave it to you?
        Mr. Barr. I am sorry, Mr. Chairman. I don't mean to be
    absenting myself from the decision-making processes. I just
    wanted to make clear that it is a departmental judgment. I
    share that judgment. I certainly was quite involved in that
    judgment, and it is my responsibility to work to get that
    judgment enacted. And you can hold me accountable if you
    don't----
        Mr. Conyers. All right. Let us look at it like this:
    Treasurer Geithner wrote this up and gave it to you and you and
    maybe one other person, and we have got it now. It is okay to
    admit it here.
        Mr. Cohen. You have a right to a lawyer. You have the right
    to remain----
        Mr. Barr. I don't especially need one. I am happy to have
    you hold me accountable for anything I say up here about the
    resolution authority. It certainly, in my judgment, it is the
    right course of action. And please, any questions you may have
    about it, I am happy to answer.
        Mr. Conyers. Well, I am glad that you are happy to answer
    them. I am happy to give them to you.
        Now that we are all happy, let us--somebody wrote this.
    This didn't drop out of the air, or somebody walking, a window
    rolled down in a limo and a sheaf of papers were handed to you.
        Mr. Barr. Mr. Chairman----
        Mr. Conyers. Somebody wrote it, and you are the one that
    wrote it.
        Mr. Barr. I am not trying to avoid responsibility, Mr.
    Chairman. You can hold me accountable for it. It is the
    department's position. I worked on it with our general
    counsel's office. We have a terrific team of people there, and
    I am happy to have you hold me accountable for any of the words
    in it.
        Mr. Conyers. Well, look, I will hold your secretary
    accountable then, or the guy in the office next door to you.
        Mr. Barr. No. Please hold me accountable, sir.
        Mr. Conyers. Well, that is what I was trying to do. So why
    are you trying to----
        Mr. Barr. I apologize, sir. I am not----
        Mr. Conyers [continuing]. What is with the modesty? I hold
    you accountable and you accept accountability.
        Mr. Barr. Yes, sir.
        Mr. Conyers. All right, now that that is straight. Now we
    are getting somewhere.
        Now, over in the Federal Deposit Insurance Corporation,
    where modesty is the mode, Mr. Krimminger, and you have already
    asserted your modest role in this, where does the relationship
    between FDIC and Treasury come in here? In other words, they
    wrote it and you are here supporting it, right, this new
    resolution authority?
        Mr. Krimminger. It was Treasury's bill. We are here because
    we support the concept of having a new resolution authority. We
    do not support every provision of the bill and we have had
    discussions about some areas that we do have concerns about. So
    I think that is the completely honest and completely fair way
    of expressing our view.
        Mr. Conyers. Well, that is all we are trying to do is
    identify the--look, we are all in the same government working
    on behalf of the same citizens, and--but you are here to
    support the Treasury's position, and there are some
    reservations that you have. Okay. Now that we have got that, we
    are through with this and the modesties and the assuming
    responsibility parts have all been handled.
        Now, in this new proposal of resolution authority there
    comes with it a dismantling of some of the protections that
    have already existed. Is that not correct?
        Mr. Barr. Mr. Chairman, in our judgment the bill preserves
    important protections--key protections--for firms, for
    shareholders in the firm and for creditors in the firm, while
    providing the government with the appropriate tools to engage
    in resolution authority subject to judicial review of their
    actions with respect to the appointment of a receiver or the
    adjustment of claims, as Mr. Krimminger has previously
    outlined.
        Mr. Conyers. I see. That is not so good.
        Mr. Krimminger, let me try the same question on you:
    Doesn't this proposal anticipate and include certain
    dismantling of some protections that already exist?
        Mr. Krimminger. Chairman, I do not believe it does because
    it simply--the only change that it really creates is that the
    initiation of an insolvency proceeding that would be initiated
    through an administrative process rather than through a court-
    filed insolvency process through the bankruptcy code. The types
    of protections that would be available to creditors and
    shareholders to challenge that process and challenging the
    decisions through a court action would all remain in place.
        Mr. Conyers. Are you a lawyer?
        Mr. Krimminger. Yes, sir.
        Mr. Conyers. And Mr. Barr, are you an attorney?
        Mr. Barr. Yes, sir.
        Mr. Conyers. Oh, okay. What about the dismantling of--you
    both not agreed with my assertion. What about bankruptcy code
    protections currently in existence?
        Mr. Barr. So again, Mr. Chairman, with respect to----
        Mr. Conyers. No dismantling?
        Mr. Barr. With respect to firms that are subject to the
    special resolution regime, those firms would be subject to the
    resolution process that the FDIC uses for bank failures. Those
    bank failure protections provide important protections for
    creditors and shareholders with the appropriate opportunity for
    judicial review, and those same sets of procedures would be
    used with respect to these firms. So in our judgment it doesn't
    dismantle protections; it provides protections that are
    available under the bank failure regime and provides those
    protections in the context of firms that are subject to the
    special resolution regime.
        Mr. Conyers. Okay. Attorney Barr, that is very good.
        Now, let me try Attorney Krimminger. Same question.
        Mr. Krimminger. I think, Chairman, we--in the FDIC's
    resolution process we provide the same types of protections for
    creditors. For example, there is protection under the
    bankruptcy code for secured creditors; there is protection
    under the FDI Act for secured creditors. In fact, in some ways
    there is even more protection under the FDI Act for secured
    creditors because secured creditors are not subject to cram
    down, as there can be some circumstances under the bankruptcy
    code.
        Another example is that for existing contracts of the
    failed bank or the failed institution, there is protection for
    those existing contracts. There is a bankruptcy trustee who has
    the power to reject or affirm certain contracts under the
    bankruptcy code. So does the FDIC as receiver has the power to
    reject or, as it was referred to in our statue, repudiate those
    types of contracts.
        But damages recoveries are available to those whose
    contracts are rejected. If they disagree with the decision on
    the repudiation or disagree with the amount of damages that the
    receiver determines to be due to them they can file for a de
    novo review, or actually a de novo case, in the Federal
    district court of the jurisdiction of the bank or in the
    District of Columbia.
        Mr. Conyers. Well, let us take antitrust safeguards.
    Attorney Barr, antitrust safeguards--are they compromised,
    diminished, or dismantled, from your perspective, under this
    new extended resolution authority idea?
        Mr. Barr. In our judgment the proposal mirrors the
    procedures that are used with respect to bank failure laws. So
    in the event of the need for merger and acquisition, there is a
    process for appropriate Department of Justice review. As under
    existing bank failure law there are emergency exceptions to
    that; those would apply also in this case.
        Mr. Conyers. So the answer is no?
        Mr. Barr. In our judgment they are, again, Mr. Chairman,
    the same as currently provided under bank failure law. We are
    extending the exact type of regime that exists today with
    respect to antitrust review to this narrow context. In our
    judgment that is appropriate.
        Mr. Conyers. Let me try a new tactic with Mr. Krimminger.
        Yes or no?
        Mr. Krimminger. With regard to the antitrust protections?
        Mr. Conyers. That is right.
        Mr. Krimminger. With regard to the antitrust protections,
    Assistant Secretary Barr stated it accurately. There
    typically--yes, there is a requirement to go through Department
    of Justice review on bank failures, but there can be
    exceptions.
        Mr. Conyers. But there is no dismantling or diminution of
    antitrust safeguards? Your answer is, like Attorney Barr's, no?
        Mr. Krimminger. In a systemic context there can be cases in
    which there is an override of the anticompetitive consequences,
    yes.
        Mr. Conyers. Wait a minute.
        Well, let us talk about union contracts. Are they protected
    under the bankruptcy code?
        Mr. Krimminger. My understanding, and I would consult with
    counsel on this because I have never been involved in a
    bankruptcy proceeding involving union contracts----
        Mr. Conyers. Well, they are all in back of you. Just take a
    moment. We are in no hurry----
        Mr. Krimminger. But nonetheless, in a Chapter--I think a
    Chapter 11 proceeding is somewhat distinct from a Chapter 7
    liquidation proceeding. A bank receivership, where they--I can
    just give you the experience that I have with bank
    receiverships. In a bank receivership the claims under the
    union contract would be due to be paid in accordance with the
    priority system for the bank receivership, because once the
    bank is closed the charter is pulled--charter is terminated.
        There is no longer a right, of course, to the employment
    because we are in a liquidation mode in a bank receivership.
    But any claims that are due from the bank to the union or to
    the union employees would be paid in the priority system, in
    that liquidation priority system.
        Mr. Conyers. So you can break the contract?
        Mr. Krimminger. The institution in that case, Chairman, is
    no longer in existence. I have no employer to provide. And I
    understand from counsel that there are similar protections and
    similar rights to reject certain union contracts under Chapter
    11 provisions of Title 11, of course with certain protections
    in place. Chapter 11 proceedings, of course, are reorganization
    proceedings, whereas Chapter 7 is a liquidation and the
    resolution of a bank is the closing of the bank so that there
    is no longer a reorganization of that specific bank but the
    sale of its assets over to other private entities.
        Mr. Conyers. Lawyers, are retiree benefits and pensions
    protected as they are--would they be protected under the
    resolution authority concept that you bring to us as they are
    under the bankruptcy code?
        Mr. Krimminger. I believe they would be protected,
    Chairman, in the same way that they would be protected in a
    Chapter 7 liquidation proceeding. You are entitled----
        Mr. Conyers. Wait a minute. Could we start off with a yes
    or no and then the explanation?
        Mr. Krimminger. Yes, they would be protected in the same
    way as under a Chapter 7 liquidation proceeding. As in a
    liquidation proceeding, there is a winding up of the affairs of
    the entity and its assets are then sold to others in order to
    recover money to pay off the creditors. That is the same
    situation in a bank failure.
        Mr. Conyers. Now, Attorney Barr, what is your response to
    that same question?
        Mr. Barr. I am afraid, Mr. Chairman, I would have to defer
    to Mr. Krimminger's expertise on that.
        Mr. Conyers. Sure.
        I am sorry, Mr. Chairman, but this is some of the most
    fantastic questioning and responses that I have received in a
    long time here in the Committee. I apologize for taking so much
    time.
        Now, in bankruptcy the non-bank would be in a Chapter 11
    and not break the contract without negotiations and approval.
    That is not true under the FDIC. Is that a true statement?
        Mr. Krimminger. I would defer, Chairman, to your counsel
    with regard to what the bankruptcy provides. But what the FDI
    Act provisions provide is that, just as in a Chapter 7
    liquidation, we have a insolvent closed entity that no longer
    continues in operation.
        Our goal with the resolution authority that we would
    support is to end the ``too big to fail'' so that the entity is
    propped up in some fashion, either temporarily or permanently,
    from government or taxpayer dollars. So we would be closing the
    entity, just as in a bank receivership, and it would be then--
    its assets would then be recycled, if you will, into the
    financial system.
        Mr. Conyers. Is that a long way of saying yes?
        Mr. Krimminger. I say I would defer to counsel--your
    counsel----
        Mr. Conyers. My counsel says yes.
        Mr. Krimminger. I do not know the bankruptcy provision on
    that specific provision, but we are not talking a Chapter 11
    proceeding. We are talking about the closure of the
    institution, the pulling of its charter, and then the
    maintenance of the functions that are systemic, not the actual
    firm in a Chapter 11 reorganization. So it is a different
    situation.
        Mr. Cohen. Mr. Chairman, if I could do something out of the
    ordinary, I would like to ask Mr. Miller to come up to the
    panel--not be recognized, because I think everybody has
    recognized him in the past; he is kind of our Black's Law
    Dictionary on bankruptcy sometimes--and ask him without
    introduction if he can give us his basis of his knowledge on
    bankruptcy to respond to some of the questions the Chairman has
    asked and the witnesses have demurred on.
        Mr. Miller, please?
        The question is an assortment of questions that the
    Chairman asked. He may want to ask you directly about
    bankruptcy law and how it might be distinguished from
    resolution, and as far as union protection, as far as Justice
    Department and antitrust, as far as pensions, et cetera, et
    cetera. Are there more opportunities to the bankruptcy court to
    protect rights of individuals that might be under this new
    legislation?
        You need to hit your mike.

                    TESTIMONY OF HARVEY R. MILLER,
                       WEIL, GOTSHAL & MANGES LLP

        Mr. Miller. As I understand the testimony, the concept of
    the FDIC is that because the charter of the bank is terminated
    there is no longer an employer and therefore there is no longer
    a union contract, and all of these other contracts have
    effectively been terminated. Under the bankruptcy code, if it
    is a Chapter 11 bankruptcy, there are protections for pensions,
    there are protections for labor contracts, and very specific
    procedures that have to be followed.
        And a Chapter 11 does not have to be a reorganization. Many
    Chapter 11s today are liquidations with those protections under
    1114 and 1113 in place. So there are extra protections under
    the bankruptcy code.
        Under Chapter 7, which is a liquidation, those provisions
    do not apply. But if a Chapter 7 trustee wanted to sell the
    assets to another company or a purchaser who wanted to run that
    business, there is still the possibility for a trustee to
    assume the union contract and transfer it to the purchaser. So
    I would submit there are greater protections which are being
    proposed in the resolution regime.
        [The prepared statement of Mr. Miller follows:]
                     Prepared Statement of Harvey R. Miller

                                   __________

        Mr. Krimminger. May I respond briefly?
        Mr. Cohen. Yes, sir.
        Mr. Krimminger. Just to be clear about this, if you have a
    Chapter--if you have a bank resolution and you create a bridge
    bank, yes, the existing contracts can be terminated by the fact
    that there is no further employer, but you can also transfer a
    contract. That is one of the powers of the receiver when one of
    us talk about continuity. The receiver would have the authority
    to transfer those contracts over to the bridge bank intact so
    that, just like a Chapter 11, there are to be similar types of
    protections for union, pension, or other contracts if that were
    viewed as being important to maintain the going concern value
    of the entity in a bridge bank structure or a bridge financial
    institution structure under the proposal, or the operations and
    prevent a systemic risk that was the concern that led to the
    use of this extraordinary power in the first place.
        So you can transfer contracts. That is why I am saying it
    is very similar, in many ways, to bankruptcy law. You can
    transfer contracts by the receiver over to the bridge bank. You
    can also terminate, reject, or repudiate, depending upon your
    preference for terms, those contracts as well so that they
    don't flow over to the bridge banks.
        Mr. Conyers. It doesn't seem like you concur completely
    with Mr. Miller.
        Mr. Krimminger. No, I don't, because there is also the
    power to continue those contracts into the bridge bank, and I
    would just simply humbly suggest that perhaps that is something
    that hasn't been considered.
        Mr. Miller. If I may, Mr. Chairman, that assumes that the
    FDIC will find a buyer. What we are talking about here are
    first-tier financial holding companies of a huge size. I would
    look to the Indymac situation, where the FDIC was unable to
    find another bank to transfer those accounts to. And in the
    context of the testimony, that would mean those union
    contracts, those pension plans are terminated.
        Mr. Krimminger. Well, look, if I may respond as well--may
    I?
        Since the reference was made to the Indymac situation, the
    Indymac situation did involve, effectively, a bridge bank
    structure created. The contracts and primary--all of the
    operations of Indymac were transferred to that bridge bank
    structure and then that entity was sold virtually intact from
    the bridge bank. Of course you leave some claims that are of no
    value down in the receivership, but that institution was sold
    virtually intact and is now operating as One West Bank in
    California by a new set of investors.
        Mr. Miller. Yes, sir, which can also be done in bankruptcy
    if you are going to have a bridge bank that is being financed
    by a Federal agency. You can also do it in Chapter 11 without
    any Federal assistance.
        Mr. Krimminger. And may I respond as well?
        The Indymac receivership and bridge bank, since we are
    referring to that one, had no special assistance other than a
    protection of the depositors, which is, of course, the charge
    of the FDIC. There was not other Federal assistance provided at
    all.
        Mr. Conyers. Well, there seems to be a problem in the minds
    of some of the Members of this Committee about whether these
    guarantees are diminished or improved through this resolution
    authority idea. I am a little bit concerned, and this is why we
    are having this discussion, of course, isn't it?
        I mean, after all, this is a draft that is not in final
    form, is it, Mr. Barr?
        Mr. Barr. That would be up, of course, to the Congress to
    determine.
        Mr. Conyers. Well, sure, and we wouldn't do anything
    without consulting with you and Mr. Krimminger. And so we are
    concerned about whether or not we would be dismantling many of
    the bankruptcy code protections that apply to non-bank
    financial institutions and the antitrust safeguards that apply
    to them.
        That is a valid concern, and that is a big concern, Mr.
    Miller.
        Mr. Barr. Again, Mr. Chairman, in our judgment it made
    sense to use the system that is in place for bank failures,
    which has a long history and established protections in it and
    to decide in particular circumstances that are rare that should
    be extended to a further category of institutions that would
    have then a regime that has the same protections that have been
    used in bank failure law for many, many years.
        Mr. Miller. Thank you, sir.
        I suggest that we should not forget that what is the
    fourth-largest non-bank financial holding company is currently
    in bankruptcy and is being administered in bankruptcy very
    efficiently and without a single dollar of Federal assistance,
    in a proceeding in which, as the prior panelists have said, was
    able to sell assets within a period of 5 days, did not need
    debtor and possession financing, has been running this estate--
    this huge, complex estate--for well over a year, and if it had
    the protection of the automatic stay in connection with the
    derivative contracts, would be a much more valuable estate
    today.
        I would submit to the Committee that this whole problem of
    derivatives is so complex that three-quarters of the people on
    Wall Street still do not understand what a derivative is. And
    where you have almost a million counterparties in these
    derivative transactions, many of whom took full control because
    of the way the statute is written.
        I don't believe the FDIC has ever had any experience with
    derivatives and how you unpeel them and how you unwind them.
    And there are billions and billions of dollars involved in that
    process.
        Mr. Conyers. We can't disagree with that, can we, Mr. Barr?
        Mr. Barr. If I could, Mr. Chairman----
        Mr. Cohen. Well, Mr. Krimminger, that is the reason I asked
    you the question about, is the FDIC equipped to take on these
    global economic situations with these multi-country--I mean,
    you all do like the bank of, you know, Tucum Karey--you are
    talking about doing the bank of the Semi-world.
        Mr. Krimminger. Like WaMu and some other substantial
    institutions. Yes, I think it would be a challenge but I think
    the----
        Mr. Conyers. You have never done it before.
        Mr. Krimminger. Well, I don't know--our point is that there
    is value to preplanning and value to planning these types of
    insolvencies in advance. There were some consequences from the
    Lehman failure that were created by the drying up of liquidity.
    I am not going to say that was all caused by the Lehman
    failure, but certainly there were consequences to that failure
    that created substantial problems in the financial system.
        Our judgment, which we would agree with Treasury on this,
    is that it is important to have an alternative system where you
    have the most--the largest financial firms involved in a
    potential collapse. We have had experience working with
    derivatives. We have dealt with a lot of major counterparties
    around the world.
        My work, as illustrated by the Chairman's introduction, as
    a co-chair of the international working group looking at these
    issues, we have been working with international colleagues for
    months and years to try to deal--to try to find better ways of
    dealing with these issues.
        One of the recommendations in our working group report,
    which was published on the Bank for International Settlements
    Web site on September 17, was the need to have an insolvency
    system that could be consistent across both banks and the very
    largest non-bank financial firms in order to allow for greater
    coordination to prevent there from being cross-border
    consequences that can cause significant problems.
        And it is certainly not a secret that there certainly have
    been substantial cross-border disagreements with regard to
    everything from information sharing, with regard to the
    treatment of certain creditors and certain claims, and with the
    preferential treatment alleged by some of certain creditors and
    claims in the Lehman Brothers bankruptcy.
        So I wouldn't want to sit here and say that it is an easy
    problem to solve, but I don't think we can sit here and say
    that the bankruptcy resolution is an easy problem to solve for
    these very largest institutions either.
        Mr. Conyers. Well, we beg to apologize for undervaluing the
    extensive global experience that the FDIC has accumulated over
    the years. I wasn't fully appreciative of that fact.
        Mr. Barr. If I could, Mr. Chairman, I think that the
    bankruptcy proceeding that Mr.--is referring to is successful
    only in the narrowest sense. So we have a responsibility, I
    think all of us, not just to have a system that works with
    respect to the process of bankruptcy and the creditors in that
    bankruptcy, but really with respect to the stability of the
    financial system as a whole and the protection of taxpayers.
        And the decisions that were made last year and the results
    of which, since the tools were so limited available to the
    Federal Government, the Lehman bankruptcy was maybe okay for
    the narrow proceeding that it is engaged in, but was absolutely
    horrible for the financial system, and American taxpayers,
    consumers, and businesses are paying for it every day. And I
    don't think we want to set up a system in the future that is
    narrowly procedurally successful and brings down our financial
    system.
        Mr. Conyers. But aren't we creating a super--a powerful
    super-regulator with so-called resolution authority that we
    have never created before?
        Mr. Barr. Not in my judgment, Mr. Chairman. We have a
    longstanding system of resolution for bank failure, we have
    particular----
        Mr. Conyers. Am I right? Are we creating a--or maybe I am
    wrong. When have we ever created any kind of authority with the
    power that is being contemplated now that the Treasury--that
    Mr. Barr, particularly--has handed us to consider? Is this
    routine?
        Mr. Miller. Absolutely not, sir. Absolutely not. I don't
    believe we have ever done that before.
        Mr. Conyers. I don't know about it.
        Mr. Barr. Mr. Chairman, we have a longstanding history, we
    have a bank failure regime that has been in place for three-
    quarters of a century. It is a special resolution regime for
    financial firms. We are talking about applying that in rare
    circumstances to an additional group of companies whose failure
    could really bring down the system. And so in our judgment
    really we have a long history of established practice and we
    are applying it in this context.
        Mr. Conyers. Well, all I have to do is take my medicine and
    get more rest and I will learn that this is what we do
    regularly for almost a century. This has been going on all the
    time, Chairman Conyers, you just didn't know about it. It
    slipped my attention completely. A super-regulator authority
    with this authority to get rid of many of the safeguards of due
    process for unions, pensions, for secured and unsecured
    creditors that are all covered in the bankruptcy code now.
        Attorney Harvey Miller?
        Mr. Miller. Yes, sir.
        Mr. Conyers. It is all there.
        Mr. Miller. It is all there. I think Mr. Barr, sir, is
    referring to two different things: one, what caused the
    failure, which is an entirely different subject. There are many
    factors that precipitated Lehman's collapse which were--
    included excessive risk-taking, which should have been subject
    to some regulation, poor regulation, and a general economy
    which was suffering from the takeover of Fannie Mae and Freddie
    Mac, and as well as the growing enormity of the subprime
    crisis. And you can trace back the subprime crisis, many of the
    problems.
        What I was addressing myself to was, when failure occurs,
    how do you deal with that failure? And the bankruptcy code and
    the bankruptcy courts allow you to deal with that failure with
    all of the protections which Congress has already put in, and
    if you amended the code to deal with this derivatives problem
    we would have a much more efficient Administration.
        And even though Lehman was an unplanned Chapter 11, it was
    something that, responding to Mr. Johnson's comments, the
    Federal Reserve Bank and the Treasury and Mr. Cox told the
    board of directors of Lehman, ``You should file a bankruptcy
    petition by midnight on September 14.'' And while they said it
    is in the discretion of the board, it was pretty much a
    command.
        And then the question was, how do you deal with that
    failure? I believe that the Chapter 11 bankruptcy in Lehman
    demonstrates that you can deal with it and we have dealt with
    it. And in fact, Lehman owns two banks. And it is through the
    Chapter 11 proceeding where, in the full light of the sunshine,
    full transparency, the Lehman estate has invested money in
    those to banks to keep them in compliance with the FDIC. And
    you have an administration there where everybody is involved
    and the stockholders are being wiped out.
        Mr. Conyers. Would you agree with that, Mr. Barr?
        Mr. Barr. I don't, sir. With respect, I think it is very
    hard to hold up the failure of Lehman Brothers and the way it
    was managed as a model of how we want to deal with financial
    crises in the future. It was horrible for the system, it is
    horrible for taxpayers, it is horrible for consumers, it is
    horrible for workers, it is horrible for our economy.
        We have to set up a system that is designed to bring----
        Mr. Conyers. What should we have done?
        Mr. Barr. I think we need to have tougher regulation. Mr.
    Miller and I are in agreement on that. As I said at the outset,
    we need to make sure that these largest financial firms that
    are complex and interconnected have tougher regulation, higher
    capital requirements, more stringent activities and
    restrictions alike, but we have to have a system of special
    resolution.
        If they fail we have to have humility about getting that
    right and the system we have in the past, where our choice is
    sending that firm into the bankruptcy or not, is insufficient
    and it has really hurt the system. We can't do it again.
        Mr. Conyers. But isn't the Miller description, Mr.
    Krimminger, a valid one?
        Mr. Krimminger. Well, I think what the Miller description
    fails to recognize is that you have the light of day. You have
    transparency in the bank receivership process as well. You have
    access to the courts, you have determinations by Federal judges
    about whether or not claims were accurately paid or not.
        So while I understand Mr. Miller's understanding of the
    bankruptcy code, I think you have to look at what has actually
    been done in the bank receivership laws as well. There are
    protections, contrary to what he said, for secured creditors.
    There are protections for unsecured creditors. There are
    protections for all types of----
        Mr. Conyers. Maybe he hasn't studied this carefully enough
    to know that.
        Mr. Miller. I agree with a lot of the things that Mr. Barr
    said and what we do need, but in a context of saying that if
    you disagree with the FDIC and how they are handling things in
    autocratic fashion you can start an action in the Federal
    district court, a plenary action, it is not like going to the
    bankruptcy court, which has hearings regularly, somewhat
    informal. Starting a plenary action to complain about the FDIC
    requires a great deal of financial backing, and that----
        Mr. Barr. We are talking about the largest firms in the
    country.
        Mr. Krimminger. And that is why you have an administrative
    process first to hear those claims and have a determination of
    them, then there is the right, if you are dissatisfied with
    that determination, to go to court in which there is no
    deference given to the FDIC's views.
        Mr. Conyers. Well, let us see. What is it that we agree on
    collectively? These are three of the finest legal minds in the
    country. What is it that we can agree on here and what is it
    that needs to be discussed a little further?
        Mr. Barr. I think that we can all agree we need to end the
    perception of ``too big to fail.'' I think we can all agree we
    need tougher capital requirements, tougher liquidity
    requirements, more stringent forms of supervision on the
    largest, most interconnected firms.
        I think that we need to come to an agreement but we
    apparently don't have one with Mr. Miller that the----
        Mr. Conyers. Or this Committee.
        Mr. Barr [continuing]. Bankruptcy regime is sufficient. In
    our judgment, the bankruptcy regime is not designed for the
    purpose of protecting financial stability. It is not designed
    for the purpose of protecting the taxpayer. It is designed for
    the purpose of ensuring process with respect to creditors. That
    is too narrow a vision. I think we have a deeper
    responsibility.
        Mr. Conyers. What do you say, Mr. Krimminger?
        Mr. Krimminger. Well, I think that we do agree on the need
    for reform across the regulatory and supervisory realm, which I
    mentioned both in my written statement and my oral statement.
    But what we also--we think that there does need to be a special
    resolution regime, if you will, only to be used in those rare
    cases where the--going through the normal bankruptcy process
    could create additional systemic risk.
        So I concur with Assistant Secretary Barr that it is
    important that in that narrow scope of issues that we have the
    ability to go through a process that is designed to make sure
    there is speed, make sure there is continuity in these key
    contracts so that contracts where the liquidity is so crucial
    can be maintained through the bridge financial institution.
    That is simply what we are proposing, not some other--not a
    Federal bailout--because we believe that we do need to end
    ``too big to fail.''
        The problem is that there was not an interest by both, in
    some cases policymakers but certainly in the case of also
    creditors, in many cases, of putting some of these largest
    firms through a bankruptcy proceeding because of the fear that
    there would be a massive dumping of these financial contracts
    on an already illiquid market. That is a danger that we need to
    avoid, and we can avoid it without having to have a taxpayer
    bailout as the only alternative.
        Mr. Conyers. Attorney Harvey Miller?
        Mr. Miller. I agree with almost everything Mr. Barr has
    said, but when he refers to stability I need a definition for
    stability. I said in my statement that Lehman's primary
    problem, putting aside its other problems, the immediate
    problem on the weekend of September 12 was liquidity. The
    liquidity had been drained out of Lehman by a series of
    different events, and finally the clearing banks just demanding
    more and more collateral.
        If you were looking for stability at that point in time,
    the government, the Federal Reserve Bank, or the Treasury could
    have done a bridge loan. And there was a request for a bridge
    loan to get Lehman assistance to get to a sale.
        The Treasury decided against that, and that resulted in the
    unstable conditions that happened. There is no prohibition in
    using the bankruptcy process, and if it is appropriate for the
    Treasury or whoever, in the interest of stability, to do a
    bridge loan it can be done in bankruptcy and it can be done in
    the bright light of full transparency.
        Mr. Conyers. Now, you don't need to qualify that statement
    do you, Mr. Barr?
        Mr. Barr. I think that--I think again, with respect to Mr.
    Miller, it is too narrow a perspective. We are not focused on
    the success of failure of Lehman. We are focused on financial
    stability overall.
        I think that the Lehman process obviously occurred in the
    context of a massive inflow of--followed by a massive inflow of
    liquidity provided into the system. There was a massive inflow
    of liquidity in the system from the Federal Reserve before.
    There was an enormous amount of government action taken in and
    around the Lehman bankruptcy.
        The Lehman bankruptcy itself is a narrow slice of what we
    need to look at, and I think we have broader responsibilities.
    I think we need to have a special resolution regime because we
    are looking out for the taxpayer and the system and not just
    for the creditors or the firm.
        Mr. Conyers. Mr. Krimminger, you have less criticism of the
    Miller evaluation.
        Mr. Krimminger. I wish that I could provide concurrence,
    but I will say again that what the Miller evaluation fails to
    recognize, I think, is that the simple process that are
    provided by current bankruptcy code provisions, of requiring or
    allowing parties to terminate and net their contracts
    immediately onto an illiquid market creates a great deal of
    risk of destabilization.
        A bridge loan would not necessarily solve that, but let us
    presume for a second that we also adopted the Miller proposal,
    say that these financial contracts were subject to the
    automatic stay. That is going to create nothing but illiquidity
    and concern by creditors of other entities that might be in
    trouble around the financial markets that their contracts will
    be subject to delay and they won't be able to get out of the
    contracts.
        As much as the netting provisions cause problems, they were
    put in place in part to help deal with the potential
    destabilization that could occur by immediate--by having
    contracts tied up in a bankruptcy proceeding or other type of
    proceeding. That is why the Congress, in its wisdom, did give
    us the power to transfer these contracts over to a bridge
    financial institution so that they could be maintained and
    wound down slowly rather than being terminated immediately.
        Mr. Miller. Referring to the last comment, that is what
    should be in an amendment to the bankruptcy code, and that is
    exactly what, as I understand it, the resolution regime would
    want--the ability to assume or reject these contracts rather
    than allowing the counterparties to terminate them and take
    advantage of a declining market.
        The other issue that I would raise is, in response to Mr.
    Barr, how are you going to protect this country against the
    same decision that was made on the weekend in which the
    Treasury decided, ``We are not going to do a bridge loan or
    anything for Lehman,'' and then on Tuesday the 16th advanced
    $85 billion to AIG? How do you check that decisions?
        Mr. Conyers. How can you explain that?
        Mr. Barr. Mr. Chairman, obviously I was not in the
    government at the time of those decisions. I don't really have
    a particular judgment with respect to weekend activities. I
    will say that I think it is absolutely critical--and here I
    think Mr. Miller and I agree--that we change the basic nature
    of regulation in our system so that there are big buffers and
    we can internalize the costs. I think those are important----
        Mr. Conyers. But he wants to put the law into bankruptcy
    and you want to put it into a super-regulator.
        Mr. Barr. I don't want to put it into a super-regulator,
    sir. I think that these institutions need to be toughly,
    confidently supervised at the consolidated level. I think there
    need to be important checks and balances in the system for the
    use of resolution authority with three keys, as under the
    systemic risk approach--the Federal Reserve, the Treasury, and
    the FDIC in agreement.
        I think there does need to be transparency in the process
    once the firm is in resolution with the opportunity for
    judicial review. So I don't agree with the characterization of
    this as a super-regulator.
        And again, with respect, I think that we need to have
    broader system interests in mind and not just the interests of
    creditors of the firm.
        Mr. Cohen. The Chair is temporarily going to ask Chairman
    Conyers to assume the Chair and recognize the Ranking Member as
    well to continue this questioning. And if the Chair would take
    the Chair for just about 5 or 10 minutes, I would appreciate
    it. And I will return shortly. But Mr. Franks has some
    questions, but I will leave that to the Chair to recognize Mr.
    Franks.
        Mr. Conyers. [Presiding.] Recognize Mr. Franks.
        Mr. Franks. Well, thank you, Mr. Chairman.
        You know, I guess just fundamentally here I think Mr.
    Miller's testimony has been very compelling to me. My original
    question was, what is the primary difference between what you
    are doing and the bankruptcy protocol that is already set up?
    And I understand that the big difference is who is in charge
    here.
        And I have got to tell you, I want to be very respectful to
    Mr. Barr and Mr. Krimminger because I know that you are here,
    you know, at the behest of others, but you are in a position of
    having to defend what I think is almost an indefensible
    situation here because there is the reality of a super-
    regulator, like the Chairman suggests. This is putting this
    into an entirely new environment, kind of a bureaucratic
    environment, and you are trying to write a whole century of law
    here in a short period of time. You are trying to create an
    entirely new mechanism; you are trying to essentially replace
    what the bankruptcy system already accomplishes in most cases.
        I have not heard any particular, clear, specific advantages
    that this would offer over the bankruptcy system. I just
    haven't. So let me just say that one of the things that
    concerns me is under the legislation here it says--this is
    verbatim--no judicial review of determination pursuant to the
    subparagraph. No court may review the appropriate Federal
    regulatory agency--that would be you--determination subject to
    subparagraph D to disallow a claim.
        In other words, the gentleman, Mr. Miller, is absolutely
    correct. You could go into a Federal court and make a big
    statement--I will call on you in a moment--and I just think
    that you are talking about a modicum of chaos here, and there
    is a lot of hubris I am hearing here that if the right people
    were in charge it would all work out okay.
        And, you know, I am looking at some graphs here and there
    is an indicator where, when the bankruptcy by Lehman occurred
    there was a little hiccup in the graph, but when the Bernanke-
    Paulson testimony came and TARP was announced, boom, it was
    disaster time. And I am convinced that the inept intervention
    by the department is most of what catalyzed the panic. Now, I
    am not suggesting that it was at the cores substance of what
    the underlying problem was, but it catalyzed the panic.
        The same thing here with the Dow. When the Lehman
    bankruptcy occurred it bounced a little and bounced back up,
    but when this announcement of this two-and-a-half-page plan to
    save the world occurred the Dow just went--bottomed out because
    the market couldn't understand how the bureaucrats were going
    to come along and save the day.
        Now, what I hear happening here is that somehow you are
    going to all of a sudden have, under the FDIC, the ability to
    have the same transparency, the same protective rules, the same
    wisdom, the same experience as the entire bankruptcy court
    mechanism that has been going on for so long. And I know I am
    being a little rough on you here, but let me ask a couple
    questions.
        First of all, it seems to me that the additional strain and
    resource demand on the FDIC of this proposed new regulation
    would weaken the confidence in the FDIC's existing brand as a
    guarantee and the resolver of depository institutions and a
    single measure failure here by the FTC to resolve a bank
    holding company, for example, Citigroup, under the new proposed
    resolution would undermine the market confidence in the FCID.
    And wouldn't a loss of confidence then accomplish the same
    tragedy here where there is a run on the banks?
        So let me ask you both, if you have got Goldman Sachs over
    here on one hand, now a bank holding company, and you have got
    your largest covered bank under FDIC, and both of them go into
    disaster at the same time, which one is your priority? And I
    will address it to Mr. Barr first.
        Mr. Barr. Thank you very much, Mr. Franks. I guess I would
    respectfully disagree with respect to the characterization of
    the activity we are doing as creating this kind of entity you
    described. What we are talking about doing is applying for a
    narrow class of the largest, most interconnected firms in the
    country the opportunity to apply, in narrow circumstances,
    special resolution authority to be administered by the FDIC, an
    institution that has carried out the same procedures through
    the same protections for three-quarters of a century in the
    narrow additional class.
        In my judgment the FDIC would have the capacity to engage
    in the kind of necessary approach to preserve the stability of
    the financial system while also taking care of deposit
    insurance----
        Mr. Franks. But you are suggesting that it would be a new--
    you know, you would have additional responsibilities? I hope I
    could get that, because if I can't get that I am----
        Mr. Barr. Yes, sir.
        Mr. Franks. Okay. So what would be the main--and you
    haven't told me where your priorities would be. Would it be
    with Goldman Sachs or your largest bank--covered bank?
        Mr. Barr. It is not a question of----
        Mr. Franks. Well, that is my question.
        Mr. Barr. Yes, sir. I believe that the FDIC has the
    judgment and the capacity to take appropriate steps to protect
    depositors with respect to a bank and also to take appropriate
    steps to wind down large firms and to preserve through that
    mechanism financial stability in the system.
        Mr. Franks. Well, could you understand a potentially large
    bank's reticence to see this situation when maybe Goldman
    Sachs, which would be largely represented in the department,
    and all of a sudden it looks to me like that they would say,
    ``Hey, you know what? These guys might favor Goldman Sachs over
    the banks here because of the large political representation
    that is there.'' And I am not making any--I am not challenging
    anybody's loyalty here, I am just suggesting that the market is
    going to consider that and what you are doing is you are
    politicizing the whole process.
        You have got sort of a ``bailout on demand'' mechanism here
    and you are widening the ability of executive government, of
    bureaucratic government, department government to intervene in
    these areas that it really--that has pretty much been
    determined to be what was the catalyst of a lot of the panic in
    the first place. And I mean, can't you understand why the
    business community would say, ``Well, they screwed it up once.
    Why should we all of a sudden have this great confidence that
    they can come along and rescue everything now?''
        Mr. Barr. Mr. Franks, in fact I agree that we shouldn't
    care at all what Goldman Sachs thinks or any other firm thinks
    about anything we all do up here. The point is to develop a
    system that protects the taxpayer, protects our economy, and
    makes sure that we have the tools available to we need to end
    ``too big to fail,'' to regulate the largest firms, to have
    higher capital requirement and liquidity requirement on it, and
    we have to be humble about that.
        We have to know that sometimes that is not going to work.
    If it doesn't work we need to have the option, other than a
    bailout or bankruptcy, that is actually going to be able to
    resolve the firm in a way, wind it down in a way that is not
    disruptive to the system. And our judgment is that----
        Mr. Franks. It just occurs to me that, you know, if you
    have got this additional process, that the market doesn't know
    whether to trust it or not and the firms, then they think,
    ``Oh, well then our issue is not whether we get a bailout or a
    bankruptcy. We have got this other possibility that we may
    try.'' And all of a sudden there is an entirely new calculus in
    the minds of some of the business leaders. And it just occurs
    to me that this is a recipe for absolute confusion.
        And I still haven't heard a major advantage in the process
    that you are talking about that would not be--and I am sure
    there may be some--but that would not be already available
    under what Mr. Miller has talked about in a Chapter 11.
        Mr. Barr. Could I suggest, sir, that I think that the
    ability to act quickly and decisively with respect to changing
    the management, with respect to providing financing for
    liquidity functions, with respect to the ability to reduce
    risks to financial system as a whole through knock-on effects
    to counterparties, and the ability to take that kind of
    decisive action, not with respect to protecting the narrow
    interests of the firm but with respect to preserving taxpayer
    interests and having the ability to assess on the industry as a
    whole to make sure that the largest firms pay for any financing
    improves market discipline and preserves the ability to
    strengthen our financial system. I do not believe that
    bankruptcy is adequate to doing that.
        Mr. Franks. So getting back to the one question that I
    asked, just as clear as you can, I know--what happens if
    Goldman Sachs and your largest bank blow up on the same
    weekend? What happens? What do you do?
        Mr. Barr. You resolve the depository institution according
    to existing bank failure law and you resolve the large
    financial holding company according to the special resolution
    procedures as described in our proposal.
        Mr. Krimminger. May I respond to the section of the FDI Act
    that you read from a moment ago?
        Mr. Franks. Sure.
        Mr. Krimminger. That section simply means that there is no,
    like, administrative procedure act type of review of the
    decision by the receiver. That is why I was saying before,
    there is a de novo judicial review of the decision.
        The court can't review the decision and give deference to
    it; they have to review it without giving deference. And the
    subsequent provision of the FDI Act, which provides
    specifically for the ability to go to court, file your claim,
    and get that resolved by the court. So there is a judicial
    review of the claim, the decision----
        Mr. Franks. But the ultimate impact is that the process
    then has less transparency in the long run because, you know,
    you can't possibly suggest to me that you are going to--under
    this new modicum here where you don't have 50 years of
    developed transparency with the bankruptcy court, you can't
    suggest to me that there is the same transparency.
        And Mr. Miller, would you suggest----
        Yes. We have given you plenty of time here, guys, but I
    want to--because my time is short too.
        Mr. Miller. Thank you, Mr. Franks. There is nothing that
    Mr. Barr has said that could not be done as a complement to
    bankruptcy. I believe Mr. Barr is--and I think simply saying
    that the Chapter 11 bankruptcy has a very narrow focus is
    understating, because if there is exigent in circumstances,
    certainly there is going to be a lot of public interest in it.
        In terms of bridge financing and all of that, that can be
    done. Now, I hate to use Lehman as an example all the time, but
    before Lehman filed, the Federal Reserve and the Treasury went
    to all of the major money-center banks and the major street--
    Goldman Sachs and Morgan Stanley and Merrill Lynch, when
    Merrill Lynch was still there--and nobody was prepared to do
    anything. What do they do in those circumstances?
        Mr. Barr. I think that Mr. Miller is exactly right that no
    one was prepared to do anything. Our financial system was
    teetering on the brink. And I think it is ironic to say the
    least to hold up the failure of our financial system last fall
    as the model for the kind of financial system we want to have
    in the future. We can't have that kind of system in the future.
        Mr. Miller. Well, I would just suggest that, you know, the
    entire foundation of the crash was loans that did not perform
    as those who rated them said they would perform, because
    whether it is derivatives or whatever it might be, that was the
    basis. If those loans had performed as they would have
    traditionally, until we changed the rules and government in the
    middle of it all, then the entities would have had much more to
    lose and their own stockholders, all of these systems--even
    Fannie Mae and Freddie Mac--their stockholders would have said,
    ``What? You are underwriting loans that you don't know whether
    the person has a stated income, no credit history, no big down
    payment. What are you doing?''
        All of a sudden the traditional judgment would have entered
    into the process, but when government comes in and says,
    ``Well, we are guaranteeing it because we are really smart; we
    know how to make it all work,'' and I will suggest to you that
    this is the same mistake that has littered the highway of
    histories where government comes in and feels like they can
    make better judgments than the market and those who are in
    business and the foundational productivity sector are.
        Now, let me just suggest here, the assistance that is
    talked about in this legislation for a bank holding company--
    this would be Goldman Sachs--this would allow you to come in,
    make loans or purchasing any debt obligation, purchasing assets
    of the covered bank, assuming or guaranteeing the obligations
    of the covered bank, acquiring any type of equity interest in
    the covered bank, taking a lien on all assets of the covered
    bank, selling or transferring all or any part of the covered
    bank. That is a recipe for you just coming in and just taking
    them over, and I don't know how you think that you are going to
    do a better job than most of the private sector has done
    without putting the responsibility on them to perform or go
    bankrupt.
        Mr. Krimminger. May I make a comment with regard to that
    provision?
        As I indicated before, we have not--we at the FDIC have
    not--supported every provision in the proposed Treasury
    proposal. We do not support provisions that would provide
    assistance to open institutions. That is why our focus is on
    the institution needs to be closed and needs to go through an
    insolvency process and not be bailed out prior to closure.
        Mr. Franks. Well, the Chairman has been very kind to me and
    I want to give you, Mr. Barr, a last thought and Mr. Miller a
    last thought, then I am finished. But obviously you could
    probably guess here that I am a little bit not convinced here.
        Mr. Barr. Mr. Franks, I would agree with you that we need
    to be humble. We need to be humble about the ability to have
    regulators. We need to be humble about the ability of managers
    of large firms.
        And I think that is why it is absolutely critical that we
    build up large buffers in the system in the event of failure.
    It is why we need tough rules on these institutions in advance.
        And I think what we are talking about is just a narrower
    question of, do you want a process through the bankruptcy
    process, which involves a set of individuals working in the
    government, or do you want a special resolution process which
    involves a set of individuals working in the government to
    decide the nature of the resolution? And in our judgment the
    bankruptcy process is set up, designed for a different
    function. It works well for most of the time for most
    institutions in doing what it is supposed to do.
        We are talking about in the narrow case of financial
    stability--do we need a broader purpose and a carefully cabined
    approach using long trusted mechanisms? We think that we do.
        Mr. Franks. Mr. Chairman, considering the history of the
    last year, we have seen some major intervention by government
    that is unprecedented in this country, and I would just suggest
    that if we had gotten back to just basics and told these
    financial institutions, ``Listen, you better have enough equity
    to cover your risks and you better make sure that the taxpayer
    is the last one to have to intervene here, and if you don't you
    are not going to go bankrupt you are going to go to jail if you
    don't follow at least having the fundamental equity necessary
    to cover your risk.'' And if we did that and we said, ``Okay,
    buyer beware, lender beware, guys, have a good time,'' I can
    tell you it would have worked a whole lot better than
    government trying to come in and tell everybody how to do it
    and guaranteeing everything to the extent that it threw the
    whole skew of a real market out of place in the minds of any
    rational participant.
        And with that, Mr. Miller, I give you the last word here.
        Mr. Miller. Thank you, Mr. Franks.
        I go back to what Mr. Johnson said earlier this morning in
    connection with Chairman Bernanke's statement about after the
    experiences with AIG and Lehman we need a third option. There
    is no place where Mr. Bernanke or anybody else has said, ``What
    are the experiences in AIG and Lehman that requires this
    special super-agency?''
        I would submit to you that H.R. 3310 is a good start to
    where we should go incorporating those amendments into the
    bankruptcy code. We need to deal with the derivative problem.
    We have to take out those safe harbors that are in the
    bankruptcy code. And all of this without some cross-border
    solution is not going to work.
        We are dealing with firms that are global and have huge
    operations overseas. In the Lehman case we now have 80 separate
    insolvency proceedings. We have to deal with corporate
    governance obligations and fiduciary duties in other countries
    that the FDIC can't deal with, or the Treasury, in terms of
    stability.
        And until we have a cross-border solution the type of
    solution--this regime that is being proposed simply is not
    going to work. It all can be done in the bankruptcy--within the
    bankruptcy law and, as I said, with full transparency.
        Mr. Cohen. [Presiding.] Thank you, sir. And this has been a
    very unusual manner of conducting a Committee hearing, but I
    think it has been very evocative of issues, and I think it has
    been very helpful to us. And I thank Mr. Miller for joining the
    panel and Mr. Barr and Mr. Krimminger for participating as we
    have gone long.
        I would like this one last thing, Mr. Barr. I just think
    there probably needs to be some type of standard when you get
    out of the bankruptcy into this resolution, and the standard
    ought to be spelled out in some way, like a compelling state
    interest sometime that--your compelling financial economic
    doomsday, you know, and define some standards that could be
    met.
        Mr. Barr. I would agree with that, Mr. Chairman, and we
    have a standard proposed in our legislation. We would be happy
    to make it available to you for your consideration.
        Mr. Cohen. I look forward to that and I think--and I have
    to ask you, too, how are you related to Bob Barr? Are you all
    cousins?
        Mr. Barr. We are not cousins. In fact, I am fairly
    confident we are not related in any way. My name comes from a
    long string of changes through the process of immigration and
    assimilation to the United States and I believe it used to be
    Kaplinski in Poland.
        Mr. Conyers. But so did Barr's, I think, came from the same
    place. [Laughter.]
        Mr. Barr. The gulag. Maybe. Right now I am just your
    neighbor up the street in Ann Arbor.
        Mr. Cohen. Thank each of you and I appreciate your
    testimony. And I would--you might want to find a different word
    that is a better word than regime. I am afraid that may reflect
    poorly. But I thank each of you.
        Mr. Barr. Thank you for your advice.
        Mr. Cohen. We will get the thesaurus together.
        We would like to now welcome the second panel and thank our
    first panel for their--oh. I thought I beat the clock----
        Mr. King. Mr. Chairman, I----
        Mr. Cohen. Mr. King is here.
        Yes, Mr. King, you are recognized.
        Mr. King. Thank you, Mr. Chairman. I thought for a moment
    that you had suspended your peripheral vision and----
        Mr. Cohen. I can go to my left.
        Mr. King [continuing]. And I seldom do.
        And I want to thank the witnesses for your testimony, and
    as I look out across the list we have here perhaps I could
    start with Mr. Barr and ask you this question, and that would
    be, if we had simply allowed these financial institutions to go
    through a normal process of Chapter 11 or Chapter 7, what would
    you predict would be the results today? How would those large
    investment banks have fared? What would be left? Who would have
    picked up the pieces without regard to what the prediction
    might have been for the global financial structure?
        Mr. Barr. I think that if we had--if the Federal Government
    at the time had not taken significant measures, both through
    the Federal Reserve and the Treasury and the FDIC, to provide
    liquidity in the system the financial consequences would have
    been much more severe and lasting. Already I think that the
    difficulties that have been experienced because of the
    financial crisis have been quite severe to American consumers
    and businesses and households and the taxpayer. I think----
        Mr. King. Mr. Barr, I think I am going to need to rephrase
    my question: What would the pieces look like if we had let that
    happen, though? I mean, I understand that you endorse the
    support that has been there for these institutions to maintain
    the entities that we had as much as possible to go through
    this.
        Had we not, if we had decided that ``too big to be allowed
    to fail'' really didn't apply, that the free enterprise and
    free markets and the risk of failure as a deterrent for future
    imprudent investments or risks on lending institutions, what do
    you think would have happened in the function of the, say,
    bankruptcy court, for example, of those large investment
    institutions that were bailed out?
        Mr. Barr. Sir, in my judgment let me just say, I don't
    really care at all about the firms themselves or what pieces
    would have been left of them or what----
        Mr. King. But I do, Mr. Barr. That is why I asked the
    question.
        Mr. Barr [continuing]. What new pieces arrive. It is not
    about protecting the firm, so the key question is what is
    necessary, in terms of imposing the discipline on them in the
    future, making sure they have higher capital standards, higher
    liquidity requirements, bigger buffers in the system, tougher
    forms of prudential supervision. We have to make sure they are
    supervised on a consolidated basis so you don't have a firm
    like AIG that really is a loophole in the system with respect
    to bank holding companies.
        And then the question is just, in the event of crisis if
    all that is crashing down and has failed, should the government
    have the ability to throw those firms into a resolution
    procedure? I think the answer is that in some cases maybe yes,
    and that is why there is this narrow authority that is provided
    in that special circumstance with respect to these largest
    interconnected firms.
        Mr. King. Thank you, Mr. Barr.
        If I could direct that similar question to Mr. Miller, and
    also ask Mr. Miller if you have gamed this out and anticipated
    or tried to predict what would have happened if the government
    hadn't intervened. And as a person who takes care of my money--
    when I invest it in a business startup, for example, I do so
    with the prudence of the realization that if it doesn't work
    out I lose my money. When I borrow money or loan money it is
    done so with the prudence of the judgment of being allowed to
    fail.
        And that deterrent was taken away, and I think it was taken
    away implicitly some years ago. In fact, some of the top
    financial people that I have heard from 2 years ago were,
    ``What you do in this business is pretty much what everybody
    else does. That way, if they are making money you make money
    but if everything falls apart you get bailed out with the rest
    of them.'' What would you say about that subject matter?
        Mr. Miller. Mr. King, I would respond in this context: If
    the firms went into bankruptcy--Chapter 11 or Chapter 7--the
    survival of the firms would be minimal at all. The assets would
    have been offered for sale, they would have been broken up.
        If the economy was in a stable condition there is a thing
    called--a capitalist term called constructive destruction, or
    something like that, that part of capitalism is failure, and
    when there is a failure other elements of the economy take over
    that deceased, let me call it, entity. I think the problem in
    September of 2008 was the systemic risk, where it wasn't a
    question of Lehman; it was the question, was Merrill Lynch
    next? Was Goldman Sachs next? Was Morgan Stanley next?
        And if you had a successive set of bankruptcies for each
    one of those firms the consequences to the overall economy, I
    think, would have been disastrous.
        Mr. King. I thank you, Mr. Miller, Mr. Barr, all the
    witnesses.
        I appreciate it, Mr. Chairman, and I yield back the balance
    of my time.
        Mr. Cohen. Thank you, Mr. King.
        And now we will conclude the first panel, and we are going
    to quickly go because we are going to have to vote at 3'ish, or
    whatever.
        Mr. Barr. Thank you, Mr. Chairman, Chairman Conyers.
        Mr. Cohen. You are welcome, sirs. Thank you very much.
        Second panel, come in. I am sorry I have been probably
    derelict in recognizing your expertise and just deferring to
    Mr. Miller but it made for a good panel discussion.
        The first witness we are going to hear from is going to be
    Mr. David Moss. Professor Moss is the John McLean professor at
    the Harvard Business School, teaches business, government--
    senior economist at Abt Associates and he joined the business
    school faculty in 1993. And we will recognize Professor Moss
    now for his statement.
        Professor Moss, if you would start in the interest of time?

            TESTIMONY OF DAVID MOSS, HARVARD BUSINESS SCHOOL

        Mr. Moss. Thank you, Mr. Chairman.
        Mr. Chairman and Members of the Subcommittee, I appreciate
    your inviting me here today, and I am very pleased to have the
    opportunity to speak about the proposal for a resolution
    mechanism for systemically significant financial institutions.
    I actually support--I do support the broad idea of a resolution
    mechanism, and the reason I support it is that I believe it
    could be helpful in navigating a rather narrow path and a
    treacherous path between----
        Mr. Cohen. If I may interrupt, at the suggestion of the
    Chairman we will go through a continued unorthodox policy in
    this Committee, which I am happy to be the initiator of because
    I am very unorthodox in more ways than one. And what we would
    like to do is ask Mr. Moss, first, Professor Sagers, Professor
    Skeel, and Mr. Weissman to comment--you can incorporate some of
    what you had in your opening statements, all of which will be
    put into the record, but also to comment on what you have heard
    in the testimonies of Mr. Barr and others and give your opinion
    of their testimonies and how you--safeguards or non-safeguards
    you think we should look for in having a resolution group
    rather than bankruptcy.
        Professor Moss, you start.
        Mr. Moss. It was quite an interesting discussion to begin
    with. I guess I would start that I am not sure that the choice,
    which has been framed here is, in fact, the choice we face. The
    choice that was framed in this discussion back and forth was
    one between a resolution mechanism and bankruptcy, and I
    realize that that may seem like the choice but I don't think it
    is.
        I think the choice, sadly, is between resolution and
    bailout. I think that in the--what we have seen is that there
    is now a sufficiently widely held belief, perhaps correct, that
    bankruptcy of enough very large financial institutions could
    have catastrophic effects for the financial system. And given
    that, it is not clear that policymakers from any party at any
    time, in my view, would allow that to happen.
        And I think as a result, although the law on the books
    would say to put the firm in bankruptcy, it is not clear to me
    that in fact that would be followed in a crisis. It was not
    followed in this crisis by either administration, Republican or
    Democrat. I don't think it would be followed in the future
    either.
        And, as a result, I don't actually think the choice is, in
    fact, between resolution and bankruptcy. I think it is between
    resolution and bailout.
        Between those two choices I will take resolution. I
    recognize its problems.
        I will say that your predecessors, it seems to me--I had
    not prepared to talk about this, but--your predecessors have
    excluded financial firms quite regularly over the course of
    American history from bankruptcy law. The original 1898 act, as
    I recall--Mr. Miller, I am sure, would know better than I--but
    I believe excluded all corporations from voluntary bankruptcy,
    but banks in particular were excluded from involuntary
    bankruptcy, so they were already excluded. Banks, of course,
    were subsequently brought under FDIC.
        And insurance companies are also excluded, if I am correct,
    from bankruptcy law. So I think the idea of excluding financial
    companies from bankruptcy law is not a new phenomenon.
        Maybe I can just make one more comment--I know you want me
    to be brief. I have two significant concerns about the idea of
    a resolution mechanism. Broadly I think it is necessary, but I
    have two concerns.
        One is that we should not fool ourselves to think that a
    resolution mechanism will solve all the problems. There is
    still the basic problem of systemic risk and the basic problem
    of moral hazard, and as we try to solve one we increase the
    other. A resolution mechanism is an attempt to provide a
    balancing act, but it is not a perfect one.
        The more serious problem--and I think this is one you ought
    to consider if you go forward with the resolution mechanism--is
    that in a crisis, in a crisis it is not clear that we would, in
    fact, follow a resolution mechanism. The question is, is the
    resolution mechanism credible? Just in the way that we have to
    ask, is bankruptcy credible? Over the past year-and-a-half it
    has not been. At every opportunity we avoided it.
        At every opportunity--it seems to me that if we are not
    careful we could create a beautiful resolution mechanism and it
    would be circumvented in a crisis. So we need to create a
    mechanism, and a system, that is credible.
        I would be glad to talk about how to do that. I have some
    ideas. But I will just remind you that with FDIC--which, by the
    way, I think the resolution mechanism works quite well with
    FDIC--but it is attached to an insurance system that protects
    depositors. I suspect that if that insurance system did not
    exist we would be very reluctant to put a major bank into
    resolution for fear that it would spark runs on other banks by
    fearful depositors.
        So there is a question of how we stabilize the broader
    financial system, whether we put a major financial institution
    into bankruptcy or resolution. Do we have a system for
    protecting the healthy institutions at the same time? I would
    be glad to talk about that in more detail if that would be
    helpful, but those are my broad comments.
        [The prepared statement of Mr. Moss follows:]
                      Prepared Statement of David A. Moss

                                   __________

        Mr. Cohen. Thank you. And we will come back and hopefully
    have time for discussion.
        We are going to go to Professor Sagers next because Mr.
    Miller has let us know his thoughts and participated in the
    colloquy that we previously had. Professor Sagers practiced law
    for 5 years in D.C. at Arnold & Porter and Shea & Gardner,
    involved in large-scale litigation, public policy matters, and
    different issues of commercial affairs.
        Professor Sagers, your thoughts and opinions?

                   TESTIMONY OF CHRISTOPHER SAGERS,
                   CLEVELAND-MARSHALL COLLEGE OF LAW

        Mr. Sagers. Thank you very much, Mr. Chairman. It is my
    great privilege to be here.
        I am more than happy to scrap my prepared statement because
    I think that I can be of use here in precisely one way, which
    is to answer Chairman Conyers' specific question, does the bill
    change existing antitrust law with respect to these entities?
    And I can give a yes or no answer. I have the disability of
    also being a lawyer, so I would like to expand on it a little
    bit if I could, but the simple answer is yes, it does change
    existing law.
        In deference to Secretary Barr and Mr. Krimminger, I gather
    they are not antitrust lawyers primarily, and in drafting the
    bill and preparing their testimonies they were advised by
    antitrust counsel, and in their defense they gave answers which
    were not literally false. There is an existing--and I don't
    mean to cast any aspersion there---- [Laughter.]
        Mr. Cohen. Criminal defense lawyer? [Laughter.]
        Mr. Sagers. The short answer--a short way of saying what is
    really a very complicated answer--is that it is true that bank
    merger review has always existed as something of a special case
    under our antitrust merger review system. And it is also true,
    as they testified, that that system contains a series of
    emergency safety valves that can make the process go really
    fast if the banking regulators decide that one of the banks is
    in danger of failure.
        I think we need to beware--I do want to say, by the way,
    that there is one significant change. There is one technical
    legal change made to the law that really is potentially
    breathtaking. But even before getting to that, it is a bit
    misleading to say that we have addressed competition concerns
    because we just incorporate antitrust law that we have always
    had for bank failures.
        The antitrust law that we have always had for bank failures
    is extremely problematic. It has never ever incorporated any
    concern for systemic risk; it has repeatedly approved the
    merger of immense banking institutions and conglomerate
    financial institutions even over strenuous objections about the
    increase in systemic risk that is being caused.
        And I don't think that--even if that system weren't put
    into an incredibly rushed procedural framework under this bill,
    as it will be, it wouldn't--that existing system of bank merger
    law wouldn't be very well designed to handle the competitive
    risks, which are both systemic risks and also the more
    traditional competitive risks that we deal with in merger law.
    That system wouldn't be very well set up to deal with mergers
    of entities of this immense magnitude.
        All right. That is all in answer to the question whether
    existing bank merger law is really adequate to deal with these
    problems even if it is not going to be changed by the bill. In
    one important respect existing bank merger law is changed by
    this bill, and that is that the bank holding companies that can
    be subject to the resolution authority under this bill include
    ``financial holding companies''--that is, those businesses that
    are allowed to own both banks and other financial businesses.
        It is clear under the bill that if one of these resolution
    actions is undertaken and an entire financial holding company
    or big pieces of it are given away--sold, rather; they wouldn't
    be given away but sold to other large competitors--there will
    be merger review, and moreover, the non-banking piece of any
    financial holding company that is taken into receivership, that
    transfer of that piece will be reviewed not under bank merger
    law, but under the Hart-Scott-Rodino Act, or as the familiar,
    more normal review of antitrust merger review.
        And that is how it would happen under existing law, except
    that this bill provides that that non-banking piece of the
    financial holding company that is to be transferred to a
    competitor, possibly a really big competitor with a lot of
    market share, that transfer will be judged under the Hart-
    Scott-Rodino Act, just exactly as it would under existing law,
    except that the antitrust agencies won't be allowed to make the
    so-called second request for additional information, they won't
    be allowed to request any extension of time for reviewing the
    merger.
        So what we are basically going to have is transactions
    involving transfers of truly the largest non-banking financial
    institutions reviewed by DOJ or FTC under extremely tight time
    constraints and with very limited information, and those
    agencies are either going to be forced to rubber stamp these
    transactions or just challenge all of them so that they can get
    them stopped and the courts can review them. So the testimony
    that was given is, to some extent, incorrect and I think quite
    misleading.
        [The prepared statement of Mr. Sagers follows:]
                  Prepared Statement of Christopher L. Sagers

                                   __________
        Mr. Cohen. Professor Sagers, thank you for your addendum to
    their testimony.
        Mr. David Skeel, professor of corporate law at Penn, author
    of ``Icarus in the Boardroom''--the history of bankruptcy
    laws--publications, received several distinguished recognitions
    and honors, corporate law, bankruptcy, and sovereign debt, law
    and religion, and poetry in the law.
        Thank you, Professor Skeel.

                   TESTIMONY OF DAVID A. SKEEL, JR.,
                 UNIVERSITY OF PENNSYLVANIA LAW SCHOOL

        Mr. Skeel. Well, thank you for that plug. I wish I had
    brought a few of my books to have outside to try to sell to
    people before we are done today.
        I think I have three quick points in response to the
    commentary I have heard so far. The first is, although Harvey
    Miller and I do not agree about everything--there are a few
    things in bankruptcy we are not completely on the same page
    on--I pretty much agree completely with everything Harvey has
    said thus far. To elaborate on that just a tad, Professor Moss
    made the comment that our real choice is resolution versus
    bailout. In my view that is not quite right. I think our real
    choice is bankruptcy versus bailout.
        In my view, the proposed resolution authority would just
    institutionalize the bailouts we have seen in the last year. If
    we had that resolution authority in place, what would happen if
    we had another Lehman or AIG is they would be bailed out before
    they got to the resolution authority decision. And I think it
    is not either accidental or unimportant that the trigger
    decision--the decision whether to invoke the resolution
    authority--is a purely political decision being made by bank
    regulators. So that is my first point.
        My second point is, with respect to Mr. Krimminger and Mr.
    Barr--and I am sorry they are not here now; Michael Barr is a
    friend of mine; I have not previously met Mr. Krimminger--they
    repeatedly referred to 75 years of beautiful FDIC history
    resolving bank failures. In my view, the reality is the FDIC
    was not tested from the 1930's until the 1980's. We didn't have
    bank failures, for the most part, and that is one of the
    beauties of post-war America.
        The first time the FDIC was truly tested was in the banking
    and S&L crisis of the 1980's. By most accounts their
    performance was quite poor. And as a result of that poor
    performance we put new banking laws in place in 1989 and 1991
    that really forced the FDIC's hands.
        We have prompt corrective action rules, we have least cost
    resolution rules. Those work pretty well for small banks and
    maybe for medium-sized banks as well. But they effectively
    don't apply to the very institutions we are talking about
    today.
        They do not apply to large banks. When they run into
    trouble the FDIC is able to do whatever it wants, exaggerating
    just a little bit. And the FDIC's history with the big banks is
    not a good history. I think the Indymac example from last year
    is a good example.
        So to the extent the FDIC is effective, it is only
    effective with small and medium-sized banks. It is not
    effective with large banks and there is not good reason to
    extend its authority beyond banks to other financial
    institutions.
        Finally, in my view the key question--what I would hope you
    all will be thinking about and talking about in the coming
    months--is how we can make a bankruptcy system that works
    really well even better. And the answer to that, it seems to
    me, has to do with derivatives.
        Over the past 20 years, as part of the their campaign
    against regulation derivatives lobbyists together with the Fed
    and the Treasury persuaded Congress--that is you all--to exempt
    derivatives from several key core bankruptcy provisions, the
    most important of which is the automatic stay. What I hope you
    all will be talking about is how and how much to reverse that
    deregulation of the last 20 years and reimpose the stay.
        One approach to that would be a blanket reversal, a stay of
    all derivatives. Another would be the approach that has been
    suggesting in H.R. 3310. Either of those, I think, are very
    good approaches and I hope that is where you all end up before
    the dust settles.
        Mr. Cohen. Do you have a poem to close with?
        Mr. Skeel. I will work on one before--give me a couple more
    hours. I can----
        Mr. Cohen. A limerick will do----
        Mr. Skeel. Let us go now, you and I, while the evening is
    spread against the sky. [Laughter.]
        Mr. Cohen. It is not for us to do or die.
        Mr. Skeel. We are reading from the same script. That is for
    sure.
        [The prepared statement of Mr. Skeel follows:]
                   Prepared Statement of David A. Skeel, Jr.

                                   __________
        Mr. Cohen. Mr. Weissman has written extensively. He is our
    next witness--Robert Weissman, Public Citizen president. That
    is a pretty heady title. Expert on economic, health care,
    trade, and globalization, electoral property, and regulatory
    policy, and issues related to corporate responsibility and
    commercialism.
        Written extensively over the years. Prior to joining Public
    Citizen he was director of corporate accountability
    organization Essential Action, editor of Multinational Monitor,
    that tracks corporate actors worldwide, and an attorney with
    the Center for the Study of Responsive Law.
        Mr. Weissman, you are on.

              TESTIMONY OF ROBERT WEISSMAN, PUBLIC CITIZEN

        Mr. Weissman. Thank you very much, Mr. Chairman. I am sorry
    that I am afraid I won't be able to offer any poems or a--
    perhaps concepts achieve pristine insight of poetry.
        I want to thank you for holding the hearing and emphasize,
    I think, the importance of an antitrust approach to considering
    the ``too big to fail'' problems in the structure of the
    financial sector. I think antitrust offers us a lot of tools
    and principles to think about how to handle the sector.
        With Chairman Greenspan I am happy to say that we agree
    that an appropriate application of antitrust principles is to
    actually directly break up the largest institutions. They are
    too big to fail. I agree with all of the proposals that Mr.
    Barr put forward on the front end to deal with systemic risk,
    but they are not enough. The largest institutions will always
    find a way to get around narrow, traditional agency
    regulation--prudential regulation.
        But if they are smaller they are more able to be grappled
    with. We can avoid a lot of the problems that we are spending
    this hearing talking about if we go ahead with an aggressive
    breakup strategy.
        It is feasible, can be done in an aggressive, top-down way,
    or it can be done in a more gentle way by the institutions
    themselves. Citigroup, for example, is itself now stripping
    itself down effectively on the model that I might be
    suggesting.
        Second, I think antitrust teaches us about the importance
    of structure and also looking to revising Glass-Steagall itself
    or Glass-Steagall-like principles and separating out the super-
    risky activities of the investment banking operations from the
    commercial banks. And again, we are here very happy to side
    with Chairman Volcker on this point.
        There are more modest ways to achieve these kinds of
    objectives--for example, unwinding the recent set of mergers
    which have made the ``too big to fail'' problem much worse, or
    at least saying there should be a standstill on future mergers
    that are going to exacerbate the problem going forward.
        We should also be enforcing existing concentration limits
    which have been breeched in the last round of mergers, and
    there should be examination, I think, by Congress over new
    forms of concentration limits, both in terms of the depository
    institutions but also thinking about asset categories other
    than depository institutions, where it is not obvious what kind
    of standards you would impose.
        Finally, in terms of trying to avoid problems before they
    emerge, I think antitrust teaches us not just to look at
    traditional regulation but a set of conduct remedies that are
    different in approach from what traditional regulators do. And
    to just quickly highlight some of the things we--I think it is
    worthwhile for Congress to consider both avoid systemic risk
    problems, enhance the ability of regulators to understand what
    is going on in the super large institutions, and to offer
    increased consumer protection.
        For this category of institutions that still are super
    large, there should be a prohibition on the use of offshore tax
    havens and off-the-books accounting, both of which make it too
    hard for our regulators to understand what is going on. There
    should be affirmative obligations that bonuses are tied--
    executive pay and bonus compensation is tied to long-term
    performance to avoid the wrongful incentives that exist with
    the short-term bonus structure that we have now.
        There should be, as Mr. Barr said, increased capital
    reserve standards, and I think also increased consumer
    protection obligations on the largest institutions. To the
    extent they are permitted they can continue to exist.
        On the specific issue of resolution authority, we do think
    that there is a good case to be made for resolution authority
    to avoid the bailout problem, but with some caveats and with
    some suggestions. One is that there should be a presumption
    that the institutions are not provided with new financing
    unless there is some very affirmative showing made that there
    needs to be external financing made available. So you really
    are talking about winding down the institution and you are
    avoiding the problem of the subsidies that were given to AIG
    counterparties.
        The AIG bailout, by the way, was really not a bailout of
    AIG so much as it was a bailout of AIG counterparties, which
    is, I think, an important consideration to keep in mind.
        There should be also, I think, a directive--this speaks to
    Professor Sagers' point--there should be a directive to any
    resolution authority that as it is doing the resolution a
    central and maybe overriding objective must be to avoid a
    worsening of ``too big to fail'' problems, that as they are
    breaking up banks or merging them, whatever they are doing, it
    should not be to create new even bigger institutions, the
    bigger great white sharks of Mr. Johnson's metaphor--maybe I do
    have some poetry in my after all. We ought to be avoiding
    worsening that problem.
        And finally, there should be conditions attached on the
    resolved enterprises, either in whole or when parties are
    broken up, replicating, I think, some of the things that I
    mentioned in the area of conduct remedies. Those things
    including, as you pointed out properly, compensation limits and
    competition standards ought to be attached. If taxpayers are
    going to be involved and intervening in these institutions it
    is reasonable that we have some reciprocal demands on what goes
    on with them after they are put back into the private sector.
        [The prepared statement of Mr. Weissman follows:]
                     Prepared Statement of Robert Weissman

                                   __________

        Mr. Cohen. Thank you, Mr. Weissman. I appreciate it.
        Mr. Miller, who has been on our panel--he is our Black's
    Law of bankruptcy; he is also associated with NYU and Columbia
    Schools of Law and the firm of Weil, Gotshal & Manges.
        Last thoughts?
        Mr. Cohen. Microphone.
        Mr. Miller. Thank you.
        Professor Skeel stated my position much more eloquently
    than I can, and I will rely upon his statement.
        Mr. Skeel. He has a sense of humor, too. [Laughter.]
        Mr. Cohen. Mr. Conyers, do you have questions of the panel?
        Mr. Conyers. Well, I think we have covered it all except
    that I would think that in the next 2 to 3 weeks, if not
    sooner--Mr. King, I would like you to hear this, as well,
    because I would want to get the concurrence of this Committee--
    first of all, I think the selection of these professors,
    lawyers, experts is very, very much needed. I think that we may
    have to reassemble to monitor what the Congress does and what
    further--we have got to go over this transcript. There is an
    incredible amount of material that we have got to digest and
    evaluate.
        We have had experts all over the place here, and I want to
    try to elicit an agreement that our panel would be able to come
    back and that we would be able to have them back as we proceed
    in a somewhat informal way that the Chairman has conducted this
    meeting, but it has been important.
        Why do you need a 5-minute rule? We are talking about the
    economic future of the Nation, and we are asking somebody to
    summarize in 5 minutes where this should go. And I appreciate
    the way that this has been conducted, and I commend all of you
    for what you have contributed to that.
        And I think Mr. Miller might want to comment in here, and I
    would like to yield to him if I can, Mr. Chairman.
        Mr. Cohen. Mr. Miller, briefly. We have got 10 minutes and
    Mr. King. But Mr. Miller, you are on.
        Mr. Miller. I think I have said all I want to say about my
    position and I would be happy to answer any questions.
        Mr. Cohen. Thank you, sir.
        And thank you, Mr. Chairman.
        Mr. King, briefly please?
        Mr. King. Thank you, Mr. Chairman. I am happy to expedite
    this, and I would second Chairman Conyers' recommendation and
    suggestion. There is far too much knowledge and expertise here
    to dispense with it in 5 minutes of testimony each and a
    printed testimony. I hope we can find a time to do this in an
    environment where we can dig into this in depth.
        I had the whim to request a beer summit with all of you. I
    think that would be a constructive thing to do.
        But the testimony that I have heard and the testimony that
    I have read is engaging, and a lot of it concurs and overlaps,
    but the contradictions especially--those disagreements--I think
    we need to take some time to explore it in an intelligent
    fashion. And so rather than have me drill into one component of
    this I would really look at it at the broad perspective and
    second the recommendation of Chairman Conyers and ask that we
    do come back together and do justice to the quality of the
    witnesses we have today.
        I thank you and I would yield back.
        Mr. Cohen. Thank you, Mr. King.
        I appreciate all of the witnesses. I apologize for the
    timing. We are going to be out for another hour. We may, if you
    are kind enough to return, ask you to return at a future time
    for another hearing. Your prepared remarks will be part of the
    record.
        We had, I think, a very good discussion and I appreciate
    Mr. Miller coming up. He is the only one of the panelists who I
    was familiar with, and I am sure that each of you could have
    contributed as well, but it would have not been maybe as--it
    might have been unwieldy. So I thank you for allowing me to
    have that type of discussion, which I think was helpful to us.
        It is an issue--bankruptcy versus resolution--and maybe it
    is another issue because people talked about the bailout. And
    when do you--the compelling interests of the--but you lose
    some--some of the people lose out if you go to resolution that
    don't lose out in bankruptcy. They have to be thought about.
        And there is a concern in this Nation that we have done too
    much, as I think Barney Frank talks about the collateral
    benefit that to help the whole country we have had to help some
    people who aren't deserving of help because they are not
    appreciative and they are such gluttons that they poison the
    water to where nobody wants to swim there again. And we might
    have to go there again, but it will be difficult because of the
    great white sharks that are out there swimming in that water.
        Mr. Conyers. Would the Chairman yield for----
        Mr. Cohen. Yield to the Chairman of the Chairman----
        Mr. Conyers. I just wanted all of you to know that we have
    been in consultation with Chairman Barney Frank, and that both
    the Judiciary Committee and the Finance Committee are moving
    together--we are not at odds or in competition. We met before
    this hearing, and we will certainly be meeting before we all
    reassemble again. So the thoughts and recommendations that you
    accumulate in preparation for this next Committee hearing, we
    will be looking forward to.
        And again, I want to extend my thanks to each of you for
    what you have done and contributed here today.
        Mr. Cohen. Thank you, Mr. Conyers.
        And I would like to thank all the witnesses for their
    testimony and their--today.
        Without objection, Members have 5 legislative days to
    submit any additional written questions which we forward to the
    witnesses, and we would ask you to answer promptly as you can
    to be made part of the record. Without objection the record
    remains open for 5 days for submission of other materials. And
    I thank each Member for their time, their patience, their
    forbearance for the way I ran the Committee and the time that
    we took.
        This hearing of the Subcommittee on Commercial and
    Administrative Law is adjourned.
        [Whereupon, at 3:11 p.m., the Subcommittee was adjourned.]
                                A P P E N D I X

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                   Material Submitted for the Hearing Record

     Material submitted by the Honorable Lamar Smith, a Representative in
    Congress from the State of Texas, and Ranking Member, Committee on the
                                   Judiciary

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       Material submitted by Michael S. Barr, U.S. Department of Treasury

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                   Material submitted by Christopher Sagers,
                       Cleveland-Marshall College of Law

       Material submitted by Harvey R. Miller, Weil, Gotshal & Manges LLP

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