[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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                       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

                              ----------                              


               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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