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


 
   HEARING TO EXAMINE THE REGULATION OF OVER-THE-COUNTER DERIVATIVES

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

                             JOINT HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE

                                AND THE

                    COMMITTEE ON FINANCIAL SERVICES
                        HOUSE OF REPRESENTATIVES

                             FIRST SESSION

                               __________

                             JULY 10, 2009

                               __________

                           Serial No. 111-23

                       (Committee on Agriculture)
                           Serial No. 111-55

                   (Committee on Financial Services)


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov


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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho

                                 ______

                           Professional Staff

                    Robert L. Larew, Chief of Staff

                     Andrew W. Baker, Chief Counsel

                 April Slayton, Communications Director

                 Nicole Scott, Minority Staff Director

                                  (ii)
?

                    COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Vice Chairman,    SPENCER BACHUS, Alabama, Ranking 
Pennsylvania                         Minority Member
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, North Carolina
GREGORY W. MEEKS, New York           JUDY BIGGERT, Illinois
DENNIS MOORE, Kansas                 GARY G. MILLER, California
MICHAEL E. CAPUANO, Massachusetts    SHELLEY MOORE CAPITO, West 
RUBEN HINOJOSA, Texas                Virginia
Wm. LACY CLAY, Missouri              JEB HENSARLING, Texas
CAROLYN McCARTHY, New York           SCOTT GARRETT, New Jersey
JOE BACA, California                 J. GRESHAM BARRETT, South Carolina
STEPHEN F. LYNCH, Massachusetts      JIM GERLACH, Pennsylvania
BRAD MILLER, North Carolina          RANDY NEUGEBAUER, Texas
DAVID SCOTT, Georgia                 TOM PRICE, Georgia
AL GREEN, Texas                      PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri            JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois            ADAM H. PUTNAM, Florida
GWEN MOORE, Wisconsin                MICHELE BACHMANN, Minnesota
PAUL W. HODES, New Hampshire         KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota             THADDEUS G. McCOTTER, Mississippi
RON KLEIN, Florida                   KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio              BILL POSEY, Florida
ED PERLMUTTER, Colorado              LYNN JENKINS, Kansas
JOE DONNELLY, Indiana                CHRISTOPHER JOHN LEE, New York
BILL FOSTER, Illinois                ERIK PAULSEN, Minnesota
ANDRE CARSON, Indiana                LEONARD LANCE, New Jersey
JACKIE SPEIER, California
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN H. ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE M. KOSMAS, Florida
ALAN GRAYSON, Florida
JAMES A. HIMES, Connecticut
GARY C. PETERS, Michigan
DANIEL B. MAFFEI, New York

                                 ______

                           Professional Staff

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

                                 (iii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Bachmann, Hon. Michele, a Representative in Congress from 
  Minnesota, prepared statement..................................     7
Bachus, Hon. Spencer, a Representative in Congress from Alabama, 
  opening statement..............................................     6
Frank, Hon. Barney, a Representative in Congress from 
  Massachusetts, opening statement...............................     5
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................     4
    Submitted letter.............................................    59
    Submitted material...........................................    60
Minnick, Hon. Walt, a Representative in Congress from Idaho, 
  opening statement..............................................     2
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     1
    Prepared statement...........................................     2

                                Witness

Geithner, Hon. Timothy F., Secretary, U.S. Department of the 
  Treasury, Washington, D.C......................................     8
    Prepared statement...........................................    11
    Submitted questions..........................................    63


   HEARING TO EXAMINE THE REGULATION OF OVER-THE-COUNTER DERIVATIVES

                              ----------                              


                         FRIDAY, JULY 10, 2009

                  House of Representatives,
                          Committee on Agriculture,
                                                 joint with
                   Committee on Financial Services,
                                                   Washington, D.C.
    The Committees met, pursuant to call, at 10:04 a.m., in 
Room 1100, Longworth House Office Building, Hon. Collin C. 
Peterson [Chairman of the Committee on Agriculture] presiding.
    Members present for Committee on Agriculture: 
Representatives Peterson, Holden, McIntyre, Boswell, Baca, 
Scott, Marshall, Cuellar, Costa, Ellsworth, Walz, Kagen, 
Schrader, Dahlkemper, Pomeroy, Childers, Minnick, Lucas, 
Goodlatte, Moran, Johnson, Rogers, King, Neugebauer, Conaway, 
Smith, Latta, Roe, Luetkemeyer, Thompson, Cassidy, and Lummis.
    Members present for Committee on Financial Services: 
Representatives Frank, Kanjorski, Waters, Maloney, Watt, 
Sherman, Meeks, Moore of Kansas, Capuano, Hinojosa, McCarthy of 
New York, Baca, Lynch, Miller of North Carolina, Scott, Green, 
Cleaver, Bean, Ellison, Wilson, Perlmutter, Donnelly, Foster, 
Carson, Childers, Minnick, Adler, Kilroy, Kosmas, Himes, 
Peters, Bachus, Royce, Lucas, Manzullo, Biggert, Hensarling, 
Garrett, Gerlach, Neugebauer, Putnam, Bachmann, Marchant, 
McCotter, Posey, Jenkins, Lee, Paulsen, and Lance.
    Staff present for Committee on Agriculture: Robert L. 
Larew, Claiborn Crain, Adam Durand, Scott Kuschmider, Merrick 
Munday, Clark Ogilvie, James Ryder, April Slayton, Rebekah 
Solem, Kevin Kramp, Tamara Hinton, Bill O'Conner, and Jamie 
Mitchell.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Chairman Peterson. Good morning everybody, and welcome to 
today's hearing. I want to welcome Treasury Secretary Geithner, 
and thank him for his time, and I want to thank Financial 
Services Chairman Frank and his staff for working with me and 
my staff to have this joint hearing today.
    In the interest of time, I will submit my full statement 
for the record, we have 111 Members of Congress who serve on 
these two Committees. And I know many of my colleagues who are 
attending today's hearing have questions for the Secretary.
    Last month, the White House presented broad reform 
proposals to overhaul the financial regulatory system. I am 
pleased to note that several key provisions regarding over-the-
counter derivatives are similar to what the House Agriculture 
Committee passed this year as part of a bipartisan bill H.R. 
977, which would strengthen oversight of futures, options and 
over-the-counter markets. However, the devil is always in the 
details and I look forward to hearing additional details today 
about the Administration's reform ideas. And I hope Secretary 
Geithner's appearance today will get us into the weeds on how 
this will work.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota

    Good morning, and welcome to today's hearing. I want to welcome, 
and thank, Treasury Secretary Geithner for his time, and I want to 
thank Financial Services Chairman Frank and his staff for working with 
me and my staff to have this joint hearing today.
    In the interest of time, I will submit a full statement for the 
record. We have 111 Members of Congress who serve on these two 
Committees and I know many of my colleagues who are attending today's 
hearing have questions for the Secretary.
    Last month, the White House presented broad reform proposals to 
overhaul the financial regulatory system. I am pleased to note that 
several of their key provisions regarding over-the-counter derivatives 
are similar to what the House Agriculture Committee passed earlier this 
year as part of a bipartisan bill, H.R. 977, which would strengthen 
oversight of futures, options, and over-the-counter markets.
    However, the devil is always in the details. I look forward to 
hearing additional details today about the Administration's reform 
ideas, and I hope Secretary Geithner's appearance today will help get 
into the weeds on how this will all work.
    I now want to yield 2 minutes of my opening statement time to a 
Member of both the Agriculture and Financial Services Committee, who 
has some knowledge about this area, the gentleman from Idaho, Mr. 
Minnick.

    Chairman Peterson. I now want to yield 2 minutes of my 
opening statement to a Member of both the Agriculture and 
Financial Services Committee who has done a lot of work and has 
some knowledge in this area, the gentleman from Idaho, Mr. 
Minnick for 2 minutes.

  OPENING STATEMENT OF HON. WALT MINNICK, A REPRESENTATIVE IN 
                      CONGRESS FROM IDAHO

    Mr. Minnick. Chairman Peterson and Chairman Frank, I am a 
farm boy who grew up skeptical of Wall Street wondering how a 
loaf of bread could cost a dollar when it contained only a few 
cents worth of wheat. I also spent over 20 years as the CEO of 
substantial companies which relied on Wall Street and used 
customized derivatives to hedge currency and interest rate 
risk. I learned that these financial instruments are essential 
to the proper functioning of our 21st century economy.
    I have listened to many experts and studied the 
Administration's 84 page concept paper. If we are to craft a 
regulatory structure which can keep our nation from ever again 
repeating the financial excesses which have brought today's 
economy to its knees, we need to give serious consideration to 
the following reforms which go beyond those proposed by the 
Administration.
    First, we should merge the SEC and the Commodity Futures 
Trading Commission. Financial derivatives whether they 
originate----
    Chairman Frank. Mr. Minnick, one of the Members on the 
Republican side just pointed out the acoustics in this room are 
terrible. Now, when Ways and Means holds forth in this room, 
this is their room, they consider that an advantage. But we are 
here not marking up a tax bill but having an important public 
hearing so we are going to ask everybody to speak fairly 
loudly, particularly you, Mr. Secretary, because while I can't 
see you, I would like to be able to hear you. Mr. Minnick may 
resume.
    Mr. Minnick. First we should merge the SEC and the 
Commodity Futures Trading Commission. Financial derivatives 
whether they originate in a commodity, a security, or neither, 
like weather futures are functionally identical and must be 
traded, cleared and settled subject to the same rules.
    Bifurcated responsibility might be made to work 
temporarily, but is a poor long-term solution which will 
discourage bold action when crises arise and will encourage 
regulatory arbitrage.
    Second, banking regulation should be removed from an 
already overburdened Federal Reserve and the remaining three 
Federal depository institution regulators, the OTS, the FDIC 
and the OCC should be combined into a single Federal bank 
regulator; which should also be given broad consumer protection 
responsibility and resolution authority for both banks and all 
other entities deemed systemically risky.
    Powerful global institutions like Citibank, Bank of 
America, or AIG should not be allowing to shop for the weakest 
Federal regulator. Finally, the proposed systemic risk 
oversight counsel should have the highest quality permanent 
staff if it is to respond appropriately as future dangers 
arise. Because the Federal Reserve is the more institutionally 
independent Executive Branch agency, and has increasing global 
responsibilities, that staff should be housed in the Fed and 
the counsel should be chaired by the Fed Chairman. I thank both 
chairs and yield back.
    Chairman Peterson. I thank the gentleman and just for 
clarification, the gentleman spent a lot of time looking at 
this, but Mr. Frank and I, at least the two of us, have come to 
the conclusion that we are not going to be merging the SEC and 
CFTC, but we appreciate the gentleman's comments.
    Now, I want to recognize the Chairman of the Financial 
Services Committee, Mr. Frank. He and I have gotten together 
and we have a good working relationship, and we think we are 
close to having a consensus on where to move with this. You can 
see by this hearing today that we have a good cooperation going 
on between the two Committees. Mr. Frank. Oh, excuse me, I am 
sorry, I screwed up. I am supposed to recognize Mr. Lucas, I am 
getting ahead of myself. I didn't mean to overlook you, Mr. 
Lucas, my good friend from Oklahoma, who worked with us to get 
H.R. 977 out of the Agriculture Committee last February. Mr. 
Lucas is recognized. And by the way, we are going to limit 
people to 4 minutes because of all of the Members that are 
involved, so we would hope that everybody would abide by that.
    Mr. Geithner, we are not going to hold you to 4 minutes, we 
want to hear what you have to say. Mr. Lucas.

 OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN 
                     CONGRESS FROM OKLAHOMA

    Mr. Lucas. Thank you, Mr. Chairman and thank you to both 
Chairmen for holding this joint hearing to hear the Treasury's 
proposal to regulate over-the-counter derivatives, as well as 
examine the legislation that the House Agriculture Committee 
passed a few months ago. I, as Ranking Member of the House 
Agriculture Committee and senior Member of the Financial 
Services Committee, I would like for this occasion to examine 
the issue from two different perspectives. The Agriculture 
Committee has been very active in exploring the role 
derivatives play in the marketplace, and in the overall 
economy.
    The Committee has held numerous hearings to gain further 
information and insight into the complex nature of credit 
default swaps and how they should be regulated. In February of 
this year, as the Chairman noted, the Agriculture Committee 
passed H.R. 977, the Derivatives Markets Transparency and 
Accountability Act.
    No one can argue that the concepts of transparency and 
accountability are wrong, but we must make certain that our 
actions call for an appropriate level of regulation that will 
respect the nature of the marketplace and encourage product 
innovation and economic growth. Derivatives do serve a valid 
purpose in the marketplace when used with judgment. They are 
essential for managing risk. We must consider that there are 
numerous industries that have legitimate price risk and there 
must be a way to mitigate that. Derivatives provide a 
legitimate means for managing that risk. The financial problems 
that we have seen recently are not the result of merely the 
existence of derivatives, but rather because there are problems 
in measuring their true performance, or knowing with certainty 
the depth and breadth of the over-the-counter market, or 
knowing with confidence the creditworthiness of the 
counterparty.
    Simply put, the marketplace can be protected from market 
failures if regulators are fully aware of the threat. Ignorance 
of this relatively new financial instrument caused much of the 
financial failures. We now know that these complex markets need 
better models and methods for oversight and transparency. 
However, we must be careful not to overreach and force 
businesses into very expensive clearing operations that cost 
capital that they do not have, or force them out of risk 
mitigation all together. Business will then be forced to manage 
risk with higher prices, which will ultimately be passed on to 
consumers. The need to avoid artificial costs for business was 
the reason I opposed the clearing requirement in H.R. 977. 
There is considerable concern that section 13, as currently 
drafted, which relates to the clearing requirement will stifle 
invasion in the over-the-counter market.
    CFTC needs more authority to waive the clearing 
requirements in section 13 so new and safer products can get to 
the market in a timely fashion. This would recognize the fact 
that not all contracts can be cleared and that there is a need 
for customized contracts. These are just a few of the concerns 
I have on my part as we move forward today.
    Again, I thank you for the opportunity to discuss the 
issues regarding these important financial institutions. And 
Secretary Geithner, I look forward to your testimony and the 
answers to the questions posed by the panel. Thank you, 
Chairman.
    Chairman Peterson. I thank the gentleman, and now I am 
pleased to recognize my good friend the Chairman of the 
Financial Services Committee, Mr. Frank.

  OPENING STATEMENT OF HON. BARNEY FRANK, A REPRESENTATIVE IN 
                  CONGRESS FROM MASSACHUSETTS

    Chairman Frank. Thank you, Mr. Peterson and I begin with an 
apology to our friends in the media, there is no fight to cover 
between these two Committees. I know that that is an easier 
topic than the complexities of how to actually do something. 
But I believe that the besetting sin of the House of 
Representatives is jurisdictional fights, in which our egos get 
in the way of good public policy. I am very proud that Chairman 
Peterson and I and other Members of our Committee, as well as 
Chairman Gensler and Chairwoman Shapiro have made very extra 
special efforts to avoid that. And I believe we have achieved 
that. And there will be some disagreements, but they will be 
based on substance.
    There are some areas where there are no disagreements. 
Clearly we will be significantly expanding the regulation of 
derivatives. And I want to address the issue that was raised by 
the very thoughtful gentleman from Idaho, with whom I agree on 
most issues, but not on the question of the merger. I will say 
that if we were starting from scratch, I don't think we would 
have the current organizational structure. But we are not 
starting from scratch, and I don't think it is practical to 
talk about making those major changes. But I will also say 
this, there have been some complaints that what the Obama 
Administration has proposed, and they have a great deal of 
credit coming to them for the initiatives they are taking, the 
a broad range of financial restructuring, and some of what we 
are talking about. Some people have complained there is not 
enough structural change.
    Frankly, I think that is the wrong issue. What we should be 
held accountable for is making substantive changes in the 
rules. Who does these things is less important to me than what 
is done. And by the time we are through in the collaboration 
between these two Committees, in the work of the Congress as a 
whole, and in the work that the Financial Services Committee 
will do, we will, I believe, have substantially increased the 
authority of regulators to deal with these things. We have 
within our jurisdiction the question of hedge funds. I believe 
that hedge funds should be required to register. We will be 
talking about further expansion derivatives and undoing some of 
the decisions not to deal with them in the past. We will be 
talking about a number of other areas where we will be making 
some important substantive changes and giving the regulators 
the authority to do things.
    With regard to derivatives, clearly the gentleman from 
Oklahoma is correct, they play an important role. The problem 
we have is this: the role of the financial sector is to be an 
intermediary between people who are engaged in the productive 
activity of the economy, and people who have the money that 
they need to do that. The role of the intermediaries is to 
gather up money in reasonably small amounts from large numbers 
of people and have them available to those people who will do 
productive activity.
    I believe that one of the problems that we have seen in the 
past couple of decades is that there has become a confusion 
between ends and means, that is activity that is a very 
important means to the end of productive activity has become 
for some in our society an end in itself. Our job is to try and 
separate those things out. Where we have instruments, 
activities, entities that are an important means to gathering 
the funds that our private sector economy needs to do 
productive activity, we need to protect that.
    We need to make sure it is done with integrity, we need to 
give encouragement to investors who may be afraid to invest, 
that is why I regard sensible regulations of the market as very 
pro-market. You protect the people with integrity from those 
who might try to cut corners. You give some encouragement to 
those who should be investing.
    Our job is to reduce the extent to which there are things 
that go on for their own sake. I believe we are capable of 
doing that, and I am very pleased, Chairman Peterson and I, and 
our Committees are well on the way in cooperation with the 
Administration to adopting such rules.
    And I now recognize the Ranking Member of the Financial 
Services Committee, the gentleman from Alabama, Mr. Bachus.

 OPENING STATEMENT OF HON. SPENCER BACHUS, A REPRESENTATIVE IN 
                     CONGRESS FROM ALABAMA

    Mr. Bachus. Thank you, Mr. Chairman. As the Chairman and 
the Ranking Member of the Agricultural Committee have said, 
derivatives serve an important function in the market, they 
allow--they allow thousands of companies--I am going to start 
over.
    Thank you. Does that work? All right.
    As the three gentlemen before me said, derivatives serve an 
important function in the market. They allow companies to hedge 
against risk, to deploy capital more effectively, to lower 
their costs and to offer protection against fluctuating prices. 
Derivatives are about shifting risk, and my greatest concern is 
that we do not want a system, and I fear that the 
Administration is going down the path of shifting that risk, 
not to the investors or to the dealers, but ultimately to the 
taxpayers. The companies, the four companies that will deal in 
these derivatives--over-the-counter derivatives--the most will 
be four or five of the largest companies, financial companies 
in America. All of them will be deemed to be systemically 
significant.
    Part of the Administration's proposal is for when these 
companies get in trouble, and one reason they could get in 
trouble is trading in these over-the-counter derivatives, 
because they can protect against risk, they can lower costs. 
But as we saw with, I guess, Enron as a great example, they can 
take both dealers and investors down. And when that happens I 
would like some assurance that the taxpayers are not going to 
ultimately be the ones who assume that risk, that is not what 
we ought to be about.
    Now, leading up to last September, a lot of people made 
investments, they wrote over-the-counter derivatives, they made 
billions of dollars, profits on the way up, but when things 
turned down who was asked to come in and backstop them? Who was 
asked to take the risk, to suffer the loss? It was the 
taxpayer.
    Now I personally believe that we ought to allow 
corporations to continue to write customized derivatives and 
that yes, the government can look at them. But another thing 
that we ought to consider is whether the government is the best 
party to judge risk? And I say, no. I think the government has 
a very poor track record of regulators in identifying risk. Are 
we going to leave--when we start having standardized trading of 
over-the-counter derivatives, particularly the more complex 
ones and the regulators bless those trades, or say that they 
are safe, are we going to attract a whole new generation of 
investors who think that they are investing in a safe security 
or future.
    We found out with Fannie and Freddie that people began to 
think it was an implied government guarantee and they invested 
in those stocks. We need to totally avoid any implication that 
just because the government is going to regulate these markets 
they are going to insure these markets or backstop these 
markets. And I would like some assurance from the Secretary of 
the Treasury that however we ultimately decide the level of 
regulation--I look forward to the Memorandum of Understanding 
between the Fed, the CFTC and the SEC--that ultimately the 
taxpayers do not come in and take the burden, the risk, and the 
cost of over-the-counter derivatives gone bad. Thank you, Mr. 
Secretary.
    Chairman Peterson. I thank the gentleman and I thank the 
Members for their attendance and the Chairman, and the Ranking 
Members for their statements. The Chairman requests that other 
Members submit their opening statements for the record.
    [The prepared statement of Mrs. Bachmann follows:]

   Prepared Statement of Hon. Michele Bachmann, a Representative in 
                        Congress from Minnesota

    Thank you, Mr. Chairman. And, what a pleasure it is to have a 
fellow Minnesotan co-chairing this hearing today. Thank you, Mr. 
Peterson, as well.
    And, thank you, Secretary Geithner, for being here today and I look 
forward to the discussion.
    Many U.S. companies responsibly utilize over-the-counter 
derivatives on a daily basis to manage their risks and limit damage to 
their balance sheets. These end-users are America's job-creators and 
Congress should be careful not to over-reach and infringe on their 
ability to hedge risks responsibly.
    Our Subcommittee on Capitol Markets held a helpful hearing on this 
issue in June. Chairman Kanjorski invited end-users such as 3M, a 
global company headquartered in Minnesota, to testify so that we could 
hear their perspective on this important issue. We heard the sincere 
concern of end-users and manufacturers about losing their ability to 
use customized over-the-counter derivatives to hedge against foreign 
exchange, interest rate, and commodity price risks.
    I agree with Chairman Kanjorski's sentiment from that hearing that 
we should try to find the right balance as we move forward on this 
issue. While we want to improve oversight and transparency of the 
derivatives market, as Chairman Kanjorski stated, ``subjecting all 
contracts to mandatory exchange trading may cast too wide a net.'' 
(Financial Times, 6/10/09)
    The proposal submitted by the President, the legislation reported 
out of the Agriculture Committee in February (H.R. 977), and the 
Waxman-Markey cap-and-tax bill (H.R. 2454) all cast very wide nets and 
do not seem to make any attempt to differentiate between varying types 
of derivatives products. They ignore the concerns we've heard from 
American businesses about why mandatory clearing for all these 
financial products could hamper their ability to properly hedge risks.
    Particularly in the current economic climate, I question the 
prudence of impairing their ability to manage genuine operating risks. 
The end result would likely be unnecessarily sidelining precious 
capital--capital that we need in the marketplace to create jobs and 
help the economy recover.
    We should be looking for ways to improve our current patchwork of 
financial regulation and move toward a more effective and efficient 
system that legitimately improves safety and soundness.
    Thank you, Mr. Chairman, and I yield back the balance of my time.

    Chairman Peterson. Mr. Secretary, we appreciate you being 
with us. We look forward to your statement, and Members I guess 
we have votes coming up at 10:30, but we will have time for the 
Secretary's statement and maybe a couple of questions. So Mr. 
Secretary.

    STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY, U.S. 
          DEPARTMENT OF THE TREASURY, WASHINGTON, D.C.

    Secretary Geithner. Thank you, Chairman Peterson, Chairman 
Frank, and Ranking Members Lucas and Bachus. I am grateful for 
the chance to come before you today. I want to compliment both 
of you and your colleagues for already doing so much thoughtful 
work in trying to lay the foundation for reform, and for 
bringing this basic spirit of pragmatic cooperation, 
transcending the classic institutional differences that have 
made it harder to make progress in these areas in the past.
    Before I get to the subject of this hearing, which is the 
important need to bring comprehensive oversight and regulation 
to the derivative markets, I just want to make a few broader 
points about the imperative of comprehensive reform. There are 
some who have suggested that we are trying to do too much too 
soon, that we should wait for a more opportune moment when the 
crisis has definitively receded. There are some who are 
beginning to suggest that we don't need comprehensive change, 
even though the cost of this crisis has been brutally damaging 
to millions of Americans to hundreds of thousands of 
businesses, to economies around the world, and to confidence in 
our financial system.
    And there are some who argue that by making regulations 
smarter and stronger will destroy innovation. And there are 
even some who argue that we should leave responsibility for 
consumer protection for mortgages and consumer credit products, 
largely, where it is today.
    Now, in my view, these voices are essentially arguing that 
we maintain the status quo, and that is not something we can 
accept. Now, it is not surprising that we are having this 
debate, it is the typical pattern of the past. As the crisis 
starts to recede, the impetus to reform tends to fade in the 
face of the complexity of the task, and with opposition by the 
economic and institutional interests that are affected. It is 
not surprising because the reforms proposed by the President, 
and the reforms that your two Committees are discussing, would: 
substantially alter the ability of financial institutions to 
choose their regulator; shape the content of future regulation; 
and to continue the financial practices that were lucrative for 
parts of the industry for a time, but did ultimately prove so 
damaging. But this is why we have to act and why we need to 
deliver very substantial change.
    Any regulatory reform of this magnitude requires deciding 
how to strike the right balance between financial innovation 
and efficiency on the one hand, and stability and protection on 
the other. And we failed to get this balance right in the past. 
And if we do not achieve sufficient reform, we will leave 
ourselves weaker as a nation, weaker as an economy and more 
vulnerable to future crises.
    Now one of the most significant developments in our system 
during recent decades has been the very substantial growth and 
innovation in the market for derivatives, in particular the 
over-the-counter derivative market. Because of this enormous 
scale and the critical role these instruments play in our 
markets, establishing a comprehensive framework of oversight 
for derivatives is crucial.
    Although derivatives bring very important benefits to our 
economy by enabling companies to manage risk, they also pose 
very substantial challenges. Under our existing regulatory 
system, some types of financial institutions were allowed to 
sell very large amounts of protection against certain risks 
without adequate capital to back those commitments. The most 
conspicuous and the most damaging examples of this were the 
monoline insurance companies and AIG. Banks were able to reduce 
the amount of capital they held against risk by purchasing 
credit protection from thinly capitalized, special purpose 
insurers subject to little or no initial margin requirements.
    The complexity of the instruments overwhelm the checks and 
balances risk management and supervision, weaknesses that were 
magnified by very systematic failures in judgment by the credit 
rating agencies. These failures enabled a substantial increase 
in leverage both outside and within the banking system. 
Inadequate enforcement authority and information made the 
system more vulnerable to fraud and to market manipulation, and 
because of a lack of transparency in the OTC derivative markets 
the government and market participants did not have enough 
information about the location of risk exposures, or the extent 
of mutual interconnection among firms. And this lack of 
visibility, magnified contagion as the crisis intensified, 
causing a very damaging wave of deleveraging, and margin 
increases, the classic margin spiral, contributing to a general 
breakdown in credit markets.
    Now these problems in derivatives were not the sole or the 
principal cause of the crisis, but they made the crisis more 
damaging and they need to be addressed as part of the 
comprehensive reform. Our proposals for reform are designed to 
protect the stability of our financial system, to prevent 
market manipulation, fraud and other abuses, to provide greater 
transparency, and protect consumers and investors by 
restricting inappropriate marketing of these products to 
unsophisticated parties.
    This proposed plan will provide strong regulation and 
transparency for all OTC derivative products, both standardized 
and customized, and strong supervision and regulation for all 
OTC derivative dealers and other major market participants in 
these markets. And we propose to achieve these goals with the 
following broad steps. First, we propose to require that all 
standardized derivatives contracts be cleared through, well-
regulated central counterparties and executed either on 
regulated exchanges or regulated electronic trade execution 
systems. Central clearing makes possible the substitution of a 
regulated clearinghouse between the original counterparties to 
a transaction. And with central clearing, the original 
counterparties no longer have credit exposure to each other. 
They place that credit exposure to a clearinghouse, backed by 
financial safeguards that are established through regulation.
    Second, we propose to encourage substantially greater use 
of standardized OTC derivatives, and thereby to facilitate a 
more substantial migration of these OTC derivatives onto 
central clearinghouses and exchanges. We will also require, and 
I want to underscore this, that regulators police any attempts 
by market participants to use spurious customization to avoid 
central clearing and exchanges. And in this context, we will 
impose higher capital and margin requirements for 
counterparties using customized and non centrally cleared 
derivative products to account for higher level of risk.
    Third, we propose to require that all OTC derivative 
dealers and all major market participants be subject to 
substantial supervision and regulation, including appropriately 
conservative capital margin requirements, and strong business 
conduct standards, to better ensure that dealers have the 
capital needed to make good on the protection they provide.
    Fourth, we propose steps to make OTC derivative markets 
fully transparent. Relevant regulators will have access, on a 
confidential basis, to all transactions and open positions of 
individual market participants. The public will have access to 
aggregated data on opening positions and trading volumes. To 
bring about this high level of transparency we require the SEC 
and CFTC to impose record-keeping and reporting requirements, 
including an audit trail on all OTC derivatives and trades, and 
to provide information on all OTC derivative trades to a 
regulated trade repository.
    Fifth, we propose to provide the SEC and the CFTC with 
clear unimpeded authority to take regulatory and civil action 
against fraud, market manipulation and other abuses in these 
markets. And we will work with the SEC and the CFTC to tighten 
the standards to govern who can participate in these markets.
    And finally we will continue to work closely with our 
international counterparts to help ensure that our regulatory 
regime is matched by similarly affected efforts in other 
countries, these are global markets and for these standards to 
be effective they have to be applied and enforced on a global 
basis. Now with these reforms we will bring protection that 
exists in other financial markets, protections that exists to 
prevent fraud and manipulation in other markets, and preserve 
market integrity of the OTC derivative markets. The SEC and 
CFTC will have full enforcement authority. Firms will no longer 
be able to use derivatives to make commitments with inadequate 
capital.
    No dealer in these markets will escape oversight, and we 
will bring the risk reducing and financial stability promoting 
benefits of central clearing to these important markets.
    Now turning these proposals into law will require complex, 
difficult judgments. And some of these judgments will involve 
assigning jurisdiction over particular transactions and 
particular participants to our regulatory agencies. I want to 
say we have been working closely as you have with the SEC and 
CFTC over the last few months to develop a sensible, pragmatic 
allocation of duties and have made very, very substantial 
progress in narrowing the issues. And I want to join the 
Chairman in complimenting Chairman Schapiro and Chairman 
Gensler for working so closely and productively together.
    As Congress moves to craft legislation, we are moving 
quickly, along with other relevant agencies, to advance the 
overall process of reform. Just as an example, we provided 
detailed legislative language for the establishment of the 
Consumer Financial Protection Agency to Congress just last 
week. The SEC is moving forward with new rules to govern and 
reform credit rating agencies. And the CFTC as you saw, 
announced hearings recently on whether to impose limits on 
speculation in energy derivatives in order to dampen price 
swings, and to require new disclosure by derivative traders. 
Those are just some examples of things we are doing as you move 
forward to consider legislation.
    Now we welcome the commitment of these Committees, and of 
the Congressional leadership, to move forward in legislation 
this year. This is an enormously complicated project and it is 
important we get it right. We share responsibility for fixing 
the system, and we can only do that with comprehensive reform. 
I look forward to answering your questions and talking through 
the range of important complex issues we face in the reform 
effort. Thank you, Mr. Chairman.
    [The prepared statement of Secretary Geithner follows:]

    Prepared Statement of Hon. Timothy F. Geithner, Secretary, U.S. 
              Department of the Treasury, Washington, D.C.

    Chairman Frank, Ranking Member Bachus, Chairman Peterson, Ranking 
Member Lucas, Members of the Financial Services and Agriculture 
Committees, thank you for the opportunity to testify today about a key 
element of our financial regulatory reform package--a comprehensive 
regulatory framework for the over-the-counter (OTC) derivatives 
markets.
    Over the past 2 years, we have faced the most severe financial 
crisis in generations. Some of our largest financial institutions 
failed. Many of the securities markets that are critical to the flow of 
credit in our financial system broke down. Banks came under 
extraordinary pressure. And these forces magnified the overall downturn 
in the housing market and the broader economy.
    President Obama, working with the Congress, has taken extraordinary 
steps to stabilize the economy and to repair the damage to the 
financial system. As we continue to put in place conditions for 
economic recovery, we need to lay the foundation for a safer, more 
stable financial system in the future.
    This financial crisis has exposed a set of core problems with our 
financial system. The system permitted an excessive build-up of 
leverage, both outside the banking system and within the banking 
system.
    The shock absorbers that are critical to preserving the stability 
of the financial system--capital, margin, and liquidity cushions in 
particular--were inadequate to withstand the force of the global 
recession, and they left the system too weak to withstand the failure 
of major financial institutions.
    In addition, millions of Americans were left without adequate 
protection against financial predation, particularly in the mortgage 
and consumer finance areas. Many were unable to evaluate the risks 
associated with borrowing to support the purchase of a home or to 
sustain a higher level of consumption.
    The United States entered this crisis without an adequate set of 
tools to contain the risk of broader damage to the economy and to 
manage the failure of large, complex financial institutions.
    Many forces contributed to these problems. Household debt rose 
dramatically as a share of total income, financed by a willing supply 
of savings from around the world. Risk management practices at 
financial firms failed to keep abreast of the rising complexity of 
financial instruments. Compensation rose to exceptionally high levels 
in the financial sector, with rewards for executives unmoored from an 
assessment of long-term risk for the firm, thus mis-aligning the 
incentive structures in the system. Our framework of financial 
supervision and regulation, designed in a different era for a more 
simple bank-centered financial system, failed in its most basic 
responsibility to produce a stable and resilient system for providing 
credit and protecting consumers and investors.
    The Administration proposed in June a comprehensive set of reforms 
to address the problems in our financial system that were at the core 
of this crisis and to reduce the risk of future crises.
    We proposed to establish a new Consumer Financial Protection Agency 
with the power to establish and enforce protections for consumers on a 
wide array of financial products.
    We proposed to put in place more conservative constraints on risk 
taking and leverage through higher capital requirements for financial 
institutions and stronger cushions in the core market infrastructure.
    We proposed to extend the scope of regulation beyond the 
traditional banking sector to cover all firms who play a critical role 
in market functioning and the stability of the financial system.
    We proposed to put in place stronger tools for managing the failure 
of large, complex financial institutions by adapting the resolution 
process that now exists for banks and thrifts.
    We proposed to reduce the substantial opportunities for regulatory 
arbitrage that our system permitted by consolidating safety and 
soundness supervision for Federal depository institutions, eliminating 
loopholes in the Bank Holding Company Act, moving toward convergence of 
the regulatory frameworks that apply to securities and futures markets, 
and establishing more uniform standards and enforcement of standards 
for financial products and activities across the system.
    And we proposed to work with other countries to establish strong 
international standards, so the reforms we put in place here are 
matched and informed by similarly effective reforms elsewhere.
    Any regulatory reform of magnitude requires deciding how to strike 
the right balance between financial innovation and efficiency, on the 
one hand, and stability and protection, on the other. We failed to get 
this balance right in the past. The reforms that we propose seek to 
shift the balance by creating a more resilient financial system that is 
less prone to periodic crises and credit and asset price bubbles, and 
better able to manage the risks that are inherent in innovation in a 
market-oriented financial system.
    We consulted widely with Members of Congress, consumer advocates, 
academic experts, and former regulators in shaping our recommendations. 
And we look forward to refining these recommendations through the 
legislative process.
    One of the most significant developments in our financial system 
during recent decades has been the substantial growth and innovation in 
the markets for derivatives, especially OTC derivatives.
    Because of their enormous scale and the critical role they play in 
our financial markets, establishing a comprehensive framework of 
oversight for the OTC derivative markets is crucial to laying the 
foundation for a safer, more stable financial system.
    A derivative is a financial instrument whose value is based on the 
value of an underlying ``reference'' asset. The reference asset could 
be a Treasury bond or a stock, a foreign currency or a commodity such 
as oil or copper or corn, a corporate loan or a mortgage-backed 
security. Derivatives are traded on regulated exchanges, and they are 
traded off-exchanges or over-the-counter.
    The OTC derivative markets grew explosively in the decade leading 
up to the financial crisis, with the notional amount or face value of 
the outstanding transactions rising more than six-fold to almost $700 
trillion at the market peak in 2008. Over this same period, the gross 
market value of OTC derivatives rose to more than $20 trillion.
    Although derivatives bring substantial benefits to our economy by 
enabling companies to manage risks, they also pose very substantial 
challenges and risks.
    Under our existing regulatory system, some types of financial 
institutions were allowed to sell large amounts of protection against 
certain risks without adequate capital to back those commitments. The 
most conspicuous and most damaging examples of this were the monoline 
insurance companies and AIG. These firms and others sold huge amounts 
of credit protection on mortgage-backed securities and other more 
complex real-estate related securities without the capacity to meet 
their obligations in an economic downturn.
    Banks were able to get substantial regulatory capital relief from 
buying credit protection on mortgage-backed securities and other asset-
backed securities from thinly capitalized, special purpose insurers 
subject to little or no initial margin requirements.
    The apparent ease with which derivatives permitted risk to be 
transferred and managed during a period of global expansion and ample 
liquidity led financial institutions and investors to take on larger 
amounts of risk than was prudent.
    The complexity of the instruments that emerged overwhelmed the 
checks and balances of risk management and supervision, weaknesses that 
were magnified by systematic failures in judgment by credit rating 
agencies. These failures enabled a substantial increase in leverage, 
outside and within the banking system.
    Because of a lack of transparency in the OTC derivatives and 
related markets, the government and market participants did not have 
enough information about the location of risk exposures in the system 
or the extent of the mutual interconnections among large firms. So, 
when the crisis began, regulators, financial firms, and investors had 
an insufficient basis for judging the degree to which trouble at one 
firm spelled trouble for another. This lack of visibility magnified 
contagion as the crisis intensified, causing a very damaging wave of 
deleveraging and margin increases, and contributing to a general 
breakdown in credit markets.
    Market participants and investors used derivatives to evade 
regulation, or to exploit gaps and differences in regulation, and to 
minimize the tax consequences of investment strategies.
    The lack of transparency in the OTC derivative markets combined 
with insufficient regulatory policing powers in those markets left our 
financial system more vulnerable to fraud and potentially to market 
manipulation.
    These problems were not the sole or the principal cause of the 
crisis, but they contributed to the crisis in important ways. They need 
to be addressed as part of comprehensive reform. And they cannot be 
adequately addressed within the present legislative or regulatory 
framework.
    In designing its proposed reforms for the OTC derivative markets, 
the Administration has attempted to achieve four broad objectives:

   Preventing activities in the OTC derivative markets from 
        posing risk to the stability of the financial system;

   Promoting efficiency and transparency of the OTC derivative 
        markets;

   Preventing market manipulation, fraud, and other abuses; and

   Protecting consumers and investors by ensuring that OTC 
        derivatives are not marketed inappropriately to unsophisticated 
        parties.

    Our proposals have been carefully designed to provide a 
comprehensive approach. The plan will provide for strong regulation and 
transparency for all OTC derivatives, regardless of the reference 
asset, and regardless of whether the derivative is customized or 
standardized. In addition, our plan will provide for strong supervision 
and regulation of all OTC derivative dealers and all other major 
participants in the OTC derivative markets.
    We propose to achieve this with the following broad steps:
    First, we propose to require that all standardized derivative 
contracts be cleared through well-regulated central counterparties and 
executed either on regulated exchanges or regulated electronic trade 
execution systems.
    Central clearing involves the substitution of a regulated 
clearinghouse between the original counterparties to a transaction. 
After central clearing, the original counterparties no longer have 
credit exposure to each other--instead they have credit exposure to the 
clearinghouse only. Central clearing of standardized OTC derivatives 
will reduce risks to those on both sides of a derivative contract and 
make the market more stable. With careful supervision and regulation of 
the margin and other risk management practices of central 
counterparties, central clearing of a substantial proportion of OTC 
derivatives should help to reduce risks arising from the web of 
bilateral interconnections among our major financial institutions. This 
should help to constrain threats to financial stability.
    Second, through capital requirements and other measures, we propose 
to encourage substantially greater use of standardized OTC derivatives 
and thereby to facilitate substantial migration of OTC derivatives onto 
central clearinghouses and exchanges.
    We will propose a broad definition of ``standardized'' OTC 
derivatives that will be capable of evolving with the markets and will 
be designed to be difficult to evade. We will employ a presumption that 
a derivative contract that is accepted for clearing by any central 
counterparty is standardized. Further attributes of a standardized 
contract will include a high volume of transactions in the contract and 
the absence of economically important differences between the terms of 
the contract and the terms of other contracts that are centrally 
cleared.
    We also will require that regulators carefully police any attempts 
by market participants to use spurious customization to avoid central 
clearing and exchanges. In addition, we will raise capital and margin 
requirements for counterparties to all customized and non-centrally 
cleared OTC derivatives. Given their higher levels of risk, capital 
requirements for derivative contracts that are not centrally cleared 
must be set substantially above those for contracts that are centrally 
cleared.
    Third, we propose to require all OTC derivative dealers, and all 
other major OTC derivative market participants, to be subject to 
substantial supervision and regulation, including conservative capital 
requirements; conservative margin requirements; and strong business 
conduct standards. Conservative capital and margin requirements for OTC 
derivatives will help ensure that dealers and other major market 
participants have the capital needed to make good on the protection 
they have sold.
    Fourth, we propose steps to make the OTC derivative markets fully 
transparent. Relevant regulators will have access on a confidential 
basis to the transactions and open positions of individual market 
participants. The public will have access to aggregated data on open 
positions and trading volumes.
    To bring about this high level of transparency, we will require the 
SEC and CFTC to impose record-keeping and reporting requirements 
(including an audit trail) on all OTC derivatives. We will require that 
OTC derivatives that are not centrally cleared be reported to a 
regulated trade repository on a timely basis.
    These reforms will bring OTC derivative trading into the open so 
that regulators and market participants have clear visibility into the 
market and a greater ability to assess risks in the market. Increased 
transparency will improve market discipline and regulatory discipline, 
and will make the OTC derivative markets more stable.
    Fifth, we propose to provide the SEC and CFTC with clear authority 
for civil enforcement and regulation of fraud, market manipulation, and 
other abuses in the OTC derivative markets.
    Sixth, we will work with the SEC and CFTC to tighten the standards 
that govern who can participate in the OTC derivative markets. We must 
zealously guard against the use of inappropriate marketing practices to 
sell derivatives to unsophisticated individuals, companies, and other 
parties.
    Finally, we will continue to work with our international 
counterparts to help ensure that our strict and comprehensive 
regulatory regime for OTC derivatives is matched by a similarly 
effective regime in other countries.
    Turning our proposals into law will require that a number of 
difficult judgments be made. Some of these judgments involve assigning 
jurisdiction over particular transactions or particular market 
participants to particular regulatory agencies. We have been working 
with the SEC and the CFTC over the past few months to develop a 
sensible allocation of duties. We have made great progress in narrowing 
the outstanding issues, and intend to send up draft legislation that 
will provide for a clear allocation of oversight authority between the 
SEC and CFTC. In making these decisions, we are striving to utilize 
each agency's expertise, eliminate gaps in regulation, eliminate 
uncertainty about which agency regulates which types of derivatives, 
and maximize consistency of the regulatory approach of the two 
agencies.
    Our plan will help prevent the OTC derivative markets from 
threatening the stability of the overall financial system.
    By requiring central clearing of all standardized derivatives and 
by requiring all OTC derivative dealers and all other significant OTC 
market participants to be strictly supervised by the Federal 
Government, to maintain substantial capital buffers to back up their 
obligations, and to comply with prudent initial margin requirements, 
the regulatory framework that we seek to put in place should help lower 
systemic risk.
    Our plan will help make the derivatives markets more efficient and 
transparent.
    By requiring all standardized derivatives to be cleared through 
regulated central counterparties and executed on regulated exchanges or 
through regulated electronic trade execution systems and by requiring 
that detailed information about all types of derivatives be readily 
available to regulators, our plan will help ensure that the government 
is not caught--as it was in this crisis--with insufficient visibility 
into market activity, risk concentrations, and connections between 
firms.
    Our plan will help prevent market manipulation, fraud and other 
abuses by providing full information to regulators about activity in 
the OTC derivative markets and by providing the SEC and the CFTC with 
full authority to police the markets.
    Finally, our plan will help protect investors by taking steps to 
prevent OTC derivatives from being marketed inappropriately to 
unsophisticated parties.
    As Congress moves to craft legislation to reform our financial 
system, we are moving quickly to advance the overall process.
    Following the release of our White Paper on financial regulatory 
reform in mid-June, we sent up detailed legislative language for the 
establishment of the Consumer Financial Protection Agency.
    We have used the President's Working Group on Financial Markets to 
pull together all government agencies that oversee elements of the 
financial system to begin the process of formulating more detailed 
proposals for implementing the comprehensive reforms outlined by the 
President.
    The SEC is moving forward to put in place new rules to govern 
credit-rating agencies, which failed to adequately assess the risks of 
mortgage-backed and other structured securities at the center of the 
crisis.
    The CFTC has announced hearings on whether to impose limits on 
speculation in energy derivatives in order to dampen price swings, and 
to require new disclosures by derivative traders.
    SEC Chairman Schapiro and CFTC Chairman Gensler were recently on 
Capitol Hill testifying together about progress in coordinating their 
agencies' approaches to derivatives and developing a reasonable 
division of labor in the oversight of these markets.
    We welcome the commitment of the Congressional leadership and of 
the key Committees to move forward with legislation this year. This is 
an enormously complex project. It is important that we get it right. 
And we need a comprehensive approach.
    This crisis caused enormous damage to trust and confidence in the 
U.S. financial system and to the American economy.
    We share responsibility for fixing the system and we can only do 
that with comprehensive reform.
    We look forward to working with you to achieve that objective.

    Chairman Peterson. Thank you, Mr. Secretary.
    We have 8 or 9 minutes before votes, so I will go ahead 
with a couple of questions here.
    First of all--in our bill--we propose mandatory clearing, 
and if they can not be cleared, then we give CFTC the 
requirement that they put some margin and collateral 
requirements on the transaction. One of the questions that I 
still have, apparently you are not ready to give us a detailed 
response on how this is going to work, but, it mentions a broad 
definition of standardized, the presumption of standardized and 
cleared and that high volume will be an attribute of a 
standardized contract, which for me kind of just raises even 
more questions about what is going on here.
    So while you may not be able to give us a detail of what a 
standardized OTC derivative is today, can you tell us to what 
degree of certainty will a swap dealer or end-user of 
derivatives be able to know going into a swap whether it is 
going to be classified as standardized or customized, will the 
answer be in the statute itself or a regulation promulgated by 
Federal regulators? Will clearinghouses be providing answers 
based on if they choose to clear the derivative or not, or will 
the market, as a whole, show the way based on volume of the OTC 
derivative? And how much confidence will market participants 
have beforehand whether the OTC derivative they enter into will 
be judged standardized or customized?
    Secretary Geithner. Mr. Chairman, of course we want to 
have--we want to give people as much clarity as we can ex ante. 
I don't think we made a final judgment yet about to what extent 
we wanted to find those attributes and standardize them in 
statute or in regulation. I think my suspicion of what we will 
recommend is that we will lay out broad principals in statute, 
and have them defined with more clarity in regulation.
    I think the important thing is that, again, that we move 
the standardized derivatives onto central clearing, but we 
establish comprehensive enforcement authority, comprehensive 
transparency, comprehensive reporting, sufficiently 
conservative margin and capital requirements across the entire 
market. And to avoid the risk that our definition of 
standardized is arbitraged, that people try to get around that 
definition and design customized products to escape the 
protections that come with that, we are going to propose to put 
higher capital requirements on the customized products to limit 
that risk.
    Again, the basic design of this proposal is to make sure 
there is comprehensive oversight over all transactions in these 
markets, and comprehensive authority to the SEC and CFTC to 
police and deter fraud and manipulation in those markets, and 
to make sure there are appropriately conservative capital 
margin requirements across those instruments.
    Chairman Peterson. Thank you. Thank you. What about if the 
clearinghouse determines there is too much risk, too little 
profit in clearing some standardized OTC transaction? Or what 
happens it no central counterparty will clear a standardized 
contract, or do you think the central counterparties should be 
required to take on this business?
    Secretary Geithner. Having thought through that, I don't 
think that is likely to be a significant risk, because, I think 
the economic instruments of the participants will encourage 
central clearing. As the markets become more standardized, it 
is more economically efficient for a greater share of those 
products to move to central clearing. Both sides of the parties 
will be, particularly the users of the markets, will have an 
interest in seeing that, but that is something we will think 
through carefully with you.
    Chairman Peterson. Well, thank you very much. I think we 
are going to recess the Committee and go over and vote. I don't 
know how many there are, but we will come back promptly after 
the votes. Secretary, we appreciate your patience being with 
us. We will stand in recess.
    [Recess.]
    Chairman Frank. The next Member of the panel to question is 
the senior Republican on the Agriculture Committee, the 
gentleman from Oklahoma, Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman.
    And I would ask, by unanimous consent, a letter from 
Chesapeake that was copied to me and, I believe, the Secretary 
to be entered into the record, if that is possible, sir.
    Chairman Peterson. Without objection.
    [The document referred to is located on p. 59.]
    Mr. Lucas. Thank you, Mr. Chairman.
    Mr. Secretary, OTC contracts are used to manage, of course, 
very real risks. And the OTC market's very purpose is to 
provide customized solutions that meet the individual needs of 
customers. Denying or effectively limiting access to these risk 
tools by eliminating, in effect, OTC contracts, which mandated 
clearing essentially does, jeopardizes the ability to hedge 
market risk, exposing customers to increasing price volatility.
    Why isn't reporting of OTC trades enough, sir?
    Secretary Geithner. If we were to mandate clearing, central 
clearing of all derivative products, we would, in effect, be 
banning customized products. We are not proposing to do that, 
in part because we believe that there are a broad range of 
risks that cannot be adequately hedged and managed without 
recourse to more specialized, tailored instruments.
    We also believe, however, that we need to have, as I said 
earlier, a comprehensive framework of reporting, enforcement 
authority, and capital requirement protections across all those 
instruments. But for the reasons you said, and many people have 
pointed out, to force clearing of all derivatives would ban 
customized. We do not believe that is necessary, even though we 
think it is very important to have a comprehensive framework of 
protections around all those products.
    Mr. Lucas. So, then it is fair to say, Secretary, that you 
would agree that if the regulator knows about the trades, if 
the regulator has the necessary tools, that that should be 
sufficient to address and to avoid potential systematic risk?
    Secretary Geithner. I believe that for the customized part 
of the market----
    Mr. Lucas. Customized part, of course.
    Secretary Geithner.--you want to make sure that there is 
adequate capital and margin held against those exposures. That 
the SEC and the CFTC, the relevant authorities in this case, 
have the full protections to police those markets to prevent 
manipulation and fraud. And that requires a level of reporting 
and transparency that we do not have today.
    Mr. Lucas. And you indicated in your opening comments, 
Secretary, that for these kind of contracts, potentially, the 
capital requirements could be substantially higher than for the 
standardized contracts, the things that would be traded by an 
exchange.
    Could you give us a feel for, in your mind, how much more 
the standards would be for these kind of products?
    Secretary Geithner. I can't tell you how much higher, but 
let me just explain the rationale for that.
    The first is, of course, that these customized products can 
often entail more leverage, more uncertainty about future risk, 
less capacity to judge future risk. And that, in and of itself, 
requires a higher level of capital, to compensate for that 
level of risk.
    The second is, of course, we want to avoid creating a 
situation where people are encouraged to use customized when 
there is a standardized option that is economically compelling.
    Mr. Lucas. But you would agree that there are a number of 
industries, whether it is ag or energy, or a variety of 
industries, where the circumstances are so unique that there 
has to be an option for these customized contracts?
    Secretary Geithner. I do believe that. And I have a stack 
of letters here in my book from companies across the country in 
the power business, in the commodities business, in the 
business of producing large-scale machinery, that speak to the 
importance of maintaining that option.
    But I want to underscore that, because those products come 
with a lot of risk--and a lot of the losses that were so 
conspicuous in the monoline insurance companies and AIG were 
from institutions writing protections against the customized 
products. And, therefore, it is important that there be, as I 
said, a comprehensive framework of oversight and authority over 
those instruments, as well.
    Mr. Lucas. Thank you, Secretary. I see my time has expired.
    Chairman Frank. The first questioner on our side now will 
be the Chairman of the Financial Services Committee 
Subcommittee on Capital Markets, who has been working hard on 
this issue, Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Secretary, the white paper requires that the SEC and 
the CFTC make recommendations on harmonizing their statutes and 
regulations by the end of September. And, as you know, we have 
been meeting with the two regulators, yourself, and 
representatives of the Treasury Department over these last 
several weeks.
    It seems they have made tremendous progress on many things, 
but it is clear that, on some things, they, themselves, will 
not come to a resolution. And I am just curious if you could 
give us some insight, particularly because of the timing of all 
this.
    You mentioned four or five different positions people have 
taken, and I didn't fit in any of those categories. I am in 
favor of comprehensive reform, but, also taking our time to 
make sure we don't cause unintended consequences.
    And, with that in mind, have you, in your mind, formulated 
what you would do, or have you considered a joint task force of 
Treasury and the Congress in a prepositioned position to start 
formulating, if they don't agree on certain issues, what 
positions we can take to help facilitate the moving of this 
legislation on a faster track?
    Secretary Geithner. We would like to come to you with a 
recommendation before the deadline we put in the white paper, 
which was the end of September, because we know you want to 
move forward more quickly on this.
    And I agree with you, they have made a lot of progress but 
they are not there yet. And what we are doing is working 
closely with both agencies to try to explore options and bring 
them together to a position both can support.
    But, in that process, as you know, we are consulting very 
closely with both these Committees, so that we are working in 
parallel to a point that it is going to be, not just that we 
have them together with the Treasury on a common position, but 
that we are more likely to find the common ground that both 
your Committees can support.
    But we are not quite there yet.
    Mr. Kanjorski. Well, I appreciate that. And, of course, 
anything that we can do on the Congressional side, we offer our 
assistance. Because I am getting a little pessimistic as to 
whether or not the deadlines we are setting are going to be 
met. And not that that would be tragic if they are not met, but 
we are causing great expectations constantly with these 
deadlines that make it look a little difficult, or perhaps the 
perception is that we are not being as successful as we hope we 
can be.
    Mr. Secretary, have you given up, and has the 
Administration given up, on the long-term prospect of joining 
these two agencies together, the SEC and the CFTC?
    Secretary Geithner. There are a lot of compelling reasons 
made by people in this room, and many others over a long period 
of time, for merging both those agencies. In our judgment it is 
a necessary condition and the most important and, in some ways 
the hardest, thing to do is to bring the underlying statutes 
and laws into conformity and convergence.
    We think that is the most important thing to do, in part 
because, as your colleague Chairman Frank said, the critical 
test of whether we do enough to improve the system is going to 
be what we do to the basic constraints and incentives, the 
substance of regulation.
    So what we proposed in the white paper to do is to begin 
with that task, which we think is going to be enormously 
difficult and complicated. And that would provide a better 
basis for the Congress to consider institutional reforms in the 
future.
    Mr. Kanjorski. So you are not cutting short the fact--you 
are anticipating that we are going to do these preliminary 
reforms, and then continue on over a series of years with 
better reform.
    Secretary Geithner. Well, I think that is a judgment you 
would have to make. But, there is enormous value--and this is 
an enormously complicated task--in bringing those underlying 
statutes into conformity, so that you don't have different 
standards, different entities, different enforcement authority 
over what are economically very similar types of products.
    Mr. Kanjorski. All right. Thank you, Mr. Secretary.
    Chairman Frank. I thank my colleague, although the prospect 
of several more years of this is not the happiest that is 
before me.
    The gentleman from Florida, Mr. Posey, is now recognized.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Secretary, I had a couple of questions I wanted to ask 
when you were before our Committee earlier, and each time 
something came up before I got to ask my questions. So, just to 
put things into proper perspective, I would like to pose a 
couple of them now.
    The stimulus bill was advertised to reduce unemployment and 
help us get back on track. It apparently hasn't done that. I 
have seen some information which indicates, in fact, 
unemployment has gone up to about 9\1/2\ percent from below 8 
percent, instead of having the other effect. And I know the 
Vice President, the other day, said that it was something that 
the economy--that no one had anticipated and that they misread 
the economy.
    And I was just wondering where you think your plan went 
wrong.
    Secretary Geithner. Congressman, thank you for raising that 
question.
    I think if you step back and look at where we are today 
relative to where we were at the end of the year, we have 
achieved the critically important effect of helping slow the 
rate of decline in the economy, helped to stabilize the 
financial system. Business consumer confidence has improved 
very substantially. The rate of decline in economic activity 
globally has slowed and stabilized. Financial systems are 
starting to heal. The cost of credit, broad concern about 
catastrophic risk in the economy and the financial system has 
receded very dramatically.
    Those are critically important signs of initial progress, 
and they are due entirely to the actions this Congress took and 
the Administration took to put in place the largest recovery 
program in peacetime in the United States.
    The stimulus package is on its expected path, in terms of 
the rate of change, and in terms of putting money in the 
pockets of taxpayers, to provide substantial forms of 
assistance to states to reduce the risks that they are forced 
to fire tens of thousands of teachers, workers, and firemen. 
And there are very substantial investments in infrastructure 
products that have already started to take effect and will have 
their maximum impact on the economy in the second half of this 
year.
    So my own sense is, and I think this is a consensus of 
broad-based economists, that there has been substantial 
improvements in arresting what was the worst recession globally 
we have seen in generations. And those are the result of the 
actions this Congress took, the Administration put in place, 
and complementary actions taken by governments around the world 
to, again, help address what the worst crisis we have seen in a 
long period of time.
    Mr. Posey. Mr. Chairman, the chart just indicates the 
opposite. It shows----
    Secretary Geithner. No, I don't think that is true. I don't 
think that is true, Congressman.
    If you look at the dynamics of all recessions, even as 
growth starts to improve and turn positive, unemployment tends 
to continue to rise. That is the inescapable natural element of 
recessions. That is not an argument for not acting very 
forcefully in the face of crises of this magnitude.
    And so, I think, what the Congress did, what the President 
did was necessary and critically important, again, to reduce 
the risk that we see hundreds of thousands of further losses of 
jobs, we see millions of job losses beyond this point, and we 
see thousands more businesses fail unnecessarily.
    Mr. Posey. You know better than me how cyclical they are--
anyway, the next question is, we know, even in our districts, 
banks have money to lend, but they are not lending it. People 
have money to buy a new car, but they are not buying them. 
People have money to take a vacation, but they are not taking 
them. Consumer confidence isn't what we would like it to be, 
and the money is not getting spent.
    And, personally, I think it is because they don't know what 
is coming. The banks are afraid to loan it. They don't know 
what the next issue is going to be, and we are looking, really, 
kind of, for a plan.
    Chairman Frank. Let me just repeat again. If Members go 
right to the end of the time with their questions, the answer 
will have to be 10 seconds. But if Members want to have an 
answer, they are going to have to leave time for it.
    Mr. Secretary, briefly.
    Secretary Geithner. Households across the country borrowed 
enormous amounts of money relative to income in the run-up to 
this crisis. What the economy is going through is a necessary 
and very healthy adjustment, as families and the Government of 
the United States goes back to living within their means.
    That is causing a greater contraction and demand for credit 
than we normally see in recessions. And you are seeing a very 
healthy increase in private savings behavior, I think, probably 
in response to that.
    I think those are necessary healthy dynamics, although they 
will produce a slower recovery.
    Chairman Peterson. I thank the gentleman.
    The gentleman from Pennsylvania, the Vice Chairman of the 
Committee, Mr. Holden.
    Mr. Holden. Thank you, Mr. Chairman.
    Mr. Secretary, as you know, the majority of over-the-
counter derivatives are traded here and in Europe. Have you 
been discussing your proposal with your European counterparts?
    And if you can come to an agreement with the European 
Commission and the European Parliament follows suit, what is to 
prevent these markets to go to some other nation with a less 
regulatory regime to follow.
    Secretary Geithner. That is a very important question.
    We have been working very closely with them, and there is 
very substantial convergence in overall approach. And, I think, 
the broad strategy that we are going to embrace here will be 
embraced in the UK, will be embraced in continental Europe, 
will be matched by the other major financial centers of the 
world. And, again, I think they see a broad interest, as do we, 
as do these Committees, in trying to raise the basic quality of 
standards in these markets.
    Now, of course, as many of you said, it is all in the 
details and getting those right. But we are trying to do 
something we haven't done in the past, which is to move in 
parallel with other countries, that we are not left with a 
position that we raise standards substantially here and we just 
find that risk migrates to other countries.
    But, again, I am quite encouraged, and I think there is 
broad convergence in approach.
    Mr. Holden. But if we come to an agreement with the 
Europeans, what is to stop the markets from moving to Dubai, 
Hong Kong?
    Secratary Geithner. Well, again, we are not going to stop 
with the Europeans. I think the important point is to say, in 
all the major areas of financial activity, you want to have 
global standards enforced more evenly, applied more 
effectively, for just the reason you said.
    Mr. Holden. Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    Chairman Peterson. I thank the gentleman.
    I now recognize the gentleman from Virginia, the former 
Chairman and Ranking Member of the Committee, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Mr. Secretary, welcome.
    Sitting here in the august surroundings of the House Ways 
and Means Committee, with its fine audio system, and with our 
good friends from the Financial Services Committee along side 
us, some of us on the Agriculture Committee might say that they 
feel that they are sitting in ``tall cotton.''
    However, I must say that, having said that and how much we 
appreciate you taking this time, I think this hearing is 
premature. The fact of the matter is that I very much agree 
with you that we need to have as much transparency in these 
markets as possible. But we also must have that much 
transparency and more in the deliberation of this legislation. 
It is critically important that you be able to answer questions 
from Members on both sides of the aisle about the specific 
details of legislation which does not yet exist.
    So I would ask you first, would you be willing to return to 
meet with these two Committees and answer our questions when we 
actually have the substance of the legislation in front of us 
and can get more precise answers from you?
    Secretary Geithner. I would respond to any invitation by 
your Chairmen to come before you and help make the legislative 
process work on the pace that is appropriate.
    Mr. Goodlatte. That is a good answer. And I would convey to 
both Chairmen my hope that they will make this an open and 
bipartisan process and assure us that, once the legislation is 
in writing, that we won't rush to mark it up without having the 
opportunity for the millions of Americans who are very much 
affected by it as well as their Representatives having the 
opportunity to ask the questions that need to be asked.
    In particular, I would note that you had indicated you hope 
that the Members of the Committee would write legislation that 
would establish broad principles upon which, then, the various 
agencies would write the particularity in the regulations. But 
we don't even, at this point, have those broad principles in 
front of us to know how we think that process would work.
    But let me ask you specifically about one area that is of 
considerable concern to me and many others. You told us that 
the SEC and the CFTC are still working on how best to divide up 
the jurisdiction over the OTC derivatives markets and dealers. 
When this division of jurisdiction and responsibility is 
finalized, does the Administration intend that each agency 
would exercise exclusive regulatory jurisdiction over their 
assigned area?
    The exclusive jurisdiction provision of the Commodity 
Exchange Act has worked well to avoid regulatory duplication 
and conflict. And I would hope that it would be built into the 
legislation on OTC derivatives, as well. Can you confirm to me 
that it will be?
    Secretary Geithner. Good question. There is a lot of merit 
in that approach. And I would say that probably because of the 
precedent established, that is the presumption we are going to 
bring to this.
    But, again, until we see the full package and have a chance 
to walk you through that, I don't want to respond in detail--or 
I don't want to get ahead of the delicate, careful process we 
are trying to work through now with those two agencies.
    Mr. Goodlatte. I see that you have the same problem that I 
have with this process, then. And I wonder if you could----
    Secretary Geithner. Well, yes Congressman, of course, I 
agree that it is going to be all in the substance and the 
details of this. And we do carry the burden of presenting 
before you detailed proposals in legislative form so that you 
can consider those recommendations. And we are going to deliver 
on that commitment.
    Mr. Goodlatte. I thank you.
    I wonder if you would be willing to assure the Committees 
that you would get back to us on that specific question in 
writing once you have the information in front of you that 
would enable you to----
    Secratary Geithner. Absolutely. I think that when we 
propose our recommendations on how to solve these 
jurisdictional questions, a necessary part of the answer will 
be a response to the question you raised.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Chairman Peterson. I thank the gentleman.
    And I would just remind the gentleman that we marked our 
bill up and passed it out of the Committee in February under an 
open process. It has been out there since then. I think we can 
assure you that we are going to continue that open process.
    We are having a hearing here today, and we are probably not 
going to get around to this until, maybe, September, so we are 
being as open as we can be.
    Mr. Goodlatte. Mr. Chairman, if you might yield on that 
point, would that be an indication that we might actually have 
a hearing on the legislation itself rather than the subject?
    Chairman Frank. Of course. I am puzzled by the inference 
that we didn't plan to do that, and I am puzzled by the 
argument that it is premature to have a hearing. I didn't 
subpoena the gentleman here. He is free to go off and do other 
things. But I would think having a hearing well in advance of 
when we actually start to get the legislation would be seen as 
a useful part of the process, to begin to open the subject up. 
Of course there will be a hearing on the bill itself.
    Mr. Goodlatte. If the gentleman would yield, if that is 
coupled with a follow-up hearing on actually what we are going 
to do, then I would agree with the gentleman.
    Chairman Frank. Yes. But the gentleman said it was 
premature. I must say, that is an odd accusation that now----
    Mr. Goodlatte. It is not an accusation. It is a question.
    Chairman Frank. Well, ``premature'' is not a question. It 
is at least a description. Maybe the gentleman regards it as 
something good to be premature; I have never done that. But the 
point is that we are having a chance now to air the questions.
    I now recognize the gentlewoman from California, Ms. 
Waters.
    Ms. Waters. Thank you very much, Mr. Chairman.
    There is substantial attention given to OTC derivatives in 
your testimony. And, as you know, I have been talking a lot 
about credit default swaps. And I remember what you told me the 
last time I asked you; you said that if we ban credit default 
swaps, they will just emerge in another way, that the 
sophistication and creativity of those who deal in these 
markets is such that they will just find another way to do what 
they want to do.
    Basically, what I am reading from your testimony is that 
you think that credit default swaps are necessary. However, 
this country did very well without them for a long period of 
time.
    If credit default swaps do such a good job at diffusing 
risk, why did so many financial institutions lose so much 
money, even when they were using credit default swaps as a 
hedge? Doesn't this prove that these products are more 
dangerous than originally thought? And why not ban credit 
default swaps?
    Secretary Geithner. I think, as I said in my testimony, the 
principal risk these instruments presented came from the fact 
that a set of institutions wrote a lot of commitments without 
capital to back those commitments. And the regulatory 
authorities of the nation charged with policing these markets 
to prevent fraud and manipulation were not given authority over 
those basic markets. We are proposing to address those two 
critical features.
    Now, this country has decades of experience with derivative 
products of all classes. They provide, as many of your 
colleagues have said, an important economic function in helping 
companies and businesses across the country better hedge 
against their risk. And, our responsibility and job is to make 
sure that those benefits come with appropriate protections for 
financial stability of investors and consumers. And that is the 
package of reforms we have proposed.
    Ms. Waters. Mr. Secretary, you are talking in your 
testimony about all of these steps that it will take in order 
to supervise and manage and oversee credit default swaps.
    If you have to work that hard at trying to make them more 
substantial in terms of having the collateral to back up the 
risk, why do you have to do them at all, if you have to work 
this hard at it?
    Secretary Geithner. I don't think we have to work so hard, 
but Congress has to legislate the authority to make that 
possible. And that authority didn't exist before, and we are 
proposing Congress provide that authority.
    But I don't think it is a challenge beyond the capacity of 
the people in this room, or in the Congress, or the regulatory 
authorities to do that.
    Again, we are proposing, in some sense, to extend and 
recreate and apply the protections that have existed in the 
range of other markets to these markets where they did not 
exist. And that is not a task that is too complicated for us to 
manage.
    Ms. Waters. Thank you, Mr. Chairman. I yield back.
    Chairman Frank. The Ranking Member of the Financial 
Services Committee, the gentleman from Alabama, Mr. Bachus, for 
4 minutes.
    Mr. Bachus. Thank you, Mr. Secretary.
    Mr. Secretary, on more than one occasion, you have said we 
are not going to make the system stronger by banning products. 
Doesn't the proposal give that authority to the Consumer 
Finance Protection Agency, and do it without any review or 
oversight?
    Secretary Geithner. Well, it is true that, in the consumer 
credit area, where we have seen just terrible examples of 
predation and failure of basic underwriting standards, basic 
protections for consumers, we are proposing to give this new 
agency comprehensive rule-writing and enforcement authority. 
And, in this context, we would expect them to proscribe certain 
types of marketing practices; and, that would be appropriate, 
given what we have been through. That is an approach that has, 
sort of, come in lots of other areas before.
    But I do think it is important to recognize--and if you 
look at what the Congress of the United States did in the wake 
of the Great Depression, we put in place this comprehensive set 
of reforms to help protect consumers and investors and 
depositors to ensure the integrity of market functioning.
    What we are proposing to do is in the spirit of that. In 
many ways, the big mistake we made as a country was we allowed 
a huge array of activity, financial activity, to build up and 
exist outside those protections. But----
    Mr. Bachus. Mr. Secretary, they would be allowed to ban 
products, though.
    Secretary Geithner. They would be allowed. There are some 
consumer practices that we believe should not be permitted. But 
we are proposing that the Congress establish the basic 
standards that would govern regulation in those areas.
    Mr. Bachus. So their actions would have to be based on 
existing statutes? Or could they go beyond those?
    Secretary Geithner. No. No, I think we are going to propose 
that you legislate a framework of standards that would help 
shape and govern regulation and rules that that agency would 
write and enforce. But that is a responsibility that you would 
have to set initially.
    Mr. Bachus. You know, you have said--I am just following 
your testimony--sometimes you don't believe in banning 
products. But you have said they can prohibit certain products 
if they are not appropriate for consumers. Now----
    Secretary Geithner. Well, Congressman, if you are asking, 
again, whether we think it is appropriate in the consumer 
protection area--again, this is the marketing of financial 
products to individual consumers--there are some practices that 
I do think should be proscribed.
    Mr. Bachus. Right.
    Secretary Geithner. But, again, I think the statue would 
have to describe, in some sense----
    Mr. Bachus. I am not arguing with you. I am just--but, now, 
what would be the determinant on whether a product was 
appropriate? What if it was appropriate for 95 percent of the 
population but not for five percent?
    Secretary Geithner. Well, I think that is exactly a good 
way to frame the basic dilemma. And, the centerpiece of our 
proposed approach to reform in this area is to encourage more 
simplicity and standardization so that consumers have the 
choice of a more accessible, easier-to-understand suite of 
financial instruments. But they would still preserve the 
option, in our proposed frameworks, to adopt or embrace a 
different type of product, a less standardized product.
    So I think there is less contrast in the basic philosophy 
on the consumer side and this other area than I think you are 
implying.
    Mr. Bachus. Who would review their actions? You know, with 
a lot of the Fed's actions you have said the Treasury would 
have to have approval there. Who is the reviewing authority 
over the Consumer Finance Protection Agency?
    Secretary Geithner. Well, Congressman, I am not a lawyer or 
a student of administrative law, but my belief in this context 
is the Congress is accountable for, and these agencies would be 
accountable to the Congress under the basic model that exists 
for the SEC----
    Mr. Bachus. Would we have to approve their actions?
    Secretary Geithner. Not their individual actions, no. But 
the statute would establish, as it does for the CFTC and the 
SEC today, that basic relationship.
    Mr. Bachus. All right.
    Let me ask you something else. Back in 1998--and I will 
just ask this--Larry Summers testified in the Senate against 
the notion of regulating derivatives. Among the things he said 
is, ``It would cast the shadow of regulatory uncertainty over 
an otherwise thriving market, raising risk for the stability 
and competitiveness of the American derivatives trading. Even 
small regulatory changes could throw the whole system out of 
whack.'' That was after Chairman Boren proposed regulating 
derivatives.
    What has changed? Or do you have those same concerns today?
    Secretary Geithner. I think there has been dramatic changes 
in the basic scale, design, and development of those markets. 
And even though, as I said in my testimony, the failures in 
those markets were not the principal cause of this crisis, they 
did cause substantial damage. And I think that justifies 
substantial reform.
    Mr. Bachus. Sure. And I am not saying it hasn't changed. 
But I guess I would say, do you still share some of his 
concerns?
    Secretary Geithner. The proposal the President laid out 
reflects--and, of course, I played a substantial role in 
shaping those proposals--my judgment, our collective judgment 
about what is appropriate, given the risk we have seen 
illustrated by this crisis.
    Chairman Peterson. The gentleman's time has expired.
    Mr. Bachus. Thank you.
    Chairman Peterson. The Subcommittee Chairman from Iowa, Mr. 
Boswell.
    Mr. Boswell. Thank you, Mr. Chairman. And thank you both 
for this hearing.
    Mr. Secretary, you are well aware that the market price in 
agriculture has been very volatile, and it is a concern. 
Experts tell me that the population of the world is growing by 
90+ million per year. Food is important.
    And I just want to say this: Please remember in all those 
discussions you have, that we have--we are envied around the 
world. We have the most plentiful, the safest, and the least 
expensive food in the world because Maxine and I--she lives in 
LA and I live in Iowa, but we contribute the same and we get 
something. We get what I just said. So keep that in mind.
    Now, I am concerned about over-the-counter, all these 
derivatives transactions will need to be registered with some 
agency. Would this include rural entities using derivatives 
like grain elevators?
    They have to hedge; they have to be careful. They get 
caught out there in a weak position, and they can go down, and 
there is no market out there in the marketplace for the 
producer.
    Secretary Geithner. Congressman, if I understand your 
question correctly, we are preserving, and I think it is 
appropriate to preserve, the ability of grain elevator 
operators, a whole range of companies and businesses across the 
country, to make sure they have the ability to hedge against 
this unique and specific risk they face.
    But, again, the markets as a whole, even in those 
customized areas, need a greater level of transparency, 
oversight, and protection.
    Mr. Boswell. Well, thank you.
    And, Mr. Chairman, I am going to use my remaining time to 
make a statement.
    I am getting frustrated. I just heard my colleague from 
Florida a minute ago ask him, where did you fail? Now, wait a 
minute. Let's just review this for a minute. We all ought to be 
involved in making this a success. Dammit, it is time to get 
together.
    Here we are, just review a little bit. Let's go back. Last 
Administration, $700 billion was asked for us to catch things 
up. And then unbeknown to many of us, the Fed spent $800 
million. That is $1.3 trillion. And so, by as early as 
February, I believe it was, folks are saying across the aisle, 
``Look what you have done to us.'' Horse feathers. That is just 
not the way it happened.
    Now, let's think of this. Dr. Kagen, I am looking right at 
you. Recently I had a loved one at the Mayo Clinic. There were 
many doctors, and I asked them time and again, ``Is getting 
well thinking you can get well? Is that about 90 percent of 
it?'' And every one of them said yes.
    Well, this country is in that position. We have to get 
well. And we ought to all be hoping and praying that we are 
going to make this thing work, and quit picking fault with it 
and saying why it won't work. And then if you want to 
politicize afterward and take over the majority, go for it. But 
let's get this country back in shape, and let's do it together.
    Chairman Peterson. I thank the gentleman.
    One of our Subcommittee Ranking Members, Mr. Moran from 
Kansas.
    Mr. Moran. Mr. Chairman, thank you.
    Secretary Geithner, it is too infrequent that we have the 
opportunity to hear from you and to have a dialogue. And I am 
going to ask questions, or at least ask you to respond to some 
thoughts that I have somewhat unrelated to the topic of today's 
hearing.
    But most of the banks in my state did not contribute to the 
financial crisis that our country faces today. They did things 
right. We still have bankers who say, ``No, I am sorry, I can't 
make this loan; you can't afford to repay it.''
    And yet, my banks, which ultimately affect my constituents, 
are facing an increasing and uncertain regulatory environment. 
Examinations are becoming perhaps more frequent, but the 
uncertainty of the exam is clearly there. The FDIC insurance 
premiums have increased. And we now hear of a new consumer 
financial product safety commission with potential additional 
regulations upon banks.
    And, again, I want to stress that the banks that we have at 
home are not the financial institutions that we have been 
engaged in in regard to Wall Street.
    The consequence of this uncertainty is direct upon the 
economy. I have had this conversation with officials at the 
Fed. And, while the Federal Reserve has lowered interest rates 
in hopes of encouraging consumers to borrow money and to 
consume, the regulatory environment, particularly with the 
examinations, has discouraged banks from making loans.
    So we are at cross purposes, it seems to me, as we try to 
improve the economy. That uncertainty lends itself to borrowers 
that I visit with who say, ``We are current, our company is 
making a profit, and yet our banks can't tell us whether they 
are going to reauthorize/renew our loans.''
    In addition to that, it means potentially higher interest 
rates, which will reduce the demand, therefore potentially 
stifle the economy. And, ultimately, the increasing cost of 
being in the banking business means that we will see increased 
consolidation. And, yet, one of the theories, at least that I 
think we have operated under, is that we want to avoid 
institutions that are too big to fail.
    And, yet, many of the things, it seems to me, that are 
happening at the Department of the Treasury and within our 
financial system is increasing the role for consolidation. 
Increased cost of being in business means that we are going to 
spread the cost, as best we can, among a larger group of banks. 
And so we see continual consolidation in the industry.
    My point is that, while it is damaging to my bankers, it is 
ultimately damaging to their borrowers, which is ultimately 
damaging to the United States economy. And I would appreciate 
any response that you might tell me that would give me comfort 
that that is recognized in the counsels that you are engaged 
in.
    Secretary Geithner. It is absolutely recognized, and it is 
a significant issue of concern.
    But, what is causing those pressures on both borrowers and 
banks is the fact that large parts of the financial system in 
this country just took on too much risk during the boom. And 
the costs of that--it is fundamentally unfair, but that is what 
happens in financial crises--fall not just on those who took 
too much risk, but they fall on a bunch of businesses and banks 
across the country which were very responsible and prudent.
    And that is why these things can be so damaging. And that 
is why it is very important that we do everything we can to put 
a better foundation for recovery in demand and growth, and try 
to make sure that the financial system has capital where it is 
necessary, and that these markets for credit start to get 
moving again. And that is the basic philosophy that has 
underpinned everything we have done.
    You are also right that there is a risk in financial crises 
that people overcorrect; that, after a period of taking on too 
much risk, that they take too little. People that got way 
overextended pull back too much. And that can cause, also, a 
lot of collateral damage. And, again, that is the basic 
rationale in a financial crisis for trying to make sure you do 
as much as you can to provide enough support for the economy to 
get back on track.
    But, I am very much aware of the concerns you expressed. I 
believe that the principal bank supervisors are, too. They are 
carefully managing those risks. And you are also right that any 
time you think about reform to legislation in the financial 
area, that is going to come with a period of uncertainty. We 
need to minimize that uncertainty.
    And, that is one reason why we want to bring clarity, 
relatively quickly, to the rules of the game that govern our 
financial system, going forward. If we were to wait years to do 
this, the markets would be left with a greater period of 
uncertainty, and that might deter more lending and risk taking.
    Mr. Moran. I simply would ask that you continue to 
differentiate, or begin to differentiate, in my opinion, the 
difference between the significant financial players, and those 
that are out there in the business every day of making loans to 
more consumers to buy an automobile, to purchase a home, to 
plant a crop.
    It does seem to me that differentiation between those kind 
of banking institutions and the financial institutions ought to 
be--they ought to be treated differently. And I would hope that 
that would be the case.
    Chairman Peterson. The gentleman's time has expired.
    Secretary Geithner. Mr. Chairman, could I respond very, 
very briefly?
    Just want to say, I completely agree. And the approach we 
have taken is to apply more exacting standards to the largest 
institutions than we are to the 9,000 banks across the country 
that are in a somewhat different set of circumstances.
    And we are very committed to make sure that we have 
preserved that basic balance. A great strength of our financial 
system is that we are not a nation of three banks, or four 
banks, or five banks, or ten banks, which is true across many 
industrial economies. We are a nation of 8,000, 9,000 very 
diverse financial institutions. And that is a source of 
resilience and strength, and we want to preserve that.
    Mr. Moran. Thank you for your answer. Thank you for 
listening to my point.
    Thank you, Mr. Chairman.
    Mr. Kanjorski [presiding.] The Subcommittee Chairman of 
Domestic Policy, the gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman.
    Mr. Secretary, I am over here, right in front of you, 
behind this tall guy.
    Last year, our mutual good friend, Rahm Emanuel and I, and 
Sue Myrick, our bipartisan cosponsor, introduced a bill calling 
for a pilot program to execute interest rate swaps on a 
transparent electronic execution platform. People perceived 
that he was from Chicago and was the CFTC guy, and I was from 
Charlotte the banking side guy, and we came together on this 
notion that that was a good thing.
    I note that that is an important part of your proposal this 
year, and I want to ask you two questions about it. This is not 
a clearinghouse or an exchange. There is something before you 
get to that. And it seems to me that the regulators could 
already be mandating this part of what you have proposed in 
legislative form now.
    So the first question is, do you see that the regulators--
Comptroller of the Currency, the other regulators--are really 
aggressively pushing that notion to your satisfaction, even 
before this legislation is passed?
    And, number two, I have been somewhat disappointed that, 
because we have control over Fannie and Freddie, no direction 
has really been given to them to use aggressively these 
electronic trading platforms. So I would like to have your 
assessment of whether you think that would be a good idea, and 
when that might be in the works.
    Secretary Geithner. Congressman, I thought the basic spirit 
of your proposals when you proposed them were right. And you 
are right that we have adopted the basic recommendation, not 
only to have central clearing of standardized products, but we 
want those to be traded on either organized exchanges or on 
transparent trade execution systems, for the reasons you 
proposed.
    I don't believe, though, that we can move substantially in 
that direction without the legislation being clarified. So my 
own sense is we need to get the broader legislation in place 
before we can bring about this broad transformation in that 
market activity.
    I do believe, though, that the economic benefits of, not 
just central clearing, but more exchange-traded and transparent 
electronic trading for some traded products in these areas, is 
are going to be very compelling to the users in these markets. 
So I believe, once the legislative framework is clarified, that 
you are likely to see much, much greater use of those 
platforms.
    Mr. Watt. What about the Fannie and Freddie----
    Secretary Geithner. Including by all users and 
beneficiaries of those types of products.
    Mr. Watt. I mean, we have control over Fannie and Freddie 
now. Wouldn't we be in a different position with respect to 
them to insist on a more aggressive, forward-looking approach 
to this than we would be, possibly, with private-sector 
entities that are under regulation?
    Secretary Geithner. Well, in many ways, because of what 
Congress proposed, the legislative framework over Fannie and 
Freddie has come closer to match what exists for banks and 
regulated financial institutions. But I think you want the 
market to move in this direction as one. And, again, I think 
there would be good risk management benefits for moving in this 
direction and good economic benefits.
    So, once we have the broad framework legislated, I think 
you are going to see very substantial movement in that 
direction.
    Mr. Watt. Thank you, Mr. Chairman. I yield back.
    Mr. Kanjorski. Thank you, Mr. Watt.
    The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for coming.
    We had a little bit of a dialogue, the other night, about 
capital and equity, and I want to go back to that. Because when 
we look at the standardized and the customized transactions, 
the question I have is--I hear you talking about margin 
requirements, capital equity.
    In traditional commodities, the clearinghouses set the 
margins for clearing those transactions. The regulator then 
determines whether the clearing agency has adequate capital for 
the activities they are involved in.
    As we move to the trading of these derivatives, do you see 
that same structure? Because, sometimes, I hear you saying that 
the regulator would start setting the margin requirements for 
these transactions. And I wanted to be clear about my 
understanding of where you are on that issue.
    Secretary Geithner. Congressman, I think you said it right. 
I think for central counterparties, central clearinghouses, 
they design the margin rules, they design the financial 
safeguards against default by a member, by a participant.
    The regulators have an important obligation to ensure, 
because central clearing can concentrate risk, that those 
safeguard margin cushions are adequate. That is an important 
obligation of the CFTC and SEC under our basic framework. And 
you want to make sure that people don't compete, take advantage 
of the existence of multiple agencies to try to attract volume 
and activity by having imprudently thin margins and cushions in 
central counterparties.
    For those products that are not centrally cleared, it is 
very important that there is capital margin required through 
supervision and regulation against the risk those positions 
impose.
    So I think you need to have that basic balance. But it 
depends, the approach varies depending on whether it is the 
centrally cleared stuff or the products where the risk is still 
bilateral.
    Mr. Neugebauer. And looking at the customized products that 
aren't going to be cleared in this regulatory structure that 
you are going to propose, where would the margin requirements 
and capital requirements for the customized transactions, where 
do you see that falling?
    Secretary Geithner. I think that is a judgment that is 
going to have to be reached in cooperation between the SEC, the 
CFTC, and the Federal Reserve. Because, again, I think you are 
going to have a bunch of different entities in these markets; 
they are going to have different regulatory authorities. Well, 
we want to make sure that there is going to be a common 
approach that is sufficiently conservative. That is a similar 
approach we bring to thinking about the design of capital 
requirements generally.
    Mr. Neugebauer. How would you--with multiple entities like 
that involved, what kind of coordination needs to happen so 
that--as you have alluded to a couple of times, shopping places 
to do business. So if you have the Fed, the SEC, CFTC trying to 
have jurisdiction over a particular clearing opportunity or a 
particular customized transaction, how would that coordination 
happen?
    Secretary Geithner. Better than it has. It is going to have 
to be substantially better than it has.
    Again, the important imperative is there has to be an 
appropriately conservative capital margin requirement set 
across the core institutions in these markets and the areas 
where risk is centralized. And that has to be--and this is 
critically important--has to be enforced more evenly.
    If you just take the example of banks and thrifts, they had 
nominally similar capital requirements. Because of very 
different enforcement regimes, a lot of banks chose to become 
thrifts. A lot of institutions were set up to take advantage of 
what they thought were lower, weaker enforcement standards.
    So you need both stronger standards set uniformly with more 
consistent enforcement across the basic entities. And it is 
harder to do than it is to say.
    Mr. Neugebauer. Well, you wouldn't foresee forcing, 
requiring these customized transactions to have a third-party 
counterparty to hold those transactions.
    Secretary Geithner. I think the definition of a customized 
product in some ways is that it is not so standardized that it 
could be centrally cleared. The risks are complicated enough 
that a clearinghouse would not want to, or would not believe it 
could, adequately manage those risks.
    Now, that is not a detailed enough standard to divide the 
line between standardized and customized, but I think that is 
the way to think about the economic difference between them.
    Mr. Neugebauer. Thank you.
    Chairman Peterson. The gentleman's time has expired.
    Now recognize the Chairman of the Livestock, Dairy, and 
Poultry Subcommittee, from Georgia, Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman.
    I am over here, Mr. Secretary, over here in the corner. I 
would like to see if I could squeeze in a couple of questions.
    First of all, I have a concern that your proposal could 
very well force non-financial dealers to meet capital 
requirements in order to provide legitimate managed risk. But, 
given that these non-financial dealers do not have depositors, 
unlike large financials, and a low or no systemic risk profile, 
is it possible that such a requirement could unintentionally 
create a bank monopoly in the over-the-counter derivatives 
market? And wouldn't that reduce competition, reduce liquidity, 
raise prices, and increase systemic risk by consolidating the 
markets?
    Secretary Geithner. I don't think so. But you are right; if 
that were the result of what we are proposing, that would be a 
subject of concern, both to us and to many other people.
    But maybe I could respond this way. The centerpiece of our 
proposals is to make sure that the major participants in these 
markets, because of their importance to the economy, be held to 
more exacting standards, higher, more constraining requirements 
for leveraging capital in the future.
    And that is one way to protect against the risks that both 
you and Ranking Member Bachus have pointed out. So, more 
exacting requirements for the major participants will help 
reduce that risk.
    Mr. Scott. Well, why would we not just have those capital 
requirements limited to firms whose failure could, indeed, 
create the systemic risk to the U.S. economy?
    Secretary Geithner. I think, again, you need to have 
capital backing risk where risk is taken and where entities are 
taking short-term liabilities, borrowing short-term and taking 
longer-term risk. That requires capital to protect the system.
    If you don't apply a uniform set of prudential requirements 
around those entities, then what will happen is the risk will 
migrate to those parts of the system where there are lower 
standards, as we have already seen in this financial crisis. So 
that is important to guard against.
    Now, that doesn't mean you have to be completely 
comprehensive, but you have to capture enough of the core 
participants that you avoid that risk.
    Mr. Scott. Another area that I am concerned about is, we 
are going to be doing some sweeping limits on the trading of 
energy derivatives. Take, for example, oil, which to me is what 
has really been the driving force behind the call for increased 
regulation of over-the-counter markets.
    Oil, as you know, is globally traded, and its price is set 
not solely by activities in the United States market, but by 
other markets. So I find it kind of dubious that we can control 
speculation and hold down the price of oil simply by 
unilaterally regulating our markets.
    Would not businesses simply move to less regulated markets 
and, in effect, diminish our opportunity to legitimately hedge 
in the domestic markets?
    Secretary Geithner. I share that skepticism and concern, 
and I think you are right in seeing it that way.
    I think what the CFTC Chairman proposed the other day, and 
what is an appropriate approach to think about policy in this 
area, is to look for ways to limit volatility.
    And it is very hard to not look at the last 2 years of 
pattern in the global energy markets, even though there has 
been such enormous shifts in confidence about the strength and 
weakness of the global economy, and not to believe we have seen 
a level of volatility that has been damaging, fundamentally, to 
the capacity of businesses to manage risk and damaging to 
confidence.
    And so it is worth trying to see whether you can, through 
better disclosure, limit that risk. Hard to do. Lots of people 
have tried it unsuccessfully. But, you are also right that, if 
you are going to do that effectively, you have to try and do it 
in a common approach where oil and other commodities are traded 
globally.
    Mr. Scott. So have other countries taken steps, or have 
there only been promises or loose commitments?
    Chairman Peterson. I apologize. Nobody else has the timer 
but myself. The gentleman's time has expired. So thank you, Mr. 
Subcommittee Chairman.
    Mr. Scott. Thank you.
    Thank you, Mr. Secretary.
    Chairman Peterson. And I would like to--well, I have one 
more on my side, Mr. Chairman.
    Chairman Frank. Oh, I didn't know which capacity Scott was 
in. Scott's a two-fer, not for the first time in his life.
    Chairman Peterson. We had a two-fer over here, too, with 
Mr. Neugebauer.
    I would just like to announce that the Secretary has to 
leave about 1:10 or so. And there may be votes, I don't know, 
12:30, 12:45. If that is the case, that will probably be the 
end of this. So I would just encourage Members, even though we 
had set this 4 minute limit, if you could keep it to one 
question, we will try to get through as many Members as we can.
    The gentleman from Alabama, Mr. Rogers.
    Mr. Rogers. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for being here and for your 
service.
    I want to go back to the answers you gave Mr. Posey a 
little earlier. You know, I live in Alabama, and we have been 
devastated economically with the car industry. You know what is 
happening there with all the supplier plants. And I was on the 
phone this morning with a tractor dealer who is a large tractor 
dealer in Birmingham, who told me he has invested $70 million 
in recent years opening new stores throughout the South, but 
that he has completely lost confidence and is not going to open 
any more. He has had to lay off 250 employees, and have others 
take early retirements.
    I have another company in my district called Metalcraft, 
which makes wrought iron railings, the largest one in the 
world, for outdoor furniture. They are having to go out of 
business because their bank, which is one of the banks that 
received TARP funding, has changed their lending criteria. And 
even though this is a profitable business, they can no longer 
get capital to work.
    I hear those stories, those anecdotal stories, all around 
my district of how we are in a crisis of confidence. People are 
scared to death. Even the people who haven't lost their jobs 
are worried they are going to.
    So when I hear you answer Mr. Posey's question with, 
``Business and consumer confidence has improved greatly.'' 
``There has been a substantial improvement in arresting what is 
the worst recession in history,'' how do I reconcile that with 
what I am seeing in the real world?
    Secretary Geithner. I think you are right, Congressman, 
that across the country, not just in your district, you still 
see businesses and families under enormous financial pressure. 
And you are still--and we are going to be living, for some 
time, with the consequences of digging out of this mess we 
started this year with.
    And so, in acknowledging and pointing out the fact that we 
have made very substantial progress in trying to repair the 
damage caused by this crisis and lay the foundation for 
recovery, we do not yet have an economy that is growing again. 
And, it is likely that this is going to take a while to come 
out of.
    But, that underscores, and the examples you pointed out, 
underscores the importance of this government doing everything 
we can to try to mitigate these pressures. And that is what the 
Recovery Act is designed to do, and that is what the programs 
we have done to help get credit flowing again are designed to 
do.
    And they are having their necessary desired effect; they 
are starting to get some traction. But you are absolutely right 
to emphasize that we have a ways to go. And, again, this is in 
families across the country that still feel they are under 
enormous financial strain.
    Mr. Rogers. What timeline is ``a while,'' in your mind?
    Secretary Geithner. Well, again, this was a--it took us a 
long time to get into this. You know, as a nation, we just were 
living way beyond our means for a long period of time. People 
took on way too much debt. And it will take some time to work 
through that.
    But we are making progress. You have already seen a very 
substantial increase in private savings. As I said, that is a 
healthy, necessary process. Our current account deficit, which 
approached seven percent of GDP only 2 years ago, is now under 
three percent of GDP.
    We are starting to see this country get back to a point 
where we are going to have a stronger foundation for 
sustainable growth, going forward, but it is going to take some 
time.
    Mr. Rogers. And that is a great point. You made the 
statement also a little while ago in answering one of the 
questions, tightening of spending and greater rate of savings 
is a healthy trait that we are seeing in our country.
    Why are we not seeing it in our government? That is what 
folks back home want to know. We are spending up here like 
drunken sailors, and it is all borrowed money. Why is it good 
and healthy for individuals and small businesses, but why 
aren't we practicing what we preach?
    Secretary Geithner. I think, Congressman, that is an 
excellent question. We could debate this for hours.
    But the lesson of the financial crisis here in the United 
States, and around the world, is that when you face a loss of 
confidence and a loss of demand of this magnitude, when you 
have a financial system on the edge of collapse, the only path 
to mitigate the damage is for the government to do what this 
Congress did and this government did, which was to try to make 
sure you were providing support for investment, for targeted 
tax cuts, to try to get demand going again.
    That is necessary but not sufficient. It also requires 
making sure you stabilize the financial system and help get 
credit flowing again. And that is the basic strategy that this 
country, fortunately, has adopted.
    Mr. Rogers. Thank you.
    Chairman Frank. Thank you.
    And let me just say--and we only have the one timer--what 
we should do is a tap when a Member has 30 seconds left, 
because it is tough. So the next time, for questions, if you 
hear the one tap that will mean 30 seconds. It will give people 
a chance to wind up.
    And next is the gentleman from New York, Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    Thank you for your service.
    Let me ask--I learned, coming in here, that there is always 
a question of, and trying to think forward so that we don't get 
involved in unintended consequences and things of that nature. 
And there are two concerns that I have and I will give examples 
of.
    For example, many small businesses use derivatives for 
legitimate risk management purposes that pose no systemic risk 
to the system. And many of these may opt out of, I am afraid, 
of hedging interest rates and currency risk if oil trades are 
moved to exchanges, and they can no longer customize and/or 
require homogenous collateral requirements. And this may lead 
to smaller firms doing more riskier things. So, that could be 
an unintended consequence.
    The concern with the dealer banks who rushed to establish 
proprietary exchanges and pushed their transactions to owned 
clearinghouses or exchanges, which would create--seem to be a 
strong incentive for this and could potentially stifle 
competition in the market and further concentrate the market, 
which could create more of a systemic risk.
    I was wondering if you could give us your thoughts.
    Secretary Geithner. I think you said it well. I think the 
risk is overstated that if we move to greater standardization 
and greater sense of clearing, more exchange trading, more 
trading on electronic trading platforms, that that would make 
it harder and more expensive for businesses to hedge risk. I 
think that is quite unlikely. But we are preserving, as I said 
several times, we are preserving the ability for small 
businesses and large businesses to engage in more customized, 
more tailored hedges against the specific and unique risks they 
face, in the event the standardized products don't provide 
adequate protection. So we are preserving that capacity. We 
think it is important for the economic benefits you laid out.
    Mr. Meeks. Let me just ask this question: There is some 
concern that pushing all derivatives to clearinghouses or 
exchanges will create the natural monopolies. I just want to 
talk, have a concern about that. But simply reducing the 
innovation factor and proper risk management system, should we 
consider creating some type of utility type clearinghouse?
    Secretary Geithner. I am worried about the same risk. But, 
again, I want to make clear, we are not proposing to force all 
derivatives onto exchanges, in part, because of the risks you 
pointed out. We are proposing to make sure that the 
standardized products that can centrally be cleared and traded 
on exchanges and electronic trading platforms, that more of 
that happens, because we think that will create a more stable 
system. But we are still in a--with careful oversight, 
appropriate capital requirements, authority to address foreign 
manipulation, we also want to make sure there are adequate 
protections over the more tailored, customized derivatives 
area.
    Mr. Meeks. Thank you. I yield back.
    Chairman Frank. The gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. Mr. Secretary, thank you. Your opening 
comments were to the tune of those people who think that we are 
moving too soon or that we don't need change right now, or your 
third point was that smarter regulations might basically 
destroy innovation. Those people you said were----
    Secretary Geithner. Those people are not in this room.
    Mr. Garrett. Excuse me?
    Secretary Geithner. They are not in this room.
    Mr. Garrett. Well, or you are saying they want the status 
quo. I appreciate that last little comment, because there are 
people here in this room who think that maybe we don't want to 
move too soon, that we do want to be thoughtful about this. And 
maybe somebody else, before I came here, said that we want to 
be able to read and digest the entire legislation before, and 
some say that we want to do it at the appropriate time. And you 
are in agreement with that?
    Secretary Geithner. Well, I am absolutely in agreement that 
we need to get this right. I am absolutely in agreement that 
this is enormously complicated. I think you need to look at it 
comprehensively. You need to look at the entire package before 
you evaluate.
    Mr. Garrett. To a point that you and I agree on, with 
regard to naked CDSs: Some people around here demonize these 
things. Would you demonize naked CDSs, or do you think that 
they actually play a valuable role that we should not be just 
totally outlawing them? I think we agree.
    Secretary Geithner. I am not sure I want to use the term 
demonize. I am not sure I would spend a huge amount of time 
extolling their merits. But, like across our financial system, 
it is important that people have the capacity to hedge risks 
that they face.
    Mr. Garrett. Would you want to eliminate them?
    Secretary Geithner. I do not believe it is necessary or 
appropriate for us to abandon them. But I want to underscore, 
as we have said, we do believe there needs to be comprehensive 
oversight over these markets, both the standardized and the 
customized.
    Mr. Garrett. And we do that because we want to get to the 
underlying causes that brought us to this morass in the first 
place. Right?
    Let's take a look at one of those pictures which is always 
on the front page, the AIG situation. The AIG situation, with 
the derivatives that they were involved with there, the 
underlying problem there was, what, mortgage-backed securities. 
Right?
    Secretary Geithner. Right.
    Mr. Garrett. Those instruments, as far as I understand, 
would not be by any stretch of the imagination a standardized 
product. Is that correct?
    Secretary Geithner. I am not sure which way you are going 
with this. But, you are right to say in the AIG case and in the 
case of the monolines, the largest part of the protection they 
wrote, and ended up with, could not back with capital were 
credit protection on real estate-related asset-backed 
securities.
    Mr. Garrett. But the products that they were dealing with 
would not be defined as a standardized product that would 
necessarily be able to go through a clearinghouse. Is that 
correct? Because you are dealing with these underlying 
mortgage-backed securities which are all over the spectrum, all 
over the field; and, therefore, to try to say we are going to 
standardize them might be problematic.
    Secretary Geithner. I agree. But, again, our proposals 
would get at the core of that specific problem, though, by 
trying to make sure that there is sufficient capital held 
against commitments financial institutions make to hedge 
against certain risks, regardless of how they do it. We are 
addressing the core of that basic problem.
    Mr. Garrett. And you would do that, though, with the AIG 
type situation: not because they would be able to go through 
the clearinghouse over here and be standardized and create 
liquidity over here, but because they would be nonstandardized 
products and you would raise stricter capital requirements in 
order to facilitate them.
    Secretary Geithner. And on the firm as a whole. But, again, 
the capital is central to this. A core part of what brought the 
system to the edge of collapse was inadequate capital against a 
range of commitments, banks, and institutions like AIG made.
    Mr. Garrett. Okay. One last area in 30 seconds: In the 
energy field--I don't know if anybody else talked about this. 
Is it not problematical for those who deal in the energy area 
to have those capital requirements, to potentially have the 
elimination of the naked swaps as well because of the nature of 
that industry and the nature of the trades of those and the 
liquidity, and the inability to put the capital behind it, at 
least under the system that we have now?
    Secretary Geithner. I don't think what we are proposing has 
that risk. But, of course, we will look carefully at any 
concerns in that area. I don't think what we are proposing has 
that risk, though.
    Chairman Frank. I apologize, I didn't pay attention to the 
30 seconds. I apologize.
    Mr. Garrett. You want me to keep going?
    Chairman Frank. No. I have never had that motion.
    Chairman Peterson. The gentleman from California, Mr. 
Costa.
    Mr. Costa. Thank you very much, Mr. Chairman. I thank both 
Chairmen for holding this important hearing. And thank you, Mr. 
Secretary.
    I want to focus my questions in the area of commodities. I 
represent a large agricultural area, and obviously commodity 
trading is very important. You have spoken about a good way to 
avoid the future AIG situations as to ensure that all parties 
have a stake in the game, or skin in the action, or whatever 
you want to call it--skin in the game, I guess. I think that is 
more achievable in terms of the financial institutions, but 
commodity hedgers don't generally have the same access to cash 
and capital in order to be a player in these markets. Their 
assets oftentimes tend to be tied up in reinvestments and their 
own company growth.
    What sort of impact do you think this is going to have on 
capital requirements on nonfinancial entities that have an 
appropriate role to be engaged in this market and to have the 
access to it?
    Secretary Geithner. Congressman, we will take a careful 
look at that. And, again, as people see the details of these 
proposals, they raise those concerns, then we would be happy to 
work with you on how to address that.
    You know, we are not trying to--we want to get the balance 
right. And, again, a systematic source of problems across our 
finance system was inadequate capital, people taking risks that 
they did not understand, could not support. So we want to make 
sure we fix that. But we are going to try to be careful to get 
the balance right, and we will be happy to respond to any 
detailed concerns raised when you see our proposals.
    Mr. Costa. The balance, I agree with you, we have to get it 
right. But is it possible you think that in terms of trying to 
do that, that we are consolidating these types of trades in the 
hands of financial institutions that do have access?
    Secretary Geithner. Again, I don't think that is the likely 
consequence of what we are proposing. But, again, we would be 
happy to respond.
    Mr. Costa. Because I am concerned about consolidation, 
getting back to the point of being too big to fail. I don't 
want to go there.
    Secretary Geithner. I share that concern.
    Mr. Costa. We have been there.
    Secretary Geithner. I share that concern. And, again, I 
don't think our proposals carry that risk. But we would be 
happy to respond to any concerns raised by them.
    Mr. Costa. In the same ballpark, in follow-up to 
Congressman Scott's question, you talked about capital 
requirements being uniform between financial and nonfinancial 
traders. How would you visualize that taking place between 
commodities, a company continuing to participate in the market, 
if they are required to have an extensive cash capital?
    Secretary Geithner. Congressman, again, I am not sure that 
I can be responsive now. But, again, my principal concern--our 
principal concern has to be by making sure that financial 
intermediaries provide the basic economic function that 
Chairman Frank outlined at the beginning of the hearing. Those 
intermediaries, because of the leverage they take on, should 
hold adequate capital against risk. That is the centerpiece of 
our proposals. But I have heard your concerns, and would be 
happy to work with you to make sure we address those concerns.
    Mr. Costa. Final question, moving over to community banks 
which provide an important source of lending in my communities. 
Under the framework, you are saying that agencies also will 
have the ability to subject banks to additional capital 
requirements. That is not new, of course. How does the 
Administration plan to do that? You know, it has been tried in 
the past.
    Secretary Geithner. Sir, to subject the largest 
institutions to higher capital requirements?
    Mr. Costa. No. Community banks to higher capital 
requirements.
    Secretary Geithner. Again, we need to take a fresh, cold 
look at capital requirements across the banking industry, 
banks, thrifts, large and small. Because my general view is--
and I think this is supported by the evidence in the crisis--
that those capital requirements did not provide sufficient 
protection. So in addition to looking at the entire framework 
of capital requirements across large and small banks, we are 
going to hold the largest institutions to more exacting 
standards.
    Mr. Costa. Thank you very much. I yield the balance of my 
time.
    Chairman Peterson. I thank the gentleman. The gentleman 
from Texas, Mr. Conaway.
    Mr. Conaway. Thank you, Mr. Chairman. Secretary Geithner, 
thank you for being here this morning. I have an observation 
and a question. And let me get them both out, and you can use 
the rest of the time in your response.
    You occupy one of the most important positions in this 
arena, and we need you speaking with the most credible voice 
possible in order to help lead this effort. I was startled when 
I heard your response to Mr. Posey, you went through a litany 
of things that have you turning the corner or looking like they 
are going to turn the corner.
    Secretary Geithner. No. I didn't use those words.
    Mr. Conaway. Let me finish. That is fine. But then you 
followed up by saying, and you pandered to us and yourself and 
the Administration when you said that that was due entirely to 
the work of the Congress and the Administration. So that is not 
credible with me and maybe some other folks.
    The question I have, if we put this regulatory scheme in 
place, and none of us will get it exactly the way we want it. 
There will be some compromises that we will have to make. If we 
put that in place and business, and the rest of the world says 
no, thanks, we are not going to do it, as they said with 
climate change over the weekend. If business begins to go to 
active markets like Dubai and places where they are not as 
regulated, can you quantify for us the reduced role that 
America's domestic financial markets will play worldwide with 
the consummate loss of jobs and wealth and influence across the 
scheme?
    Secretary Geithner. Congressman, I am very worried about 
that risk. I spent a large part of my professional life in 
trying to make sure we have more cooperation, more uniform 
standards, partly to reduce that risk. But my general view is 
that our system is stronger, has been stronger over time where 
we were prepared to take the leadership role in strengthening 
protections for investors and providing greater protections 
against systemic risk. Where we got that right in the past, it 
proved to be a great competitive asset to our financial 
institutions and our markets in the past. I think that basic 
philosophy should underpin what we do. But as you pointed out, 
because technology has made it much more easy for capital to 
move where standards are lowest, we have to do a much better 
job, as we raise standards here, in trying to bring the world 
with us. And you will be able to watch with us how successful 
we are in that. But I believe deeply in the importance of that, 
and you are right to underscore the importance.
    Mr. Conaway. Well, I appreciate your recognition that there 
is some risk that if we don't in fact get it right, and even if 
we do get it right, we may have to collectively agree that that 
is a result that we are going to have to live with until the 
rest of the world can catch up.
    So thanks for being here today. I yield back.
    Chairman Frank. The gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you. We have folks who bought 
derivatives last year. And they didn't just look at the capital 
that was available by the issuer; they said, well, this issuer 
is too big to fail now, maybe not; too interconnected to fail, 
maybe not; too well-connected to fail. And these derivative 
purchasers correctly realized that the taxpayer would bail them 
out, as it has.
    Today, derivatives are being sold, and the buyers of those 
derivatives are looking at their counterparty and they are 
saying, well, there may not be enough capital there. But one 
additional source of capital is there may be more bailout.
    Can you correct that misconception and make a clear 
statement now that derivatives that are sold today are not 
going to be the subject of bailouts for either the issuer or 
the purchaser, that capitalism is back?
    Secretary Geithner. Congressman, I understand your concern 
and I believe I share its fundamental premise. If we are going 
to be successful in creating a more stable system, we have to 
make sure that we address and reduce the moral hazard risk 
produced by the interventions expressed.
    Mr. Sherman. Mr. Secretary, even before we create a new 
system--I am talking about today, literally today--can you tell 
people who are buying derivatives today that they can't look to 
the taxpayer for any kind of bailout should the issuing party 
be unable to----
    Secretary Geithner. Again, Congressman, let me just start 
with your premise. A principal source of losses to the core of 
the financial system came from institutions like the monolines 
that are relatively small institutions. Nobody thought they 
were too big to fail and they received no assistance from the 
government, writing protection well in excess of their capital 
requirements. So I don't think I believe in the basic premise 
of your question, although I share your concerns.
    Mr. Sherman. Mr. Secretary, I am not asking for philosophy 
here, whether you agree with me on the premise. I am asking a 
very simple statement: Is it at least theoretically possible 
that a derivative issued today will be subject to a bailout 
tomorrow?
    Secretary Geithner. Congressman, I just don't think that 
there is an enormously complicated set of legal conventions 
around the diversity of financial products in our markets, and 
I don't think that that question, as you phrased it, I can 
respond to----
    Mr. Sherman. Let me ask the question a different way. Do 
you want to use this opportunity to tell the financial markets 
that there is no bailout or a possibility of one? Or do you 
want to use this opportunity to tell our constituents that 
derivatives being sold today might result in the bailout 
payments of tomorrow?
    Secretary Geithner. Congressman, what I want to use this 
opportunity to do is to lay the case for why we need 
comprehensive oversight and regulation of the participants in 
the derivatives markets and those instruments.
    Mr. Sherman. Mr. Secretary, I can understand why you prefer 
to answer somebody else's question, but I get 4 minutes. It is 
a very simple thing.
    Secretary Geithner. You can ask it different ways if you 
want, but----
    Mr. Sherman. I want a yes or no answer.
    Secretary Geithner. No, I am not going to answer that way, 
because what you are asking me to do is to give an 
irresponsible answer to a complicated legal question. And I am 
not going to add to what----
    Mr. Sherman. What you are basically saying is that you 
think it would be irresponsible to tell people that derivatives 
issued today are not possibly going to get----
    Secretary Geithner. No, I am not prepared to answer that 
question that way as it was framed. But I will happy to talk to 
you about this at any length you would like and try to make 
sure we come to a better understanding about the legal 
complexities.
    Mr. Sherman. I look forward to those discussions. Thank 
you.
    Chairman Frank. The gentleman from California, Mr. Royce, 
appears to be next on this list.
    Mr. Royce. Thank you, Mr. Chairman.
    And, Secretary Geithner, I would like to begin by thanking 
you for your work on this regulatory reform package. I think 
there are a number of provisions in there that I am encouraged 
by that are contained in the white paper. There is, however, 
one that raises concerns, and let me raise that with you, and 
that is to ask you about the resolution authority that you 
discussed in the white paper. This idea, as you portrayed it, 
is for government to unwind failed institutions. But it seems 
to allow for simply propping up struggling firms. It seems to 
be basically permanent bailout authority.
    And I guess the reason I am concerned, you have the 
government--you have politicization of the economy as it is. We 
are looking at a situation where we might have a government 
takeover of health care, of the energy markets, the government 
is running GM and Chrysler. And now, you look on page 77 of the 
reform proposal, and this is how it reads:
    ``The regime also should provide for the ability to 
stabilize a failing institution by providing loans to the firm, 
purchasing assets from the firm, guaranteeing the liabilities 
of the firm, or making equity investments in the firm.''
    This sounds like the FDIC's open bank assistance authority, 
which provides direct funding to an operating insured bank to 
keep it from failing. And such authority is of course markedly 
different from a resolution authority that would entail an 
orderly unwinding of a failed institution. So you could have 
basically permanent bailout authority where the Federal 
Government continues just to keep putting taxpayer money into 
institutions.
    Secretary Geithner. Congressman, if we were proposing that, 
what you described, you would be right to be concerned and I 
would not support a proposal described as you did. What we are 
proposing to do is to take the basic framework that the 
Congress legislated to allow the country to deal with risks to 
the financial system posed by the failure of banks and thrifts, 
and to adapt that framework to give us similar authority to 
deal with a large complex financial institution.
    The absence of that framework and that authority was 
enormously damaging to this country. We are going to take a 
framework that was carefully designed by the Congress, with 
good checks and balances, lots of experience over time, and 
simply adapt that framework to give us similar tools to help 
manage the unwinding and the failure of large complex 
institutions. That is the proposal. Again, there is--the virtue 
of using the model we have, which is the FDIC resolution 
framework, is that that has been tested, people understand its 
merits and complexity, and gives us a little bit better basis 
for finding consensus on the right approach.
    Mr. Royce. But, of course, given recent actions and given 
the fact that this is worded in a way that it does not require 
an unwinding process. Given the fact that based on current 
action we are left with the assumption that this certainly 
would allow, the way it is written, ongoing government 
involvement in a way which would continue to put taxpayer funds 
into an entity without limit. And let me ask you another 
question.
    Secretary Geithner. I don't think it has that risk, 
Congressman, again, because the centerpiece of our reform 
proposals are to create a system that is strong enough to 
withstand the failure of major institutions. But to do that 
effectively, we need authority Congress gave----
    Mr. Royce. Let me ask my last question. You were at the 
table for many of the discussions to either provide a lifeline 
or to let an institution fail. These were very difficult 
decisions at a critical time. If I could ask you to commit your 
staff to provide for the record a detailed analysis, walking us 
through how this authority would have changed the way in which 
AIG or Lehman Brothers were handled, and exactly how the 
counterparties of these firms would have been treated 
differently under this regime.
    Secretary Geithner. Hard to do, but I will be happy to try 
to do that well. And I am sure I will have the opportunity to 
testify before the Financial Services Committee on the broad 
range of----
    Mr. Royce. I would appreciate it, Mr. Secretary.
    Chairman Peterson. I thank the gentleman. The gentleman 
from Georgia, Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman.
    I suppose, had you chosen to answer Mr. Sherman's question, 
you might have said that the United States is going to stand 
behind its money supply. We are going to design our regulations 
to assure that there is no necessity for the government to 
intervene and prop up the money supply in the future. And, it 
would be very foolish for anybody investing now to even vaguely 
think that it is likely that we will fail to do that. But in 
the event that we fail, the world can rely upon the American 
money supply. We will take the actions necessary to protect the 
money supply.
    Mr. Sherman and I just had a difference of opinion 
concerning whether or not TARP was an ill-advised move. I 
thought it was, he thought it wasn't. I thought it was dreadful 
that we had to do this and a real failure by leadership in this 
country across a broad range. But it was something that I 
thought we needed to do. And I would be shocked if we wouldn't 
do something similar in the future if it was necessary, but 
also shocked if we don't take the kind of action that is 
necessary to assure that it is not necessary in the future.
    Mr. Secretary, you have in your written testimony the 
reference to we were going to require this, require this, 
require that, et cetera.
    Secretary Geithner. Proposed to require.
    Mr. Marshall. Well, we also will require, is the way you 
put it. I think there are good things to require. The devil is 
in the details of course. We will work those details out. But 
the specter we have is we don't want to disadvantage American 
business, we don't want to disadvantage the American financial 
industry. And you also referred to: ``Finally, we will continue 
to work with our international counterparts to assure that our 
strict and comprehensive regulatory regime for OTC derivatives 
is matched by a similarly effective regime in other 
countries.''
    Chairman Peterson led a CODEL to Europe. We talked with 
other countries about this very question, regulatory arbitrage 
country-to-country. It has been a challenge for us. I have no 
real confidence that you are going to be able to line up all of 
the countries; that some country won't decide to not adopt the 
strict requirements that we think are advisable in order to 
have a competitive advantage, in order to have that country 
become a financial center. Hence, things like the Cayman 
Islands, et cetera, pop up. I think it just denies history to 
suggest that there won't be countries like that.
    Has any thought been given to the United States perhaps 
teaming up with Europe and coming up with a fundamental 
regulatory scheme, sort of minimum standards that are 
acceptable. And then simply announce that investors will not be 
permitted in any way, directly or indirectly, we are going to 
look at substance, not the form, to be in our markets if they 
are elsewhere playing in markets that are not living up to this 
minimum regulatory standard? Because it just seems to me 
unrealistic to think that we are going to be able to do much 
more than that. So if there has been thought given to it, could 
you share that with us?
    Secretary Geithner. I am not sure I would go quite that 
far. I think our basic approach is very similarly laid out. And 
there is an elaborate cooperative framework now in place that 
has the United States at the table with, not just Europe, but 
the other major financial centers to design minimum standards, 
and make sure they are more evenly enforced. I am not sure we 
can go quite as far as you suggested. But the basic philosophy 
you laid out----
    Mr. Marshall. Mr. Secretary, is it your impression that all 
of these countries are going to agree with the different things 
that you are suggesting we should require?
    Secretary Geithner. I completely agree with you that it is 
going to be enormously difficult, but it is the right thing to 
try to attempt.
    Mr. Marshall. Mr. Secretary, if we move forward and require 
these things, are we going to be disadvantaged?
    Secretary Geithner. I think that if we get the balance 
wrong and do it poorly, we will face that risk. But we are 
going to try to be careful to do it in a way that improves 
confidence in our markets, in a way that reinforces what has 
been substantial assets for this country, which typically had 
stronger standards than those that were applied around the 
world. But, again, this crisis has been so searing for 
countries, not just in Europe, but across the world, there is 
going to be substantial interest in raising standards there, 
too.
    Mr. Marshall. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary.
    Chairman Frank. Chairman Peterson and I have discussed 
this. It will be our intention to include in legislation strict 
instructions to all the American financial regulators to apply 
the strictest possible sanctions to any outlying country like 
that. I would agree, with the EU, with Japan. And we have had a 
lot of conversations. But I believe that we should then say 
that any country that allows itself to be the host to that 
loses access to the American banking system, et cetera. And I 
believe we will have very strict instructions in there that is 
at least a substantial protection. The gentleman is absolutely 
right.
    Chairman Peterson. The gentleman from Louisiana, Mr. 
Cassidy.
    Mr. Cassidy. Mr. Secretary, you know far more about this 
than I. I am not challenging you, rather just posing these for 
thoughts. Natural gas, that would be currently OTC. And public 
utilities sometimes, I am told, put up their physical assets as 
collateral, and it is a straightforward swap without an 
additional fee imposed by the exchange.
    Now, I understand speculators are, well, speculators, they 
either drive up costs or manipulate the market allegedly, but 
also provide liquidity. And so my question is, though, if we 
require these public utilities to go through an exchange, 
perhaps put up cash, disrupting their cash flow, certainly 
potentially paying a fee, it seems like we are going to pass on 
higher costs to consumers from entities which are really not 
out there to disrupt the market, but rather hedging future 
costs.
    Is there a way that we can carve out these entities from 
the central clearing, for example, as one solution, or some 
other way to mitigate the increased costs that will be passed 
on to consumers?
    Secretary Geithner. Congressman, again, I think this is 
going to be an important issue. I believe that the experience 
with central clearing where it has existed, and the experience 
with the migration of derivatives onto exchanges has generally 
reduced costs to users. I think that is encouraging. But as we 
have said many times, we are still going to preserve the 
capacity for a range of companies throughout and across the 
country to engage in on a bilateral basis customized hedges 
outside the standardized clearing area. We just want that to at 
least come up with some protections.
    Mr. Cassidy. You were saying that, and you have given good 
testimony. It seems, though, that, my gosh, public utilities 
would not be customized; rather, it seems like that that would 
be----
    Secretary Geithner. In fact, I have received a lot of 
letters, and I suspect many of you have, from utilities saying 
that we want to preserve the capacity to engage in, embark in 
more customized sets of hedges, and we want to preserve that 
capacity. But, again, we want the system to be protected 
against the risks those things present, so there needs to be 
broader oversight for the SEC and the CFTC over those 
activities. But I don't think we are in a different place, and 
are very sensitive to the concern you laid out.
    Mr. Cassidy. So just to follow up, because I do think we 
are close to a similar place. Your definition of something that 
would be standardized, I think, was high volume. So I was, if 
you will, gathering from that that almost by definition these 
contracts would be considered standardized. But even if they 
are high volume, they still may go into a customized category.
    Secretary Geithner. I think the question is, are the terms 
common and more typically uniform? Or, do you need a--can you 
not meet your individual needs to hedge against the risk you 
face with those commonly prevailing terms. I think that is the 
way to think about the definition. But, again, this is a 
complicated thing to get right, and we are going to do our best 
to make proposals to you to get the balance in the right place.
    Mr. Cassidy. And just to follow up one more aspect of my 
question quickly. Again, I am told that sometimes the utilities 
will put up their physical assets as collateral as opposed to 
cash. Will that be part of this kind of balance?
    Secretary Geithner. That is something I have to think about 
and get back to you on. I don't think I can do justice to the 
details of what market practice is in that area today. But I 
will be happy to try to get back to you on that particular 
question. Several of your colleagues have raised it.
    Mr. Cassidy. Thank you very much. I yield back.
    Chairman Peterson. I thank the gentleman. And I would just 
like to comment that there has been a lot of talk about these 
customized versus standardized. What people need to understand 
is that these banks make a lot more money on customized trades 
than they do on standardized. So keep that in mind.
    Secretary Geithner. Mr. Chairman, could I just say 
something in response to what you just said on that question? I 
think you are right, and that is why I think that as you go 
through this process you want to make sure you are not 
listening just to New York and Chicago. You want to make sure 
that you are listening to the range of companies that rely on 
these markets as their risks. I think here there really is an 
interesting diversity of opinion. But what we are proposing is 
to make sure that where there is a good compelling case for the 
customized, that it comes with protections so that the system 
is not vulnerable to the risks those present.
    Chairman Frank. That recalls to me my own distinction 
between ends and means. We are talking about the end-user, not 
the people who make money on the instruments, per se.
    The gentleman from Kansas, Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman.
    Mr. Secretary, many Americans probably never heard of 
derivatives before the financial meltdown, although many 
companies in the United States used derivatives to manage and 
hedge their risks. It appears there are two sides of risk from 
looking at how best to oversee the OTC derivatives market. On 
the one hand there is the risk to the financial system if they 
are left unregulated, and on the other hand there is the 
beneficial tool of risk management that derivatives can provide 
to many businesses, large and small.
    Mr. Secretary, I believe we need to regulate this part of 
the system that was ignored for too long, but we should be 
careful of unintended consequences.
    When we consider the United States companies that played no 
role or part in the financial crisis, how should we weigh 
systemic stability against higher requirements for firms that 
are end-users of derivatives? Is there a chance systemic risk 
could actually grow if companies are forced to stop hedging the 
risks that they have on their books?
    Secretary Geithner. Yes. I do believe that if you deprive 
institutions of the capacity to manage their risks effectively, 
you could create a less stable system.
    Mr. Moore. Some claim that the Administration's plan will 
cost hundreds of billions of dollars that companies would have 
to post to a clearinghouse. Have you done any cost analysis of 
the effects on these companies?
    Secretary Geithner. It is a hard thing to do well. But, 
again, it is about the balance. The benefits to the system of 
having more conservative margin requirements than we had coming 
into this crisis are going to be very, very substantial 
economically. But you don't want to have them to be so high 
that you push a bunch of risk offshore or to other places. And 
that is going to be a hard thing to get right. But I don't 
think you can look at the last couple years of history and say 
that we erred on the side of having to be too conservative.
    Mr. Moore. Thank you, Mr. Secretary. I yield back.
    Chairman Frank. The gentlewoman from Illinois, Mrs. 
Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. And thank you, Mr. 
Secretary, for being here.
    The Administration's proposal strips all of the consumer 
protection functions from all the banking regulators and puts 
them in a separate agency, to me essentially making the 
government bigger but not better for consumers. Won't your 
proposal deny the regulators the ability to manage the risk of 
a financial institution, and won't these new agencies tell 
consumers what they can and cannot have, and tells business 
what products they can and cannot offer conflict with the 
safety and soundness role of the banking regulators? Can you 
give me a yes or no answer?
    Secretary Geithner. No. But maybe I could--could I say a 
few more things in response? We are not making government 
bigger in this case. As you said, we are taking authority that 
exists in a bunch of different places, both rule writing and 
enforcement authority, and we are moving that to a central 
place where there will be more accountability and, we hope, 
better outcomes than we achieved with the system that we have 
been living with.
    Mrs. Biggert. Well, then what is the function of the 
banking regulators, the safety and soundness?
    Secretary Geithner. Principally, safety and soundness. But 
as you and I have discussed in the past, there are areas where 
these things overlap. So it is not going to be a completely 
bright line. But we want bank regulators to be principally 
responsible for safety and soundness, and we think we are going 
to have both better consumer protection and better safety and 
soundness regulation if we have better separate accountability 
for those functions.
    Mrs. Biggert. Do you see then the Consumer Financial 
Protection Agency trumping the existing regulators?
    Secretary Geithner. Again, we are proposing, to give them 
rule writing authority and primary enforcement authority over 
consumer protection, not over safety and soundness.
    Mrs. Biggert. It seems like there will be a lot of 
duplication of effort.
    Secretary Geithner. We want to avoid that, but again there 
is a lot of duplication of effort in our system. Our system is 
characterized by a, frankly, difficult to defend mix of parts 
of the system with incredible overlapping authority and parts 
of the system where nobody had good authority. So it is not a 
system we would have designed if we were starting from scratch 
today. We are going to try to get clearer accountability, more 
focused accountability, less overlap but better safeguards 
where they didn't exist.
    Mrs. Biggert. How do you do that if you separate those?
    Secretary Geithner. Well, they are very different types of 
functions. They have not been done particularly well when they 
were done as they have been done to date. What we argue here is 
separating is more simple and clearer.
    Mrs. Biggert. I have concerns about the recently passed 
cap-and-trade bill, and it had--about derivatives in there, and 
language is included to regulate the OTC markets and limit 
participation in the markets. I would like to know, what is the 
Administration's position on the bill's new tax on 
transactions? And I know that there was a caveat in the 3 a.m., 
300 page manager's amendment which put in a caveat that if 
there is legislation passed this would be null and void. But 
what did you think about what was in that bill? And will some 
of that carry over into other legislation?
    Secretary Geithner. Congresswoman, for reasons that I think 
you can appreciate, can I respond to that in writing----
    Mrs. Biggert. I would appreciate it.
    Secretary Geithner.--or separately in some appropriate 
form? It is a complicated bill that has a lot of complicated 
provisions in these areas, and I want to do it well.
    Mrs. Biggert. Just one quick question. I am still worried 
that we are going to incentivize much of the market to move 
overseas if we impose new regulations on the market, the over-
the-counter market. How could we really forestall that?
    Secretary Geithner. Well, it is an important thing to 
avoid. But if you look carefully at what the Europeans are 
proposing now, what the U.K. has proposed in public now, there 
is much more convergence in our approach than we have seen in a 
long period of time, and that is encouraging. But we share your 
commitment to that and want to be careful to avoid that risk.
    Mrs. Biggert. Thank you. I yield back.
    Chairman Peterson. The gentleman from Indiana, Mr. 
Ellsworth.
    Mr. Ellsworth. Thank you, Mr. Chairman.
    Secretary Geithner, we have all got hundreds of questions 
we could ask you, and luckily for you we have only got 4 
minutes to do it. I would like to go back in time, since this 
is our first meeting, back in time a little bit.
    The first time I heard about a credit default swap was, I 
think it was, in a TIME magazine article maybe 7 months ago, 
something like that. I thought it was just me living under a 
rock until I started polling people back home, and most people 
have not heard of that term.
    Can you tell me, for my reference and my education, how we 
got there? If this was a life insurance company that was 
selling policies that they had no capital or were 
undercapitalized they would be in jail. Bernie Madoff has now 
been sentenced to what is essentially life in prison for a 
Ponzi scheme. Can you give me some background to how we got 
there and how we are going to prevent that in the future? And 
if you can throw in what, if we know the dollar figure on what 
these credit default swaps are worth. I have heard trillions. 
If you can tie that even to a broad range, I would appreciate 
it, sir.
    Secretary Geithner. I would be happy to respond. The 
overall estimates of magnitude of the total face value of these 
markets are in the $600 trillion range. The market value of 
those contracts, my testimony, says are more in the $20 
trillion range. That still itself doesn't really capture the 
risk. It probably substantially overstates it. But these are 
enormously large markets, enormously important to how our 
markets function. These markets include interest rate risk, 
exchange risk, equity derivatives, commodity derivatives, 
energy, food, et cetera.
    And the way this happened in credit derivatives was very 
similar to what happened in commodity derivatives and others, 
which is that decades ago people figured out a way to offer a 
company the ability to hedge against a particular risk, the 
cost of energy, cost of seeds, cost of movement in exchange 
rates, cost of a change in interest rates, and over time 
products emerged to meet that economic demand.
    What we did not do in our country is stay abreast of that 
innovation and put in place the framework of protections over 
those markets that was commensurate with the risk they 
proposed. We were behind that curve. And we had a lot of 
institutions, including regulated institutions like the 
monoline insurance companies and AIG that wrote a huge amount 
of protections without the capital to back it, and that 
combination of factors helped bring us to the edge of this very 
severe crisis. And it is an obligation we all share to make 
sure that we not just address those principal causes of this 
crisis, but we have a stronger framework to address future 
vulnerabilities, and that our framework adapts more quickly in 
the future. And that is what we are trying to do.
    Mr. Ellsworth. What would be the consequences--whether we 
voted for the bailout, the TARP, any of that. What would be the 
consequences if these were called in, these credit policies? 
Could they be called in, cashed in, make due on the credit 
default swaps?
    Secretary Geithner. I wouldn't think about the economic 
risks in what the Congress authorized for the financial sector 
as being principally affected by what happens in these 
derivative markets. The principal risk, the economy, as many of 
your colleagues have said, is we are living still with a very 
challenging set of economic risks in the future. But if we are 
successful working together, putting in place a stronger 
foundation for recovery, then the ultimate risk to the 
taxpayer, the things we want to do, will be lower.
    Mr. Ellsworth. I will yield back.
    Chairman Peterson. The gentleman from Pennsylvania, Mr. 
Thompson.
    Mr. Thompson. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for being here, for answering these questions. With 
your proposal, I wanted to just seek some clarification.
    Is it your intent to force private commodity pool operators 
to register with the SEC as a hedge fund instead of the CFTC? 
And, if so, why?
    Secretary Geithner. I haven't quite come to a firm 
conviction on that question, but we are working through it with 
the SEC and the CFTC. What we have been explicit about is that 
we want to make sure the hedge funds above a certain size are 
compelled to register. But you raise a very important question, 
thinking about how we treat other entities that are doing 
similar things, and there are a bunch of entities in those 
markets that are already forced to register, and we will have 
to think through carefully the implications of doing what we 
propose on hedge funds. We are not quite there yet, though.
    Mr. Thompson. Your proposal talks about harmonizing the SEC 
and CFTC. Your opening remarks talked about, or more earlier 
responses talked about statutes, both need to be brought in 
line. And I wanted to just see, where is that harmonization 
needed and where is it possible?
    Secretary Geithner. Well, we hope it is possible generally 
across the board because you have these two differences. You 
have different basic statutes across the markets they are 
responsible for, and you have different enforcement cultures 
and enforcement approaches. And those two differences 
themselves create a system that is not as good and strong as we 
think we can have. So what we are trying to do is get the SEC 
to bring them together and get them to propose ways to bring 
those into conformance. And they are making some progress, but 
they have a long way to go. But we are going to want to spend a 
lot of time working through the detailed merits, alternatives, 
of different approaches in those areas. But we are not far 
enough along yet to go into any detail today.
    Mr. Thompson. Thank you, Mr. Secretary. I yield back.
    Chairman Frank. The gentleman from Massachusetts, Mr. 
Lynch.
    Mr. Lynch. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. We had a chance to chat about 
this a little earlier in the week. But I want to go back to the 
system that the President's plan envisions, where you have 
standard derivatives traded over an exchange, standard ones 
being linear in many cases, well understood. And yet you have 
another system right beside that parallel system for custom 
derivatives trading privately with far less transparency. There 
are a number of moral hazards here, and I want to have you 
address them.
    Number one, as the Chairman pointed out earlier, there is a 
big payday for the banks and for the derivative designers on 
the custom side of the house, much more so than on the 
standards side.
    Second, experience has shown us whenever you have a 
regulated system operating beside an unregulated system, the 
markets favor that unregulated system and the money migrates 
over.
    Third, the absence of an exchange by--the exchange serves a 
purpose as a pricing mechanism, and a major problem with these 
derivatives has been the accurate pricing of risk. And so you 
are putting these custom derivatives off the exchange where 
there will be, again, a mispricing of risk that will continue.
    And, last, we are still allowing these gratuitous side bets 
where folks can come in and take a bet where they have no 
interest at all in the underlying asset. And those are all 
moral hazards that are going to lead us to continue to have a 
system that has gaping holes in it. And I just don't know how I 
can support such a system.
    Secretary Geithner. Congressman, I thank you for giving me 
another chance to respond to that concern. We are proposing 
comprehensive oversight, but we are not just overseeing the 
participants in these markets but over all the products, 
standardized or customized. We are proposing to give the SEC 
and CFTC the authority they do not now have to enforce fraud 
activities effectively in those key markets, whether 
standardized or customized. And like you would expect us to do 
everywhere, we are trying to make sure that the capital 
requirements and margins are higher where risk is higher. And 
that will help.
    Mr. Lynch. But, sir, could I ask you about the pricing 
mechanism? Where there is no exchange, you have these custom 
derivatives being sold by private parties.
    Secretary Geithner. But you are exactly right that you want 
to have the standardized parts where you can have price 
discovery and competition. The terms are standardized traded on 
exchanges or on, as we said, open, transparent, electronic 
trading platforms because of the benefits of price discovery. 
But a customized unique special hedge that a utility that 
provides energy needs, that is going to have to be a negotiated 
product by definition. Because if they can't meet the needs 
through the standardized product, they need to have the 
capacity to go in that direction.
    Now, you are in effect suggesting, as some have suggested, 
that we force all of this stuff onto exchanges effectively 
banning the capacity to the customized. And I would just would 
caution you to listen carefully to the users of these markets 
because you will find, as I am sure you are aware, companies in 
industries across the country, small and large, trying to make 
sure that we preserve that capacity.
    So we are going to try to get that balance right where 
there are the concerns you said. I think we proposed a 
substantially better balance then we have today.
    Chairman Frank. The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. Secretary, I am going to paraphrase part of your 
testimony. You essentially said, I believe, we are here because 
the Administration inherited an economic mess. I don't 
necessarily disagree with that assessment. I would say the 
question is whether or not the Administration's policies are 
making this mess better or worse.
    Since the Administration has come to office, clearly you 
know that unemployment has risen to 9.5 percent, the highest in 
a quarter century: 2.6 million additional jobs have been lost 
since the Administration has taken office. The public debt has 
increased by almost $1 trillion or $7,430 per household.
    Given that backdrop, I am having to look at this new 
proposal that you bring before us today. In the Capital Markets 
Subcommittee last month the 3M Company testified that they 
projected that they would be looking at $100 million per year 
on average in additional costs for a mandatory clearing 
environment.
    Now, I believe in questions by the gentleman from Kansas, 
Mr. Moore, I believe you said something along the lines of: It 
is very difficult to ultimately gauge the cost burden for those 
who may have to go to a mandatory clearing.
    Secretary Geithner. But I also said that typically the 
costs of central clearing exchange are substantially lower.
    Mr. Hensarling. I would ask this question, Mr. Secretary, 
given this is just one corporation, but I have heard this from 
other corporate entities as well. And listen, I am not 
unsympathetic that improvements can be made in clearing these 
derivatives, particularly with respect to transparency, with 
respect to margins. But I am very concerned about a proposal 
that at least, as of today, seems like we are trying to still 
pin the proverbial Jell-O on the wall. If we don't ultimately 
know the cost, we do know this: Less hedging can create less 
credit, and less credit can create fewer jobs. And in this 
economy, I am just very leery until I have convincing evidence 
about the ultimate cost and the ultimate impact on our job 
environment for moving forward on this.
    And so I guess the question would be, when will the 
Administration do modeling on jobs? When do we expect that 
analysis?
    Secretary Geithner. Congressman, as you know, you and I are 
going to disagree very fundamentally on where you began your 
question, which is the appropriate response of a country facing 
a crisis like we inherited. But on the question you are 
raising, which is about the benefits of hedging and how we get 
the balance right between stability, innovation, and the 
future, I suspect that our differences are much narrower, 
again, because, as I have said many times here today, we trying 
to preserve the capacity for hedging. We are trying to make it 
better, more possible for our country to have both a more 
stable, more resilient system, and preserve the capacity of 
people that hedge against these risks. We are basically 
committed to that. We are trying to make sure that innovation, 
which is a great strength of our financial system, can proceed 
in the future with less risk of catastrophic damage. But I 
suspect that we don't--our differences are not as great. They 
are probably very great where you began your question. And I 
would be happy to talk about that at any time.
    Mr. Hensarling. I hope that proves true, Mr. Secretary. 
Sometimes I find myself agreeing with 80 percent of the 
Administration's rhetoric and about 20 percent of their 
policies.
    The next question, Mr. Secretary, in your opening 
statement----
    Secretary Geithner. I am happy to consider alternative 
recommendations and policies all the time.
    Mr. Hensarling. I don't mean to put words in your mouth, 
but I now have 30 seconds. I think you said again that some of 
your critics you said were wanting to maintain the status quo. 
Many economists believe that the greatest cause that we have 
for the economic crisis was Fannie and Freddie, and yet your 
reform proposal does nothing about Fannie and Freddie.
    Secretary Geithner. I am very glad you raised that. It is 
absolutely true that those institutions over time took on 
enormous risk because of the implicit commitment of the 
government to back them. And that is why Congress legislated a 
reform framework over those entities last year, but that came 
unfortunately late in the process.
    Now, we are going to have to come to the Congress and 
propose how to deal with the future of those entities. But now 
is not the time to do that. And we are going to try and do that 
carefully and well. But we agree with you that that is 
something we are going to have to confront together, and we 
will come to you. It is our responsibility to do that with our 
best judgment about what to do, but we will look at a range of 
options and we will work through that together.
    Mr. Hensarling. Thank you.
    Chairman Peterson. I thank the gentleman. The gentleman 
from New York, Mr. Murphy.
    Mr. Murphy. Mr. Secretary, I want to say thanks for all 
your hard work on this, and I know that you have been pushing 
for clearing of credit default swaps long before any of us ever 
heard about it. I know you were out there and wish that we had 
been able to get that done earlier than we are now. I have a 
couple nuanced questions. I missed some of the testimony and 
you may have answered this already.
    In your testimony, you talk a lot about clearinghouses and 
clearing stuff, putting it on exchanges. Do you see those as 
one-to-one, or is there some transactions that might be cleared 
and not on an exchange, or vice versa?
    Secretary Geithner. Absolutely. There are some things that 
can't be cleared and, therefore, can't be put on-exchange. And 
you can have some products that can be essentially cleared that 
don't need to clear on the exchange. But, yes, the answer is 
that there are some products that, to meet a demand for a 
particular utility to hedge a particular energy cost, you 
probably can't centrally clear. A clearinghouse wouldn't want 
to take on that product, wouldn't think that they could manage 
that risk.
    Mr. Murphy. Well, I don't want to discourage you from 
products that we may be able to drive to central clearing, 
because I think that does reduce systemic risk, that we not 
require be on an exchange if there is not enough volume for an 
exchange to want it, or for there to be any real price 
discovery there.
    Secretary Geithner. You are right to emphasize that. We 
have been very clear to say we want to encourage standardized 
to be centrally cleared. In fact, we are going to compel that. 
And, we would like to see those products that are centralized 
ending up traded either on exchanges or on electronic 
transparent trading platforms, because of the benefits you get 
to price discovery and liquidity in that method.
    Mr. Murphy. The second point: Would considering putting 
minimum requirements from margins for the clearinghouses?
    Secretary Geithner. For the clearinghouses, absolutely. I 
think one of the important things, because they concentrate 
risk, you need to make sure that there are adequate margin 
safeguards against the risk of default.
    Mr. Murphy. I want to be confident. I think competition is 
good, but I want to be sure we don't have a race to the bottom 
where people shop for the cheapest clearinghouse.
    Secretary Geithner. You are absolutely right.
    Mr. Murphy. The last question, hedge accounting. I hear 
from a lot of the companies I talk to that hedge accounting, to 
be specific enough to get the treatment they want, requires 
them into a customized OTC marketplace, kind of going against 
what we are trying to do.
    How can we address that to try to bring that together, 
where people who truly are hedging aren't pushed to do 
something that takes them off of a standard, or exchange 
traded, or cleared product?
    Secretary Geithner. You are absolutely right. The part of 
the concern businesses have with banning customized products is 
they are concerned that the accounting requirements--they would 
not be able to meet those basic requirements. And that is one 
important concern. But, the more fundamental concern is, again, 
that not all risks that people have an interest in trying to 
protect themselves against can be adequately captured by a 
standardized instrument.
    Mr. Murphy. I agree. But I guess the question is how do we, 
for the risk that probably shouldn't be in the OTC market, not 
let our accounting rules drive us into that? I guess I want you 
guys as you are working on this, and for us to keep in mind, 
that we should try to harmonize that so we don't drive stuff 
into the OTC market that doesn't need to be there.
    Secretary Geithner. Yes, I think that is a good thing to 
take a look at. And of course we have an elaborate protection 
independent of political influences, trying to think through 
the accounting standards, and--but I agree with you that is 
important to look at.
    Generally, we have a problem where a lot of accounting 
stuff runs against the basic interests of--well, I want to be 
more careful in how I say that. I think you are right to try to 
point out the importance of that.
    Mr. Murphy. I think it is an important part of getting this 
all right. We can try to push it in one direction, but if we 
get into the accounting rules where we are marking one side of 
the balance sheet to market and not the other, or we are 
driving them to do something that moves them out of what is the 
most stable financial system, those rules can actually have a 
big impact on what people decide to do over here.
    I yield back my time.
    Chairman Peterson. I thank the gentleman. The gentleman 
from Missouri, Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Secretary 
Geithner, welcome. I am just curious about the final comment in 
your statement today or your suggestions in your statement 
today was about working with our international counterparts to 
ensure strict and comprehensive regulatory regime in our over-
the-counter derivatives. And I know we addressed it a couple 
times here and got around some of the edges of it. Could you 
just discuss that for a few minutes as to the size of the 
involvement of our foreign counterparts. If you have had any 
negotiations with those folks at this point; where do you see 
the problems, or where you see the positives of where we need 
to go with this?
    Secretary Geithner. Let me give you one example to show you 
how important this is and how you can do it and do it well.
    Starting in 2004, 2005, the New York Fed brought together 
the supervisors responsible for these markets, and for all the 
major derivatives dealers responsible for 95 percent of trading 
activities in these markets, around one table and compelled 
them to agree to a set of measurable benchmarks for improving 
standardization, automation, basic risk management, quality of 
infrastructure in these core markets, because they were global 
markets. And so that is one way to do it.
    Mr. Luetkemeyer. How did you compel them to do that?
    Secretary Geithner. Well, what we did is by getting the 
supervisors to agree on a common framework of constraints and 
reporting standards. We made it possible for each of those 
institutions that exist in different countries, different 
jurisdictions to be held to common standards. And we tried to 
enforce it not through just supervision, but make sure there 
was transparent reporting of performance across firms. And that 
helped make sure there was a level playing field. That is just 
one example.
    The U.S. has been terrifically effective in the past in the 
capital area decades ago in trying to get the world to come to 
our higher standards, but we didn't--we are not effective 
enough. But we are going to be very focused, as I said, in 
trying to make sure we bring the world together around a table 
to do it. We have a very elaborate set of cooperative 
mechanisms in place today working alongside the legislative 
process here.
    Mr. Luetkemeyer. How much participation do we have from 
other countries versus the amount of participation within our 
own country? Do you have a percentage roughly on something like 
that?
    Secretary Geithner. You mean in terms of where market share 
in these things are?
    Mr. Luetkemeyer. Yes.
    Secretary Geithner. I believe that--it varies a lot across 
products, but I would say it is probably on average roughly 50/
50 U.S. and Europe. But don't hold me to that. I would be happy 
to----
    Mr. Luetkemeyer. Well, that gives us an idea of the 
importance of the issues.
    Secretary Geithner. I agree with you.
    Mr. Luetkemeyer. Do you have some things that are some 
problems right now with the way other countries are regulating 
their securities markets that we need to be concerned about and 
we need to watch for?
    Secretary Geithner. Well, there is a--one concern I have, 
is that these are global markets and you want to have a common 
global framework, and there is a tendency in Europe to try to 
come up with a European solution to managing risk in these 
areas. And we had been very successful in the past in working 
with Europe to come up with a common approach, because we think 
that will be more effective in reducing risk.
    And that is one example where, frankly, I am a little 
concerned, that they want to come up with a separate approach. 
And so we are going to try to work with them to make sure that 
we end up with a thing that works for these markets and is 
reducing overall risk.
    Mr. Luetkemeyer. Thank you, Mr. Secretary.
    Thank you, Mr. Chairman.
    Chairman Frank. I have a proposal. We have a vote. There 
are three Members left on the Democratic side. I am wondering 
if Members could each do a minute and a half, pose a question 
and have the Secretary respond. Would that be acceptable.
    The gentleman from North Carolina, gentleman from Texas, 
gentleman from Illinois. Maybe we can shave it a little bit 
down to 1\1/2\ or 2 minutes for questions.
    Mr. Miller of North Carolina. Good morning, Mr. Secretary--
or, good afternoon, Mr. Secretary.
    Most of what you have discussed, justifying derivatives--
the purpose of derivatives is they are risk mitigation. They 
are like insurance. But it appears that there is no requirement 
with respect to derivatives that any party of the transaction 
actually have an interest in the underlying asset, the asset 
from which the derivative is derived.
    Obviously, if there is no risk to mitigate, it can't be 
risk mitigation. It doesn't appear to have anything to do with 
capital allocation. The only justification I have heard is it 
assists price discovery, and that the more transactions are 
based upon the value of an asset, the more accurate the price 
is. But that seems pretty thin given how huge the derivatives 
market is.
    Did you give any consideration to whether or not these 
products should be allowed at all, if they do anything useful 
for society? Do you think they----
    Chairman Frank. The gentleman from--well, let's get the 
question. The gentleman from Texas, do you have a question, a 
quick question?
    Mr. Green. I am sorry?
    Chairman Frank. Does the gentleman from Texas want to ask a 
question? We will try and get all the answers.
    Mr. Green. Yes, sir.
    Chairman Frank. Well, please ask your question, quickly, if 
you will. That is what I had announced.
    Mr. Green. Thank you, Mr. Secretary. I will get right to 
it.
    We have 8,246 depository institutions in this country. We 
require that they be well-capitalized. We have a coffer within 
which they pay an assessment, so as to provide the capital to 
wind them down when they go out of business.
    Is it true that what you plan to do is provide a similar 
circumstance for nondepository institutions such that, when 
they become troubled, we can wind them down, they are not to be 
over-leveraged, they can engage in hedging without being over-
leveraged, such that we can wind them down in a similar 
fashion?
    Secretary Geithner. Yes.
    Chairman Frank. All right. Ms. Bean, and then we will see 
if we can get an answer. We will have one last questioner.
    Ms. Bean?
    Ms. Bean. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being here today.
    To pick one question, there have been concerns raised about 
mandating clearinghouses to clear illiquid derivatives could 
force untenable risk levels onto the clearinghouses from the 
derivatives markets. How would you or your proposal address 
that concern?
    Secretary Geithner. Can I go in reverse order? Well, I will 
go in a different order. I said yes to you----
    Chairman Frank. Go.
    Secretary Geithner. Okay. You need to make sure that there 
are margin requirements and financial safeguards in the central 
counterparties that are adequate to compensate for that 
dramatic concentration of risk. That is the way to do it; you 
want to make sure it is uniform across those.
    You will have a chance to listen to businesses across the 
country speak to your question, which is, is there economic 
value in my capacity to take advantage of a derivative to hedge 
against a risk? And, again, our judgment is, yes, there is, but 
the system has to have greater protections around that.
    But the existence of an underlying asset is not a good 
measure about whether there is an economic value in the ability 
to hedge. But this is a complicated question. I would be happy 
to talk to you in more detail in another context.
    Chairman Frank. The gentleman from New York, Mr. Lee, is 
our last questioner.
    Mr. Lee. I will shift gears here since I am sure you are a 
little tired of discussing this. But this is an issue that is 
near and dear to my heart and dozens of my colleagues on both 
sides of the aisle, and it has to do with the Delphi retirees. 
And hopefully you are familiar with this with the auto task 
force, and the fact that you have, really, two groups here 
being treated completely differently in terms of their pension 
responsibilities.
    The hourly workers got 100 percent coverage while the 
salaried workers stand to lose potentially up to 70 percent of 
their pension. In this past year, all of these salaried 
retirees have lost their health care benefits and their life 
insurance.
    Being the fact that we now, in the government, own 60 
percent of General Motors, I have been trying to reach out to 
your organization, the auto task force, and trying to get some 
answers for these retirees who are extremely frustrated. And I 
would like your thoughts on this inequity and what we can do 
about it.
    Secretary Geithner. Congressman, there are an enormously 
complicated set of tradeoffs in the judgments that have had to 
be made as part of this restructuring process. And I would be 
happy to have our team come meet with you and talk you through 
why the judgments that have been made have been made and why 
the alternatives were not tenable. I would be happy to do that.
    Mr. Lee. Well, I would like to hopefully come up with a 
solution. But, yes, I would appreciate having that opportunity. 
So thank you.
    Chairman Peterson. I thank the gentleman.
    The gentleman from Oklahoma has a question.
    Mr. Lucas. Mr. Chairman, I would like to add a letter from 
3M on behalf of one of my colleagues, Mrs. Bachmann, and 
another letter from the National Business Roundtable and a 
number of other groups.
    Chairman Peterson. Without objection.
    [The document referred to is located on p. 59, and the 
prepared statement of Mrs. Bachmann is located on p. 7.]
    Chairman Frank. Mr. Peterson, I would just ask general 
leave for any of the Members to include any materials that they 
want.
    Chairman Peterson. Without objection.
    Chairman Peterson. With that, we will bring this to a 
close. I want to thank Chairman Frank and all the Members of 
both Committees for a great hearing, good questions, good 
dialogue. And we look forward to working with the two 
Committees together, along with the Administration, to make 
this thing work. So thank you all.
    Thank you, Mr. Secretary.
    The Committees are adjourned.
    [Whereupon, at 1:07 p.m., the Committees were adjourned.]
    [Material submitted for inclusion in the record follows:]
      
 Joint Submitted Letter by Hon. Frank D. Lucas; on Behalf of Business 
Roundtable; Grocery Manufacturers Association; National Association of 
                Manufacturers; U.S. Chamber of Commerce




Hon. Barney Frank,                   Hon. Spencer Bachus,
Chairman,                            Ranking Minority Member,
Committee on Financial Services;     Committee on Financial Services;

Hon. Collin C. Peterson,             Hon. Frank D. Lucas,
Chairman,                            Ranking Minority Member,
Committee on Agriculture,            Committee on Agriculture,
Washington, D.C.                     Washington, D.C.


    Dear Chairmen Frank and Peterson and Ranking Members Bachus and 
Lucas:

    Businesses from diverse sectors and sizes across the United States 
enter into over-the-counter (``OTC'') derivative transactions to manage 
risks associated with their business operations, including fluctuations 
in interest rates, currency exchange rates and commodity prices. A 
survey of publicly-available information conducted by the International 
Swaps and Derivatives Association found that more than 90 percent of 
Fortune 500 companies use OTC derivatives. It is critical to note that 
many of our members use them--not to speculate or augment short-term 
profits--but as a normal course of business.
    Many OTC derivatives contracts are bought and sold with standard 
terms and conditions; however, there are also many derivatives 
contracts that are customized to meet the unique needs and risk 
exposures of individual companies, including such basic terms as dates, 
rates and notional amount. When businesses employ derivatives in this 
manner, they are not taking speculative positions. Quite the opposite; 
they are seeking to reduce risks that arise from their business 
activities. Whether standard or custom, OTC derivatives help American 
businesses protect themselves from risk and improve their access to 
credit.
    We support efforts to ensure appropriate regulatory oversight of 
market participants and their derivatives activities, consistent with 
the objectives outlined by the Obama Administration in its white paper, 
Financial Regulatory Reform: A New Foundation. More specifically, we 
believe the right approach encourages central clearing for standardized 
contracts where appropriate, while promoting transparency of customized 
contracts through a reporting regime that ensures regulators have the 
information necessary to oversee the markets. This approach strikes the 
right balance: it reduces counterparty risk and enhances transparency 
while maintaining an OTC market and the benefits it provides to our 
members.
    However, legislation requiring that all contracts be traded on 
exchanges or be centrally cleared will prevent companies from using 
non-standard products to reduce the volatility of their financial 
statements and lower their cost of capital--thereby expanding, not 
reducing, risk to companies. Such legislation would require companies 
to divert cash from being used to sustain and grow their businesses to 
meeting collateral and margin requirements. In short, the proposal 
could dramatically expand the need for liquidity in the midst of a 
liquidity crisis.
    The customized terms and conditions of OTC derivatives contracts 
cannot reasonably be standardized for exchange trading or mandatory 
clearing. In fact, in order for companies to utilize hedge accounting 
under FAS 133, and thus reflect the offsetting nature of a hedge in 
their financial statements, they must prove a close and consistent 
correlation between the derivative and the underlying asset or 
liability. If a company could not do so, as likely would be the case if 
only standardized instruments were available, the benefits of its hedge 
transactions would not be shown in its financial statements, thereby 
increasing earnings volatility.
    In short, please ensure that any regulatory reform legislation that 
moves in the House preserves the ability of our member companies to use 
OTC derivatives to manage risk at prices and under terms that are 
reasonable and continue to make sense from a business perspective. We 
urge you to prevent an anti-derivatives sentiment from translating into 
anti-business legislation.
    Thank you for your consideration of our views and we look forward 
to working with you.
            Sincerely,

            [GRAPHIC] [TIFF OMITTED] T1123.002
            




Larry D. Burton,                     Mary C. Sophos,
Executive Director,                  Senior Vice President and Chief
Business Roundtable;                  Government Affairs Officer,
                                     Grocery Manufacturers Association;


                                     [GRAPHIC] [TIFF OMITTED] T1123.001
                                     




Dorothy Coleman,                     R. Bruce Josten,
Vice President, Tax and Domestic     Executive Vice President,
 Economic Policy,                     Government Affairs,
National Association of              U.S. Chamber of Commerce.
 Manufacturers;

cc: The Members of the U.S. House of Representatives


                                 ______
                                 
  Submitted Statement by Hon. Frank D. Lucas; on Behalf of 3M Company

    3M Company (``3M'') is a large U.S.-based employer and manufacturer 
established more than a century ago in Minnesota. Today, 3M is one of 
the largest and most diversified technology and manufacturing companies 
in the world.
    3M thanks the Committees for studying the critical details related 
to reforms to the U.S. financial system and for considering our 
perspective in this important debate. In examining the concepts 
outlined in the recent U.S. Treasury proposal on financial system 
reforms, 3M respectfully urges the Committees to carefully consider the 
distinct differences among various derivative products and how they are 
used, and encourages the Committees to preserve commercial users' 
ability to continue using derivative products to manage various aspects 
of corporate risk while addressing concerns about stability of the 
financial system.
Background on 3M
    In 1902, five northern Minnesota entrepreneurs created the 
Minnesota Mining & Manufacturing Company, now known today as 3M. 3M is 
one of the largest and most diversified technology companies in the 
world. 3M is home to such well-known brands as Scotch, Scotch-Brite, 
Post-it, Nexcare, Filtrete, Command, and Thinsulate. 3M designs, 
manufactures and sell products based on 45 technology platforms and 
serves its customers through six large businesses: Consumer and Office; 
Display and Graphics; Electro and Communications; Health Care; 
Industrial and Transportation; and Safety, Security and Protection 
Services. 3M achieved $25.3 billion of worldwide sales in 2008.
    Headquartered in St. Paul, Minnesota, 3M has operations in 27 U.S. 
states, including over 60% of 3M's worldwide manufacturing operations, 
employing 34,000 people. 3M's U.S. sales totaled approximately $9.2 
billion in 2008. While its U.S. presence is strong, being able to 
compete successfully in the global marketplace is critical to 3M. 3M 
operates in more than 60 countries and sells products into more than 
200 countries. In 2008, 64% of 3M's sales were outside the U.S., a 
percentage that is projected to rise to more than 70% by 2010.
    Ahead of their peers, 3M's founders insisted on a robust investment 
in R&D. Looking back, it is this early and consistent commitment to R&D 
that has been the main component of 3M's success. Our diverse 
technology platforms allow 3M scientists to share and combine 
technologies from one business to another, creating unique, innovative 
solutions for our customers. 3M conducts over 60% of its worldwide R&D 
activities within the U.S.
    Our commitment to R&D resulted in a $1.4 billion investment of 3M's 
capital in 2008 and a total of $6.8 billion during the past 5 years 
while producing high quality jobs for 3,700 researchers in the U.S. The 
success of these efforts is evidenced not only by 3M's revenue but also 
by the 561 U.S. patents awarded in 2008 alone, and over 40,000 global 
patents and patent applications in force.
    Our success is also attributable to the people of 3M. Generations 
of imaginative and industrious employees in all of its business sectors 
throughout the world have built 3M into a successful global company. 
Our interest in speaking with you today is to preserve our ability to 
continue to invest and grow, creating substantive jobs and providing 
high quality products to a growing base of customers.
Treasury Proposal
    Treasury Secretary Geithner proposed the establishment of a 
comprehensive regulatory framework for OTC derivatives that is designed 
to:

    1. Prevent activities in those markets from posing risk to the 
        financial system.

    2. Promote the efficiency and transparency of those markets.

    3. Prevent market manipulation, fraud and other market abuses.

    4. Ensure that OTC derivatives are not marketed inappropriately to 
        unsophisticated parties.

OTC Derivatives: Helping U.S. Companies Manage Risk in a Competitive 
        Marketplace
    While 3M unequivocally supports these objectives, we have strong 
concerns about the potential impact on OTC derivatives and 3M's ability 
to continue to use them to protect our operations from the risk of 
undue currency, commodity, and interest rate volatility.
    Derivative products are essential risk management tools used by 
American companies in managing foreign exchange, commodity, interest 
rate and credit risks. The ability of commercial users to continue to 
use over-the-counter (``OTC'') derivatives consistent with the 
requirements of hedge accounting rules is critical for mitigating risk 
and limiting damage to American businesses' financial results in 
volatile market conditions.
    We urge policy makers to preserve commercial users' access to 
existing derivative products as you design new regulations. We share 
the following comments with you in the spirit of working together to 
address the concerns about the stability of the financial system:

    1. Preventing Activities Within OTC Markets From Posing Risk To 
        Financial System:

     We agree that the recent economic crisis has exposed 
            some areas in our financial regulatory system that should 
            be addressed. However, not all OTC derivatives have put the 
            financial system at risk and they should not all be treated 
            the same. The OTC foreign exchange, commodity, and interest 
            rate markets have operated uninterrupted throughout the 
            economy's financial difficulties. We urge policy makers to 
            focus on the areas of highest concern, such as credit 
            default swaps.

     We would like to work with policy makers to address 
            oversight where warranted, but recommend that it be 
            targeted and not applied to all segments and market 
            participants.

    2. Promoting Efficiency and Transparency within the OTC Markets:

     We understand the need for reporting and record-
            keeping. Publicly held companies are currently required by 
            the SEC and FASB to make significant disclosures about 
            their use of derivative instruments and hedging activities, 
            including disclosures in their 10Ks and 10Qs.

     We would like to work with policy makers on ways to 
            efficiently collect information and enhance transparency. 
            Specifically, proposals have been made to establish a data 
            repository for OTC derivatives to ensure transparency and 
            disclosure. We understand and support this need for greater 
            transparency and oversight and could support providing on a 
            real-time basis the critical terms (amount, currency, 
            counterparty, rate(s), maturity) for transactions over a 
            specified minimum size (e.g., $250,000) for such a data 
            repository. Proposals have also been made to establish 
            regulatory supervision of the data, and we would look 
            forward to working with the regulating entity to develop 
            oversight parameters and participant practices that would 
            meet the goals established by Congress.

     We oppose a mandate to move all derivatives into a 
            clearing or exchange environment. One key characteristic of 
            OTC derivatives for commercial users is the ability to 
            customize the instrument to meet a company's specific risk 
            management needs. Provisions that would require the 
            clearing of OTC derivatives would lead to standardization, 
            thus impeding a company's ability to comply with the 
            requirements of Financial Accounting Standard 133 (FAS 
            133). The inability to precisely hedge specific risks, 
            whether currency, interest rates or commodities within the 
            context of FAS 133, would expose corporate financial 
            statements to unwanted volatility and uncertainty. Results 
            could include lower valuations for companies as well as a 
            reluctance to undertake as many growth investments because 
            of the need to maintain some dry powder for adverse impacts 
            from unhedged financial risks.

     While we are mindful of the reduction in credit risk 
            inherent in a clearing or exchange environment, robust 
            margin requirements would create substantial incremental 
            liquidity and administrative burdens for commercial users, 
            resulting in higher financing and operational costs. 
            Capital currently deployed in growth opportunities would 
            need to be maintained in a clearinghouse. This could result 
            in slower job creation, lower capital expenditures, less 
            R&D and/or higher costs to consumers. Hedging in the OTC 
            market is customized to fit the actual underlying business 
            risks being hedged. The clearinghouse concept relies upon 
            high volumes of standardized products, a characteristic 
            that does not exist in the customized hedging environment 
            of the OTC market.

      By imposing initial and variation margin requirements, 
            clearinghouses will add significant capital requirements 
            for end-users, adding significant costs, discouraging 
            hedging, and diverting scarce capital that could otherwise 
            be used in further growing American businesses.

    3. Preventing Market Manipulation, Fraud, and Other Market Abuses.

     We support the appropriate regulatory agencies having 
            the authority to police fraud, market manipulation and 
            other market abuses. The CFTC is utilizing its existing 
            statutory and regulatory authority to add significant 
            transparency in the OTC market, receive a more complete 
            picture of market information, and enforce position limits 
            in related exchange-traded markets. The comment period 
            remains open on the CFTC proposal and this work should be 
            allowed to continue.

    4. Ensuring That OTC Derivatives Are Not Marketed Inappropriately 
        to Unsophisticated Parties.

     We support modifications to current law that would 
            improve efforts to protect unsophisticated parties from 
            entering into inappropriate derivatives transactions.
``Clearing'' in the OTC Market
    The obvious benefits of clearing are the elimination of 
counterparty risk and the facilitation of ``data collection'' for 
executed transactions. By requiring a greater swath of derivatives to 
be cleared, the ``costs'' of trading (for both dealers and end-users) 
will rise. Increased costs will come in the form of trading fees, 
margin/capital requirements, and administrative burden associated with 
management of the margin requirements. This will likely result in:

    1. an increase in market concentration among dealers, as marginal 
        players lose profitability, and

    2. a decrease in hedging among end-users, as margin requirements 
        will pressure their capital/liquidity.

    The second impact will likely hasten the concentration effect 
mentioned above. Further, a clearing environment requires the use of 
standardized instruments. Standardized contracts are unusable to most 
end-users, as they do not permit companies to precisely hedge the risks 
of their business. Any ``mismatch'' between business exposure and hedge 
instrument could result in the end-user's loss of hedge accounting 
treatment (FAS 133), thus creating additional income statement 
volatility.
    We believe that clearing should only apply to some of the products. 
The currency, interest rate, and most of the commodity markets operated 
well throughout the recent financial crisis. Clearing, however, may be 
appropriate in other areas where authorities believe there is a high 
degree of systemic risk present. Likewise, clearing may be appropriate 
in the case of standardized instruments. Customized derivatives, 
however, need to be tailored to meet end-users' business risk 
management needs, making clearing problematic.
    It is also important to remember that, particularly with interest 
rate swaps and foreign exchange, these are global markets. According to 
the Bank for International Settlements Triennial Central Bank Survey 
(December 2007), just 15% of daily FX turnover occurred in the United 
States, while 24% was the corresponding figure in the interest rate 
(single currency) market. U.S. based companies could be put at a 
disadvantage versus their foreign competitors should OTC trading 
regulations change dramatically in the U.S.
    In addition, warehousing is not appropriate for all trades. For 
example, a large percentage of trades executed in the foreign exchange 
market (well over 50%) are of very short (1 week and under) duration. 
It would seem impractical to require warehousing for such transactions. 
Warehousing probably makes more sense for ``term'' transactions of 
longer maturity.

Conclusion
    We thank the Committees for the opportunity to submit our comments 
in writing as an employer interested in preserving and enhancing the 
global competitiveness of American businesses and workers. 3M looks 
forward to working with you as the Committees crafts legislation to 
strengthen the U.S. financial system.
                                 ______
                                 
                          Submitted Questions
Response from Hon. Timothy F. Geithner, Secretary, U.S. Department of 
        the Treasury

Question Submitted By Hon. Steve King, a Representative in Congress 
        from Iowa
    Question. Over the past 12 to 18 months, American taxpayers have 
watched with great concern as their Federal Government has expanded its 
reach deeper and deeper into the inner workings of our free market 
economic system. As part of its efforts to stabilize our weakening 
economy, the government, led by the Department of the Treasury and the 
Federal Reserve, has injected billions of taxpayers' dollars into 
various private entities. What's more, the government has taken an 
ownership and/or significant financial interest in a number of these 
entities. In my view, and in the view of many of the Americans, the 
positions that the Federal Government has taken in these entities 
amounts to de facto--and in some cases outright--nationalization. To 
illustrate this point, I draw your attention to the relationship that 
the Federal Government now shares with eight formerly private entities:

   GM--Treasury has loaned $50B in taxpayer funds to GM and has 
        taken a 61% controlling interest in the company. Taxpayers have 
        also loaned $13.5B to GMAC and have provided $3.5B to the GM 
        auto supplier support program. The U.S. Treasury's Warranty 
        Support Program also backs GM's warranties.

   Chrysler--Treasury has loaned $12B in taxpayer funds to 
        Chrysler and has taken a 9.85% equity stake in the company with 
        a right to appoint four directors. The U.S. Treasury's Warranty 
        Support Program also backs Chrysler's warranties. Taxpayers 
        have also extended a $1.5B loan to Chrysler Financial and have 
        provided $1.5B to the Chrysler auto supplier support program.

   Fannie Mae--Fannie is currently under Treasury-directed 
        conservatorship and has received $34.2 billion in funding from 
        taxpayers. The Federal Reserve also holds $71.5 billion in 
        Fannie and Freddie's debt and holds $365.8 billion in mortgage-
        backed securities guaranteed by the firms.

   Freddie Mac--Freddie is currently under Treasury-directed 
        conservatorship and has received $51.7 billion in funding from 
        taxpayers. The Federal Reserve also holds $71.5 billion in 
        Fannie and Freddie's debt and holds $365.8 billion in mortgage-
        backed securities guaranteed by the firms.

   AIG--The Federal Government replaced the company's CEO, has 
        limited executive compensation, has provided $173.4 billion to 
        AIG, and has taken a 79.9% stake in the company.

   Citigroup--The Federal Reserve has guaranteed losses on $306 
        billion of assets owned by Citigroup and Treasury has purchased 
        $20B in Citigroup preferred shares.

   Bank of America--The Federal Reserve has guaranteed losses 
        on $118 billion on assets owned by BOA and Treasury has 
        purchased $20 billion of BOA preferred shares.

   Bear Stearns--As part of a government-structured deal for 
        JPMorgan Chase to acquire Bear Stearns, the Federal Reserve 
        purchased $30 billion of Bear Stearns' assets through a new LLC 
        that the Fed created and controls.

    Please detail for me the plan the Federal Government is following 
to end its financial and/or ownership interest in each of these 
entities and every other private entity in which it currently holds 
some ownership or financial interest. What is the government's exit 
strategy? What are the benchmarks that will be used to track the 
progress being made? I believe it is imperative that the American 
people be given a candid and thorough answer.
    Answer. In late 2008 and early 2009, our country was in the midst 
of one of the most severe financial crises of the past century, and the 
economy was in danger of even further deterioration or collapse. The 
initial actions taken by the Federal Reserve and the U.S. Government at 
the onset of the financial crisis and the comprehensive, forceful, and 
sustained commitment to fiscal stimulus and financial stability made 
under the Obama Administration represented the first stage of our 
policy response. Now, in part as a result of these actions, we are 
entering the next phase of our efforts: moving from rescue of our 
financial system to a period of stabilization, rehabilitation, and 
rebuilding.
    This next phase will focus on winding down those programs that were 
once necessary to prevent systemic failure. The use of those programs, 
by design, continues to decline as the financial system recovers, and 
the U.S. Government is being repaid for its investments. But this phase 
will also involve ensuring that those policies and programs that are 
still necessary for financial and economic recovery are maintained and 
well executed, making clear that the U.S. Government still stands ready 
to do whatever is needed to ensure a lasting recovery.
    The government's exit strategy for each policy you identify is tied 
to its purpose. There are two basic categories. First, there are broad 
policies and programs designed to restore and sustain confidence in 
whole classes of financial institutions and the basic functioning of 
key financial markets. This includes capital injections for banks, bank 
liability guarantees, support for money market mutual funds and the 
commercial paper market, initiatives to encourage lending to consumers 
and businesses, and programs to stabilize the housing markets. Second, 
there are narrow initiatives designed to support key financial 
institutions.

I. Stabilization Policies
    The broad policies aimed at stabilizing the financial system were 
designed to terminate naturally. In part, the programs were designed to 
protect taxpayers' interests by being increasingly expensive for 
participants. Fees and other pricing aspects make them increasingly 
unattractive as time passes and financial conditions stabilize. Indeed, 
utilization of many of these programs has already declined 
substantially as the participants have succeeded in raising capital in 
private markets. Further, many of the programs have sunset provisions. 
Below, we discuss these aspects of each of the major programs.

A. Troubled Asset Relief Program (TARP)
    Treasury has used TARP authority to make a little over $200 billion 
in capital injections in banks through the Capital Purchase Program 
(CPP). This program was designed to stabilize the banking system, 
because banks' balance sheets had been severely impaired during the 
crisis due to losses on mortgage-related assets, increased borrowing 
costs, and collapsing share prices. CPP funds were disbursed as 
investments in which Treasury received preferred equity (or 
subordinated debentures in some cases) and warrants. The preferred 
equity provides dividends of five percent for the first 5 years of the 
investment and nine percent thereafter.
    Over $70 billion invested under the CPP has already been repaid. In 
other words, Treasury has recovered over a third of its CPP investment. 
In addition, Treasury has received roughly $10 billion in income from 
CPP investments, including dividends, interest, fees, and proceeds from 
the sale of warrants and some preferred equity. For the 23 institutions 
in which Treasury's CPP investments have been fully repaid, Treasury 
earned an annualized average return of 17 percent.
    The Supervisory Capital Assessment Program (SCAP), more commonly 
known as the ``stress test,'' contributed to the repayments to date by 
helping to convince market participants that major banks could absorb 
the losses that might come with an adverse economic scenario. The 
enhanced market confidence enabled financial institutions to raise new 
capital which was used to repay Treasury.
    Treasury's authority to make new commitments under the CPP and 
other programs authorized by the Emergency Economic Stabilization Act 
of 2008 (EESA) will expire on December 31, 2009, unless the Secretary 
of the Treasury decides to extend that authority to no later than 
October 3, 2010. Therefore, the ability to provide new assistance under 
EESA is limited to a time frame set by the law.

B. Money Market Mutual Fund Guarantee Program
    At the height of the crisis last fall, Treasury established the 
Money Market Mutual Fund Guarantee Program to prevent a run on money 
market mutual funds in the wake of the failure of Lehman Brothers and 
the well-publicized troubles of several large funds. This program--
which provided protection for about $2.5 trillion in investments--
expired on September 18. Due to improved market confidence, Treasury 
has determined that it does not need to establish a successor program. 
Since inception, Treasury has had no losses under this program. In 
fact, it has earned the U.S. Government $1.2 billion in fees.

C. FDIC Programs
    In response to the financial crisis, the FDIC's role as guarantor 
of liabilities of depository institutions was expanded. Specifically, 
the FDIC began insuring noninterest-bearing transaction accounts and 
short- and medium-term senior unsecured debt issued under its Temporary 
Liquidity Guarantee Program (TLGP).
    Like the Treasury's CPP program, TLGP was designed to be expensive 
for participants once market conditions improved. Early in the program, 
fees to issue debt under the TLGP ranged between 50 to 100 basis 
points, depending on maturity. The FDIC increased those fees on April 
1, 2009, by 25 to 50 basis points. To date, the fees have generated 
roughly $9 billion in income. As markets have stabilized, the cost of 
borrowing in private markets has declined to levels that make TLGP fees 
unattractive, and utilization of the TLGP debt guarantee program has 
declined. Issuance peaked at $113 billion in December and was roughly 
$2 billion in August. In addition, the stock of guaranteed debt has 
fallen by nearly $50 billion since early June.
    These programs are also subject to ``sunset'' provisions. After 
receiving comments and determining that the program was still necessary 
for market stability, the FDIC recently extended the guarantee on 
transaction accounts under the TLGP to June 30, 2010. However, in doing 
so it increased the fee from 10 basis points to 15-25 basis points, 
depending on an institution's risk category. This fee increase will 
help ensure that the program is self-funding and does not impose losses 
on the Deposit Insurance Fund.
    The last day for new issuance under the TLGP senior debt guarantee 
program is currently October 31, 2009. On September 9, 2009, the FDIC 
Board of Directors approved the phase out of this program as scheduled. 
In conjunction with this phase out, the FDIC is seeking comment on 
whether a temporary emergency facility should be put in place for 6 
months after the expiration of the current program. Such a facility 
could provide additional guarantees for new issuance, at a 
substantially higher fee, in the event that participants are unable to 
access credit markets due to market disruption or other events beyond 
their control.

D. Federal Reserve Programs
    The Federal Reserve has implemented a number of programs designed 
to stabilize financial markets since the onset of the crisis. One set 
of programs provides liquidity directly to borrowers and investors in 
key credit markets. Such programs include the Commercial Paper Funding 
Facility (CPFF), the Asset-Backed Commercial Paper Money Market Mutual 
Fund Liquidity Facility (AMLF), the Money Market Investor Funding 
Facility (MMIFF), and the Term Asset-Backed Securities Loan Facility 
(TALF).
    Utilization of these liquidity programs has declined as market 
conditions have improved. For example, credit extended under the CPFF 
has declined from a peak of $350 billion in January to $46 billion 
recently, and lending under the AMLF has fallen from $152 billion to 
$79 million. The Federal Reserve charges interest on loans under each 
of these programs. Further, the Federal Reserve announced that it will 
terminate the MMIFF on October 30, the CPFF and AMLF on February 1, 
2010, and the TALF on June 30, 2010.

II. Policies to Support Systemically Significant Institutions
    The government's interventions to support specific systemically 
significant companies during this crisis have been focused on the 
objective of stabilizing the financial sector and the economy while 
protecting the taxpayers' investment. We have set clear principles to 
ensure that our investments in those companies are limited and 
temporary. We will not seek to participate in the management of their 
day-to-day operations. We will exit these investments as soon as 
practical, while protecting taxpayers and promoting financial 
stability.

A. Auto Industry
    The New General Motors and the New Chrysler recently emerged from 
expedited bankruptcies. The government's support in that process has 
prevented substantial job losses, led to orderly restructurings, and 
helped stabilize economic and financial markets. In exchange, the 
taxpayer received a combination of debt, preferred equity and equity, 
along with a government commitment to manage those investments 
commercially and exit from the investments as quickly as is 
practicable.
    The government has been a reluctant shareholder in General Motors 
and Chrysler. It committed tax dollars on the strict condition that 
these companies and their stakeholders were willing to fundamentally 
transform, address prior bad business decisions, and chart a path 
toward long-term financial viability without ongoing government 
assistance. The government rejected the initial viability plans of both 
companies, and it was only after a lengthy process that acceptable 
plans were formulated and implemented, which involved sacrifices and 
commitments from all stakeholders. Throughout the restructuring 
process, the Auto Task Force has refrained from intervening in the day-
to-day decisions of these companies. Such intervention could seriously 
undermine the companies' long-term viability and, consequently, the 
government's ability to maximize the recovery of taxpayer dollars.
    The termination of the Auto Warranty Commitment Program 
demonstrates the government's prudent use of taxpayer funds and 
commitment to exit. The government invested $641 million in the 
Warranty Program to give confidence to GM's and Chrysler's customers 
during a period of substantial uncertainty. Following the companies' 
emergence from bankruptcy, the money invested in the program has been 
returned, along with interest payments from New Chrysler. Similarly, 
Treasury has decreased the commitments under the Auto Supplier Support 
Program to $2.5 billion and $1 billion for GM and Chrysler, 
respectively.
    We also note that Chrysler Financial has fully repaid the 
investment made by the government.

B. Government-Sponsored Enterprises
    Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac 
experienced substantial losses from exposure to the housing market 
during the crisis. In September 2008, they were placed in Federal 
conservatorship.
    The government has invested directly and indirectly in the GSEs to 
maintain liquidity in the residential mortgage market. Treasury entered 
into Preferred Stock Purchase Agreements (PSPAs) with the GSEs, whereby 
Treasury purchased preferred equity in the companies and committed to 
provide funding to the companies to compensate for shortfalls in 
earnings, up to a maximum of $400 billion combined for both entities. 
The GSEs have received approximately $96 billion under these agreements 
and paid the government over $2 billion in dividends on the preferred 
equity. Treasury and the Federal Reserve also established credit lines 
for the GSEs. Neither has been used. Finally, Treasury and the Federal 
Reserve have been purchasing mortgage-backed securities (MBS) 
guaranteed by the GSEs, and the Federal Reserve has also purchased GSE-
issued debt.
    The government's exit strategy for the GSEs varies by program. 
Purchases under the PSPAs are limited to $400 billion in the aggregate. 
Treasury's credit facility is scheduled to terminate at the end of this 
year. Treasury will also complete its purchases of GSE MBS by the end 
of 2009, while the Federal Reserve anticipates that it will complete 
its purchases of GSE MBS and direct obligations by the end of the first 
quarter of 2010. Treasury can hold its portfolio of GSE MBS to 
maturity, and, based on mortgage market conditions, Treasury may make 
adjustments to the portfolio.
    Improving market conditions have benefited the GSEs. Their cost of 
borrowing has come down dramatically since the peak of the crisis, and 
the Federal Reserve has slowed its purchases of GSE debt. Freddie Mac 
reported positive net income and net worth for the second quarter of 
2009, while losses slowed at Fannie Mae. As a result, requested draws 
under the PSPAs fell to $11 billion in the past quarter.
    The government's investments and the conservatorship process have 
helped keep mortgage rates at affordable levels for American families 
and we look forward to working with Congress on the long term structure 
of the GSEs.

C. American International Group (AIG)
    Treasury and the Federal Reserve have provided credit to AIG in the 
form of equity purchases (Treasury) and secured lending (Federal 
Reserve). The Federal Reserve Bank of New York (FRBNY) provided a 
credit facility in September 2008, and in connection therewith it 
received convertible preferred shares. In November 2008, Treasury 
purchased $40 billion in cumulative preferred shares from AIG which was 
used to reduce some of the FRBNY's credit facility. In April 2009, 
Treasury exchanged those cumulative preferred shares for $41.6 billion 
in non-cumulative preferred shares and also created an equity capital 
facility, which expires no later than April 17, 2014, under which AIG 
may draw up to $29.8 billion as needed. The preferred equity provides a 
ten percent dividend, and AIG has requested a little over $3 billion to 
date through the Treasury facility.
    It should be noted that the FRBNY contributed the convertible 
preferred shares to a trust for the benefit of the taxpayer. The trust 
is managed by independent trustees who are not government employees. 
These trustees have the discretion to vote the shares, which represent 
approximately 80% of the voting rights of the outstanding common stock. 
They have elected a new board of directors, and that board has chosen a 
new chief executive officer.
    AIG's new management is working to unwind the complex financial 
transactions that have generated substantial losses for the firm, and 
they are working to improve the viability of the firm's core 
businesses. Treasury will continue to work with the Fed and AIG to 
maximize the recovery of taxpayer dollars.

D. Citigroup and Bank of America
    The government has invested in Citigroup and Bank of America 
through two programs: CPP and the Targeted Investment Program (TIP). 
The government also provided guarantees to Citigroup pursuant to the 
Asset Guarantee Program (AGP).
    Through the TIP, the government purchased $20 billion in preferred 
equity in each company. It also received warrants. The preferred equity 
pays eight percent in dividends.
    Only Citigroup has entered into an agreement with the government to 
participate in the AGP. It is structured as a loss-sharing agreement 
for $301 billion in residential and nonresidential assets. Citigroup is 
responsible for the first $39.5 billion of losses on the assets. 
Treasury covers $5 billion of the next loss, with Citi covering an 
additional $0.55 billion. The FDIC guarantees the next $10 billion in 
losses, and Citi covers an additional $1.1 billion. The Federal Reserve 
would then provide a secured loan equal to 90 percent of the remaining 
value in the pool collateralized by those assets, with Citi covering 
other losses.
    In return for their support under the AGP, Treasury and the FDIC 
have received roughly $7 billion in Citi preferred equity, which 
provides cumulative dividends of eight percent. There have been no 
claim payments to Citi under the guarantee.
    As part of an exchange offer to strengthen Citigroup's tangible 
common equity capital, Treasury converted the preferred stock received 
under the CPP investment for common stock which has increased 
significantly in value. Treasury and the FDIC also converted the 
preferred stock received under the TIP and AGP transactions for trust 
preferred securities.
    On January 15, 2009, Treasury, the Federal Reserve, and the FDIC 
signed a term sheet with Bank of America to provide a guarantee of 
losses on $118 billion in assets. The parties never entered into a 
definitive agreement, and on September 21, 2009, the parties entered 
into a termination agreement with respect to this arrangement, under 
which Bank of America paid the government a total of $425 million. The 
fee was paid because Bank of America received value from the agreed-to 
term sheet, including the representation that the government would 
guarantee losses from and after January 15, 2009 and the benefits that 
signing the term sheet had on market confidence in the company. The fee 
was equal to the fee that would have been payable had the definitive 
documentation been entered into, as adjusted for the shorter period and 
for certain changes to the asset pool that were discussed in the 
negotiations.
    We will continue to work with Citi, Bank of America, and their 
regulators to ensure that they can repay the taxpayer as soon as they 
are able.

E. Bear Stearns/JPMorgan
    The Federal Reserve has not directly purchased any assets of Bear 
Stearns. It has provided approximately $29 billion in loans secured 
against former Bear Stearns assets in an entity called Maiden Lane LLC. 
The Federal Reserve is a senior creditor and receives interest payments 
for its senior loan.
    The Federal Reserve retained an outside financial advisor to manage 
the assets held in the Maiden Lane LLC portfolio. The advisor's primary 
objective is to pay off the senior loan, including principal and 
interest, while refraining from investment actions that would disturb 
general financial market conditions. Financial statements for the LLC 
are available at http://www.newyorkfed.org/markets/maidenlane.html.

III. Transparency and Oversight
    Treasury, FDIC, and the Federal Reserve all publish detailed 
information regarding their financial programs online and in printed 
publications. Treasury recently published a report entitled The Next 
Phase of Government Financial Stabilization and Rehabilitation 
Policies, which is available at: http://www.financialstability.gov/
latest/09142009_statusReport.html.
    In addition, details regarding Treasury programs authorized by 
EESA, including new investments and repayments, are reported on the 
Treasury's website: http://www.financialstability.gov/.
    The FDIC publishes details of its programs, along with monthly and 
quarterly reports, at: http://www.fdic.gov/regulations/resources/TLGP/
index.html and http://www2.fdic.gov/QBP/index.asp.
    The Federal Reserve provides details of its programs at http://
www.newyorkfed.org/ and in reports and testimony available at: http://
www.federalreserve.gov/monetarypolicy/bst.htm and http://
www.federalreserve.gov/monetarypolicy/mpr_default.htm.
    Several entities provide oversight of the government's financial 
programs. For example, Treasury continues to work with the Special 
Inspector General for TARP and the Congressional Oversight Panel to 
improve transparency and management of its programs. Publications and 
testimony from these oversight bodies can be found at: http://
www.sigtarp.gov/ and http://cop.senate.gov/, respectively.
    The Office of Management and Budget and the Government 
Accountability Office (GAO) also provide oversight of Treasury and FDIC 
programs. The Federal Reserve is subject to oversight by Congress. 
Board governors and staff testify before Congress frequently to discuss 
issues within the Federal Reserve's purview. The GAO also has broad 
authority to review and audit Federal Reserve activities. And the Board 
of Governors and Reserve Banks undergo internal and external audits.
Question Submitted By Hon. Erik Paulsen, a Representative in Congress 
        from Minnesota *
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    * There was no response from the witnesses by the time this hearing 
went to press.
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    Question. Some are proposing that all derivatives have to either go 
on an exchange or be cleared. There are obvious problems with trying to 
shoe-horn customized derivatives onto an exchange. There are also 
significant costs to end-users to forcing derivatives to be cleared. 
While many talk about the over 90% of Fortune 500 companies that safely 
and prudently use customized OTC derivatives today, it is also true 
that half of the mid-sized firms and thousands of smaller U.S. 
companies also use these tools to manage specific financial risks. Do 
you agree that requiring all derivatives to be cleared will lead to 
margin requirements for all end-users? Do manufacturers have liquid 
collateral for these margins easily at hand right now?
    In response to concerns about the costs to clearing, I've heard 
some say that companies will either find the money, or maybe fewer 
derivatives will be used--and they are ok with that. But companies--big 
and small--use these derivatives to protect against risks they face. 
What happens to companies that can't find the collateral to finance the 
use of derivatives? Would the company face more or less risk in their 
day to day business? And is it in the best interest of the economic 
growth of U.S. business to have capital tied up this way versus 
investing it in research, plants or jobs?
    The strict mandate for cash margin and collateral within the 
clearinghouse environment has been pointed to as a severe constraint on 
the end-users of OTC derivatives. End users say that they often use 
plants and equipment and even real estate as collateral in their 
current bilateral contracts. Clearing houses I understand have to 
require cash under their regulatory rules. What are your thoughts on 
the need to omit cash margin/collateral and provide broad flexibility? 
By allowing real estate and other seemingly illiquid sources for 
collateral/margin are we setting the stage for the next risk bucket or 
should cash be king in this arena in light of recent events?
    Banks currently use CLS (Continuous Linked Settlement Bank) for 
foreign exchange settlements. On average CLS settles up to $10 trillion 
each day in foreign exchange related payment obligations and has been 
recognized by G10 central banks as a significant mitigator of 
settlement risk in the foreign exchange market. Given that a platform 
like this already exists in the foreign exchange market, do you support 
significant modifications to the way the foreign exchange market works 
and if so, why?
Question Submitted By Hon. Bill Cassidy, a Representative in Congress 
        from Louisiana *
Hon. Timothy F. Geithner,
Secretary,
U.S. Department of the Treasury.

    Question. At the July 10, 2009 House Agriculture/Financial Services 
Committee joint hearing, we spoke regarding the effects of the 
Administration's proposal on publicly-owned utilities.
    As follow up, not-for-profit public utilities have asked if 
prepayment transactions utilizing tax-exempt financing for the 
prepayment of contracts would be eliminated and are concerned that the 
imposition of cash-margin requirements would drive up costs to 
consumers.
    How does the Administration propose to mitigate cash-margin 
requirements for these public not-for-profit hedgers? In addition, has 
the Administration considered imposing additional reporting 
requirements for over-the-counter market transparency without the 
standardized clearing requirement?
    I appreciate your attention to these important questions as 
Congress continues to work with you on striking the appropriate balance 
between preserving stability in our markets and fostering innovative 
methods for market participants to manage risk.
            Sincerely,
            [GRAPHIC] [TIFF OMITTED] T1123.003
            
Hon. Bill Cassidy,
Member of Congress.

                                  
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