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

                      TARP OVERSIGHT: WARRANT REPURCHASES

                            AND PROTECTING TAXPAYERS

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                          OVERSIGHT AND INVESTIGATIONS

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 22, 2009

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-67

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

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

            Jeanne M. Roslanowick, Staff Director and Chief Counsel
                  Subcommittee on Oversight and Investigations

                         DENNIS MOORE, Kansas, Chairman

    STEPHEN F. LYNCH, Massachusetts      JUDY BIGGERT, Illinois
    RON KLEIN, Florida                   PATRICK T. McHENRY, North Carolina
    JACKIE SPEIER, California            RON PAUL, Texas
    GWEN MOORE, Wisconsin                MICHELE BACHMANN, Minnesota
    JOHN ADLER, New Jersey               CHRISTOPHER LEE, New York
    MARY JO KILROY, Ohio                 ERIK PAULSEN, Minnesota
    STEVE DRIEHAUS, Ohio
    ALAN GRAYSON, Florida
                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 22, 2009................................................     1
    Appendix:
        July 22, 2009................................................    47

                                   WITNESSES
                            Wednesday, July 22, 2009

    Allison, Herbert M., Jr., Assistant Secretary for Financial
      Stability, U.S. Department of the Treasury.....................     7
    Barofsky, Neil, Special Inspector General for the Troubled Asset
      Relief Program.................................................    25
    McCool, Thomas J., Director, Center for Economics, Applied
      Research and Methods, U.S. Government Accountability Office....    29
    Warren, Professor Elizabeth, Chair, Congressional Oversight Panel    27

                                    APPENDIX

    Prepared statements:
        Moore, Hon. Dennis...........................................    48
        Allison, Herbert, Jr.........................................    50
        Barofsky, Neil...............................................    60
        McCool, Thomas J.............................................    70
        Warren, Professor Elizabeth..................................    86

                  Additional Material Submitted for the Record

    Moore, Hon. Dennis:
        Letter to Hon. Timothy Geithner, dated June 2, 2009..........    94
        Letter from Neil Barofsky and Elizabeth Warren, dated June
          16, 2009...................................................    96
        Letter from Neil Barofsky and Elizabeth Warren, dated June
          10, 2009...................................................    97
    Bachus, Hon. Spencer:
        SIGTARP audit report entitled, ``SIGTARP Survey Demonstrates
          That Banks Can Provide Meaningful Information on Their Use
          of TARP Funds,'' dated July 20, 2009.......................    99
    Warren, Elizabeth:
        Additional information provided for the record in response to
          questions asked at the hearing.............................   143

                      TARP OVERSIGHT: WARRANT REPURCHASES

                            AND PROTECTING TAXPAYERS

                                  ----------

                            Wednesday, July 22, 2009

                 U.S. House of Representatives,
                              Subcommittee on Oversight
                                    and Investigations,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2 p.m., in
    room 2128, Rayburn House Office Building, Hon. Dennis Moore
    [chairman of the subcommittee] presiding.
        Members present: Representatives Moore of Kansas, Klein,
    Speier, Kilroy, Grayson; Biggert, McHenry, Bachmann, Lee, and
    Paulsen.
        Ex officio present: Representatives Frank and Bachus.
        Also present: Representatives Sherman and Marchant.
        Chairman Moore of Kansas. This hearing of the Subcommittee
    on Oversight and Investigations of the House Financial Services
    Committee will come to order. Our hearing this afternoon is
    entitled, ``TARP Oversight: Warrant Repurchases and Protecting
    Taxpayers.'' We will begin this hearing with members opening
    statements up to 10 minutes per side, then we will hear
    testimony from our first witness. After that, members will each
    have up to 5 minutes to question our witness. I will then
    excuse our witness and invite the second panel of witnesses to
    give their testimony and we will continue with members'
    questions.
        The Chair advises members that given the busy afternoon
    schedule, I will be keeping everyone, including myself, to 5
    minutes. Any unanswered questions can always be followed-up in
    writing for the record. Without objection, all members' opening
    statements will be made a part of the record. I now recognize
    myself for up to 5 minutes for an opening statement.
        The past month or 2, it has been nice to see some good news
    regarding the TARP. After some upbeat results of the stress
    tests on the largest financial firms, 10 of the largest banks
    holding companies were authorized to pay back $68.2 billion of
    TARP funds. If you include smaller banks, they totaled over $70
    billion that has been repaid to U.S. taxpayers. And this news
    coming after the Treasury Department used more than $200
    billion for more than 600 banks to stabilize the financial
    sector. When Congress enacted TARP last year, we authorized the
    Treasury Department to request that firms receiving TARP funds
    issue warrants. This provides an opportunity for taxpayers to
    share in the upside for their investments. These warrants give
    us the right to buy shares of a company at a set price at some
    point in the future, much like an employee stock option. But as
    you might imagine, whenever the government is the key actor in
    executing these warrants, unlike an employee stock option,
    there are a number of other policy issues and concerns that we
    have to deal with and that have to be weighed.
        Even so, I am firmly committed to doing all we can to
    ensure taxpayers are fully repaid. On May 8th, Old National
    Bancorp became the first TARP recipient bank to repay its TARP
    funding and repurchase their warrants held by Treasury. The
    bank paid $1.2 million to buy back these warrants. But what
    concerned me was a professor from the University of Louisiana
    in Lafayette, Professor Linus Wilson, analyzed this transaction
    very closely, and he determined that the warrants were worth,
    at a minimum, $1.5 million, and as much as $6.9 million. So at
    the low end, Treasury was off by $300,000 and in the worst
    case, Treasury missed a return of an additional $5.4 million.
        $5 million might not sound like a lot of money when we are
    talking about billions of trillions of dollars in financial
    rescue aid, but if you consider the 600 other banks that will
    eventually need to repurchase their warrants, this money
    quickly adds up to a big potential return for U.S. taxpayers. I
    wrote a letter to Secretary Geithner on June 2nd urging him in
    no uncertain terms that he act to protect the taxpayers'
    investments in these firms by maximizing returns in these
    warrants. I carbon copied SIGTARP, COP, and GAO, and 2 weeks
    later, I received a joint letter from Special Inspector General
    Barofsky and Professor Warren expressing their commitment to
    transparency. They noted a coordinated effort between COP and
    SIGTARP to review, ``whether those warrant repurchasing
    procedures provided fair value to the American taxpayers.''
        Earlier this month, I was glad to see COP issue a report
    entirely focused on TARP repayments, including the repurchase
    of stock warrants. Similar to the analysis done by Professor
    Linus, COP found in the first 11 banks that repurchased their
    warrants, Treasury was receiving only 66 percent of what they
    could have received for taxpayers. COP knows that these small
    banks represent only a fraction of 1 percent of all warrants
    issued, but if this trend continues, taxpayers could miss out
    on an additional $2.7 billion worth of returns on their
    investment.
        But on the same day the COP report was released, we
    received some good news when The Wall Street Journal reported
    that JPMorgan Chase had decided to pursue repurchasing its
    warrants through a public option. They were frustrated with the
    Treasury Department for demanding too high a price for their
    warrants. I am very glad the Treasury Department is holding a
    tough line, especially against the largest of the TARP
    recipients. And today Goldman Sachs announced they will pay
    $1.1 billion to redeem their warrants, representing a return of
    23 percent for U.S. taxpayers. That sounds pretty good, but is
    it enough? I will keep pushing to make sure that every single
    TARP dollar that helped stabilize our financial sector is fully
    repaid so that our children and grandchildren are not left with
    the tab.
        I look forward to hearing from our witnesses today,
    especially the new TARP Administrator and the Assistant
    Secretary for Financial Stability, Mr. Herb Allison. He has one
    of the toughest jobs in the country, and I look forward to
    Treasury's viewpoint on how they weigh these difficult
    decisions to stabilize the financial sector while protecting
    taxpayers. And the strong oversight Congress put in place when
    we created TARP continues to publish what amounts to thousands
    of pages of oversight reports all free and available online
    examining every angle and aspect of TARP.
        Just this week, SIGTARP published their third quarterly
    report. I look forward to hearing Mr. Barofsky, Professor
    Warren, and Mr. McCool's testimony today. I now recognize for 5
    minutes the ranking member of the subcommittee, my colleague
    and friend from Illinois, Ranking Member Judy Biggert.
        Mrs. Biggert. Thank you, Mr. Chairman, for holding this
    hearing today, the hearing which is intended to focus on a
    specific aspect of the TARP program, warrant repurchases and
    protecting taxpayers. It is in the taxpayers' best interest
    that as soon as possible, the Federal Government gets out of
    the trillion dollar bailout business and out of the practice of
    owning and running private businesses. This is something the
    Administration also supports. How soon can we withdraw taxpayer
    money and end the practice of taxpayers propping up industries.
    Treasury, the Fed, and the FDIC must communicate to the markets
    and taxpayers the exit strategy and the timeline for it. We
    need to put an end to the Federal Government picking winners
    and losers in the marketplace which has facilitated unfair
    competition, competitive advantages for some businesses, and
    completely abandoned others.
        It is also in the taxpayers' interest that Treasury secure
    the best possible return on its investment. I think we will
    hear some criticism from some of our witnesses today that
    Treasury is shorting taxpayers on the investment. From what I
    understand, this may or may not be true. The accusation may be
    more for headlines than true and is based on differences of
    opinion as to what is the best modeling methodology to value
    warrants. Whatever the case, taxpayers must be assured that
    Treasury is using the best means to recapture taxpayers' money.
    I hope that Mr. Allison will provide us with those assurances
    today. And I agree with many of our witnesses today that
    taxpayers deserve transparency with regard to warrants and with
    regard to what TARP recipients are doing with taxpayer money.
    At the same time, I want assurances from today's witnesses that
    as they work to improve TARP transparency, and while TARP is
    still active, they will not jeopardize Treasury and taxpayers'
    negotiating position to secure the best return on their
    investment.
        It is also vital that we prevent any individual, Federal
    entity or business involved in TARP from making a profit based
    on insider information especially when it is at the expense of
    the taxpayer. That is unacceptable and I want to know what is
    being done to prevent this.
        Finally, I am disappointed with legislation that would
    siphon off TARP returns when we still don't have a guarantee
    that TARP will ultimately produce a return or loss for
    taxpayers. At a time of record deficits and unemployment
    reaching 10 percent nationwide, any profit on this tremendous
    risk should first and foremost go toward paying down the
    deficit. With that, I would like to yield the balance of my
    time to the ranking member of the Financial Services Committee,
    Mr. Bachus.
        Mr. Bachus. Thank you. And thank you, Mr. Moore, for
    convening today's important subcommittee hearing on oversight
    of the TARP program. I would also like to recognize Ranking
    Member Biggert's fine service. She has been particularly, I
    think, helpful on the issues involving the SEC and the CFTC. I
    thank you. Last fall, Congress required recipients of
    assistance under the Capital Purchase Program to issue warrants
    to the Treasury. I have a particular interest in this program
    because I first proposed it or something like it on September
    18th, and felt like by setting a dividend or at least the
    repayment at a certain percent, I felt like we would be best
    assured of receiving a fair return as opposed to a more fluid
    definition.
        For instance, when you buy toxic assets, and I said that in
    the very first meeting with Secretary Paulson and Chairman
    Bernanke, you know, what do we price these at? If you price
    them too low, it doesn't help the banks with their capital. If
    you pay too much for them, it is a bad deal for the taxpayers.
    So I have always thought that this was our best opportunity of
    safeguarding the taxpayers and yet coming to the aid of the
    banks. And I think time has shown that to be correct.
        Chairman Frank and I and others worked in a bipartisan way
    on this along with Representative Roy Blunt. And this was done
    so that the American taxpayer would have the opportunity to
    benefit from the warrants, particularly from any upside as
    these companies return to financial health. And although we
    were hoping that was the case now, some of them had a
    spectacular return. And you saw today with Goldman Sachs paying
    back the money, there was a 23 percent annualized return. Now,
    that is going to be unusual I think, but it certainly was good
    news to the taxpayers.
        However, many questions do remain about how to properly
    value these warrants to ensure that taxpayers receive a proper
    return on their investment. And I know, Ms. Warren, Professor
    Warren or Dr. Warren, you had proposed that they be placed on
    the open market for sale to the highest bid. And certainly,
    that is one option that has some appeal. Particularly if the
    Treasury and the party cannot come to some agreement, I think
    that is probably the only valid option. And normally I would be
    in favor of letting the market decide asset values in all
    cases. I do think that the Oversight Panel's formula for
    setting the option price could result in the government having
    to hold the warrants for an extended period of time, and then
    you have the risk of another economic downturn.
        So if you knew that the economy was going to continue to
    recover, or the companies' prospects, I would say yes. But you
    look at the commercial mortgage market and others and it is
    really a--it is a somewhat speculation. And I have advocated
    trying to, particularly if the Treasury sets a price and it is
    accepted, let the taxpayers get their money back, go ahead and
    get that money back in the Treasury where it can be used to pay
    down the deficit.
        In the July report on additional views, my colleague, Mr.
    Hensarling, explained that the valuation of the warrants is a
    highly complex analysis. And that a one-size-fits-all approach
    may not yield the best results for the American taxpayer. You
    know, I agree that is true. While the July report seems to
    paint a picture that some money may be left on the table if its
    valuation formula is not used, I believe that a far better
    result for the American taxpayer, as I said, is to go ahead,
    and as soon as possible, get the Federal Government out of the
    business of holding stocks and warrants. The financial
    institutions and Treasury have indicated that is also their
    policy. So to get the government's investment back as soon as
    possible.
        Let me conclude by saying, Mr. Chairman, as institutions
    begin to pay back their TARP assistance, and really Capital
    Purchase Program monies, we need to end bailouts, return the
    money to the taxpayers, not recycle the funds back into more
    bailouts. Part of that will be regulatory reform to ensure that
    we don't have any more bailouts. And I think protection of
    consumers is a part of that. Although my approach differs from
    Chairman Frank, I believe that what we ought to be doing is
    saying to the regulatory agencies which have the skill and the
    means and the resources to enforce consumer protection, that we
    give them the charge to do it, and tell us how they are going
    to do it. And if over the period of 6 months to a year, we see
    that is not working, then we could address it in a more novel
    way.
        But let's be clear about another fact. Although the Capital
    Purchase Program may earn a profit, the TARP program overall
    will not. So for that reason, I believe that all these dividend
    payments ought to be given back to the Treasury as soon as
    possible. Mr. Chairman, thank you for your indulgence and my
    opening statement.
        Chairman Moore of Kansas. Thank you as well. I now
    recognize Mr. Klein for 2 minutes.
        Mr. Klein. Thank you, Mr. Chairman, for holding this
    important hearing. This is one of those hearings where we
    should have a lot more press coverage and a lot more attention
    to the fact that we are having a pleasant discussion about the
    TARP and the scenario where not only there are large banks that
    were probably put in a more solid position after what happened
    in September, but the consideration now is not only paying back
    the initial capital, but what is going to happen with the
    bonus, that is the warrants. And for those people who aren't
    familiar with warrants, that is obviously the upside that we
    have been talking about all along.
        So there is a very positive discussion going on here today.
    And I am glad that members on both sides of the aisle can
    recognize that. That doesn't mean that things are good for
    everyone, but this is a little bit of a silver lining to the
    fact that the taxpayers of the United States who put all this
    money on the table are going to get not only the money paid
    back, but will share in the upside.
        Now that being said, I want to, in my opinion, and I
    appreciate the witnesses today and I had a chance to meet with
    many of you and talk to you about some of the specifics. And I
    thank you for your service. It is a very important part of the
    oversight here, is making sure that the taxpayers receive the
    maximum return for the risk that they took. Not everybody
    wanted to go along with this, but we did what we had to do. And
    those people who said we didn't need to do this, that is a
    matter for history to judge. But at the present time, we want
    to wish all of our businesses and banks in the United States
    success; we want them to succeed; we want them to lend more.
    And a strong message I would like to deliver to the banks that
    are top recipients is to start lending, start moving along
    here.
        I mean, we have a liquidity issue in the United States that
    still is out there. And whether or not you are paying back the
    money, or the warrants are going to be exchanged in some form
    or fashion, we need you to be a part of our recovery. That
    being said, the fairness part of this is making sure that we
    get the maximum bang for the buck. And whether it is on an
    auction or whether there is a wait or not a wait, again, I will
    leave that to some of the professionals who can help us realize
    that we get the maximum bit of value back from the banks that
    end up taking this money. Some of them are now recording
    historic profits. And again, we wish them all well. We want
    that success to filter out to others as well. But we want to
    make sure that the taxpayers in this country who literally went
    on the line to make sure the recovery was going to begin, and
    it seems to be beginning now, that we can put some of this
    money back in the till. And those banks that may need some
    additional help and others around the United States may get
    that help, but other than that we get the maximum dollars back.
    Thank you, Mr. Chairman.
        Chairman Moore of Kansas. Thank you, Mr. Klein. The Chair
    now recognizes Ms. Mary Jo Kilroy for 2 minutes.
        Ms. Kilroy. Thank you, Mr. Chairman. Thank you for
    conducting this hearing. Although I was not part of the 110th
    Congress, and I voted ``no'' on the House plan to release more
    money from the Troubled Assets Relief Program, I understand
    that the American taxpayers took on some risk when we worked to
    bail out the banks, many of whom made decisions that have hurt
    Ohio's families and hurt Ohio's economy. In fact, they hurt our
    country's economy.
        Now, as Main Street still awaits the economic recovery and
    the jobs that it deserves, some banks are back to making record
    profits again after receiving our help. And I think that it is
    appropriate that the American public receives a return on the
    investment that they made with the TARP money. I find it
    unacceptable that the downturn hurt Main Street hardest, yet
    the recovery seems to be benefiting corporate America first.
    This issue, the repayment of the taxpayers and the upside of
    warrants, is one situation where the taxpayers deserve to reap
    the full benefits in an open and transparent process.
        According to the reports that we have received from Dr.
    Warren, and from Mr. Barofsky, the banks and Treasury are
    negotiating the repayment of this debt, the purchase and sale
    of these warrants behind closed doors instead of allowing the
    transfer and the trading to happen on the open market and
    allowing the market to set the price. We do not know if the
    current process is producing the benefits we are owed, however,
    Dr. Warren has found that we are getting about $0.66 on the
    dollar for our investment and that the total shortfall to our
    constituents could be as much as $2.7 billion.
        A market-based approach would remove the secrecy and
    special interest and maximize the return on taxpayers'
    investment. That is why I introduced with six of my colleagues
    what we call the Profit Act. This logical and commonsense bill
    would maximize profits for our taxpayers and ensure
    transparency by requiring an open process, eliminating the
    loophole that allows banks to negotiate behind closed doors
    with Treasury. The public auction would be such a transparent
    open market.
        And I think that one of our witnesses, Assistant Secretary
    Allison, stated earlier this year in his testimony that in
    relation to toxic assets on bank balance sheets, ``We have our
    theories, but in the last analysis that is why you have
    financial markets, you have to have liquid interchanges and
    then the truths will come out as to what assets are actually
    worth.''
        I look forward to today's testimony. And I suggest to the
    panel and to my colleagues that now is the time to act to close
    this loophole. According to the Congressional Oversight Panel,
    which Dr. Warren heads, less than 1 percent of the warrants,
    those stock options for the American people have been sold.
    This is the time to push Treasury to open the process with
    transparency and to make sure Americans get the deal that they
    deserve. Thank you. I yield back.
        Chairman Moore of Kansas. Thank you, Ms. Kilroy, for your
    opening statement. And it is now my pleasure to introduce our
    first witness, Mr. Herbert M. Allison, Jr., the newly confirmed
    Assistant Secretary for Financial Stability at the U.S.
    Department of the Treasury. As Assistant Secretary for
    Financial Stability, Mr. Allison is responsible for developing
    and coordinating Treasury's policies on legislative and
    regulatory issues affecting financial stability, including
    administering TARP. Mr. Allison most recently served as
    President and CEO of Fannie Mae as well as the Chairman,
    President, and CEO of TIAA-CREF. He has held senior positions
    at Merrill Lynch, Time Warner, and the New York Stock Exchange.
    Mr. Allison also spent 4 years as an officer in the United
    States Navy, including a year in Vietnam. Without objection,
    your written statement will be made a part of the record. Mr.
    Assistant Secretary, you are recognized for 5 minutes to
    provide a brief summary of your statement.

     STATEMENT OF HERBERT M. ALLISON, JR., ASSISTANT SECRETARY FOR
          FINANCIAL STABILITY, U.S. DEPARTMENT OF THE TREASURY

        Mr. Allison. Chairman Moore, Ranking Member Biggert, and
    members of the subcommittee, thank you for the opportunity to
    discuss Treasury's efforts to stabilize and repair the Nation's
    financial system. In response to the major crisis in our
    Nation's financial system and housing markets, Congress passed
    the Emergency Economic Stabilization Act, or EESA, last October
    establishing the Troubled Assets Relief Program, or TARP, and
    giving Treasury the necessary tools and flexibility to
    stabilize the financial system and restore the flow of credit
    to consumers and business. Our mandate in EESA is two-fold; to
    stabilize the financial system while protecting the taxpayers.
    Today I want to update you on our progress. In just 10 months,
    Treasury has invested more than $200 billion in 657 financial
    institutions of all sizes in 48 States, including over 300
    small and community banks through the Capital Purchase Program,
    or CPP. We reopened the Capital Purchase Program recently for
    small and community banks recognizing the critical role these
    banks play in our communities. We provided support to three
    systemically significant institutions.
        We launched an unprecedented housing program to help
    millions of homeowners. We assisted with restructuring of both
    General Motors and Chrysler through the bankruptcy process, and
    as a result, both companies are better able to compete today.
    We helped to restart the securitization markets, a key source
    of credit to consumers and businesses. We launched a public and
    private investment program to help remove legacy assets from
    the balance sheets of financial institutions so they can
    redeploy their capital to support lending. And we issued
    regulations guiding executive compensation at all firms
    receiving TARP funds. We have allocated about $643 billion to
    our EESA programs. We have actually invested $362.6 billion of
    that amount to date. We have also received over $70 billion in
    CPP payments from 34 institutions and $6 billion in dividend
    repayments from participants in all the TARP programs.
        Finally, we are beginning to receive proceeds from the sale
    of warrants through the CPP. And as was noted today, we
    received $1.1 billion from Goldman Sachs, representing a return
    of 23.15 percent on the taxpayers' money. As you can see,
    Treasury has accomplished a great deal, all while building a
    new Office of Financial Stability. However, we have much more
    to do as described later in my testimony. I would like to
    briefly discuss Treasury's process for selling the warrants it
    has received through the CPP.
        I have attached our policy statement and our frequently
    asked questions on this subject with my testimony for the
    record. Treasury has communicated its consistent and clear
    process for valuing warrants in a manner that protects
    taxpayers. We apply the same process consistently for all banks
    large and small. Treasury is committed to getting fair value
    for the taxpayers for these warrants and we made that process
    public on our Web site. When a publicly-traded institution
    repays Treasury's investment under the CPP, it has the
    contractual right to repurchase its warrants at fair market
    value through an independent valuation process directly from
    Treasury. One source of complexity in valuing warrants is that
    the warrants do not trade on any market so they don't have
    observable market prices. Models by themselves cannot give us
    reliable estimates of the realizable price in the marketplace.
        So we are using a comprehensive approach to estimating
    these values, which involves a variety of inputs, including a
    set of well-known financial models. In developing our valuation
    and repurchase process, we counsel with numerous experts,
    market makers, and industry participants. Treasury also
    consults with third-party market participants as to what they
    would be willing to pay for the warrants and we obtain full
    independent valuations from outside investment managers.
    Treasury decided to sell the warrants within several months
    after they are eligible for sale rather than hold them for a
    substantial period. Our guiding principle is the President's
    belief that the extraordinary government interventions
    necessitated by the crisis should be unwound as quickly as is
    consistent with Treasury's mandate under EESA to restore
    liquidity and stability to the financial system while
    protecting the interests of taxpayers.
        As with all aspects of our financial stability programs,
    Treasury welcomes the recommendations and comments of others as
    we continually strive for improvement, transparency, and
    accountability in all of our programs. Earlier this month,
    Treasury announced its selection of nine asset managers for the
    legacy securities public-private investment program, also known
    as PPIP, to remove legacy assets from the balance sheets of
    financial institutions. The PPIP is a critical element of
    Treasury's financial stability plan and is designed to support
    market functioning and facilitate price discovery in the
    important asset-backed securities markets allowing banks and
    other financial institutions to redeploy capital and extend new
    credit to households and businesses.
        Treasury took a number of comprehensive measures to enhance
    the potential of this program and to protect the taxpayer. We
    consulted closely with the SIGTARP as we developed a robust
    framework for compliance, governance, and controlling conflicts
    of interest. Treasury also ensured that the PPIP includes a
    spectrum of minority-, women-, and veteran-owned businesses
    that represent our communities. The TARP has been key to
    stabilizing the financial system and preventing greater
    deterioration in the availability of credit to households,
    businesses, and communities.
        Amid signs of recovery in the financial markets in the
    first half, we have seen improvement in spreads, that is the
    measure of risk in the financial system, and we have also seen
    the issuance of corporate debt has increased sharply. There are
    also some signs that the economy is beginning to mend. Consumer
    confidence has increased significantly, housing starts have
    moved higher, and house purchases have begun to pick up in some
    parts of the economy. Nevertheless, our financial system and
    our economy remain vulnerable. Even with the modest improvement
    in conditions, unemployment and the level of home foreclosures
    remains high. Strains in the commercial real estate market
    continue to build. This is why Treasury must remain vigilant
    and press ahead with our financial stabilization efforts.
        Upon taking office, President Obama committed to increased
    transparency, accountability, and oversight in our government's
    approach to stabilizing the financial system. Secretary
    Geithner further underscored Treasury's commitment to
    transparency in all our programs. One of Secretary Geithner's
    and my priorities is to ensure that we enhance and provide
    transparency as our activities evolve. I will regularly update
    Congress on our progress. We have productive working
    relationships with our four oversight bodies: the Special
    Inspector General of the TARP, or SIGTARP; the Government
    Accountability Office, or GAO; the Congressional Oversight
    Panel, or COP; and the Financial Stability Oversight Board, or
    FSOB. Treasury has accepted a great majority of the
    recommendations of those bodies. Where we conclude that a
    recommendation is impractical, we find other means to achieve
    the same goal. Treasury shares the concerns of Congress and/or
    oversight bodies that we see an increase in lending by banks.
    And we have required banks receiving a Treasury investment to
    report their lending activities regularly.
        In January, Treasury launched an important initiative to
    help the public easily assess the lending activities of banks
    participating in the CPP starting with the top 21 banks, since
    they account for over 50 percent of lending in our communities.
    Then in March we expanded the survey to include all banks in
    the CPP and have now published 3 lending reports with data from
    over 500 banks. Because we believe these reports are critical
    to helping the public understand the lending environment during
    this crisis, we have asked 10 large banks that have repaid
    Treasury's CPP investment to continue participating in the
    survey through the end of this year and they have agreed, and
    we appreciate their voluntary cooperation. Treasury is working
    urgently to maximize the impact of our programs on financial
    stability but we must allow some time for these programs to
    have their full effect.
        We recognize that we have much work ahead to restore the
    flow of credit to consumers and businesses and alleviate the
    real hardships that Americans face every day. As my colleagues
    and I work on this important financial stability effort, we
    will strive to be prudent investors on behalf of the American
    people and to protect the taxpayers who have entrusted us with
    so much of their money. Here are the top priorities of the
    Office of Financial Stability:
        First, we will carefully review the controls over
    taxpayers' money, giving special attention to compliance with
    laws and directives governing risk and internal audits. In this
    regard, we will work closely with Congress and the oversight
    bodies. Second, we will strive to maximize the effectiveness of
    financial stability programs restoring soundness to financial
    institutions and liquidity to our markets. And finally, we will
    emphasize transparency and interaction with Congress so that
    the American people will know what we are doing with their
    money, why we are doing it, and how it is helping the financial
    system, the economy, and their lives. Thank you very much, and
    I look forward to answering your questions.
        [The prepared statement of Assistant Secretary Allison can
    be found on page 50 of the appendix.]
        Chairman Moore of Kansas. Thank you for your testimony, Mr.
    Allison.
        I now recognize myself for 5 minutes for questioning. Mr.
    Allison, as you know, Goldman Sachs announced they are buying
    back their warrants for $1.1 billion directly from the
    Treasury, and JPMorgan Chase is going to a public auction
    because according to news reports, there is a feeling you are
    driving too hard a bargain, which I am frankly glad to hear. Is
    $1.1 billion enough for Goldman's warrants? Would taxpayers
    have received more if they went to a public auction.
        Mr. Allison. Thank you, Chairman Moore, for your question.
    It is a question that we ask ourselves all the time. We have,
    even though we are contractually obligated to go through this
    process of independent valuation with a bank if it chooses to
    do so, if the bank decides it would rather auction the
    warrants, we are willing to go that route. We have modeled both
    approaches. Of course, as I mentioned in my earlier testimony a
    month or so ago, we can't tell for sure how the market will end
    up valuing warrants. We try our best if the process is going to
    be the independent valuation approach mandated by contracts, to
    get market-based information nonetheless.
        And so that is why we go out and we ask market participants
    to give us quotes on these warrants. We are satisfied based on
    those quotes, based on analysis by independent asset managers,
    and based upon our own use of valuation models similar to that
    used by the COP, that this is a very fair price for taxpayers.
    We are comfortable with that. Although I still can't tell you
    that we would do better or worse out in the open market.
    Nonetheless, based on a system we use for every bank and have
    since the beginning, we are very pleased with this outcome.
        Chairman Moore of Kansas. Thank you. Mr. Allison, what is
    your response to the paper from Professor Linus on Old National
    as well as COP's report saying that Treasury could miss out on
    a potential $2.7 billion worth of returns for taxpayers? What
    policy issues does Treasury consider when reviewing these
    warrant repurchases? And also, I have heard some say auctions
    should be held shortly after earning season, say early August,
    providing transparency to all potential buyers. When will
    Treasury hold these auctions?
        Mr. Allison. In response to our view of the process of the
    COP, first of all, we use a similar model to the COP. We
    respect their approach. We have had discussions with the COP
    about ours and about theirs. There are, as the COP report
    pointed out, small differences in the assumptions that go into
    a model, especially when you are valuing warrants as long as 10
    years, can have a major impact on the result of the valuation.
        And in this case, one of the assumptions has to do with
    whether there should be a discount to the price baked into the
    model because small banks have much smaller warrant positions
    that we hold, and when they are sold, there is likely to be
    less demand, less liquidity in the market, and therefore a
    lower price. We factor in for small banks a discount for the
    lack of liquidity of those warrants. So that is one reason why
    there could be a difference between the model outcome of the
    COP and ours. I would also ask that you look at the comments of
    various COP members appended to the COP report where they point
    out some of these issues. I think we have to be--while we are
    all trying to do our best to value these warrants, we all have
    to respect the uncertainty of a model and that is why we use
    alternative approaches such as going into the market and asking
    real market participants what they think the warrants are
    worth.
        Chairman Moore of Kansas. And my final question, Mr.
    Allison. I know you have only been on the job for a month, but
    have you given any thought to a TARP exit strategy? Do you have
    any sense of how long we should expect TARP to be up and
    running? The law creating TARP requires that after 5 years, the
    President must submit a legislative proposal to Congress of how
    the financial services industry will pay for any remaining
    outstanding losses on the program. Since we are nearing the
    one-year anniversary of the law, do you expect that we will
    have losses on the program in 4 years?
        Mr. Allison. The EESA legislation provides that at the end
    of the year, we might end up making investments in companies.
    However, the Secretary of the Treasury can make a determination
    as to whether the program should be extended, that is for
    making investments, until October of next year. The Secretary
    will be deliberating that matter in the Fall and will reach a
    decision. I should point out that the features of these
    investments either contain expiring dates for our investments,
    or increasing costs to the bank in which we are investing. So
    there are incentives built into the program for banks to repay
    Treasury as rapidly as their financial condition allows.
        Chairman Moore of Kansas. Thank you, sir. My time is up. At
    this time, I recognize Mrs. Biggert for any questions she may
    have for you, sir.
        Mrs. Biggert. Thank you, Mr. Chairman. This is sort of
    similar, but Mr. Allison, you know the Treasury is being
    criticized for not securing the best possible return on its
    investment. In fact, I think in the Congressional Oversight
    Panel's, the COP's recent report they accused the Treasury of
    reselling the warrants back to the banks at two-thirds of their
    actual value. Is this true?
        Mr. Allison. Thank you for your question, Congresswoman
    Biggert. This is a question many people are asking as a result
    of that report. We have, as I said, taken various approaches to
    valuing these warrants. They are the exact same approaches that
    we took in valuing Goldman Sachs' warrants. And we determined,
    based on this approach, that we were receiving a very fair
    value from those smaller banks, and that is why we accepted
    those bids. And we will eventually be disclosing more
    information that lay behind those bids and our decision. And we
    look forward to making that information available down the
    road.
        Mrs. Biggert. Is there a difference because the small banks
    have probably less liquidity than the larger banks?
        Mr. Allison. Yes, that is true. In fact, we did, as I
    mentioned, apply a liquidity discount in the model. That was
    also, by the way, reflected in the market indications that we
    received. We did not apply a liquidity discount in the case of
    Goldman Sachs, and we would not in the case of other larger
    banks, because given the value of those warrants, they are more
    likely to enjoy a liquid market if they were auctioned.
        Mrs. Biggert. Can you give the American taxpayers
    assurances that Treasury is using the very best means to
    recapture the taxpayers' money?
        Mr. Allison. I can assure you that we are making every
    effort, and this is our obligation to the American public, to
    receive an appropriate and ample return for the taxpayer. We
    know they are the ones who put their money at risk and we feel
    a great obligation as responsible stewards of their money.
        Mrs. Biggert. Well, you received a fair value, but is there
    a difference with the best value?
        Mr. Allison. We believe that in each of these cases, these
    were ample values and we have applied the same standards to
    all. So we examine each method and the results that it
    produces, and then we determine what is an appropriate price
    that we should demand from each bank and we stick to that
    price.
        Mrs. Biggert. As I mentioned in my opening statement, it is
    vital that we prevent any individual or fiduciary entity or
    business involved in TARP from making a profit based on insider
    information, especially when it is at the expense of the
    taxpayer. What is the Treasury doing to prevent and track this?
        Mr. Allison. Well, we have had many close consultations
    with the SIGTARP. We have also invited the SIGTARP's staff to
    meet with us and the candidates to be asset managers on the
    PPIP program, for example. I think we have had a robust
    dialogue with Inspector General Barofsky and his team about
    this. We are charged with promoting financial stability while
    protecting the taxpayers. Our mandate and the reason for the
    law is to build and implement programs that are going to
    eventually help the American public and the financial system.
    And so with that in mind, we have decided on an approach where
    we and the SIGTARP will have the access to trading data across
    each of the fund managers that we are hiring daily so we and
    the SIGTARP can check trading in the various funds of each of
    these fund managers to see whether in fact there are any
    questionable trades that might cause us to wonder whether we
    are getting full value for the taxpayers' money, whether a
    manager is trying to take advantage of our investments at the
    benefit of one of their other investments. So we have almost
    real-time ability to intervene. We are also getting
    certifications from the managements of these funds. We are
    prohibiting fund complexes from having one fund trade with our
    fund as another control. So we have we think very robust
    controls to protect the taxpayer.
        Mrs. Biggert. In Mr. Barofsky's quarterly report which was
    released yesterday, he highlights the fact that Treasury has
    declined to institute barriers to prevent the conflicts of
    interest with the management of the PPIP program. Maybe this
    was before you worked something out with him. But thinks that
    this could have serious consequences related to money
    laundering or could lead to increases in government's exposure
    to losses with no corresponding increase in potential profits.
    Is this accurate?
        Mr. Allison. Well, we carefully considered SIGTARP's
    recommendation. We welcome SIGTARP's ideas. I may say that the
    SIGTARP has suggested dozens of ideas to us. And we look back
    and we have accepted or in a way very similar accepted the
    SIGTARP's recommendations about three-fourths of the time.
    There are some cases where we have determined that in the
    interest of financial stability and because we can find other
    ways of protecting the taxpayer that we declined to implement,
    and one of these cases has been the creation of a wall. Now, in
    many cases, and here I draw upon 35 years experience in the
    financial services industry, in many cases, it makes great
    sense to have a wall to separate asset managers in one area
    from asset managers in another.
        In the case of the asset managers, we are hiring on behalf
    of the taxpayer, and we want to have their best talents working
    for the American taxpayer in the PPIP fund. But these managers
    in these fund complexes are already committed to other funds
    that they manage. The fund cannot take them away from those in
    order to focus on ourselves.
        Conversely, if we allowed the best managers to stay with
    the other funds, we would have to have them hire other managers
    without the track records that are the reason why we hired
    those fund complexes. So instead of having a wall, we provide
    transparency, the ultimate test. And I have worked with walls.
    A wall can be defeated by people determined to collude. They
    can leave the workplace, they can go out in the street and talk
    to each other, they can use cell phones to talk to each other.
    Even if you have a wall, you have to make sure the wall is
    working. That is why we are insisting on these managers making
    available their trades across the whole fund complex every day
    so we have the ability to get total transparency on what they
    are doing, pin them down right then and there if we see
    suspicious trading activity in order to protect the taxpayer.
        Mrs. Biggert. Thank you.
        Chairman Moore of Kansas. Thank you. With all due respect,
    I am going have to advise the members and the witnesses that we
    have just been advised that we have votes being called in the
    next 15 to 30 minutes. There are six votes which I anticipate
    will take about an hour, so I would like to move along here.
    And I would advise members and the witness too that they will
    have an opportunity to submit additional information for the
    record if they would, please.
        Ms. Kilroy, you are recognized for 5 minutes.
        Ms. Kilroy. Thank you, Mr. Chairman. Mr. Allison, thank you
    for being here this afternoon. It is my understanding that the
    TARP statutes initially permitted Treasury to convert a warrant
    into cash or to exercise that when Treasury decided that doing
    so would allow the public reasonable gain and that the market
    was optimal for such assets and that the goal of that was to
    maximize the value for taxpayers, is that correct, is that your
    understanding?
        Mr. Allison. Yes, Congresswoman. In fact, the law has
    changed several times since the EESA law was enacted. And
    recently we have been given the ability, again the flexibility,
    to sell the warrants at a time of our choosing when we think it
    is in the best interest of the taxpayers.
        Ms. Kilroy. And do you believe that it is still, despite
    the changes in the law, the goal to maximize return for the
    taxpayer?
        Mr. Allison. We believe that selling the warrants
    relatively soon after we are repaid by the bank for its
    preferred stock investment, that it is appropriate for us to
    sell the warrants in a way that will benefit the taxpayers. And
    the reason for this, one of the reasons is that a warrant value
    is based on a stock value that incorporates the market's
    expectations regarding the future performance of the stock.
        So even if we sell the warrants over the near term, we are
    not forfeiting the upside potential of the warrant. We also
    find if we hold a warrant for a longer period of time, and here
    it gets a little bit technical, the option value of that
    warrant declines. We also would engage in market timing if we
    hold the warrant for a long period of time. And we are not in
    the business of being long-term investors conducting market
    time and trying to find the right time to sell the stock, and
    frankly there never will be any agreement on what is the right
    time to sell.
        Ms. Kilroy. Separate and apart from the timing issue, is
    there an issue in terms of protecting the taxpayer and
    protecting taxpayer confidence in the process of the
    methodology by which the warrants are sold or converted to
    cash?
        Mr. Allison. Well, again, where we are going to be
    disposing of the warrants, we first have to follow a
    contractual process where the bank that issued the warrants has
    the ability to bid to buy back its warrants. We don't have to
    accept their bid. In fact, in most cases, we have not. We will
    let them rebid if they wish. If they decide to no longer bid,
    then we have the ability to go out and auction those warrants
    in the open market.
        Ms. Kilroy. The contractual process, would you agree, is
    more one-sided, and gives the banks more authority in setting
    the methodology for the sale of the warrants?
        Mr. Allison. Actually, Congresswoman, I think it puts the
    Treasury in a very good position to represent the taxpayers. We
    do not communicate what to us is the price that we require in
    order to sell in that process. The bank has to bid. We will not
    accept until there is a bid that reaches our considered price.
    And at that point, if they reach that price, and some don't, we
    will sell, and we think at that point we are capturing ample
    value for the taxpayer.
        Let me also add that I know there is concern, and you
    voiced it, about whether we are doing this in a closed room. We
    are going to be disclosing information about the methodology
    and the actual calculations that we used in arriving at the
    appropriate warrant price. I mentioned at the appropriate time.
    Right now we are engaged in discussions with a number of large
    banks. We think it is in the taxpayers' interest that we defer
    that disclosure until a later date.
        Ms. Kilroy. Would it be your understanding that the
    Treasury would have no authority to enter into contracts with
    the banks regarding the TARP money other than that flowed from
    the statute that set up that program in the first place?
        Mr. Allison. I am aware that all of our actions on behalf
    of financial stability in the Office of Financial Stability are
    carrying out the law, the EESA law.
        Ms. Kilroy. And that would include the obligation to
    protect the taxpayers' interest first and to, to use the phrase
    from EESA, to maximum the return for the taxpayer?
        Mr. Allison. Absolutely.
        Ms. Kilroy. Thank you, Mr. Chairman. I yield back.
        Chairman Moore of Kansas. The ranking member is recognized.
        Mrs. Biggert. Thank you, Mr. Chairman. I just have a
    unanimous consent to allow two members of the general Financial
    Services Committee, but not of the subcommittee, to participate
    today, Mr. Brad Sherman of California and Mr. Kenny Marchant of
    Texas.
        Chairman Moore of Kansas. Without objection, it is so
    ordered. Mr. Bachus, Congressman Bachus, excuse me, you are
    recognized next.
        Mr. Bachus. I have been called a lot worse than that. Mr.
    Allison, the Act we passed back on October 1st, the EESA that
    includes the TARP and the Capital Purchase Plan, it states
    exclusively that proceeds from the sale of troubled assets and
    revenues from dividends and the surrender of warrants shall be
    paid into the general fund of the Treasury for reduction of the
    public debt. And of course, that was part of the bargain in
    passing that Act.
        Mr. Allison. Yes, sir.
        Mr. Bachus. The Treasury has interpreted that, and this is
    according to Mr. Barofsky's most recent report, you interpret
    that the maximum amount of funding is $299 billion. So as long
    as you don't have that much funding out, you can replenish the
    fund as opposed to returning it to the general fund, is that
    correct?
        Mr. Allison. The limit that was set on the amount of
    investments outstanding at any one time is $700 billion. As I
    mentioned, currently that number is a little over $360 billion.
    We have budgeted to spend about $643 billion to date. However,
    we have also received repayments, as you know, of over $70
    billion so far. And that together creates headroom under the
    $700 billion outstanding at any one time of about $128 billion
    to date.
        Mr. Bachus. So you have interpreted that as, when you get
    these dividend payments, that you don't have to--they don't
    have to be returned to the general fund?
        Mr. Allison. All the monies that we receive are returned to
    the general fund. And then under the EESA law--
        Mr. Bachus. Then you draw back out.
        Mr. Allison. Under the EESA law, we may make additional
    investments so as long as we do not exceed $700 billion
    outstanding at any one point.
        Mr. Bachus. So it is deposited in the fund and then it is
    drawn out.
        Mr. Allison. It is deposited. And then there is a new
    decision and a new allocation.
        Mr. Bachus. I am sure you are aware that Chairman Frank has
    introduced TARP for Main Street--
        Mr. Allison. Yes, sir.
        Mr. Bachus. --which is legislation to use the dividend
    payments, and I guess the warrant payments too, I am not sure
    about that, to fund several public housing initiatives instead
    of the money being returned to the Treasury. Was this type of
    use of TARP in your opinion ever envisioned by the Treasury
    Department?
        Mr. Allison. Let me first say that the Treasury is
    carefully looking at Chairman Frank's proposals. And we also,
    however, believe that it is important to maintain the headroom
    that we have today, keeping in mind that while conditions have
    improved a great deal there are still strains in the financial
    system. Banks are still facing pressures. But let me go back
    and say that we are carefully analyzing Chairman Frank's
    proposals and we will be coming back to Chairman Frank with our
    thoughts.
        Mr. Bachus. Do you have any initial concerns with
    legislation that draws out of that fund for purposes other than
    what was authorized in the EESA?
        Mr. Allison. I think we have to have more conversations
    about exactly what form that would take before I could draw a
    conclusion.
        Mr. Bachus. It really sounds to me like you all have not
    taken any hard approach, that you are not going to reach into
    that fund for all sorts of new ideas.
        Mr. Allison. I would not presume at this point to speak on
    whether we might or might not be funding some of those
    initiatives out of the TARP funds, but we are considering it
    consider carefully.
        Mr. Bachus. Would you have conversations with the Minority
    as you move forward?
        Mr. Allison. Let me say, Congressman, that I look forward
    to meeting with each member of the committee. And I would be
    glad to discuss and respond to any questions or suggestions
    that you may have for us.
        Mr. Bachus. I have one last quick question. Rahm Emanuel
    has said that the Obama Administration has rescued the economy.
    Do you agree with that assessment?
        Mr. Allison. I would say that the EESA law has played a
    very important role in improving the financial markets and the
    soundness of the financial industry in the United States, which
    has already had measurable benefits for the American public.
        Mr. Bachus. And I do agree that the Act that was passed
    last September has had benefits. I am not sure that we can
    pronounce victory. A former President did that in a foreign
    policy matter and it came back to bite him.
        Mr. Allison. As this President has said, it is going to
    take time to heal this economy and to heal the financial
    system.
        Mr. Bachus. Thank you.
        Mr. Allison. Thank you.
        Chairman Moore of Kansas. Ms. Speier, you are recognized
    for 5 minutes.
        Ms. Speier. Thank you, Mr. Chairman. And thank you, Mr.
    Allison, for joining us this afternoon.
        I have been listening to the discussion, although I haven't
    been present in the room. But I do have a couple of questions
    for you.
        The Inspector General for SIGTARP was before another
    committee yesterday, and he was very clear that no one in
    Treasury has come over to review the surveys that he has
    received from every one of the banks in terms of how they are
    using TARP money. I find that absolutely unbelievable and
    irresponsible that one agency of government has been able to
    access information, has the information, and nobody from
    Treasury has looked at it, no one from your shop has looked at
    it. And I want to know, why not?
        Mr. Allison. Well, thank you for your question,
    Congresswoman.
        First let me compliment Inspector General Barofsky for his
    initiative. I look forward to seeing the information, as do my
    colleagues, and we will be happy to meet with him about this.
        Ms. Speier. So you are committing to this committee now
    that you are going to meet with the Inspector General and
    review the material that he has developed in the survey of 360
    banks.
        Mr. Allison. I will be very pleased to meet with him.
        Ms. Speier. Great. In his report that he issued yesterday,
    he said, ``Although Treasury has taken some steps towards
    improving transparency in TARP programs, it has repeatedly
    failed to adopt recommendations that SIGTARP believes are
    essential to providing basic transparency and fulfill
    Treasury's stated commitment to implement TARP with the highest
    degree of accountability and transparency possible.''
        Now, one of the recommendations is that the Treasury should
    require all TARP recipients to report on the actual use of TARP
    funds. Treasury has declined, saying that reporting would be
    meaningless. And I have to tell you that my constituents
    probably don't think it is meaningless to know precisely where
    their taxpayer dollars are going.
        So my question to you is, will you actually adopt that
    particular recommendation?
        Mr. Allison. Well, first of all, we welcome the
    recommendations of the SIGTARP and the other oversight bodies.
    As I mentioned earlier in my testimony, we have adopted--or
    come very close, with a few minor details to adopting--about
    three-fourths of the recommendations that we have received.
        Ms. Speier. Well, there are only four recommendations here,
    and he says you haven't adopted any of them. I just want to get
    a clear answer, will you or will you not make public how the
    money that has been received by these banks in TARP have been
    spent?
        Mr. Allison. Let me, first of all, point out that every
    month we provide comprehensive information on our Web site,
    financialstability.gov, about the actual lending activities of
    all the banks in which we have invested.
        Ms. Speier. Mr. Allison, with all due respect, I am asking
    a very simple question, and I just want a simple answer. Either
    you are willing to do it or you are not willing to do it.
        Mr. Allison. Well, we think that the most important
    information--
        Ms. Speier. Either yes or no. Will you do it?
        Mr. Allison. We have looked at that possibility. Our
    concern, which we have mentioned, is that--let me give you some
    examples. This is a Capital Purchase Program. Its intent is to
    provide capital to banks. We disclose all those activities.
    Every capital transaction, whether we invest or whether we
    receive monies back, is posted on our Web site within 48 hours.
    There is voluminous information about that.
        Once the money has been invested, on a daily basis the
    banks may be shifting the use of the funds. They are dynamic
    institutions. If they report one day the money has been used
    for this, another day it can be changing.
        Furthermore, because the money is all placed in a cash
    account as it is received and money is fungible, while the bank
    may say that they have, let's say, put $50 million--
        Ms. Speier. Mr. Allison, I hate to interrupt you, but my
    time is very limited and you have just used up another 2
    minutes.
        This is my request to you. Mr. Barofsky believes that you
    can put this on a public place for public distribution. I am
    asking you to work with him and find a way by which the
    taxpayers of this country are going to be able to access this
    information and know how the banks are spending their money. I
    want to know--and I am really getting tired of many of the
    people in the Administration and, frankly, some of my
    colleagues in Congress, protecting the banks. We should be
    protecting the taxpayers, and the taxpayers have every right to
    know how their TARP money is being spent.
        Chairman Moore of Kansas. The gentlelady's time has
    expired.
        The next person we recognize is Congressman McHenry for 5
    minutes.
        Mr. McHenry. Thank you, Mr. Chairman. And thank you for
    your testimony, Mr. Allison.
        I think, to my colleague's point here, you know, money is
    obviously fungible, right? So it would be very difficult for
    you to say that it is the $100 billion or $1 billion that this
    institution got that they lent here the whole deal. That is
    fair to say; is that correct?
        Mr. Allison. Yes, sir.
        Mr. McHenry. Now, the point that I think many of us have is
    we are concerned about what is happening on Main Street, how
    that money is actually being lent. So to get more precisely at
    my colleague's question, are you able to track lending
    standards for these various institutions?
        Mr. Allison. While we post the actual information on
    lending by all those banks--which we think is very important
    for the public to know--we are not the regulator for those
    banks. We don't oversee the bank's lending standards. Our role
    has been, under the EESA law, to provide capital to promote the
    stability of those banks, not to manage the banks and not to
    regulate the banks. The regulation is handled by other
    regulatory agencies.
        Mr. McHenry. Obviously. But in terms of disclosure and
    tracking those lending standards, are you doing that?
        Mr. Allison. We are not tracking the individual lending
    standards of each bank. I assume that the regulators are very
    much involved in monitoring the lending standards.
        Mr. McHenry. Yes. But we have you before the Congress about
    TARP funds, and TARP funds which are then being lent out or not
    being lent out. And the SIGTARP report says obviously this can
    be done to track lending standards, so we will get to that in
    the next panel.
        With that, I would like to yield the balance of my time to
    my colleague from New York, Mr. Lee.
        Mr. Lee. That is very kind of you, sir. Thank you.
        Just a quick question. And it gets back to--and I have to
    tell you, the taxpayers in my district are very frustrated with
    what we are doing in Washington and the concern over the debt
    that we have in this country. Now, at the end of this year, the
    projections are close to $2 trillion. And I think it is very
    positive news in the fact that we have--I believe you mentioned
    somewhere in the neighborhood of $70 billion being paid back.
    But overwhelmingly I hear from my constituents that we need to
    start paying down this debt rather than--it sounds like what I
    heard from you today is that we just plan on keeping this
    program going on in perpetuity, or at least over the next 5
    years. So dollars coming back are being potentially reinjected
    into the market and potentially going to places outside what
    their original purposes were stated, or the potential to do so.
    Is that a fair statement?
        Mr. Allison. Let me make clear, Congressman--and thank you
    for that, it gives me an opportunity to clarify that concern--
    under the EESA law the Treasury would no longer make
    investments in institutions after the end of this year unless
    the Treasury Secretary makes the determination that it is in
    the interest of the economy and of the Nation to extend this
    program until October of 2010. This is not an open-ended,
    unending investment program. And in the investments themselves
    there are built-in incentives to pay back the money.
        The cost of the funds in many of these programs rises over
    time. In some, the program itself expires over a period of
    time. So we are very mindful of the need to protect the
    taxpayers' interest, to get the highest possible return we can,
    to be careful stewards of the money, and we also understand
    that this program, in terms of making investments, will
    terminate at some point in the not too distant future.
        Nonetheless, the government may still hold investments for
    a longer period of time, and we are preparing for that
    eventuality to make sure we continue to have the procedures,
    the policies, and the personnel to be responsibly overseeing
    those investments.
        Mr. Lee. Thank you. I yield back my time.
        Mr. McHenry. Thank you.
        Chairman Moore of Kansas. The Chair now recognizes Mr.
    Grayson for 5 minutes. But I will remind everybody in the room
    that votes are about to be called, so we will probably go
    another 5 to 7 minutes after votes are called and then recess
    the hearing and come back after votes are concluded.
        You are recognized, sir.
        Mr. Grayson. Thank you.
        On page 3 of your statement, Mr. Allison, you say, ``We
    have provided capital to 657 institutions across 48 States,
    including over 300 small and community banks, enabling banks to
    absorb losses from bad assets. While continuing to loan to
    consumers and businesses, we continue to invest in banks every
    week.''
        In terms of that statement, Mr. Allison, I think of this
    myself as a distinction between good banks and bad banks. Good
    banks are banks that have been profitable and remain profitable
    through the economic disaster that we have experienced the past
    year and a half, are well managed, can assess risk properly,
    and they are fundamentally different from the bad banks. The
    bad banks have basically taken bets, often with taxpayer-
    provided money, government-provided money, they have made bad
    decisions, and unfortunately for all of us, many of the people
    at those banks are still in charge of those banks, making more
    bad decisions every day.
        Now, it seems to me that if you provide a dollar's worth of
    capital to a good bank, that bank might be able to make $10
    worth of loans. That is the fractional reserve system we live
    under. If you provide $1 worth of capital to a bad bank, that
    bank certainly is not going to be able to do any more than
    provide $10 worth of loans. It also will try to cover its
    losses, maybe pay out more money to its bad management, maybe
    pay out money to its shareholders, and not do what we are
    trying to do through this program.
        So why is it that we do something like enable banks to
    absorb losses from bad assets in this program? Why don't we
    invest in the good banks, not the bad banks?
        Mr. Allison. Congressman, thank you for the question.
        We are investing in banks that are deemed to be viable by
    the regulators. And banks voluntarily come to us, but they must
    be deemed to be viable banks. Now, some viable banks have bad
    assets, but those viable banks are still very important to
    their communities. And so as part of the financial stability
    effort, we are helping banks to recover and stabilize so that
    they can continue lending in their communities to businesses,
    large and small, and to individuals to keep the economy going.
        Mr. Grayson. Well, following this line of questions,
    wouldn't we be better off if we gave the same amount of money
    to good banks, banks that were functioning well, so that they
    could expand their operations and make more loans rather than
    propping up bad banks that have made mistakes that have cost
    all of us?
        Mr. Allison. Congressman, these are viewed as good banks
    with some bad assets, and as banks that can be viable and
    ongoing and continue to serve their communities.
        Mr. Grayson. How do we get to a point where a good bank has
    a bad asset? I mean, seriously, doesn't that reflect some
    really bad choices on the part of the management of that bank
    whenever they have a bad asset?
        Mr. Allison. Well, I think that virtually every bank has
    some bad loans on its books. And what we have seen is, because
    prices of real estate have declined so much, commercial as well
    as residential, a number of companies have had to go out of
    business because of declining economic activity. Loans that
    seemed to be quite good when they were granted turn out to be
    not so good in an extreme environment like today.
        Mr. Grayson. And yet we have had banks that make the right
    decision. Are you familiar with the concept of ``moral
    hazard?''
        Mr. Allison. Yes, sir.
        Mr. Grayson. Aren't we inviting serious moral hazard by
    continuing in this way to prop up bad banks rather than helping
    good banks expand their operations and letting capitalism work?
        Mr. Allison. Well, sir, we have to keep in mind that these
    banks have to pay us back--and we have been well paid back just
    today by one of them. And we are working and making every
    effort to make sure that the taxpayers who made these
    investments obtain an appropriate return. That is our
    responsibility, to work on their behalf.
        At the same time, these funds are going to help stabilize
    not just the banking system, but the economy, which benefits
    all Americans. And we have seen that the banking condition has
    improved. We have seen that home sales are starting to
    stabilize in many parts of the country. The risk of the
    financial system has declined, which is good for everybody. And
    we are hopeful that by continuing to provide the support, as
    the banks need it, that we are going to have a strong
    underpinning to begin this recovery that we are all so anxious
    to see.
        Mr. Grayson. But resources are always limited, even for the
    Federal Government. Wouldn't we be able to accomplish all of
    that and more if we directed our support to good banks rather
    than to propping up bad banks?
        Mr. Allison. Well, again, I believe that many of these were
    good banks that were active in lending in their communities,
    and we are now seeing a financial situation that this country
    hasn't experienced since at least the 1930's. This has been an
    extremely serious decline in asset values that has affected
    every American.
        We have to keep the economy going. The whole purpose of
    this program, as enacted by Congress last year, was to inject
    capital into the banking system so it could not only survive,
    but stabilize as soon as possible.
        Mr. Grayson. I see my time is up. But I would urge you, Mr.
    Allison, to give some thought to this subject. If you are
    continuing to invest in banks every week, give some thought to
    investing in the good banks, not the bad ones.
        Mr. Allison. Thank you for your advice. I appreciate it.
        Chairman Moore of Kansas. Thank you.
        Mr. Paulsen, you are recognized for 5 minutes.
        Mr. Paulsen. Mr. Allison, you mentioned in your testimony
    that you could not comment on some of the existing discussions
    and negotiations you are having with some of the banks given
    that they are trying to buy back some of the warrants that they
    have that are outstanding.
        I have had some questions come back from some of these
    folks that I have interacted with about other different set of
    rules, etc., that apply to them, but you also mention in your
    testimony that if Treasury and these firms or these banks
    cannot agree on a fair market value for these warrants, that
    the warrants would be sold then by Treasury in a public
    auction, correct?
        Mr. Allison. Yes, sir.
        Mr. Paulsen. Is there a timeline on that public auction of
    when that would be? Is there a timeframe that would be put in
    place when the auction would actually take place? Are there
    guidelines or stipulations that you can share a little bit more
    about?
        Mr. Allison. Yes, sir. Thank you for the question.
        We are actually working hard on those guidelines now. They
    are not yet completed. When they are, we will provide more
    information. We want this to be as transparent a process as
    possible, but we have had to give very careful thought since
    this amendment to the Act was put into place on how we might
    best do this in a way that protects the interests of taxpayers.
        Mr. Paulsen. And just knowing that it is in the interest of
    protecting taxpayers, as you said, and repaying and kind of
    unwinding all this that has taken place, you don't foresee this
    is going to be like another year or--
        Mr. Allison. No, sir.
        Mr. Paulsen. Okay. I was just kind of curious on that.
        I also want to mention, too, from your estimation, all the
    work that you have done on this issue, do you think that the
    TARP funds have been equitably reaching the smaller financial
    institutions?
        Mr. Allison. Well, most of the institutions that have
    received TARP funds are small. And we have at least 300 quite
    small community banks and other small institutions who have
    received these funds. Nonetheless, we are concerned about
    making sure that small banks--which are so vital to their local
    communities and account for an outsized portion of small
    business lending--are able to continue lending. So that is why
    we reopened the CPP program in May, I think it was, to make it
    possible for these banks to, if they need it, tap into the CPP
    facility. And we have had a number, we have a number every week
    who are coming to us for that funding and giving us their
    preferred stock.
        We are also looking at other ways of assisting small
    business, and we may have some announcements to make about that
    before long.
        Mr. Paulsen. And this was a question I was going to ask
    also of the next panel, but it seems at least I am hearing
    differently from some of the smaller financial institutions
    about their inaccessibility of some of the opportunities for
    these funds. And I am just curious as to if you have a
    perspective on why I might be hearing that perspective.
        Mr. Allison. Well, first of all, I would like to know the
    names of those banks, Congressman. If you can provide them to
    us, we will get in touch with those banks as soon as possible.
    They also should be talking with their regulator.
        We make investments on the recommendation of the bank's
    regulator. So their first stop should be the regulator, and
    then we will consider the investment.
        Mr. Paulsen. Thank you. I yield back.
        Chairman Moore of Kansas. Mr. Marchant of Texas, you are
    recognized for 5 minutes, sir.
        Mr. Marchant. Thank you, sir.
        Could you just really quickly discuss the concept of
    headroom that you were talking about earlier? You have a $700
    million, basically, cap on the amount of money that you can put
    out at any given time.
        Mr. Allison. Yes, sir.
        Mr. Marchant. So now that we are pretty far into this
    program, you also have an inflow of money, so you have kind of
    a revolving fund. So is it public how much the Goldman Sachs
    transaction was worth today?
        Mr. Allison. Let me make clear that when money is repaid to
    us, it is put in the general account of the U.S. Treasury. So
    the headroom is the difference between the amount that we have
    budgeted and the amount of the total limit, which is $700
    billion, plus the amount that has been repaid. So we have
    budgeted totally about $643 billion, but we have also repaid
    money. And when you add the repayments to the difference
    between the $643 billion and the $700 billion, you end up with
    about $128 billion of what we call headroom, which we think is
    important to have at this point in this economic crisis in case
    banks find that they need additional funding in order to
    maintain their activities and preserve their financial
    strength.
        Mr. Marchant. But when you define budget, you mean that
    those are funds that you have already committed that have not
    been disbursed?
        Mr. Allison. These are funds that we have allocated and we
    may use for certain purposes. But we point out that at this
    moment we have invested about $360 billion. So it is the
    difference between the $360 billion and the $643 billion, I
    believe it is, is what we have more or less earmarked for
    additional uses.
        Mr. Marchant. So when you say allocated, it may be an
    asset-type allocation, but not a specific obligation to fund a
    bank?
        Mr. Allison. As far as the CPP program goes, that is
    correct, yes, sir.
        Mr. Marchant. So if Congress reauthorizes the extension
    to--October 2010; is that correct?
        Mr. Allison. Well, it will be the Treasury Secretary who
    has the authority to extend the program until October 2010.
        Mr. Marchant. So if the Treasury Secretary authorizes the
    extension to 2010, then this whole dynamic process of headroom
    and inflow and outflow remains the same. I mean, you have that
    pretty well fixed in the way you are going to do that?
        Mr. Allison. Yes, sir.
        Mr. Marchant. Then in 2010, is there a possibility to
    extend beyond that on the part of the Secretary, or would that
    be a congressional act?
        Mr. Allison. I believe that the Treasury's authority--the
    Secretary of the Treasury's authority extends through 2010 to
    extend that.
        Mr. Marchant. And that is to disburse. And then the
    repayment follows that.
        Mr. Allison. The repayments could continue for some time.
        Mr. Marchant. But then there is no longer any outflow; it
    is all inflow at that point.
        Mr. Allison. That is my understanding of how it works, yes,
    sir.
        Mr. Marchant. And what if you ended up with a situation
    where you had in excess of the $700 billion because of the
    repayment of the TARP and the sale of the warrants and the
    redemption of the preferred and the interest paid?
        Mr. Allison. Do you mean--we would not be above $700
    billion, we would be well below it.
        Mr. Marchant. You have already forecasted that you--
        Mr. Allison. There is a limit on the amount we can have
    outstanding at any one time invested on behalf of the public;
    that limit is $700 billion. We may not exceed that number.
        Mr. Marchant. So it goes into the Treasury in the general
    fund.
        Mr. Allison. Yes, sir.
        Mr. Marchant. But we have already raised the debt ceiling
    to include that appropriation, correct?
        Mr. Allison. Sir, you are getting beyond my expertise.
        Mr. Marchant. Well, I mean, is there a snap-back provision
    in the bill that says that as the money comes back into the
    Treasury then the money is paid down on the debt? Or did we not
    already have through the--by raising the budget, isn't the
    money really captured in the Federal Government coffers?
        Mr. Allison. I will get back to you on that, but it is my
    understanding that as the money comes in, that reduces the
    national debt as it comes in. But let me give you a more
    definitive answer on that as soon as possible.
        Mr. Marchant. Thank you.
        Chairman Moore of Kansas. I thank the gentleman. And I
    would, at this time, thank you, Mr. Allison, for your
    testimony. You are excused.
        I invite the second panel to sit down. We have just a very
    few minutes, I think, before votes are called, and we will go
    as long as we can. We will go for 5 or 7 minutes.
        Mr. Bachus. Mr. Chairman, I would just like to introduce
    into the record the Special Inspector General's report on the
    banks' use of money, which does show that 83 percent of them
    tell the SIG that they had used it for lending, even the 4
    percent that said they--
        Chairman Moore of Kansas. They had or had not used today?
        Mr. Bachus. Had. So, I mean, it does, I think, indicate at
    least some evidence that the U.S. banks are using the TARP
    funds to increase lending. Some of them did it to maintain
    their capital levels and stay in business to keep the doors
    open.
        Chairman Moore of Kansas. Without objection, it will be
    received into the record.
        Mr. Bachus. Thank you.
        Chairman Moore of Kansas. And thank you, Mr. Allison.
        At this time, the Chair would invite the second panel to be
    seated.
        I am pleased to introduce the second panel of witnesses for
    this hearing. First, Mr. Barofsky, the Special Inspector
    General of the Troubled Asset Relief Program, better known as
    SIGTARP.
        And next, we are glad to have with us again Professor
    Elizabeth Warren, Chair of the Congressional Oversight Panel.
        And finally, we will hear testimony from Mr. Tom McCool,
    Director of the Center for Economics at the Government
    Accountability Office.
        Thank you all for being here. And without objection, your
    written statements will be made a part of the record.
        You will each be recognized, and I think votes are just now
    being called. I think we can take the first witness. You will
    each be recognized for 5-minute statements summarizing your
    written testimony.
        Inspector General Barofsky, you are recognized for 5
    minutes, sir.

     STATEMENT OF NEIL BAROFSKY, SPECIAL INSPECTOR GENERAL FOR THE
                     TROUBLED ASSET RELIEF PROGRAM

        Mr. Barofsky. Thank you, Mr. Chairman. It is an honor to be
    back before this committee.
        It is also an honor to be sitting next to two of our most
    important oversight partners, of course Professor Warren from
    the Congressional Oversight Panel and Mr. McCool from GAO.
        This week we have introduced and presented our most recent
    quarterly report and the oversight that we have been conducting
    over the past quarter. So much of that oversight is a result of
    the coordination that we have had with our oversight partners.
    And one of the things we strive for of course is to coordinate
    the oversight.
        The TARP has gone from a $700 billion program, which is
    large enough in its own right, to now being expanded with
    activity at the Federal Reserve and the FDIC into an almost $3
    trillion program. This is more than any one of the three of us
    in our organizations could ever cover alone. And we strive to
    coordinate that oversight, working with GAO, our important
    audit partner, trying to cover as much of this terrain as
    possible. We are putting forward a joint audit project, our
    first on corporate governance, utilizing the experience and
    activity of both of our agencies. And we recently, this month,
    did a coordinated project with Professor Warren and the
    Congressional Oversight Panel. The first part was, I thought,
    their excellent valuation report in their July report and the
    conclusions there. We are going to be using that as context for
    an audit that we have launched into the warrant repurchase
    process.
        Basically, in our report that we have just delivered this
    week, I will very briefly describe what is contained in there.
        In section 2 of our report, we do a brief overview of what
    has happened in the last 3 months in the TARP. And there has
    been a lot of activity, from the bankruptcy of the auto
    companies, from repurchase of more than $70 billion in the
    Capital Purchase Program, from the selection of the nonasset
    managers and the commitment of approximately $30 billion of
    taxpayer money in the Public-Private Investment Program.
        In section 3 or our report, we attempt to put that in
    context by giving detail surrounding the approximately 50 other
    programs. So often a particular TARP recipient not only
    accesses the TARP, but will access other parts of the financial
    bailout from the government, whether it is a loan guarantee
    from the FDIC or borrowing money from the Federal Reserve. And
    what we have attempted to do in our report is bring
    transparency to that by setting out approximately 50 of the
    most significant programs that have been implemented or
    discussed and described since the onset of this crisis.
        In section 5 of our report, we give our recommendations. We
    go over our past recommendations and have issued several new
    recommendations. One of them, which was discussed with Mr.
    Allison, was our continued recommendation that Treasury require
    TARP recipients to provide information on their use of funds.
        As was also discussed, we recently finished our audit,
    which was completed and made public this Monday. And we have
    demonstrated that, notwithstanding the inherent fungibility of
    money, banks can and should be required to report on the use of
    funds. Contrary to Mr. Allison's suggestions, we have
    demonstrated that this is a meaningful task. And when we asked
    the banks what they did with the money, they were able to tell
    us, and they were able to tell us some of the things that,
    Ranking Member Bachus, you described just moments ago. They
    were able to explain how they were able to increase lending, or
    at least stop the hemorrhaging, avoid further reduction of
    lending. Banks told us that they would have come to a
    standstill if not for these funds.
        But they were also able to explain other uses of funds, how
    they invest in money, how they are able to maintain capital
    cushions so they can withstand future losses. This is vitally
    important data from our perspective and vitally important
    transparency. I understand the orthodoxy in the concept of
    capital accounts, and I understand that perhaps that is why
    Treasury initially was so reluctant to adopt our
    recommendation. But now that we have the proof, now that banks,
    when asked, the banks themselves have said we can report on how
    we are using the funds, we believe that these excuses and
    explanations for lack of transparency should no longer be
    countenanced, and we believe that Treasury should, and, in
    order to meet its promised goals of bringing transparency to
    this program, must adopt this recommendation.
        We also make other recommendations in the report relating
    to other aspects of transparency, including the Public-Private
    Investment Program, as well as some other transparency
    recommendations that have been kicking around for some months,
    including the basic one that Treasury report to the American
    people what the value is of their investment. Treasury receives
    monthly reports from its asset managers with estimates of what
    the value of the TARP portfolio is, and we believe basic
    transparency would require Treasury to make that information
    public.
        Thank you, Mr. Chairman.
        [The prepared statement of Special Inspector General
    Barofsky can be found on page 60 of the appendix.]
        Chairman Moore of Kansas. Thank you, Mr. Barofsky. Votes
    have been called. There are 10 minutes left for votes. We can
    hear one more witness.
        Professor Warren, I will ask you to do a 5-minute
    presentation, or less, so we can get over and vote. And then we
    will reconvene and hear from Mr. McCool and then have questions
    for the witnesses afterwards.
        Mr. Bachus. Actually, Mr. Chairman, if she takes even 6
    minutes, I think we are in good shape.
        Chairman Moore of Kansas. Very good.
        Mr. Bachus. Thank you.

     STATEMENT OF PROFESSOR ELIZABETH WARREN, CHAIR, CONGRESSIONAL
                            OVERSIGHT PANEL

        Ms. Warren. Thank you very much. Thank you, Chairman Moore.
    Thank you, Ranking Member Bachus. It is an honor to be here
    again today in front of this committee. I appreciate your
    inviting us.
        I want to say, as I always do, unlike the gentlemen to my
    left and right, I am part of a panel, and so when I am here, I
    am not scripted, which means I speak for myself. I will do my
    best to represent my panel, but I represent only my views when
    I open my mouth.
        Our job is to review the current state of financial markets
    in the financial regulatory system and to report to Congress
    every 30 days. So far, we have delivered to you eight oversight
    reports and two special reports on regulatory reform and on
    farm credit, both of which were also required by law. We have
    also had nine hearings. We have been out in the field on your
    behalf. We will have our tenth hearing next Monday in Detroit.
        Our contribution, again, our statutory mandate is a fact-
    based analysis designed to raise issues about the operation and
    direction of TARP and about the broader effort to restore
    stability to the economic system. We call that asking whether
    or not TARP is operating to benefit the American family and the
    American economy.
        We hit three repeating themes, and that is the need for
    transparency, the need for accountability, and the need for
    clearly articulated programs by Treasury. We coordinate closely
    with the GAO. And the Special Inspector General, Mr. Barofsky,
    just identified our coordinated effort which we are very
    pleased to participate in, and that is an important part of the
    report we just issued on warrant valuation.
        Ranking Member Bachus identified the key to what the
    warrants are about. We understood what the risks were when
    Congress allocated the potential $700 billion to TARP. This is
    the American taxpayers' one opportunity to participate in the
    upside.
        Our statutory mandate is to look at the choices Treasury is
    making, and that really involves not just our July report, but
    also our June report. Our June report was on stress tests, the
    question about repayment in the first instance and whether the
    stress tests were stressful enough. We then moved to our July
    report. Once the decision is made to take money back from these
    financial institutions, what should be the pricing on the
    warrants.
        In order to do the warrant valuation, we thought it would
    be helpful, in terms of oversight, to do an independent
    valuation, to ask how it is that others might value this, our
    own expertise within the panel, but also, we were aided by
    Nobel Laureate Robert Merton, Professor Daniel Bergstresser,
    and Professor Victoria Ivashina. All are from the Harvard
    Business School; all advised us independently without
    consulting with each other. They helped us review our model,
    and they helped us review our inputs. Ultimately, we did all of
    the calculations internally to the panel. And that is how we
    came up with the numbers we came up with.
        Now, our finding was that the price paid in the first
    warrants that were sold were about 66 percent of what our
    valuation would show was the current market value. If Treasury
    got only 66 percent of current valuation as it went forward,
    that would be a loss to the American taxpayer of about $2.7
    billion.
        Now, we are very careful in this report to point out some
    key features. The first is, only a tiny proportion of these
    warrants have been sold, and they are in very small banks in
    the first sales. We acknowledge there may be differences about
    what are the appropriate liquidity discounts to put into the
    valuation. We also acknowledge that there may be considerations
    other than maximizing the return to the taxpayer, for example,
    trying to get out of this business of holding warrants as
    quickly as possible, and those could affect the valuation.
        I will say, however, that since we issued our report 12
    days ago, Chase has decided it wants to go to auction, and
    Goldman Sachs has just struck a deal today which adjusted for
    the rise in the value of their stock prices over the last 12
    days. It is almost precisely at our estimated valuation. And I
    heard Treasury announce in this hearing that they will be
    revealing more information about their negotiations over stock
    price warrants. I think that means oversight works.
        So I am pleased to be here today to give you our report, to
    answer your questions in any way that we can, and to talk about
    alternative approaches to valuing these warrants.
        I, again, appreciate the invitation to be here, and I am
    glad to take your questions.
        [The prepared statement of Professor Warren can be found on
    page 86 of the appendix.]
        Chairman Moore of Kansas. Thank you for your testimony,
    Professor Warren.
        We are going to stand in recess until after votes, and I
    would ask members to come back immediately after votes so we
    can reconvene this hearing. We will finish up with the
    testimony of Mr. McCool and then have questions by the members.
        Thank you. And I apologize for this interruption of our
    hearing, but we do have to vote. Thank you very much. We will
    see you all in a bit.
        [recess]
        Chairman Moore of Kansas. The hearing will reconvene. I
    thank the witnesses for staying around for the hearing, and we
    got back here just as quickly as we could.
        Mr. McCool, you are recognized, sir, for 5 minutes.

    STATEMENT OF THOMAS J. McCOOL, DIRECTOR, CENTER FOR ECONOMICS,
     APPLIED RESEARCH AND METHODS, U.S. GOVERNMENT ACCOUNTABILITY
                                 OFFICE

        Mr. McCool. Thank you, Mr. Chairman. Chairman Moore,
    Ranking Member Biggert, and members of the subcommittee, I am
    pleased to be here today to discuss our work on the Troubled
    Asset Relief Program.
        The Emergency Economic Stabilization Act that authorized
    TARP requires GAO to report at least every 60 days on findings
    resulting from our oversight of the status of actions taken
    under the program. My statement today is based on our fifth
    mandated report issued on June 17th, which follows up on our
    previous recommendations and covers the actions taken as part
    of TARP through June 12, 2009.
        Our oversight work under the Act is ongoing, and our next
    report will be issued in the next few days and will focus on
    TARP's Loan Modification Program. Specifically, my statement
    today focuses on the nature and purposes of activities that
    have been initiated under TARP, including repurchases of
    preferred shares and warrants and Treasury's efforts to
    establish a management structure for TARP.
        As of July 10, 2009, Treasury had disbursed about $361
    billion of the roughly $700 billion in TARP funds. Most of the
    funds, $204 billion, went to purchase preferred shares and
    subordinated debentures of over 650 financial institutions
    under the Capital Purchase Program. This Program continues to
    be the Office of Financial Stability's primary vehicle for
    stabilizing financial markets. At the same time that Treasury
    continues to purchase preferred shares in institutions, other
    institutions have paid over $70 billion to repurchase shares.
    As of July 10th, 12 of the 33 financial institutions that
    repurchased their preferred shares from Treasury had also
    repurchased their warrants and three others had repurchased
    their warrant preferred stock from Treasury at an aggregate
    return of about $80 million.
        Although the Office of Financial Stability and its
    regulators have established criteria for accepting and
    approving CPP applications, the regulator's criteria for
    determining when institutions can repurchase preferred stock
    from Treasury lack adequate transparency. This is an area in
    which we made a recommendation in our report for the Treasury
    in coordination with the primary regulators to ensure
    consistent criteria in the consideration of repurchases.
        While Treasury has provided some limited information about
    the warrant valuation process, it has yet to provide a level of
    transparency at the transaction level that would address
    questions about whether the Department is getting the best
    price for taxpayers. This is another area in which we recommend
    that Treasury provide such transparency in the process by
    publicly disclosing more detailed information about warrant
    prices. I was pleased to hear Mr. Allison suggest earlier
    Treasury seems to be moving forward in that effort.
        Although it is unclear whether any institutions will choose
    to participate in the Capital Assistance Plan, the Federal
    Reserve did conduct stress tests of the largest 19 bank holding
    companies to see how well they would withstand more arduous
    than expected economic conditions. While the Federal Reserve
    disclosed the stress test results, it had no plans to disclose
    information about the institutions going forward. What
    information, if any, is disclosed will be left to the
    discretion of the affected institutions raising a number of
    concerns, including that the institutions could disclose
    inconsistent or only selected information.
        Moreover, the Federal Reserve had not developed a mechanism
    to share information with the Office of Financial Stability
    about the ongoing condition of the bank holding companies that
    continue to participate in TARP programs. For this reason we
    made a recommendation to the Federal Reserve to disclose to the
    public information on the companies against the more adverse
    scenario on a going forward basis.
        While the Office of Financial Stability has made progress
    in establishing its management infrastructure, continued
    attention to hiring remains important, especially within the
    Office of the Chief Risk and Compliance Officer and the Home
    Ownership Group. Those are areas where their hiring has not
    been up to what they themselves say are their requirements.
    They still have a number of vacancies and they need to fill
    them as rapidly as they can.
        Treasury has also continued to build a network of
    contractors and financial agents to support TARP administration
    and operations that have been key to OFS's efforts to develop
    and administer the TARP programs. Treasury has provided
    information to the public on procurement contracts and
    financial agency agreements, but has not included a breakdown
    of cost data by each entity. As a result, Treasury has missed
    an opportunity to provide additional transparency to its TARP
    operations. This is another area in which we made a
    recommendation to Treasury to improve transparency.
        Mr. Chairman, Ranking Member Biggert, that concludes my
    statement. I am happy to answer any questions.
        [The prepared statement of Mr. McCool can be found on page
    70 of the appendix.]
        Chairman Moore of Kansas. Thank you, Mr. McCool. At this
    time, I will recognize myself for 5 minutes for questions.
        Professor Warren, once people have had a chance to analyze
    the transaction, do you have any sense that $1.1 billion paid
    by Goldman Sachs will be enough for taxpayers? Do you think we
    could have received more if Goldman went through a public
    auction? Are there other policy issues that should be
    considered?
        Ms. Warren. I think that--thank you, Mr. Chairman. I think
    it is a good question. Using the valuation metrics that we laid
    out in our report, the Goldman price comes in almost precisely
    at what we had recommended. I believe the Goldman price is $1.1
    billion, and using our valuation, it would have been $1.08
    billion. So we are within rounding error on that. And that
    certainly increases our confidence that Treasury is using a
    strong valuation approach here.
        I do want to say, though, that there are these other issues
    that lurk in the sales process, and it is hard to find a
    substitute for the benefit of a public sale. A public sale
    reassures everyone that this is the market price. But I
    certainly understand Congressman Bachus' point. There are times
    when we decide that we don't want to delay, that we want to be
    able to move faster. These are costs and benefits and
    ultimately policy choices not just for Treasury but for
    Congress to weigh in on. We think as your Oversight Panel, the
    best we can do is outline it. We can give you this independent
    valuation, as we have done, and put the factors in front of
    you, which we have tried to do.
        Chairman Moore of Kansas. Thank you.
        Mr. Barofsky, do you have any different thoughts about that
    or do you agree with what Professor Warren said?
        Mr. Barofsky. I definitely defer to Professor Warren. Her
    report and her study I think was comprehensive. I thought it
    was very instructive. We haven't done a similar effort. We do
    have an ongoing audit that will address different issues, but I
    would certainly defer to Professor Warren and the panel on
    this.
        Chairman Moore of Kansas. Mr. Barofsky, another question. I
    notice that in addition to your quarterly reports you issued
    this week, you also concluded the ``use of funds'' audit that
    you conducted. What did you learn from that audit and what
    steps should Treasury take to increase accountability in the
    TARP program? And I want to ask you that, sir.
        Mr. Barofsky. I think the most important thing we have
    learned is I think we have definitively proved that despite the
    apparent fungibility of money banks can, when asked, report on
    how they are using their funds and that they can provide a
    great degree of transparency and answer that question. We saw
    that banks did--although Treasury, as Mr. Allison noted, does
    provide lending snapshots of each month, that is not the only
    thing that banks do with their TARP funds. According to the
    banks themselves, they use it to maintain capital cushions,
    insurance for a rainy day for future losses, they use it to
    acquire other financial institutions, they use it to invest in
    securities. All sorts of different things that our survey
    helped provide a necessary level of transparency, but it is
    only part of--you know, our survey was a snapshot as of
    February. We don't have the resources to do this on a regular
    basis, and our survey was voluntary.
        So my recommendation is that Treasury finally adopt our
    recommendation and require financial institutions who are
    receiving TARP funds to report on a periodic basis on how they
    are using the money.
        Chairman Moore of Kansas. Thank you.
        Professor Warren, did you find any connections or parallels
    with the SIGTARP's use of funds audit and what COP learned when
    reviewing the lending practices and how it affects American
    families and small businesses?
        Ms. Warren. Yes, Mr. Chairman, we did. In our field
    hearings and our earlier reports we have documented the
    constriction in small business lending and the inadequacy of
    the tools that have been used thus far by Treasury to try to
    stimulate small business lending. We think this is entirely
    consistent, what we have found and reported on, with what it is
    that Mr. Barofsky has found and reported on through a different
    mechanism.
        Chairman Moore of Kansas. My time is up. And at this time,
    I will yield to questions from Mrs. Biggert, please, the
    ranking member.
        Mrs. Biggert. Thank you, Mr. Chairman. Mr. Barofsky, in
    talking about the audit of the warrants and valuation and
    sales, when can we expect to see this audit?
        Mr. Barofsky. We are basically valuating the timing. When
    we first launched the audit, it was unclear when sort of the
    larger institutions were going to be either repurchasing or
    going through the auction process. Now that we are seeing some
    of these repurchases, I think we want to take a look and see
    the auction process. For it to be the most useful audit I think
    we would like to see that process be used before we project an
    end date.
        Mrs. Biggert. Can you ensure that the audit will not
    compromise the Treasury Department to negotiate the best
    possible price for taxpayers? Do you think there is any chance
    of that happening if the audit is out and they are negotiating?
        Mr. Barofsky. With everything that we do, including this
    and any of our audits and really with our recommendations, I
    think it is very important for us to take into consideration
    the point that you just raised. And we would never make a
    disclosure midway through a negotiation, anything that could
    possibly impact in a negative way on the taxpayers' return. Our
    job is to protect the taxpayers' interest, and we are very,
    very sensitive to these types of issues and protecting
    confidential information to the extent it may impact or be a
    detriment to the taxpayer.
        Mrs. Biggert. Thank you.
        And Professor Warren, the July report issued by COP states
    that the best manner to sell these warrants is on the open
    market, however--and as my colleague Mr. Hensarling stated in
    his additional views to that report--choosing a one-size-fits-
    all method does not seem to be the most appropriate method to
    value these warrants given that each repurchase negotiation
    will have different circumstances. Don't we need flexibility in
    the process to help determine the best value while getting the
    taxpayers out of the business of owning bank stocks or
    warrants?
        Ms. Warren. Congresswoman, I actually think the report says
    exactly that, that there should be flexibility. We talk about
    the advantages to an open market process, but we acknowledge
    that there are circumstances that may differ. And I assume that
    is part of the reason that Congressman Hensarling voted for
    that report. We had a 5-0 vote on the valuation report.
        Mrs. Biggert. There are always additional views.
        Ms. Warren. In which I think he cited the report
    extensively.
        Mrs. Biggert. Right. In determining like fair market value
    do you use financial models or is it just a one-size-fits-all?
    I mean like Black-Scholes, do you take that into consideration?
        Ms. Warren. Of course. Actually our financial models are
    laid out in many, many pages in our report. And as I said in my
    testimony, they were independently reviewed, the models were
    independently reviewed by three highly renowned specialists in
    modeling, all from the Harvard Business School.
        Mrs. Biggert. Three members of the panel, Representative
    Hensarling and, I think, Senator Sununu and Richard Nieman,
    voiced their support for the Administration's and Treasury's
    stated objective to exit warrant holdings as soon as practical
    after banks repay the preferred stock. It didn't seem like this
    point was stressed at all in the July report.
        Ms. Warren. Well, I think that it is like so many things,
    it depends on the cost. There is always a judgment to be made.
    And exiting in the fastest possible way in return for getting
    the lowest cost for the taxpayer may not be ultimately
    beneficial. On the other hand, I certainly understand the point
    about not hanging on to the warrants for 10 years and the
    political as well as economic implications of that.
        So I think the main point in the report was that there are
    advantages and disadvantages to speed and to going to the
    market in order to try to sell these warrants. Ultimately,
    though, we did emphasize the point that when there is a market-
    based auction, no taxpayer needs to wonder what happened behind
    closed doors or whether the appropriate price was reached.
        Mrs. Biggert. I guess my point is that it seemed like that
    was the majority and it wasn't really stressed in the report
    what they said. And next, the panel's press release for the
    July report contained the headline, ``So Far Treasury Has Sold
    Warrants Back at 66 percent of Panel's Best Estimate of Fair
    Market Value.'' And I think that the headline kind of seemed
    misleading since the banks that have redeemed their warrants
    represent less than 1 percent of the value of all the warrants
    outstanding. It sounded like there were 66 percent.
        Ms. Warren. Actually, I think the press release makes
    exactly that point. But let's keep in mind that when that press
    release was issued, the immediate response was that Chase said,
    we will go to a public auction, Goldman 11 days later said, we
    will sell at the panel's recommended price, and Treasury said,
    we will release more information about our sales process. If
    the consequence of this report is to encourage those sorts of
    responses, then I am very happy about that report.
        Mrs. Biggert. I yield back.
        Chairman Moore of Kansas. Thank you. And the Chair will
    next recognize Congresswoman Jackie Speier, please.
        Ms. Speier. Thank you, Mr. Chairman. I want to thank each
    of you for being true public servants and incredible guardians
    of the American taxpayers. Having said that, I find this
    discussion very interesting because on the one hand some of my
    colleagues often call upon us to think about small businesses
    and lending to small businesses and the fact that we haven't
    had enough lending to small businesses. And yet we can't seem
    to get access to information from the banks as to whether or
    not they are lending to small businesses, and wouldn't we want
    to know that? And isn't that what our job is really all about?
        Now, I think we have to be very practical here. This is an
    arm's-length transaction that goes on between these financial
    institutions and the U.S. Government, and these warrants have
    value. Now, I think timing has everything to do with our
    success at maximizing the amount of money we get back for the
    taxpayers. And it is very clear to me that there are some of
    these arrangements that aren't going to be profitable. AIG
    comes to mind as one in particular.
        So it is important to us I think to maximize profits to
    compensate for the ones that are clearly going to be underwater
    forever. And I am hoping that as you continue to evaluate, if
    you believe that we should be holding these assets, these
    warrants, that we should hold those. It is an arm's-length
    transaction. If the banks are coming to us now saying, we want
    you to exercise the option on the warrant or to redeem the
    warrant, they are saying that because they know that they are
    on the road to recovery and it is only going to increase in
    value. So it behooves us to be smart investors right now.
        And I would like your opinions on whether or not there is
    something to be gained by holding onto them. Just because they
    say they want them redeemed doesn't mean we have to act and
    redeem them. Our first and only goal should be maximizing the
    profits for the taxpayers. Your comments.
        Ms. Warren. Congresswoman, I think you have put your finger
    right on the ultimate policy question here. If that is the only
    goal and that is what Treasury should be doing, then Treasury
    should act like any other investor. And you are exactly right
    that they should take these to market when it is appropriate to
    take them to market. When they make the judgment that they
    would be better off to hold, then they should hold.
        There are those who believe there are alternative
    considerations. There are those who are deeply concerned about
    the notion that the Federal Government holds warrants. We
    ultimately believe that is a policy choice. There is a
    difference of opinion on which is the right way to go with
    these warrants. And my strong view on this is that we laid this
    out in our report and ultimately Congress should advise
    Treasury about what it thinks is the right way to go here.
        I think we do this through this hearing process. We want to
    say that if what they are trying to do is maximize value we can
    point out ways that we think that is best accomplished. If they
    have other considerations then--let me be blunt--then they
    should articulate what those alternative considerations are and
    evaluate how much money is left on the table in order to
    accommodate them.
        Ms. Speier. Thank you.
        Mr. Barofsky?
        Mr. Barofsky. I could not agree with Professor Warren more.
    I think that is precisely right. I think the report brought
    transparency to the issue, a decision needs to be made. And I
    think the really strong point that Professor Warren makes that
    I can't agree with more is that you need to be up front in
    articulating what the policy decision is, be up front with the
    American taxpayer that we think there is good reasons to
    liquidate these warrants now because for whatever the reasons
    are, for the benefits of the banks, let the financial
    institutions off the hook, whatever the justification is, but
    be up front and honest about what is happening. So I agree with
    Professor Warren on this.
        Ms. Speier. Mr. McCool?
        Mr. McCool. Again, I would agree as well. I mean there are
    tradeoffs here, and I think that as long as you are transparent
    about the tradeoffs and everybody who should be involved in
    thinking about those tradeoffs is in the decision-making
    process, then I think that is the way it should work.
        Ms. Speier. Mr. Chairman, I would just like to point out
    that there are people who want to see the TARP fail, they want
    to be able to say I told you so. So there are people I believe
    who are going to make us try and take action that are not
    necessarily in the best interests of the public because they
    want to be able to say at the end of the process that we should
    never have done it in the first place.
        So I hope that we keep our eye on what is most important
    here, and that is the American taxpayer. I yield back.
        Chairman Moore of Kansas. I thank the gentlelady for her
    questions and the witnesses for their responses.
        Next, I recognize the distinguished ranking member of the
    full committee, Mr. Bachus.
        Mr. Bachus. Thank you. I think the theme here could be that
    oversight worked. I mean it worked very well. And I think that
    is always true of accountability or transparency. It normally
    has a very positive approach. And I think that one of the
    confirmations we got today that the panel can be proud of is
    the Goldman price. It was exactly as you say. It was actually
    $20 million more than you said, and so that maybe can pay for
    the panel. This is a panel that actually is going to end up
    making the taxpayer some money. Often the consumer, the
    taxpayer, is not at the table, and I think they were through
    this panel. It is interesting the history is that this was
    originally a three-page bill without any accountability. Then I
    think the Congress can take a bow because we put that in there,
    we put that accountability in there, which was the board. I
    think it worked very well.
        One thing that we always have to--if we could look in the
    future and see where the markets and the economy are going it
    would be pretty easy to make a call on whether we ought to hold
    it. Although I personally don't think that the United States
    ought to be sort of investing or speculating in the market,
    which to a certain extent if you can get a good fair price you
    take it. Now, if the market dropped 600 points tomorrow and 300
    the next day, I would say hold on to them probably. And that is
    a policy decision that I think the Administration probably will
    have to make. And it will be within 10 years, we can probably
    tell what we should have done.
        One thing that did strike me, and I heard 4 or 5 months ago
    from a banker in Alabama that he went to a seminar in Georgia
    and there was a bank there in Georgia wanting to buy, saying if
    you are for sale we are going to buy you, and they were going
    to do it with their TARP money. So you did have 4 percent that
    made acquisitions. You know, it would be kind of interesting to
    maybe go back and take a closer look at that. Mr. Barofsky, I
    think they are probably going to tell you the truth because you
    have a right to prosecute them, and you have that reputation
    that you are a very good prosecutor. So I think that--now,
    there will be some I am sure in that number that actually
    were--you know, the FDIC or other people said this is a failing
    bank and they probably--I wouldn't assume that that 4 percent
    was a bad thing in and of itself. I think the Treasury has to
    understand what we have to understand as a Member of Congress,
    and that is that this is the peoples' money, so there needs to
    be accountability. This wasn't--you know, this isn't just a
    private business where you are wanting to know about some
    proprietary thing, this was money that was taxpayer money. So I
    think that--sometimes I think you can't justify, you know, some
    sorts of getting information, but I think you can here. And I
    think you have done a great job.
        Let me change gears, Professor Warren. I wrote a letter to
    you on June 24th. I have looked at some of those questions.
    Some of them I am not sure. They are a little harder to
    interpret. Sometime maybe in August, if you could kind of
    respond to some of those, I would appreciate it. But I am not
    even going to ask you about them now.
        But the other thing I just thought I would show you--
        Ms. Warren. Would you accept my apology that you don't have
    a response yet?
        Mr. Bachus. Well, I wouldn't expect it. There is too much
    going on.
        Ms. Warren. Nonetheless, Congressman, please accept my
    apology. We are doing our best.
        Mr. Bachus. Actually, I don't even think they are due,
    because I don't think it is sufficient time for you to have
    responded, because the questions are really, you know they are
    going to take a little time. But I just wanted to direct--one
    thing I want to show you, and kind of at some point you might
    give me an answer. We are talking about one-page disclosures,
    and this is actually 15 pages on a card agreement. Now, some of
    these aren't--you know they are just part of the page, but that
    is what the law requires right now. So you have quite a job,
    because you are going to have to almost say, you know, well, we
    are not going to require this anymore, or maybe some of this
    you are going to decide to put in small print. But it does show
    you the challenges you face if you get your agency through. So
    I thank you.
        Ms. Warren. Thank you.
        Chairman Moore of Kansas. Thank you, sir. Next, the Chair
    recognizes--
        Mr. Bachus. I usually ask questions. That is very rare for
    me not to do that, but there were no questions because I
    thought the questions were answered.
        Chairman Moore of Kansas. Thank you.
        The Chair next recognizes Congresswoman Kilroy for 5
    minutes.
        Ms. Kilroy. Thank you, Mr. Chairman. I appreciate it. And
    thanks all of you for your work on helping to look out for the
    taxpayers' issue and to make sure that the values of
    transparency and accountability are the values that we don't
    forget as we move further away from the initial infusions of
    the TARP money. And each one of you have in your testimony
    emphasized the importance of transparency. And I will certainly
    agree with you, certainly sunshine is a great, great thing to
    have in the public sector.
        But I also think that in this instance that transparency
    can assist the taxpayers in getting maximum value, maximum
    return on the investment that they made. And I think the
    Congressional Oversight Panel report backs it up. It says,
    ``Treasury would be more likely to maximize taxpayer returns if
    it sold the warrants through auction. The reason is
    straightforward. An auction would cause the warrants to be
    allocated to the buyers willing to pay the highest price, and
    competitive pressures in the bidding process may push bids
    up.''
        Do you agree with that statement, Professor Warren?
        Ms. Warren. I do, Congresswoman.
        Ms. Kilroy. Well, I certainly do as well. And I think that
    the markets and public auctions are certainly a very valid way
    for setting a price. We have heard today a lot of talk about
    Goldman and the value that was received through the negotiation
    process with Goldman, but not to be too pessimistic or too
    cynical, there are reports today that the initial offer from
    Goldman was made several weeks ago and the initial offer was
    $650 million. And that was followed up by a counteroffer by
    Treasury of some $900 million and then followed up sometime
    after that by the release of Goldman's statements indicating
    how much money they had made, certainly in part because of the
    infusion of money the taxpayers gave them. And as Goldman stock
    prices go up, would you agree that the value of those warrants
    that the taxpayers were holding would also be going up?
        Ms. Warren. Yes.
        Ms. Kilroy. So then it is certainly maybe not surprising
    that Goldman increased its offer to the taxpayers and offered
    to pay $1.1 billion for the warrants. Do you agree with that?
        Ms. Warren. Yes.
        Ms. Kilroy. But would you also agree that perhaps if we
    allowed it to go to market that others who might see the same
    reports about Goldman's recent earnings might think that
    holding Goldman's warrants which could be used by them to
    purchase stock over a pretty lengthy period of time might be to
    them worth more than $1.1 billion and they might make a higher
    offer than that at public auction?
        Ms. Warren. That is certainly possible, Congresswoman.
        Ms. Kilroy. So would you agree that the market has a great
    deal of experience in this issue of setting prices and that
    Treasury has also experience in terms of conducting public
    auction?
        Ms. Warren. Yes, Congresswoman.
        Ms. Kilroy. And again going back to all three of you, in
    your statements with respect to maximizing value to the
    taxpayer and being transparent, would you agree that a public
    auction would be an excellent way to combine and achieve those
    two goals, maximizing profits and being transparent?
        Ms. Warren. Yes, Congresswoman.
        Ms. Kilroy. Does anybody on the panel have a different view
    or disagree?
        Mr. Barofsky. I think in particular it addresses a lot of
    the transparency concerns and a lot of the allegations that may
    be made when it is a closed door process.
        Ms. Kilroy. And the goal of restoring public confidence in
    the markets and having public confidence in our government
    officials is an important and worthwhile goal as well, I would
    think.
        Ms. Warren. Yes.
        Ms. Kilroy. Thank you. I yield back.
        Chairman Moore of Kansas. I thank the gentlelady.
        The Chair now recognizes Mr. McHenry, Congressman McHenry,
    for 5 minutes.
        Mr. McHenry. Thank you, Mr. Chairman. Thank you all for
    testifying and sorry for the length of the day. It is long for
    all of us.
        Obviously, Mr. Barofsky, I heard from you yesterday in
    front of the Oversight and Government Reform Committee, of
    which I am a member. Ms. Warren, in terms of your panel, the
    Congressional Oversight Panel, what is your budget?
        Ms. Warren. I can tell you how much we have spent, but we
    actually don't have an allocation.
        Mr. McHenry. Is there an allocation?
        Ms. Warren. No, we don't have a budget allocation.
        Mr. McHenry. How much have you spent?
        Ms. Warren. We have spent $2.7 million.
        Mr. McHenry. $2.7 million. Where did that money come from?
    Is it out of TARP or is it out of Treasury?
        Ms. Warren. It comes from the Senate and from the House; it
    comes from you.
        Mr. McHenry. How is that allocated?
        Ms. Warren. I am sorry, Congressman.
        Mr. McHenry. Basically you just spend whatever you want and
    send the bill to Congress. I mean, how is that allocated?
        Ms. Warren. Well, we go through the process, for example,
    of hiring and getting your approval.
        Mr. McHenry. How many people can you hire, are you
    authorized to hire?
        Ms. Warren. We can hire as many as we need.
        Mr. McHenry. Okay. That is enough. I think it just shows
    that there isn't a clear budget.
        Ms. Warren. No.
        Mr. McHenry. Mr. McCool, is that a fair assessment, that
    there has not been an appropriations for this committee?
        Mr. McCool. I don't really know, Congressman.
        Mr. McHenry. This is quite a challenge.
        Mr. Barofsky?
        Mr. Barofsky. Congressman, we have the TARP to look after.
    We haven't looked into the funding for the Congressional
    Oversight Panel. Our funding I certainly could speak on if you
    would like.
        Mr. McHenry. The Inspector General's Office is an
    appropriation, yes. Ms. McCool, in terms of your panel
    meetings--I am sorry, Ms. Warren.
        Ms. Warren. I am sorry, I thought you said Ms. McCool, so I
    lost who you were talking to. I am sorry.
        Mr. McHenry. It is late in the day. I don't have much time.
        Ms. Warren, is it true you have regular panel meetings?
        Ms. Warren. Yes, we do, Congressman.
        Mr. McHenry. Are those publicly disclosed?
        Ms. Warren. The fact that we have the meetings, yes,
    Congressman.
        Mr. McHenry. No, actually the panel meetings.
        Ms. Warren. We have business working meetings that are not
    public meetings.
        Mr. McHenry. So you have a panel of how many members?
        Ms. Warren. We have a five-member panel. Since Senator
    Sununu will be stepping down, we will have a four-member panel.
    I presume it will be five again soon.
        Mr. McHenry. When you meet in session for the purposes of
    transacting business, is that open to the public?
        Ms. Warren. We have working meetings that are not open to
    the public.
        Mr. McHenry. Do you have a transcript or minutes of that
    meeting?
        Ms. Warren. I don't have a transcript or minutes of that
    meeting. It is recorded by the Senate Conference Services. But
    no, Congressman, I have not seen a transcript.
        Mr. McHenry. Is a transcript available of your meetings?
        Ms. Warren. Publicly?
        Mr. McHenry. For Members of Congress, is that available for
    your meetings?
        Ms. Warren. It is not available publicly, no, Congressman.
        Mr. McHenry. I am a Member of Congress.
        Ms. Warren. Oh, I am sorry.
        Mr. McHenry. Am I able to get a copy of the transcript of
    your meetings?
        Ms. Warren. I believe our transcripts are held in our
    office. And if you wanted to send someone over to read them, I
    believe you would be able to read them.
        Mr. McHenry. Would that be available?
        Ms. Warren. I believe you would be able to read them if you
    wish to do that, Congressman.
        Mr. McHenry. So you will make that available for Members?
        Ms. Warren. If you wish to come to our offices to read it.
        Mr. McHenry. Why are the transcripts not available to the
    public?
        Ms. Warren. These are working meetings of the panel and we
    discuss a great deal of confidential information. And so they
    were never public from the beginning. We do hold, I should
    remind you, Congressman, we do hold public hearings.
        Mr. McHenry. Is this an executive session? This is what is
    interesting to me. You are an oversight panel.
        Ms. Warren. Yes.
        Mr. McHenry. Yet you don't disclose your meetings. And what
    happens and what transpires in these meetings and the decisions
    you make, the votes you take, are there votes taken at these
    meetings?
        Ms. Warren. There are sometimes votes.
        Mr. McHenry. So we don't even know what the votes are much
    less how this report was created with this Panel. So there is
    no disclosure from the Oversight Panel. Do you think that is
    perplexing or strange?
        Ms. Warren. Well, we have working meetings where we discuss
    confidential information. We issue a public report every 30
    days. And the report on that vote is made public every 30 days.
    And each of the members is entitled as part of that process to
    add additional views if they wish to do so.
        Mr. McHenry. I think it is quite perplexing that an
    oversight panel wouldn't disclose their meetings. Even you can
    redact confidential information. That is certainly in your
    capacity, which is done throughout government. But it seems
    like this is very removed from the public and pretty
    nontransparent for a board that is demanding transparency from
    TARP funds and the Treasury in general. Do you find that
    problematic?
        Ms. Warren. Well, what I would find--
        Mr. McHenry. If she would be able to finish.
        Ms. Warren. I would find it quite problematic if we
    discussed sensitive information about TARP recipients, about
    the inquiries and the lines of inquiry that we were pursuing
    and that were a matter of public speculation as soon as we
    finished saying it.
        My sense is we need an opportunity to work together, and
    that is what we try to do. But we issue public reports every 30
    days and hold public hearings at least once a month.
        Chairman Moore of Kansas. The gentleman's time has expired.
    Thank you for the questions, Mr. McHenry.
        And next, the Chair will recognize Mr. Paulsen for 5
    minutes.
        Mr. Paulsen. Thank you, Mr. Chairman.
        Mr. Barofsky, I would just like to ask a question. I am
    going to yield some of my time, but just to follow up, in some
    of the discussion we had in the first panel with Mr. Allison it
    had been mentioned that some companies have been getting mixed
    signals, mixed answers in terms of what is coming out of
    Treasury on the requirements for paying back the payments or
    purchasing the warrants, I guess, what the regulations or
    stipulations might be for that. There is some frustration.
        In the work that your office has done or seen have you
    found that the government or Treasury has been very clear in
    terms of what it has actually demanded for repayment of those
    funds? Has it been foggy? I am just curious what your
    perspective might be on that.
        Mr. Barofsky. With respect to the warrants, our audit is
    pending and ongoing. So I am not really prepared at this time
    to give sort of a conclusion that would come out of that audit.
    So it is a little bit premature for me to answer that question.
        Mr. Paulsen. Okay. And I also have heard from some in the
    small business community about the way the stimulus or the TARP
    funds have been distributed or handled. The committee had a
    hearing yesterday on the whole issue of too-big-to-fail, the
    full committee. And one of the things that we think we have
    missed is the whole too-small-to-save or the concept of with
    small community banks or small business, what the impact has
    been on them, where the majority of those funds have gone to
    the larger institutions. But after about 6 months now, we have
    seen the Administration has started now finally to talk about
    actually looking at the small business angle and focusing more
    in that direction, which I think is smart and prudent. And as
    you know, I think at the first time go around, earlier this
    year we had an amendment that was before this committee that
    would have added authorizing legislation that would have
    required you to report on small business activity as well as a
    part of the Special Inspector General's obligations on the next
    report.
        Is that something you think you could look at including in
    your next report, just kind of including some measures on small
    business participation in the TARP or small financial
    institutions?
        Mr. Barofsky. I think it would be--what we could do is with
    the information that we already have perhaps from the survey on
    what banks are doing with respect to small lending and what
    they are saying. We don't really have the resources or
    mechanism to do exactly what you are saying. That really falls
    on Treasury. I mean that is a basic part of Treasury's, I
    think, obligations. Under the concept of transparency they
    should be doing that assessment and making that information
    available. It really goes to the heart of our transparency
    recommendation about use of funds, how are the institutions
    using the funds with respect to small businesses, and reporting
    on in their transaction report what steps they are taking for
    small businesses.
        I will be happy to work with you and your staff and have my
    staff talk to you. If we could think out some other ways where
    we could contribute to that transparency, we are always open to
    suggestions and we look forward to following up with you on
    that.
        Mr. Paulsen. I appreciate it. I do want to commend you for
    your work, and you have been very helpful to members on this
    committee.
        I just would like to yield the balance of my time, Mr.
    Chairman, if I could, to Mr. McHenry.
        Mr. McHenry. Thank you. I thank my colleague for yielding.
    Ms. Warren, just to follow up on this again. The fact that
    there is an unknown budget that hasn't been allocated, and to
    my knowledge from the Legislative Branch Appropriations, there
    wasn't a line item for that. And I would ask the GAO and I
    would ask the SIGTARP if you all could take a look at that and
    perhaps answer how that actually works if the Chair doesn't
    know.
        Additionally--
        Mr. Barofsky. Congressman--
        Mr. McHenry. I know you don't have purview. My apologies.
        Mr. Barofsky. I am actually prohibited by statute from
    doing that.
        Mr. McHenry. Well, it is late in the day, so obviously I am
    missing a few things here.
        Ms. Warren, you testified before this committee about the
    Consumer Financial Protection Agency last month, right?
        Ms. Warren. Yes, Congressman.
        Mr. McHenry. And I also saw a YouTube video, and I think a
    few thousand others saw it as well, and your advocacy for CFPA,
    right?
        Ms. Warren. Yes, Congressman.
        Mr. McHenry. Is that part of your official role as head of
    the Congressional Oversight Panel?
        Ms. Warren. No, it is part of my role as professor at
    Harvard Law School.
        Mr. McHenry. So that is done through your official
    resources at Harvard?
        Ms. Warren. Yes, it is, and through my personal resources,
    I should say. I wrote a check for it.
        Mr. McHenry. Well, YouTube is actually pretty cheap.
        Ms. Warren. A personal check. No, I wrote a check for the
    out-of-pocket expenses to be able to produce the video.
        Mr. McHenry. Okay. You got a producer, that is good. No, I
    understand. It is YouTube. I understand.
        Ms. Warren. Well, a person who held the camera.
        Mr. McHenry. But there is a lot of conjecture that you
    would be the head of the CFPA if Congress does pass that. But
    no official resources under the Congressional Oversight Panel
    has been used or staff has been used in your advocacy?
        Ms. Warren. No.
        Mr. McHenry. Good to know. Thank you, and I yield back.
        Chairman Moore of Kansas. Thank you. Next, the Chair
    recognizes Mr. Lee for 5 minutes.
        Mr. Lee. Thank you. Before I start, I do want to thank all
    three of you for your support and what you try to do to protect
    the taxpayers and the oversight. It is very commendable. And I
    will start off with Mr. Barofsky. We have had a chance to meet
    in the past, and again he has been very accessible and I
    appreciate what you have been doing. Again, one thing that does
    scare me, however, is the fact that over--or under your
    oversight at risk I heard numbers anywhere between $2.3
    trillion to $2.8 trillion and that the total potential support
    governmentwide in response to the crisis since 2007 could reach
    close to $24 trillion. Are those numbers fairly accurate?
        Mr. Barofsky. Yes. To explain the $24 trillion though, to
    put it in context, what we did in our report is in Section 3 we
    gave a summary of about 50 different support programs outside
    of the TARP. And for each of those programs we calculated how
    much is currently outstanding, what the high water mark was
    since the inception and then what the maximum amount that the
    government has said it would commit to each of those programs.
    So the amount outstanding is about $3 trillion, the high water
    mark was about $4.7 trillion, and the $23.7 trillion, that
    represents that if everything was maxed out at once. It is not
    likely that that would ever occur, but I just want to put that
    caveat there.
        Mr. Lee. Not likely but a scary number altogether.
        Mr. Barofsky. But it is absolutely an accurate number of
    what the government is committed to do to support the financial
    system.
        Mr. Lee. In June, the Congressional Budget Office scored
    the TARP at a loss to taxpayers of roughly $160 billion. We are
    writing off billions in loans to GM and Chrysler. Yet it is
    unclear to me what we are doing with the funds being repaid by
    the TARP recipients. In letters to the Secretary of the
    Treasury and to the President, which to my knowledge have to
    this point gone unanswered, many of us on this panel, led by my
    colleague Mr. McCarthy from California, have advocated for
    those repayments to be used specifically to reduce the national
    debt. Yet others want to recycle these funds and use them for
    other programs, some of which are brand new.
        I am curious, from your perspective do you believe it is in
    the best interest of the taxpayer to take TARP repayments to
    pay down the debt?
        Mr. Barofsky. Our perspective is really a legal one. And I
    think legally, Treasury's treatment of taking any interest or
    dividends and/or profits and direct them to reduction of the
    national debt, that is very clearly what is compelled by law
    under EESA. The principal repayments of the Treasury does have
    its position, and we think that it is consistent with the law,
    is they have the option to relet that money out up to a maximum
    of $700 billion as long as TARP is in existence--I am sorry, as
    long as EESA permits them to do so, which is right now through
    the end of the year.
        Mr. Lee. The part that I keep hearing from people,
    taxpayers, is take the money back and then we throw it out
    there and keep adding more risk and eventually the debt
    obligation that we have is staggered.
        I am just curious, Ms. Warren, from your point you have
    also been an advocate on behalf of consumers, i.e., the
    taxpayers. I am curious whether you think a taxpayer is better
    served by paying down the debt or spending TARP for other
    purposes.
        Ms. Warren. Well, I think, Congressman, this is really the
    policy choice that Congress should be making, and the
    legislation is ambiguous on this point. And Treasury has made
    its position clear that it is going to use the headroom analogy
    that Mr. Allison talked about. So if Congress wants something
    different, then Congress is going to have to pass legislation,
    I think, to change that.
        Mr. Lee. With that, I am going to yield back. Thank you.
        Chairman Moore of Kansas. Thank you, sir.
        And Mrs. Bachmann, you were up for questions, please.
        Mrs. Bachmann. Mr. Chairman, thank you. And I agree--thank
    you all for being here. I agree it is a long day, but you have
    all been very responsive and we appreciate the great
    information that you have made available to us.
        I was curious, I was listening to the previous line of
    questioning on meetings, and help me, did I understand
    correctly, and I guess this would be Ms. Warren, you had
    mentioned if a Member of Congress requested a transcript of one
    of these meetings of the panel we could get it. Was that true
    or maybe I didn't understand?
        Ms. Warren. Congresswoman, I was surprised by the question.
    So let me articulate more clearly. We don't have official
    transcripts. Unlike your circumstances where there are
    published transcripts, Members go back and they correct the
    language, we identify who spoke and who did not speak, we have
    no verified transcripts, we have no official transcripts. We
    have typing that comes back from someone who listened to our
    tapes who is not part of our panel, not part of this process,
    and no one has verified the accuracy of any part of it.
        Mrs. Bachmann. So then the meetings that you had that are
    not the field hearings, where it is the four, I guess it is
    four members now, was five members, when the five members meet
    or when the four members meet, are those meetings recorded?
        Ms. Warren. We have working meetings that have been
    recorded.
        Mrs. Bachmann. So those meetings are recorded. So are they
    transcribed or they are just in recorded form?
        Ms. Warren. They are in recorded form. And as I understand,
    there is a transcription service.
        Mrs. Bachmann. So we can get those transcribed? It is
    possible for us to have the transcription of those meetings?
        Ms. Warren. Actually, I have not considered this question
    because no one had asked. And I am a little hesitant to commit
    my co-panelists to a process when these are unverified
    transcripts; that is, something may be attributed to someone
    that has never been verified.
        Mrs. Bachmann. That is something that I would want to know
    as a Member of Congress. If the panel is meeting as a panel,
    whether it is the five or the four, and if the meetings are
    recorded, it seems to me that they could be transcribed. And I
    don't know what the verification process is. The reason why I
    am asking is because I learned yesterday that two requests were
    made to access those transcriptions and that those requests
    were not honored. And I have no reason to doubt the cause for
    transparency. And the Treasury Department wants to be
    transparent, I have no reason to doubt that at all. But it
    seems to me that is in conflict. If on the one hand, the
    Treasury Department is saying they want to be transparent, on
    the other hand, why can't we as Members of Congress at least
    receive transcribed copies? Or even if we as Members of
    Congress can't receive the copies, couldn't the members of the
    panel receive the copies of the transcribed--of the recorded
    meetings?
        Ms. Warren. Congresswoman, you may be aware this is a
    matter of some discussion within the panel, and the panelists
    themselves have different views on this. And those views are
    currently under discussion. We have been trying to work out
    something that is congenial to all of the panelists. But I have
    to emphasize these are working meetings where we discuss lines
    of inquiry that we are taking in oversight.
        Mrs. Bachmann. I understand that. And I understand
    Congressman McHenry said it is possible to redact material. One
    thing I had wondered--and I guess this is a little off point,
    but does the Congressional Oversight Panel have a phone number?
        Ms. Warren. I believe we do.
        Mrs. Bachmann. You do, okay. Very good. And can we get it?
        Ms. Warren. Certainly.
        Mrs. Bachmann. So then we would be able to call and make
    that request for the recording or the transcriptions
    potentially?
        Ms. Warren. As I said to Congressman McHenry, I believe it
    would be the case. And I really must add the qualification, as
    I said before, I am not the entire panel.
        Mrs. Bachmann. So no decision has been made about the
    transparency of those hearings. We know that they aren't put up
    on the public for record, but no decision has been made. It
    just seems to me odd that if the commitment is transparency
    that we wouldn't be able to actually receive those hearings
    because votes are made in those meetings.
        Ms. Warren. As I have said, Congresswoman, these are
    working meetings. I think perhaps the correct analogy would be
    a congressional committee holding a working or planning
    meeting.
        Mrs. Bachmann. Well, what is the difference between working
    meetings and any other meeting?
        Ms. Warren. Well, then there are public meetings where we
    do not discuss matters that should not be in the public domain.
        Mrs. Bachmann. But aren't these public meetings?
        Ms. Warren. No, they are not, Congresswoman.
        Mrs. Bachmann. They are meetings of the committee, they are
    formal meetings of the committee members, right?
        Ms. Warren. These are working meetings. I don't know what
    formal meetings. These are working meetings.
        Chairman Moore of Kansas. The gentlewoman's time has
    expired. And I will advise the members that if they have
    additional questions or other questions or would like to pursue
    this, you certainly have a right to submit that in writing.
        Without objection, the hearing record will remain open for
    30 days for members to submit written questions to the
    witnesses and to place their responses in the record.
        Mr. McHenry. Mr. Chairman, if I may, I just wanted to
    clarify what the witness said in answer to my question versus
    Congresswoman Bachmann, and I want to make sure I have the
    correct understanding.
        Chairman Moore of Kansas. Sir, we have another meeting
    scheduled for this room at 5:30, so I am going to deny the
    gentleman's request.
        Mr. McHenry. Well, parliamentary inquiry.
        Chairman Moore of Kansas. You have a right to submit
    written questions and they will be answered within 30 days.
        Mr. McHenry. Parliamentary inquiry.
        Chairman Moore of Kansas. Yes, sir.
        Mr. McHenry. At what point will a transcript of this
    meeting be available?
        Chairman Moore of Kansas. I don't know that we have a
    transcript of this meeting.
        The Chairman. There will be one. I don't know how long. If
    the gentleman would yield to me?
        Chairman Moore of Kansas. Certainly.
        The Chairman. We have a pretty hardworking staff here since
    we have had a lot of hearings. But I will say this: Rather than
    wait for a whole transcript if there is a particular piece that
    the gentleman is concerned about we could have the
    stenographers prepare that piece for him.
        Mr. McHenry. Thank you.
        The Chairman. A whole transcript may take a while, but a
    particular piece we could break it out. So if you would
    designate to the staff what you want to look at so you could
    formulate your question based on that you can get it tomorrow.
        Mr. McHenry. Thank you, Mr. Chairman. And thank you, Mr.
    Chairman.
        Chairman Moore of Kansas. And again I just want to thank
    all of the witnesses for their testimony this afternoon. I
    think this gives us a better understanding of how the TARP
    process works. We need to continue to keep pressing for
    taxpayer protections throughout TARP.
        And I look forward to working with Republicans and
    Democrats. These issues should not be partisan at all. We are
    all in this together, as well as the Treasury Department and
    TARP oversight organizations to finish this. And I again thank
    the witnesses.
        The hearing is concluded.
        [Whereupon, at 5:48 p.m., the hearing was adjourned.]
                                A P P E N D I X

                                 July 22, 2009
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