[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


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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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