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





                     REGULATORY PERSPECTIVES ON THE
                    OBAMA ADMINISTRATION'S FINANCIAL
                  REGULATORY REFORM PROPOSALS, PART II
=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 24, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-68





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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 A. 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










                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 24, 2009................................................     1
Appendix:
    July 24, 2009................................................    51

                               WITNESSES
                         Friday, July 24, 2009

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation (FDIC).............................................    36
Bernanke, Hon. Ben S., Chairman, Board of Governors of the 
  Federal Reserve System.........................................    34
Bowman, John E., Acting Director, Office of Thrift Supervision 
  (OTS)..........................................................    39
Dugan, Hon. John C., Comptroller, Office of the Comptroller of 
  the Currency (OCC).............................................    37
Geithner, Hon. Timothy F., Secretary, U.S. Department of the 
  Treasury.......................................................     7
Smith, Joseph A., Jr., North Carolina Commissioner of Banks, on 
  behalf of the Conference of State Bank Supervisors (CSBS)......    40

                                APPENDIX

Prepared statements:
    Bachmann, Hon. Michele.......................................    52
    Watt, Hon. Melvin............................................    54
    Bair, Hon. Sheila C..........................................    56
    Bernanke, Hon. Ben S.........................................    72
    Bowman, John E...............................................    89
    Dugan, Hon. John C...........................................   106
    Geithner, Hon. Timothy F.....................................   140
    Smith, Joseph A., Jr.........................................   149

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Letter from the Federal Trade Commission.....................   175
    Written statement of Commissioner J. Thomas Rosch, Federal 
      Trade Commission, dated July 21, 2009......................   177
Bair, Hon. Sheila C.:
    Written responses to questions submitted by Representative 
      Bachus.....................................................   189
Bernanke, Hon. Ben S.:
    Written responses to questions submitted by Representative 
      Bachus.....................................................   205
    Written responses to questions submitted by Representative 
      Bean.......................................................   213
    Written responses to questions submitted by Representative 
      Capito.....................................................   214
Bowman, John E.:
    Written responses to questions submitted by Representative 
      Bean.......................................................   216
    Written response to a question submitted by Representative 
      Sherman....................................................   217
Dugan, Hon. John C.:
    Written responses to questions submitted by Representative 
      Bachus.....................................................   218
    Written responses to questions submitted by Representative 
      Bean.......................................................   227
Smith, Joseph A., Jr. :
    Written responses to questions submitted by Representative 
      Bean.......................................................   232
 
                     REGULATORY PERSPECTIVES ON THE
                    OBAMA ADMINISTRATION'S FINANCIAL
                  REGULATORY REFORM PROPOSALS, PART II

                              ----------                              


                         Friday, July 24, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Gutierrez, Watt, Sherman, Meeks, Moore of Kansas, 
Hinojosa, Miller of North Carolina, Scott, Green, Cleaver, 
Bean, Ellison, Klein, Wilson, Foster, Carson, Speier, Minnick, 
Adler, Driehaus, Kosmas, Himes; Bachus, Castle, Royce, 
Manzullo, Biggert, Miller of California, Capito, Hensarling, 
Garrett, Neugebauer, Price, McHenry, Campbell, Putnam, 
Bachmann, Marchant, Posey, Jenkins, Lee, Paulsen, and Lance.
    The Chairman. The hearing will come to order. The 
photographers will disperse. This is another in a series of 
hearings we are having on the question of restructuring our 
financial regulatory apparatus. We will be doing hearings 
today, and some next week. We will be returning in September 
with some action.
    I think it is very clear the first thing we will be doing 
will be marking up the consumer financial protection entity. 
And we will then be proceeding to marking up other aspects of 
this. Our expectation is that they will go to the Floor as one 
bill because that has been the Senate's preference.
    But I am committed to a structure which will give us time 
to debate them sort of title by title on the Floor, which is 
clearly much more than a 1-day Floor event. And I will be 
working hard to make sure we have adequate time to debate on 
the Floor the various aspects. We have 8 minutes for--
    Mr. Bachus. Mr. Chairman?
    The Chairman. Yes.
    Mr. Bachus. Are you saying that next week, we will be 
addressing--is it executive compensation?
    The Chairman. Yes.
    Mr. Bachus. Not the consumer.
    The Chairman. I said September.
    Mr. Bachus. Okay. Thank you.
    The Chairman. The executive compensation on Tuesday, 
probably on the Floor on Friday.
    And with that, we will have our opening statements.
    The gentleman from Pennsylvania is recognized for 2 minutes 
and 40 seconds.
    Mr. Kanjorski. For more than 70 years, Mr. Chairman, the 
regulatory reforms of the 1930's brought about, and then 
enacted because of the unbridled excess of dangerous 
speculation of an earlierera, safely steered our financial 
markets through the always rocky seas of capitalism.
    But all good things must come to an end. Created for the 
economy of the last century, those antiquated rules failed to 
respond to today's realities in which financial engineering and 
innovation surpassed effective oversight.
    For our economy to flourish once again, we must fix this 
problem. The Administration's diligent efforts to reform our 
outmoded and flawed regulatory system have resulted in a White 
Paper and subsequently specific legislative proposals.
    In particular, I am pleased that the Administration calls 
for establishing the Office of National Insurance, an idea I 
first originated and for which I have strongly advocated for 
some time. Also I commend efforts to regulate the advisors of 
hedge funds and other private pools of capital. Similarly 
derivatives and swaps markets will finally face a suitable 
level of scrutiny under the Administration's plan. These 
reforms are long overdue.
    While the Administration's proposals for credit rating 
agencies represent a good start, we must do more, much more, in 
this field. By sprinkling their magic dust on toxic assets, 
rating agencies turned horse manure into fool's gold. We 
therefore should no longer pursue only modest modifications in 
regulating this problematic industry.
    Instead, we must consider radical reforms aimed at 
improving accountability, reliability, transparency, and 
independence. We could, for example, promote better ratings 
quality by establishing a fee on securities transactions to pay 
for ratings, forcing a government quality assessment of rating 
agency methodologies, changing liability standards for rating 
agencies and altering business structures.
    Additionally, I must reiterate my deep and profound 
concerns about the selections of the Federal Reserve as the 
primary entity in charge of systemic risk. I believe that we 
need someone with real political accountability in this role 
like the Treasury Secretary.
    On the whole, however, the Administration has produced a 
very thoughtful approach to financial services regulatory 
reform. I applaud the Administration for its hard work.
    Congress has now begun its hard work using the 
Administration's promising foundation as our guide for enacting 
new laws that put in place a regulatory system that will last a 
very long time and help to ensure American prosperity for many 
years to come.
    I yield back my time.
    The Chairman. The gentleman from Texas for 3 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    When you have the wrong diagnosis, you will in turn offer 
the wrong remedy, and that is exactly the case with the 
Administration's proposal before us.
    Our economic turmoil has not arisen from deregulation, but 
more so from dumb regulation. That, and regulators who did not 
lack adequate regulatory authority but may have lacked adequate 
judgment.
    Although I have a number of concerns about the plan, I am 
simply taken aback by the lack of reform of Fannie Mae and 
Freddie Mac, the epicenter of the financial crisis, not to 
mention the suggested creation of an agency to abridge consumer 
rights.
    Rather than taking on the current status quo for these 
GSEs, the Administration's plan institutionalizes the problem. 
When President Obama referenced sweeping reform, I didn't know 
he meant sweeping Fannie and Freddie under the rug.
    Worse yet, his plan actually gives the Federal Reserve 
power to create more systemic risk by establishing tier one 
financial holding companies which can simply create more 
Fannies and Freddies, and signals to the market that the 
biggest institutions among us will always have a taxpayer 
safety net. In other words, the proposal enshrines us as a 
perpetual bailout nation.
    One of the more troubling components of the proposed plan 
is the creation of a new consumer financial product approval 
agency ruled by five unelected bureaucrats. Based upon their 
subjective determination of ``fairness,'' they will be 
empowered to decide which credit cards we can receive, which 
home mortgages we are permitted to possess, and even whether we 
can access an ATM machine. The proposal represents one of the 
greatest assaults on consumer rights I have ever witnessed.
    The legislation will stifle innovation, perhaps the next 
online banking service or the next frequent flyer mile 
offering, and worse yet will contract credit to our small 
businesses at a time of historic unemployment.
    There is a better way. The Republican plan under Ranking 
Member Bachus' leadership creates a new chapter of the 
Bankruptcy Code to enhance the resolution of large nonbank 
financial institutions. It puts an end to taxpayer-funded 
bailouts and too-big-to-fail. A market stability and capital 
adequacy board will be established and tasked with monitoring 
the interactions of all sectors of the financial system and 
identifying risk that can endanger the stability and soundness 
of the system.
    The Republican plan focuses the Federal Reserve on its core 
mission of conducting monetary policy. And although we preserve 
its 13(3) exigent powers, we do not leave them unlimited. Once 
the housing market is stabilized, we would phase out taxpayer 
subsidies of Fannie Mae and Freddie Mac and end the current 
model of privatized profits and socialized losses.
    Furthermore, our proposal creates an Office of Consumer 
Protection to empower consumers with effective disclosure and 
enhance the penalties for fraud.
    There are choices between more bailouts and no bailouts; 
market discipline or government control; consumer empowerment 
or the laws of consumer rights. Let's hope this committee and 
this Congress chooses wisely.
    I yield back the balance of my time.
    The Chairman. I will now recognize myself for 2 minutes and 
40 seconds.
    I want to address a startling misconception that somehow we 
are ignoring Fannie Mae and Freddie Mac. The charge that Fannie 
Mae and Freddie Mac were being ignored was accurate up until 
2007. That is, before 2007, while there were some efforts to 
legislate, one which came from this committee under the 
chairmanship of Mr. Oxley, but was opposed by President Bush, 
nothing happened.
    In 2007, we did pass in March of that year the bill to 
reform Fannie Mae and Freddie Mac and include every power 
requested by the Bush Administration. It passed the House that 
summer. It did not, unfortunately, pass the Senate until the 
following year because the Senate was narrowly divided, but the 
fact is that the proposal of the Bush Administration, and 
particularly Secretary Paulson, for increased powers over 
Fannie Mae and Freddie Mac did become law; it is now under 
conservatorship. So the notion that there is an unbridled 
Fannie Mae and Freddie Mac out there is mythic.
    Now, it is true that, going forward, we will need to change 
the model, but it is not the case that they are now the way 
they were. They are under conservatorship. They are in fact 
serving as not what they used to be, but as almost a public 
utility in terms of trying to deal with the mortgage crisis. 
And their main role now is to try to help us deal with the 
foreclosure crisis and with refinancing. So they have, in fact, 
been--the first step was taken again at the request of the Bush 
Administration, and everything that was done regarding Fannie 
and Freddie in 2008 was done at their request.
    We do have on the agenda going forward a look at what their 
future role should be, but they were not what they were.
    We will be proceeding finally with other aspects of this. 
And I do want to say with regard to the Consumer Protection 
Agency--no, it is not called the consumer product approval 
agency. It will not be called that except by people trying to 
caricature it, and it will not have that function. The notion 
that we should leave exactly as we have consumer protection 
when it he has been so badly done, frankly that is a debate I 
am glad to have before the American people.
    The notion that the existing institutional structure 
protects consumers adequately, I think is a mistake. Yes, I was 
very pleased, for instance, when the National Federation of 
Independent Business supported our credit card bill, because as 
credit card users, small businesses wanted that kind of 
protection. That is what we will be doing going forward.
    The gentleman from Texas, Mr. Neugebauer, for 1 minute.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Based on the principles of ending taxpayer bailouts, 
getting the government out of the business of picking winners 
and losers, and restoring market discipline, our Republican 
plan calls for a simplification for consumers not duplication.
    Adding new regulations and new bureaucracy does not create 
a regulatory reform. Designating some firms as too-big-to-fail 
and creating a permanent bailout authority doesn't reform the 
system and does not protect the taxpayers. Adding more 
regulations when original ones weren't getting--regulators, 
when the original ones weren't getting the job done doesn't fix 
the problems.
    If there are regulatory holes, we should fill them. If we 
can streamline the number of agencies and reduce the overlap, 
we should do so. We need reform that tightens the regulatory 
structure and protects the taxpayers. Rather than more bailouts 
and more bureaucracy, we need to make more market discipline 
and more taxpayer protection available.
    I yield back.
    The Chairman. The gentleman from North Carolina for 2 
minutes and 40 seconds.
    Mr. Watt. Thank you, Mr. Chairman.
    I want to welcome Secretary Geithner.
    And I want to particularly welcome my good friend Joe 
Smith, the commissioner of banks from my home State, the State 
of North Carolina, who will be testifying on the second panel.
    In the 22 years that I practiced law before I came to this 
institution, I came to realize that most often the definition 
of a good compromise is one that leaves everybody unsatisfied. 
And measured against that criteria, the Administration's 
proposal for restructuring is a resounding success, because I 
haven't heard anybody who is completely satisfied with what has 
been proposed.
    That probably suggests that we have hit the right balance 
if we do what the Administration has proposed with some minor 
modifications which we have to get involved in.
    The area in which I think we have received the most 
pushback has been the Consumer Products Agency. And I 
understand the natural resistance to change, but I would just 
say to my friends and the industry with whom I have worked over 
the 18 years that I have been in this body now that if we reach 
the end of this process, having given to the regulators and to 
the industry, both of whom succeeded in really allowing a 
meltdown to take place in this country, the same kind of 
structure and authorities without a focus on the consumer, the 
public will be outraged, and they should be outraged.
    So I want to welcome, encourage my friends and the industry 
to come to the table and sit down and talk about how we 
structure this new Consumer Protection Agency in a way that 
does robustly what we intend for it to do, protection of 
consumers, and does not have the disadvantages that have been 
spelled out and in my opinion grossly overstated. I think some 
of the concerns that have been raised are legitimate. We can 
address those, but we need to roll up our sleeves and work 
together to do so. I yield back.
    The Chairman. The gentleman from California, Mr. Royce, for 
1 minute.
    Mr. Royce. Thank you.
    I think getting to the bottom of what caused the housing 
bubble should be our primary objective here.
    And in point of fact, it was the Fed that came to us, came 
to this committee, and came to the Senate committee, and said 
that because of the size of the portfolios of Fannie and 
Freddie and because of the leverage ratios of 100 to 1, 100 to 
1 in leverage, because of the direction for them to have 
purchased a trillion in subprime mortgages for their political, 
for their affordable housing goals and so forth, that they had 
to be regulated for systemic risk.
    In 2003, I put in a bill to do that working with the Fed. 
In 2005, we in fact had my amendment on the Floor to try to 
give the regulators the ability to regulate for systemic risk. 
Fannie and Freddie opposed it. Franklin Raines opposed it. It 
was opposed by most of the Members of this House.
    But in 2006, in the Senate, they actually got it out of 
committee. But again, the Democratic Members on the Senate side 
opposed that regulation to give the regulators the ability to 
handle Fannie and Freddie for systemic risk. That is the 
history of this. We need to address it.
    The Chairman. The gentlewoman from Illinois for 1 minute.
    Mrs. Biggert. Mr. Chairman, the Administration's plan 
endorses the too-big-to-fail mantra putting taxpayers on the 
hook for future bailouts caused by the behavior of a few 
dysfunctional Federal regulations and enforcement.
    It also allows the Federal Government to continue to pick 
winners and losers in the marketplace. That is not fair to 
taxpayers, and it is not fair to the little guys in my 
district.
    Speaking of picking winners and losers, TARP has left many 
community banks hanging out to dry. Those local banks are 
denied access to CPP and CAP assistance. By the time any aid is 
extended, it may be too late.
    Illinois banks have private equity at the door, but waiting 
for a Federal match that is not available. Some have estimated 
that, with a $250 million capital infusion in total, around 200 
community banks could be saved.
    I want to hear from today's witnesses, at a fraction of the 
cost of letting them fold, and for less than 3 percent of the 
$700 billion authorized, why can't you help our community 
banks?
    The Chairman. The gentleman from California, Mr. Miller, 
for 1 minute.
    Mr. Miller of California. Thank you, Mr. Chairman.
    After listening to the regulators over the last 2 weeks in 
these hearings, I am very concerned about the lack of 
communication between financial regulators overseeing our 
economy and recovery. The Financial Accounting Standard Board 
may change the fair-value accounting only after serious market 
turmoil and oversight from financial policymakers.
    When asked in a recent hearing, the SEC Chairman was 
unaware of how the banking regulators were applying the new 
accounting rules. While it is not the job of the SEC to oversee 
recovery efforts and regulate banks, financial policymakers 
should be collaborating on major issues that impact on our 
economy. The SEC, after all, conducted a 259-page study on fair 
value accounting standards and specs on financial institutions 
and banks.
    I am glad you are here, the Treasury, along with banking 
regulators are here to discuss regulatory reform. But I 
strongly believe that we need to have a hearing on both with 
regulators and accounting policymakers. In fact, major changes 
will be enacted in the credit market will be retroactive 
accounting changes known as SAS, FAS 166 and 67. I hope we can 
be proactive in examining the changes instead of responding 
reactively like we did with fair value.
    I thank you and I yield back.
    The Chairman. The gentleman from New Jersey, Mr. Garrett, 
for 1 minute. Let me just say, after this, I believe we will 
have time for the Secretary's opening statement. Then we will 
break and come back.
    Mr. Garrett for 1 minute.
    Mr. Garrett. Thank you.
    Mr. Secretary, you know, Chairman Frank has been critical 
of the banking industry for opposing the Administration's plan 
for the CFPA. I don't think anybody believes that we don't need 
some reform, but the industry is not going to be the only one 
who expresses concerns.
    We are going to have a whole panel later on of all the 
regulators out there. And I think just about every one of them 
have expressed some doubts or some concerns with the CFPA 
proposal. As a matter of fact, Mr. Bernanke was here the other 
day, and he has expressed his concerns with the proposal as 
well.
    I know that some on the other side are going to say, they 
create a whole new Federal bureaucracy; that is a good 
political winner. I will disagree. And some may well say that 
it is a good thing to go forward. But I am glad that we are 
going to postpone this debate a little bit longer. As a matter 
of fact, the chairman has just said that this is an area that 
is worthy of an actual debate.
    I completely agree, because the more we debate, the more we 
hear about it, the more problems we see, the more we realize it 
is a bad idea; that it is going to limit consumer choice, limit 
credit availability. It is going to increase cost, and the most 
important thing, the most ironic thing, is it potentially 
decreases safety and soundness for our banking system.
    Thank you, Mr. Secretary.
    The Chairman. We will have the Secretary's statement. We 
probably have about 15 minutes, so the Secretary can give his 
statement, and we will then break and come back.
    Mr. Secretary.

STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary Geithner. Chairman Frank, Ranking Member Bachus, 
and members of the committee, thanks for giving me the chance 
to come before you today.
    Let me first begin by commending you for the important work 
you have already undertaken to help build consensus on 
financial reform. We have an opportunity to bring about 
fundamental change to our financial system, to provide greater 
protection for consumers and for businesses. We share a 
responsibility to get this right and to get this done.
    On June 17th, the President outlined a proposal for 
comprehensive change of the basic rules of the road for the 
financial system. These proposals were designed to lay the 
foundation for a safer, more stable financial system, one less 
vulnerable to booms and busts, less vulnerable to fraud and 
manipulation. The President decided we need to move quickly 
while the memory of the searing damage caused by this crisis 
was still fresh and before the impetus to reform faded.
    These proposals have led to an important debate about how 
best to reform this system, how to achieve a better balance 
between innovation and stability. We welcome this debate, and 
we will work closely with the Congress to help shape a 
comprehensive and strong package of legislative changes.
    My written testimony reviews the full outlines of these 
proposals. I just want to focus my opening remarks on two 
central areas for reform.
    The first is our proposal for a Consumer Financial 
Protection Agency. We can all agree, I believe, that in the 
years leading up to the current crisis, our consumer protection 
regime fundamentally failed. It failed because our system 
allowed a range of institutions to escape effective 
supervision. It failed because our system was fragmented, 
fragmenting responsibility for consumer protection over 
numerous regulators, creating opportunities for evasion. And it 
failed because all of the Federal financial services regulators 
have higher priorities than consumer protection.
    The result left millions of Americans at risk, and I 
believe for the first time in the modern history of financial 
crises in our country, we face an acute crisis, a crisis which 
brought the financial system to the edge of collapse in 
significant part because of failures in consumer protection. 
The system allowed--this system allowed the extreme excesses of 
the subprime mortgage lending boom, loans without proof of 
income, employment or financial assets that it reset to 
unaffordable rates that consumers could not understand and that 
have contributed to millions of Americans losing their homes.
    Those practices built up over a long period of time. They 
peaked in 2006. But it took Federal banking agencies until June 
of 2007 after the peak to reach consensus on supervisory 
guidance that would impose even general standards on the sale 
and underwriting of subprime mortgages. And it took another 
year for these agencies to settle on a simple model disclosure 
for subprime mortgages.
    These actions came too late to help consumers and 
homeowners. The basic standards of protection were too weak. 
They were not effectively enforced, and accountability was 
diffused. We believe that the only viable solution is to 
provide a single entity in the government with a clear mandate 
for consumer protection and financial products and services 
with clear authority to write rules and to enforce those rules.
    We proposed to give this new agency jurisdiction over the 
entire marketplace. This will provide a level playing field 
where the reach of Federal oversight is extended for the first 
time to all financial firms. This means the agency would send 
examiners into nonbanks as well as to banks reviewing loan 
files and interviewing sales people.
    Consumers will be less vulnerable to the type of race-to-
the-bottom standard that was produced by allowing institutions 
without effective supervision to compete alongside banks. We 
believe that effective protection requires consolidated 
authority to both write and enforce rules. Rules written by 
those not responsible for enforcing them are likely to be 
poorly designed with insufficient feel for the needs of 
consumers and for the realities of the market. Rule-writing 
authority without enforcement authority would risk creating an 
agency that is too weak dominated by those with enforcement 
authority. And leaving enforcement authority divided as it is 
today among this complicated mix of supervisors and other 
authorities would risk continued opportunities for evasion and 
uneven protections.
    Our proposals are designed to preserve the incentives and 
opportunities for innovation. Many of the practices of consumer 
lending that led to this crisis gave innovation a bad name. 
What they claim was innovation was often just predation. But we 
want to make it possible for future innovations and financial 
products to come with less risk of damage. We need to create an 
agency that restores the confidence of consumers and the 
confidence of financial investors with authority to prevent 
abusive and unfair practices while at the same time promoting 
innovation and consumer access to financial products.
    The second critical imperative to reform is to create a 
more stable system. In the years leading up to this crisis, our 
regime, our regulatory framework, permitted an excess buildup 
of leverage both outside the banking system and within the 
banking system. The shock absorbers that are critical to 
preserving the stability to the system, these are shock 
absorbers in the form of capital requirements, margin, 
liquidity requirements, were inadequate to withstand the force 
of the global recession. They left the system too weak to 
withstand the failure of a major financial institution.
    Addressing this challenge will require very substantial 
changes. It will require putting in place stronger constraints 
on risk taking with stronger limits on leverage and more 
conservative standards for funding and liquidity management. 
These standards need to be enforced more broadly across the 
financial system overall, covering not just all banks but 
institutions that present potential risk to the stability of 
the financial system.
    This will require bringing the markets that are critical to 
the provision of credit and capital, the derivatives markets, 
the securitization markets and the credit rating agencies, 
within a broad framework or oversight. This will require reform 
to compensation practices to reduce incentives for excessive 
risk taking in the future.
    This will require much stronger cushions or shock absorbers 
in the critical centralized financial infrastructure, so that 
the system as a whole is less vulnerable to contagion and is 
better able to withstand the pressures that come with financial 
shocks and the risk of failure of large institutions.
    And this will require stronger authority to manage the 
failure of these institutions. Resolution authority is 
essential to any credible plan to make it possible to limit 
moral hazard risk in the future and to limit the need for 
future bailouts.
    Alongside these changes, we need to put in place some 
important changes to the broader oversight framework. Our 
patchwork, antiquated balkanized segmented structure of 
oversight responsibility created large gaps in coverage, 
allowed institutions to shop for the weakest regulator, and 
left authorities without the capacity to understand and stay 
abreast of the changing danger of risk in our financial system. 
To address this, we proposed establishing a council responsible 
for looking at the financial system as a whole. No single 
entity can fully discharge this responsibility.
    Our proposed Financial Services Oversight Council would 
bring together the heads of all the major Federal financial 
regulatory agencies, including the Federal Reserve, the SEC, 
etc. This council would be accountable to the Congress for 
making sure that we have in place strong protections for the 
stability of the financial system; that policy is closely 
coordinated across responsible agencies; that we adapt the 
safeguards and protections as the system changes in the future 
and new sources of risk emerge; and that we are effectively 
cooperating with countries around the world in enforcing strong 
standards.
    This council would have the power to gather information 
from any firm or market to help identify emerging risks, and it 
would have the responsibility to recommend changes in laws and 
regulation to reduce future opportunities for arbitrage, to 
help ensure we put in place and maintain over time strong 
safeguards against the risk of future crises.
    The Federal Reserve will have an important role in this 
framework. It will be responsible for the consolidated 
supervision of all large interconnected firms whose failure 
could threaten the stability of this system, regardless of 
whether they own a depository institution. The Fed, in our 
judgment, is the only regulatory body with the experience, the 
institutional knowledge, and the capacity to do this. This is a 
role the Fed largely already plays today.
    And while our plan does clarify this basic responsibility 
and gives clear accountability to the Fed for this 
responsibility, it also takes away substantial authority. We 
propose to take away from the Fed today responsibility for 
writing rules for consumer protection, and for enforcing those 
rules, and we propose to require the Fed to receive written 
approval from the Secretary of the Treasury before exercising 
its emergency lending authority.
    Now, we look forward to refining these recommendations 
through the legislative process. To help advance this process, 
we have already provided detailed draft legislative language to 
the Hill on every piece of the President's reform package.
    The Chairman. Mr. Secretary, if you can wind it up, and 
then we can come back. Thank you.
    Secretary Geithner. Just 30 seconds. We welcome your 
committee and your counterparts in the Senate to pass reform 
this year.
    Despite this crisis, the United States remains in many ways 
the most productive, the most innovative, and the most 
resilient economy in the world. To preserve this, though, we 
need a more stable, more resilient system and this requires 
fundamental reform.
    Thank you. We look forward to working with you.
    [The prepared statement of Secretary Geithner can be found 
on page 140 of the appendix.]
    The Chairman. We will return to begin the questioning.
    [recess]
    The Chairman. The hearing will reconvene.
    And, Mr. Secretary, I will get to a question, but I did 
want to use my 5 minutes, as it is up to us, to continue the 
history.
    I think the distortion of history that we see, particularly 
with regard to Fannie Mae and Freddie Mac, needs to be 
addressed.
    The gentleman from California, Mr. Royce, mentioned that in 
2005, when this committee voted on a bill, he offered an 
amendment that he said would have resolved the problem, and he 
obviously strongly believed that. He mentioned that it was 
opposed. He then went on to say that, in the Senate, there was 
a version that was better, but the Democrats opposed it. He did 
not characterize the party positions in the House, so I thought 
I would check and see if my memory in this one case held up. It 
did. The vote on the amendment offered by the gentleman from 
California: 153 Republicans voted no; 70 voted yes. The current 
ranking member of the committee, Mr. Bachus, voted no, along 
with me and Mr. Oxley, the chairman of the committee, the 
gentleman from Texas, Mr. Neugebauer, and the gentleman from 
California, Mr. Miller; we all voted no.
    So it is true that the amendment was offered, but it was 
defeated overwhelmingly and by more than two-thirds of the 
Republican Members. So if the history is relevant, it seems to 
me that is a relevant part of it. The gentleman from Texas did 
vote yes and spoke for it. And again, I would reiterate that, 
in 2005, the Republican-controlled House, the Republican-
controlled committee brought a bill out. It passed the House. 
Some Members thought it was too weak. The President thought it 
was too weak. The Republican Senate passed a different version. 
The Republican Senate didn't take the bill up, and nothing 
happened.
    The Secretary of the Treasury at the time, Mr. Snow, said 
he thought the bill that was brought forward by Mr. Oxley was a 
good bill. He was overruled by the Administration. The 
gentleman from Ohio was troubled by what the Administration 
did. I joined him in writing a letter. I had actually voted 
against the vote on the Floor because of some unrelated issues, 
not Fannie and Freddie issues, but housing issues. But I did 
join him in writing to the Senate saying, ``Let's try and work 
this out.'' The Senate never took up the bill.
    The Senate Chair, the Republican Chair, apparently felt 
that it wasn't at this point worth trying, probably because he 
had some Republican opposition within. But then, in 2007, as it 
was clear that there was a crisis, as I did believe by 2005, 
the House did take it up when the committee organized after the 
election of 2006, and I was the chairman. The first major piece 
of legislation we dealt with was to reform Fannie and Freddie, 
and in this point worked completely with the Administration, 
including the powers of receivership, etc. The bill passed. It 
didn't pass the Senate because of that same partisan division; 
51-49 Senators are hard to make function. Whether it is 51 Ds 
or Rs, it doesn't seem to make much difference.
    But I did want to say, that was the history. And as I said, 
the bill did pass in 2008. So we are not dealing with a Fannie 
Mae and Freddie Mac of the past. Clearly we have to do 
something before they can resume their role, but they are now 
playing a very different role than they had played before.
    And now, Mr. Secretary, I was struck to note that there has 
been a lot of debate about whether or not to have a Consumer 
Protection Agency and who should be the systemic risk 
regulator. And it was interesting to me to note that your 
critics on this seem to be aligned with the socialist 
government in London, while the conservative government in 
London is on the other side. I did note that the conservative 
party line that just came out for a consumer regulator and for 
the Bank of England being the single systemic risk regulator, 
which does appear to be close to your position; whereas the 
socialist government, the labor government, still nominally 
socialist, has taken the opposite side.
    So apparently when things cross the Atlantic, they get 
reversed. I had not realized that was the ideological effect of 
a transoceanic voyage. I think the point is this, that what we 
are talking about here are important issues that people of good 
will can differ about, and that ideology really shouldn't be 
driving this and, in many cases, doesn't drive it. These are 
practical and pragmatic decisions to be made.
    The only thing I would add again is that while I strongly 
support the rationale of the Consumer Protection Agency, one of 
the members on the other side noted that all the regulators are 
against it. Now, those regulators should be happy they are 
getting support from some corners that they don't ordinarily 
get, so maybe they should cherish it when they get it.
    I am always skeptical when people who are often in 
disagreement with somebody suddenly find great wisdom in that 
individual when they happen to agree. Stopped clocks come to 
mind. But the fact is that what we are talking about are 
agencies that are going to lose powers, and they object to 
losing their powers. And I think they have the right to make 
the argument that is sometimes made in an old joke; they can 
argue that taking the powers away from them may not make sense 
because the powers that will be taken away from them are in 
very good shape because they have rarely been used. Yes, it is 
true that they are pristine powers. They have sat largely 
undrawn upon for a while. But I think it is time to put them 
into the hands of someone who will use them.
    The gentleman from Texas--I am sorry, the gentleman from 
Alabama.
    Mr. Bachus. Thank you.
    I accept your apology, Mr. Chairman.
    Secretary Geithner, before we move on regulatory reform, I 
hope you will at least avail yourself to coming back one more 
time so we can talk about that issue because it is of extreme 
importance, including what the gentleman just said about the 
new agency which will design and determine appropriateness of 
all financial products.
    Secretary Geithner. Come back and talk about that or about 
GSEs?
    Mr. Bachus. That, GSEs, the whole--I think it would be 
extremely helpful.
    My first question, the chairman reminded me about Fannie 
Mae, which also you know one of the big things on the table is, 
how much money is the government or the taxpayers ultimately 
going to lose from everything that happened over the last year? 
And you see some figures of $20 trillion, which, you know, that 
would just take--I mean, I don't even use that figure. I just 
say, you know, we have seen $3 trillion is the amount 
outstanding.
    But I have looked at those, and I think there are three big 
areas of loss. And I want to see if you sort of go and follow, 
how much does it look like we are ultimately going to lose? The 
biggest loss of all, the $85 billion that we extended to 
Freddie and Fannie, I see no prospect of getting that money 
back and would like your views on that.
    Now, the second biggest one looks to be the car companies. 
You know, we extended $80 billion, and it looks like we have 
gotten $2 billion back. And we do have an equity share, you 
know, which is going to be very problematic. I see those as the 
biggest losses.
    Normally, people say AIG is the biggest loss. But I know 
the property you took on board has diminished in value by about 
$15 billion, so I do see maybe right now a $15 billion or $20 
billion loss. But by far, Fannie is the big one. The car 
companies and Chrysler Finance, and maybe the next one--I know 
that Bank of America and Citi, there is a lot of money there. 
And of course, Bear Stearns and CIT, we probably lost $5 
billion there.
    But would you go over that? Are there others? In fact, I 
see some of the programs are making money. But I see those two 
big ones are Fannie being the biggest, about $85 billion, and 
maybe all those $70 billion.
    Secretary Geithner. Congressman, I think what you did is 
very helpful, because I think that some of these broad numbers 
don't actually capture exposure, and they don't represent any 
reasonable estimate of risk of loss to the taxpayer. And you 
are doing it the right way, which is to look at the areas of 
our system which were most damaged, most at risk, and try to 
build up from that.
    But I don't believe we are in the position today really to 
give you, even this month or maybe even this year, a realistic 
estimate yet of those losses. That is the important thing for 
us to do. One of the strengths of our system is that when we 
make these commitments, under our budget rules, we are required 
to sort of set aside an estimate that is done independently of 
the Administration of the potential risk of loss to the 
taxpayer.
    Let me just take the positive side of this for just a 
minute. As you said, some of these programs are making money. I 
will just give you two examples. You know, we have had I think 
in the range of $80 billion in capital come back to the 
Treasury in just over the last 2 months.
    Mr. Bachus. You have a Capital Purchase Plan making money--
    Secretary Geithner. Right.
    Mr. Bachus. That is on the lending program.
    Secretary Geithner. And if you look at the value of the 
investment the government made in Goldman Sachs after the 
warrants, the government did realize a 23 percent annual return 
on investment. And that is a measure of the effectiveness of 
the policies that Congress helped put in place to try to bring 
more stability to our financial system. With the effect of 
those actions, the ultimate cost of this crisis could prove to 
be very modest relevant to the scale of the risk we confronted, 
but we won't know that until--
    Mr. Bachus. And let me ask another question, but I think 
you have Fannie and the car companies are our biggest loss, 
looking to me, maybe AIG.
    You know, you are talking about the Capital Purchase Plan. 
The idea there was we put the money in the banks. They will 
lend it. You get a multiplier effect, and then it will pass 
through the economy, and I think a velocity is the economic 
term there. Of course they are holding on to it, but that is 
because of the capital requirements. They are restocking their 
capital. Some of them are lending it. But tell me why we didn't 
really see that multiplier effect?
    Secretary Geithner. Well, I think you did.
    Mr. Bachus. Did we?
    Secretary Geithner. Remember, a dollar of capital is 
equivalent to between $8 and $12 of lending capacity. So if you 
are short a dollar of capital, you are going to have to reduce 
lending by $8 to $12. So on the scale of our financial system, 
just think of this, so without that initial $250 billion of 
capital the previous Administration put into the financial 
system, you would have seen overall lending capacity decline by 
well over $1 trillion, $1 trillion to $2 trillion. So you did 
see the benefits of that.
    The Chairman. The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you very much, Mr. Chairman.
    Again, welcome. We are sort of wearing that seat out, Mr. 
Secretary, with your presence, but we do appreciate it.
    In my opening remarks, I referred to the rating agencies. 
And we paid some particular attention to the White Paper and 
the suggestions of Treasury. I am not necessarily overwhelmed 
with the strong position--
    Secretary Geithner. I had that sense.
    Mr. Kanjorski. --that you have taken. Run through some of 
the alternatives we have. Could you give me arguments pro or 
con, issuer pay, whether or not if we take issuer pay away that 
will have a positive effect for straightening out some of the 
problem, and if we do, where could we allocate that pay?
    Secretary Geithner. I think you are right that many people 
say that the fundamental problem is in the issuer pay model. 
But having looked at that question over a long period of time 
and having listened to the experts on it, I don't see a 
practical viable alternative. There have been some models that 
don't have that structure tested. They didn't seem to work that 
well. But I agree with you; this is an important area of 
reform. And of course, we don't have the monopoly of wisdom in 
these areas, and we are happy to look at any idea, including 
the ones you listed in your opening statements.
    Mr. Kanjorski. How soon do you think we should try and get 
the package of the items we are talking about and the White 
Paper referred to, how soon should they be finished? Would you 
feel comfortable that we have responded to the--
    Secretary Geithner. Meaning when do we want to have these 
reforms in place?
    Mr. Kanjorski. Yes.
    Secretary Geithner. Well, I think they need to be done as a 
package. You have made that point yourself many times. You 
know, you can't fix this by just looking at capital over here 
and looking at some action over here. And in the systemic 
stuff, including on the rating agencies, you have to look at 
the comprehensive set of reforms together as a package. And as 
I said in my opening remarks, I think it is very important we 
move this year, just because, as you have already heard, given 
the scale of interest affected by these reforms, given the 
amount of authority we are proposing to take away from people 
who have it today, there is a lot of resistance and opposition. 
And if we wait or we try to do it piecemeal, it is going to be 
much harder, I think, for this committee to find consensus on 
something sufficiently strong.
    Mr. Kanjorski. Now, we are working on something on 
insurance, and I know Treasury is setting something up. If we 
don't get a national jurisdiction over the insurance industry 
of some element, how will this systemic risk regulator work? 
Won't that leave it very deficient and over a very large 
portion of our financial industry?
    Secretary Geithner. I agree that, as you saw in the model 
line insurance companies and in AIG, one of the things at the 
center of this crisis was you had entities that were not only 
insurance companies with no Federal oversight of any meaningful 
level writing dramatically large commitments for credit 
protection with no meaningful levels of capital against that, 
and that is something we can't afford to allow to happen in the 
future.
    So I think the framework that we proposed, which largely 
models on something you proposed, to begin the process of 
putting in place a Federal level oversight entity, it will be 
very important. But, of course, our job is not just to deal 
with the last war, but to make sure that we are putting in 
place something that is going to capture those weaknesses and 
vulnerabilities more quickly in the future. But I think you are 
hiding one particular example of the weakness of our current 
framework.
    Mr. Kanjorski. Well, I appreciate that and I look forward 
to working with you.
    And we should not be any more than one telephone call away, 
Mr. Secretary.
    I yield back my time Mr. Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. It is always good to see you. If I 
had more than 5 minutes, we would actually talk about a few of 
the things that we agree on. But given the limited time, I must 
admit--
    Secretary Geithner. I could use my time to describe those.
    Mr. Hensarling. On your time, yes; on my time, no.
    Let's continue on with our GSE history lesson if we can. 
Beginning in 1990, Fannie and Freddie's investment portfolios 
grew tenfold. In 1995, HUD first authorized Fannie and Freddie 
to purchase the subprime securities, including loans to low-
income borrowers. In 2004 alone, Fannie and Freddie purchased 
$175 billion in subprime mortgages, accounting for 44 percent 
of the market. From 2005 to 2007, Fannie and Freddie purchased 
approximately $1 trillion, a number that is all too common in 
this Congress, $1 trillion in subprime and Alt-A loans, and the 
list goes on. That is the history.
    Where do we find ours today? We know that Fannie and 
Freddie's share of the origination market has now increased 
from roughly half to 75 percent. At last look, the taxpayers 
have paid out, I believe, $85 billion that none of us expect to 
get back. They are on the hook for an additional $315 billion, 
principally for helping securitize loans to people who couldn't 
afford to pay them back in the first place.
    Now, Mr. Secretary, you have said in, I believe in rolling 
out the White Paper before the Senate Banking Committee on June 
18th, ``we wanted to make sure we were focusing on central 
issues of this crisis.'' I know you are concerned about Fannie 
and Freddie, but as a logical conclusion, since there is not a 
proposal beyond a study of the GSEs in the Administration's 
proposal, that the Administration has concluded that Fannie and 
Freddie were not a central cause of the crisis.
    Secretary Geithner. No, I would say that Congress in its 
wisdom passed legislative authority that provided for, for the 
first time, a modern oversight capacity over these 
institutions. That was done in the summer of 2008.
    Mr. Hensarling. So if I could, Mr. Secretary--
    Secretary Geithner. But I think they did play a fragile 
role.
    Mr. Hensarling. I do have limited time. So it is a central 
cause, but do you believe to a great extent it has already been 
remedied?
    Secretary Geithner. No. Could I just finish this one thing?
    And I agree with you on this. As a government, we are going 
to have to figure out their future. What they are today is not 
going to be their future. It is not in their future.
    Mr. Hensarling. But why not include it in the legislative 
proposal if it is a central cause and needs to be addressed?
    Secretary Geithner. Because we are rarely accused of 
insufficient ambition. We are taking on a lot of things. We are 
trying to solve a lot of problems in this area. And we think we 
want to do that one, don't need to do that right now, cannot 
credibly begin to think about that reasonably right now because 
they are now the entire mortgage market in the country because 
of the deep failures we saw across the banking system. But that 
in time will come, and I think it will come relatively quickly.
    Mr. Hensarling. I understand your answer, Mr. Secretary. I 
have limited time.
    Let's think about another ambition then of the 
Administration. Again, I am not going to adhere to your 
terminology or the chairman's terminology. What I see is a new 
government agency being proposed to approve consumer financial 
products, the CFPA.
    Apart from subprime mortgages, can you point to any other 
consumer financial product that you believe was a but-for cause 
of this credit crisis?
    Secretary Geithner. I want to just agree with one thing you 
said in your opening statement first, which is to say there is 
a lot of dumb regulation in our country. And part of our 
challenge is smarter regulation, not just more regulation.
    But I think if you look at credit products marketed to 
consumers, not just subprime, a broader array of mortgage 
products, and in the credit card area, beyond credit cards, 
too, there were a lot of examples of practices that we should 
not have tolerated in this country.
    Mr. Hensarling. I agree with you, Mr. Secretary.
    But the question is, besides subprime mortgages, was it 
viewed as a central cause, since you know the Fed has already 
issued their final home mortgage disclosure rules under 
Regulation Z. And so either, one, it is inadequate--I guess I 
am asking this question--why come up with an agency that has 
the power to ban or modify mortgages, ban or modify credit 
cards, ban or modify remittances? And I respectfully disagree 
with the chairman. I have read the language of his bill. I 
guess we can have two different lawyers look at it and decide 
what it means to have the ability to render unlawful unfair 
acts and practices that are subjectively decided on by this 
five-person unelected board.
    I mean, if credit cards and remittances were not a part of 
the central cause, why are they included in this legislation, 
and Fannie and Freddie aren't?
    Secretary Geithner. This is not an agency we are proposing 
to give excessively broad scope. We are proposing to focus on 
the credit area in particular, where the principal failures 
were. It is a commission. It is a set of five commissioners 
appointed by the President, confirmed by the Senate, not 
unelected bureaucrats, and with authority that now exists in a 
bunch of other agencies. We want to put it in one place.
    The Chairman. The gentlewoman from New York is recognized 
for 5 minutes.
    Mrs. Maloney. Welcome Mr. Secretary.
    And thank you for your service. A ticking time bomb is the 
commercial mortgage loans. Roughly $1 trillion will become due 
in the next couple of years, and the credit markets are totally 
frozen. I am told they can't get refinancing anywhere. So we 
will be looking at bankruptcies and defaults that will have a 
terrible effect on the regional banks that have invested 
heavily in commercial mortgage loans, and community banks, not 
to mention the loss of jobs and commercial activity.
    I would like to know if you are putting some of your 
creative attention to this problem. I know that Treasury came 
forward with the proposed guidance on residential-backed 
securities, mortgage-backed securities, that allowed them to 
restructure. As you know, under current law, the parties have 
to wait until a default is imminent before borrowers would put 
up new capital.
    And there has been some indication that Treasury is looking 
at issuing administrative guidance that would temporarily ease 
these rules so that borrowers can proactively discuss possible 
loan modifications with those who service their loans in order 
to deal with these issues while there is still time to deal 
with them. And my question is, are you looking at this? Are you 
intending to put forward guidance? When can we expect this 
guidance, and what other steps are you taking to prevent this 
ticking time bomb to our economy?
    Secretary Geithner. We have not made a judgment on whether 
guidance in that particular area is necessary or appropriate or 
possible, but that is something we would be happy to talk to 
you and your staff about in more detail.
    Stepping back a second, you are right to say this is still 
a significant challenge for the U.S. financial system. We do 
have in place today, though, relatively creative, carefully 
designed programs to help mitigate the effects. The first is 
the program that allows us to give capital to community banks, 
a program we expanded and extended 2 or 3 months ago. And that 
is a very important thing to do.
    The second is a program we designed with the Fed to provide 
financing to the markets that are central and important to 
commercial real estate financing. Now those are important 
programs. We think they can be helpful in this. But I think you 
are right to say this is still going to be a challenge for our 
economy and our financial system to work through.
    Mrs. Maloney. What is the problem with giving the same 
treatment to commercial-backed securities that you gave to 
residential mortgage-backed facilities? If this will help them 
refinance--and we are not talking about forcing them to modify 
or extend loans, but simply allowing them to begin the dialogue 
to see if they can work this out.
    Secretary Geithner. I understand why you are drawing 
attention to this issue, and I commend you for doing it. But 
this is an enormously complicated set of issues, and it is 
something we have to work through very carefully. As I said, we 
would be happy to talk to you and your staff about this in more 
detail.
    Mrs. Maloney. Then, secondly, when we talk about the 
Consumer Protection Agency, which I totally and completely 
support, but I also support letting the agencies maintain these 
protections for consumers in these agencies. A great deal of 
how well an agency performs is who is in charge, who is 
appointed. And oftentimes, there is a political agenda. We have 
seen very ineffective chairmen or commissions or whatever and 
others that really protected consumers. So I believe consumer 
protection is so important that we should have a check and 
balance.
    And to give the example of the Federal Reserve that was so 
helpful to this Congress in the passage of the Credit 
Cardholders' Bill of Rights, I truly believe momentum did not 
come to this effort until they came forward with a very well-
thought-out rule that helped move the process forward.
    So it seems to me that it would be counteractive and put in 
jeopardy consumer protections to take away the right for other 
agencies that have the in-depth understanding that it would 
take years for a new agency to learn, to take that away from 
them and to also counter a situation where you may have an 
agency head who is not performing the way they should or 
carries a political agenda. We have certainly seen that at the 
FDA time and time again.
    Secretary Geithner. I understand that concern. We thought 
about that a lot carefully, but let me just make the other 
case. If you give this agency only rule-writing authority and 
no enforcement authority, it will be too weak, and the rules 
won't be well designed, as I said in my opening statements. 
Because they are not responsible for enforcing, they won't have 
the incentive to design the rules carefully to meet the needs 
of both consumers and the basic realities the way these 
businesses work.
    So that is one reason. The second reason is that right now 
what you have been proposing is you are leaving in place with a 
bunch of different people now enforcement authority that 
frankly was not well used or deployed. It is in a bunch of 
different places now, and I think it is very hard to look at 
that system and say that it did anything close to an adequate 
job of what it was designed to do. So I think it is a hard case 
to make that enforcement as effective as it needs to be in the 
future if you leave it where it has been.
    Mrs. Maloney. I would move the enforcement to the 
protection agency but allow the others to continue with their 
rulemaking and their input into protecting consumers.
    Secretary Geithner. So you would move enforcement and leave 
rule-writing authority where it is?
    Mrs. Maloney. As a backup.
    Secretary Geithner. Again, as I said, we want to have a 
strong agency with the right balance between innovation and 
protection, and we would be happy to work with you and your 
colleagues on how best to achieve that.
    Mr. Kanjorski. [presiding] The gentlelady's time has 
expired. The Chair now recognizes Mr. Neugebauer for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. Mr. Secretary, 
thank you for coming today. Earlier in the week, Chairman 
Bernanke was here, and we entered into a dialogue, and he at 
the end stated that when it comes to separating the financial 
products regulator from the primary regulator he was opposed to 
that because he thought it bifurcated the regulatory process. I 
guess the first question is--and I am not trying to pit you two 
against each other--why is he wrong and why are you right?
    Secretary Geithner. As the Chairman said, I think it is 
perfectly reasonable and understandable that the institutions 
that have this authority and have teams of dedicated, 
motivated, experienced people with that responsibility today, 
they are not enthusiastic about giving up that authority. And 
I, with great respect to the Chairman and the other supervisors 
who are reluctant to do this, they are doing what they should. 
They would just defend the traditional prerogatives of their 
agencies. And I think, frankly, all arguments need to be viewed 
through that basic prism. And I understand that obligation they 
feel.
    On the substance, though, these are very different types of 
responsibilities. Prudential supervision is different from 
consumer protection. And I don't think--again we have had a 
running national experiment as a country living with them being 
done together in their existing basic framework and that did 
not turn out so well for us.
    So I think the basic point is that I don't think there is a 
plausible defense of maintaining that current system in place 
today, although I understand why people who still preside over 
those authorities are trying to make the case to preserve them.
    Mr. Neugebauer. I think the question, then, if you are 
going to have two different agencies, then what is the size of 
an agency that has to basically audit or oversee every 
financial institution in this country for their compliance? And 
what does that cost and who is going to pay for that?
    Secretary Geithner. That is an important question. But let 
us just step back right now. As you said at the beginning, 
there are existing teams of examiners spread across bank 
supervisory agencies and to some extent the FTC today, with 
responsibility for consumer protection. So we would like to 
take that expertise and put it in a single place, less 
diffused, take advantage of that accumulated experience and 
have that entity be responsible for this important function. 
Since I think overall supervision was inadequate, particularly 
over the nonbank sector. It is not--I am not sure I can tell 
today what you are going to need in term of the overall 
resource envelope. But we can take advantage of the fact that 
there are substantial existing resources today. They are just 
spread out in a place where they have not been optimally 
deployed.
    Mr. Neugebauer. Does it concern you, though, when I read 
your legislation, I see the charge of that and you spend a lot 
of time talking about this particular area in your 
recommendation. Other areas are pretty short, but this area--
and I think what begins to look like to me is that these--
products that could be approved that are going to be ``the 
optimum product begins to look like government trying to limit 
the choices of the American people.'' In other words, this is 
kind of the optimum credit card, this is the optimum mortgage, 
this is the optimum car loan, and to me, I don't see that as a 
role of the Federal Government.
    So I think there is a difference between consumer 
protection, and I think all of us are for that. And then there 
is the other piece of it, which is product, the government 
determining what products the American people get to look at. I 
am going to be on the ``no'' category of the government telling 
us what kind of financial products we should have.
    Secretary Geithner. Generally, I agree with you on that. 
And if we were proposing that, I would agree with your 
criticism and I would share it. But we are not proposing that. 
So let me just be clear about this.
    We are suggesting that as part of a broad range of reforms 
to fix these vulnerable business systems, there should be a set 
of standardized, simple to understand, clear disclosure set of 
products that are available to consumers, that they can choose 
to avail themselves of or choose not to. We make it very clear 
and explicit that we want banks and others institutions to have 
the ability still to market other products to consumers. But 
even as your colleague said, there needs to be stronger 
protections in place against fraud and predation in those types 
of products.
    So we have a relatively pro-choice proposal here, and by 
suggesting that firms should be marketing standardized, more 
simple, with clear disclosure products, we are not materially 
limiting choice.
    Mr. Neugebauer. I think we all agree with the disclosure 
piece that there is a lot of difference between good disclosure 
and the government picking the products, and I think that to be 
very careful if this becomes an endorsement of the Federal 
Government of certain products.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Mr. Geithner, we certainly appreciate your presence here 
today, and I would like to congratulate you on the strong 
leadership that you are already providing for the Consumer 
Financial Protection Agency. I think it is very important. I am 
absolutely dedicated to the proposition that we can do 
something for consumers. We held a very important press 
conference led by our chairman just yesterday, I am releasing 
an editorial today. When we are on recess, my first town hall 
meeting will be on this issue, and I will plug it into stops 
that I will be making for speaking engagements in New Jersey, 
Tennessee, Georgia, and some other places. So I believe that 
this is very important and again I appreciate the work that you 
are doing.
    Many of our members are very appreciative of that and will 
be joining you in your efforts. So I won't talk about that 
anymore in my limited period of time. I have to focus on what I 
can do for job creation. I don't have to tell you that the 
unemployment rates in minority communities and poor communities 
are double digit, have been for a long time, and when we see 14 
and 15 percent like in New York, you are really talking in some 
census strike areas 35, 40 percent around this country. And so 
I am very interested in doing everything that I can do to help 
create jobs.
    To that end, you know, I have been a real advocate in 
pushing for a minority participation with the Treasury on a 
number of your programs that have been developed under the 
TARP, the PPIP, minority and women owned programs--well, the 
PPIP program in particular is your latest effort. Let me thank 
you for paying attention and including some minority firms in 
cooperation with some of the majority firms. I am very pleased 
that we have at least one firm that will be a main participant 
in the effort, and I am very pleased that we have identified 
and you have helped to select through your work minority firms 
that can participate with majority firms.
    But in examining what the minority firms are doing, I am 
finding that they are getting more fee-based work rather than--
flat-fee work, rather than percentages. We want to beef up the 
participation with our minority firms to make sure that they 
are earning credible amounts of money because this money goes 
back into these minority communities.
    If you would take a look at Magic Johnson, for example, and 
what he has been able to do showing people that you can go into 
the minority community, you can do business, you can make a 
profit, and you can create jobs. So we need a lot more of that, 
and I would like to commend to you our database which we have 
been, I think, trying to share with you so that you will have 
access to those firms that are very, very capable of providing 
mainstream services and not having to rely on small amounts 
that are allocated by some of these firms that they have joined 
up with.
    Having said that, have you given more consideration to how 
you can involve women and minority-owned firms in this really, 
really once of a lifetime opportunity that has been afforded 
through all of the work that is going on with TARP?
    Secretary Geithner. We are giving more consideration to it. 
We haven't made a judgement yet whether we are going to 
allocate, appoint additional managers under this program, but 
we will be reflecting on that as the program gets underway, and 
I understand how important this is to you. And thank you for 
highlighting the things we have already done.
    Ms. Waters. As I understand it, you will be involved very 
soon in another aspect of this work. Are you putting something 
out within the next few weeks relative to the PPIP program 
still?
    Secretary Geithner. We are not fully operational yet. So I 
think the next stage in particular is as these firms we have 
appointed go out and try to raise capital for the program--but 
anyway, I would be happy to come up and spend time with you and 
talk to you and your staff about the details and what is ahead. 
As I said, we are committed to trying to find ways to increase 
participation of small, women-, and minority-owned businesses 
in these programs. We have already done some important things 
in that areas, and we will look for ways to do more.
    Ms. Waters. I think we are referring to valuation agents, 
my staff just said. That is something that I think is available 
now. And I don't know what has been done in making sure that 
you do the kind of acceptable outreach to include these firms. 
They are very capable, they are very competent. This sector of 
the minority community is more prepared, more developed than a 
lot of our other sectors. That is why it is so important for 
them to participate so that they can help create these jobs in 
needed communities.
    I thank you, and I yield back the balance of my time.
    The Chairman. The gentleman from South Carolina, Mr. 
Barrett. Is Mr. Barrett here?
    Then next Mrs. Capito, the gentlewoman from West Virginia.
    Mrs. Capito. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for being here and for your service to our Nation.
    I am from a small State and we have a lot of community 
bankers. A lot of the commerce and residential business is 
conducted by the community bankers in a very personal way. In a 
hearing last week, we had a community banker who talked about a 
woman who had run into a bit of bad luck because her husband 
was very ill and she was able to go to her community banker and 
reshape temporarily her mortgage so that it could meet her 
needs. Naturally, with the prospect of this Consumer Financial 
Products Commission and other regulations, the community 
bankers and those of us living in States who are served 
principally by community bankers are very concerned that the 
flexibility that this bank was able to show this individual 
would not be there for them, not only the flexibility, but the 
timeliness of this.
    What is your response to this kind of situation?
    Secretary Geithner. I think you are right. What you 
described is one of the great strengths of our system and it is 
very important that we preserve that. I don't think there is 
any credible risk, but this is in the hands of this committee 
and Congress. But I don't think there is any credible risk that 
in putting in place strong protections for consumers like we 
have proposed, we would be limiting credit to viable businesses 
and families or materially interfering with the capacity of 
banks to work out those kinds of things. But--and that is 
something we can achieve together. There is no risk as this 
takes shape that we reduce that kind of flexibility.
    Mrs. Capito. But if we are going to talk about--and I would 
like to get an explanation of this and I would appreciate your 
answer on this vanilla loan concept where everything has to 
have a plain vanilla sort of look to it. You know, mortgage 
products are one of the things that was talked about. It seems 
to me that we could be limiting some flexibility here for our 
community bankers, and then you get into things like car loans 
where they are 5 or 6 percent, or zero percent down or $1,500 
incentives.
    Is this Product Safety Commission going to be able to move 
fast enough to oversee this and is this the kind of thing we 
are going to be overseeing?
    Secretary Geithner. I am very glad you raised this again, 
because it is very important. Again, what we are proposing is 
that banks be required to offer the standardized, simple, 
easily understood, clear disclosure product. But they can also 
offer a range of other existing products that can be tailored 
to meet specific needs of families and businesses and--
    Mrs. Capito. But the regulation of those products, excuse 
me, does fall within that consumer product?
    Secretary Geithner. We are again--we are pretty clear in 
the language we put out in our draft proposal. And again we are 
happy to--obviously we are happy to look for ways to make that 
clear and better. But we are largely going to rely on 
disclosure and penalties against fraud to provide the 
protections against the risks that future innovation in these 
areas imperils the system. But I think that in this area we 
very much share your objective in trying to make sure we are 
preserving the capacity for competition of products and for 
innovation in products. That is very important to us. This is 
one of the great strengths of our system. We just let it get a 
little too far away from any basic sense of gravity and we need 
to bring that balance back a little bit. But I very much share 
the objective of preserving competition and product innovation 
but within a better framework of protection against fraud and 
predation.
    Mrs. Capito. Well, I think naturally--and you mentioned 
this in your opening statement or one of the responses to the 
question, that a lot of the problems was really not in the bank 
sector, it was in the nonbank sector. And the community bankers 
and other bankers of this ilk are getting the broad brush 
painted against them not only in negative publicity associated 
with what has happened, but also as we come in to regulate, as 
we are known to do in Congress and Administrations, 
overregulate and make it a one-size-fits-all sort of policy 
that it ends up gutting, I think, a lot of what goes on in the 
day-to-day life of a community banker and other small bankers?
    Secretary Geithner. I think you are absolutely right. And 
let me just say for the record we have a system which has 8,000 
small community banks as a core part of our system. It is a 
great strength of our system. Many of those institutions were 
dramatically more prudent than their larger competitors, and 
that is a good thing about our system. And you are also right 
to point out that one of the challenges they faced was we had a 
system that allowed nonbanks to compete with them without the 
same basic standards, regulatory framework. That was not so 
good for them. It required many of them, if they wanted to 
compete, to lower their standards.
    That is something we have to prevent. That is why we need a 
level playing field. That is why we need a single point of 
accountability around these basic standards, more evenly 
enforced. I think the thrust of this will be very helpful for 
banks, reducing the risk in the future. They are going to be 
faced with that kind of competitive pressure solely produced by 
the ability to evade the kind of protections Congress 
legislates.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. Secretary Geithner, in 
my opening statement I unequivocally made it clear to everybody 
that I am a strong supporter of the Consumer Protection Agency, 
one with equally robust mission and authority as the safety and 
soundness and prudential regulation authority that other 
agencies have, and no less subject to being second guessed or 
having their actions vetoed.
    So I am starting from that proposition. I am not debating 
that philosophical thing anymore. But I am not closing my mind 
to concerns that are raised, and I want to say that to my 
committee members and to the industry and to the other 
regulators--three things I want to ask you about, which I think 
have some merit that have been raised, and ask you and others 
if they care to, to work with me on.
    One of those you addressed in your opening statement, which 
was the examination authority. And the question I want to ask 
is, will you work with me and us and whomever else wants to 
work on it to make sure that the consumer protection 
examinations are coordinated with the prudential examinations 
so that we don't end up with duplicative examiners in their 
different times and overburden the regulated institutions, the 
ones that are already regulated? If you can tell me that yes or 
no, that would be helpful.
    Secretary Geithner. Absolutely. And I think we can do 
better than that. We are proposing to put the prudential 
supervisor on the board of--
    Mr. Watt. That is the--actually the second part of it here. 
The resolution of potential conflicts when--although I have 
asked multiple people to tell me what those conflicts are and I 
have yet to find any real credible ones that don't either fall 
clearly into consumer protection or clearly into safety and 
soundness, in which case a clear articulation of the 
authorities would suffice, but my question is, will you work 
with me to make sure that when there is some kind of conflict, 
there is an appeal or review mechanism? I thought it was going 
to be in the financial services oversight council, but I have 
reviewed what you all sent over in the last few days and I 
don't see it particularly addressed there, and I want to make 
sure that we get that clearly articulated somewhere, that 
everybody gets coordinated or reviewed if there is a real 
conflict, not a contrived one.
    Will you work with me on that?
    Secretary Geithner. Absolutely. What we propose to do at 
two levels, someone at the level of the board of this new 
agency where we have representatives of the supervisors there 
on the board, that would help, but also at the level of the 
broader financial services oversight council.
    Mr. Watt. The third question that I think is a legitimate 
question, although I think it is a red herring and I think we 
ought to completely eliminate it as an issue is, will you work 
with me to make sure that there is no presumption of liability 
for products that are issued that are not the so-called plain 
vanilla products?
    The argument I have heard, which I keep hearing over and 
over again, is that we--if you have a plain vanilla product and 
we issue something else, somebody is going to sue us because we 
issued something--will you work with me to make sure that there 
is no presumption against non-vanilla--plain vanilla products 
that would create any kind of legal liability just because you 
created--offered some other product? That is, I think, the same 
question that Mrs. Capito raised in a different form.
    Secretary Geithner. Yes.
    Mr. Watt. Okay. All right. Now, that I have those three 
things--
    Secretary Geithner. I was going to qualify it a little bit, 
but I understand your objective.
    Mr. Watt. --those three things clarified, I am sure there 
are multiple others, but those at least seem to me to have some 
degree of validity and I think we can do all of those three 
things without in any way compromising the authority or 
subjugating this new agency to somebody else.
    I yield back and thank the chairman for the time.
    The Chairman. I will just say the gentleman speaks for me 
and I think the great majority on our side for that. The 
gentleman from California, Mr. Royce.
    Mr. Royce. Thank you. I was just going to go back to an 
issue where the chairman said he was going to correct the 
record. I don't think there was anything in the record there to 
correct. The chairman said that the majority of the members had 
voted against my legislation that the Fed, the Federal Reserve, 
wanted and indeed that is true. Most of the members, that is 
what I said, most of the members had voted against that in the 
House. The chairman said the bill did not go out of the Senate. 
That is true. In a straight party line vote in the Senate, it 
did go out of committee, but it couldn't get off of the Floor 
on a 55/45 split in the Senate, although I do remember at the 
time the speeches given by Chuck Hagel, who was the author on 
the Senate side of the Fed's bill, and the speech given by John 
McCain in support and the speech on the floor given by Chris 
Dodd in opposition to it.
    So I just want to again confirm that, yes, indeed, the 
Federal Reserve, and the Treasury as a matter of fact, 
supported that legislation. And the reason it is important is 
because we are back to debating that again. If we go back to 
where OFHEO and HUD were in terms of their positions, we 
basically have a situation where the safety and soundness 
regulator is being trumped, is being prevented just as with the 
case of Fannie and Freddie. HUD had in its mission these 
affordable housing goals and as a result HUD came out with the 
idea of zero down payment loans. That would be anathema to 
safety and soundness, but no skin in the game, zero down 
payment loans. HUD came out with the idea of allowing them to 
arbitrage. Go ahead and leverage 100 to 1. Now, this was 
absolutely anathema to the regulators for safety and soundness, 
but nevertheless it was allowed to happen. And the amendment to 
try to do something about it and allow the regulator to step in 
and regulate for systemic risk was blocked. When it came to the 
idea of meeting those affordable housing goals by doing $1 
trillion in subprime, that was encouraged. Not by the safety 
and soundness regulators. For them, they saw in 2004, 2005, 
2006, as they came up here and advised us against this, they 
saw where this was headed, and so did the Treasury.
    And so now we are in the process of trying to look at the 
problems that are in the past, but not repeating those problems 
in the future. And that is why I think it is important at the 
end of the day that the regulator for safety and soundness be 
able to trump these other missions. Fannie and Freddie became 
the most powerful influence or lobby up here. And as you know, 
I have supported a Federal insurance charter for sometime.
    I would like to talk about another issue here. I was 
concerned about the AIG problem and not being able to get our 
hands around the information, and I think you were, too. We 
have talked about that. As you have laid out your regulatory 
reform proposal, there are several problems with the current 
balkanized State-based regulatory system. It is inefficient. It 
is costly for consumers. It hampers U.S. competitiveness. It 
lacks a centralized regulator, which is a key concern for me, 
with an ability to look at the entire U.S. market. As we are 
looking to streamline and consolidate regulatory authority in 
the insurance portion of our financial system, it appears we 
may be taking a step back in the banking sector, especially 
with respect to the Consumer Financial Protection Agency. 
Within your CFPA proposal, you call for creating a floor for 
consumer protection which would allow State consumer laws to go 
over the top of the national standard.
    Bearing in mind what has happened in our insurance market, 
where we have 50 different sets of rules, 50 different 
regulatory approaches, are you concerned that the negative 
consequences that have arisen in the insurance market could be 
replicated in the banking sector with this approach, and would 
it not make sense to set a ceiling as well as a floor so there 
is some consistency nationwide?
    Secretary Geithner. I understand the concern you are 
raising, and it is difficult to get the balance perfect. We 
thought about it a lot. What we laid out was our best judgment. 
Again, how to make sure you have stronger, more uniform 
protections at the national level without depriving States of 
the ability to go beyond that. But I understand the concern 
again. We thought we got the balance right, but this is a very 
complicated issue. This committee spent a lot of time on these 
issues in the past in the preemption area. And again, we are 
happy to work with you and try to think through how best to get 
a better balance.
    Mr. Royce. I appreciate it. And one last point before my 
time expires. Would you concur on the thought about Fannie and 
Freddie, some of the points that I made in terms of the 
systemic risk that they pose to the system?
    Secretary Geithner. There is no doubt that we as a country 
let Fannie and Freddie get to a point where they posed enormous 
risk to the financial system. No doubt about it. It would have 
been good if we had figured out a way to avoid that earlier, 
and that mistake should underpin much of what we do in thinking 
about how to create a more stable system.
    Mr. Royce. Thank you.
    The Chairman. The gentleman's time has expired. We have a 
couple more. Mr. Secretary, we will start at 1:00 with the next 
panel. What I plan to do with regard to the questioning is to 
pick up where we have left off with the second panel. So 
members who have already asked of the Secretary--we will go to 
members who haven't asked.
    Plus--and I talked to the ranking member--we did have a 
time for the Secretary and we would have more time, but 56 
procedural votes preempted him. They weren't all procedural, 
but they were all silly. But what we will do is in September 
when we come back, one of the first things we will have is a 
full session of several hours with the Secretary. So we will 
get back to that.
    Mr. Bachus. Thank you, Mr. Chairman.
    The Chairman. And I will now recognize for 5 minutes the 
gentleman from North Carolina, Mr. Miller, if he would like to 
take the time. The gentleman from Texas?
    Let me just take the gentleman from Texas, if he would 
yield me his first 30 seconds. The gentleman from California is 
right. But again, let us be clear, we are not at the old OFHEO/ 
HUD situation. In 2007, this committee passed a bill that 
included some of the things that had not been in the previous 
bill, approved by Secretary Paulson, President Bush, and Mr. 
Lockhart from OFHEO. So we are not now in a situation where the 
old rules apply. The new rules do apply. There will still have 
to be further changes, but we are not in the old situation as a 
result of legislation in 2008.
    The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman. Thank you for the 
clarification as well.
    Mr. Secretary, welcome again. It is always a treat to hear 
you. I was very impressed with your opening statement. I have 
been visited by many community bankers, as has been the case 
with many colleagues, and one of the concerns expressed is a 
desire not to pay for the sins of others. They sincerely say 
this in a literal sense, they don't want their premiums to 
escalate because of those who engaged in 3/27s, 2/28s, 
prepayment penalties that coincided with teaser rates, and many 
other products that they were not purveying. Can you give us 
your word, please, that they will be comforted in knowing that 
they won't pay for the sins of others?
    Secretary Geithner. I have said this in public before, and 
I will be happy to say it again. But I think they have a point. 
And I think, as Commissioner Bair has already laid out and we 
are very supportive of this, I think we need to move to a point 
where the basic cost of the failures in the system in the 
future are shared a bit more fairly. And I think that is an 
important thing. But, yes, I share that commitment.
    Mr. Green. Well, I would dearly like to work with you in 
making sure that they have the level of comfort that I think 
they richly deserve given that they were not a part of the 
concerns that we are trying to address today.
    Next point. You indicated that penalties against fraud 
would be one of the means by which going forward hopefully we 
would deter some of the products or the behavior that we saw. 
If you would, give a better bit of clarity to that phrase, 
penalties against fraud. Will there be civil as well as penal 
actions or are we talking civil only?
    Secretary Geithner. I probably can't do that justice today, 
but again, I am happy to spend some time working through those 
issues. Again, I think the basic principle--it is not enough to 
have standards, it is not enough to have rules, it is not 
enough to state protections. They have to be enforced. And 
fraud, violations of those protections, there has to be 
consequences. We need to make sure that the framework work in 
place today provides enough deterrents against those kind of 
practices reemerging. That is the objective we are working 
towards, lots of ways to do that. I am happy to spend time 
talking about how best to do that.
    Mr. Green. Thank you. And I would just like to share a 
thought with you as I complete my moment. I understand that we 
have two classes of consumers. We have those who actually 
consume or deal with the products that are being purveyed and 
then you have another class, the folks who work for minimum 
wage which just went up today to, I think, $7.25 an hour, but 
who suffer because others make unwise choices. They end up 
losing jobs, we have seen how connected the economy is, how 
interconnected the world is. And by virtue of this, I care 
about those consumers who make $7.25 an hour. I care about not 
only Fannie Mae and Freddie Mac that we have discussed today, 
but also Aunt Fannie and Uncle Freddie, people who have real 
lives that are being impacted by those who made bad choices.
    So I am here to let you know that I want to work with you, 
but my Fannie Mae and Freddie Mac includes at least two classes 
of Fannies and Freddies.
    Thank you. And I will yield back, Mr. Chairman. Mr. 
Chairman, I did an unusual thing, I yielded back time.
    The Chairman. I appreciate that, and I now recognize the 
gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary. Before I begin, will you work with Mr. Watt on all 
those issues?
    Secretary Geithner. I am just--
    Mr. Garrett. I was being funny about it. It was an attempt 
at humor. Thank you. Following those lines--
    The Chairman. Never mind. Go ahead.
    Mr. Garrett. Yes, thanks.
    Randy asked a question with regard to who do we trust, who 
do we believe with regard to the Feds last week and your 
position here as far as--
    Secretary Geithner. You can believe him and believe me. We 
have a difference, it doesn't mean--
    Mr. Garrett. Right. One of your comments was sort of 
intriguing. You said you understood what they were saying, you 
understood what they were doing. And one of your comments was 
that what they were doing is the right thing, they are 
defending the prerogatives of the agency basically. And you are 
nodding your head and she can't write that down, but that is a 
yes, right? Yes.
    Secretary Geithner. They are defending the people who have 
worked on these issues over time.
    Mr. Garrett. Right.
    Secretary Geithner. And speaking in favor of preserving the 
traditional prerogatives of their agency. That is an 
understandable thing to do. It happens all the time.
    Mr. Garrett. I guess my concern there of course is it then 
really puts us in a hard situation when agencies come before us 
if that is the understanding of the agencies that are going to 
come from aspects from defending the prerogatives of their 
agencies, whether it is the Fed or one of the regulators or 
whether it is the Treasury, if they come to us doing it not for 
the good necessarily of the overall economy or the country or 
what have you, but defending their prerogatives, you can 
understand why that raised a red flag when I heard that.
    Secretary Geithner. No. I think that inherent in your job 
is to think about how to make those choices.
    Mr. Garrett. And to consider the source?
    Secretary Geithner. There is no doubt about it. Absolutely.
    Mr. Garrett. Going to Mr. Watt's question, though. You said 
you would work with him with regard to one of the three issues. 
One of the issues was his example of someone coming in for a 
vanilla product and then getting a more complicated product. 
And his concern is that if the more complicated product isn't 
right for me, do I have the right to sue the bank that gave me 
this more complicated product? And you just said that you hoped 
that you would work with him to make sure that you can't sue 
the banks just because you are into this new product. Did I 
understood his question right?
    Secretary Geithner. I would probably say it differently 
that that. In trying to make sure again we have better 
protections against fraud and predation and in trying to make 
sure it is possible that people can be able to see, for 
example, a 30-year fixed-rate mortgage alongside a suite of 
other mortgage products, you also want to make sure that they 
have the ability to choose a 5-year adjustable rate mortgage 
too without presumption, as he said it, that they would be 
vulnerable to challenge for offering products other than the 
vanilla product. That I agree with.
    Mr. Garrett. What about the flip side of that, though? What 
if an individual comes into the bank and the bank does have 
these more esoteric products and they don't offer it to the 
client or the individual and all they offer to the customer is 
the vanilla product. Does that client have a right to go back 
to the bank and say that this bank is profiling me and saying 
that I am not eligible for this type of more sophisticated 
product?
    Secretary Geithner. That doesn't worry me that much. In our 
system--because we will have a lot of banks competing for this 
business--that consumer will be able to go to another 
institution and say, I like the range of choice that 
institution offers.
    Mr. Garrett. That certainly should trouble you because we 
have heard a lot of discussion on this panel with regard to 
something called predatory lending, and so many times they said 
that there should be other products that individuals should be 
entitled to but they are just not offered those, and all they 
are offered are these much higher rate products or just really 
ones that put them in a bad situation.
    Secretary Geithner. It is very unlikely, I think, that 
would come with an institution that chose on its own only to 
offer 30-year fixed-rate mortgages. It is possible, but I think 
it is unlikely.
    Mr. Garrett. In my time remaining, on the wind-down 
authority I have heard different stories, and let me go to the 
source. On the winding down authority--first of all, the 
chairman made a comment I agree with completely. He said that 
if we identify who the Tier 1 companies are--what did he say 
the other day? And then we shouldn't have a pre-existing list 
because if you do, then he said you will only exacerbate the 
problem of too-big-to-fail. I agree with that. But under the 
proposal that has come out right now, it seems as though you 
are beginning to identify them by certain parameters and what 
have you. So, A, wouldn't that cause some problem here because 
you are basically telling us who they are and, B, the second 
question--maybe you can get back to me on this--is I have heard 
different stories of where the assessments will be, will the 
assessments only be on the Tier 1 companies? And if the answer 
to that is yes--and you can give the answer off line too--will 
that be potentially harmful to those companies, the remaining 
companies, if the assessment is too large because you only have 
a small group?
    Respond to the question if you can.
    Secretary Geithner. Let me do the first part of your 
question, and the second part and the third part I will be 
happy to do separately. On the first part, here is our basic 
challenge. We believe--I think there is a very strong case for 
this--that the largest institutions that present these unique 
risks to the stability of our system, they need to have more 
conservative constraints on capital and leverage. They need to 
be holding more resources against the risk of loss so that we 
are less vulnerable in the future to the mistakes they made and 
the system as a whole is better able to withstand the effects 
of their failure. To do that, you have to be able to apply 
differentially higher charges. That requires identifying at 
least a mix of institutions that meet that risk. But we of 
course deeply understand the moral hazard risks that we live 
with today and that come various variants in this stuff. Again, 
we will work--
    The Chairman. The gentleman's time has expired. I am going 
to do two more. The gentleman from Georgia.
    Mr. Scott. Thank you, Mr. Chairman. Mr. Geithner, welcome 
again. I want to ask you specifically in terms of would you not 
commit to at least having someone on your staff who is 
dedicated to increasing the participation of African-American-
owned firms, management asset firm, other firms, so that they 
can get business in the financial sector as we move in this 
area?
    Secretary Geithner. I think I can do better than that in 
the sense that I would be happy to designate to you the 
principal Senate confirmed official in the Treasury with broad 
responsibility over the design and management of these 
programs, part of whose responsibility will be to continue to 
make sure we are looking for opportunities to increase 
participation of again small, women-owned, and minority-owned 
businesses in these programs.
    Again we have been pretty careful and pretty effective in 
expanding those opportunities, and we are happy to work with 
you on ways we can do better.
    Mr. Scott. Because there are many, many well-qualified 
minority-owned firms who, if we don't make a special effort to 
make sure they have the opportunity to compete, and if it 
doesn't come from the top, it just doesn't get done. So I would 
appreciate it, and I know this committee would appreciate your 
work on that area.
    Now another area that I am vitally concerned about, and 
that is many, or shall we say some in the banking industry, it 
seems to me, are reverting back to some of the very practices 
that got us into this mess. I am sure you are familiar with the 
reports that have come out of now the huge, multimillion 
dollar, billion dollar compensation packages, bonuses that 
really got us into some of this. And they are going right back 
to it. What can you do about that?
    Secretary Geithner. Congressman, I just want to make it 
clear, we do not believe we can go back to the set of practices 
of compensation that prevailed over the last decade and helped 
contribute to this crisis, and that is why we proposed well 
designed but very important reforms in the compensation area, 
and that is why it is very important you are moving question 
quickly as a committee to consider those reforms just next 
week, I believe.
    But it is important that we do this in the context of 
broader regulatory reform because it is not going to be enough 
just to bring about better incentives for compensation. We are 
also going to have to put other constraints on risk taking 
through capital requirements; for example, more conservative 
safeguards, require firms to hold greater cushions against 
loss. But you need to look at comprehensive reform again to 
reduce the risks that we start to recreate some of the same 
problems that got us here.
    Mr. Scott. We continue to get complaints from some in the 
banking industry with certain practices. We have the Consumer 
Protection Agency which we are pushing, which unfortunately 
some are fighting very hard. And yet they are not doing the 
basic things that need to be done. They are not lending. What 
can you do to increase pressure on our banks to lend?
    Secretary Geithner. Let me just say two things in response 
to that. One is, there are basically two core substantive 
strategies that you can do that would be helpful in that area. 
One is again to make sure that banks who need capital have 
access to capital. That is critical. Without that, you will 
have further reduction in lending capacity. Banks will have to 
pull back further.
    The second is to make sure that our broader credit markets 
that compete alongside banks are working better. We have done a 
lot of things in both of those areas, but I think those are the 
most important effective things we can do. I do think it is 
important, given the cumulative effect of what a bunch of 
judgements by banks across the country did to our economy. I 
think it is very important that they work very hard to earn 
back the confidence of the American people that they are going 
to be a source of capital and credit for growing businesses and 
for families going forward. I think it is very important to 
them they work hard to earn back that basic trust and 
confidence.
    Mr. Scott. There is another growing practice that is 
happening in our financial sector and some banks, not all, but 
we have gotten reports where, in our rush to allow banks to do 
a multiplicity of services and products in which they have 
encouraged individuals to open up their savings account at this 
bank, open up their checking account at this bank and if they 
need a loan or home equity loan or any loan that they would 
take at the bank. What happens is that oftentimes and 
particularly now when there is pressure on consumers out there 
to--and they are on the margins, where these banks would go in 
and if they are a week or 2 late on their payment for a loan, 
they would go in and take that individual's savings without 
their knowledge and--or their checking and apply it to the 
loan.
    The Chairman. The gentleman's time has expired. The 
gentleman from Delaware, for the last question.
    Mr. Castle. It has been stated perhaps by you, but I know 
by others, that various financial entities in this country seem 
to be relatively free or flexible in selecting their 
regulators, if you will. It is a little beyond the purview of 
this hearing. That just interested me. I mean, you are talking 
about everything from State regulators to the Fed, the OCC, the 
FDIC, the OTS or whatever. And I would think that the regulator 
would be dictated by how they are structured. So what are they 
doing that allows them to be able to so-called select their 
regulator and how great a problem is that in terms of some of 
the enforcement mechanisms we are concerned about?
    Secretary Geithner. Let me just give you some of the most 
compelling examples of that. Countrywide and WAMU were banks, 
found the strictures of being banks inconvenient, shifted their 
charter to a thrift charter, and were able to take advantage of 
what in retrospect can only be judged as lower standards of 
enforcement, and they grew dramatically or a more rapid pace 
after they made that basic switch. That is one example. But 
there were others in our system, too.
    Mr. Castle. Should we be looking at legislation to change 
that?
    Secretary Geithner. We should. We have proposed as the 
centerpiece of our legislation that we eliminate the thrift 
charter and combine Federal responsibility for these bank-like 
entities into one place, to eliminate--
    Mr. Castle. Do you think that will solve a lot of the--not 
all of the problems, but a lot of the problems?
    Secretary Geithner. Not all. But in the banking area, that 
difference between the thrift and the bank charter as it was 
enforced--now, there are hundreds of well-run thrifts across 
the country. But there were unfortunately a few very big 
examples that caused a lot of damage where effectively people 
would go from one system that was stronger to a weaker system, 
grow market share, took themselves to the edge of the abyss 
because of that, and that is something we have to prevent.
    Mr. Castle. Changing subjects, on the Consumer Financial 
Protection Agency--and this may be in some of your writings. 
You are submitting a lot of writings. Sometimes, I think in 
your spare time, you wrote the health care bill and the energy 
bill and a few other things. And I haven't had a chance to read 
it all. Maybe this is spelled out in there.
    The Chairman. I would have to rule out attacks on the 
witness' character.
    Secretary Geithner. I am innocent of that particular 
charge. That is right.
    Mr. Castle. How do you view this would be structured? How 
big would it be? How expensive would it be? Would there be 
offsets and reductions in employment in the other various 
agencies that are now regulating if it were to occur? How do 
you foresee that? Maybe that is not thought out carefully yet.
    Secretary Geithner. There is a whole range of complicated 
design questions we have to work through. But again, the simple 
thing you said well, which is again there is a substantial body 
of existing examiners who now do consumer protection spread 
across our multitude of bank regulators, and what we ideally do 
is take advantage of that expertise in shaping the workforce of 
this new agency. That would be the ideal thing. It would not be 
sensible not to do that. And I think that as a result, the 
amount of employment in what will be bank supervisor with a 
narrow set of responsibilities for safety and soundness would 
be reduced.
    Mr. Castle. Is it your view that every new product that the 
bank would issue, a change in a credit card or whatever it may 
be, would have to go through an approval process with this 
Consumer Protection Agency?
    Secretary Geithner. Absolutely not.
    Mr. Castle. How would they determine whether they go 
through it or not? In your view, what is going to be the 
methodology for determining what needs to be submitted and what 
doesn't?
    Secretary Geithner. We don't envision that process. I don't 
think that would be necessary or desirable. Again, the core of 
our proposal is to say we have put out broad standards and 
principles that should govern products and practices in this 
area. There is a lot of good stuff that has happened somewhat 
late, but good stuff that has happened in the last 2 years both 
in the credit card and mortgage area. You heard some in the 
paper today. We build on that basic model. But what we really 
want to do is just to make sure that consumers have the ability 
to take advantage of a more standardized plain vanilla, easier 
to understand product even as they contemplate a range of other 
different sets of choices. That is the basic thrust of our 
proposal.
    Mr. Castle. As you know, some of the existing regulators 
are not totally happy with this change, shall we say. In my 
judgment, they are starting to do a lot better than they did 
before. I will be the first to agree with you that there were 
serious problems, but the credit card business and the Fed is 
an example of starting to do a much better job. What is your 
response to them? There is a great deal of expertise at the 
Fed, for example, with some of this.
    Secretary Geithner. There is.
    Mr. Castle. I am worried about giving that up.
    Secretary Geithner. There is a lot of respect. We have to 
take advantage of that. But again, I think we had a long period 
of testing of the efficacy of that system, and it didn't serve 
us well enough.
    Mr. Castle. Thank you.
    The Chairman. Thank you, Mr. Secretary. As the song goes, 
see you in September. And this part of the hearing is ended and 
the second panel--we will take about 5 minutes for the second 
panel to get in place.
    Let me apologize in advance for the fact that we are having 
some votes. We will begin the opening statements and some 
questions. At some point, there will be votes. As a practical 
matter, we probably cannot continue. But we have had a great 
deal to do here, and I apologize to everybody for the 
inconvenience. The only thing worse I think would have been not 
to have tried, and we will proceed.
    And we will start with the Chairman of the Federal Reserve, 
Mr. Bernanke, whom I caught unawares and I apologize.

STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Thank you, Mr. Chairman. Chairman Frank, 
Ranking Member Bachus, and other members of the committee, I 
appreciate the opportunity to discuss ways that the U.S. 
financial regulatory system can be enhanced to better protect 
against systemic risks.
    The financial crisis of the past 2 years has had diverse 
causes, including both private sector and regulatory failures 
to identify and manage risks, but also gaps and weaknesses in 
the regulatory structure itself.
    This experience clearly demonstrates that the United States 
needs a comprehensive and multifaceted strategy, both to help 
prevent financial crises and to mitigate the effects of crises 
that may occur. That strategy must include sustained efforts by 
all our financial regulatory agencies to make more effective 
use of existing authorities.
    It also invites action by the Congress to fill existing 
gaps in regulation, remove impediments to consolidated 
oversight of complex institutions, and provide the instruments 
necessary to cope with serious financial problems that do 
arise.
    In keeping with the committee's interest today in the 
systemic risk agenda, I would like to identify the key elements 
that I believe should be part of that agenda.
    First, all systemically important financial institutions 
should be subject to effective consolidated supervision and to 
tougher standards for capital liquidity and risk management 
consistent with the risks that the failures such a firm may 
pose to the broader financial system.
    Second, supervision and regulation of systemically critical 
firms and of financial institutions more generally should 
incorporate a more macro prudential perspective, that is, one 
that takes into account the safety and soundness of the 
financial system as a whole. Such an approach, which considers 
interlinkages and interdependencies among firms and markets 
that could threaten the financial system in a crisis, 
complements the traditional micro prudential orientation of 
supervision and regulation which is focused primarily on the 
safety and soundness of individual institutions.
    Third, better and more formal mechanisms should be 
established to help identify, monitor, and address potential or 
emerging systemic risks across the financial system as a whole, 
including gaps in regulatory or supervisory coverage that could 
present systemic risks. The Federal Reserve Board sees 
substantial merit in the establishment of a council to conduct 
macro prudential analysis and coordinate oversight of the 
financial system. The expertise and information of the members 
of such a council, each with different primary 
responsibilities, could be of great value in developing a 
systemwide perspective.
    Fourth, to help address the too-big-to-fail problem and 
mitigate moral hazard, a new resolution process for 
systemically important nonbank financial firms is needed. Such 
a process would allow the government to wind down a troubled 
systemically important firm in an orderly manner that avoids 
major disruptions to the broader financial system and the 
economy. Importantly, this process should allow the government 
to impose haircuts on creditors and shareholders of the firm 
when consistent with the overarching goal of protecting the 
financial system and the broader economy.
    And fifth, ensuring that the financial infrastructure 
supporting key markets can withstand and not contribute to 
periods of financial stress also is critical to addressing both 
the too-big-to-fail problem and systemic risks. For this 
reason, reform should ensure that all systemically important 
payment clearing and settlement arrangements are subject to 
consistent and robust oversight and prudential standards.
    Comprehensive reform of financial regulations should 
address other important issues as well, including the needs for 
enhanced protections for consumers and investors in their 
financial dealings and for improved international coordination 
in the development of regulations and in the supervision of 
internationally active firms.
    Let me end by noting that there are many possible ways to 
organize or to reorganize the financial regulatory structure. 
None would be perfect and each will have advantages and 
disadvantages. However, one criterion I would suggest as you 
consider various institutional alternatives is the basic 
principle of accountability. Collective bodies of regulators 
can serve many useful purposes, such as identifying emerging 
risks, coordinating responses to new problems, recommending 
actions to plug regulatory gaps, and scrutinizing proposals for 
significant regulatory initiatives from all participating 
agencies. But when it comes to specific regulatory actions or 
supervisory judgments, collective decisionmaking can mean that 
nobody owns the decision and that the lines of responsibility 
and accountability are blurred. Achieving an effective mix of 
collective process and agency responsibility, with an eye 
toward relevant institutional incentives, is critical to a 
successful reform.
    Thank you again for the opportunity to testify in these 
important matters. The Federal Reserve looks forward to working 
with the Congress and the Administration to achieve meaningful 
regulatory reform that will strengthen our financial system and 
reduce both the probability and the severity of future crisis.
    Thank you, Mr. Chairman.
    [The prepared statement of Chairman Bernanke can be found 
on page 72 of the appendix.]
    The Chairman. Ms. Bair.

 STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL 
              DEPOSIT INSURANCE CORPORATION (FDIC)

    Ms. Bair. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for holding this hearing 
and for the opportunity to give our views on reforming 
financial regulation.
    The issues before the committee are as challenging as any 
that we face since the days of the Great Depression. We are 
emerging from a credit crisis that has greatly harmed the 
American economy. Homes have been lost, jobs have been lost, 
retirement and investment accounts have plummeted in value.
    The proposals by the Administration to fix the problems 
that caused this crisis are both thoughtful and comprehensive. 
Regulatory gaps within the financial system were a major cause 
of the crisis. Differences in regulating capital, leverage, and 
complex financial instruments as well as in protecting 
consumers allowed rampant regulatory arbitrage. Reforms are 
urgently needed to close these gaps.
    At the same time, we must recognize that many of the 
problems involve financial firms that were already subject to 
extensive regulation. Therefore, we need robust and credible 
mechanisms to ensure that all market players actively monitor 
and control risk taking. We must find ways to impose greater 
market discipline on systemically important institutions. In a 
properly functioning market and economy, there will always be 
winners and losers. And when firms, through their own 
mismanagement and excessive risk taking, are no longer viable, 
they should fail.
    Efforts to prevent them from failing ultimately distort 
market mechanisms, including the incentive to compete and to 
allocate resources to the most efficient players. 
Unfortunately, the actions taken during the past year have 
reinforced the idea that some financial organizations are 
simply too-big-to-fail. To end too-big-to-fail, we need a 
practical, effective, and highly credible mechanism for the 
orderly resolution of large and complex institutions that is 
similar to the process for FDIC insured banks.
    When the FDIC closes a bank, shareholders and creditors 
take the first loss. We are talking about a process where the 
failed bank is closed, where the shareholders and creditors 
typically suffer severe loss, where management is replaced, and 
where the assets of the failed institution are sold off. The 
process is harsh, as it should be. It is not a bailout. It 
quickly reallocates assets back into the private sector and 
into the hands of better management. It also sends a strong 
message to the market that investors and creditors face losses 
when an institution fails, as they should.
    We also believe potentially systemic institutions should be 
subject to assessments that provide disincentives for 
complexity and high risk behavior and reduce taxpayer exposure. 
I am very pleased that President Obama, earlier this week, said 
he supports the idea of assessments. Funds raised through an 
assessment should be kept in reserve to provide working capital 
for the resolution of large financial organizations to further 
insulate taxpayers from losses.
    In addition to a credible resolution process, we need a 
better structure for supervising systemically important 
institutions, and we need a framework that proactively 
identifies risks to the financial system. The new structure, 
featuring a strong oversight council, should address such 
issues as excessive leverage, inadequate capital, and 
overreliance on short-term funding. A regulatory council would 
give the necessary perspective and expertise to look at our 
financial system holistically.
    Finally, the FDIC strongly supports creating a new Consumer 
Financial Protection Agency. This would help eliminate 
regulatory gaps between bank and nonbank providers of financial 
products and services by setting strong, consistent, across-
the-board standards. Since most of the consumer products and 
practices that gave rise to the current crisis originated 
outside of traditional banking, focusing on nonbank examination 
and enforcement is essential for dealing with the most abusive 
lending practices that consumers face.
    The Administration's proposal would be even more effective 
if it included tougher oversight for all financial services 
providers and assured strict consumer compliance oversight for 
banks. As both the bank regulator and deposit insurer, I am 
very concerned about taking examination and enforcement 
responsibility away from bank regulators. It would disrupt 
consumer protection oversight of banks and would fail to 
adequately address the current lack of nonbank supervision.
    Consumer protection and risk supervision are actually two 
sides of the same coin. Splitting the two would impair access 
to critical information and staff expertise and likely create 
unintended consequences.
    Combining the unequivocal prospect of an orderly closing, a 
stronger supervisory structure, and tougher consumer 
protections will go a very long way to fixing the problems of 
the last several years and to assuring that any future problems 
can be handled without cost to the taxpayer.
    Thank you very much.
    [The prepared statement of Chairman Bair can be found on 
page 56 of the appendix.]
    Mr. Kanjorski. [presiding] Thank you very much, Ms. Bair.
    Our next presenter will be the Honorable John C. Dugan, 
Comptroller, Office of the Comptroller of the Currency.

 STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER, OFFICE 
            OF THE COMPTROLLER OF THE CURRENCY (OCC)

    Mr. Dugan. Thank you, Mr. Kanjorski, Ranking Member Bachus, 
and members of the committee. I appreciate this opportunity to 
discuss the Administration's comprehensive proposal for 
reforming the regulation of financial services.
    The OCC supports many elements of the proposal, including 
the establishment of a Council of Financial Regulators to 
identify and monitor systemic risk. We believe that having a 
centralized and formalized mechanism for gathering and sharing 
systemically significant information and making recommendations 
to individual regulators makes good sense. We also support 
enhanced authority to resolve systemically significant 
financial firms.
    The FDIC currently has broad authority to resolve 
systemically significant banks in an orderly manner, but no 
comparable resolution authority exists for systemically 
significant holding companies of either banks or non-banks. The 
proposal would appropriately extend resolution authority like 
the FDIC's to such companies.
    We also believe it would be appropriate to designate the 
Federal Reserve Board as the consolidated supervisor of all 
systemically significant financial firms. The Board already 
plays this role with respect to the largest bank holding 
companies. In the financial crisis of the last 2 years, the 
absence of a comparable authority with respect to large 
securities and insurance firms proved to be an enormous 
problem. The proposal would fill this gap by extending the 
Federal Reserve's holding company regulation to such firms.
    However, one aspect of this part of the proposal goes much 
too far, which is to grant broad new authority to the Federal 
Reserve to override the banking supervisor on standards, 
examination, and enforcement applicable to the bank. Such 
override power would undermine the authority and the 
accountability of the banking supervisor.
    We also support the imposition of more stringent capital 
and liquidity standards on systemically significant firms. This 
would help address the heightened risk to the system and 
mitigate the competitive advantage they could realize from 
being designated as systemically significant.
    And we support the proposal to effectively merge the OTS 
into the OCC with a phaseout of the Federal thrift charter. 
However, it is critical that the resulting agency be 
independent from the Treasury Department and the Administration 
to the same extent that the OCC and the OTS are currently 
independent.
    Finally, we support enhanced consumer protection standards 
for financial services providers and believe that an 
independent agency like the proposed CFPA could achieve that 
goal. However, we do have significant concerns with some 
elements of the proposed CFPA stemming from its consolidation 
of all financial consumer protection, rule writing, 
examination, and enforcement in one agency, which would 
completely and inappropriately divorce all these functions from 
the comparable safety and soundness functions at the Federal 
banking agencies.
    I believe it makes sense to consolidate all consumer 
protection rule writing in a single agency with the rules 
applying to all financial providers of a product, both bank and 
non-bank, but we believe the rules must be uniform and that 
banking supervisors must have meaningful input into formulating 
these rules. Unfortunately, the proposed CFPA falls short on 
both counts.
    First, the rules would not be uniform, because the proposal 
would expressly authorize States to adopt different rules for 
all financial firms, including national banks, by repealing the 
Federal preemption that has always allowed national banks to 
operate under uniform Federal standards. This repeal of the 
uniform Federal standards option is a radical change that will 
make it far more difficult and costly for national banks to 
provide financial services to consumers in different States 
having different rules, and these costs will ultimately be 
borne by the consumer. The change will also undermine the 
national banking charter and the dual banking system that has 
served us very well for nearly 150 years in which national 
banks operate under uniform Federal Rules and States are free 
to experiment with different rules for the banks they charter.
    Second, the rules do not afford meaningful input from 
banking supervisors, even on real safety and soundness issues, 
because in the event of any disputes, the proposed CFPA would 
always win. That should be changed by allowing more banking 
supervisors on the board of the CFPA and by providing a formal 
mechanism for banking supervisor input into CFPA rulemaking.
    Finally, the CFPA should not take examination and 
enforcement responsibilities away from the banking agencies. 
The current banking regime works well, where the integration of 
consumer compliance and safety and soundness supervision 
provides real benefits for both functions. Real life examples 
attached to my testimony demonstrate how this works.
    To the extent the banking agencies have been criticized for 
consumer protection supervision, the fundamental problem has 
been with the lack of timely and strong rules, which the CFPA 
would address, and not the enforcement of those rules. 
Moreover, moving these bank supervisory functions to the CFPA 
would only distract it from its most important and daunting 
implementation challenge, establishing an effective examination 
and enforcement regime for the shadow banking system of the 
tens of thousands of non-bank providers that are currently 
unregulated or lightly regulated, like the non-bank mortgage 
brokers and originators that were at the heart of the subprime 
mortgage problem. CFPA's resources should be focused on this 
fundamental regulatory gap, rather than on already-regulated 
depository institutions.
    Thank you very much.
    [The prepared statement of Comptroller Dugan can be found 
on page 106 of the appendix.]
    Mr. Kanjorski. Thank you very much.
    Our next presenter will be Mr. John E. Bowman, Acting 
Director, Office of Thrift Supervision.

STATEMENT OF JOHN E. BOWMAN, ACTING DIRECTOR, OFFICE OF THRIFT 
                       SUPERVISION (OTS)

    Mr. Bowman. Good afternoon, Mr. Kanjorski, Ranking Member 
Bachus, and members of the committee.
    Thank you for the opportunity to testify today on the 
Administration's proposal for financial regulatory reform and 
H.R. 3126, the Consumer Financial Protection Agency Act of 
2009. It is my pleasure to address the committee for the first 
time in my role as Acting Director of the Office of Thrift 
Supervision.
    The OTS supports the fundamental objectives at the heart of 
the Administration's proposal, agrees that the time to act is 
now, and agrees that the status quo must change. As you 
consider legislation to meet those objectives, I encourage you 
to ensure that each proposed change addresses a real problem 
that contributed to the financial crisis or otherwise weakens 
this Nation's financial system.
    In my view, the solutions to these real problems fall into 
three categories:
    Number one, protect consumers. One Federal agency whose 
central mission is the regulation of financial products should 
establish the rules and standards for all consumer financial 
products. This structure would replace the current myriad of 
agencies with fragmented authority and a lack of singular 
accountability. For entities engaged in consumer lending that 
are not insured depository institutions, the Consumer 
Protection Agency should not only have rulemaking authority, 
but also examination and enforcement authority.
    Number two, establish uniform regulation by closing gaps. 
These gaps became enormous points of vulnerability in the 
system and were exploited with serious consequences. All 
entities that offer financial products and services to 
consumers must be subject to the same consumer protection rules 
and regulations and vigorous examination and enforcement so 
that under-regulated entities cannot gain a competitive 
advantage over their more regulated counterparts.
    Number three, create the ability to supervise and resolve 
systemically important firms. No provider of financial 
production should be too-big-to-fail, achieving through size 
and complexity an implicit Federal Government backing to 
prevent its collapse and thereby gaining an unfair advantage 
over its more vulnerable competitors. The U.S. economy operates 
on the principles of healthy competition. Enterprises that are 
strong, industrious, well-managed, and efficient succeed and 
prosper. Those that fall short of the mark struggle or fail and 
other stronger enterprises take their places. Enterprises that 
become treated as too-big-to-fail subvert the system. When the 
government is forced to prop up failing systemically important 
companies, it is in essence supporting poor performance and 
creating a moral hazard.
    If the legislative effort accomplishes these three 
objectives, it will have accomplished a great deal, and in my 
view, the reform effort will be a ringing success.
    Thank you for the opportunity to be here today. We look 
forward to continuing to work with the members of this 
committee and others to create a system of financial services 
regulation that promotes greater economic stability for the 
Nation, and I would be happy to answer your questions.
    [The prepared statement of Mr. Bowman can be found on page 
89 of the appendix.]
    Mr. Kanjorski. Thank you very much.
    Now, we will hear our final presenter, Mr. Joseph A. Smith, 
Jr., North Carolina Commissioner of Banks, on behalf of the 
Conference of State Bank Supervisors.

STATEMENT OF JOSEPH A. SMITH, JR., NORTH CAROLINA COMMISSIONER 
OF BANKS, ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS 
                             (CSBS)

    Mr. Smith. Thank you, sir.
    Representative Kanjorski, Representative Bachus, members of 
the committee, good afternoon. My name is Joseph A. Smith, Jr., 
and I am North Carolina Commissioner of Banks and Chairman of 
the Conference of State Bank Supervisors.
    Thank you for inviting CSBS to testify today on the 
Administration's plan for financial regulatory reform. CSBS 
applauds this committee and the Administration for the time and 
energy put into a challenging undertaking. We look forward to 
working with Congress and the Administration toward a reform 
plan that makes meaningful and sustainable improvements in the 
way our financial system serves the public and strengthens 
local communities and the Nation's economy.
    My statement today reflects the perspectives of 
commissioners and deputy commissioners from around the country, 
and I would like to thank them for their efforts in helping to 
put this together.
    Our major concern is that the legacy of this crisis could 
be a highly concentrated and consolidated industry that is too 
close to the government and too distant from consumers and the 
needs of its communities. That need not be the result. To avoid 
that outcome, Congress needs to realign the regulatory 
incentives around consumer protection and end too-big-to-fail.
    We believe that many provisions of the Administration's 
plan would advance these goals. These include the continuation 
of the current supervisory structure for State-chartered banks, 
a comprehensive approach to consumer protection, and the 
recognition of the importance of State law and State law 
enforcement in accomplishing consumer protection.
    However, we also have some concerns. In our view, the 
Administration's plan inadequately addresses the systemic risk 
posed by large, complex financial institutions. My testimony 
today will present our perspective on these issues.
    We support the creation of the Consumer Financial 
Protection Agency in concept and we support its goals. 
Restoring public confidence in our financial system is a 
necessary objective. Consumer protection standards for all 
financial service or product providers, such as those to be 
promulgated by the agency, are an important step in that 
direction.
    Any proposal to create a Federal Consumer Financial 
Protection Agency must preserve for the States the ability to 
set higher, stronger consumer protection standards. We are 
pleased to see that the Administration's proposal, as well as 
H.R. 3126, does just that, explicitly providing that Federal 
consumer protection standards constitute a floor for State 
action.
    We believe that the new agency's activities would be most 
effective if focused on standard setting and rulemaking. As 
part of this, we support the agency having broad data and 
information gathering authority. We believe the agency's 
visitorial authority should be a backup function aimed at 
filling in regulatory gaps. We also believe the agency's 
enforcement authority should be a backstop to the primary 
enforcement authority of State and Federal prudential 
regulators and law enforcement. As part of this, timely 
coordination and information sharing among Federal and State 
authorities will be absolutely critical.
    We do not believe that systemically significant 
institutions should be too-big-to-fail. There should be a 
clearly defined resolution regime for these institutions that 
actually allows them to fail.
    Every type of institution must have a clear path to 
resolution. We believe the FDIC is the best choice as receiver 
or conservator for any type of financial institution. It is an 
independent agency with demonstrated resolution competence.
    For systemically significant institutions, the regulatory 
regime should be severe, meaning tougher capital leverage and 
prompt corrective action standards, and it must protect 
taxpayers from potentially unlimited liability.
    We applaud the Administration for its prompt and 
comprehensive response to the obvious need for improvement in 
our system of financial regulation. We now look forward to the 
members of this committee bringing your specialized knowledge 
and legislative experience to this proposal in order to ensure 
that it accomplishes its stated objective, a safer, sounder 
financial system that provides fair and stable access to credit 
for all sectors of the economy.
    We look forward to working with you on this legislation to 
reduce systemic risk, assure fairness for consumers, preserve 
the unique diversity of our financial system, and enhance 
Federal-State coordination to create a seamless network of 
supervision for all industry participants.
    Thank you again for the opportunity to share our views 
today. I look forward to any questions you may have. Thank you.
    [The prepared statement of Mr. Smith can be found on page 
149 of the appendix.]
    Mr. Kanjorski. Now we will hear from Mr. Sherman of 
California for 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman.
    First as to the CFPA, the consumer agency, I hope that 
would not interfere with the traditional relationship between 
attorneys and CPAs and the clients that they advise. This 
relationship has traditionally been regulated by the States. 
When attorneys and CPAs act within the scope of their 
profession, it would seem unnecessary to have yet another 
consumer agency, since they are already bound by professional 
ethics, fiduciary duties, State licensure, and centuries of 
ethical traditions. But my comments don't apply when those 
professionals decide to become investment brokers or step 
outside of their traditional roles.
    Also as to the consumer agency, and the chairman and I have 
had a colloquy on this, we should be creating a regulatory 
agency that enforces the law, not a law-writing agency, and I 
hope we are able to craft the language to make that clear. 
Otherwise, we would be taking this committee out of the 
consumer protection business and punting that to the unelected.
    Mr. Kanjorski focused on credit rating agencies. I focus a 
little different than the chairman in that it is, to me, not 
who pays the credit rating agency, but who selects the credit 
rating agency. Imagine a baseball league where the umpire is 
selected by the home team. Even if the league paid the umpire's 
fee, if the umpire is selected by the home team, you are going 
to influence the outcome. I will be introducing legislation to 
have credit rating agencies selected at random from a qualified 
panel.
    As to derivatives, we are told that even over-the-counter 
derivatives play this important role in our economy, but most 
derivatives are just naked casino bets without anybody hedging 
any risk they have in their actual business. So one wonders why 
we need over-the-counter derivatives allowed, except in those 
circumstances when one of the parties is hedging a legitimate 
business risk. When there is no societal purpose served by an 
over-the-counter derivative, why expose our economy to the 
systemic risk?
    Chairman Bernanke, I hope you will respond for the record 
as to whether there would be any harm if the President 
appointed all your regional boards of governors. After all, I 
don't know why banks are appointing those who serve on the Fed 
and indirectly the FOMC, when the pharmaceutical companies 
don't get to actually name the people who serve on the FDA, the 
bar association doesn't pick the lawyers. We have a system of 
democracy where you elect a President and he appoints 
governmental officers.
    Mr. Bowman, you seem to suggest, and I hope you will 
respond for the record, that perhaps we should break up those 
institutions that are too systemically important to fail or 
too-big-to-fail rather than sit around and see if they go under 
and then break them up. I don't know if that was your 
suggestion. If so, it is remarkable to have somebody in the 
Executive Branch be so bold.
    Chairman Bernanke, I want to focus on bailout authority. 
You have powers under 13(3) that are unlimited in terms of 
dollar amounts. I remember once I asked whether you would 
accept a $14 trillion limit. It was a facetious question to 
which I got an interesting answer. But you have limited 13(3) 
to close to zero risk transactions, and I applaud you for that 
modest interpretation of your authority.
    In one area of his presentation on an issue where you agree 
with the Secretary of the Treasury, he talks about resolution 
authority, and he says any cost to the taxpayer from the use of 
this resolution authority will be recovered through ex post 
facto assessments on large financial firms.
    So his vision of resolution authority is that there will be 
cost to the taxpayer. And the question is, if we continue to 
have 13(3) as authority for the Fed, would it be unduly 
burdensome on those of you in the bailout business or the 
systemic business, or whatever, to put a half trillion dollar 
limit on any additional permanent TARP authority that we create 
in this statute?
    Mr. Bernanke. Thank you. On the presidents question, the 
regional presidents, we do not support Presidential appointment 
of the Reserve Bank presidents. We are in a situation now where 
we need to increase our consistency of enforcement and 
oversight, where we need to coordinate across the system, and I 
think creating 12 new Presidential appointees, 19 Presidential 
appointees around the FMOC table, is going to create a more 
diffuse and decentralized system. So, I wouldn't be in favor of 
that.
    On 13(3), my answer to your facetious question was also 
facetious. We recognize the need to be very careful in the use 
of this authority. And, in particular, if this Congress puts 
together a resolution authority that can address the problem of 
failing firms, then I would certainly be open, in fact quite 
eager, to subordinate the 13(3) authority to the request or the 
requirement of the resolver.
    Mr. Sherman. Having your authority limited by another part 
of the executive branch--if you could just address the 
question. Do you want unlimited new TARP authority?
    Mr. Bernanke. We are currently, as you know, winding down 
our 13(3) program. So, I don't anticipate we will be 
approaching the previous peaks. I can't anticipate what kinds 
of situations might arise in the future.
    Mr. Sherman. So you might need unlimited authority to deal 
with them. Thank you.
    Mr. Kanjorski. The gentleman's time has expired.
    We will hear now from the gentlelady, Mrs. Bachmann.
    Mrs. Bachmann. Thank you, Mr. Chairman. I found Mr. 
Sherman's question very interesting on unlimited authority for 
the Fed as they go forward, and I appreciate also the 
Chairman's response, being able to anticipate what the need 
would be for authority going forward.
    I would just ask the Chairman briefly, do you believe it 
would be beneficial for the GAO to do an audit of the Federal 
Reserve?
    Mr. Bernanke. Well, I have addressed this question some 
this week. The GAO already has authority over most of our 
activities, all supervisory and operational activities, the 
single firm loans, like AIG and Bear Stearns. It also has 
authority over our TALF program. So we would be happy to work 
with Congress to address any remaining aspects of our 
operations that involve the use of taxpayer funds or financial 
management. We are more than happy to work with the GAO to 
allow their audits and oversight.
    The concern that I have with the bill that has been 
proposed is that it does not exempt monetary policy and related 
operations, and my concern is that GAO audits are not really 
audits. They are really policy reviews. And I am concerned that 
the ability of Congress to essentially ask the GAO to audit any 
monetary policy decision would be a major reduction in the 
independence of the Federal Reserve to make monetary policy, 
which would have, I think, very negative consequences for the 
economy.
    Mrs. Bachmann. So I think to summarize, the answer would be 
no?
    Mr. Bernanke. Very broad authority is fine, but I would 
like to retain the exemption for monetary policy and related 
operations.
    Mrs. Bachmann. I appreciate the nuance. I do. Thank you so 
much for that.
    My concern really goes back also to the concerns in the 
opening statement that was given by Mr. Hensarling early and 
also by others. I share those concerns. I am very concerned 
that the President's proposal that came before this committee 
is silent on any true, meaningful GSE reform, because nowhere 
in the President's White Paper that I could surmise does he 
propose any substantive ideas to fix the fatal flaws that I 
think many of us would agree are inherent in the GSEs, the too-
big-to-fail philosophy that drove Bailout Nation. These are 
flaws that significantly contributed in many of our estimations 
to the financial crisis the country experienced.
    So my question would be for members of the panel, how can 
the only plan be, and I am quoting from the White Paper, how 
can the only plan be to engage in a wide-ranging initiative to 
develop recommendations on the future of Fannie Mae and Freddie 
Mac and the Federal Home Loan Bank system which will be punted 
until the President's release of his 2011 budget? It just seems 
to me that real reform could have been, had Congress included 
placing Freddie and Fannie in receivership rather than in 
conservatorship, and how can we ever expect to fix the problems 
with our financial system without making changes at the root 
cause? If we have effectively nationalized these GSEs, what is 
our way out? I mean literally, will Starbucks be too-big-to-
fail? Will these be considered financial Tier 1 organizations?
    I think, at this point, we need to ask those questions.
    We saw that the government backed away from CIT, which I 
think many of us were happy to see. But I would ask again, do 
you believe that we should be acting sooner to reform the GSEs?
    And that is for anyone on the panel.
    Ms. Bair. I think the hesitancy to address the GSE issue is 
that it transcends financial policy and perhaps extends to 
housing policy, and this is really not an area where any of us 
have direct responsibilities at this point. But certainly, as 
the GSEs are functioning now and have functioned before, I 
believe they are quite profoundly systemic. They were sources 
of systemic risk that had built up over the years, as we know 
now.
    So I think if they do continue to exist, clearly this is 
something that an oversight council should have some input and 
responsibility for. But as you say, the long-term future of 
those entities seems somewhat unclear right now, and it is 
really not within our purview as banking regulators to 
influence that policy decision.
    Mrs. Bachmann. I appreciate that. It is also rhetorical in 
the sense of just laying that on the table again that there are 
concerns from this side of the bench to say that this is an 
area that we do have concern.
    Also regarding the resolution authority, my colleague Mr. 
Sherman had just referenced, and I think rightly so, Secretary 
Geithner's testimony indicates that because the government can 
collect the ex post facto assessments to cover the costs of a 
resolution, that moral hazard will be reduced. So it seems like 
everyone from the taxpayers to the innocent banks will have the 
potential to lose big, except the creditors and the 
counterparties of the failed firms. So how will that improve 
the status quo, in your estimation?
    Mr. Bernanke. Well, Chairman Bair has also spoken on this 
topic, but I think we would all agree that an effective 
resolution regime would take value from shareholders and impose 
costs and losses on creditors. So, I think that would be an 
important part of it.
    An alternative, a close alternative, would be to require 
firms to have securities like contingent capital or convertible 
debt that, in the event of one of these resolution events, 
would be converted into a less valuable, more junior liability, 
and therefore indirectly impose costs on the lenders to the 
company. But I think we all agree that imposing costs on the 
shareholders and the creditors is an important part of this 
idea.
    Mrs. Bachmann. Just to change subjects, do you think there 
is going to be an influx of lawsuits that would be challenging 
products? This is now on the--apparently my time is up.
    Thank you, Mr. Kanjorski. Thank you again to the panel, 
too. I appreciate it.
    Mr. Kanjorski. The gentleman from New York, Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    It is good to see all of you again. My first question would 
be to Chairman Bernanke. It seems that every time you look at 
reports, we seem to be getting some early signs that if not 
recovering, at least the recession is bottoming out. But most 
of the data that we looked at is based on domestic economic 
trends and housing, employment, etc. But we have also seen that 
our economy has become increasingly dependent on a broader 
global economy, and in particular developing countries, which 
have accounted for some 75 percent of global economic growth 
this decade and over 60 percent of growth in U.S. exports.
    So my question is, how do you see trends and risk in the 
recovery in developing countries impacting our own recovery 
here at home, going back and forth?
    Mr. Bernanke. Well, emerging market economies took a very 
big hit because there was a lot of capital flowing out of those 
countries, and many of them are very dependent on exports and 
trade fell a lot. So, those economies did have very serious 
declines late last year and early this year. But the news I 
think is generally good. Most emerging market economies in 
Asia, Latin America, and other parts of the world have 
generally bounced back to some extent, and I think that is very 
positive. It won't have a major impact on the United States 
because we don't export a great deal to those countries, but it 
will contribute to a broader and more stable global economy and 
financial system. So, I think it is very positive, both for us 
and for them.
    Mr. Meeks. I will ask Chairman Bair, and anyone can answer 
this question, I am always concerned about what took place with 
Lehman Brothers, especially currently with the bankruptcy that 
still has a lot of U.S. investors' money tied up in London.
    I was wondering how would we prevent something--you know, 
if we had with the new regulatory reform program coming in, how 
would we handle the same situation that we had with Lehman 
Brothers? How would it be different? How could we make sure we 
don't fall into the same situation that we are currently in in 
regards to an international holding company like Lehman?
    Ms. Bair. With a resolution authority that is patterned off 
of what the FDIC has now, you could have, in a situation like 
that, put the systemic functions into a bridge facility and 
required that derivative counterparties continue to perform on 
those contracts.
    In a bankruptcy situation, counterparties have an immediate 
right to close out netting, and that is in point of fact what 
happened. They exercised those rights, pulled collateral out of 
the institution, netted out their positions, and went out to 
re-hedge. That caused a lot of disruption in the system.
    With the resolution authority along the lines of what we 
have now, you could have wiped out shareholders and unsecured 
creditors under our claims priority. But, you could have 
required secured creditors, such as counterparties, to continue 
performing on their contracts and had an orderly wind-down of 
the institution. But with the rights of immediate closeout 
netting that are triggered with bankruptcy, you had a very 
disruptive situation.
    Any resolution is going to be a difficult thing, but I do 
think that with the kinds of tools that we have, you can also 
do advanced planning with our resolution process, particularly 
for a bank. We work with the primary regulator. When we see 
trouble coming, we start planning in advance. So, you can 
control the timing as well. In bankruptcy, there is no control 
over the timing.
    There are a lot of advantages that we have that I think 
provide in appropriate circumstances a more orderly process, 
while at the same time imposing significant losses on 
shareholders and creditors.
    Mr. Meeks. Let me ask my last question to Comptroller 
Dugan. This is based upon news reports yesterday that FASB is 
considering a new accounting standard that would require that 
all banks' assets be mark-to-market, including those currently 
held at book value.
    Now, given that many people argue that the primary hurdle 
to getting the banks to move toxic assets off their balance 
sheets and getting them to participate in the government 
programs to facilitate this has been the unwillingness of the 
banks to mark down the value of their held-to-maturity loans.
    So do you see this as a positive accounting standard, or do 
you think it would promote greater urgency for banks to 
actively move toxic assetts off of their balance sheets?
    Mr. Dugan. Congressman, I believe that FASB announced they 
will be putting such a proposal out later in the year. I 
haven't read the exposure draft, but as explained to me, it 
would move more of the loans on balance sheet to a mark-to-
market or fair value status, although it would have different 
treatment for how the ups and downs in that would be run 
through the income statement or the balance sheet.
    I must say, I do have a very significant concern about 
moving more assets and liabilities into the mark-to-market 
arena. I thought, given all of the issues that we have had this 
year about the volatility that introduces into income 
statements and balance sheets, that we wouldn't have continued 
marching down that path. So this concerns me. It also concerns 
me what it will do to the process of having more ability to 
have loan loss reserves in good times to prepare for losses in 
bad times.
    So we will want to study this.
    The Chairman. The time has expired.
    The gentleman from California.
    Mr. Campbell. Thank you, Mr. Chairman.
    The Chairman. This will be the last questioner. I apologize 
to all concerned, but we have about an hour of votes, and we 
will end the hearing at this point. It isn't fair to the 
witnesses to have them sit around while we vote for an hour and 
have the only two people in Washington who aren't making planes 
come back and look at them.
    Mr. Campbell. I guess I am the clean-up batter.
    The first question to Chairman Bernanke, we are talking 
about firms that are systemically significant, too-big-to-fail, 
too-interconnected-to-fail. Not an exact number, but in order 
of magnitude today, how many firms is that? Five, 50, 500?
    Mr. Bernanke. Order of magnitude, I would guess--
    The Chairman. Could members as they are leaving please do 
it in a quiet way so we don't disrupt the hearing any more than 
it has been disrupted.
    Thank you. Please continue.
    Mr. Bernanke. A very rough guess would be about 25. But I 
would like to point out that virtually all of those firms are 
organized as bank holding companies or financial holding 
companies, which means the Federal Reserve already has umbrella 
supervision. So, I would not envision the Fed's oversight 
extending to any significant number of additional firms.
    Mr. Campbell. Okay. So it is basically, like you say, 
additional oversight for about 25 firms over which you already 
have some oversight?
    Mr. Bernanke. In fact we already have umbrella supervision 
authority, yes.
    Mr. Campbell. Okay. And those firms, if a firm was 
determined to be systemically significant and they didn't like 
or want the additional supervision they were going to get, they 
could always spin off divisions or do whatever they needed to 
do to not become systemically significant, correct?
    Mr. Bernanke. Absolutely.
    Mr. Campbell. The second question for the whole panel is, 
unless I heard incorrectly, with the exception perhaps of Mr. 
Bowman, I think all of you believe that some of the powers or 
authority or whatever in the CFPA should be somewhere else than 
the CFPA as the Treasury has proposed it.
    I think that question was very inartfully worded, but 
hopefully you understand that the powers and everything that 
Treasury gave to the CFPA, with the possible exception, Mr. 
Bowman--or maybe you agree, but all of you believe that some of 
those powers and authorities should be somewhere else, is that 
correct?
    Everybody is nodding.
    The Chairman. The reporter cannot pick up nods.
    Mr. Bernanke. Yes.
    Ms. Bair. Yes.
    Mr. Dugan. Yes.
    Mr. Bowman. Yes.
    Mr. Smith. Yes.
    Mr. Campbell. All of you believe that.
    Okay, then, one final question for me, and then I can yield 
the balance of my time to Mr. Posey.
    The Treasury proposal does not have Federal preemption, 
which in theory perhaps means 51 regulators instead of one. Do 
any of you not support Federal preemption?
    Ms. Bair. There are a lot of State-chartered banks that 
operate in multiple jurisdictions, and they comply with State 
consumer protection laws, and it is really not that much of a 
problem. So we do disagree on this issue. We think that it is 
appropriate, even for federally-chartered institutions, to 
comply with State consumer protection laws.
    Also, with a good strong standards setter and some strong, 
valid, common-sense standards, the need for the States to go 
above the Federal standard will probably be greatly reduced, if 
not eliminated. But, there are lots of State-chartered banks 
that operate in multiple jurisdictions that comply with these 
State consumer protection laws now.
    Mr. Campbell. I am from California now. No matter what 
regulations are set up, my State will make them more onerous.
    Mr. Smith.
    Mr. Smith. I agree with every single thing that Chairman 
Bair has said. There are a number of situations where the 
Federal standards were proper where States did not adopt 
additional standards. In fact some States actually cut back to 
the Federal standard. The States have acted when there has been 
no Federal standard or inadequate enforcement.
    Mr. Campbell. So a 3-2 vote on that.
    I will be happy to yield the balance of my time to Mr. 
Posey.
    The Chairman. We will give Mr. Posey 2\1/2\ minutes. We 
will give him an extra minute.
    Mr. Posey. I don't have any questions.
    The Chairman. The hearing will be then be adjourned.
    Mr. Bowman, you wanted to add something?
    Mr. Bowman. Mr. Chairman, if I could, Mr. Sherman asked me 
a question which I didn't have sufficient opportunity to 
respond to. With your permission, I would like to supplement 
the record.
    The Chairman. The record will be open for all witnesses, 
members, and others to submit statements.
    Let me just say there are a number of witnesses here who 
have appeared before the committee on several occasions. I 
welcome you here in your guise as born-again consumer 
protectors.
    Mr. Bachus. Mr. Chairman, I think it is so important that 
this panel come back, maybe not Mr. Bernanke. Chairman Bernanke 
has been here so many times. I am kind of reminded of the story 
of the mother who told her son--
    The Chairman. Let's do it quickly here.
    Mr. Bachus. I would like them to come back in September.
    The Chairman. We are I think sufficiently entangled, all of 
us, so that, yes, we will see them again as well as we deal 
with this in September.
    The hearing is adjourned.
    [Whereupon, at 1:45 p.m., the hearing was adjourned.]




                            A P P E N D I X



                             July 24, 2009


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