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



 
                    SYSTEMIC REGULATION, PRUDENTIAL


                     MATTERS, RESOLUTION AUTHORITY,


                           AND SECURITIZATION

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


                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 29, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-88



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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:
    October 29, 2009.............................................     1
Appendix:
    October 29, 2009.............................................    97

                               WITNESSES
                       Thursday, October 29, 2009

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation....................................................    38
Baker, Hon. Richard H., President and Chief Executive Officer, 
  Managed Funds Association (MFA)................................    66
Bowman, John E., Acting Director, Office of Thrift Supervision 
  (OTS)..........................................................    42
D'Arista, Jane, Americans for Financial Reform...................    76
Dugan, Hon. John C., Comptroller, Office of the Comptroller of 
  the Currency (OCC).............................................    39
Geithner, Hon. Timothy F., Secretary, U.S. Department of the 
  Treasury.......................................................     8
Kandarian, Steven A., Executive Vice President and Chief 
  Investment Officer, MetLife, Inc...............................    71
Menzies, R. Michael S., Sr., President and Chief Executive 
  Officer, Easton Bank and Trust, Co., on behalf of the 
  Independent Community Bankers of America (ICBA)................    73
Ryan, T. Timothy, Jr., President and Chief Executive Officer, 
  Securities Industry and Financial Markets Association (SIFMA)..    79
Sullivan, Hon. Thomas R., Insurance Commissioner of the State of 
  Connecticut, on behalf of the National Association of Insurance 
  Commissioners (NAIC)...........................................    43
Swagel, Hon. Phillip L., Visiting Professor, McDonough School of 
  Business, Georgetown University................................    67
Talbott, Scott, Senior Vice President, Government Affairs, the 
  Financial Services Roundtable..................................    69
Tarullo, Hon. Daniel K., Governor, Board of Governors of the 
  Federal Reserve System.........................................    41
Trumka, Richard L., President, American Federation of Labor and 
  Congress of Industrial Organizations (AFL-CIO).................    64
Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy 
  Studies, the American Enterprise Institute.....................    74
Yingling, Edward L., President and Chief Executive Officer, 
  American Bankers Association (ABA).............................    77

                                APPENDIX

Prepared statements:
    Garrett, Hon. Scott..........................................    98
    Bair, Hon. Sheila C..........................................    99
    Baker, Hon. Richard..........................................   117
    Bowman, John E...............................................   127
    D'Arista, Jane...............................................   138
    Geithner, Hon. Timothy F.....................................   150
    Kandarian, Steven A..........................................   155
    Menzies, R. Michael S., Sr...................................   166
    Ryan, T. Timothy, Jr.........................................   188
    Sullivan, Hon. Thomas R......................................   219
    Swagel, Hon. Phillip L.......................................   229
    Talbott, Scott...............................................   236
    Tarullo, Hon. Daniel K.......................................   291
    Trumka, Richard L............................................   308
    Wallison, Peter J............................................   312
    Yingling, Edward L...........................................   321

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Written statement of Andrew W. Lo............................   335
    Written statement of the Property Casualty Insurers 
      Association of America (PCI)...............................   346
Garrett, Hon. Scott:
    Excerpt from the Congressional Record, dated October 3, 2008.   371
    Dear Colleague letter from Representative Brad Sherman, dated 
      October 29, 2009...........................................   374
Paulsen, Hon. Erik:
    Written statement of the Commercial Mortgage Securities 
      Association (CMSA).........................................   376
    Letter to Chairman Barney Frank and Ranking Member Spencer 
      Bachus from the American Land Title Association, et al., 
      dated October 28, 2009.....................................   383
D'Arista, Jane:
    Addendum to written testimony................................   385
Swagel, Hon. Phillip:
    Additional information provided for the record in response to 
      a question posed by Representative Watt during the hearing.   386


                    SYSTEMIC REGULATION, PRUDENTIAL



                     MATTERS, RESOLUTION AUTHORITY,



                           AND SECURITIZATION

                              ----------                              


                       Thursday, October 29, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 9:30 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Watt, Sherman, Meeks, Moore of Kansas, Hinojosa, Clay, McCarthy 
of New York, Baca, Miller of North Carolina, Scott, Green, 
Cleaver, Ellison, Klein, Perlmutter, Donnelly, Foster, Carson, 
Speier, Minnick, Adler, Driehaus, Kosmas, Himes, Peters, 
Maffei; Bachus, Royce, Paul, Manzullo, Biggert, Capito, 
Hensarling, Garrett, Neugebauer, McHenry, Putnam, Bachmann, 
Marchant, McCotter, Posey, Jenkins, Lee, Paulsen, and Lance.
    The Chairman. The hearing will come to order. I apologize. 
I was delayed a few minutes and I regret that. We will have 10 
minutes on each side for opening statements and the gentleman 
from Illinois is recognized for 3 minutes.
    Mr. Gutierrez. Thank you, Mr. Chairman. First of all, I 
would like to thank the Secretary for coming here today; and, 
while I support most of the legislation, I am apprehensive 
about the way we propose to create a fund to pay for the costs 
associated with the resolution of a failed, systematically 
significant financial institution. It seems to me that behavior 
that was reckless, dangerous, and risky in the past has 
generated huge profits and gains and allowed Wall Street 
executives to line their pockets with hundreds of millions of 
dollars, if not become billionaires in this process; that 
greed, that avarice, should it ever raise its ugly head once 
again, there should be an insurance fund paid for them. These 
are good times.
    We read all about how good the Wall Street giants are doing 
once again and how their profitability is there. They should 
set aside some of that money. Most of us don't die and then buy 
a life insurance policy. Most of us say, in case something 
happens to Luis, let me make sure if I owe people money and if 
I have responsibilities, that I leave my family and all of 
those to whom I have a responsibility, that I set aside some 
money and I buy some insurance. It would be wonderful that one 
day I would just wake up cold and that all my debtors and 
everybody would say, oh, let's go take the life insurance 
policy on Luis.
    That's not the way it works. The way it works, and Wall 
Street has to learn, because I read in the paper this morning, 
Mr. Secretary, they're complaining. Record profits on Wall 
Street, and they're complaining that the Congress of the United 
States might require them to set aside some of those billions 
of dollars in earnings so that in the eventuality that they 
might become systematically risky to us and fail, that there be 
money set aside for that.
    No more American taxpayer money should be set aside in case 
we have the kind of tragedy and economic failure that we saw in 
the last couple of years. So my basic premise today is, look, 
they were greedy. They should pay for future insurance policy 
payouts. The fund should be set up just in case their behavior, 
their reckless and dangerous and risky behavior, raises its 
ugly head again. And I look forward not only today but to the 
process of designing legislation that makes sure that those 
risky institutions are paying into a fund now, today--not after 
the fact.
    Thank you very much, Mr. Chairman.
    The Chairman. The gentleman from Alabama is recognized for 
5 minutes.
    Mr. Bachus. Mr. Chairman, as you know from the letter you 
received from the House Financial Services Committee 
Republicans yesterday, the process for considering the most 
far-reaching reforms of our financial system since the Great 
Depression should be deliberative and not hurried.
    The draft legislation that was supposed to be the subject 
of this hearing was not received until Tuesday afternoon. I 
doubt that any of today's witnesses, with the possible 
exception of Secretary Geithner, have had an opportunity to 
fully comprehend the legislation in its entirety or to arrive 
at informed views on its merits. Under the rules of this 
committee, the witnesses' written testimony was due 2 days 
before this hearing, which is to say it was due before the 
draft bill was released.
    The written testimony, therefore, cannot and does not 
address in any meaningful way the legislation we are marking up 
early next week. Although we have had the draft bill for less 
than 48 hours, even a cursory reading shows that the 
Administration has chosen to continue its failed policy of 
costly taxpayer bailouts orchestrated behind closed doors by 
officials of the Treasury and the Federal Reserve.
    The Democrats' talking points that their new proposal ends 
the era of ``too-big-to-fail'' are just that--talk. Their 
proposal places taxpayers first in line to bear the losses when 
the government invokes its resolution authority; and, for those 
who believe that those taxpayer losses will subsequently be 
recouped from surviving firms, I would direct their attention 
to the recent examples of GM, Chrysler, Fannie Mae, Freddie 
Mac, and AIG, and the even more recent example of GMAC, where 
the prospects for full taxpayer reimbursement are fanciful.
    In fact, in testimony before this committee last month, 
former Federal Reserve Chairman Paul Volcker warned that a 
resolution authority with the power to lend or provide money 
would encourage the ``too-big-to-fail'' syndrome. Although he 
advises the Obama Administration, his caution has been rejected 
in this draft. And in an attempt to naming the institutions it 
deems ``too-big-to-fail,'' the Administration's legislative 
proposal foregoes the transparency and full disclosure that are 
the hallmark of America's capital markets. In the place of an 
open process, it substitutes a regulatory regime built around a 
secret list of ``too-big-to-fail'' institutions.
    It is foolish to assume such a list will be kept secret. 
Are we so gullible as to believe that the regulatory 
authorities for eight government agencies will be able to 
impose increased capital requirements and a host of other 
regulatory constraints on the so-called identified firms 
without market participants quickly figuring out which firms 
are on the list? Are companies expected to treat this 
information as immaterial for purposes of filing reports with 
the SEC?
    Until these questions are answered, it's simply 
irresponsible for this committee to accept such a foundation on 
premise and move forward with this legislation. The 
Administration's desire to get something, anything done to 
satisfy some arbitrary deadline imposed on the chairman will 
result in this committee passing a product that has not 
received the careful deliberation necessary to ensure sound 
legislation.
    Mr. Chairman, is it too much to ask the members of this 
committee and the people they represent that they have enough 
time to read and understand the far-reaching implications of 
this legislation?
    In conclusion, this committee's haste also stands in marked 
contrast to the views expressed by Federal Reserve Vice 
Chairman Donald Kohn, who said: ``I hope we build a regulatory 
structure that's good for a couple of decades and it's worth 
taking our time to get it right. The economy is fragile, and we 
learned this morning that it continues to lose jobs. We need to 
promote job creation and growth--not more uncertainty.''
    I share Vice Chairman Kohn's hope that we fulfill our 
obligation to do this in a deliberative manner, not the haste 
that we are witnessing this morning. I yield back the balance 
of my time.
    The Chairman. The gentleman from Pennsylvania is recognized 
for 2 minutes.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Chairman, I understand that we are under pressure to 
get some things done, and unfortunately we have not had a great 
deal of time to spend in analyzing this proposition. I wanted 
to address my remarks simply to the Secretary that in his 
presentation can help us out.
    I discern that there is a great interest in America for us 
to have this type of power at the Federal level to prevent 
future disasters of the kind we have experienced within the 
last year; but, I also feel that the American people are 
speaking to this Congress and very broadly to the world that 
they cannot understand how we just support the safety 
mechanisms for the bailout and cannot put caps or limitations 
on the huge conglomerations of money that we are causing by our 
own very bailout.
    It seems to me that if Treasury was able to come up with 
proposals like this, they also should have the burden and at 
this time use this offer as a balancing act to come up with the 
mechanism in place so that we can act to start limiting the 
unlimited power of the Goldman Sachs of the world and other 
huge conglomerations of money. And that may sound strange. It 
may sound revolutionary, but we are almost in revolutionary 
times. But, clearly, if Treasury and the Executive Branch have 
come to the conclusion that the danger to our system was so 
great that we have to use the Interstate Commerce Clause to 
create tremendous executive authority without much restraint.
    I just read the chairman's letter and I think he makes some 
good points in his letter. If we are going to have that kind of 
a transfer of authority, it seems to me it is the obligation of 
Treasury to come forth and say how we are going to prevent 
this, so this never happens again in the future, by really 
curtailing and tailoring down the size of the institutions, 
particularly the financial institutions of this country so that 
we do not have systemic risk.
    The Chairman. The gentleman's time has expired. I am going 
to go to a couple of members on the Republican side, because we 
have just a spattering of people. The gentleman from Texas, Mr. 
Neugebauer, for 1 minute.
    Mr. Neugebauer. Thank you.
    I thank Secretary Geithner and Chairman Frank for their 
work on this new draft. While they have addressed some of the 
concerns raised from prior proposals, the overall concept 
doesn't seem to have changed much. This draft will still allow 
regulators to identify firms that are ``too-big-to-fail,'' 
although those firms will now be kept secret. This version 
still keeps the government in the bailout business while a line 
of credit for the taxpayers will be used, and may or may not be 
paid back.
    These two ideas for me are non-starters. Rather than an 
arbitrary, government-run resolution, we need a stronger 
bankruptcy process that holds firms and creditors to the rule 
of law. Rather than picking winners and losers behind closed 
doors, the council should require regulators to look at risks 
across financial entities and review capital requirements to 
ensure that all firms are holding the necessary capital for the 
risk that they are taking.
    We need a reform plan that puts the taxpayers and the 
economies first rather than making bailouts permanent. And, 
like the ranking member, I think this process needs to be 
slowed down some, because these are probably some of the more 
important things that we'll do on this committee in the next 
few months, and we need to get it right. I yield back.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman. Apparently, the ``too- 
big-to-fail'' model is ``too-hard-to-kill.'' I thought we would 
have learned our lesson from Fannie Mae and Freddie Mac. Prior 
to their failure, it was widely perceived that the government 
would be there to bail them out when they ran into trouble. 
That implicit guarantee translated into real advantages for the 
GSEs in terms of lower cost of capital which facilitated their 
dominance in the marketplace.
    The explicit backstop already provided to the largest of 
our financial institutions is having an eerily similar effect. 
A recent study by the Center of Economic and Policy Research 
found that the ``too-big-to-fail'' doctrine has translated into 
a tangible subsidy for the 18 largest bank holding companies 
worth $34 billion per year with a 78 basis points lower cost of 
capital when compared to their smaller competitors. Instead of 
granting permanent bailout authority and institutionalized in 
the ``too-big-to-fail'' doctrine which this legislation does, 
we should set up a structure that will allow for an orderly 
liquidation of an institution through an enhanced bankruptcy 
without the use of government funds. I yield back.
    The Chairman. The gentlewoman from Illinois, Ms. Biggert, 
for 1 minute.
    Mrs. Biggert. Thank you, Mr. Chairman. My initial review of 
the chairman and Secretary's financial stability plan is that 
it would do the complete opposite: create further financial 
instability; and facilitate risky behavior in financial firms. 
And while the headlines have said that a deal has been reached, 
I would argue that this is no deal for the American people and 
especially the taxpayers.
    While I support a strong council of regulators, including 
Federal and State regulators at the table, and I support 
stronger and smarter regulation, I don't think that the 
resolution authority under this proposal is the right answer. 
It is my hope that instead of supporting more proposals to 
increase the power of the Federal Government, the 
Administration will strongly consider a new chapter to the 
Bankruptcy Code.
    In addition, it is my hope that we can also consider 
proposals addressing two of the biggest financial failures of 
our time: Fannie Mae and Freddie Mac. Never again can we allow 
regulators to fall asleep at the wheel or another bailout, or 
the government picking winners and losers of private 
businesses. I yield back.
    The Chairman. I will yield myself 5 minutes.
    We are in a difficult situation. History has apparently 
been somewhat rewritten. All of the bailouts that the gentleman 
from Alabama referred to, where we are not going to get money 
back, were the result of an absence of policies to deal with 
this set of situations; and, every one of those bailouts was of 
course requested by the Bush Administration, by Secretary 
Paulson and Chairman Bernanke.
    Now, as of April 2008, Secretary Paulson said we needed to 
do some things to keep this from happening. It happened very 
quickly, and we were unable to avoid those. The question of 
simply allowing bankruptcy to be the way to deal with it, 
there's nothing theoretical about that.
    That's the Lehman Brothers situation. The Lehman Brothers 
went bankrupt and the Bush Administration officials had two 
responses: first, to use Federal Reserve authority without any 
congressional approval, and even prior notification, to begin 
the process of providing funds to pay off the creditors of AIG. 
That was done by the Federal Reserve last September under the 
Bush Administration with no congressional involvement other 
than to be told after the fact.
    Second, they came and asked us for authority to spend some 
money to provide some forms of cash so other institutions 
didn't go under. Congress agreed with some conditions, I think, 
and avoided worse dangers. It could have been administered 
better.
    Our whole purpose today was to change that situation and to 
prevent it. Yes, it is true that we had these previous 
problems. That's because we didn't have a set of rules. What we 
do today is to begin deliberation on a proposal that does. 
There are two problems that were raised with regard to the 
bailouts: one, the use of taxpayer money; and this is a set of 
proposals that will prevent taxpayer money from being used.
    Members say, ``Oh, this requirement that it come from the 
financial industry, that won't work. Congress will do it 
instead.'' They have a very different Congress in mind than the 
one I have served in. I do not believe there is any remote 
chance that Congress would come to the rescue of the financial 
industry that this bill will have required and said substitute 
taxpayer money. If that's their intention, they can try.
    I think they will be outvoted if they feel that's what has 
to happen. Secondly, there is the moral argument. There is the 
argument that once people know that certain institutions are of 
a certain size, they'll be protected. That's why many of us 
protected the notion that there will be a list published 
beforehand. What we have here is this. A group of regulators 
that will be monitoring institutional behavior, both cumulative 
institutional behavior, like subprime loans, and the behavior 
of a large, irresponsible institution like AIG.
    There will be no notification to the public or privately 
that a particular institution is in that category without 
simultaneous restrictions on the institution. There will be no 
prior notification, so the institution will then be free to 
attract investment, because it will be shown to be so big. It 
will become manifested. This institution is covered. The day 
that the regulator says you must significantly increase your 
capital, you must reduce your activity. We will be adding to 
this. It's in here--an ability to take the kind of restrictions 
that existed under Glass-Steagall nationwide and impose them 
institution by institution.
    Now, there is a threshold question. Is it possible to go 
forward in this situation without any funds ever being used to 
prevent the kind of cataclysm of failure leading to failure 
leading to failure that the Bush Administration felt very much 
we had to avoid. We, I think, minimized this in a couple of 
ways. First of all, the penalty for being such an institution 
will be very severe. There will be death panels enacted by 
Congress this year, I hope, but they will be for those large 
institutions, which will be put out of business, whose 
shareholders will be wiped out, whose executors will be fired, 
whose boards of directors will be replaced.
    There will also be no guarantee in any case that the 
creditors are going to receive 100 cents on a dollar. Classes 
of creditors will be allowed to be exempted entirely from any 
repayment. Other creditors will have it reduced. You can't do 
that under bankruptcy. General bankruptcy makes it harder to 
have that kind of thoughtful selection. We are using the 
constitutional power of bankruptcy, but in a way that is more 
thoughtful.
    Finally, I would say this: This is not the only piece. We 
are regulating derivatives over the objection of my Republican 
colleagues. I hope we will be imposing some restrictions on 
your ability to securitize 100 percent of the loan. We are 
doing other things. We are requiring other people to register. 
There will be other restrictions that will keep us from getting 
to that situation.
    And, now, I recognize the gentleman from Texas, Mr. 
Hensarling, for 1 minute.
    Mr. Hensarling. Thank you, Mr. Chairman.
    I find it somewhat curious that we are having a hearing on 
systemic regulation, and nowhere do I see the Director of the 
FHFA, the regulator of Fannie and Freddie, the same Fannie and 
Freddie that were compelled to buy the lion's share of poorly 
underwritten loans in this Nation; the same Fannie and Freddie 
that have now cost the taxpayer over $1 trillion.
    The Administration has now submitted to us legislation to 
regulate pawnshops and grocery stores, but no legislation 
dealing with the greatest systemic risk within the system: 
Fannie and Freddie. The bill we are considering today will 
simply institutionalize ``too-big-to-fail,'' paving the way for 
more Fannies and Freddies in perpetual taxpayer bailouts. 
According to the Wall Street Journal, the Administration is not 
done with taxpayer funded bailouts, as apparently GMAC is now 
in for their third multi-billion-dollar bailout.
    To borrow from a title of the song from the Commodores: 
``Once, Twice, Three Times a bailout;'' enough is enough. I 
yield back.
    The Chairman. The gentleman from New Jersey, Mr. Garrett, 
for 1 minute.
    Mr. Garrett. Mr. Chairman, I seek unanimous consent to 
enter into the record the statement by Congressman Brad Sherman 
regarding, ``Let's Not Adopt TARP On Steroids,'' an appropriate 
analysis of exactly what this legislation stands for.
    The Chairman. Without objection, it is so ordered.
    Mr. Garrett. Okay. Thank you. And secondly, I wish to enter 
into this record the ``Congressional Record'' from the day in 
which the TARP legislation was passed by this House of Congress 
and indicate in that day of the ``Congressional Record'' that 
the chairman was the manager of that legislation as it passed 
through a Democratic Congress, without objection.
    The Chairman. Without objection, it is so ordered.
    Mr. Garrett. There you go. Thank you.
    Mr. Chairman, do I begin my time now?
    The Chairman. Start the minute now.
    Mr. Garrett. Thank you. Mr. Chairman, I find this 
legislation draft proposal, which is a continuation of bailout 
legislation, absolutely incredible. Over the last several 
months, it was my impression that there was a developing 
consensus that the Federal Reserve should be given less power 
and not more. But in reading over this discussion draft in the 
very limited time that we have had to review probably the most 
important legislation the members of this committee will ever 
consider in our lifetimes, I am just struck by how much power 
the Federal Reserve is given.
    Although it is not singled out as a systemic uber-regulator 
in name, don't anyone be fooled. This Fed is given primary 
supervision over systemic firms and can override lesser 
regulators that don't comply with its wishes. In the name of 
mitigating systemic risk, the Fed is given almost unlimited 
authority to systemically dismantle a private company. This is 
a lot more than imposing capital standards.
    I for one, given the extraordinary government intervention 
into private firms we have already seen with the trampling of 
the rule of law in order to benefit some political favorites in 
the auto industry, for instance, I am very uncomfortable with 
giving this sweeping, unchecked power to the same entity that 
failed to effectively mitigate many of the large bank holding 
companies already under its purview. Thank you.
    The Chairman. The Secretary of the Treasury is now 
recognized for his statement.

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

    Secretary Geithner. Thank you, Mr. Chairman. It's a 
pleasure to be here again.
    I want to begin with a few comments on the economy. Today, 
we learned that our economy is growing again. In the third 
quarter of this year, the economy grew at an annual rate of 3.5 
percent, the first time we have seen positive growth in a year, 
and the strongest growth in 2 years. Business and consumer 
confidence has improved substantially since the end of last 
year. House prices are rising. The value of American savings 
has increased substantially. Americans are now saving more and 
we are borrowing much less from the rest of the world.
    Consumers are just starting to spend again. Businesses are 
starting to see orders increase. Exports are expanding. And 
these improvements are the direct result of the tax cuts and 
investments that were part of the Recovery Act and the actions 
we have taken to stabilize the financial system and unfreeze 
credit markets. But, this is just the beginning.
    Unemployment remains unacceptably high. For every person 
out of work, for every family facing foreclosure, for every 
small business facing a credit crunch, the recession remains 
alive and acute. Growth will bring jobs, but we need to 
continue working together to strengthen the recovery and create 
the conditions where businesses will invest again and all 
Americans will have the confidence that they can provide for 
their families, send their kids to college, feel secure in 
retirement. And we have a responsibility as part of that to 
create a financial system that is more fair and more stable, 
one that provides protections for consumers and investors, and 
gives businesses access to the capital they need to grow.
    That brings me to the topic at hand. This committee has 
made enormous progress in the past several weeks. In the face 
of a substantial opposition, you have acted swiftly to lay the 
foundation for far-reaching reforms that would better protect 
consumers and investors from unfair, fraudulent investment 
lending practices to regulate the derivatives market, to 
improve investor protection, to reform credit rating agencies, 
to improve the securitization markets, and to bring basic 
oversight to hedge funds and other unregulated activities. 
Today, you carry this momentum forward.
    One of the most searing lessons of last fall is that no 
financial system can work if institutions and investors assume 
that the government will protect them from the consequences of 
failure. Never again should taxpayers be put in the position of 
having to pay for the losses of private institutions. We need 
to build a system in which individual firms, no matter how 
large or important, can fail without risking catastrophic 
damage to the economy.
    Last June, we outlined a comprehensive set of proposals to 
achieve this goal. There has been a lot of work by this 
committee and many others since then. The chairman has 
introduced new legislation to accomplish that. We believe any 
effective set of reforms has to have five key elements. I am 
going to outline those very, very quickly, but I want to say 
that the legislation, in our judgment, meets that test.
    The first test is the government has to have the ability to 
resolve failing major financial institutions in an orderly 
manner with losses absorbed not by taxpayers, but by equity 
holders and by unsecured creditors. In all but the rarest 
cases, bankruptcy will remain the dominant tool for handling 
financial failure, but as the collapse of Lehman Brothers 
demonstrates, the Bankruptcy Code is not an effective tool for 
resolving the failure of complicated global financial 
institutions in times of severe stress.
    Under the proposals we provided, which are very similar to 
what already exists for banks and thrifts, a failing firm will 
be placed into an FDIC-managed receivership so they can be 
unwound, dismantled, sold or liquidated in an orderly way. 
Stakeholders of the firm would absorb losses. Managers 
responsible for failure would be replaced.
    A second key element of reform: any individual firm that 
puts itself in the position where it cannot survive without 
special assistance from the government must face the 
consequences of that failure. That's why this proposed 
resolution authority would be limited to facilitating the 
orderly demise of the failing firm, not ensuring its survival. 
It's not about redemption for the firm that makes mistakes. 
It's about unwinding them in a way that doesn't cause 
catastrophic damage to the economy.
    Third key point: Taxpayers must not be on the hook for 
losses resulting from failure and subsequent resolution of a 
large financial firm. The government should have the authority, 
as it now does, when we resolve small banks and thrifts. The 
government should have the authority to recoup any losses by 
assessing a fee on other financial institutions. These 
assessments should be stretched out over time as necessary to 
avoid amplifying adding to the pressures you face in crisis.
    Fourth key point, and I want to emphasize this: The 
emergency authorities now granted to the Federal Reserve and 
the FDIC, should be limited so that they are subject to 
appropriate checks and balances and can be only used to protect 
the system as a whole.
    Final element: The government has to have stronger 
supervisory and regulatory authority over these major firms. 
They need to be empowered with explicit authority to force 
major institutions to reduce their size or restrict the scope 
of their activities, where that is necessary to reduce risks to 
the system. And this is a critically important tool we do not 
have at present.
    Regulators must be able to impose tougher requirements, 
most critically, stronger capital rules, more stringent 
liquidity requirements that would reduce the probability that 
major financial institutions in the future would take on a 
scale of size and leverage that could threaten the stability of 
the financial system. This would provide strong incentives for 
firms to shrink simply to reduce leverage.
    We have to close loopholes, reduce the possibilities for 
gaming the system, for avoiding these strong standards. So 
monitoring threats to stability will fall to the responsibility 
of this new financial services oversight council. The council 
would have the obligation and the authority to identify any 
firm whose size and leverage and complexity creates a risk to 
the system as a whole and needs to be subject to heightened, 
stronger standards, stronger constraints on leverage.
    The Federal Reserve under this model would oversee 
individual financial firms so that there's a clear, 
inescapable, single point of accountability. The Fed already 
provides this role for major banks, bank holding companies, but 
it needs to provide the role for any firm that creates that 
potential risk to the system as a whole. The rules in place 
today are inadequate and they are outdated. We have all seen 
what happens, when in a crisis the government is left with 
inadequate tools to respond to data damage.
    That is a searing lesson of last fall. In today's markets, 
capital moves at unimaginable speeds. When the system was 
created more than 90 years ago, and today's economy given these 
risks requires we bring that framework into the 21st Century. 
The bill before the committee does that. It's the 
comprehensive, coordinated answer to the moral hazard problem 
we are also concerned about.
    What it does not do is provide a government guarantee for 
troubled financial firms. It does not create a fixed list of 
systemically important firms. It does not create permanent TARP 
authority; and, it does not give the government broad 
discretion to step in and rescue insolvent firms. We are 
looking forward. We are looking to make sure we provide future 
Administrations and future Congresses with better options than 
existed last year. This is still an extremely sensitive moment 
in the financial system.
    Investors across the country and around the world are 
watching very carefully your deliberations, our debate, our 
discussions; and, I want to make sure they understand that 
these reforms we're proposing are about preventing the crises 
of the future, while we work to repair the damage still caused 
by the current crisis.
    The American people are counting on us to get this right 
and to get this done. I want to compliment you again for the 
enormous progress you made already and I look forward to 
continuing to work with you to produce a strong package of 
reforms.
    Thank you, Mr. Chairman.
    [The prepared statement of Secretary Geithner can be found 
on page 150 of the appendix.]
    The Chairman. I want to begin and use my 5 minutes 
essentially to make some points. I know there will be no dearth 
of questions, Mr. Secretary. So while I will not be asking you 
any questions, I do not think you will feel ignored by the end 
of this morning.
    First, let me address the timing issue. The ideas that we 
are talking about here really were first formulated for major 
public debate by former Treasury Secretary Paulson in April of 
2008, and they have been under serious discussion since then. 
Various versions have gone forward. This particular draft, 
reflecting a lot of conversations a lot of people have had was 
recently released. We won't get to mark it up until next week, 
and probably not until Wednesday now, because we have a couple 
of things to finish up from Tuesday.
    The argument that we should wait, we are more open to the 
criticism that we haven't moved quickly enough rather than we 
are moving too quickly in this. There was a paralysis in the 
financial system, but that is happily ending. And we don't want 
to get behind that curve. Second, I want to address the 
question of Fannie Mae and Freddie Mac. I am astounded by the 
notion that we have to regulate them. We did.
    In 2007, as chairman of this committee, I made as our first 
major order of business adopting the regulation of Fannie Mae 
and Freddie Mac that the Bush Administration wanted. We did 
that in the House. We did not get prompt action in the Senate, 
surprisingly, and when the first stimulus bill came up in 
January of 2008, I urged that they take our Fannie/Freddie 
reform, which was approved by the Bush Administration, and make 
it part of the bill.
    They weren't able to get agreement with themselves to do 
it. The Senate did act on our reform in 2008--too late to stall 
off the crisis--but the fact is that the Fannie and Freddie 
that exist today are already the ones that were strictly 
regulated. Now, they have collapsed. They are not acting as 
they did before. It is important for us going forward to 
totally revise the functions of the secondary market and 
whether or not the subsidy should be a part of that.
    That certainly will be on our agenda next year. But, Fannie 
and Freddie are not out there doing what they did before: (A) 
they are subject to regulation; and (B) there is a collapse. It 
is not a case that they are two unregulated entities working 
out. I think part of this debate suffers from serious cultural 
lag with a little partisan motivation.
    Next, I want to talk about the comparison between this year 
and last year. In the events leading up to the collapse of last 
year, there was no regulation of subprime lending, a major 
contributing factor. We adopted legislation to control subprime 
lending in the House. It didn't get enacted in the Senate. The 
Fed is still active. We have that as part of this bill. We will 
not have the unrestricted, unregulated, irresponsible subprime 
lending that led in part to the collapse because so many of the 
securities that fell apart were of that sort.
    We had no regulation of derivatives. AIG was engaged in 
wild speculation and these things all interact. You had bad 
subprime mortgages that shouldn't have been issued. Then you 
had AIG without any restriction ensuring against the default of 
these bad subprime mortgages. That again will be corrected by 
the time we go forward. We will have hedge fund registration, 
private equity registration, much more data collection than we 
had before.
    We, as I said, have Fannie and Freddie playing a very 
different role. You had an unregulated Fannie and Freddie 
before this House began the process of regulating for 2007. You 
had unregulated subprime mortgages. You had unregulated 
derivatives. All those things are now incorporated, so yes, we 
want to avoid the ``too-big-to-fail.'' Part of it is that we 
have restrictions here that will keep these institutions: (A) 
from getting too big; (B) from being likely to fail; and (C) 
having fewer consequences when they do.
    So the comparison of today to before, as I said, is serious 
cultural lag. We will have severely restricted the kind of 
irresponsible activity in derivatives in subprime lending; and 
another piece that I mentioned, in securitization. I myself 
think one of the biggest causes that happened here was that 30 
years ago people who lent money to other people were the people 
who were expected to be paid back.
    Once they were able to get rid of all of those loans, the 
discipline of the lender-borrower relationship diminished, so 
we are severely--we are going to reform securitization with 
some risk retention. We are restricting irresponsible subprime 
loans. We are regulating derivatives. There will be no 
unregistered, large financial enterprises going forward. We 
will have the ability to significantly increase capital 
requirements, more than proportionally, so all of those things 
are there.
    Yes, in the absence of all of those, we had greater 
problems. We are talking about a regime that puts all those in 
a place and then in the end says, for all of that, somebody 
fails. We step in and we hammer them pretty hard and we protect 
the taxpayers.
    The gentleman from Alabama.
    Mr. Bachus. Secretary Geithner, this list of companies is 
to be kept secret? Is that correct?
    Secretary Geithner. Congressman, the central imperative is 
to make sure that institutions that could threaten the 
stability of the system are held to tougher constraints on 
leverage and risk-taking.
    Mr. Bachus. And capital and prudential--
    Secretary Geithner. Capital and liquidity--
    Mr. Bachus. Yes--
    Secretary Geithner. And risk-taking generally.
    Mr. Bachus. Right.
    Secretary Geithner. That's the central lesson of this 
crisis, the central imperative of reform. To do that, they have 
to know who they are.
    There should not be a fixed list. It may change over time, 
because the system changes over time. But the central 
imperative is, if you take on or could risk the stability of 
the system as a whole--
    Mr. Bachus. But you have to designate, it has to come on a 
list, or it has to be designated, if you're going to increase 
capital on them, or prudential regulations, or--
    Secretary Geithner. Exactly. And in some ways--
    Mr. Bachus. So you will have a list. There will be these 
companies that you know of.
    Secretary Geithner. What I state is this--and this is the 
system that exists today, although it didn't work as well as it 
needs to--right now--
    Mr. Bachus. I'm not talking about that, I'm just saying--
    Secretary Geithner. No, but this is important. Right now, 
if you were a globally active bank, the capital requirements 
you are held to are different from and tougher than if you were 
a regional or community bank.
    So that's the system we have today. Now those banks know 
who they are, they exist, and they're designated as globally 
active banks.
    Mr. Bachus. I understand. But for instance, the SEC, these 
companies have to file with the SEC. They would have to make a 
material disclosure as to that they were--
    Secretary Geithner. Yes. And it won't be a secret that 
they're held to tougher standards. It's very important that 
they are held to the tougher standards, and you know that they 
are held to the tougher standards.
    Mr. Bachus. So it will not be a secret?
    Secretary Geithner. No, it can't be. Because again, they 
have to be--the purpose of it is so that they're held to 
tougher standards.
    Mr. Bachus. So if it is not a secret, then people will 
know. I think it's a given that people can figure out quite 
quickly, when you raise capital restraints, require more 
capital, that will be disclosed.
    Secretary Geithner. If they weren't held to higher capital 
requirements, we would be making a mistake. If they were held 
to it, but nobody knew it, it wouldn't do any good.
    Mr. Bachus. You say in this legislation that you can 
increase the capital requirements.
    Secretary Geithner. Of course, exactly. And that's why I 
think it's designed this way, and it's very appropriate.
    Mr. Bachus. And the market and the investors or 
shareholders, they'll know that in fact the companies would 
have to disclose that--
    Secretary Geithner. Absolutely. Again, for the capital 
requirements, they have to exist to be tougher.
    Mr. Bachus. Right.
    Secretary Geithner. And the market will have to know 
they're held to tougher standards.
    Mr. Bachus. So the public would almost immediately realize 
who these companies were.
    Secretary Geithner. True. But Congressman, I think we're 
missing the key point. What you don't want to do is by 
identifying a list of companies that are going to be held to 
tougher standards, create an expectation that government will 
step in and protect them, if they screw up.
    Mr. Bachus. Well--
    Secretary Geithner. It's a difficult balance. That's the 
balance you have to strike.
    Mr. Bachus. I know that you won't release--it says that 
there will not be a release of the companies on a list. Okay?
    But by putting new requirements on them, people will 
realize quite quickly, in fact those companies will have to 
disclose to investors and to the market, and to the SEC and 
other regulators that they're under those constraints.
    Secretary Geithner. I don't think we're disagreeing, 
Congressman. I think, if I understand you correctly, you're in 
favor of making sure that these firms can be held to higher 
standards. This is a way of doing that. And--
    Mr. Bachus. No, and let me say this, I'm not in favor of 
them being held to higher standards. But if we are to hold them 
to higher standards, I think the market is going to have to 
know.
    Secretary Geithner. But you would not impose tougher 
standards on the largest, most risky institutions, than apply 
to a community bank or a regional bank?
    Mr. Bachus. All right. Let me ask you this. I'm not, 
because what you then do, you say that you can loan these 
companies money.
    Secretary Geithner. No. I think that's a 
mischaracterization of this. What this does is makes sure, if 
in the future, they get themselves in the position where they 
can't survive on their own--
    Mr. Bachus. Right--
    Secretary Geithner. Then the only authority we would have 
is to manage their failure without causing the economy to go 
through what this economy went in this crisis. That's the 
basic--
    Mr. Bachus. But under 1109, even a solvent company, you can 
have capital injections, you can invest in those institutions, 
you can buy their assets.
    Secretary Geithner. Again, Congressman, the important thing 
to recognize is--and it's just worth going back to what it was 
like last fall--without the ability for the government to step 
in and manage the failure of a large firm, and contain the risk 
of the fire spreading, we'll be consigned to repeat the 
experience of last fall.
    It's a stark simple thing. And I know of no person who has 
stood in my seat--this is true for Secretary Paulson--in any 
central bank in any major country, who would say the country 
should be run with no authority to step in and act in that 
case.
    Mr. Bachus. Let me ask you--
    Secretary Geithner. I don't think there's any credible--
    Mr. Bachus. Let me ask you this, Secretary--this will be my 
last question. You impose a tax on large and medium-sized 
financial institutions to--
    Secretary Geithner. Only if, as part of protecting the 
system from their failure, the government is exposed to losses. 
In that case and only to that extent, would there be a fee 
assessed on the institutions to cover it.
    Mr. Bachus. But that's a tax on their competitors, is it 
not?
    Secretary Geithner. But that's again--Mr. Kanjorski, can I 
borrow my time?
    Mr. Kanjorski. [presiding] A second, to finish.
    Secretary Geithner. Okay.
    Mr. Kanjorski. But no further questions.
    Secretary Geithner. Okay.
    This is a very important key thing. The system Congress 
designed for small banks and thrifts today works in a similar 
way. It's different because it's part of an explicit insurance 
regime. But in that case, if the government has to step in--and 
the FDIC does this every week, step in and manage the failure 
of a bank--if in that case, the government assumes any risk of 
loss, it has to put a fee on institutions to recoup that loss 
over time, so the taxpayer is protected.
    What we are doing is a very simple thing. We're taking that 
basic framework, and we're adapting it to the system we have 
today. We should have done that 10 years ago, but we didn't do 
it.
    But it's a very simple thing. If the government is exposed 
to loss when it acts to protect the system--any risk of loss--
it should assess a fee on banks over time to recoup that loss. 
That's to make sure the taxpayer is not in the position of 
absorbing those losses. That's the basic premise.
    Mr. Bachus. Of course, I think we all know that what they 
do now is--
    Mr. Kanjorski. The gentleman's time has expired.
    Mr. Bachus. A fee on the insured deposit is what it is--
    Mr. Kanjorski. The gentleman's--
    Secretary Geithner. No, it goes beyond that.
    Mr. Kanjorski. Look, time has expired, and the Chair is 
going to ask for cooperation here.
    Mr. Bachus. Okay. Thank you.
    Mr. Kanjorski. All right.
    And now the Chair is going to take its time, 10 minutes, 
right? No, I'm serious.
    [laughter]
    Mr. Kanjorski. I am going to follow up on the questions 
that the ranking members asked. If I listened to what he was 
saying--and I that your answers were off the point, Mr. 
Secretary--he is asking you on what authority is this 
extraordinary centralization of executive authority contained?
    Do you have some particular provision of the Constitution 
that says that this Congress has a right to transfer this 
amount of authority to the Executive Branch of Government?
    And that should be a pertinent question that we all 
address. There are a lot of things in this country we would 
like to do, should do, or could do to protect the people. But 
there is a little document that they executed some 233 years 
ago or 223 years ago, that does not allow us to do that.
    Now what is the basis for your authority?
    Secretary Geithner. It's--you can just look at the system 
today, and I think there's--I'm not a lawyer, and of course our 
lawyers would love a chance to study this very carefully--but 
Congressman, right now, the Congress grants to a series of 
agencies created by the Congress the authority to set capital 
requirements on banks.
    Mr. Kanjorski. Yes.
    Secretary Geithner. And right now, the Congress has given 
the Executive Branch the authority for banks and thrifts--
    Mr. Kanjorski. Mr. Secretary, I agree with that.
    Secretary Geithner. Yes.
    Mr. Kanjorski. But that is because those institutions 
exercise the right of being insured under statutes that this 
Congress has passed.
    Secretary Geithner. No, it's not solely because of that, 
because the protections that exist today that Congress has 
given the Executive Branch the authority or the responsibility 
for executing go beyond simply the explicit insurance of 
deposits.
    Mr. Kanjorski. Mr. Secretary, I am not a man who fears this 
Administration or you. But I do fear the accumulation of power 
exercised by someone in the future that can be extraordinary.
    Now you and I know that in this last disaster, Treasury was 
able to determine that General Motors and the auto industry 
were banks, financial institutions, so they could have access 
to TARP.
    I am not sure I agree with that. But at the time, it was 
certainly essential, if we were going to save those 
institutions.
    But what we are doing is allowing a board or council, or 
organization to make determinations in a time of extremity--no 
question about that--that some of us may not agree that 
authority rests in those entities, or was constituted, or we 
even had the authority in this Congress to give that type of 
authority.
    Secretary Geithner. You get to choose now what mix of 
authorities and limits and executive power are going to be 
appropriate for the future. That's the choice you're going to 
be debating and making.
    Now, then, what we propose, though, has a very carefully 
designed set of checks and balances, and it does limit very 
substantially the authority of the Executive Branch.
    But again, that's the choice you'll have to make in that 
case. But we're using a model that exists today, building on 
that model.
    Mr. Kanjorski. Okay. I am going to make the assumption you 
have the authority, your lawyers have said you have the 
authority, you have a good constitutional basis.
    If you do, what is our excuse for not exercising that same 
type of authority to stop these ``too-big-to-fail'' 
organizations from occurring and existing? Why can you not in 
this legislation say, ``No, this bank is just too large, it has 
to cut up and split up,'' with authority?
    Why should the American people have to sit out there and 
see us creating mammoth organizations that nobody says we have 
the authority to control or limit, but we have the authority to 
help them when they get into trouble?
    Secretary Geithner. I agree with you, and that's why this 
bill would provide authority to not just impose higher capital 
requirements on them, constraints and leverage; it would have 
the authority to limit the scope of their activities, to compel 
them to shrink and separate.
    That is a very important thing, and I agree with you about, 
and I think the chairman does too.
    Mr. Kanjorski. You believe we have the authority, or you 
will under this bill have the authority to preemptively seize 
these corporations, and take them under the control of Federal 
authority, with no judgment, no due process, or no thought on 
their part?
    Secretary Geithner. No. I think you need to separate two 
different things. One is about prevention, and it's what about 
what you do in the event of a severe crisis. On the prevention 
front, what this does is make it clear that regulators would 
have the responsibility and the authority to limit risk-taking, 
limit the scale and scope of activities, size if necessary, if 
that's necessary to protect the system.
    That's a very important thing. We did not have that in this 
crisis for a large part of the financial system. That fixes 
that.
    Mr. Kanjorski. So let me understand. You are interpreting 
this statute to give Treasury the authority to look at an 
organization that is not in difficulty or extreme, but is huge; 
and potentially it is not determined to be monopolistic at this 
point, but it is huge and could have systemic risk 
characteristics to it that you have the right to summarily 
seize that organization--
    Secretary Geithner. No, no--
    Mr. Kanjorski. Disband the assets of that organization--
    Secretary Geithner. No, no, no, no. That--you're slightly 
conflating two different things. It gives the responsible 
regulatory authority--
    Mr. Kanjorski. There are some organizations that have no 
regulators. General Motors did not have a regulator until you 
came in and interpreted that it was a bank.
    Secretary Geithner. That wasn't my judgment, that was my 
predecessor's judgment--
    Mr. Kanjorski. I understand. But then do you sustain what 
judgment was made there, that in fact, it was a bank and 
subject to Federal Government regulation?
    Secretary Geithner. Congressman, again, I don't think 
that's quite the right way to think about that. Again, that was 
a judgment made by my predecessor under authority given to him 
by the Congress, under the Emergency Economic Stabilization 
Act.
    I think he made the right judgment there, but that was his 
judgment, in that context.
    Mr. Kanjorski. Okay.
    Secretary Geithner. But I don't think that's what this bill 
is about.
    Mr. Kanjorski. I wish we had more time, Mr. Secretary. We 
don't--
    Secretary Geithner. We will--
    Mr. Kanjorski. But we certainly should engage in the 
future. And if I could make a recommendation that we perhaps 
break down into sections with this committee on both sides, so 
some of these questions, fundamental questions, should be 
answered.
    Mr. Neugebauer, you are recognized for 5 minutes.
    Mr. Neugebauer. Yes. Thank you, Mr. Chairman.
    I want to go back to a little bit of what the ranking 
member was talking about, Mr. Secretary, because I'm a little 
confused now.
    On page 11, Confidentiality, ``The Committee of the 
Congress, receiving Council's report, shall maintain the 
confidentiality of the identity of the companies described in 
accordance with paragraph A3, the information relating to 
dispute resolutions described in accordance with paragraph''--
    Then I'll go over to page, I believe it is 17, and it says, 
``The Council and the Board''--which is the Fed--``may not 
publicly release a list of companies identified under this 
section.''
    And what they're talking about is the identification of 
financial companies for heightened prudential standards for 
financial stability purposes.
    So what are those companies? The determination for those 
companies would be their capital structure, number one. And 
those would be categorized into well-capitalized, which we hope 
all companies are well-capitalized--but then we have 
undercapitalized, significantly uncapitalized, and critically 
undercapitalized companies.
    And the council is going to make, I guess along with their 
prudential regulator, make that decision of what categories 
they fall into.
    And you're telling me that you're going to disclose that 
information? The bill says you can't disclose that information. 
And I'm a little concerned about what is the answer to the 
question? Yes or no?
    Secretary Geithner. I guess we can start with a simple 
thing. It does make sense to the system in which community 
banks and regional banks are held to the same standards that 
are necessary to protect the system from the risk posed by 
large complicated financial institutions.
    You need to have a different regime, tougher set of 
constraints applied to them, because they pose more risk--
    Mr. Kanjorski. Mr. Secretary, with the different regimes, I 
just want to know, are going to disclose the companies or not? 
And are you going to disclose the--
    Secretary Geithner. But you have to start with this thing. 
They need to be subject to a different set of constraints. I 
have heard nobody suggest that what's appropriate for a 
community bank is appropriate for a major global firm. Now, if 
that's true--
    Mr. Kanjorski. Leave the banks out of it. Let's just talk 
about the large banks.
    Secretary Geithner. If that's true, then they have to 
subject to higher standards, and I am sure, for the reasons 
many of you have said, they will be disclosing the regime 
they're operating under to their creditors, their equity 
holders. Analysts will know. And it will be clear how much 
capital they're holding.
    And I think that's the best way to get the balance right.
    Again, what you want to avoid, I think--as many of you said 
in the past--is you want to have the sense there's a fixed list 
of companies out there, that are going to benefit from special 
support.
    We want to avoid that risk. And that's why the chairman 
tried to strike the balance in the draft the way it's done.
    Mr. Neugebauer. I want to reclaim my time, because there 
will have to be a list, this bill calls for a list to be 
determined, because that's the council's responsibility.
    Secretary Geithner. Would you prefer it be a public list?
    Mr. Neugebauer. I think we have to decide, because I don't 
know how you can keep it secret, because these companies--if 
I'm a creditor or a shareholder of a company, and it's not 
disclosed to me that I'm investing in a company that's 
critically undercapitalized--does the government have some 
fiduciary responsibility that--
    Secretary Geithner. I think--
    Mr. Neugebauer. You're withholding information from--
    Secretary Geithner. I'm not sure we're disagreeing. I think 
that the company will be held to tougher standards. It will 
have to disclose how much capital it holds. The analysts that 
cover it, its creditors, its equity holders will understand 
that. And that's probably the right way to get the balance.
    Mr. Neugebauer. Where I'm headed with this is that the 
resolution now that is proposed under this bill basically 
doesn't necessarily--and we haven't in some of the resolution 
of these entities followed what would be the rule of law--and 
in the sense that certain creditors were given preferences in, 
for example, GM. Or they were intimidated into taking a 
position that they didn't necessarily want to take.
    Secretary Geithner. Now GM was managed under the 
established bankruptcy procedures of the laws of the land. The 
Congress recognized many, many years ago that those procedures 
do not work for banks, because banks borrow short, they take on 
leverage, they cannot function effectively under that kind of 
regime.
    Thus, a different regime, very much modeled on the 
Bankruptcy Code, that establishes clear priorities for 
creditors. But again, that system exists today for banks and 
thrifts.
    Mr. Neugebauer. Why not--
    Secretary Geithner. Now--
    Mr. Neugebauer. Why not just go ahead and use the 
Bankruptcy Code as a Republican alternative, and set up a 
special--
    Secretary Geithner. But if you--again, I don't think this 
is complicated.
    Look what happened to Lehman, in the wake of Lehman. 
Bankruptcy Code was the only option available in that context. 
It caused catastrophic damage.
    That's why in the wake of the S&L crisis--and actually well 
before that--Congress recognized that for banks, and they 
operate like banks, they need to have a special set of 
protections to allow for the equivalent of bankruptcy.
    Mr. Neugebauer. But had we had a different provision in the 
Bankruptcy Code for a Lehman-like or financial institution, we 
could have done that and made sure that--
    Secretary Geithner. That is effectively what this does. 
That is effectively what this is designed to do.
    Mr. Kanjorski. The gentleman's time has expired.
    And now we will recognize the gentlelady from California, 
Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Let me ask Mr. Geithner, do you have a list of 
systematically significant organizations that are basically in 
the definition of ``too-big-to-fail?'' Do you have a defined 
list?
    Secretary Geithner. I do not have a defined list today. But 
I want to come back to one thing. Right now the way the--
    Ms. Waters. Excuse me, please. I just want to know that.
    Secondly, in this legislation, where you're asking for 
broad authority, do you have authority to bail out, to rescue--
    Secretary Geithner. In this proposal?
    Ms. Waters. Yes.
    Secretary Geithner. What this proposal does--
    Ms. Waters. Just, do you have the authority to spend money 
to bail out any of these systemically significant organizations 
after they get in trouble? Not just resolution authority to 
break them up and to assign the management of their failed 
assets, etc., etc. Do you have the authority to spend the 
taxpayers' money to bail them out if you deem that to be a good 
way of handling that situation?
    Secretary Geithner. No.
    Ms. Waters. Describe what authority you have to resolve 
them, if you don't have bailout authority.
    Secretary Geithner. What you have is the authority to wind 
them down, to separate the bad from the good. To sell the good 
businesses, to put them out of existence in a way that doesn't 
cause catastrophic damage to the economy.
    And if in that process, the taxpayer is exposed to any 
losses, then we propose to recoup those losses, as we do now 
for banks and thrifts, by imposing a fee on banks--
    Ms. Waters. Okay. I think I have the answer. You're not 
asking for any monetary bailout authority, as you do the 
resolving of any of these systemically significant 
institutions. That's what you're saying.
    Secretary Geithner. We want the ability to let them fail, 
without the taxpayer being exposed to losses.
    Ms. Waters. You're not asking for the authority to bail 
them out. Okay, I got that.
    Have you suggested to any of these systemically significant 
organizations that they should be winding down the size of 
their organizations? We know that AIG, for example, started to 
sell off, started to wind down.
    You have to some systemically significant organizations 
that are in trouble now. Citi is in trouble. What are you 
suggesting they do?
    Secretary Geithner. I would be happy to go into detail as 
to what I think the Chairman of the Fed--and go through exactly 
the conditions that have been put on a range of institutions to 
make sure they emerge from this safe, and not relying on the 
taxpayers' money.
    But I want to emphasize one very important thing. Since I 
came into office, we have had $70 billion of capital taken back 
out of the financial system, replaced with private capital. The 
financial system has changed very dramatically.
    Those major institutions are smaller, they have less 
leverage today, they are beginning to run more safely. The 
riskier part of their business has been wound down very 
dramatically, and it's a very important--
    Ms. Waters. All right. I want to take back my time. But the 
question really is this, if you know who they are, and there is 
a possibility they could cause the same kind of meltdown that 
we have experienced in this economy, have you suggested, before 
they get into trouble again, that they should be downsizing, 
they should be selling off--
    Secretary Geithner. Exactly, of course--
    Ms. Waters. They should be reducing their size?
    Secretary Geithner. Of course, absolutely.
    The Chairman. Will the gentlewoman yield to me for 10 
seconds?
    Ms. Waters. Yes.
    The Chairman. I do want to say precisely the purpose of 
this bill is to give them powers to do more of that than they 
now have. They do not have the powers in a binding way to do 
exactly what the gentlewoman is suggesting. And this bill would 
give them more powers to make those not just as suggestions, 
but as binding orders.
    Secretary Geithner. Before they need money from the 
government.
    Ms. Waters. Let me just finish. As we take a look at what 
has happened in the past, with the bailout that we have 
supported, and we have found that these institutions that we 
bailed out, froze the credit, didn't make credit available, 
they increased interest rates, they did all of that, perhaps we 
had the power to put some mandates on them, some dictates on 
them about what they should do in exchange for getting the 
bailout.
    For example, our small regional community banks don't have 
capital now. And you say to them, ``You have to go out and you 
have to get capital, or we're going to close you down.'' Or 
FDIC or somebody says that. And we have bailed out some of 
these big banks, who are now richer. Goldman Sachs is a lot 
richer, because we bailed them out.
    Banks lend money to each other, but they're not lending 
money to the small community banks and regional banks and 
minority banks.
    What can you do, or what have you done to make that happen?
    Secretary Geithner. Congresswoman, this is a very important 
issue. Small businesses are much more reliant on credit from 
banks, including small banks. For again, to get that credit, 
banks have to have the capital they need to lend. The President 
proposed last week two important new initiatives to make sure 
small banks can get that capital, as well as community 
development and finance institutions as well.
    And I think Congress needs to work with us to help make 
those banks more comfortable, coming to get capital from the 
government. If they do that, then they'll have a better 
capacity to provide credit to small businesses. And we think 
that's a very important thing to do.
    The Congress also passed in the Recovery Act some important 
changes to help encourage small business lending by the SBA. 
Lending by the SBA since those actions were taken has increased 
very dramatically.
    But I think you're absolutely right that for many small 
businesses across the country, they're still not getting the 
credit they need to grow and expand. And we need to work with 
you to try to fix that problem.
    The Chairman. This is obviously a very important question; 
let me just reinforce what the gentlewoman said. Absent the 
addressing of this, I think we will have a great deal of 
problems going forward in any broad way.
    The gentleman from California, I believe, is next.
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. Geithner, I asked you about a provision in your White 
Paper earlier this year, and I would come back to that. And 
that's this idea of providing direct funding to an operating 
institution to keep it from failing.
    Such authority of course, we would be markedly different 
from a resolution authority that would entail an orderly 
unwinding of a failed firm.
    Some have compared this idea that's in the White Paper to 
the open bank assistance authority at the FDIC. It appears as 
though you've maintained this idea in the discussion draft that 
was issued earlier this week.
    And I would ask, is it your belief, should this legislation 
become law, that the government should have the authority to 
prop up an operating institution with Federal dollars, without 
ever unwinding it?
    Secretary Geithner. And my answer to that is no. But let 
me--it's a little more complicated than that.
    You need two authorities we don't have today. One is for a 
large institution that is courting failure and whose failure 
could cause catastrophic damage, you need to be able to act and 
unwind them with less damage to the economy, without the 
taxpayers being exposed to loss.
    We don't have that authority today; thus the traumatic 
damaging experience of last fall.
    You also need to make sure that you can protect solvent, 
liquid institutions in the rest of the system from losing their 
capacity to operate and fund. In classic financial panics, what 
happens is the weakness of one spreads to the strong.
    You need to arrest that to contain panics to fix panics. 
And that's why in this bill there is some authority reserved 
for the Fed and the FDIC to contain the risk of panic spreading 
to healthy institutions.
    We propose to limit that authority, relative to what exists 
today. But you need to have both those provisions for it to 
work.
    Mr. Royce. But under that interpretation, the government 
would have the authority to prop up that operating institution 
with Federal dollars, without unwinding it, because of your 
presumption at some point that you're eventually going to be 
able to restabilize it.
    I think--
    Secretary Geithner. No, I wouldn't--that's not quite right. 
Think of a world in which you have one bank that is large and 
complicated and can no longer survive without government 
assistance. And you have the rest of the system that is still 
relatively strong and healthy.
    What you want to do is take that one institution that 
managed itself to the edge of the abyss, and you want to put it 
out of the existence safely.
    Now you can't flip a switch and do that. It's a complicated 
task. In Continental Illinois, it took 10 years. But you have 
to have the capacity to do that as quickly as you can and 
safely.
    But you need to make sure the rest of the system does not 
suffer a calamitous loss of funding--
    Mr. Royce. But there's--
    Secretary Geithner. And you need that basic--it's like a 
firebreak kind of--
    Mr. Royce. Right, I understand your argument on that. Part 
of the problem here are the unintended consequences. And unless 
we set very clear parameters on this authority, we run the risk 
of the market really interpreting the worst here.
    Let me give you an example, and this has to do with moral 
hazard. It was often stated by several individuals, including 
members of this committee, that the government would not bail 
out Fannie Mae and Freddie Mac when they ran into trouble.
    But because there was a level of ambiguity, the market 
perceived these institutions as government-backed. At times, we 
asserted they were not, but the market perceived that they 
were, which, by the way, turned out to be the case. Economists 
pointed this out at the time.
    With respect to the chairman's comments, it's true that 
several members often raise the example of Fannie and Freddie. 
We do this not simply because the GSEs were at the center of 
the mortgage market meltdown--and I feel they were. When you 
put a mandate from Congress that one half of your portfolio has 
to be either Alt-A or subprime, when you manage to bully the 
system into a way where you have zero downpayment loans and so 
forth, and when it ends up being 85 percent of the losses of 
these institutions, I think you can see how some of us would 
believe that played a large role in the market turning into a 
bubble.
    I think that many in the Fed believed it did too. And I 
think, going back to what happened over on the Senate side, the 
fact that Senate Democrats blocked the real reforms that passed 
the Senate Banking Committee, on a party-line vote, and I think 
the fact that Fannie's and Freddie's political pull prevented 
real reforms during the years--because I certainly saw them up 
here, lobbying against the reforms that would be necessary to 
deleverage these institutions until it was too late--I think we 
can see out of that how we ended up with moral hazard in the 
system. And creating more GSEs would compound that problem.
    The Chairman. A brief response, if you wish?
    Secretary Geithner. I believe I agree with you. You cannot 
allow a system to be created again where institutions exist and 
operate with the expectation there will be government support 
if they mismanage themselves to the extent they can't survive 
with that.
    That's the central lesson of this crisis, and the central 
responsibility that we have to make sure that doesn't happen. 
And that requires us to make sure we have strong constraints on 
risk-taking and leverage, and we limit dramatically any 
expectation of government support.
    The Chairman. The gentleman from Illinois.
    Mr. Gutierrez. Thank you, Mr. Chairman.
    First of all, Secretary Geithner and Chairman Frank, I 
think the proposal is really a step in the right direction in 
terms of imposing the tougher standards, in terms of the 
constraints, in terms of allowing us to create a system that 
will prevent to the extent humanly possible the kind of 
calamity that we have suffered already.
    And to that extent, let's move forward, let's get that job 
done. That's the last piece that we need to get done. We have 
done a lot of work here, and we really need to this last piece 
done.
    It's really not my issue here this morning or with the 
proposal. The main issue with the proposal is that we have this 
reckless and dangerous and risky behavior, which we have no 
evidence is going to cease to exist. So we should assume that 
Wall Street and those on Wall Street, the Goldman Sachs of the 
world, are going to continue to conduct themselves and behave 
as they have in the past.
    And so therefore, we have these new powers and this new 
regime to constrain them. But we also know that they were great 
at getting around those constraints in the past.
    We also know that, with all due respect to you, that in the 
past, we had one CEO of Goldman Sachs after the another in your 
job. How do we know the next Secretary of the Treasury won't be 
the former CEO of Goldman Sachs, as they have been in the past?
    They seem to be interwoven. And that's what the American 
public sees. They see this interconnectedness in terms of their 
power, their influence, and always to their benefit.
    So as we see American workers' dreams of retirement being 
delayed and postponed, and vanquished, and we see them losing 
their homes, as we see them losing their small businesses, we 
see record profits over at Goldman Sachs.
    And so I think we have a responsibility here to say, if 
indeed in the future, after we have used all of our power, all 
of our intelligence, every power that we have, to make sure 
that doesn't happen, that they be the ones paying for this.
    So my proposal is very simple: No more TARP. No more 
bailouts. Let them create the fund, the systemic risk fund that 
will guarantee that the American taxpayer will no longer have 
to be involved, should they cause such a crisis ever again.
    You said to us here this morning--I think we're headed in 
the right direction--you said to us here this morning that you 
would like there to be a resolution of a systemically risky 
financial institution, much in the same way that the FDIC deals 
with banks.
    Good. We have an FDIC insurance corporation. They pay into 
the fund. Let's create the fund, just like the FDIC, so that 
when you need to resolve it, it stands. Your argument is, ``Oh, 
but Luis, moral hazard. If the fund exists, they'll ask 
risky.'' I don't see banks racing to the precipice of 
destruction and bankruptcy because the FDIC exists. Nor do I go 
to an insurance company and take out a life insurance policy on 
myself and the next day decide, ``Wow, maybe I'll just start 
smoking. Maybe I'll start drinking. Maybe I'll start driving my 
car in a crazy manner. Maybe I really don't care whether or not 
I live or die. I have life insurance. What the hell if I die? 
Everything's taken care of.''
    No, that's not the way it works. And if that is the way it 
works, then you should use your new power to say, ``You will 
not drive, you will not smoke, you will not exist, because we 
will not allow that kind of behavior to incur a debt to the 
insurance fund.''
    So I think you can use your new power to make sure that 
they don't behave recklessly any more. And at the same time, 
should they escape you--because that's why we take insurance--
should they escape you and there is an accident, that the 
American taxpayer is not once again asked to repay.
    So can we work to create the fund, like the FDIC fund, and 
make sure that those who engage in riskier behavior are the 
ones who pay more into the fund, and the greater your 
likelihood of creating a debt to the fund that you pay into the 
fund? Can we talk about that?
    Secretary Geithner. I think we generally agree. But this is 
a very important issue. And the difference between doing a fund 
in advance versus assessing a fee on banks to cover any losses 
in the event is a very important thing. And this is not quite 
like an insurance.
    Deposit insurance is explicit insurance. Explicit contract 
for insurance. In that case, it makes a lot of sense to 
establish a pre-existing fund to help give depositors 
confidence there will be money there to protect their deposits.
    We don't want to provide explicit insurance for creditors. 
If you create a fund in advance, there is a risk you're going 
to create more moral hazard. People will live the expectation, 
where the government will come in and protect them.
    We don't want to create that expectation. That's why we 
think it's better to do it after the fact.
    The Chairman. The gentleman's time has expired.
    The gentleman from Texas?
    Dr. Paul. Mr. Secretary, more and more people today are 
looking critically at the Federal Reserve and wondering what's 
going on and of course, the people are asking more questions 
and they want to know exactly what role the Federal Reserve has 
played in our financial crisis.
    In the past, the Federal Reserve was held in very high 
esteem; that they produced prosperity and full employment and 
stable prices. Today, they are viewed somewhat differently. And 
many economists are joining in this. Today the Congress is, by 
the number of 307, who are asking for more transparency of the 
Federal Reserve. But also, everybody agrees that we have a 
financial crisis and we're working very hard on regulations.
    And I think, sometimes, we get misdirected in this because 
if indeed the source of our problem is coming from the Federal 
Reserve, then you're depending too much on regulations without 
looking at the real cause. We're treating symptoms rather than 
the cause. Just the idea that the Federal Reserve is the lender 
of last resort, contributes horrendously to moral hazard, 
especially when we're dealing with the reserve currency of the 
world. But everybody knows that, no matter what happens, the 
lender is going to be there to bail them out.
    But, you had an interview this year and you were asked what 
you thought were the really, the causes of this crisis, and I 
was fascinated with your answer. Because, in a way, it seems 
like you might have agreed a little bit with what I'm saying. 
Because you listed as number one, you say, one, the monetary 
policy was too loose, too long, and that created this just huge 
boom in asset prices, money chasing risk, people trying to get 
a higher return. That was just overwhelmingly powerful. And I 
think that really makes my point and unless you deal with that, 
and the suggestion is, is that what we do is move in with more 
regulations and hope and pray that'll work.
    But again, if this is true, that a monetary policy way too 
loose lasted too long, how can the solution be speeding it up? 
How can you say, this is the real problem, so we'll double the 
money supply. Interest rates were too low at 1 percent, let's 
make them \1/4\ percent. I can't reconcile this. How can you 
reconcile this on just common sense?
    Secretary Geithner. Congressman, there is one part of that 
quote you omitted, which is, I said, monetary policy around the 
world was too loose, too long. But I think it's very, you're 
right to say that this crisis was not just about the judgment 
of individuals to borrow too much or banks to lend too much. It 
wasn't just about failures in regulation supervision. It was 
partly because you had a set of policies pursued around the 
world that created a large credit boom, asset price boom.
    And I think you're right to emphasis that getting those 
judgments better in the future is an important part of the 
solution.
    Dr. Paul. Okay. On the issue that it's worldwide and we 
don't have the full responsibility, there's a big issue when 
you are running and managing the reserve currency in the world 
and other countries are willing to take those dollars and use 
those as their asset and expand and monetize their own debt, so 
it's all, we're not locked in a narrow economy, it's a 
worldwide economy and it's our dollar policy and our spending 
habits and our debt that really generated this worldwide 
crisis. That's why it's not a national crisis; it's a worldwide 
crisis.
    Secretary Geithner. And again, I'm not sure we disagree, 
but I would say it slightly differently, which is that a bunch 
of countries around the world made the choice to tie their 
currencies to ours and effectively adopt our monetary policy 
and that made monetary policy too loose in their countries.
    But it also created this wave of investment and savings 
into U.S. financial assets, which pushed interest rates down 
here and pushed up asset prices here, but you're right to say, 
you have to look at the global mix of policies. We have 
responsibilities to get that right, but we can't do that on our 
own. And that's important to think about, not just about 
regulation.
    Dr. Paul. I do think we do have responsibility on our own, 
if we're managing the world reserve currency, we can deal with 
that, we can deal with our spending policies, our deficits, the 
pressure on the Fed to inflate, so I think if we do what's 
right, it will benefit the entire world.
    Secretary Geithner. I agree with that.
    Dr. Paul. In your testimony, you also talk about a new 
international accord and that you're working on 
internationalizing regulations, which literally scares me. I 
think we have way too many already and they don't solve the 
problem.
    But, in those negotiations, since this issue of a new 
reserve currency is being discussed in the ordinary media you 
hear reports. Just this morning, I read, U.N. planning a new 
reserve currency. In these accords, could you tell me, every 
time this conversation comes up, and what is being talked 
about, and how you relate to what the Chinese are saying, yes, 
they would like to see a new reserve currency, they would like 
to participate--
    The Chairman. The gentleman's time has expired.
    Dr. Paul. And it seems like that would be some very 
important information for us.
    Secretary Geithner. I would be happy to come and talk to 
you about that privately or in another context.
    The Chairman. The gentleman's time has expired and I 
recognize myself for questions next. Secretary Geithner, I have 
started to review the draft, the discussion draft that has been 
introduced and just want to clarify for the record one thing, 
and I think I know the answer to this without you answering it, 
but I just want to get it in the record.
    I noticed that in the council that is created, the 
financial services oversight council, there is not a 
designation of the consumer protection financial agency 
representative. I presume that is because no such agency 
currently exists, but as part of this whole reform process, if 
we create a consumer protection financial agency, am I correct 
in assuming that person, the director, would be on this 
council? Is that your intention?
    Secretary Geithner. Yes.
    The Chairman. Okay. I thought that was the case. It just 
doesn't exist yet.
    Secretary Geithner. And you had the right explanation for 
why it's not explicitly named there.
    The Chairman. All right. Let me kind of pose the question 
Mr. Gutierrez has posed in a slightly different way because one 
concern that has been raised by banks is the integrity of the 
FDIC, the insurance fund itself. I take it that resolution 
authority, this new resolution authority is different than what 
currently exists under the FDIC because there's already in 
place a mechanism for resolving banks that are regulated and 
insured under the FDIC.
    It could involve the resolution of a non-bank. Is that 
correct?
    Secretary Geithner. Yes. We're creating a system modeled on 
the existing system for banks and thrifts to make sure they 
could be used for a major bank holding company.
    The Chairman. But it could be, theoretically, a non-bank 
entity that's causing systemic risk or acting out of control in 
some way. That's true, right?
    Secretary Geithner. Yes, carefully constrained authority 
with a lot of checks and balances. That's correct.
    The Chairman. So, one concern that has been raised is, what 
are the implications of that for the integrity of the FDIC 
fund, the insurance fund itself? Are we sending a message that 
we may be in someway endangering that because that has become 
an asset of the public, so, how do we clarify that? Is there a 
way to create an entity that, for bigger systemically risky 
entities or non-financial entities that may be systemically 
risky that makes it absolutely clear that the insurance fund 
itself is not going to be put at risk in any way?
    Secretary Geithner. You're making a very important point. 
And the insurance fund cannot be used for this; it needs to be 
separate and completely protected.
    The Chairman. Okay, so--
    Secretary Geithner. The mechanism we're proposing for these 
large institutions would be completely separate.
    The Chairman. So, how do you do that without creating some 
kind of separate fund that's separate from the FDIC fund, 
itself, or do you just say, we're going to take care of this, 
but there at least needs to be a guarantee in here that you're 
not using FDIC funds.
    Secretary Geithner. I think that can be done very clearly 
and explicitly and therefore, create no risk that the fund, the 
existing fund, could be used for these other purposes. That 
would be an important to do. I would support that.
    The Chairman. Where would you contemplate getting funds to 
do that outside the FDIC?
    Secretary Geithner. Again, the way the FDIC framework works 
today, the FDIC does have the authority to go out and 
temporarily use resources that are not in the fund to do its 
job to manage the failure of banks. But, it has to recoup any 
losses that might produce by imposing a fee on banks in the 
future.
    The Chairman. But, we don't want to impose that fee on 
banks in the future because they weren't responsible in this 
context, so--
    Secretary Geithner. But again, we're really talking about 
what are effectively banks. They're just not small banks and 
thrifts. And I think the basis principle of fairness is the 
right one in this context, which is, if in the future, the 
government's exposed to any losses as it acts to protect the 
economy from the failure of those institutions, then I think 
that the taxpayer shouldn't bear the cost of that. And the cost 
of that should be imposed on the banks that benefitted from the 
action.
    And what the bill proposes to do is to make sure that banks 
below, I believe, $10 billion is the threshold in the statute, 
would not be exposed to fees to cover any losses from this 
authority.
    The Chairman. Okay. We need to keep talking about this, but 
my time has expired and we obviously can't do it right now.
    Ms. Biggert is recognized.
    Mrs. Biggert. Thank you, Mr. Chairman. Secretary Geithner, 
it seems to me that an ex post assessment proposal that you 
have been talking about to pay for the failure of a firm, that 
the government deems ``too-interconnected-to-fail,'' could 
create perverse incentives. The firm that fails and their 
creditors don't have to pay the cost of clean up, but the 
survivors, those other firms, who had no control over the 
firm's risk taking, do. So, as a result, no individual firm, 
and none of the creditors, has an incentive to minimize the 
firm's risk-taking because the gains are internalized and yet, 
the losses are borne by others. More than that, knowing that 
the firms that act prudently will end up at a competitive 
disadvantage to those firms that are taking the risk, and be 
having to pay for the failure of those firms, undermines the 
incentives to manage risks.
    Secretary Geithner. If the proposal did that, I would agree 
with you. But, that's not what it is designed to do. In fact, 
it's quite the opposite. We want to make it very clear and 
credible that again, if a firm manages itself to the point 
where it's at the edge of the abyss, can't survive without the 
government, then equity holders and creditors would be exposed 
to losses in that context. And that would happen before the 
taxpayer was exposed to any loss.
    And if the taxpayer was exposed to any loss, then you would 
have to recoup that loss with a fee on the industry. And I 
think that, again, that's the model we have today for small 
banks and thrifts and it makes sense because other banks will 
benefit from the actions taken to protect them from the risks, 
that the panic spreads to them.
    So, I think it's fair in that sense.
    Mrs. Biggert. What happens, though, is that the taxpayer is 
the interim lender, aren't they?
    Secretary Geithner. But again, this is taking a model that 
Congress designed for small banks and thrifts, and just 
adapting it to a system that has outgrown that framework. But 
that system exists today and I think it's the best way to do 
it. The alternative way, which is again, to create an ex-ante 
insurance fund that would create an expectation of explicit 
insurance, I think would create more moral hazard.
    Mrs. Biggert. Wouldn't bankruptcy be faster? I think that 
this proposal, you have what, 60, I forget what it is, 60 
months or something to settle this while bankruptcy--
    Secretary Geithner. Bankruptcy just, again, I think Lehman 
makes this clear and compelling. And it's why Congress designed 
a bankruptcy-like system, but it's a different kind of system. 
We call it resolution authority for banks and thrifts because 
banks are different. And if they lose the capacity to fund, 
then they can cause enormous damage to the system as whole. So, 
you need a slightly different regime for banks because banks 
are different from regular companies.
    Mrs. Biggert. Okay, if just, let's say, an institution the 
size of Citi or Bank of America failed, how many institutions 
would have to be assessed to cover the cost of that resolution?
    Secretary Geithner. Again, the proposal we made is that 
banks above a certain size would have to pay a fee, because 
they would benefit indirectly and directly from the actions 
taken to contain the risk of panic. So, I think it's fair--
    Mrs. Biggert. They would benefit because there's one less 
competitor? Is that what you're saying?
    Secretary Geithner. No, no, no, no. Because in the absence 
of action to manage the failure in a way that's safer for the 
system, does convey some broader benefits. So, it's not like, 
and so again, they should bear some, now, the choices, which we 
don't think should--
    Mrs. Biggert. What would be those benefits?
    Secretary Geithner. Well again, the way financial panics 
work, is that viable institutions face the risk they lose their 
funding and therefore, have to collapse. That's what financial 
panic did to define the second half of the 19th Century, the 
first quarter of this century, help produce the Great 
Depression, led the Congress, this government to act in the 
Great Depression to set up some protections for that. What we 
didn't do is extend those protections to institutions that are 
very much like banks.
    Again, the alternative approach, which we would not 
support, is to say, the taxpayer would be there in the front of 
the line absorbing the cost of that failure. That, we think, is 
not necessary and would be a mistake.
    Mrs. Biggert. All right. Then, do you think that the 
government control and concentration of power and the increased 
unchecked powers to control both the consumers and businesses, 
as outlined in your plans, is the answer? Isn't this really a 
huge amount of power that's going to the Administration?
    Secretary Geithner. Again, let's just step back. Right now, 
the Congress of the United States has given more than four 
Federal agencies and a whole number of other agencies the power 
to do consumer protection. They just did not do it well and 
we're proposing to consolidate that responsibility in one place 
so that it can be done better.
    Now, outside of consumer and investor protection, what 
we're proposing to do is to make sure the government has the 
same tools to manage risk it now has in small banks and thrifts 
for institutions that now define our modern financial system 
and can bring the economy to the edge of collapse. That's a 
necessary function for governments to do because banks can pose 
enormous risk. If you don't constrain the risk-taking of banks, 
we'll be consigned to repeat the crisis we just went through.
    Mrs. Biggert. I yield back.
    The Chairman. The gentleman from California.
    Mr. Sherman. Thank you. Mr. Secretary, you have submitted 
about 900 pages of proposed legislation. I strongly agree with 
well over 90 percent, I commend your work and that of your 
staff and the chairman and his staff. I hope my colleagues have 
gotten this ``Dear Colleague'' letter that I have distributed. 
If anybody doesn't have it, please ask me, I do have a few 
extra copies. And Mr. Garrett has already put it in the record.
    Unfortunately, you have in here what I call ``TARP on 
steroids.'' You have permanent, unlimited bail-out authority. 
This is the most unprecedented transfer of power to the 
Executive Branch to make decisions about both spending and 
taxes in history, all without congressional approval and in a 
sharp departure from our Constitutional values. And depending 
upon what some future executive chooses to do, it authorizes 
the greatest transfer of money from Treasury to Wall Street, 
ever.
    The bill allows for the bailout of both solvent and 
insolvent financial institutions and Mr. Secretary, the last 
time you were here, I asked you to embrace a $1 trillion limit 
on this total bail-out power and I'm still waiting for that 
embrace.
    Specifically, Section 1109 allows the Executive Branch to 
loan unlimited amounts to any solvent financial institution. 
When such a loan is made, the executives keep their jobs, the 
shareholders retain ownership of the company, and their 
shareholder and company value is dramatically enhanced.
    Section 1604 allows for the bailout of troubled financial 
institutions with unlimited loans and unlimited investments in 
the equity of the troubled firm. Now, when the troubled 
institution gets bailed out, the chief beneficiaries are its 
creditors. This will cause creditors to lend money on favorable 
terms to the systemically important institutions. Because after 
all, if the institution fails, the creditor will probably get 
paid by the government.
    However, the shareholders of the bailed-out institutions 
also stand to benefit handsomely. The taxpayer takes the 
enormous risk, perhaps investing in the entity or lending money 
to it. And if things go well, the taxpayers get their money 
back and the shareholders get a previously comatose and now 
revived giant institution that they reassume ownership of.
    Now, Sections 1109 and 1604 provide a multi-step process 
for bailouts. The first step is that we transfer billions, 
perhaps over a trillion dollars to Wall Street. The second step 
is that the taxpayers are supposed to get their money back from 
a new tax imposed on large and medium-sized institutions. The 
proposed statute directions the Executive Branch to get our 
money back within 60 months and then specifies, or such longer 
amount of time as the Executive Branch decides. So, it could be 
60 years.
    I find it difficult to think how we would ever recoup from 
a single financial industry, particularly one in extremis, the 
hundreds of billions of dollars which might be necessary to 
repay the taxpayer from the next bailout.
    Now, the Executive Branch is empowered, and look at this 
from a Constitutional perspective, the Executive Branch is 
empowered to write the new tax law. So, how much money is paid 
by a medium-sized financial institution in your district, 
whether it is $100,000 or $100 million, is totally at the whim 
of the Executive Branch and can go up or down by that factor, 
depending upon what the Executive Branch wants to do.
    The law will allow those institutions that are systemically 
important to borrow at a lower cost. This will help the largest 
institutions get larger so that they become greater systemic 
risk. And by becoming a greater systemic risk, such an 
institution becomes even more bail-out eligible, further 
lowering its cost of funds.
    Now, those institutions that are medium-sized are going to 
have to pay whatever tax the Executive Branch chooses to 
impose. However, they're not going to be able to get money at 
lower rates because savvy investors are not going to believe 
the local regional banks are going to get bailed out. So, the 
medium-sized institutions will fund the program, which benefits 
only their large competitors.
    It's like being forced to pay insurance on your 
competitor's business while yours goes uninsured.
    Now, this tax is sometimes referred to as ``polluter 
pays,'' but it's hardly that. The financial institution that is 
the polluter, the one that took big risks and became insolvent, 
pays nothing. Instead the prudent financial institutions have 
to compete with the high fliers and then pay to bail them out 
in the bad times. I yield back.
    The Chairman. The gentleman's time has expired. The 
gentlewoman from West Virginia, Ms. Capito.
    Mrs. Capito. Thank you. Thank you, Mr. Secretary for being 
here today.
    Secretary Geithner. Excuse me. Mr. Chairman, am I going to 
have a chance to respond to Congressman--
    The Chairman. Yes, if there is no objection, we will take a 
minute to respond.
    Secretary Geithner. I'll just say very briefly because--
    The Chairman. Let me say to the Secretary, you will 
probably have many opportunities to respond.
    Secretary Geithner. Can I just say one thing? I actually 
think, Congressman Sherman, we agree on much more than 90 
percent. And what you were describing is something I would 
oppose. And it is not what we have proposed. And I share, very 
much, your basic concern that we not create a system that would 
create those risks. I would be against that. I would not 
support it. I would not want to have to live under it and 
administer it. And it's just not the proposal we're describing.
    Mr. Sherman. If the Secretary wants to correct any of my 
statutory citations, I hope he does for the record. I yield 
back.
    The Chairman. The gentlewoman from West Virginia.
    Mrs. Capito. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary. Quickly, I would like to ask, are you now imposing 
larger capital requirements on the systemically ``too-big-to-
fail'' institutions at this moment?
    Secretary Geithner. The current rules which are old and 
outdated and did not work do establish slightly different ones, 
but they're not conservative enough, they're not tough enough, 
and they weren't applied broadly enough.
    Mrs. Capito. So, you are or you aren't? Requiring higher 
capital?
    Secretary Geithner. They are somewhat different than what 
would apply to community and regional banks, but they're not 
different enough, they're not conservative enough, they're not 
tough enough, they're not designed well enough, they're not 
applied broadly enough.
    Mrs. Capito. All right. Well then, let me go to GMAC, which 
announced yesterday the Treasury was looking seriously, I guess 
by November, to decide whether to do another infusion to them 
of taxpayer dollars for the third time. And they're under this 
regime of trying to raise more capital. Is that correct?
    Secretary Geithner. I'm glad you raised that--
    Mrs. Capito. How would this bill be different then, in 
terms of GMAC?
    Secretary Geithner. This bill has nothing to do with GMAC.
    Mrs. Capito. Okay, but let's put GMAC under this bill. 
Right now, today.
    Secretary Geithner. It wouldn't fit, so let me explain and 
clarify this.
    Mrs. Capito. But wait a minute, but I thought--
    Secretary Geithner. But let me explain and clarify this. 
It's very important. My predecessor, the Secretary of the 
Treasury, made the judgment under the authority Congress gave 
him in the fall of last year, in the middle of the worst 
financial crisis in 3 generations, to lend money to 2 
automobile industries and to 2 auto finance companies, 
including GMAC.
    When I came in, we put the major institutions, including 
GMAC, through a very tough stress test forcing them to disclose 
what their losses might be, how much capital they would need, 
in the event of a worse recession. At that time, we disclosed 
to the market and to the world, including for GMAC, what their 
likely capital needs would be. And we committed in the event 
that they would be able to raise capital from the market, that 
the government would put that capital in.
    Now, GMAC, at the time, there was no prospect, frankly, 
they were going to be able to raise that capital from the 
market. All the other institutions, in contrast, have been able 
to go out and raise that capital from the market. The only 
thing we're doing is making sure we follow through on that 
commitment and in fact, although I don't want to go into any 
detail here, in fact, we're likely to have to put in less 
capital than we expected.
    Now, no government should be in the position of having to 
do this kind of thing again. And we want to make sure that our 
role in those institutions is limited, we're not in there a 
minute longer than necessary, we get the taxpayers' money back 
as quickly as possible, with interest, and that is what we are 
doing for the major banks already where you've seen $70 billion 
in capital come out, more than $12 billion in returns to the 
taxpayer on those investments, and we're going to work very, 
very hard to unwind those positions as quickly as possible.
    But, those initial judgments were not my judgments, 
although I support them, and we would like to make sure we get 
out of this as quickly as we can.
    Mrs. Capito. The fact is, this is the third infusion of 
TARP funds, taxpayer dollars into GMAC. I don't know what 
category they would fall in and so I would say, I think that 
the adaptability issue that you talked about on the resolution, 
I would like to see an enhanced bankruptcy resolution that 
provides that partition from the government into the court 
systems. I think we can create an enhanced bankruptcy through 
our court system that could address these adaptability issues 
and the GMAC issue and other issues.
    And even some of your fellow Presidents of the Federal 
Reserve have spoken in favor of this because, and I'll just 
take one quote, there's a widespread relief that public funds 
will soften the blow to private creditors.
    And I think this is an option we need to look at as we're 
working this through.
    My last comment, question, sort of, and clarification would 
be, the whole secrecy issue here. You even, in questioning the 
gentleman from Alabama, basically said, once everybody is 
required to have larger capital requirements, those will be out 
in the public realm.
    There really is no secret in Washington, D.C., for long; 
they are not too easy to keep, so I think we think that there 
will be, in the public domain, knowledge of these institutions, 
and there will be, they will be in a separate class from our 
community bankers, our credit unions and our other financial 
institutions.
    And I think that's problematic because I think that does 
bring about, whether it says it or not, brings about the ``too-
big-to-fail'' concept that we have just seen over the last 
year.
    Secretary Geithner. That's exactly what we're trying to 
prevent. But if you want the big banks to have different, 
tougher capital requirements than small banks, you want them to 
have different standards because they create more risk, then 
you have to hold them to tougher standards. And if you hold 
them to tougher standards, they will disclose how much capital 
they hold and that's a good thing, not a bad thing.
    Mrs. Capito. No, disclosure's great. Transparency--
    The Chairman. The time has expired. What I want to do is, I 
think we can get two more questions in. We have several votes. 
We're then going to have to excuse the Secretary. We'll come 
back to the panel of regulators. So, we can go to the gentleman 
from New York, the gentleman from Texas, if we hold right to 
the 5 minutes on the first vote. The gentleman from New York.
    Mr. Meeks. Thank you, Mr. Chairman. And thank you for the 
hard work you have been doing on this committee. Thank you, Mr. 
Secretary. Mr. Secretary, I would like you to consider, for the 
sake of this question, that we pass this bill. Say if had we 
passed this bill as currently drafted 5 years ago, and if that 
had been the case, I would like to know, one, do you think that 
Lehman bankruptcy would have still occurred, or would it have 
been averted? Two, if it had occurred, could you please walk us 
through how it would have played out differently than it 
actually did, specifically how and why the system as a whole 
would have been better able to withstand the shock, and what 
would have been the consequences or the sequence of events from 
the moment the precarious state of the firm was identified to 
when the resolution plan for the firm would have been 
implemented and finally, how long, in your opinion, would the 
resolution of such firm have taken place and how much would it 
have cost the taxpayers?
    Secretary Geithner. Excellent questions, complicated 
questions and I won't be able to do them justice this quickly, 
but, let me make a quick attempt. If this set of authority and 
constraints had been in place ahead of this crisis, then you 
would have not have had AIG, you would not have had the world's 
largest investment banks, you would not have had firms like 
Countrywide and a bunch of other thrifts across the country, 
take on a level of risk that they could not manage.
    That would have been preventable. You would not have 
allowed a bunch of insurance companies to write a whole bunch 
of commitments in derivatives they did not have capital to 
support. That would have been enormously effective in limiting 
the risk, the build-up of pressures, that helped produce this 
crisis.
    You would not have let this terrible set of practices in 
mortgage underwriting, separate and lending in a bunch of other 
areas, get to the point they did. They would have been arrested 
more quickly. People would have been held to a level playing 
field with tougher requirements to constrain risk-taking.
    Now, firms will still make mistakes, even within a regime 
designed well like that. But if they do, then what this regime 
would allow for is us to take a firm, like Lehman, and have 
that put them out of existence, have the good businesses sold 
off, have them resolved, in a situation that would have caused 
less risk of broad panic and not put the position where you had 
millions of Americans, millions of investors, people who held 
pension funds, municipalities, counties across the country who 
invested money in money market funds that had funded Lehman. 
They would not have been exposed to that scale of losses and 
you would not have the extent of the panic you saw last fall, 
which did threaten the viability of a whole range of other 
institutions.
    In that case, what happened is, because the authority 
didn't exist, the government had to come in and do much more 
dramatic things, that created much greater risk of moral 
hazard, provided much greater protections to firms that should 
not have been exposed to those protections. And that's the 
basic rationale for this framework and that's what it would 
have provided.
    But, we will have firms in the future that make mistakes, 
we just don't want those mistakes to come at the expense of 
well-managed institutions and at the expense of the taxpayer.
    Mr. Meeks. Let me, and I want to go to the, in the short 
time that I have, there are two other things that I'm concerned 
about, of course. One of the major challenges in dealing with 
systemic risk going forward will also be the international 
coordinate and what will be necessary to handle systemic risk 
posed by financial firms with a global footprint.
    Could you please clarify for me how this plan before us 
today would manage the systemic risk posed by firms for which 
we are the home country, i.e., the firms that are headquartered 
in the United States but have major operations internationally, 
and for those where we are the host country from financial 
firms headquartered abroad but have major interests or major 
operations in the United States.
    Secretary Geithner. Again, a very complicated but excellent 
question. Two quick responses. These constraints on capital, on 
funding, on leverage, on risk-taking, they have to be 
negotiated and applied internationally so there's a level 
playing field. So, you want to make sure that other major 
institutions that compete with U.S. institutions but are Swiss 
or German or are British, are held to the same standards.
    Now, in the event, again, they manage themselves to the 
edge of failure, you make sure that in each of these major 
financial centers, you have the types of authorities that we're 
proposing to Congress establish in law today.
    If you have that authority to better manage failure, then 
you can better manage the unwinding dismantlement of these 
major globally active firms. Now, we're going to have to, once 
we have these national authorities in place, we're going to 
have to do a better job of coordinating than was possible in 
the Lehman case, for example. But the real problem in the 
Lehman case was the absence of resolution authority, both here 
and in the U.K., frankly.
    So, establishing at the national level first is probably 
the most important thing to do to achieve the objective that we 
both share.
    The Chairman. The gentleman's time has expired. The 
gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman. Mr. Secretary, 
welcome. Chairman Frank and I will continue to debate the 
effectiveness of the GSE legislation that he brought to the 
Congress. What the facts are today, we have essentially 80 
percent government control of Fannie and Freddie, their 
conforming loan limits have increased, increasing their 
exposure. Their market share has increased precipitously. 
Taxpayers, between the Treasury and the Federal Reserve now 
have roughly $1 trillion exposure out of a potential of $2 
trillion.
    Does the Administration plan to offer GSE reform 
legislation before year's end?
    Secretary Geithner. No.
    Mr. Hensarling. Thank you. But if not, when?
    Secretary Geithner. But I am looking forward to that 
discussion with you because you're absolutely right, that the 
system we have in place we cannot live with going forward and 
that's why we have committed--
    Mr. Hensarling. Is there a timetable for the Administration 
to propose GSE reform legislation?
    Secretary Geithner. What we have said is, that we believe 
early in the year, we're going to outline at least our initial 
ideas on options for having to do that, so we need to begin 
that process soon. I agree with you and I look forward to it.
    Mr. Hensarling. Thank you, Mr. Secretary. I understand, I 
believe the Administration is endorsing the chairman's bill 
that we are discussing today. Did I understand that from your 
testimony?
    Secretary Geithner. We worked very closely with the 
chairman on the bill and as I said, we think it needs the 
critical test of the strong package of reforms.
    Mr. Hensarling. Initially, under this bill then, taxpayers 
would shoulder the initial burden of ``too-big-to-fail,'' then 
I believe that we hope that the institution may be 
resuscitated, they may be able to pay, eventually, if that 
doesn't happen, competitors may end up having to foot the bill.
    Secretary Geithner. No, I wouldn't say that.
    Mr. Hensarling. This is not your understanding?
    Secretary Geithner. Resuscitated is the wrong word, exactly 
the wrong word. As I said in my statement, the chairman said 
this, too. You don't want the government in that context to act 
with the objective of saving the institution to allowing it to 
live for another day. That would be a mistake. What you want to 
do is to make sure they live with the consequences of their 
failure and they can be unwound and sold and disassembled.
    Mr. Hensarling. I heard the chairman use the phrase ``death 
panels'' again in his opening statement, but as I have been 
able to read the 253 page bill, I do not believe that type of 
resolution is required. It certainly is permitted. I did not 
see where it was required. Perhaps I have missed that in the 
bill. That is the ultimate goal.
    Secretary Geithner. That's our objective, and I think it's 
a very important objective.
    Mr. Hensarling. I agree. Let me ask you this question, Mr. 
Secretary. In thinking through this idea that firms that are in 
the marketplace will be able to either repay money or their 
competitors will, do you believe, what portion of the $128 
billion that AIG has received, do you believe, ultimately, they 
will be able to pay back?
    Secretary Geithner. We are in the process now, as required 
by law, to provide a comprehensive evaluation of the range of 
actions the government was forced to take in this crisis, both 
my predecessor and me, and we're going to be putting out that 
report in mid-December.
    Mr. Hensarling. Do you have a range now of what you expect 
the taxpayer to recover?
    Secretary Geithner. I can't give you a range now, but will 
be able to give it to you soon.
    Mr. Hensarling. Okay. How about with respect to General 
Motors and the roughly $63 billion?
    Secretary Geithner. It is in the same case.
    Mr. Hensarling. Same category?
    Secretary Geithner. So, we're going to provide a set of 
independent assessments of what the range of potential losses 
and gains are across those programs.
    Mr. Hensarling. Mr. Secretary, we have had this discussion 
before about what was written into the ESSE statute. The bottom 
line is, that GM and Chrysler, de facto, have been considered 
financial institutions under the TARP statute, have received 
extensive government funding or were designated essentially 
systemic firms.
    To many of us, that suggests that ultimately the number of 
perhaps Fortune 50, Fortune 100, companies that ultimate could 
receive government bail-out assistance, is not, unfortunately, 
a limited universe. And when I think about this regime where 
one's competitors pay to essentially clean up your mess, if 
WalMart were to become insolvent, how smart or how fair is it 
to impose that cost upon Target and Costco?
    Secretary Geithner. Right now, Congressman, who bears the 
cost when firms screw up? What happens now is, is that 
companies, families, businesses, taxpayers, community banks, 
bear that cost. We're proposing to change that. For the simple 
reason, it's not fair. And what is fair, we believe, is that in 
the end, because banks are special and risky, if they manage 
themselves to the point where they're imperiling the system, 
then if the government--
    Mr. Hensarling. Should Ford bear the cost of compensating 
the taxpayer for what happened to GM and Chrysler?
    Secretary Geithner. Look, I think you're making a good 
point, but you have to look at the alternatives. The 
alternatives to what we are proposing, which is based on the 
existing framework for banks and thrifts, we're under the 
existing framework for banks and thrifts, under the laws of the 
land established by Congress. What happens is, if the 
government has to act to close an institution and it's exposed 
to any loss, it imposes a fee on banks. It's just, it's very 
simple, it's compelling and it's better than the alternatives.
    The Chairman. The gentleman's time has expired. The 
gentleman from Alabama has a brief request.
    Mr. Bachus. Thank you. As a unanimous consent request, I 
would like to submit for the record a series of questions to 
Secretary Geithner on various aspects of this highly--
    The Chairman. Without objection, let me say that same right 
will be extended to any member who wants to submit questions.
    Mr. Bachus. And to get the answers, if possible, and or 
implore the Treasury Department to answer some of these 
questions and make them available for us.
    The Chairman. I would say, implicit in the request for 
questions would be a request for answers.
    Mr. Bachus. That's right.
    The Chairman. But if there's a need to make it explicit, we 
will do that.
    Mr. Bachus. Thank you.
    The Chairman. We are in recess.
    [recess]
    The Chairman. The committee will reconvene, and the next 
panel will take their seats. I don't know whether ``panel'' is 
a singular or collective verb, but the members of the panel 
will each take their seats, so each take his or her seat. And 
we have had all the opening statements, and we have everyone 
here, I guess. Yes, we have Commissioner Sullivan.
    This is a panel of the Federal regulators plus a 
representative of the National Association of Insurance 
Commissioners. I just would note that throughout this process, 
we have stayed in close contact with the State bank supervisors 
and with the National Association of Insurance Commissioners, 
who are very much a part of this operation.
    We are going to start the process now. I have to leave for 
a quick session. It is my plan, let me tell my friend from 
Kansas, who as the ranking subcommittee chairman here will be 
presiding, our intention would be to start with him and go down 
the list. That is, members who already asked questions of 
Secretary Geithner on our side will not ask again. So he will 
begin with himself, and go down the list in seniority, so that 
we do not have that duplication.
    And with that, I am going to turn this over to the 
gentleman from Kansas as we begin our opening statements with 
the Chairman of the Federal Deposit Insurance Corporation.

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

    Ms. Bair. Chairman Frank, Ranking Member Bachus, 
Congressman Moore, and members of the committee, I appreciate 
the opportunity to testify today regarding proposed 
improvements to our financial regulatory system. The proposals 
being considered by the committee cover an array of critical 
issues affecting the banking industry and financial markets. 
There is an urgent need for Congress to address the root causes 
of the financial crisis, particularly with regard to resolution 
authority.
    In the past week, this committee passed a bill to create a 
Consumer Financial Protection Agency, a standard-setting 
consumer watchdog that offers real protection from abusive 
financial products offered by both banks and non-banks. The 
committee is also considering other important legislation 
affecting derivatives and securitization markets.
    However, today, I will focus on two issues that are of 
particular importance to the FDIC. First, a critical need 
exists to create a comprehensive resolution mechanism to impose 
discipline on large interconnected firms and end ``too-big-to-
fail.'' I truly appreciate the efforts of the committee in 
moving forward with legislation to address this crucial matter.
    Second, changes need to be made to the existing supervisory 
system to plug regulatory gaps and effectively identify and 
address issues that pose risks to the financial system. One of 
the lessons of the past few years is that regulation alone is 
not enough to control imprudent risk-taking within our dynamic 
and complex financial system. So at the top of the must-do list 
is a need to ban bailouts and impose market discipline.
    The discussion draft proposes a statutory mechanism to 
resolve large interconnected institutions in an orderly fashion 
that is similar to what we have for depository institutions. 
While our process can be painful for shareholders and 
creditors, it is necessary and it works. Unfortunately, 
measures taken by the government during the past year, while 
necessary to stabilize credit markets, have only reinforced the 
doctrine that some financial firms are simply ``too-big-to-
fail.''
    The discussion draft includes important powers to provide 
system-wide liquidity support in extraordinary circumstances, 
but we must move decisively to end any prospect for a bailout 
of failing firms. For this reason, we would suggest changes 
that take away the power to appoint a conservator for a 
troubled firm and eliminate provisions that could be 
interpreted to allow firm-specific support for open 
institutions. Ending ``too-big-to-fail'' and the moral hazard 
it brings requires meaningful restraints on all types of 
government assistance, whatever its source. Any support should 
be subject at a minimum to the safeguards existing today in the 
systemic risk procedures.
    To protect taxpayers, working capital for this new 
resolution process should be pre-funded through industry 
assessments. We believe that a pre-funded reserve has 
significant advantages over an ex-post fund. All large firms, 
not just the survivors, would pay risk-based assessments into 
the fund. This approach would also avoid assessing firms in a 
crisis. The assessment base should encompass only activities 
outside insured depository institutions to avoid double 
counting.
    The crisis has clearly revealed regulatory gaps that can 
encourage regulatory arbitrage. Therefore, we need a better 
regulatory framework that proactively identifies and addresses 
gaps or weaknesses before they threaten the financial system. I 
believe a strong oversight council should closely monitor the 
entire system for such problems as excessive leverage, 
inadequate capital, and overreliance on short-term funding. A 
strong oversight council should have authority to set minimum 
standards and require their implementation. That would provide 
an important check to assure that primary supervisors are 
fulfilling their responsibilities.
    To be sure, there is much to be done if we are to prevent 
another financial crisis. But at a minimum, we need to 
establish a comprehensive resolution mechanism that will do 
away with ``too-big-to-fail'' and set up a strong oversight 
council and supervisory structure to keep close tabs on the 
entire system. The discussion draft is an important step 
forward in this process, and I look forward to working with you 
on these proposals.
    Thank you.
    [The prepared statement of Chairman Bair can be found on 
page 99 of the appendix.]
    Mr. Moore of Kansas. [presiding] Mr. Comptroller?

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

    Mr. Dugan. Mr. Moore, Mr. Bachus, and members of the 
committee, thank you for the opportunity to discuss the 
discussion draft of the Financial Stability and Improvement 
Act.
    We support many of its key initiatives but also have 
significant concerns about certain provisions; and we are 
continuing to review the draft in detail to provide additional 
comments to the committee. Let me briefly comment here on four 
key parts of the draft. First, we believe the Financial 
Services Oversight Council established by the draft has 
appropriate roles and responsibilities. The Council would be 
well-positioned to monitor and address developments that 
threaten the financial system, identify regulatory gaps in 
arbitrage opportunities, and make formal recommendations to 
individual regulators.
    The Council would also have the responsibility, which is 
appropriate, for identifying those financial companies and 
financial activities that require heightened prudential 
supervision and stricter prudential standards.
    Second, the discussion draft expands the role of the 
Federal Reserve in two fundamental ways: as consolidated 
supervisor and standard-setter for all systemically significant 
financial firms; and as the standard-setter for financial 
activities that pose systemic risk. We support extending the 
Federal Reserve's consolidated supervisor authority beyond bank 
holding companies to any other type of financial company that 
the council identifies as posing systemic risk. The lack of 
such authority over such non-banking companies as AIG, Bear 
Stearns, and Lehman Brothers was a key contributor to the 
financial crisis, and is imperative to eliminate this 
supervisory gap.
    In terms of setting and implementing standards for these 
companies, the discussion draft is an improvement over the 
Administration's bill in terms of the role played by primary 
supervisors in the process. While the Federal Reserve would 
have authority to establish such standards for holding 
companies and their subsidiaries, the primary supervisors of 
regulated banks, if they disagreed with such standards, they 
would have the authority not to impose them if they explained 
in writing why they believed imposing them would be 
inappropriate.
    As a practical matter, this will provide banking 
supervisors with the opportunity to provide meaningful input 
into the design of the standards. This is appropriate given 
that in many cases, primary supervisors will have more 
expertise with respect to the impact of particular standards on 
the firms they directly supervise than will the Federal 
Reserve.
    We are very concerned, however, about the separate 
authority provided to the Federal Reserve to establish 
standards for any financial activity that the council deems to 
present systemic risk. There, the Board's authority is much 
broader in that the banking supervisor could in essence be 
compelled to apply the standard to the bank even if it objected 
in writing. As a practical matter, this would significantly 
diminish the banking supervisor's ability to provide that 
meaningful input to the standards. We believe this expansion of 
authority is too broad. And, more generally, we believe that 
there should be a meaningful consultation requirement with all 
primary supervisors before the Federal Reserve adopts any 
heightened standard for identified financial firms that 
meaningfully affects institutions regulated by primary 
supervisors.
    We also have concerns about Fed authority to act on 
divestitures or acquisitions affecting the bank and about 
continuing gaps in supervision of non-bank holding company 
affiliates.
    Third, we support the agency consolidation provisions of 
the discussion draft. These would transfer the bulk of the 
functions of the Office of Thrift Supervision to the OCC, while 
providing a framework in which the Federal Thrift Charter is 
preserved. The mechanics of the proposed transfer appear to be 
sensible and workable, and fair and equitable to employees of 
both agencies.
    There are, however, important technical areas, including 
assessments, transfer of property and personnel, and 
clarification of the agency's independence where we will have 
additional comments.
    Finally, the discussion draft includes important new 
measures to address the so-called ``too-big-to-fail'' problem. 
It would establish a new regime primarily administered by the 
FDIC to facilitate the orderly resolution of failing 
systemically important financial firms. As it has with failing 
banks, the FDIC would have the authority to operate the 
financial firm, enforce or repudiate its contracts, and pay its 
claims. It could also provide the firm with emergency 
assistance in the form of loans, guarantees or asset purchases 
but only with the concurrence of the Secretary and only after 
determining such assistance is necessary to preserve financial 
stability. And in doing so, however, there would be a strong 
presumption that the FDIC as receiver would remove senior 
management.
    Even more important, shareholders, subordinated creditors, 
and any other provider of regulatory capital to the firm could 
never be protected. Instead, they would always absorb first 
losses in the resolution to the same extent as such 
stakeholders would in an ordinary bankruptcy. This mandatory 
exposure to first loss by shareholders and creditors is a 
substantial change from the Administration's original proposal. 
We believe it is an appropriate and effective way to maintain 
market discipline and address the ``too-big-to-fail'' problem 
while protecting systemic stability.
    Thank you very much.
    Mr. Moore of Kansas. Thank you very much, Mr. Dugan.
    Governor Tarullo, please.

 STATEMENT OF THE HONORABLE DANIEL K. TARULLO, GOVERNOR, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Tarullo. Thank you, Mr. Chairman, Ranking Member 
Bachus, and members of the committee.
    We have three panels, lots of witnesses today, so let me be 
brief. Systemic crises typically reveal failures across the 
financial system, and that has certainly been the case with the 
crisis that has beset our country in the last few years. There 
were profound failures of risk management in many private 
institutions. There were supervisory shortcomings at each of 
our financial regulatory agencies. Supervisory changes need to 
be and are being made. But we also need changes in legislative 
authority and instructions under which the regulatory agencies 
operate.
    In this regard, the discussion draft put forward by the 
chairman today provides a strong framework for achieving a 
safer, more stable financial system. The draft contains the key 
elements of an effective legislative response to systemic risk 
and ``too-big-to-fail'' problems. It reflects the need for 
multiple tools in containing these problems: stronger 
regulation; more effective supervision; and improved market 
discipline. In particular, creation of the kind of resolution 
mechanism contemplated in the discussion draft will give the 
country a third alternative to the current, often unwelcome, 
options of either a bailout or disorderly bankruptcy.
    As a complement to the regulatory and other changes in the 
legislation, it will give the government a means for letting 
even a very large institution fail while still safeguarding the 
financial system. This mechanism will move us away from a 
situation in which severe financial distress for large 
financial firms has led to a risk of loss being borne by 
taxpayers in order to safeguard the system to one in which in 
losses are borne by shareholders, creditors, managers and, if 
necessary, other large financial institutions.
    As always, Mr. Chairman, we would be pleased to work with 
the committee on any issues that arise as you move this 
legislation forward. Thank you very much.
    [The prepared statement of Governor Tarullo can be found on 
page 291 of the appendix.]
    Mr. Moore of Kansas. Thank you, sir. Mr. Bowman, you are 
recognized for 5 minutes, sir.

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

    Mr. Bowman. Good afternoon, Congressman Moore, Ranking 
Member Bachus, and members of the committee. Thank you for the 
opportunity to present the views of the Office of Thrift 
Supervision on the Financial Stability Improvement Act of 2009.
    As Acting Director of OTS, I have testified several times 
about various aspects of financial regulatory reform, including 
OTS' strong support for maintaining a thrift charter, 
supervising systemically important financial firms, 
establishing resolution authority over systemically important 
financial firms, establishing a strong Financial Services 
Oversight Council, establishing a Consumer Protection Agency 
with rule-making authority over all entities offering financial 
products, and addressing real problems that caused this 
financial crisis and could cause the next one.
    I have also testified about OTS' opposition to 
consolidating bank and thrift regulatory agencies, believing 
that such an action would not have prevented the current 
crisis, and that the existence of charter choice was not a 
cause of the crisis.
    During this time, I have told OTS employees that based on a 
review of the Administration's initial proposal, they could 
take some comfort in assurances that whatever happened, they 
would be protected, treated fairly, and valued equally with 
their counterparts at other agencies. After reviewing the draft 
bill, I can only conclude that this is no longer the case. We 
know that major changes were made to this portion of the bill 
recently. Instead of abolishing both OTS and the Office of the 
Comptroller of the Currency and establishing a new agency 
called the National Bank Supervisor, the bill would merge the 
OTS into the OCC. What we do not know is why these changes were 
made.
    If Congress concludes that merging agencies would 
accomplish an important public policy goal, then we believe 
Congress should build a Federal bank supervisory framework for 
the 21st Century by establishing a strong, new agency with a 
name that is recognizable to consumers and accurately reflects 
its mission.
    If this bill were to pass as currently drafted, OTS 
employees would be unfairly singled out and cast under a 
shadow. The impact of this approach would be particularly 
onerous for the one third of all OTS employees who are not 
examiners and who would not work in the OCC's proposed new 
Division of Thrift Supervision. Instead of having an equal 
opportunity to obtain a position in the reconstituted agency 
based on merit and on-the-job performance, they would be folded 
into current divisions of the OCC. I believe that if all 
employees had an equal opportunity to compete for positions, 
then the resulting agency would be more cohesive and would 
benefit from the most qualified and capable workforce and 
leadership.
    It is also critical that the bill include strong 
protections for all employees of the reconstituted agency, most 
importantly the same 5-year protection from a reduction in 
force that is contained in the bill to establish the Consumer 
Financial Protection Agency.
    I am concerned that OTS employees could regard the current 
bill as punitive, and that such an approach would send the 
wrong signal, not only to the OTS workforce but to all Federal 
employees about how they would be treated in a similar 
situation. The timing of such a signal could hardly be worse 
when a large percentage of Federal employees are nearing 
retirement age and Federal agencies are redoubling their 
efforts to attract the workforce of the future to respond to 
the call of Federal service.
    In conclusion, Congressman Moore and members of the 
committee, I strongly urge you to affirm that Congress values 
the service of all Federal employees and to ensure that this 
bill would promote a fair, even-handed approach that would 
result in a harmonious agency with employees hopeful about the 
future of their agency and their role in it.
    Thank you, and I would be happy to respond to questions.
    [The prepared statement of Acting Director Bowman can be 
found on page 127 of the appendix. ]
    Mr. Moore of Kansas. Thank you, Mr. Bowman. The Chair next 
recognizes Commissioner Sullivan for 5 minutes.

   STATEMENT OF THE HONORABLE THOMAS R. SULLIVAN, INSURANCE 
  COMMISSIONER OF THE STATE OF CONNECTICUT, ON BEHALF OF THE 
     NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

    Mr. Sullivan. Thank you, Mr. Moore, Ranking Member Bachus, 
and members of the committee for the opportunity to testify at 
today's hearing. My name is Thomas Sullivan. I am the insurance 
commissioner for the State of Connecticut. I am also a member 
of the National Association of Insurance Commissioners, serving 
as Chair of its Life Insurance and Annuities Committee. Today, 
I represent the views of my fellow regulators on behalf of the 
NAIC.
    With respect to the proposals being considered by Congress 
to prevent or manage systemic risk, we continue to stress the 
following principles.
    First, we believe that any new system must incorporate, but 
not displace, the State-based system of insurance regulation. 
State insurance regulators are on the front lines in resolving 
approximately 3 million consumer inquiries and complaints each 
year. And that daily attention to the needs of individuals and 
businesses must remain a cornerstone to any effort of reform. 
Our national solvency system is resilient and any group capital 
standards should supplement, but not supplant, the requirements 
of the functional regulators.
    Second, Federal legislation should ensure effective 
coordination, collaboration, and communication among all 
relevant State and Federal financial regulators in the U.S. 
financial stability regulation as it relates to insurance can 
only be stronger with the added expertise of the 13,000 people 
who currently work in our Nation's State and territorial 
insurance departments. As such, State insurance regulators must 
have a meaningful seat at the table of the proposed Financial 
Services Oversight Council. In order to provide a complete view 
of the financial system, regulators at the State and Federal 
level must also have appropriate authority to share 
information.
    Third, group supervision of complex holding companies that 
includes functional regulators is necessary, but preemption of 
State regulators, if ever necessary, should result only after 
State efforts have been exhausted. There is a great benefit to 
having multiple sets of eyes looking at an institution such as 
what exists today with the current State-based insurance 
regulatory system. Preemption and putting a single regulator in 
charge would take away a crucial fail-safe of allowing real and 
potential oversights by one regulator to be spotted and 
corrected by another.
    Additionally, we would also stress that systemic 
supervision should consider the unique expectations of 
consumers and that different regulatory structures for 
different entities within a holding company. The health of a 
well-regulated subsidiary must not be sacrificed to preserve 
another unregulated subsidiary.
    To reiterate, systemic resolution authority must continue 
to allow State regulators to protect the assets of sound 
insurance entities from the plundering by unsound, poorly 
regulated subsidiaries or the broader holding company. State 
receivership authority prioritizes policyholders as creditors 
of failed insurers, and we have extensive experience in 
unwinding insurers.
    In conclusion, we urge caution in pursuing any proposal 
that could impact our ability to adequately regulate the 
insurance market and protect insurance consumers. And we ask 
that our perspective be considered by this committee in the 
critical days and weeks ahead.
    Thank you for the opportunity to testify at today's 
hearing, and I would be happy to answer any questions.
    [The prepared statement of Commissioner Sullivan can be 
found on page 219 of the appendix.]
    Mr. Moore of Kansas. Thank you, Commissioner Sullivan. The 
Chair first recognizes himself for 5 minutes of questions. 
Chairman Bair, I believe we must end ``too-big-to-fail.'' I 
appreciate the work Chairman Frank and the Treasury Department 
put into improving the systemic risk and resolution authority 
title. Taxpayers must be fully protected and creditors, 
shareholders, and management must be fully accountable before 
taxpayers step in, in my opinion. The discussion draft takes us 
in that direction, but the Systemic Risk Council and resolution 
process must be more accountable, efficient, and transparent.
    Page 17 of the discussion draft states, ``The Federal 
Government will not publicly release a list of firms that pose 
systemic risk.'' I understand the intent for a private list is 
to eliminate any competitive advantage for being an identified 
firm but does not the marketplace already know who most of 
these firms are? And the firms that will be put at a 
competitive disadvantage will be the ones near the borderline, 
not the obvious ones, like Goldman Sachs, Citigroup, and Bank 
of America.
    Additionally, if the point of putting creditors and 
shareholders on notice is that they stand to be wiped out if a 
firm posing systemic risk fails, how will they know the value 
of their investments legal claims if the list of firms is not 
public? If the cost and burdens put on these firms are not 
great enough to offset any perceived advantage, I would prefer 
to increase those costs instead of trying to hide the list. Why 
not make the list public? Chairman Bair, do you have any 
thoughts on that? Or at least require identified firms to 
notify their shareholders?
    Ms. Bair. I think that it is probably unrealistic to think 
that a list like that is going to be kept secret. Everyone will 
already know the obvious firms. I understand the intent of that 
provision is to try to not make it look like these institutions 
are ``too-big-to-fail,'' but I think you take care of that 
problem with a robust resolution mechanism. So, at the end of 
the day, I am not really sure it is realistic to try to keep 
those confidential. In any event, they may very well be 
required to be disclosed as material under the SEC rules. And 
we have always asked for institutions to fully comply with 
securities disclosures. So, my sense is it is perhaps not 
realistic to require that the list be confidential.
    Mr. Moore of Kansas. Would anybody else like to address 
that question? Yes, sir?
    Mr. Dugan. There is a fundamental conundrum between wanting 
to be able to impose higher requirements on companies that pose 
systemic risk and trying to keep that quiet or secret somehow. 
I think at some level, when you impose the requirement, you 
have to know who they are. And when you do this, if they are 
significant, people will understand who they are. So I think it 
is going to be hard not to disclose in some way, shape or form 
who they are.
    Mr. Moore of Kansas. Governor Tarullo, do you have a 
statement, sir?
    Mr. Tarullo. I think, Mr. Chairman, that Comptroller Dugan 
has summed it up. Surely we can keep the list private if that 
is what the Congress wants us to do, but through some 
combination of self-mandatory disclosures to shareholders and, 
frankly, just financial analyst observation of their behavior, 
capital, set-asides and the like for the firms, it is likely 
that most, if not all, of the institutions so identified would 
eventually be known to the public. And I think, as someone 
suggested, you may have a bit of a problem if an incorrect 
inference is drawn. So while again, there is a reason to try to 
avoid an increase in moral hazard, we should probably be 
realistic here about what will and will not be known.
    Mr. Moore of Kansas. Thank you, sir. Mr. Bowman and Mr. 
Sullivan, any comments?
    Mr. Bowman. I do not think I have anything to add to that, 
Congressman.
    Mr. Moore of Kansas. All right. Okay. Next question very 
quickly. Another issue I would like to discuss is the 
requirement for firms with assets over $10 billion to 
contribute to the systemic risk fund after a large firm fails 
and goes through the resolution process. Why not make only the 
firms that have been identified to pose a systemic risk pay for 
the clean-up? Would not this further incentivize firms to not 
become ``too-big-to-fail?''
    Additionally, instead of simply paying back the principal 
for the use of taxpayer funds to help wind down a failing firm, 
I would suggest adding that any interest paid to service the 
national debt and the use of these expenses should also be 
repaid. What are your views on this? Chairman Bair, do you have 
any thoughts on that?
    Ms. Bair. First and foremost, it is very important to make 
clear that the assessment base would only apply to activities 
outside of an insured depository institution. Given such an 
assessment base, smaller institutions would really not pay 
significantly because most of their assets and liabilities are 
inside the insured bank.
    It is hard to know in advance which institutions might pose 
systemic risk. So the rationale behind the $10 billion 
threshold was to try to identify those we could say with 
confidence would not be systemic. However, clearly it is likely 
that they would be significantly higher in assets if they were 
systemically significant.
    If you design the assessment base appropriately, the 
smaller regional institutions would not pay significantly. But 
I think there needs to be some cut-off. It is just very 
difficult to know completely in advance who would or who would 
not need to be put into this type of resolution authority.
    Mr. Moore of Kansas. Thank you, Chairman Bair. And my time 
has expired. If any of the other members of the panel have 
thoughts they would like to express, please put those in 
writing to us if you would.
    The Chair next recognizes, for 5 minutes, Mr. Garrett.
    Mr. Garrett. I thank the Chair, and I thank members of the 
panel. First of all, I assume everyone here was listening to 
the last panel when the Secretary was here? Okay. Oh, you heard 
it before. You have heard him testify before on two occasions. 
I do not mean for this comment to be flippant, but he did say 
it twice when he said that when we do hear the regulators, I 
know some are regulators, some are not, that--he did not say 
this, I am paraphrasing, we should take it all with a grain of 
salt because they are all just protecting their turf. If that 
is the case, then I guess I should take everything he says with 
a grain of salt as well because he is probably just protecting 
his turf, so I do not know why we have any of these panels. But 
I do really appreciate the testimony that we have heard so far.
    One of the questions is, and I am going to go up and down 
the row. Ms. Bair, do you think that we should be extending 
this overall program beyond depository institutions, first of 
all?
    Ms. Bair. Yes, I do think there is a need for this ability. 
We think the Systemic Risk Council should be able to decide if 
there are institutions that pose systemic risk that have not 
already been identified.
    Mr. Garrett. Yes. Now if you were listening to Secretary 
Geithner, he said something to Ms. Capito, which I do not 
understand, about the auto companies. First of all, he said he 
was not around back then, but he agreed with what they did. I 
would have asked him would he have done it again. Since he 
agreed with them, I assume he would have done it again. He also 
said that GMAC would not come under this legislation. Does 
anybody here understand why GMAC would not come under this 
legislation? No? So you all assume that it would?
    Ms. Bair. We would hope that this only applies to financial 
intermediaries, number one. And, number two, I do not comment 
on open operating institutions, so I would rather not opine on 
the second part of the question. I think it would be a 
determination for the council as to whether a non-bank entity 
would go under this legislation.
    Mr. Garrett. Here is the thing. When I read this--and I 
read the beginning and went three quarters, and then I went to 
the last page to see how it all ended. But if you are reading 
the definitions to find out who all the council is dealing 
with, it has a two part standard to define them. One, they must 
be a corporation registered here in the country, yada, yada, 
yada.
    Two, they must be an institution that engages directly or 
indirectly in financial activity. That would be my dry cleaners 
who has to take a loan out in order to operate his business. 
That would be the Drudge Report, which has reported in a local 
paper as having an influence on the value of the dollar. That 
would be just about any corporation in this country. That may 
even be me if I am a candidate who has a corporation for my 
candidacy because we engage in financial activity. So just 
reading what they gave us, it is pretty broad as to who comes 
under the council's authority.
    Does anybody have a reason to believe that it is not that 
broad by the language in here, not just by intent?
    Ms. Bair. Congressman, I was out of town yesterday, and I 
have been speed reading this myself. That did catch my 
attention, and we think it could be a little bit more narrow. 
We would be happy to work with the committee on that technical 
matter. It is a very broad definition. I would agree with you.
    Mr. Garrett. Anybody else? And that is a neat little 
comment. Who else had to be like I did speed reading this 
thing? I think that is a fair assumption, and I appreciate the 
candor. I did too. I am not a speed reader. It takes me a long 
time to read this stuff.
    Ms. Bair. We appreciate that the committee did consult with 
us on a lot of the pieces on resolution authority. I do not 
mean that as a criticism. I am just apologizing that I have not 
had a chance to read it all.
    Mr. Garrett. Yes, we all did and this is pretty darn 
complicated stuff. And that is why I wonder if the next 
portion, let's take the worst-case scenario that you actually, 
and I will get back to Ms. Bair on the other question, and the 
rest of you too can chime in as to whether it should be ex-anti 
or ex-post as far as the assessment, but it is ex-post in here. 
I read it to say that what happens is if something goes down, 
you need to collect money from other companies, institutions, 
financial institutions over $10 billion, right, again reading 
this, I could say that does not just apply to financial 
institutions as I would think of them, as banks and what have 
you, it could apply across-the-board.
    It could apply to all the car companies. It could apply to 
all the biotech companies. It could apply to everyone in this--
just about any corporation that is over $10 billion in size, 
that they would be responsible for, heaven forbid, that BOA has 
a problem. Did anybody else read it that this cannot go across-
the-board as far where they get it from a $10 billion 
assessment?
    Ms. Bair. I do not think that is the intent of the 
discussion draft. Again, the language can be further refined. 
But I do not think that is anyone's intent, not as it has been 
explained to me.
    Mr. Garrett. Okay. I am just going by the language. Intent 
is one thing but the way that regulators effectively carry 
things out is not always as Congress intends.
    The other question is, and I don't know if I have the time, 
the sell-off ability. Once you have an institution that you 
define, you might want to sell off its assets, it goes back to 
what Mr. Kanjorski was raising before, I do not see any due 
process elements in here. On page 19, mitigation of systemic 
risk section, if the Board determines, they can sell off assets 
at will.
    Is there any due process in the language of the bill?
    Mr. Moore of Kansas. The gentleman's time has expired. And 
the witnesses will have an opportunity to present any responses 
they have in writing for the record.
    Mr. Garrett. Can I get a yes or no real quick?
    Mr. Moore of Kansas. If somebody has a quick yes or no?
    Ms. Bair. There is due process in the FDIC's procedures 
against which this has been patterned, and we can give you a 
more thorough answer in writing on that, yes.
    Mr. Garrett. Thanks. Thanks, Mr. Chairman.
    Mr. Moore of Kansas. Thank you. The Chair next recognizes 
the gentlelady from New York, Ms. McCarthy.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. It is 
interesting listening to the testimony, and I guess when we 
received this some time late last night, obviously why it is in 
this small print, I have no idea. At my age, I need it a little 
bit bigger. Forget about even speed reading. But with that 
being said, the whole idea about having these hearings and 
having the different witnesses come in front of us is so that 
we can go through this, can work through it and certainly make 
the adjustments that need to be done. We have done that with 
every piece of legislation as we have gone through this whole 
process in the last several months.
    But I guess, Chairwoman Bair, one of the questions that we 
constantly hear, with the amount of authority that you are 
going to be having, and it is certainly extensive between the 
resolution authority and the supervising State charter thrifts, 
how do you respond to those critics that are saying that this 
is going to be too much, too far of a reach for you and your 
group to be able to do everything that they are supposed to do?
    Ms. Bair. I do not think the State-chartered thrifts will 
be a significant burden--there are 472 of them. They are 
primarily smaller institutions. We regulate nearly 5,200 
institutions already. So I do not think that would be a 
significant resource demand.
    On the resolution authority, obviously this is cyclical 
work. Somebody needs to do it. We are the best equipped of the 
agencies to do it. We set up a group to look at what the 
resource needs would be. We do not think resources would be 
significant on a start-up basis. We have a lot of contractors 
that we rely upon. That is the whole idea of the FDIC, to be 
able to expand quickly because of the cyclical nature of this 
work. Some agency has to do it, and we certainly have the 
infrastructure already that can be built out to assume more of 
this responsibility.
    My hope is that this is not something that is going to have 
to be used a lot, if ever. The whole idea of having a robust 
resolution mechanism is to put better market discipline back 
into the system, especially to tame some of these larger 
institutions so that investors and creditors will be more 
demanding. We want them to understand what kind of risk the 
institutions are taking, whether they are well-managed, and 
whether they are transparent because investors and creditors 
know their money will be at risk if the institution gets into 
trouble.
    The hope and expectation is that the new Systemic Risk 
Council combined with these resolution authorities will help 
take a lot of risk out of the system. But you will always have 
cycles, and you will always have instances where institutions 
get into trouble. So, some mechanism is needed. But, I think 
that the primary benefit of that is the strong signal it sends 
to the market that these are the rules. You will take losses if 
you fund or invest in high risk-taking institutions that get 
too big. If these institutions are going to be closed, you will 
take losses.
    Mrs. McCarthy of New York. I agree with you on that. I 
would like to throw it out to the rest of the panel. Being that 
obviously your staff has probably gone through each section 
that would affect each and every one of you as far as your 
interests, have you seen anything that you would want to add to 
the legislation as we go forward to either improve it or do you 
think--I have heard some complaints there that some parts, that 
you do not agree to, but what we are missing in this piece of 
legislation?
    Mr. Dugan. Mrs. McCarthy, as I indicated in my longer 
written statement, we have thought for some time that there is 
an unevenness that goes on right now inside of bank holding 
companies in the sense that banks are extensively regulated but 
holding company affiliates, even if they are engaged in the 
very same activity, are not subject to this same examination 
and supervision on a regular basis. We think we ought to level 
that playing field so that you do not have any potential for 
arbitrage between different parts of the holding company 
because we did see some of that in previous times.
    Mrs. McCarthy of New York. Governor?
    Mr. Tarullo. Thank you. I think all of us would agree that 
there will be places where we can make suggestions and 
recommendations. A couple that come to my mind, first, I do not 
think we want, the Federal Reserve I do not think wants to be 
on the board of the FDIC. I do not think we bring a whole lot 
to that enterprise. So that would be one change.
    I suspect that we will, working with many of you, see 
opportunities for perfecting a lot of the other areas as well. 
And we are not unsympathetic to what Mr. Dugan said at the 
outset about needing to make sure that the allocation of 
authorities among agencies preserves the strongly and 
effectively collegial relationship that we do have certainly in 
working with the OCC within the bank holding company context.
    Mr. Bowman. In my opening statement, I made a couple of 
remarks regarding the proposed merger and some of the issues 
that are there. And we will be happy to provide written 
suggestions in that regard.
    Another area we would like to look at is a loss of a fairly 
fundamental advantage for smaller institutions that have 
holding companies. That is the consolidated holding company 
approach where you have the same regulator for the holding 
company and the institution, as distinguished from larger 
institutions or entities that have multiple affiliates, perhaps 
as Comptroller Dugan talks about, where you need a different 
kind of regulator.
    In a case of a single institution, perhaps smaller, with a 
holding company and not a lot of other activities, consolidated 
supervision of those two entities, the holding company and 
institution, are real advantages to the smaller community 
institutions.
    Mr. Moore of Kansas. I am sorry, the gentlelady's time has 
expired. And I would ask if Commissioner Sullivan, if you have 
additional comments, we would like to have those in writing for 
the record, please. And I apologize. But Mr. Manzullo, you are 
recognized, the gentleman from Illinois, for 5 minutes.
    Mr. Manzullo. Thank you. I have a couple of questions. Mr. 
Dugan, on page 5 of your testimony you state, dealing with 
Federal Reserve separate authority and impose heightened 
prudential standards and safeguards concerning certain 
financial activities and practices, and then you say, ``Once 
the Council makes this identification, the Federal Reserve 
would have unilateral authority to establish a broad range of 
standards and safeguards for such activities and practices but 
without seeking public comment and without consulting with 
primary supervisors even where the primary supervisor has 
greater expertise and experience with respect to such 
activities.'' It is obvious you do not like that authority?
    Mr. Dugan. I think it could be adjusted, and I take the 
comments of Governor Tarullo to heart. I think there are some 
places where there needs to be more of a recognition of the 
respective roles that we have on different things. For 
example--
    Mr. Manzullo. I have a question that goes along with that.
    Mr. Dugan. Okay.
    Mr. Manzullo. And I did not mean to cut you off, but you 
made your point quite clear here, and I respect that. Have you 
been following all the debate on the Consumer Financial 
Protection Act?
    Mr. Dugan. Yes, I have.
    Mr. Manzullo. You realize that what this new piece of 
legislation attempts to do is exactly what the CFPA would do on 
safeguarding activities and practices? Maybe you do not realize 
that but it--
    Mr. Dugan. It is a different slice, it is more on the 
safety and soundness prudential side of things, and it is 
trying to get at a broader range of institutions where the CFPA 
is focused on consumer protection.
    Mr. Manzullo. Ostensibly, but if you read the CFPA Act, it 
is so broad. I can see a huge fight going on over who is going 
to do something, and then this bill says the Fed can move 
unilaterally without talking to the people who have authority 
on it.
    The second question, Mr. Sullivan, I do not want you to 
fall asleep over there, no one has asked you any questions. 
Your testimony I think is very, very pointed. On page 5, you 
identify the blame that many in this town refuse to recognize.
    When you start at--on page 5, line 3, ``The insurance 
industry in general does not pose a systemic risk to the 
nation's financial markets to the extent we have seen in the 
bank and securities sectors. Rather, insurance companies are 
more often the recipients or conduits of risk. Mortgage and 
title insurance, for example, do not generate systemic risk. 
They simply facilitate underlying loan transactions.'' Is not 
the problem with the financial collapse that we have had in 
this country due to the fact that these subprime mortgages were 
allowed to take place with very little underwriting standard 
supervision?
    Mr. Sullivan. And I would point to the area that we 
regulate, the dominion that we have authority over, insurance 
has very high capital standards. And as a consequence, we have 
not seen failures within the insurance industry. I can count on 
one hand over the last 3 years the insurance affiliates that 
have failed during the most significant upheavals in the 
financial market while we have seen hundreds of banks fail 
during the same time.
    Mr. Manzullo. Then some witnesses here want to pool the 
entire insurance industry.
    Mr. Sullivan. And we are very skeptical about any grab of 
such authority when we have a proven system that works.
    Mr. Manzullo. That is my question--the only people around 
here who do not seem to be getting any recognition or any 
respect are the people who have been doing their jobs back home 
in the State insurance authorities, and then all of a sudden 
people say, let's bring it together.
    The third question is open to everybody, actually to the 
Governor. The Feds already had the authority, it has had it for 
years, to set underwriting standards for mortgages. I am 
talking subprimes. And do ridiculous things, such as requiring 
written proof of a person's earnings. And yet the Fed never put 
those regulations into effect until October 1st of this year. 
So why should the Fed be given more authority under a brand new 
organization set up when it had that authority in the first 
place and simply failed to act? And the failure did not occur 
during Mr. Bernanke's term. By the time he got in, it was too 
late.
    Mr. Tarullo. So, Congressman, before I was on the Board, I 
was actually quite critical in my former capacity as an 
academic of the failure of the Board, indeed of the government 
more generally, to move to do something about subprime lending 
problems, both directly in their consumer implications, and 
indirectly in their safety and soundness implications.
    And, as you indicate, I think Chairman Bernanke came, when 
he became chairman, he took a look at those prudential and 
consumer regulatory issues and under his leadership, the Board, 
I think, has enacted a good set of mortgage related as well as 
credit card related regulations. So the short answer I guess to 
your question is that the Congress can give mandates to 
agencies and then give authority to agencies, but the decisions 
that the people leading those agencies make and the context in 
which they make them matter. And to that degree, I think we all 
just have to recognize that the policy orientations of 
appointees to these agencies are important things for you and 
your colleagues on the other side of the Hill to consider.
    Mr. Manzullo. Thank you.
    Mr. Moore of Kansas. Thank you, Mr. Manzullo. And next, the 
Chair recognizes the gentleman from Texas, Mr. Green, for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank you and the 
ranking member for hosting the hearing. Mr. Bowman, I respect 
you for speaking up for and standing up for your employees. How 
many are we talking about? And I am going to ask that you 
answer as quickly as possible because I have a series of 
questions that are of concern. How many employees are we 
talking about?
    Mr. Bowman. I believe as of tomorrow, it will be 1,040, 
approximately.
    Mr. Green. And is it your opinion that under the current 
proposal, these employees will not receive a fair and equitable 
transition?
    Mr. Bowman. Our brief review of the legislation we received 
the other evening would suggest that two-thirds of the 
employees, the examination workforce, who are specialized and 
trained, would probably make out quite well. For those who 
provide other services, there is a difficulty in terms of how 
they will be merged with the OCC.
    Mr. Green. For additional edification, when you say 
``others,'' are we talking about clerks, are we talking about--
tell me what the others consist of?
    Mr. Bowman. We are talking about economists. We are talking 
about legal. We are talking about IT specialists. We are 
talking about compliance specialists who are not examiners, 
those who would not go to the CFPA.
    Mr. Green. And have you examined any information or any 
document that would help someone such as myself, who is 
concerned, something that you have codified that might help me 
to help those employees, is there something available?
    Mr. Bowman. There are two places to start, and we will get 
you the information if you would like. One is the merger of the 
old Federal Housing Finance Board and the Office of Federal 
Housing Enterprise Oversight where they took two agencies and 
merged them into one, even though they had different charters 
and different purposes.
    We would suggest that the second starting point would be 
the Administration's original proposal. It started off by 
creating a new agency, and then having the OCC and the OTS come 
together on equal footing.
    Mr. Green. I will be candid with you, that may be difficult 
at this point, but I would like to hear more about what you 
propose. And I will look to work with you and your office and 
to see what we can do.
    Mr. Bowman. Thank you, and I look forward to that.
    Mr. Green. Thank you. And I will come to you, Mr. Dugan. 
Let me ask one quick question because I have to make sure that 
I get this in, a comment first. ``Too-big-to-fail,'' without 
question, is the right size to regulate. It is also the right 
size to eliminate. I am of the opinion that we absolutely want 
to prevent ever having ``too-big-to-fail.''
    And the question becomes, can we allow institutions to grow 
so large that they can be resolved and not cost the taxpayers 
dollars. The paradigm that we are proposing provides for 
resolution. The question that the taxpayers are interested in 
is this. If we had in place what we are proposing, would we be 
able to wind down AIG and not use one penny of taxpayer money? 
Ms. Bair? And if you can, give me a yes or a no. I know 
everyone is tempted to give a long explanation.
    Ms. Bair. Yes.
    Mr. Green. Your opinion is, yes, we could with the current 
proposal, all right. Mr. Dugan?
    Mr. Dugan. Yes, I think we could too, but it is hard to go 
backwards in time and see exactly. I think if you put all these 
proposals in place, the answer is yes.
    Mr. Green. All right. Sir?
    Mr. Tarullo. I think that is correct, Congressman. I do not 
think it would have cost the taxpayers a penny in the end.
    Mr. Green. In the end, not a penny, current proposal in 
place?
    Mr. Tarullo. Yes, the question would be would there have 
been any temporary liquidity support provided in the interim, 
but that could have been fully collateralized and repaid.
    Mr. Dugan. I would say yes, but of course, the devil is in 
the details.
    Mr. Sullivan. And the only concern we have from a State 
regulator's perspective is protecting policyholders. So if the 
wall of the assets that protect policyholder liabilities, and 
so if the unwinding--
    Mr. Green. I am going to take that as a yes.
    Mr. Sullivan. As long as we protect policyholders, that is 
our--
    Mr. Green. I have to move on. Final comment and then Mr. 
Dugan is this. Once that list is codified, my assumption is 
that it will become public knowledge. Once more than one person 
knows about it, in the world that we live in today, things just 
do not remain esoteric. And I think we should provide for the 
possibility that it will be public more than private.
    Now, Mr. Dugan, your comment?
    Mr. Dugan. Yes, very quickly, Mr. Green. I just wanted to 
say that on the transfer of personnel and fairness issues, we 
absolutely want to work with you to make sure that we provide 
information to you as well as OTS to make sure that it is fair 
and orderly.
    Mr. Green. Thank you. Thank you, Mr. Chairman.
    Mr. Moore of Kansas. Thank you. If any other witnesses care 
to respond to Mr. Green's question, you are welcome to do that 
for the record. The Chair next recognizes Mr. Paulsen for 5 
minutes.
    Mr. Paulsen. Thank you, Mr. Chairman. Let me just follow 
up. We had some discussion earlier this morning about the 
repayment from the AIG loan and the GM bridge loan to nowhere 
as being far from certain that those payments are going to be 
repaid. And I think many of us here have had concerns that this 
Administration may be using the extension of TARP, for 
instance, as a continued ATM or walking around money and having 
those funds out there.
    And Mr. Volcker recently testified before the committee 
here. He said that, ``The proposed overhaul of financial rules 
would actually preserve the policy of `too-big-to-fail' and 
could lead to future banking bailouts.'' I am just curious, Mr. 
Geithner has left now, but from your perspective, can you just 
comment, what in this plan really prevents or assures that we 
are not going to have those future bailouts occur after we 
heard that testimony from the former Chair of the Federal 
Reserve?
    Ms. Bair. We think there are areas where this proposal 
could be strengthened, but it prohibits any type of open bank 
assistance for an individual firm. That is number one. It 
prohibits capital investments of any kind. It does under 
extraordinary circumstances allow the government to provide 
some liquidity support for healthy institutions, but that needs 
to be done through a systemic risk process, which is a fairly 
extraordinary procedure.
    It also says that if there are any losses, a tenet with any 
of this, that it would be borne by the industry through an 
industry assessment. There would be no more one-off bailouts 
under this. There would be a fund. Whether we think it should 
be pre-funded or funded after the fact, any cost or unexpected 
losses associated with the resolution activity would be borne 
by the industry.
    It does not provide for a guarantee of liabilities. Such 
obligations should not be affirmed for individual firms. This 
is far different from the type of thing you saw with AIG. There 
would be no capital investments, for one thing. It would be a 
closed system.
    Again, we do not expect significant losses, as this is a 
wind-down process. It is more akin to a bankruptcy process in 
terms of the losses being imposed on shareholders and 
creditors. You would not have bondholders being taken out at 
par the way you had with some of these bailouts, for instance. 
And shareholders would be completely wiped out whereas they 
might live to fight another day with some of the bailouts that 
had been done so far. So this is a profoundly different process 
from what you have seen in the past. And that is not a 
criticism, we did what we had to do. There were no tools 
available, but this will be very different going forward.
    Mr. Paulsen. And many of us I think would advocate for the 
bankruptcy process to recede, and we had discussions earlier 
even this morning about the moral hazard argument. What in the 
plan really encourages companies to not engage in risky 
behaviors, to actually grow larger to a size where they will be 
deemed systemically important or at risk?
    Mr. Tarullo. So, Congressman, there, the question you just 
asked brings up the important point that we need to have 
mutually reinforcing pieces of this system. Chairman Bair has 
just described how market discipline can be brought to bear 
when you have a robust resolution mechanism. I would add to 
that, bringing into the parameter of companies that are 
regulated, firms like AIG and Bear Stearns, stops you from 
getting to a situation which is very high leverage in some 
unregulated firms.
    In terms of the question of, does this provide an incentive 
to become big or a disincentive to become big, I think it is 
incumbent on all of us to make sure that the incentives in the 
system make--require firms to internalize the costs of their 
bigness and their interconnectedness. It requires the 
counterparties of those firms to internalize them when they 
enter into transactions. It requires the firms themselves 
because of the imposition of special liquidity and capital 
requirements to internalize them.
    So when we put all three pieces together, regulation, 
supervision, and market discipline, we should make sure that 
each firm, small, medium or large, is able to provide financial 
services to the businesses and consumers of our country but 
only in such a way that their safety and soundness is assured.
    Mr. Paulsen. And before I just run out of time, Mr. 
Chairman, I want to ask Commissioner Sullivan, who is now on 
the end as well, do you have any concerns about Treasury, the 
Treasury Department or the Federal Government essentially 
obtaining authority to regulate insurance under the draft plan 
or concerns about Federal interference down the road as a State 
commissioner?
    Mr. Sullivan. Indeed, with respect to any preemption what 
we do today, yes. So if capital requirements are set higher 
than what we set today in the State regulatory system, have at 
it. But do not undermine or preempt what we do today, as I 
stated in my comments, our record is proven and it speaks for 
itself.
    We have not had any failures of insurance enterprises and 
that is because they are strictly regulated from a financial 
solvency perspective. So do not preempt us from a resolution 
authority perspective. Do not preempt us from a capital 
requirement perspective. Do not preempt us in any of those ways 
because our system works.
    Mr. Paulsen. Mr. Chairman, I just wanted to ask unanimous 
consent to submit two letters for the record, one from CMSAA 
and one from the American Land Title Association.
    Mr. Moore of Kansas. Certainly, they will be received for 
the record. Thank you, sir.
    The Chair next recognizes the gentleman from North 
Carolina, Mr. Miller, for 5 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. Ms. 
Bair, Mr. Garrett asked earlier whether if there was a 
resolution under these powers, a manufacturer who is just 
minding their own business might be surprised to get an invoice 
declaring that they were a financial company, and they had 
assets of more than $10 billion. And what would keep that from 
happening. And you said that you did not think that was 
intended by the legislation.
    Page 165, 166 includes a definition of financial company, 
which is a bank holding company as defined in Section 2(a) of 
the Bank Holding Company Act. An identified financial holding 
company is defined in Section 2(5) of the Financial Stability 
Improvement Act, any company predominately engaged in 
activities that are financial nature, for purposes of Section 
4(k) of Bank Holding Company Act or any subsidiaries of any of 
those. And all of those are defined statutory terms.
    And with respect to the ``predominately engaged in 
activities,'' there is a procedure for notice that the company 
is regarded as predominately financial and they have an 
opportunity to contest that. Does that support your argument 
that no manufacturer minding their own business is just going 
to get an invoice?
    Ms. Bair. It certainly attempts to. Again, my apologies, as 
I have not had a chance to read this entire bill. I think we 
all understand we want this confined to financial 
intermediaries. If there are further refinements in the 
language, we are happy to work with the committee. But, yes, I 
think that is clearly the intent. And, as it is drafted here, 
that is what is expressed. But, there are other provisions I 
know my staff had concerns over, and I need a chance to read 
the entire bill before I can respond.
    Mr. Miller of North Carolina. Okay. All right. Thank you. 
There has been a substantial discussion about whether banks 
should not do certain things. Any systemically significant firm 
should not engage in some inherently risky procedures. We have 
had that comment from economists for several months now as part 
of this debate. Mervyn King, the Bank of England governor, said 
there should be--banks should be broken up into casino 
functions and utility functions.
    And Paul Volcker, testifying here last month, said that 
much the same thing, and specifically gave the example of 
proprietary trading. Do you agree that there are some functions 
that systemically significant firms should not do, among other 
reasons, because it is almost entirely impossible for their 
board of directors or even their CEO to know what they are 
doing if they are engaged in all manner of complex activity, do 
you agree with that? And do you agree specifically with respect 
to proprietary trading?
    Ms. Bair. Right.
    Mr. Miller of North Carolina. And does this bill give 
sufficient authority to do that?
    Ms. Bair. I think he was saying that insured depository 
institutions should not do that.
    Mr. Miller of North Carolina. Right.
    Ms. Bair. Those that benefit from the deposit insurance. I 
do not think he was saying nobody should do that. I think his 
preference would be basically to do away with Gramm-Leach-
Bliley so that you have banking operations that take deposits 
and make loans separate from securities and insurance activity. 
So, we have somewhat of a hybrid approach. We would like much 
more definitive walls of separation, both legally and 
functionally, between insured depository institutions and other 
affiliates in a bank holding company.
    We also would agree with Comptroller Dugan that regulatory 
standards for the holding company activity should be higher. 
The capital standards should be at least as high for holding 
companies as they are for insured depository institutions. The 
quality of capital should be just as high.
    If you are going to have an insured depository institution, 
you should be in a position of strength, not weakness. We would 
like some strict separation of proprietary trading and a lot of 
these complex securitizations, etc., should be outside the 
insured depository.
    We also were very grateful that the bill does propose 
giving us some back-up authority for holding companies so that 
when a holding company affiliate is doing something that puts 
the insured institution at risk, we would have some back-up 
ability to come in there and work with the Federal Reserve, 
presuming the Federal Reserve is the holding company 
supervisor, to remediate that situation.
    We do want greater walls of separation between the banks 
and other types of activities, but we would not say that they 
could not co-exist within a broader holding company structure.
    Mr. Miller of North Carolina. I am sorry. Say the last bit 
again?
    Ms. Bair. So we would like greater separation between the 
insured depository and the affiliates that do other types of 
higher risk activities, though we would not say that the 
insured institution has to be taken completely out of the 
holding company structure. They could co-exist in a holding 
company structure.
    Mr. Miller of North Carolina. Okay. Mr. Dugan?
    Mr. Dugan. The one thing that I would add is that there is 
a notion that you can stop financial companies from engaging in 
this risky activity, and that will solve the problem, but the 
problem is somebody will continue to do those activities.
    Mr. Miller of North Carolina. Right.
    Mr. Dugan. They will get systemically significant and big. 
That is what happened last year. We had companies that weren't 
banks that did that, and we ended up having to do something 
about it. So I guess the approach of this bill is you cannot 
ignore the fact that they can become systemically significant. 
And that being the case, you ought to have ways to go regulate 
them.
    Mr. Miller of North Carolina. And I support that approach.
    Mr. Moore of Kansas. The gentleman's time has expired. The 
Chair will next recognize the distinguished ranking member, Mr. 
Bachus.
    Mr. Bachus. Thank you, Mr. Chairman. One thing, the State 
regulators I know under the FFIEC, you all are voting members 
under that council. This is a council that presently exists, 
and I think I would agree with my colleagues who say that the 
States ought to have voting members there. It is kind of 
letting you serve on something and not giving you a vote or a 
voice is I do not think it is acceptable.
    Mr. Green mentioned the OTS and the employees, and it 
definitely seems like they are receiving shabby treatment, as 
has Mr. Bowman. And you also have a concern that if the OTS is 
simply merged into another agency, and Republicans have 
proposed that as well as Democrats, so I am not casting any 
aspersions on anyone, but it obviously would have a net effect 
of diminishing the thrift charter. I know that everyone seems 
to be proposing that, but I appreciate your testimony. I think 
you outlined ways it can be done.
    I know the American Bankers Association wants a strong 
thrift charter, but I do not know that you can have a strong 
thrift charter if you do not have an agency whose primary 
responsibility is to the thrift. And most of those are small, a 
lot of them are Main Street banks at a time when we are 
concerned about concentration and ``too-big-to-fail.'' And it 
seems like that principle works against the purpose of the 
bill.
    Mr. Tarullo, the Federal Reserve gains an awful lot of new 
authority under this draft. What role did the Federal Reserve 
have in drafting the text?
    Mr. Tarullo. So far as I am aware, Mr. Bachus, we had no 
role in drafting the text. We did not do the drafting. We 
certainly, along the way, over the last 6 months, but more 
recently over the last few weeks, were asked our views, I think 
as my colleagues were, by people in the Administration and 
people on the committee staff and elsewhere. But we were not 
involved in the drafting of the text itself.
    Mr. Bachus. Were you consulted throughout the process? Were 
you consulted during the writing of it?
    Mr. Tarullo. There were certainly some consultations in the 
sense that we were asked by the Administration our views on 
certain things, and we had meetings, the President's Working 
Group and elsewhere, among many of us on that topic. But if you 
are asking whether there was some sort of particular, our 
particular role as opposed to that of our colleagues, I think 
the answer to that is no. We were all certainly talking to one 
another.
    Mr. Bachus. All right. Now, under this, you would pick up 
the power to force companies into bankruptcy or require them to 
divest segments of their company, would you not?
    Mr. Tarullo. I believe there are provisions in the bill 
which would do those two things, yes, sir.
    Mr. Bachus. Okay, all right. It also gives you the ability 
to overrule your colleagues at other Federal banking agencies, 
are you aware of that?
    Mr. Tarullo. Yes, and I think that is what Mr. Dugan was 
alluding to in his opening statement. And, as I said, I think 
there are a lot of things that went wrong in supervision and 
regulation over the last 10 years in this country, but one of 
the things that I found when I came to the Fed earlier this 
year that actually goes right is the cooperation between the 
OCC and the Fed and the regulation of holding companies that 
have national banks. And I do not think we want to undo that.
    I think we want to have a collegial relationship, not one 
of trying to set up situations which are overruling one 
another. So we certainly want to come out with an accommodation 
that achieves the safety and soundness ends that I think the 
drafters intended to achieve on the one hand, while preserving 
that collegial relationship on the other.
    Mr. Bachus. And I think you will agree that some of the 
policies by the Fed leading up to the events of the last 2 
years actually probably contributed to the overextension of 
credit.
    Mr. Tarullo. So, Congressman, this may be my academic self 
speaking, but I can identify a lot of policies by a lot of 
entities who contributed to this, including the Fed.
    Mr. Bachus. Thank you. I appreciate that. Chairman Bair, 
Republicans have pretty much uniformly rejected the idea of a 
continuing permanent bailout mechanism, but I know Chairman 
Frank in this legislation sets up--funds two different 
basically bailout authorities. Can you explain or give us some 
of your concerns with a system that pays for failure after the 
fact or one that assesses surviving competitors of failing 
institutions as this plan does?
    Ms. Bair. We do think there are some areas where it could 
be strengthened and are happy to keep working with the 
committee. There is a suggestion of a conservatorship for 
failing institutions. We think the process should be a 
receivership with the goal to be a prompt wind-down of the firm 
or breaking it up and returning it to the private sector.
    I think it is very positive that it prohibits capital 
investments of any kind. If there is truly a system-wide 
problem, such as an international destabilizing event, and 
there is a system-wide problem where even healthy institutions 
cannot get liquidity support, I think there should be some 
ability for the government to step in. But that should be only 
with the systemic risk procedures. We think that should apply, 
whether it is us giving the support or the Federal Reserve 
giving support.
    The intent is a wind-down authority, not a bail-out 
authority. That is our understanding of the intent. And we are 
happy to keep working with the committee to effectuate that.
    But you are certainly right, the whole purpose of doing 
this is to send a strong signal to investors and creditors that 
they will be the ones taking losses and to management that they 
will be replaced if they get themselves into trouble. It is 
very important that the bill sends that message.
    Mr. Bachus. And the ability to loan money to a failing 
corporation.
    Mr. Moore of Kansas. The gentleman's time has expired.
    Ms. Bair. No, we would not support that.
    Mr. Moore of Kansas. I would ask the gentleman and the 
Chairman to have any additional comments in writing please for 
the record. Next, Mr. Perlmutter from Colorado, is recognized 
for 5 minutes.
    Mr. Perlmutter. Thank you, Mr. Chairman. I will try to keep 
it under 5 minutes. Many of you have appeared probably a dozen 
times, if not more than that, in the course of the last year 
before this committee. I just kind of have to go back to this 
time last year. And in any of your experiences, had you ever 
seen a banking system in such peril or the economy in such 
peril in September, October, November of last year? And I would 
say let the record reflect people are shaking their heads no.
    Ms. Bair. No.
    Mr. Tarullo. Absolutely not.
    Mr. Perlmutter. Okay. So now after all the times you have 
appeared, all of you have been thinking about how do we manage 
the system so that we can deflect the failures that we saw last 
fall from happening again, at least during our lifetimes. The 
next generation will do whatever it does.
    And I know it is almost premature asking you this question, 
but in your commenting to the Treasury Department or in the 
time that you have had to kind of skim this bill, are we 
missing something to try to constrain and be able to respond to 
the free fall that we had last fall? And, Ms. Bair, it is an 
open-ended question, if you can kind of give me a quick answer, 
I would appreciate it.
    Ms. Bair. No, I think the things that we consider to be 
most important are in this bill. We would like to see a 
stronger council. I think one of the benefits of the council is 
the ability to identify and address regulatory gaps, as well as 
to serve as a check on all of us to make sure we do our job. We 
believe the council should have the ability to set its own 
rules, that it would increase standards if individual 
regulators are not doing what they are supposed to.
    Mr. Perlmutter. And I appreciate your saying that because I 
did want to respond to Mr. Garrett. I kind of agreed with his 
point about when Secretary Geithner did not think GMAC Finance 
would be part of this. And then his next point, but he thought 
his dry cleaner would be part of it. Just looking at page one, 
he did not get very far in the bill, because on page one, it 
defines the financial company as any incorporated, any 
organization incorporated in the United States, and it talks 
about banks. And then it says, ``that is in whole or in part 
engaged in financial activities.''
    So that is a lot of companies. Then there is a limitation 
that I hope would get rid of his dry cleaner, and that is on 
page 13, where it says that the council determines is a 
material financial distress that could pose a threat to the 
financial stability of the economy. Now, I hope his dry cleaner 
is not so big that it would pose a financial threat to the 
economy. But it does seem to me, Ms. Bair, that you do have a 
very broad roof that you can--
    Ms. Bair. That is right. As I told Congressman Miller 
earlier, our staff were a little concerned about this in whole 
or in part, directly or indirectly. But you are right. It would 
have to be systemic for the council to get involved, so clearly 
the dry cleaner could not at all be subject to this. A large 
commercial entity, perhaps. This should be clarified because I 
think we all are talking about financial intermediaries. But, 
absolutely a dry cleaner could not be included in this.
    Mr. Perlmutter. So General Electric, major manufacturer, 
major company but also has a major financing arm. I would 
expect it would be, in some facet or another, covered by this. 
And not to pick on them, I am just trying to figure out who is 
covered and who is not?
    Ms. Bair. Right, I think we're talking about institutions 
of significant size and complexity. Yes, that would be my 
assumption.
    Mr. Perlmutter. That if they were to get into trouble, it 
could have a domino effect.
    Ms. Bair. That is right.
    Mr. Perlmutter. Just starting with IndyMac, then Fannie Mae 
and Freddie Mac and then Merrill Lynch and AIG and Lehman and 
all that, it was dominoes.
    Ms. Bair. Right.
    Mr. Perlmutter. And it was a painful experience. So, Mr. 
Dugan, I will ask you this, kind of changing the subject. There 
is a question, and there seems to be some debate, I am a 
bankruptcy lawyer, all right. That was 25 years I did Chapter 
11's. And it bothers me a little bit that people are being so 
free and loose with the word ``bankruptcy'' because there are 
all sorts of bankruptcies. There are liquidating bankruptcies. 
There are reorganizing bankruptcies. There are different 
varieties. And we should not use it as one thing.
    Do you think that there should be the ability to reorganize 
or do you think there should be an orderly liquidation of 
companies that potentially are systemically risky and are in 
the financial business? For the most part, we do orderly 
liquidations of it.
    Mr. Dugan. It is a good question, and I am not sure. I am 
not a bankruptcy lawyer, and I think there is a very important 
technical bankruptcy point in here about the reorganization 
question. I think what the draft gets at and what people have 
been so concerned about is, however you do it, the shareholders 
of the company and the subordinated creditors bear the losses, 
so even if it is reorganized, others senior in the chain might 
get there.
    It has been viewed as somewhat impractical, I gather, 
historically, to do this in the financial institution context. 
I do not really understand why, but I think it is a perfectly 
legitimate question. And let us give it some more thought, and 
we will provide something for the record.
    Mr. Perlmutter. Thank you.
    Mr. Moore of Kansas. The gentleman's time has expired. 
Votes have been called. We are going to have one more set of 
questions. Ms. Bachmann from Minnesota, please?
    Mrs. Bachmann. Mr. Chairman, thank you. Again, with the 
253-page bill that just came out less than 48 hours ago and 
another several thousand page bill on the horizon with the 
healthcare, this is a lot to take in. And I think two 
adjectives that come to my mind are breathtaking and stunning 
when I look at the Resolution Authority. And I think on both 
sides of the aisle I think there is bipartisan concern about 
the unprecedented level of power that seems to be centralized 
under this.
    So it seems to me prudent that we would exercise serious 
due diligence on the part of establishing what the chairman and 
the President have called a Resolution Authority to break up 
systematically risky institutions.
    And here is my question. The proposal looks to me like we 
are codifying--and I am sure you have gotten this comment 
before of what our constituents were outraged about last year 
when Congress passed TARP, except under this proposal we, the 
Congress, wouldn't have to take a vote each time an institution 
needs a bailout; and the bill would give the FDIC the authority 
to extend credit on the backs of taxpayers whenever it wants.
    Do you think that is an accurate characterization, or am I 
wrong? And that is for anyone on the panel.
    Ms. Bair. No. I don't think that is an accurate 
characterization. I think the bill carefully constrains what we 
can and can't do. And we clearly cannot provide any kind of 
assistance, nor can the Federal Reserve, I might add, on an 
individual basis, to an individual failing firm. There is a 
process for a systemic support if you had a major destabilizing 
event where the government needed to step in and stabilize a 
system, or even healthy institutions could not access 
liquidity.
    But no, the whole point of this is to make sure that the 
shareholders and creditors are the ones that take losses, and 
there is an orderly wind-down. You may need to have some 
temporary liquidity support into a bridge financial institution 
as you break it up and sell it off.
    But I think those short-term liabilities are already fully 
secured. So, that would not be imposing any losses on the 
receivership that wouldn't otherwise be obligated, whether as a 
bankruptcy practice or the statutory resolution process. Based 
on our experience with bridge banks, we think that those 
preserve value and minimize losses if you can maintain the 
short-term funding relationship.
    This is not a bailout mechanism. This is a wind-down 
mechanism. We think it is very important that this be clear and 
understood.
    Mrs. Bachmann. Let me follow up then. With the Republican 
alternative that several of my colleagues are offering, it is 
clear that bankruptcy is the end game for those who make 
mistakes or the risky banks. And that is what our plan does, to 
strengthen market discipline by making it clear that a failing 
institution's creditors and counterparts would bear the cost of 
the financial mistakes, not the taxpayers.
    And I know I heard Treasury Secretary Geithner say earlier 
that he didn't believe that this would fall on the back of the 
taxpayers. But there was a certain amount of incredulity on the 
part of us as Members of Congress, especially when we heard the 
$81 billion that has already been forwarded to the auto makers. 
We can expect that the taxpayers won't be paid back.
    And I think that we are very concerned when we look at the 
wind-down authority and wondering, how is that a speedier 
resolution of a company than what we would find in bankruptcy?
    Ms. Bair. The bankruptcy process is what we have had, and 
it led to all of these bailouts.
    Mrs. Bachmann. But we haven't had, perhaps, a modification 
of that, that would anticipate--
    Ms. Bair. We don't differ profoundly in where we want to 
end up. We believe the claims priority that should apply to the 
receivership process, which is what we have now for insured 
banks, is much along the lines of what you have in bankruptcy.
    Mrs. Bachmann. I think that may be accurate, that we may 
not differ in where we want to end up other than authority. Who 
has that power? Who has the authority?
    And I think that is the real concern here, is that taking 
away a power from the Congress and giving that over to the 
Executive Branch. And again, I think Mr. Kanjorski asked a very 
good question earlier of the Treasury Secretary when he said, 
where in the constitution would you find that authority?
    Mr. Kanjorski said he didn't believe that Congress even had 
the authority to devolve to the Executive Branch of the 
taxpaying function, or the tax-assessing function. And I would 
agree with Mr. Kanjorski on that.
    On an unrelated question--this would be for Chairman Bair--
on October 7th, I sent you a letter requesting examination of 
the role of ACORN, what they play in helping banks satisfying 
their Community Reinvestment Act obligations. And as you know, 
ACORN has earned a reputation with the public for extremely 
poor systemic controls that have led to persistent unethical 
behavior, and repeated disregard for voter registration and 
other Federal and State laws.
    So as chairman of the Federal Financial Institutions 
Examination Council, I requested that you and your fellow 
council members conduct a thorough examination of the issue and 
prohibit financial institutions from receiving CRA credit by 
donating to or partnering with ACORN.
    Have you seen my letter? Are you willing to consider such 
an examination?
    Ms. Bair. I have seen your letter, and we are in the 
process of consulting with our fellow regulators and giving you 
a good response.
    Mrs. Bachmann. Do you have any idea when I would anticipate 
a reply?
    Mr. Moore of Kansas. The gentlelady's time has expired.
    Ms. Bair. We will try to do it as promptly as possible. We 
will give you a thoughtful response.
    Mrs. Bachmann. Thank you very much.
    Mr. Moore of Kansas. If the gentlelady has additional 
questions--
    Mrs. Bachmann. I thank the chairman.
    Mr. Moore of Kansas. --or comments from the panel, that is 
fine. We have Mr. Foster for 2 minutes, and then we are going 
to go for votes. Votes have been called.
    Mr. Foster is recognized for 2 minutes, sir.
    Mr. Foster. Thank you. My questions are in regard to 
subtitle (f) on risk retention during the asset-backed security 
process. And it is my reading of it that you have very wide 
authority to set it not just at 10 percent, but to eliminate it 
entirely or make it significantly higher.
    My concerns are with the macroeconomic effects and possible 
politicization of this. It is obvious this could exert a very 
powerful, and possibly beneficial, damping influence on, for 
example, real estate price bubbles. If someone had said several 
years ago that, look, you are securitizing out of Las Vegas, 
you don't have to put 10 percent down but 25 percent down, it 
could have had a very beneficial macroeconomic effect.
    And so my question is, how do you anticipate this will 
actually be exercised? Do you anticipate varying the risk 
retention by asset class? By industry sector? By geographical 
region, in the case of mortgage securitization? Governor 
Tarullo?
    Mr. Tarullo. Thank you, Congressman. Obviously, it will 
depend on how you all write the bill in the end. But I think 
our preference would be for the capacity to do just what you 
suggest. That is, the variety of asset classes which can be 
subject to securitization, the variety of the credit 
circumstances under which they are so subject, and, 
importantly, the role of servicers as well as originators of 
securitized assets, are such as to make the retained risk a 
very useful instrument, but one that needs to be deployed in a 
fashion that takes account of the centers that vary across 
asset class.
    Mr. Foster. So you contemplate using it in concert with 
monetary policy? For example, to cool off a real estate bubble?
    Mr. Tarullo. I think that provision, as I read it, is 
intended to be a safety and soundness rather than macroeconomic 
provision. And unless instructed otherwise, I think that is the 
way we would read it, which is to say, how does risk retention 
ensure that the loans in question, when securitized, are 
themselves risk appropriate?
    So I don't think we look at it as a monetary policy 
instrument as such, although I think your question--
    Mr. Foster. It certainly would have an effect because 
even--
    Mr. Tarullo. It would have an effect, and one would need to 
think about it. That is correct.
    Mr. Moore of Kansas. The gentleman's time has expired. I 
want to thank the second panel for your testimony and for your 
appearance here today before this committee. Votes have been 
called. After votes, we will resume with the third panel.
    The committee stands in recess. Thank you all.
    [recess]
    The Chairman. We will reconvene. I apologize to everyone 
except Mr. Baker for this delay. He knew what he was getting 
into.
    As for the rest of you, we apologize. We thank you for 
being here.
    Let's get right to the statements, and we will begin. Mr. 
Trumka, I know you have some time constraints, so if at any 
point you have to leave, we understand. Mr. Baker, too.
    Mr. Trumka. Thank you.
    The Chairman. And actually, if you leave, it will be like 
the old days when we used to have pairing, one on each side. So 
you can leave together.
    We will begin with Richard Trumka, President of the AFL-
CIO.

STATEMENT OF RICHARD L. TRUMKA, PRESIDENT, AMERICAN FEDERATION 
  OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS (AFL-CIO)

    Mr. Trumka. Thank you, Mr. Chairman. And thank you to 
Ranking Member Bachus. My name is Rich Trumka, and I am the 
president of the AFL-CIO.
    The AFL-CIO is a federation of 57 unions representing 11\1/
2\ million members. Our members were not invited to Wall 
Street's party, but we have paid for it with devastation to our 
pension funds, lost jobs, and public bailouts of private sector 
losses. Our goal is a financial system that is transparent, 
accountable, and stable, a system that is the servant of the 
real economy rather than its master.
    The AFL-CIO is also a coalition member of Americans for 
Financial Reform, and we join that coalition in complimenting 
the committee for its work on the Consumer Financial Protection 
Agency, and we endorse the testimony of AFR's witness here 
today; however, we are concerned with the working draft, that 
the committee's work thus far on the fundamental issues of 
regulating shadow financial markets and institutions will allow 
in large part the very practices that led to the financial 
crisis to continue.
    The loopholes in the derivatives bill and the failure to 
require any public disclosures by hedge funds and private 
equity funds fundamentally will leave the shadow markets in the 
shadows. And we urge the committee to work with the leadership 
to strengthen these bills before they come to the House Floor.
    The subject of today's hearing, of course, is systemic 
risk. And the AFL-CIO strongly supports the concepts in the 
Treasury Department White Paper, that a systemic risk regulator 
must have the power to set capital requirements for all 
systematically significant financial institutions, and be able 
to place a failing institution in a resolution process run by 
the FDIC. We are glad to see that the committee bill actually 
does those things.
    Although we have some concerns with the discussion draft 
that was made public earlier this week, we really haven't had a 
chance to go through it. And our understanding so far is that 
some of the intention of the committee, we may have read things 
at variance with that, and we think they can be worked out. But 
our concern is that this bill gives pretty dramatic new powers 
to the Federal Reserve without reforming the governance by 
ending the banks' involvement in selecting the boards of the 
regional Fed banks, where the Fed's regulatory capacity is 
located.
    The discussion draft would appear to give power to the 
Federal Reserve to preempt a wide range of rules regulating the 
capital market, power which could be used, unfortunately, to 
gut investor and consumer protections. If the committee wishes 
to give more power to the Federal Reserve, we think it should 
make clear that this power is only to strengthen safety and 
soundness regulation, and that it must simultaneously reform 
the Federal Reserve's governance. These powers must be given to 
a fully public body, and one that is able to benefit from the 
information and perspective of the routine regulators of the 
financial system.
    We believe a new agency with a board made up of a mixture 
of the heads of the routine regulators and direct presidential 
appointees would be the best structure. However, if the Federal 
Reserve were made a fully public body, it would be an 
acceptable alternative. Unfortunately, it is reported today 
that the Fed has rejected Treasury Secretary Geithner's request 
for a study of the Fed's governance and structure.
    We are also troubled by the provision in the discussion 
draft that would allow the Federal Government to provide 
taxpayer funds to failing banks and then bill other non-failing 
banks for the costs. We realize that it is not intended that 
this be a rescue, but rather a wind-down.
    The incentive structure created by this system seems likely 
to increase systemic risk, from our point of view. We believe 
it would be more appropriate to require financial institutions 
to pay into an insurance fund on an ongoing basis. Financial 
institutions should be subject to progressively higher fee 
assessments and stricter capital requirements as they get 
larger, and we think this would actually discourage ``too-big-
to-fail.''
    Finally, the discussion draft appears to envision a 
regulatory process that is secretive and optional. In other 
words, the list of systemically significant institutions is not 
public, and the Federal Reserve could actually choose to take 
no steps to strengthen the safety and soundness regulation of 
those systemically significant institutions. We think that in 
these respects, the discussion draft appears to take some of 
the problematic and unpopular aspects of the TARP and make them 
a model for permanent legislation.
    In closing, Mr. Chairman, I would say that instead of 
repeating some of the things we did in the bank bailout, 
Congress should be looking to create a transparent, fully 
public, accountable mechanism for regulating systemic risk and 
for acting to protect our economy in any future crises.
    On behalf of the AFL-CIO, I want to thank you for the 
opportunity to testify today.
    [The prepared statement of Mr. Trumka can be found on page 
308 of the appendix.]
    The Chairman. Next is Richard Baker, president and chief 
executive officer of the Managed Funds Association.

  STATEMENT OF THE HONORABLE RICHARD H. BAKER, PRESIDENT AND 
    CHIEF EXECUTIVE OFFICER, MANAGED FUNDS ASSOCIATION (MFA)

    Mr. Baker. Thank you, Mr. Chairman. It is a pleasure to be 
here today. I shall wait to the end of the proceedings to come 
to a resolution thereon.
    MFA is the primary advocate for sound business practices in 
industry professionals in hedge funds, funds of funds, and 
managed futures, as well as industry service providers. MFA is 
committed to playing a constructive role in the regulatory 
reform discussion as it continues, as investors' funds have a 
shared interest with other market participants and policymakers 
in seeking to restore investor confidence and achieving a 
stable financial system.
    In considering the topic of a Systemic Risk and Resolution 
Authority, it is important to understand the nature of our 
industry in taking action. With an estimated $1.5 trillion 
under management, the industry is significantly smaller than 
the U.S. mutual fund industry or the $13 trillion U.S. dollar 
banking industry. Because many hedge funds use little or no 
leverage, their losses have not contributed to the systemic 
risk that more highly-leveraged institutions contributed.
    A recent study found that 26.9 percent of managers do not 
deploy leverage at all, while an FSA study in 2009 found that, 
on average over a 5-year period, leverage of funds was between 
2 or 3 to 1, significantly below most public perception. The 
industry's relatively modest size and low leverage, coupled 
with the expertise of our members at managing financial risk, 
means we have not been a contributing cause to the current 
difficulties experienced by the average investor or the 
American taxpayer.
    Although funds did not cause the problems in our markets, 
and though we certainly agree with recent statements by 
Chairman Bernanke that it is unlikely that any individual hedge 
fund is systemically relevant, we believe that the industry has 
a role in being a constructive participant as policymakers 
develop regulatory systems with the goal of restoring stability 
to the marketplace.
    We believe the objectives of systemic risk can be met 
through a framework that addresses participant, product, and 
structural issues, which include: a central systemic regulator 
with oversight of the key elements of the entire system; 
confidential reporting by every institution, generally to its 
functional regulator, which would then make appropriate reports 
to the systemic regulator; prudential regulation of 
systemically relevant entities, products, and markets; and a 
clear, single mandate for the systemic risk regulator to take 
action if the failure of a relevant firm would jeopardize broad 
aspects of economic function.
    We believe these authorities are consistent with the 
authorities contemplated by the discussion draft. We believe 
the objectives of systemic risk regulation are best met not by 
subjecting non-banks to the Bank Holding Company Act, but by 
developing a framework that adopts a tailored regulatory 
approach that addresses the different risk concerns of the 
business models, activities, and risks of the systemically 
significant firms.
    For example, when firms post collateral when they borrow 
from counterparties, like hedge funds customarily do and as 
major market participants will be required to do under the OTC 
bill recently passed by this committee, the potential systemic 
risks associated with that borrowing are greatly reduced, a 
factor that should mitigate in determining what prudential 
rules should apply to various market activities.
    We believe that smart regulation, facilitated by the OTC, 
the Advisor Registration, and the Investor Protection bills 
recently passed by the committee also will greatly reduce the 
likelihood that a Resolution Authority framework will even need 
to be implemented.
    To the extent that a regulator does need to implement such 
authority, however, we believe that it should be done in a 
manner to ensure that a firm's failure does not jeopardize the 
financial system. However, it should be explicitly stated that 
this authority should not be used to save firms from failing. 
It is unclear at the moment whether the authority granted by 
the proposal would enable assistance to be extended to a firm 
not leading to resolution of the entity being assisted.
    There are other issues that have been raised by members' 
questions and the testimony earlier today that we would also 
address. But for the sake of time, I shall conclude by saying 
we believe that the Systemic Risk and Resolution Authority 
framework discussed above will address the concerns underlying 
the Systemic Risk and Resolution Authority bills, while 
minimizing unfair competitive advantages and moral hazards that 
can result from market participants having an implied 
government guarantee.
    It is important this framework be implemented in a manner 
that allows investors, lenders, and counterparties to 
understand the relevant rules and have confidence those rules 
will be applied consistently in the future. When investors do 
not have that confidence, they are less likely to put their 
capital at risk. And when market function is impaired, we all 
pay a price.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Baker can be found on page 
117 of the appendix.]
    The Chairman. Next, Professor Phillip Swagel, visiting 
professor at Georgetown.

    STATEMENT OF THE HONORABLE PHILLIP L. SWAGEL, VISITING 
 PROFESSOR, McDONOUGH SCHOOL OF BUSINESS, GEORGETOWN UNIVERSITY

    Mr. Swagel. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee. Thank you for the 
opportunity to testify.
    I am a visiting professor at the McDonough School of 
Business at Georgetown University, and a nonresident scholar at 
the American Enterprise Institute. I was previously Assistant 
Secretary for Economic Policy at the Treasury Department from 
December 2006 until January of 2009. I will focus now briefly 
on the provisions in the legislation, the draft legislation, 
for enhanced Resolution Authority.
    The critical steps that provide certainty to market 
participants and lead them to believe that costs will be 
imposed in a crisis will change risk-taking behavior and help 
make a future crisis less likely. But the enhanced resolution 
authority in the draft bill does the opposite.
    In the end, it provides complete discretion for the 
government. Put simply, this is a proposal for a permanent and 
supercharged TARP. The government could deploy public money 
without further authorization from the Congress, making this a 
permanent TARP. The government could repudiate contracts, 
making this a supercharged TARP.
    This expansive new Resolution Authority does not provide 
the certainty that would help avoid future crises, and it would 
allow the Executive Branch to usurp Congress's prerogatives in 
this area. Let me mention briefly two specific concerns.
    The first is moral hazard. Even though the resolution 
regime can impose losses on creditors, the fact that ultimately 
it gives complete flexibility to the government inevitably 
gives rise to moral hazard. There is a tradeoff between 
certainty and flexibility, but there should be no doubt that 
the legislation being discussed today falls squarely on the 
side of flexibility.
    My second concern is that with flexibility to deploy public 
resources and change contracts outside of a judicial process, 
there comes a potential for enormous mischief--in the end, the 
temptation to use the new power in inappropriate ways, ways 
that were not contemplated when the power was granted.
    This is not a theoretical concern. Enhanced resolution 
authority would allow the government to put money into a 
private firm and to change contracts. And both of these were 
done in the recent automobile bankruptcies. Contracts were 
changed, with the capital structure rearranged to favor junior 
creditors over senior ones. And the two firms were used as 
conduits to transfer resources to favored parties.
    Now let me be clear at the very beginning. It is entirely 
legitimate for the President or others to propose the use of 
public funds to ensure that workers and retirees maintain 
access to health insurance. That is absolutely legitimate.
    But the dedication of such resources should be done through 
a vote of the Congress, and not embedded in a financial rescue. 
Moreover, the reordering of the capital structure has the 
potential to lead to higher costs of financing for future 
projects, and thus less investment and slower economic growth 
and less job creation.
    It would be difficult for any Administration to resist the 
temptation to transfer public resources through regulatory 
authority rather than new legislation. And yet the 
Administration did not resist this temptation. Even when it 
must have been clear, absolutely clear, that this action would 
have a direct negative implication for their own proposal to 
obtain non-bank resolution authority.
    In the event of a future crisis, it would be preferable for 
Congress to decide to deploy fiscal resources. In the meantime, 
a better way to provide certainty would be to pursue an 
improved bankruptcy regime. H.R. 3310 includes such an 
approach.
    My written statement touches upon other aspects of the 
legislative proposals.
    Mr. Chairman and Ranking Member Bachus, thank you again for 
the opportunity to appear today.
    [The prepared statement of Mr. Swagel can be found on page 
229 of the appendix.]
    The Chairman. Next, Mr. Scott Talbott, who is the senior 
vice president at the Financial Services Roundtable.

STATEMENT OF SCOTT TALBOTT, SENIOR VICE PRESIDENT OF GOVERNMENT 
           AFFAIRS, THE FINANCIAL SERVICES ROUNDTABLE

    Mr. Talbott. Chairman Frank, Ranking Member Bachus, and 
members of the committee, I am Scott Talbott, as the chairman 
said, senior vice president of government affairs for the 
Financial Services Roundtable. Thank you for the opportunity to 
allow us to appear before you today and address the committee 
draft on systemic risk, prudential standards, failure 
resolution, and securitization.
    Steve Bartlett would have liked to have been here himself, 
he was looking forward to it, but he fell victim to H1N1 and 
felt it was better not to expose his fellow panelists to the 
flu.
    The Chairman. Let me just say, you can tell Mr. Bartlett I 
have a general rule. No one need ever apologize for not coming 
here.
    [laughter]
    Mr. Talbott. I will let him know.
    The Roundtable supports greater systemic risk oversight. We 
support creation of a resolution mechanism. We support more 
effective prudential supervision. And we agree with asking 
mortgage securitizers to retain some risk. As such, we commend 
the committee in addressing these necessary reforms through the 
creation of a financial services oversight council.
    We oppose the idea of ``too-big-to-fail,'' and believe that 
if a firm is going to fail, it should be allowed to fail. 
Creative destruction is part of the market system. The key here 
is to strengthen the regulatory framework to spot developing 
trends, and then if the firm does fail, to minimize the effects 
of its demise on the entire system.
    Let me turn to the discussion draft and offer our 
perspectives on a few of the details. First of all, the draft 
allows for better coordination between prudential regulators. 
This is a very crucial step necessary to break down the silos 
that allow, in part, this crisis to develop as it was.
    There are other ways, however, to increase the coordination 
and communication between the prudential regulators. One would 
be to have a Federal insurance regulator on the council. I know 
there are proposals working their way through Congress to 
create an FIO, and we believe that once it is created, like we 
heard earlier today with the CPA, they should be added to the 
council.
    Additionally, we believe that the Financial Accounting 
Standards Board should be underneath the council's purview. 
Accounting standards are integral to protecting the investor, 
and we believe they should be part of the council.
    Next, the discussion draft preserves thrift charters and 
grandfathers industrial loan charters and their lawful 
affiliations in commercial companies. However, the limits on 
cross-marking between the parents and ILCs would restrict 
activities and their abilities to meet their customers' needs. 
These standards would freeze the ILCs in time, and would force 
a company to choose between keeping its ILC and satisfying the 
ever-changing demands of customers and the markets.
    The discussion draft correctly focuses on the U.S. 
financial firms and does not extend beyond its borders. We 
should ensure that this regulation, as well as any others, are 
examined to ensure that they do not conflict or overlay with 
home country regulations. The G-20 is focusing on this area, 
and we think they are headed in the right direction.
    The draft, unfortunately, focuses, we feel, too much on 
size and the complexity of the identified financial holding 
company, and we think that there is excessive authority that is 
focused, as I said, based solely on size or complexity. And 
these two factors are not necessarily an indicator of risk to 
safety and soundness, and we believe that other factors should 
be considered. And those include liquidity, assets, the quality 
of assets, and the strength of management.
    The discussion draft also places an excessive focus on 
capital as the answer to safety and soundness concerns. While 
capital is important, it should not become the siren song, and 
could overpower economic growth. Any increase in capital, we 
believe, should be based on activities rather than the size of 
the institution, and should be applied across the industry 
regardless of size.
    In addition to capital, we recommend a comprehensive 
approach that focuses not just on capital but activity 
restrictions where appropriate, prudential supervision, 
liquidity requirements, as well as prudential standards. We 
oppose the idea of requiring firms to issue contingent capital 
as a debt they can convert to equity if the company runs into 
trouble. This would greatly increase the costs of raising 
capital.
    The standards used in the draft must be examined carefully 
as well to ensure that the power that is granted under this 
authority is not exercised unless there is an extreme 
emergency. You want to make them high enough that they aren't 
triggered unnecessarily.
    On securitization, the draft proposes a 10 percent risk 
retention requirement for mortgage lenders as well as 
securitizers. We support the concept of risk retention, but 
believe that the risk retention provisions contained in H.R. 
1728, which called for a 5 percent requirement, are the right 
one; 5 percent should be the ceiling and not the floor.
    Furthermore, the 10 percent risk requirement is unstudied. 
There have been no hearings on the matter. And we believe that 
this is a crucial piece that should be discussed further, and 
should not apply to the FHFA, to Ginnie Mae, as well as the GSE 
standards. It could have the unintended consequence of 
significantly limiting securitization and subsequent the 
ability of a home mortgage finance company, and limit the 
ability of customers who are trying to seek to purchase a home.
    The discussion draft would subject derivative transactions 
between the bank and its affiliates to a quantitative limit 
contained in Section 23(a), and we oppose this. We believe that 
the arm's length standard contained in 23(b) is sufficient.
    Additional, the discussion draft would mandate haircuts for 
unsecured creditors, and we think this would raise the costs of 
capital going forward.
    On the issue of costs, we have heard a lot of testimony 
today. We support having a post-event assessment. We believe 
that the $10 billion should be studied so it is not over-
inclusive as well as under-inclusive. We believe it should be 
fair and equitable assessment, possibly on a sector-by-sector 
basis, or even limited to possible stakeholders.
    Finally, the discussion draft should be one--going forward, 
we should focus on the concept of balance. We want to make sure 
that we regulate properly, but we don't hinder the ability of 
markets to serve consumers to promote and sustain economic 
growth.
    I look forward to any questions you may have. Thank you.
    [The prepared statement of Mr. Talbott can be found on page 
236 of the appendix.]
    The Chairman. Our next witness is Mr. Stephen Kandarian, 
who is executive vice president and chief investment officer of 
the Metropolitan Life Insurance Company.

STATEMENT OF STEVEN A. KANDARIAN, EXECUTIVE VICE PRESIDENT AND 
            CHIEF INVESTMENT OFFICER, MetLife, INC.

    Mr. Kandarian. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for inviting me to testify 
today. You have asked MetLife for its perspective on the 
proposals under discussion today. MetLife is the largest life 
insurer in the United States. We are also the only life insurer 
that is also a financial holding company.
    Because of our financial holding company status, the 
Federal Reserve serves as the umbrella supervisor of our 
holding company, in addition to the various functional 
regulators that serve as the primary regulators of our 
insurance, banking, and securities businesses, including our 
State insurance regulators, the OCC, and the SEC.
    While I'll comment on certain aspects of the Administration 
and congressional proposals, I can best contribute to the 
dialogue on systemic risk and resolution authority by providing 
some thoughts about the potential impact of the proposals being 
discussed. My written statement also includes some suggested 
guidelines that we believe are important to keep in mind as you 
consider how to improve the securitization process.
    Let me start by saying that we support the efforts of 
Congress and the Administration to address the root causes of 
the recent financial crisis and to better monitor systemic risk 
within the financial system. We applaud your thoughtful and 
deliberate approach to these very complex issues.
    The discussion draft proposes to establish a new regulatory 
structure to oversee systemic risk within the financial system, 
enhance prudential regulation, and authorize Federal regulators 
to assist or wind-down large financial companies whose failure 
could pose a threat to financial stability or economic 
conditions in the United States.
    We recognize the need to identify, monitor and control 
systemic risk within the financial system, but we are concerned 
that creating a system under which companies will be subjected 
to differing requirements based on their size will result in an 
unlevel playing field and will create new problems.
    As proposed, the concept of designating tier one financial 
holding companies and subjecting such companies to enhanced 
prudential standards and new resolution authority may address 
some of the problems we have seen in the financial markets, but 
it may also create new vulnerabilities, including the creation 
of an unleveled playing field if tier one status is assigned to 
only a small number of companies in industry.
    Systemic threats can stem from a number of sources in 
addition to large financial institutions. For example, in 1998, 
the hedge fund Long-Term Capital Management was not 
particularly large, but it created a significant amount of 
potential systemic risk when it was at the brink of failure 
because of its leverage and the volatility in the financial 
markets.
    Attempting to address systemic risk by focusing a higher 
level of regulation on a discrete group of companies under a 
tiered system could result in little or no oversight of those 
other sources of risk, leaving the financial system exposed to 
potentially significant problems.
    We suggest that Congress consider regulating systemic risks 
by regulating the activities that contribute to systemic risk 
without regard to the type or size of institution that is 
conducting the activity. Linking regulatory requirements to the 
activity will help close existing loopholes and prevent new 
regulatory gaps that could be exploited by companies looking to 
operate under a more lenient regulatory regime.
    The discussion draft also introduces a new resolution 
authority based on the premise that large institutions must be 
treated differently than smaller ones. While we are pleased 
that the drafters have excluded certain types of institutions 
from the enhanced resolution authority provisions, including 
insurance companies, we are concerned about the potential 
conflicts the new resolution system may create.
    For example, what if the new Federal resolution authority 
decided to wind-down a financial holding company that also has 
a large insurance subsidiary? Given their different missions, 
the Federal resolution authority might seek one treatment of 
the insurance subsidiary that is in direct conflict to the 
desires of the State insurance regulators.
    As a result, creditors, counterparties, and other 
stakeholders will likely find it difficult to assess their 
credit risks to these institutions. These large financial 
institutions will have to pay a higher-risk premium because of 
this uncertainty, placing them at a competitive disadvantage 
both domestically and globally and leading to higher costs that 
will ultimately be borne by consumers and shareholders.
    We believe the current system of functional regulation has 
worked well in the insurance industry. In our experience, the 
Fed and the functional regulators have worked cooperatively, 
sharing information and insights that allow each regulator to 
perform its function.
    In light of the issues outlined here and in my written 
statement, I will conclude by suggesting that Congress regulate 
activities that contribute to systemic risk rather than 
creating a system of regulation that uses size of the financial 
institution as a key criterion. We believe that such a system 
can be more effective, easier to administer, and result in 
fewer unintended consequences then the proposed tiered 
structure. Thank you.
    [The prepared statement of Mr. Kandarian can be found on 
page 155 of the appendix.]
    The Chairman. Now, we will hear from Mr. Michael Menzies, 
who is the president and chief executive officer of Easton Bank 
and Trust, testifying on behalf of the Independent Community 
Bankers of America.

 STATEMENT OF R. MICHAEL S. MENZIES, SR., PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, EASTON BANK AND TRUST, CO., ON BEHALF OF THE 
        INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

    Mr. Menzies. Chairman Frank, Ranking Member Bachus, and 
members of the committee, it's an honor to be with you again. 
And I'm especially proud to be the chairman of the Independent 
Community Bankers of America. We represent 5,000 community bank 
members throughout the Nation.
    ICBA appreciates the opportunity to comment on the joint 
discussion draft that has just been released. Based on our 
early review, we believe the draft is a substantial improvement 
over earlier proposals, and we commend you, Mr. Chairman, and 
your committee for these efforts.
    Just a year ago, due to the failure of our Nation's largest 
institutions to adequately manage their highly risky 
activities, key elements of the Nation's financial system 
nearly collapsed. Even though our system of locally-owned and 
controlled community banks were not in similar danger, the 
resulting recession and credit crunch have now impacted the 
financial cornerstone of our local economies, community banks. 
Accordingly, we recommend that Congress move quickly on this 
legislation.
    We strongly support the provisions of the discussion draft 
that designate the Federal Reserve as the systemic risk 
regulator, and that appear to give it sufficient authority to 
carry out its responsibilities.
    We also support the enhanced authority of the Financial 
Services Oversight Council over the Federal Reserve's 
decisions. While the Federal Reserve has the expertise and 
experience to deal effectively with these matters, they are so 
critical that other agencies must be involved as well.
    ICBA is especially pleased that the discussion draft 
provides the Federal Reserve the authority to require a 
systemically risky holding company to sell assets or terminate 
activities if they pose a threat to the company's safety and 
soundness or the Nation's financial stability. This authority 
gets to the heart of many of the problems that led to the 
Nation's financial meltdown.
    Some institutions have become so large that they cannot be 
effectively managed or regulated, and must simply be downsized. 
ICBA recommends that the legislation direct the Federal Reserve 
to intensely study each identified financial holding company to 
determine if it should be subject to this new authority.
    The draft legislation appears to give the FDIC ample 
authority to responsibly resolve systemically risky holding 
companies. The bill gives the Treasury Secretary the sole 
authority to appoint the FDIC as receiver for a failed holding 
company. This vests a politically appointed official with 
tremendous power over the Nation's economy.
    We recommend that the legislation specifically empower the 
FDIC, as an independent agency, to recommend to the Secretary 
that he or she exercise his authority. Downsizing and resolving 
systemically risky institutions are key to eliminating ``too-
big-to-fail'' from the financial system.
    Another important part of the solution of the ``too-big-to-
fail'' problem is contained in the Bank Accountability and Risk 
Assessment Act introduced by Representative Gutierrez. This 
bill would make the funding of deposit insurance more risk-
based and equitable. We urge the committee to incorporate this 
measure into broader financial reform.
    ICBA recommends that funding for the resolution process for 
systemically risky holding companies be provided by the largest 
institutions in advance, rather than after the fact. We believe 
that a pre-funded resolution process has many advantages. It 
avoids the initial call on taxpayer funds that would be likely 
if an institution were to fail unexpectedly, which of course is 
what happens. It places the cost on institutions that may later 
fail rather than only on institutions that haven't failed, 
providing an important equitable balance. And prefunding avoids 
procyclical effects, tapping the industry for modest, 
predictable contributions when the times are good.
    We strongly support the revisions in the discussion draft 
that block the creation of additional industrial loan companies 
that may be owned by commercial firms. This is the last 
loophole that would allow the mixing of banking and commerce.
    Even though the OTC would be merged into the OCC, ICBA is 
particularly pleased that the discussion draft retains the 
thrift charter; the vast majority of Federal thrifts have 
served their communities well.
    In that vein, we appreciate continued support of the 
chairman and the Administration for the current regulatory 
system as it applies to community banks. It provides valuable 
checks and balances that would be lost to a single regulatory 
scheme. I want to convey our appreciation for your efforts and 
thank you for the opportunity to testify today.
    [The prepared statement of Mr. Menzies can be found on page 
166 of the appendix. ]
    The Chairman. Next is Mr. Peter Wallison, Arthur Burns 
fellow in financial policy studies at The American Enterprise 
Institute.

   STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN 
  FINANCIAL POLICY STUDIES, THE AMERICAN ENTERPRISE INSTITUTE

    Mr. Wallison. Thank you very much, Mr. Chairman, and thank 
you, Ranking Member Bachus, for holding this hearing. The 
discussion draft of October 27th contains an extremely 
troubling set of proposals, which if adopted will turn over 
control of the financial system to the government, sap the 
strength and vitality of our economy, and stifle risk-taking 
and innovation.
    Rather than ending ``too-big-to-fail,'' the draft makes it 
national policy. By designating certain companies for special 
prudential regulation, the draft would signal to the markets 
that these firms are ``too-big-to-fail,'' creating Fannies and 
Freddies in every sector of the economy where they are 
designated.
    These large companies will have funding and other 
advantages over small ones, changing competitive conditions in 
every sector of the financial system. The draft suggests that 
the names of these companies can be kept secret. That can't 
happen. The securities laws alone will require them to disclose 
their special status.
    For designated companies, new activities, innovations, and 
competitive initiatives will be subject to government approval. 
Companies engaged in activities that the regulators don't like 
will be forced to divest. That power will ensure that nothing 
will be done in New York that wasn't approved in Washington.
    Commercial companies would be separated from financial 
activities even though these activities are never separated in 
the real world. All companies--retailers, manufacturers and 
suppliers--finance their sales. It's a puzzle how U.S. 
companies will compete with other foreign companies when they 
can't finance their own sales.
    Another flawed idea in this draft is that there is some 
kind of discernable line between finance and commerce. That 
line is political, it's imaginary. For example, to protect the 
Realtors against competition from banks, Congress has stopped 
the Fed from declaring that real estate brokerage is a 
financial activity. Can anyone describe why securities 
brokerage is financial but real estate brokerage is not? Of 
course not.
    Every industry will be asking for special treatment or 
exemption if this draft is adopted. The resolution authority is 
based on the faulty assumption that anyone can know in advance 
whether a company will--if it fails--cause a systemic 
breakdown. This is unknowable, but government officials are 
supposed to make this determination anyway.
    With unfettered discretion, officials will follow a better-
safe-than-sorry policy, taking over companies that would only 
create economic disruptions, not full-scale systemic 
breakdowns. General Motors and Chrysler are an example. They 
were not systemically important but they were politically 
important. Their failure would not have caused a systemic 
breakdown, but would have caused a loss of jobs and other 
economic disruption.
    Companies like these will be rescued, while smaller ones 
with less political clout will be sent to bankruptcy. The 
markets will have to guess which will be saved and which will 
not, creating moral hazard and arbitrary gains and losses.
    Worse than giving government officials this enormous 
discretionary authority is what the draft authorizes them to do 
with it. They can rescue some companies and liquidate others, 
pay off some creditors and not others, and using government 
funds keep failing companies operating for years and competing 
with healthy companies.
    This will not only create uncertainty and moral hazard, but 
will again give large and powerful firms advantages over small 
ones. Those that seem likely to be taken over by the government 
will have an easier access to credit at lower rates than those 
likely to be sent to bankruptcy.
    In other words, the draft proposes a permanent TARP. It 
will use government money to bail out large or politically 
favored companies and then will tax the remaining healthy 
companies to reimburse the government for its cost of competing 
with them.
    That concludes my testimony, Mr. Chairman.
    [The prepared statement of Mr. Wallison can be found on 
page 312 of the appendix. ]
    The Chairman. The next witness is Jane D'Arista, from 
Americans for Financial Reform.

   STATEMENT OF JANE D'ARISTA, AMERICANS FOR FINANCIAL REFORM

    Ms. D'Arista. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee for inviting me. And I 
want to say that I'm representing a very large group of 
organizations that are consumer and non-financial or nonprofit 
and concerned with the issues of reform, not just consumer 
issues but the entire panoply.
    I would say that President Trumka has laid out many of our 
concerns about this draft legislation today. I'm going to take 
the opportunity, if I may, to go into something else, which is 
to say that obviously it is important that we begin by dealing 
with crisis management, as you have done in this legislation.
    But we must not forget that the important thing to do is 
not just manage these problems but to prevent them. And I find 
that the legislation so far comes up short in the preventive 
era. I would like to talk about two particular issues.
    One of them is what I see as an equally important 
underlying cause of the crisis, and that's the combination of 
excessive leverage, proprietary trading, and the new funding 
strategies that go into the repurchase agreements, markets and 
the commercial paper markets, etc., for financial institutions.
    We have here a situation in which leverage has, in effect, 
monetized debt, because assets are used as backing for new 
borrowing to add more assets. The evidence of this is that the 
financial sector has grown 50 percent in the decade from 1997 
to 2007, rising to 114 percent of GDP. That is pretty shocking 
in and of itself.
    Proprietary trading is an issue that must be addressed, and 
it is of concern for a lot of different reasons, one of which 
of course is that it erodes the fiduciary responsibility of 
intermediaries.
    But equally important is the issue of the fact that what is 
at stake here is institutions trading for their own bottom line 
without any contribution to their customers or to the economy 
as a whole. What money goes in to the financial sector comes 
from our earnings and our savings, and they have skimmed it off 
to game it. It is our money that is at risk in this game.
    The funding strategies that have been used in order to 
support leverage and proprietary trading have been the major 
contribution, in my view, to the interconnectedness of the 
financial sector. These institutions are borrowing from one 
another, not from, primarily, from the outside non-financial 
sector, as a result of which over half of those positions are 
supplied by other financial institutions. This is the 
counterparty issue, this is what we were dealing with when we 
were dealing with Lehman, AIG, etc., and it is something that 
absolutely must be addressed.
    Finally, briefly, about securitization. Securitization has 
changed the structure of the U.S. financial system. We have 
gone from a bank-based system to a market-based system with new 
rules of the game. We have eroded the bank-based rules that 
shielded the consumer and the household in this country since 
the 1930's. These new rules expose households to interest rate 
risks, market rate risk, etc., but they do so to institutions 
as well because of the mark to market phenomena they require. 
You cannot have a market without marking it to market.
    But the chart drops against capital that we have seen here, 
and we have not fully evaluated, have turned capital of our 
financial institutions into a conduit to insolvency--not a 
cushion, but a conduit to insolvency.
    So what I think is that this committee has a very large 
plate to deal with going into the future as a preventive set of 
resolutions. I would urge you to do so not in the direction 
you're going now, which is to give discretion to too many 
institutions that we know--the Federal Reserve in particular--
but to actually craft the rules of the game that need to be 
followed in the future.
    Thank you very much.
    [The prepared statement of Ms. D'Arista can be found on 
page 138 of the appendix.]
    The Chairman. Next, Mr. Edward Yingling, who is the 
president and chief executive officer of the American Bankers 
Association.

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, AMERICAN BANKERS ASSOCIATION (ABA)

    Mr. Yingling. Chairman Frank, Congressman Bachus, and 
members of the committee, thank you for inviting me to testify.
    It has been over a year since I first testified before this 
committee in favor of broad financial reform. This week, the 
committee is considering legislation that addresses the 
critical issues that we identified in that testimony, and the 
ABA continues to support such reform.
    The key issues addressed include the creation of a systemic 
oversight council, addressing key gaps in the regulation of 
non-banks, addressing ``too-big-to-fail,'' and establishing a 
regulatory approach to the payment system.
    My written testimony addresses these issues more fully, and 
I want to emphasize we appreciate the progress that has been 
made in these areas, the areas that are most critical to 
reform. One very important change in the draft from the 
original Administration proposal is that the draft maintains 
the thrift charter. The ABA wishes to thank Chairman Frank for 
his leadership on this important issue.
    In my remaining time, I want to talk about a few areas that 
need further work, in our opinion. First, there is one glaring 
omission in the Administration's original proposal and in the 
draft, the failure to address accounting policy. A systemic 
risk oversight council cannot possibly do its job if does not 
have oversight authority over accounting rule-making.
    Accounting policies are increasingly influencing financial 
policy and the very structure of our financial system. Thus, 
accounting standards must now be part of a systemic risk 
calculation. We believe the Federal Accounting Standards Board 
should continue to function as it does today, but it should no 
longer report only to the SEC. The SEC's view is simply too 
narrow. Accounting policies contribution to this crisis has now 
been well-documented, and yet the SEC is not charged with 
considering systemic or structural effects. ABA has strongly 
supported H.R. 1349, introduced by Representatives Perlmutter 
and Lucas, in this area.
    Second, I want to reiterate the ABA's strong opposition to 
using the FDIC directly for non-bank resolutions. Several weeks 
ago, the ABA provided a comprehensive approach to resolutions 
and to ending ``too-big-to-fail.'' The draft, in many ways, 
mirrors that proposal. However, using the FDIC directly as 
opposed to indirectly is fraught with problems and is 
unnecessary.
    Putting the FDIC directly in charge of such resolutions 
would greatly undermine public confidence in the FDIC's 
insurance for the public's deposits. This confidence is 
critical and it's the reason we have had no runs on banks for 
over 70 years, even during this very difficult period.
    The importance of this public confidence should not be 
taken for granted. Witness the lines that formed in front of 
the British bank, Northern Rock, at the beginning of this 
crisis, where they did have classic runs. Yet our own research 
and polling shows that while consumers trust FDIC insurance, 
their understanding of how it works is not all that deep.
    Headlines saying, ``FDIC in charge of failed XYZ non-bank'' 
would greatly undermine that trust. Just imagine if the FDIC 
were trying to address the AIG situation this year, dealing 
with AIG bonuses and that type of thing. We urge the Congress 
not to do anything that would confuse consumers or undermine 
confidence in the FDIC.
    We also believe it's a mistake to use existing bank 
resolution policies in the case of non-bank creditors. Basic 
bankruptcy principles should be applied in those cases.
    Finally, we want to work with the committee to achieve the 
right balance on securitization reform. We want to work with 
you to provide for skin in the game on securitization. We 
understand why there is interest in that, but we need to 
address the very thorny accounting and business issues involved 
in having skin in the game.
    ABA has been a strong advocate for reform. A good deal of 
progress has been made through the constructive debate in this 
committee, and we really appreciate the consideration members 
have given to our views. Thank you.
    [The prepared statement of Mr. Yingling can be found on 
page 321 of the appendix.]
    The Chairman. I thank you, and we now have--our last 
witness is Mr. Timothy Ryan of the Securities Industry and 
Financial Markets Association.

    STATEMENT OF T. TIMOTHY RYAN, JR., PRESIDENT AND CHIEF 
 EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL MARKETS 
                      ASSOCIATION (SIFMA)

    Mr. Ryan. I want to thank the committee for this 
opportunity to appear today. We believe that systemic risk 
regulation and resolution authority are the two most important 
pieces of legislation focused on avoiding another financial 
crisis and solving the ``too-big-to-fail'' problem.
    I testified in support of a systemic risk regulator before 
this committee nearly a year ago. It is vital to the taxpayers, 
the industry, and the overall economy that policymakers get 
this legislation right.
    We believe that the revised discussion draft gets most 
aspects right. We support the general structure it sets up, but 
given its breadth and its complexity and the short time we have 
had to review it, we have already identified a number of 
provisions in the revised draft that we believe could actually 
increase systemic risk instead of reduce it.
    We understand your need to act quickly, but please try to 
do no harm through the legislative process. My written 
testimony provides details on the proposals weaknesses. We urge 
the committee to take the time to correct them. We will work 
day and night to suggest constructive changes.
    Just two examples. We support the idea of an oversight 
council. We think it should be chaired by the Secretary of the 
Treasury. We believe it will be beneficial to have input from a 
number of key financial regulatory agencies. We're also pleased 
to see that the Federal Reserve would be given a strong role in 
the regulation of systemically important financial companies.
    But we are not sure of the size and composition of the 
council. We're concerned that the influence of agencies with 
the greatest experience and stake in systemic risk will be 
diluted and possibly undermined with a lesser stake. This 
structure must be reviewed carefully to ensure the council is 
designed to achieve its goal of identifying and minimizing 
systemic risk.
    Second, resolution authority. We strongly support this new 
authority, essential to contain risk during a financial crisis 
and to solve the ``too-big-to-fail'' problem. The bank 
insolvency statute is the right model for certain aspects of 
this new authority.
    A Federal agency should be in charge of the process. It 
should be able to act quickly to transfer selected assets and 
limit the liabilities to third party. It should have the option 
of setting up a temporary bridge company to hold assets and 
liabilities that cannot be transferred to a third party so that 
they can be unwound in an orderly fashion.
    But the bank insolvency statute is the wrong model for 
claims processing and for rules dividing up the left-behind 
assets and liabilities of non-bank financial companies. The 
right model is the Bankruptcy Code. The Code contains a very 
transparent judicial claims process and neutral rules governing 
creditors rights that markets understand and rely upon.
    By contrast, the bank insolvency statute, the Federal 
Deposit Insurance Act, contains a very opaque administrative 
claims process and creditor-unfriendly rules. These may be 
appropriate for banks, where the FDIC as the insurer of bank 
deposits is typically the largest creditor. But the bank 
insolvency claims process and creditor-unfriendly rules are 
inappropriate for non-banks which fund themselves in the 
capital markets, not with deposits.
    So there is a very important reason to preserve the 
bankruptcy model for claims processed for non-banks. If you 
don't, the new resolution authority will seriously disrupt and 
permanently harm the credit markets for non-banks, increasing 
systemic risk instead of reducing it.
    We urge the committee to revise the resolution authority so 
that it takes the best parts of the bank insolvency model and 
the best parts of the bankruptcy model. That way it will 
reflect the strengths of both models without reflecting either 
of their weaknesses.
    We and our insolvency experts stand ready to work with you 
immediately to improve the highly complex and technical 
resolution authority section.
    Finally, we also question whether the FDIC has the 
necessary experience to exercise resolution authority over the 
large, complex, interconnected, and cross-border financial 
groups that are the targets of this legislation. We believe 
that adding the Federal Reserve to the FDIC board is a step in 
the right direction, but in order to ensure that the right 
experience is brought, we think we need a new primary Federal 
resolution authority.
    And I thank you very much, Mr. Chairman, for your courtesy.
    [The prepared statement of Mr. Ryan can be found on page 
188 of the appendix.]
    The Chairman. Mr. Trumka, I appreciate your staying. I know 
you had some schedule issues. Let me--one thing you point out, 
which has to be correcting in the drafting, any ambiguity on 
preemption of existing statutes would be cleared up. They will 
be allowed to do capital standards, etc., but no investor 
protection, no consumer protection. We will make it very clear 
that is not intended. As some of you have heard me say, I have 
a favorite phrase to put in the legislation, this bill does not 
do what this bill does not do. It will not do that.
    Secondly, as to reforming the Federal Reserve structure, I 
had a study done; 90 percent of the dissents at the Federal 
Open Market Committee are from regional bank presidents and 90 
percent of the 90 percent are for higher interest rates. Those 
are inappropriately placed private businessmen or women, 
occasionally, picked by other private businessmen and 
occasionally women, and they should not be setting public 
policy.
    I don't care that the Fed rejected what the Treasury said. 
That may be a nice discussion among gentlemen. The Fed will not 
reject it when we, I promise you, next year take up 
legislatively the issue--and I think it's very clear--you 
should not have private citizens like the presidents of the 
regional banks voting on policy, and I guarantee you that won't 
happen.
    So those are two things that we do very much intend to deal 
with, and I appreciate your calling them to our attention.
    Let me just go to Mr. Ryan and--I have to say, you have 
actually strengthened my view, in one sense, as to how you do 
the resolution authority. You say that you don't like what we 
have picked because it is creditor unfriendly. Yes, that's what 
we want to be.
    Here's the problem, the whole question of moral hazard is 
one that seemed too creditor-friendly. The argument for moral 
hazard is that once people think a particular bank is going to 
be involved in this, they put their money there, they become 
the creditors of that institution, because they think they are 
going to be protected.
    So frankly, I wasn't quite sure about where the differences 
are. Yes, we want to be creditor-unfriendly because we want to 
generate the uncertainty here, because it is the lack of 
certainty and it is the sense that we are too creditor-friendly 
that causes the problem.
    Now, we also want to address the question of the list. One 
of my favorite Marx Brothers movie quotes is between Chico and 
Groucho negotiating a contract, and they're going through each 
clause, and Chico doesn't like this clause and that clause, and 
they keep ripping it up, and finally, Chico says, ``What's 
this?'' He said, ``That's the sanity clause.'' And Chico says, 
``You can't fool me. There ain't no sanity clause.'' Well, 
``There ain't no list, either.''
    There may have been a misinterpretation of what I said. 
Here's my view of this. I will insist that in this legislation, 
in order to get my support--which is helpful in getting it out 
of here, not enough, but it's necessary, albeit not 
sufficient--there will be no identification of a systemically 
important institution until the hammer falls on it. That is, 
there will be no two-step process--they're important, what do 
we do about it? They will know that there is concern about them 
the day they are given higher capital requirements or told to 
divest this entity.
    Now that's not supposed to be secret. There may have been a 
misinterpretation. When I said I didn't want there to be a 
list, people said, we won't tell you what's going on. No, that 
will be made public. The draft has to be revised. Yes, the 
regulators will say that's a potentially troublesome 
institution. I believe that this will be a scarlet letter. I 
think it will be the opposite of moral hazard.
    There will be no list, this is a systemically important 
institution. There will be a list of the institutions that were 
considered troubled, and therefore were given higher capital 
requirements or told they couldn't issue as many of this 
instrument, or may be broken up, because I want to put in here 
a kind of institution-by-institution Glass-Steagall that they 
can put in there.
    So I did want to clear those up. Ms. D'Arista, let me just 
say, I agree in part. As to securitization, we are addressing 
it. Some people think we're being too tough on it. One other 
issue, though, that you raised that's intriguing, Paul Volcker 
has said it, the question of proprietary trading by banks, both 
risky and anti-competitive. I'm asking the bank to trade for me 
and they're trading for themselves. In a pinch, who gets the 
better deal?
    And I appreciate it, but I tell you, I have become a little 
weary of people telling me to solve the problem. You help me 
solve the problem. You raised it, you say, make rules. 
Seriously, let me just ask you this, what would you have us do 
about proprietary trading? I mean that seriously. I think 
that's on the table. Should we ban proprietary trading by 
depository institutions or put limits on it? What would we do?
    Ms. D'Arista. Certainly ban it by depository--
    The Chairman. What's that?
    Ms. D'Arista. Ban it by depository institutions, yes, 
because they are in conflict with their clients. But it is a 
very large problem. I think proprietary trading goes on 
globally.
    The Chairman. All right, well then send us something in 
writing. I understand the large--
    Ms. D'Arista. Okay, all right. The problems--
    The Chairman. You do us no service when you tell us the 
problem--
    Ms. D'Arista. Leverage will help, and if you were to extend 
the idea of the National Bank Act to limit lending to financial 
institutions, that would be very helpful.
    The Chairman. Let me ask you to do that in writing, because 
I do think the issue of proprietary trading is one that we 
would like to work on. If you can send us that in the next week 
or so--
    Ms. D'Arista. I would be happy to do that, thank you.
    The Chairman. That would be helpful. Mr. Ryan, I am over my 
time, but I talked about you. So I will give you a few seconds.
    Mr. Ryan. Thank you. Just on uncertainty, there is some 
uncertainty that we don't like. It's uncertainty that causes a 
pricing impact--
    The Chairman. No, but here is what we have been told. When 
we get into--when we're talking about those that would be 
subject to resolution authority, we're told that there is a 
moral hazard there because people will now say, ``Oh, they're 
going to be resolved. That means I should put the money 
there.''
    I want that to be less creditor-friendly. I want 
creditors--I want the uncertainty that says, ``You know what? 
That institution is somewhat troubled. Maybe I won't deal with 
them because I want the institution to have an incentive to 
stop doing what's troubling people.''
    Mr. Ryan. May I just say--
    The Chairman. Yes.
    Mr. Ryan. --what I fear? What I fear is that uncertainty 
will cause significant disruptions in the intra-daily markets 
and--
    The Chairman. Mr. Ryan, isn't it likely to cause--and I 
apologize, if I can go--isn't it likely to cause a transfer 
from one institution to another? After all, there will be some 
institutions that will be on this list and some that won't.
    So, what I am trying to do is to convert the fear that 
being put on the list is a badge of honor into making it a 
scarlet letter. And I don't see how it would be disruptive, 
unless there are a whole lot of institutions there. But if only 
a few institutions are there, they can put their money 
elsewhere.
    Mr. Ryan. We will try to come back to you with some ideas 
which will get to your--
    The Chairman. All right, I appreciate it.
    Mr. Ryan. Thank you.
    The Chairman. I appreciate the indulgence. Let me just say 
that I want to put into the record an article on the 
feasibility of systemic risk management by Andrew Lo at MIT--
because there is no point in pretending you can do any of this 
unless you can get the data and make sense of it, and he says 
you can--and also testimony from the Property Casualty 
Insurance Association of America on this hearing.
    So, I ask unanimous consent that they be put in the record.
    The gentleman from Alabama is recognized.
    Mr. Bachus. Thank you, Mr. Chairman. Mr. Chairman, I would 
like to ask each of the panelists--and maybe just a yes or no, 
or a very brief response, have you had time since the 
discussion draft was issued to thoroughly analyze the bill, as 
far as strengths and weaknesses?
    Mr. Trumka. No.
    Mr. Baker. No, sir, not enough.
    Mr. Swagel. No.
    Mr. Talbott. No.
    Mr. Kandarian. No.
    Mr. Menzies. No.
    Mr. Wallison. Certainly not all, Mr. Chairman.
    Ms. D'Arista. No.
    Mr. Yingling. No.
    Mr. Ryan. No.
    Mr. Bachus. All right. We hadn't, either, so I appreciate 
that.
    The chairman mentions creditors. I guess you can't have 
credit without creditors.
    So, let me see. There are so many questions I would like to 
ask. Professor Swagel, you were at Treasury last year. You said 
that the enhanced resolution authority would create a permanent 
super-charged TARP?
    Mr. Swagel. Yes.
    Mr. Bachus. Secretary Geithner and Chairman Frank have 
repeatedly said that the resolution authority does not provide 
for bailouts. But you disagree. Is that correct?
    Mr. Swagel. I do disagree. I listened carefully to the 
Secretary's testimony, and I understand--his testimony was 
about what he would intend to do, and I believe him and respect 
him.
    My concern is that the legislation allows much more. And I 
look at what happened with the TARP. I don't think anyone 
anticipated all the manifold activities that the TARP would get 
into. And that's essentially what the text of the legislation 
allows, as well.
    Mr. Bachus. Mr. Wallison, Secretary Geithner said that the 
chairman's discussion draft does not provide for the 
possibility of future bailouts. So what's your perspective on 
that?
    Mr. Wallison. I was very puzzled to hear the Secretary say 
that, because there is language in here that does permit things 
that anyone would consider to be a bailout. That means 
assistance to an institution that is failing, and then 
permitting that institution to be brought back to solvency.
    Now, under any person's interpretation of what a bailout 
might be, that is a bailout, because government funds are then 
used to bring the institution back to solvency, and set it off 
again competing with others.
    In my prepared testimony as well as in my oral testimony, I 
said that this doesn't seem like either an equitable or 
sensible thing to do. Because then the costs of the government 
in keeping that other institution alive, to compete with the 
existing healthy institutions, are then taxed to the healthy 
institutions, which have just been weakened by that assistance.
    So, I could not understand what the Secretary was saying, 
and I would be delighted for someone to interpret it.
    Mr. Bachus. Maybe they hadn't had sufficient time to read 
the bill.
    Mr. Wallison. Maybe not.
    Mr. Bachus. Mr. Kandarian, you said, and I have said this 
before, that I think a better approach would be to regulate 
activities, not institutions. Does anyone else on the panel 
agree with that, that it would be a better approach? Maybe 
start with Mr. Trumka.
    And let me say this. When you decide that certain 
institutions will be bailed out and some will not, you make a 
decision not only that institutions are ``too-big-to-fail,'' 
you make a determination that 99 percent of institutions--or 
99.9--are ``too-small-to-save.'' And that doesn't seem very 
fair. Mr. Trumka?
    Mr. Trumka. Would you please repeat the first part of the 
question?
    Mr. Bachus. Yes. Do you have a problem with--I will just 
say the last part. Do you have a problem with ``too-big-to-
fail,'' as far as from a fairness standpoint?
    Mr. Trumka. We have a problem with ``too-big-to-fail.'' We 
would like to prevent people from becoming ``too-big-to-fail.'' 
Because once they are there, you do not have a lot of choice 
but to bail them out. So, the goal should be to try to prevent 
that from happening.
    Mr. Bachus. All right.
    Mr. Trumka. And make sure that systemic risk doesn't 
aggregate, even--
    Mr. Bachus. You believe that it's--that activities within 
an--it's an activity that creates the risk, and it's an 
institution--I guess I will just go to Mr. Baker, going down.
    What do you think about the approach where you regulate 
activities, and not institutions, as a--
    Mr. Baker. Activities should be the focus, not necessarily 
assets under management.
    Mr. Bachus. All right, thank you.
    Mr. Swagel. I would agree with that.
    Mr. Talbott. I agree. It's not the size; it's the riskiness 
of the activities.
    Mr. Bachus. Thank you. Mr. Kandarian? We will just go on 
down the line.
    Mr. Kandarian. Yes, those were my comments, so certainly I 
support--
    Mr. Bachus. Yes, you would support it.
    Mr. Menzies. I disagree. Our activities are unbelievably 
regulated right this minute. It's the size of the institutions.
    Mr. Bachus. What about subprime lending? Do you think it 
was regulated, or--
    Mr. Watt. [presiding] I--
    Mr. Bachus. Can I get the rest of the answers--
    Mr. Watt. I am trying to get the rest of your answers in--
    Mr. Bachus. All right, Mr. Wallison?
    Mr. Watt. --but you can't--
    Mr. Bachus. You're right. I have--
    Mr. Watt. --ask another question and then expect the rest 
of the--
    Mr. Bachus. You're right. Mr. Wallison?
    Mr. Wallison. As I have testified to this committee before, 
I don't think any institution can create systemic risk, no 
matter what its size, unless it is an insured commercial bank.
    Ms. D'Arista. No, I think size is important. Yes, 
activities must be regulated. I have advocated that for many 
years. But management of a very large institution runs another 
problem that has to be addressed.
    Mr. Bachus. All right. Mr. Yingling?
    Mr. Yingling. I think we need more subtle approaches than 
just having a somewhat arbitrary list.
    Mr. Bachus. You mean of institutions or activities?
    Mr. Yingling. Of institutions.
    Mr. Bachus. Okay. Mr. Ryan?
    Mr. Ryan. I agree with Ed's comments.
    Mr. Watt. The gentleman's time has expired. And I will 
recognize myself for 5 minutes, just to say that every effort 
that we have tried to regulate as an activity, my colleagues 
have said they don't want to regulate either.
    So, this is one of those situations where it seems to me 
we're damned if we do and damned if we don't. If we do it based 
on size, they oppose it. If we do it based on activities, we 
oppose it. I guess that's what the Minority is designed to do, 
just oppose something, as opposed to propose something that 
will solve a problem. But that's--I won't belabor that point.
    Now, I know there are people on this panel who are 
unalterably--maybe they have moderated a little bit--but at 
least still opposed to the concept of a CFPA. I understand 
that. But assuming that there is a CFPA, is there anybody on 
this panel who thinks that the director of that agency 
shouldn't be on the council that is set up under this bill?
    I am not looking for a speech about whether you like CFPA 
or not. I just want to know whether you think they ought not to 
be on the council. Yes, sir?
    Mr. Swagel. Yes, I would not put the director of the CFPA 
on the systemic risk--
    Mr. Watt. We need to do something about your microphone.
    Mr. Swagel. Sorry about that. I would not put the director 
of the CFPA on the systemic risk council.
    Mr. Watt. Okay. Anybody else who will agree with that?
    [No response.]
    Mr. Watt. Okay. I won't go into your reasons. Give me your 
reasons in writing.
    Mr. Swagel. Okay.
    Mr. Watt. I won't take the time to do that. Mr. Yingling, 
you raised an issue that I raised this morning with the 
Secretary about dividing the funds, the FDIC fund, which has a 
brand, obviously, that the public relies on from whatever fund 
gets created to--either after the fact or before the fact--to 
deal with this resolution of systemically risky institutions. I 
think some of the others of us are concerned about that.
    You support setting up a fund in advance of a resolution or 
after the fact?
    Mr. Yingling. I would do it after the fact. I think your--
    Mr. Watt. Okay, and who would you tax with the--with 
putting up the money to put into that fund?
    Mr. Yingling. I think, unfortunately, you end up with 
something similar. We would have some changes in what the 
Administration proposed, but some--
    Mr. Watt. All right. I understand that. I'm asking you who 
you would tax. Would it be all financial institutions? Would it 
be some financial institutions? Would it be institutions above 
$10 billion? Would it be--who would you tax?
    Mr. Yingling. What we said in our proposal was very similar 
to what the Administration proposed. We didn't put a number on 
it.
    Having said that, one thing we would like to see is a much 
stronger provision relating to the fact--and Chairman Bair 
mentioned this--that you get credit for the fact that you're 
already paying deposit insurance. So those--
    Mr. Watt. Would it be set--
    Mr. Yingling. Those liability--
    Mr. Watt. --up as a separate fund, I take it?
    Mr. Yingling. Oh, absolutely--
    Mr. Watt. Totally separate from the FDIC?
    Mr. Yingling. Oh, absolutely, but--
    Mr. Watt. Called something else? A resolution fund?
    Mr. Yingling. A resolution fund, and we think the agency 
should not be called the FDIC, it should be called the systemic 
resolution agency. That is what it is. And that the--
    Mr. Watt. Anybody else on the panel--
    Mr. Yingling. You get credit for the fact that you are an--
    Mr. Watt. --disagree with that?
    Mr. Yingling. --insured depository.
    Mr. Watt. Mr. Menzies, you disagree with--
    Mr. Menzies. I--
    Mr. Watt. --separating the funds?
    Mr. Menzies. I'm a victim of my experience as a community 
banker. We set aside reserves--
    Mr. Watt. I don't want to provide a platform for you to 
give--
    Mr. Menzies. Okay.
    Mr. Watt. --a speech about it. I understand you say that.
    Mr. Menzies. We should pre-fund--
    Mr. Watt. But this is about the fund, Mr. Menzies.
    Mr. Menzies. We should pre-fund that.
    Mr. Watt. You should pre-fund it?
    Mr. Menzies. Absolutely. We should--
    Mr. Watt. What are the arguments in favor of pre-funding 
it, as opposed to doing it after the fact?
    Mr. Menzies. The same logic as applying loan loss reserves.
    Mr. Watt. And who would contribute to that fund?
    Mr. Menzies. Those who present some form of systemic risk 
to our system.
    Mr. Watt. And how would you designate those without knowing 
who they are in advance?
    Mr. Menzies. The industry is not going to be designating 
those. That's what Congress and the regulators need to do.
    Mr. Watt. So we ought to just pick it out of the--Congress 
ought to make a decision about it and put them on a list? Okay.
    We keep going around and around in a circle here. My time 
has expired. And, let's see, Mr. Royce is next.
    Mr. Trumka. Mr. Chairman, I was supposed to be out of 
here--
    Mr. Watt. Oh, I'm sorry. I was supposed to make apologies. 
Mr. Trumka had indicated beforehand that he had to leave, and I 
was supposed to announce that--
    Mr. Trumka. At 2:30.
    Mr. Watt. --so that it didn't look like he was running out 
on Mr. Royce. I hope nobody has any objection to that. He has 
to leave anyway, but you can put your objection in the record, 
so--
    Mr. Bachus. If he has to leave, he has to leave.
    Mr. Watt. You are excused without objection, I believe. You 
are excused without objection.
    Mr. Trumka. Thank you.
    Mr. Watt. And don't take that out of Mr. Royce's time. 
Start his clock over.
    Mr. Royce. Fair enough. Thank you, Mr. Chairman. I had a 
question for Mr. Wallison, and it went to memory of some of the 
hearings, and some of the comments.
    Back when he was Chairman of the Federal Reserve, Alan 
Greenspan often mentioned that he believed deposit insurance 
had an effect of weakening market discipline. He noted that the 
benefits of deposit insurance are great. But he said, 
``Explicit safety nets weaken market discipline. It encourages 
institutions to take on excessive risk.''
    And I am not arguing here against the benefits of deposit 
insurance, obviously. But I am concerned that this legislation, 
by extension, would expand that perceived safety net throughout 
our financial system, that it wouldn't just be any longer a 
question of accounts covered by deposit insurance. Suddenly it 
becomes a problem that ripples throughout the entire financial 
system.
    And I would like to hear your comments on that, or your 
thoughts on it.
    Mr. Wallison. Thank you very much, Congressman. I think it 
should be obvious that deposit insurance does enable the taking 
of risk, and reduces market discipline.
    In fact, I think that's why banks are regulated, because 
once the government is backing their deposits, the only way for 
the government to protect itself against excessive risk-
taking--because the creditors, then, and at least the 
depositors--have no significant incentive not to lend to an 
institution that is backed by the government. That is, of 
course, the whole reason why everyone is supposed to be 
concerned about ``too-big-to-fail.'' And I was quite surprised 
by the chairman's comments about ``too-big-to-fail.''
    But if we have a system in which any institution is looked 
upon as though when it fails, there will be no serious losses 
to people--and that's what this legislation does--we're in the 
same position as we are when we have institutions that are 
covered by deposit insurance--people will have much less 
concern about lending to them. They will get much more 
favorable terms.
    And, unfortunately, that will enable them to take more 
risks. And eventually, we end up with failed institutions. 
Fannie Mae and Freddie Mac are the poster children for exactly 
that. That was systemic risk writ large, and the American 
people are now going to have to spend something like $200 
billion to $400 billion to pay for the losses that are embedded 
in their balance sheets right now.
    Mr. Royce. Now, the chairman's draft legislation would give 
regulators the ability to shield creditors from losses. Do you 
agree that making public funds available to soften the blow to 
private creditors would weaken market discipline, as deposit 
insurance does?
    Mr. Wallison. Of course. It's the same thing as deposit 
insurance, and it doesn't really matter very much that 
eventually the public funds made available to these 
institutions are then recouped from the rest of the industry or 
whoever is going to be required to pay these costs.
    The important point is the fact that creditors know in 
advance that they have a much better chance of being paid 
politically or in some other way through a resolution system 
than they would have if the companies went into bankruptcy.
    Mr. Royce. So political pull, or the importance of it, 
starts to replace market discipline or market forces. And I 
suspect we could see a lot more activity by those who suddenly 
begin to focus on that issue.
    As the Richmond Federal Reserve has pointed out, roughly 
half of our financial system--at least in 1999--had some degree 
of government backing, whether it was explicit or implicit.
    I think the critical question in this regulatory reform 
effort is whether or not our system will benefit from a 
government safety net covering what is likely today well over 
half of the liabilities in our credit markets. Considering the 
unintended consequences that have come about from these types 
of market distortions, I have a hard time believing this is a 
good development. And I think we should look to ways to scale 
back that safety net and enhance market discipline in the 
system.
    And I would ask if you had any additional thoughts on that 
matter?
    Mr. Wallison. I agree. And one of the problems with the 
draft legislation is that it actually expands the safety net in 
very significant ways: reduces market discipline, and 
guarantees there will be more risk-taking by large 
institutions--it favors large over small.
    And what will happen in the end is the same thing that 
happened with Fannie Mae and Freddie Mac. We will face huge 
losses in very large companies that have not been properly 
disciplined by the market.
    Mr. Royce. Thank you. Thank you, Mr. Chairman. Thank you, 
Mr. Wallison.
    Mr. Watt. The gentleman, Mr. Himes, is recognized.
    Mr. Himes. Thank you, Mr. Chairman. I have two kind of 
esoteric questions, which may or may not elicit a response. I 
hope they do.
    The first is on the topic of securitizations. 
Securitization structured products, like so much of what we're 
talking about, are real double-edged swords, inasmuch as, used 
correctly, they increased credit and liquidity. Used 
incorrectly, or kept off balance sheet, or poorly rated, they 
contributed to the place we find ourselves in today.
    I am a big believer in the idea incorporated in this 
proposed legislation of retention, that you keep a piece of 
whatever it is that you create. I think it's very elegant. It 
prevents us or the regulators from having to try to sort 
through securities, because, really, the creator of a 
structured product, to some extent, will eat his or her own 
cooking.
    I do have real concerns, though, about the stipulated 
level. The legislation says that you will hold 10 percent of a 
structured product, perhaps down to 5 percent, no lower than 5 
percent. And my problem with that is that I think structured 
products can have wildly different credit characteristics. You 
could have a structured product full of agency and treasuries, 
you could have a structured product full of high-risk stuff.
    So, I am really--and I am thinking about, is there some way 
to link the retention to the credit risk of the product, or to 
the fees associated with the product, which presumably are 
higher, if the product is more complex.
    I am wondering if there is any comment on what is proposed, 
vis-a-vis the 5 to 10 percent retention, and whether these 
ideas I have thrown out maybe have any merit.
    Mr. Ryan. Our view--and it has been consistent here--and I 
believe the chairman asked the same question about a year ago, 
did we support retention, and I said yes.
    We have been working also in Brussels with the European 
Commission. They are basically at a 5 percent number. We hope 
they will also provide some flexibility.
    Based on your esoteric question--because it really is 
different risks, depending on the assets that are held. So what 
we would like to see is 5 percent, not 10 percent, as the 
high--5, but the flexibility for this systemic council or some 
other regulator to determine a standard that could be used 
below that.
    Mr. Yingling. I would agree with your comment, that there 
needs to be flexibility.
    The other problem we have is, particularly for smaller 
banks, you can only keep 5 percent, and it looks like you have 
95 percent off your books. But for accounting and other 
reasons, you still treat it as though you have 100 percent. So 
that's the other issue.
    Mr. Himes. Yes, sir?
    Mr. Talbott. Yes, H.R. 1728, which was, I think, approved 
by the House, started with 5 percent as the ceiling, and we 
think that's the right place to start. And I agree with the 
comments. Start with 5 percent, and then adjust the risk based 
on the riskiness of the underlying asset.
    Mr. Himes. I am sensing a general assent that maybe one of 
the guiding principles to retention ought to be the riskiness 
of the structured product itself. Is that maybe a place to 
start? Okay. I'm seeing lots of nods.
    Mr. Talbott. Yes.
    Mr. Himes. Okay. One other esoteric question. Embedded 
finance companies--I happen to have GE and Pitney Bowes in my 
district. And, of course, there are other companies that have 
finance arms that have operated for a long time. Certainly, the 
way I think about this project we're embarked on is that we 
look very hard at those entities that screwed up and 
contributed to the mess. We look a little less hard, but we 
look nonetheless at entities that maybe weren't involved, but 
could--hedge funds, others.
    It does seem to me that these embedded companies really 
weren't part of the problem. And I am glad to see that, versus 
the original draft, we're not requiring separation. But I am 
concerned about some of the restrictions, cross marketing, that 
are in this draft.
    So, again, I just would like a general comment on whether 
you think this threads that needle in a competent way. Yes, 
sir?
    Mr. Talbott. Yes, we're pleased that the--it's 
grandfathered, but the provisions that you mentioned, like the 
cross marketing, as well as changing ownership, those 
essentially freeze them in time, and prevent the ILC from 
changing as the markets change. You risk, if you make a change, 
that the ILC goes away. And so you lose that flexibility, going 
forward, to be able to adapt as the markets change.
    Mr. Himes. Thank you. Yes, sir?
    Mr. Wallison. If I can just make a comment on this, the 
legislation assumes that it is possible to separate finance and 
commerce. I don't think they can be separated. This has been 
shown again and again when the Federal Reserve has been 
required to decide what is a financial activity and what is not 
a financial activity.
    Here, what we are proposing is to take financial 
activities, whatever they are--and that's going to be a very 
heavily debated question right here in this committee and in 
the halls of Congress, generally--separate them from the 
operations of the company, and then impose restrictions on what 
that separate financial company can do to help the original 
parent. That is a very troubling thing to do.
    Mr. Himes. Thank you, Mr. Chairman.
    The Chairman. Time has expired, but I am going to ask for 
10 seconds just to say to Mr. Yingling--and you have mentioned 
this before--I am sympathetic here.
    You have talked about the accounting impact. We would be 
glad to receive from you language that would allow 
securitization that would not have those broader accounting 
implications. We are not trying to interfere with accounting, 
but where we're creating something, we have a right to create 
it clean.
    So, you're right, that should not--that's a serious 
impediment, and please give us language. We will try to clean 
that up.
    Mr. Yingling. Thank you, Mr. Chairman.
    The Chairman. The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. Ms. 
D'Arista, before you raised the question of proprietary trading 
and the chairman followed up with it, I had asked the previous 
panel about that.
    Ms. D'Arista. I heard you, sir.
    Mr. Miller of North Carolina. In part, because while 
Chairman Volcker had testified last month that proprietary 
trading by systemically significant firms should be prohibited, 
that perhaps customer trading should be allowed, but not 
proprietary trading.
    And Ms. Bair seemed to agree, with respect to the 
depository institutions, but thought it would be okay in an 
affiliate within a holding company.
    And then Mr. Dugan, not surprisingly, found a reason not to 
do it at all, and that was that if you required it to be by a 
separate entity, the entity would still grow to be so large 
that it would be systemically significant. It certainly 
occurred to me that there are still reasons to do it, even if 
all the different entities end up being really big.
    One is the market discipline--to use the term that others 
have used today--that if you're dealing with a company that 
just does one thing, you focus on that, and do not assume that 
because they're so big they're going to be good for their 
debts. Who could imagine Citigroup not being good for their 
debts? Obviously, it could never ever happen--or Bank of 
America.
    It's impossible to manage a company. Obviously, the CEOs, 
and certainly the boards of directors, had no idea what the 
different parts of their companies were doing, the ones that 
got into trouble.
    And finally, it's impossible to regulate. Again, not 
surprisingly, we have had other discussions of Freddie and 
Fannie. Everybody seems to have agreed right along that the 
regulator for Freddie and Fannie was not up to the task, 
because Freddie and Fannie was so complex.
    And they had derivatives in case interest rates went up, 
they had derivatives in case interest rates went down. And 
there were only a handful of people on the planet who could 
figure out what it all meant. And the more lines of business 
there are that are all complex and opaque, the harder it is to 
regulate.
    Do you agree that even if the separate entities end up 
being really big, and probably systemically important, that 
proprietary trading should not be done at the same entity 
that's doing--that is a depository institution that's doing 
lending?
    Ms. D'Arista. I would agree, and I would think that you 
need to limit proprietary trading across the entire financial 
system, not only within the conglomerate, but with other 
institutions.
    Typically, this was the province of investment banks in the 
past, who have changed muchly, as we know.
    Mr. Miller of North Carolina. Right.
    Ms. D'Arista. I think as I began to say--and I will submit 
some information about my thinking on this--we could go at this 
in a number of ways: limiting leverage; limiting counterparty 
exposure; etc. This will reduce the amount of counterparty 
trading, or proprietary trading, that is going on.
    But you have to understand that the proprietary trading is 
what blew up, inflated into a balloon, our financial system. We 
are not Iceland, but we're getting there, if we don't do 
something about it. In other words, size is important Because 
of what it means in terms of gross domestic product, in the 
size of the financial institution itself, of the financial 
sector, etc.
    Where does it get to the point where we don't produce 
enough in the economy to cover the exposure of our financial 
sector?
    Mr. Miller of North Carolina. All right. Mr. Yingling, 
should depository institutions do proprietary trading?
    Mr. Yingling. I don't think they should do it directly in 
the depository institution. I would agree with Ms. Bair's 
response to you earlier.
    Mr. Miller of North Carolina. That affiliates within the 
holding company should do proprietary trading, but--
    Mr. Yingling. Yes, with careful regulation and capital 
requirements and leverage limits.
    Mr. Miller of North Carolina. Mr. Ryan, you seem to want to 
be recognized. Were you raising your hand?
    Mr. Ryan. I do. Thank you.
    Mr. Miller of North Carolina. Yes.
    Mr. Ryan. That's why I came, to answer questions like this.
    Mr. Miller of North Carolina. Okay.
    Mr. Ryan. And my view is, first of all, there are different 
types of proprietary trading. Some have excessive risk, some do 
not. And that's an important question.
    What we have proposed--and I think that your bill proposes, 
or the Administration's bill proposes--is this type of activity 
would be in the domain of the systemic risk regulator. They 
would look to see, are they taking excessive risk? Or, more 
importantly, are they capable of managing the risks that 
they're taking?
    That is the way I would approach it, because there is such 
a wide difference between excessive risk in proprietary 
trading, and some proprietary trading that is not that risky.
    The Chairman. The gentleman from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman. Ms. D'Arista, you 
said we're not quite Iceland, but we're getting there. Are you 
suggesting we're going to lose McDonald's?
    [laughter]
    Ms. D'Arista. No, and I perhaps exaggerated for effect.
    Mr. Cleaver. I am--that's--yes. It came through clearly.
    But I do have a serious--my kids would think that's 
serious. But I have an even more serious question. The World 
Bank president on Monday--Mr. Zoellick--made a speech. And it 
was a little surprising in the fact that he said that Treasury, 
rather than the Fed, should be given the authority to regulate 
systemic risk, because Treasury is an executive department, and 
that both Congress and the public would have more involvement 
in how this authority is used than if the Fed is given this 
authority.
    Where do you come down on that?
    Ms. D'Arista. As President Trumka said, if the Fed were a 
reform, we would not have a problem with the Fed having the 
responsibilities that they have been given. I think we do have 
a problem with the Treasury. The Federal Reserve is an agency 
of the Congress. And I think that the Congress needs to 
undertake greater responsibility for overseeing the Fed, both 
in terms of monetary policy and regulatory policy.
    But the idea that the Treasury, the Administration, should 
assume such a large role is, in my view, a problem.
    Mr. Cleaver. So you are saying that it is de-politicized--
I'm asking the question--it is de-politicized if the Fed has 
the responsibility and authority, as opposed to Treasury, which 
is appointed by the President and confirmed by the Senate?
    Ms. D'Arista. Yes and no. I really--looking at the 
Constitution, and what--
    Mr. Cleaver. We don't do that in here.
    Ms. D'Arista. Well--
    [laughter]
    Mr. Cleaver. Go ahead.
    Ms. D'Arista. You have the responsibility for creating 
money and maintaining its value. And that is a responsibility 
that you passed on to the Federal Reserve.
    I don't think you have--I don't think this body has, in 
recent years, done the job it should have done with the Federal 
Reserve. But the Federal Reserve is an important institution, 
it is the central bank, and it has knowledge and reach, and it 
goes into the issues of external markets, etc.
    I think it should be on the council, but not dominate the 
council. I want the council to have more responsibility, but I 
don't feel that it should be under the thumb of the Treasury.
    Mr. Cleaver. Mr. Baker, as a former Member of this August 
body, do you differ with Ms. D'Arista?
    Mr. Baker. Certainly, we feel that a council-like structure 
would be more appropriate in providing balance and perspective.
    I understand the concerns Members have with regard to the 
Federal Reserve unilaterally engaging. There are certain 
questions with regard to monetary policy obligations and 
resolution of particular systemically significant entities, 
which could create issues. Go back to Mr. Volcker during the 
Mexican currency crisis, when it was advocated that banks 
extend credit, notwithstanding concerns about creditworthiness, 
which created considerable concerns about the integrity of 
monetary policy formulation and bank lending activity.
    This is a very carefully constructed question that I think 
we should take time to examine. But certainly having a 
Presidential appointee unilaterally make the decision or have 
the Federal Reserve make the decision, both are fraught with 
inappropriate resolution ability.
    Mr. Cleaver. Are any of you aware of any other central bank 
that has the responsibility for supervising systemic banking 
risk and managing monetary policy? Any other central bank that 
does--yes, sir, Mr. Wallison?
    Mr. Wallison. There are other central banks that do that. I 
think the French central bank does that.
    The Chairman. Did you say the French central bank?
    Mr. Wallison. Yes.
    The Chairman. But I thought they lost monetary policy to 
the European Bank. So they don't have monetary any more, ECB 
does.
    Mr. Wallison. Yes, I suppose it's possible, if the ECB has 
taken over all the central bank responsibilities. But I think 
the national central banks do continue to have some 
responsibility for monetary policy within those countries. But 
I just wanted to mention that they are proposing to do this in 
the U.K., to return some responsibility to the Bank of England 
that was taken away.
    But it is a troubling idea, because the central bank has 
important responsibilities, and the idea of giving it 
responsibilities that would otherwise be handled by a political 
organ of the government, in some ways, compromises its 
independence. And in the United States this is very troubling, 
because to weaken the dollar through compromising--
    The Chairman. Time has expired.
    Mr. Wallison. --the independence of the central bank is a 
problem.
    The Chairman. The time has expired.
    Mr. Cleaver. Thank you, Mr. Chairman.
    The Chairman. I think many of the national central banks 
will welcome your restoring to them powers that I understand 
they all lament having lost.
    The gentleman from California is now recognized.
    Mr. Sherman. Let me ask the independent bankers, under the 
recapture provisions, your members could be taxed if they have 
assets of over $10 billion. Are you confident that every future 
Administration will not hit you with any significant taxes for 
the cost of bailing out the big folks on Wall Street?
    Mr. Menzies. I think the answer is, what's the right 
number? Should it be $10 billion? Should it be $50 billion? 
Should it be $100 billion? I think that is an economic question 
and a political question, and I don't have the answer to 
either.
    Mr. Sherman. Do you believe any of your members are singly 
and by themselves systemically important? Not that--yes, 
obviously, community bankers, as a group, are systemically 
important. But would you put any of your members in that 
category?
    Mr. Menzies. We do not believe we have systemically 
important members. And we do believe we are systemically 
important to every community we serve.
    Mr. Sherman. You were saying that you do not believe that 
any one of your members meets the statutory definition of 
being--
    Mr. Menzies. Of being systemically important, no.
    Mr. Sherman. So, none of your members is going to be able 
to benefit from an implicit Federal guarantee that says, ``You 
are `too-big-to-fail,' and unsecured creditors will get some 
sort of bail-out assistance in order to safeguard our economy 
from systemic risk.'' Your uninsured creditors don't get any of 
that, right?
    Mr. Menzies. No. If we fail, we fail. Our uninsured 
creditors are not paid. It's as simple as that.
    Mr. Sherman. So do you think that the tax should be imposed 
on any entity that is too small to be considered ``too-big-to-
fail?''
    Mr. Menzies. Absolutely not.
    Mr. Sherman. Okay. Mr. Baker, welcome back.
    Mr. Baker. Thank you.
    Mr. Sherman. Hedge funds are often under $10 billion. But 
you folks--some of your members engage in pretty 
sophisticated--some would say risky--investment strategies. You 
were careful to point out that many of them don't.
    Do you believe that a $9 billion hedge fund with tens of 
billions of dollars of contingent liabilities should be subject 
to this tax so that we can recoup the costs of bailing out a 
systemically important institution?
    Mr. Baker. I think the whole manner of who is assessed, and 
to what extent, for the failure of an unrelated enterprise--for 
example, if I am understanding the mark properly, it could be 
an insurance company that has activities totally unrelated to 
the hedge fund sector performance. The question becomes, how 
far does one go in extending the assessment on--financial in 
nature--outside the sector in which you are performing? So I--
    Mr. Sherman. Do you think that if we bail out an insurance 
company, only the insurance companies should pay the tax, and 
if we bail out a commercial bank, only the commercial banks 
should pay the tax?
    Mr. Baker. It's unclear as to the economic resolution at 
the scale of the--the difficulty and the assets of the 
particular sector. It certainly is something worth a 
discussion. I would say, as far as my members will go, we are 
not looking for bailouts. We haven't received a bailout. Now, 
we--
    Mr. Sherman. Well--
    Mr. Baker. --fortunately, because of the length of the 
future, and how uncertain it is, we may be subject to 
resolution. But the distinction between the two is pretty 
significant.
    Mr. Sherman. Let me interrupt and go to Mr. Swagel.
    Can you run a modern economy if the major players do not 
believe that the major players are likely to be bailed out, 
should it come to that? Can we run this country without 
bailouts being available when Treasury thinks they ought to be?
    Mr. Swagel. Right. If the major players think that there is 
a possibility of a bailout, that will affect their behavior. 
If, for some reason, as you--
    Mr. Sherman. So--oh, yes. Obviously, if you go out and tell 
everybody, as we apparently--unbeknownst to me--did, prior to 
Lehman Brothers, that everybody like Lehman Brothers is going 
to get bailed out, and then you don't do it, then you're 
building the house of cards and then you're not protecting 
those cards from the wind.
    But my question is, can you--
    The Chairman. The gentleman's time has expired.
    Mr. Swagel. I would just briefly note that Lehman's senior 
debt was trading at 10 cents on the dollar before it failed, 
and the auction cleared at 9 cents on the dollar. So people had 
a pretty good sense of what was going to happen to Lehman.
    The Chairman. The hearing is now adjourned. I thank the 
witnesses for their persistence in staying through a couple of 
votes.
    And let me say anyone who wants to--we have asked 
specifically of Ms. D'Arista--but anybody who has any further 
information to send in, we will be glad to get it.
    [Whereupon, at 3:40 p.m., the committee was adjourned.]


                            A P P E N D I X



                            October 29, 2009

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