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




 
                THE CONDITION OF FINANCIAL INSTITUTIONS:
                   EXAMINING THE FAILURE AND SEIZURE
                         OF AN AMERICAN BANK

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 21, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-97



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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             THADDEUS G. McCOTTER, Michigan
RON KLEIN, Florida                   KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio              BILL POSEY, Florida
ED PERLMUTTER, Colorado              LYNN JENKINS, Kansas
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

                 LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELVIN L. WATT, North Carolina       J. GRESHAM BARRETT, South Carolina
GARY L. ACKERMAN, New York           MICHAEL N. CASTLE, Delaware
BRAD SHERMAN, California             PETER T. KING, New York
DENNIS MOORE, Kansas                 EDWARD R. ROYCE, California
PAUL E. KANJORSKI, Pennsylvania      WALTER B. JONES, Jr., North 
MAXINE WATERS, California                Carolina
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
CAROLYN McCARTHY, New York               Virginia
JOE BACA, California                 SCOTT GARRETT, New Jersey
AL GREEN, Texas                      JIM GERLACH, Pennsylvania
WM. LACY CLAY, Missouri              RANDY NEUGEBAUER, Texas
BRAD MILLER, North Carolina          TOM PRICE, Georgia
DAVID SCOTT, Georgia                 PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri            JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois            KEVIN McCARTHY, California
PAUL W. HODES, New Hampshire         KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota             CHRISTOPHER LEE, New York
RON KLEIN, Florida                   ERIK PAULSEN, Minnesota
CHARLES A. WILSON, Ohio              LEONARD LANCE, New Jersey
GREGORY W. MEEKS, New York
BILL FOSTER, Illinois
ED PERLMUTTER, Colorado
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    January 21, 2010.............................................     1
Appendix:
    January 21, 2010.............................................    59

                               WITNESSES
                       Thursday, January 21, 2010

Austin, Jeff III, Vice Chairman, Austin Bank.....................    13
Glassman, Mitchell L., Director, Division of Resolutions and 
  Receiverships, Federal Deposit Insurance Corporation (FDIC)....    41
Hartnack, Richard C., Vice Chairman, U.S. Bank...................    12
Kelly, Jennifer, Senior Deputy Comptroller for Midsize and 
  Community Bank Supervision, Office of the Comptroller of the 
  Currency (OCC).................................................    39
Kelly, Michael E., Chairman and Chief Executive Officer. FBOP 
  Corporation....................................................    10
McCullough, Steven, President and Chief Executive Officer, Bethel 
  New Life Inc...................................................     8
Miller, David N., Acting Chief Investment Officer, Office of 
  Financial Stability, U.S. Department of the Treasury...........    38

                                APPENDIX

Prepared statements:
    Gutierrez, Hon. Luis.........................................    60
    Austin, Jeff III.............................................    62
    Glassman, Mitchell L.........................................    81
    Hartnack, Richard C..........................................    92
    Kelly, Jennifer..............................................    98
    Kelly, Michael E.............................................   112
    McCullough, Steven...........................................   131
    Miller, David N..............................................   147

              Additional Material Submitted for the Record

Gutierrez, Hon. Luis:
    Responses to questions submitted to Jeff Austin III..........   151
    Responses to questions submitted to Mitchell Glassman........   152
    Responses to questions submitted to Steven McCullough........   155
    Responses to questions submitted to David N. Miller..........   158
    Article from the Chicago Tribune entitled, ``Failed banker 
      called local hero,'' dated January 20, 2010................   159
    Written statement of David Pope, President, Village of Oak 
      Park.......................................................   163
Price, Hon. Tom:
    Responses to questions submitted to Mitchell Glassman........   166
    Written statement of Steven D. Bridges, Executive Director of 
      Legislative & Regulatory Affairs, Community Bankers 
      Association of Georgia.....................................   168
    Written statement of Richard R. Cheatham and James W. 
      Stevens, Kilpatrick Stockton LLP...........................   172


                       THE CONDITION OF FINANCIAL
                        INSTITUTIONS: EXAMINING
                        THE FAILURE AND SEIZURE
                          OF AN AMERICAN BANK

                              ----------                              


                       Thursday, January 21, 2010

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Luis V. 
Gutierrez [chairman of the subcommittee] presiding.
    Members present: Representatives Gutierrez, Maloney, Moore 
of Kansas, McCarthy of New York, Baca, Green, Clay, Miller of 
North Carolina, Scott, Ellison, Klein, Foster, Perlmutter, 
Speier, Minnick; Hensarling, Castle, Jones, Garrett, 
Neugebauer, Price, Marchant, Lee, Paulsen, and Lance.
    Ex officio present: Representative Bachus.
    Also present: Representatives Biggert, Davis of Illinois, 
and Rush.
    Chairman Gutierrez. This hearing of the Subcommittee on 
Financial Institutions and Consumer Credit will come to order.
    Good morning, and thanks to all of the witnesses for 
agreeing to appear before the subcommittee today. Today's 
hearing will examine the current state of the U.S. lending 
system, with a specific focus on a case study involving the 
bank holding company FBOP and its affiliated banks, including 
Park National Bank of Chicago.
    The subcommittee has asked our witnesses to address not 
only the specifics of the case study, but also the overall 
picture of the health of the lending industry, as well as the 
process of how insolvent financial institutions are resolved.
    Because of the interest of members on this issue, I will be 
increasing opening statements to 12 minutes per side, with the 
ranking member's agreement. But, without objection, the record 
will be held open for all members' opening statements to be 
made part of the record.
    In addition, I ask unanimous consent that Congressman 
Davis, Congressman Rush, and Congresswoman Biggert and others 
be empaneled for this hearing, and that they be allowed 5 
minutes each to question the panelists after the members of the 
committee. Hearing no objection, it is so ordered. I yield 
myself 5 minutes.
    Ever since the beginning of this financial crisis in 2008, 
we have all heard about the big financial firms and the banks 
that have failed: Bear Stearns; Lehman Brothers; and Merrill 
Lynch.
    But for every large bank that fails, there have been dozens 
of smaller community banks that have also failed, banks with 
names like People's First Community Bank and St. Steven's State 
Bank. Even banks like Park National Bank, that was supported by 
a largely successful holding company, fail every week.
    While the focus of this hearing will be the failure of one 
particular bank holding company, it is my intention to shed 
light on lessons learned from recent bank failures and the 
insolvent bank resolution process. Last year alone, 140 banks 
failed across this Nation. And so far this year, four banks 
have failed, including three just last Friday.
    Through this hearing, I hope to provide our banks better 
insight into the factors used by the regulators when they make 
their decisions, and for the regulators to have a better 
understanding of the impact that bank closures and 
consolidations have on our local communities and on civic and 
community organizations like our schools and faith-based 
institutions.
    We should also examine today the FDIC's flexibility in 
accounting for factors such as the purchasing bank's knowledge 
of the market that it's moving into, as well as a bank's record 
of community investment and support beyond the standard CRA 
rating. If the FDIC requires a change in the current law to be 
able to account for our community's well-being, then by all 
means, we should have that discussion now, before more and more 
banks fail and consumers suffer even more than they already 
have.
    Finally, I want to stress the importance of banks that 
focus on lending to our communities, and not simply on using 
their money to make profits through trading on Wall Street. 
Real economic growth in this country happens when we invest in 
Main Street. It is based on old-fashioned lending, through a 
loan to a bakery to buy a new commercial oven, by helping to 
finance the expansion of a local school, by helping to put a 
child through college, or simply by offering them a reasonable, 
affordable loan to purchase a home.
    The economic crisis that we face was created by trading in 
confusing and all-too-crazy products like credit default swaps 
and mortgage-backed securities, not by financing the expansion 
of a hardware store down the street. This kind of trading is 
still based too much on greed. Just take a look at the decrease 
in lending last year, and compare that to the increase in 
bonuses doled out by many of the largest and yet most 
vulnerable institutions.
    And, as our local lenders close all around us, these banks 
continue to play financial roulette. It's fundamentally 
backwards, and quite simply, counterintuitive. I believe that 
in order to stabilize our financial system, we must re-examine 
what it means to be a successful bank in this country, and 
encourage a return to fundamentals of lending.
    I am glad to hear that President Obama will be addressing 
this very issue later today when he announces his plans for 
limiting the ability of commercial banks to conduct proprietary 
trading with their depository funds.
    Finally, I want to thank all of you who came to this 
hearing--in particular, those who made the long journey by bus. 
I applaud your interest and your involvement in these important 
issues, which are vital to the sustainability of our 
communities. And I look forward to hearing the testimony of 
those before us today.
    I yield Mr. Hensarling 4 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. And thank you for 
calling what is really a very, very important hearing. I think, 
although many would agree that the financial stability crisis 
appears to have passed, clearly, economic recovery has yet to 
take hold.
    Unfortunately, since this Administration has taken office, 
we continue to be mired in double-digit unemployment, and 3\1/
2\ million more of our fellow citizens have been put on the 
unemployment rolls.
    We know that we have the highest level of bank failures 
that we have had, I believe, since the early 1990's: 140 last 
year, costing the Deposit Insurance Fund $36.5 billion.
    We know that for only the second time in history, the 
Deposit Insurance Fund in September went into the red. The 
taxpayers of this Nation are being oppressed.
    We have now seen, in just the last 2 years, the Federal 
deficit increase tenfold. Tenfold. We know that we are on a 
pathway now, under this Administration and this Congress, to 
triple the national debt in the next 10 years, and it's just a 
matter of time before they are knocking on the door of the 
taxpayer yet again to bail out the Deposit Insurance Fund.
    We can afford no more bank failures. So I think it is 
important that we examine what is the cause, and also examine 
and try to understand why does there still appear to be a 
relative dampening of lending activity that is out there.
    It is interesting, as we look at the case that is before 
us--and I read, I guess--I believe it was from yesterday's 
Chicago Tribune; I look forward to Mr. Kelly's testimony, I 
assume that they got it right--but reading from the 20th 
edition of the Chicago Tribune, ``He,'' referring to Mr. Kelly, 
``had stashed $890 million in the preferred stock of 
government-sponsored mortgage lenders Fannie Mae and Freddie 
Mac, partly to fund acquisitions. This would be the biggest 
mistake of Kelly's career. At the time, regulators had created 
numerous incentives encouraging banks to invest in the so-
called GSEs. They were deemed about as risky as government 
bonds, and were treated favorably when it came to evaluating a 
bank's capital.''
    Again, another data point on how the GSEs have simply 
wreaked havoc with this economy, and how the regulators were 
actually pushing their paper, creating exemptions for them.
    And, speaking of exemptions, as we continue to look at how 
shocking a number of bonuses are, how about the bonuses for 
those who run the GSEs? We are paying more money for them to 
lose more money.
    Why was it that the Administration waited until Christmas 
Eve to simultaneously announce that they are lifting the cap on 
taxpayer exposure to Fannie and Freddie--apparently $400 
billion wasn't enough, apparently they hadn't wrecked enough 
banks already--lifting taxpayer exposure at the same time they 
were announcing $6 million bonus packages for their chief 
executive officers, $42 million for other execs. Those are the 
bonus structures that I want to be taking a look at. So, I'm 
glad that we're having this hearing.
    Another thing we need to look at is, why is there a 
dampening of lending activity? Well, I talked to bankers in the 
fifth congressional district of Texas that I have the honor and 
pleasure of representing in Congress. I talked to them all over 
east Texas.
    For example, I speak to Milton McGee, president and CEO of 
Henderson Citizens Bank Shares in Henderson, Texas. He said, 
``I think the primary reason we are not seeing much commercial 
lending is the uncertainty with what is coming out of 
Washington. The small business owner doesn't know what health 
care costs are going to do to him, plus any new taxes, as a 
result of the ever-increasing deficit. Business owners are not 
going to borrow and invest until they feel comfortable with the 
economic and political conditions. Way too many mixed signals 
are coming out of the Administration.''
    I hear that all over my congressional district. I hear it 
all over east Texas. I hear it all over America. If you want 
there to be greater lending activity, there is going to have to 
be less of a tax burden, and more certainty about the 
regulatory burden on these businesses.
    I thank you, Mr. Chairman, and I yield back the balance of 
my time.
    Chairman Gutierrez. Mr. Bachus is recognized for 3 minutes.
    Mr. Bachus. Thank you, Chairman Gutierrez, and I thank you 
for holding this hearing. I want to focus on the community 
banks and the regional banks, because for some period of time, 
I have felt like the rules were being applied more aggressively 
towards our community banks and our regional banks.
    In every part of the country, members are hearing from 
community bankers, frustrated by new, inconsistent, and often 
arbitrarily applied mandates from the regulators. This 
zealousness--or I would call it overzealousness--is stifling 
meaningful economic recovery. Healthy community banks across 
the Nation are dealing with conflicting standards, and hearing 
mixed messages from the regulators.
    At the same time that the Administration is advocating for 
more consumer and small business lending, the bank regulators 
and the bank examiners are implementing regulatory standards in 
ways that inhibit responsible bank lending.
    Mr. Chairman, no one questions the need for strong safety 
and soundness regulation of our Nation's banks, particularly 
those too-big-to-fail institutions that nearly brought down our 
economy during the recent financial crisis. But there is 
mounting evidence that pendulum may have swung too far, and 
that regulatory overreach is preventing our smaller financial 
institutions and our regional banks from meeting the legitimate 
credit needs of the communities.
    In testimony before the Financial Crisis Inquiry Commission 
last week, Rusty Kluvier, on behalf of the ICBA, referenced a 
2008 interagency statement called, ``Meeting the Needs of 
Credit-Worthy Borrowers,'' that established a national policy 
for banks to extend credit. The statement said, ``The agencies 
expect all banking organizations to fulfill their fundamental 
role in the economy as intermediaries of credit to businesses, 
consumers, and creditworthy borrowers.''
    But if this standard is operative, why is every Member of 
Congress hearing from bankers that regulators and their actions 
are undermining their ability to lend? Why are 61 percent of 
community bankers saying that their most recent safety and 
soundness exams were significantly tougher than their last?
    Actions speak louder than words. These actions stand in 
sharp contrast to statements by the regulators and the intent 
of the law. The mixed messages from regulators are impeding 
economic recovery. However, the mixed message that is coming 
from this Administration, and many Members of the Majority in 
Congress are even more harmful.
    The Administration and some Members of the Majority 
chastised banks for not lending, but then pushed legislation 
that discourages investment and creates uncertainty. Increases 
in capital gains taxes, the cap and tax bill, government-run 
health care, as well as the Administration's new bank fee 
create regulatory uncertainty. When the rules of the game are 
constantly changing, financial institutions are less willing to 
invest the capital needed to sustain economic growth.
    Thank you for holding this hearing. I look forward to 
hearing our witnesses testify.
    Chairman Gutierrez. Mr. Garrett is recognized for 2 
minutes.
    Mr. Garrett. Yes, I thank the chairman, and I thank the 
chairman for holding this important hearing with regard to this 
one particular bank. But, along with my colleagues, I do 
believe the larger issue that we need to be looking at is the 
GSEs, Fannie Mae and Freddie Mac.
    Because, as the ranking member said, it was indeed on 
Christmas Eve that the Obama Administration and the Treasury 
Department expanded and extended the bailout to Fannie and 
Freddie, and also approved those now-famous multi-million 
dollar compensation packages with nary a word from the chairman 
of this committee.
    The CBO is currently projecting losses of over $400 billion 
by these institutions. So, when you think about it, we will 
probably end up spending more money on the bailouts for these 
institutions than what Congress did with TARP.
    Since Fannie and Freddie were bailed out, we have had 
exactly one full committee hearing, and exactly one 
subcommittee hearing on this issue, entirely. So a lot of 
people think that this committee has been negligent in its 
oversight responsibilities in this area.
    After Christmas, on December 30th, Ranking Member Bachus 
and I wrote a letter to the chairman, asking him to hold a 
hearing on this issue. But here we are, almost a month later, 
and no response to the hearing request.
    I do understand that this topic may cause discomfort to 
some Members of Congress, considering the role that they played 
in basically shielding the GSEs from meaningful regulatory 
scrutiny in the period leading up to their collapse. 
Nonetheless, we shouldn't let past mistakes lead us from 
carrying on an oversight responsibility that we have now, going 
forward.
    It was the chairman who did, in fact, announce a hearing on 
executive compensation for this Friday, tomorrow. But again, he 
has refused to agree with a request by Ranking Member Bachus to 
have the heads of Fannie and Freddie here to testify as well, 
as far as what their role is in all this.
    The chairman even stated, ``The public, having provided 
significant support for the purpose of restoring trust and 
confidence in our country's financial system rightfully insists 
that large bonuses, such as these awarded by institutions 
receiving public funds at a time of a serious economic 
downturn, cannot continue.'' Well, if that's the case, then 
it's really unacceptable that this committee has not responded. 
And we must respond in an appropriate manner.
    So, once again, I do call on the chairman of the full 
committee to hold a hearing on the Obama Administration's 
expanded bailout of Fannie and Freddie--
    Chairman Gutierrez. The time of the gentleman has expired.
    Mr. Garrett. --and the approval of their $1 million 
bonuses--
    Chairman Gutierrez. Mr. Foster is recognized for 2 minutes.
    Mr. Foster. I won't use my 2 minutes here. I just want to 
make it clear once again to everyone that we are dealing with 
the aftermath of the fact that, in the last year of the last 
Administration, $17 trillion of money was removed from this 
economy by the economic policies that were then in place. We 
should never forget who ran the car into the ditch here. And if 
you put those $17 trillion of money back into the local 
communities, back into the local banks, we would not be 
worrying about this today. I yield back.
    [applause]
    Chairman Gutierrez. I would remind you that you are all 
guests, and you are not to applaud for the comments of the 
members.
    Dr. Price of Georgia is recognized for 2 minutes.
    Mr. Price. Thank you, Mr. Chairman. I want to thank you and 
Representative Hensarling, as well, for holding this important 
hearing on the anatomy of a bank failure. This issue is of 
paramount importance, not just to this Nation, but especially 
to my home State of Georgia.
    As you know, Georgia holds the distinction of having the 
largest number of failed banks in 2009: 25 of the 140. Banks in 
Georgia employ over 50,000 people, and hold $276 billion in 
assets. Most of these banks are community banks, which were 
mere bystanders to the financial and liquidity crisis of the 
last 2 years.
    Understanding how a bank fails is critical to determining 
if all these failures are necessary, and if policies and 
procedures are being applied fairly and uniformly by prudential 
regulators, especially the FDIC. I have grave concerns that the 
FDIC has taken its mission to protect depositors and used it to 
promote a world in which there are fewer banks.
    FDIC actions in the last 2 years have shuttered over 350 
banks, and further concentrated assets in already large 
depository institutions. As a matter of policy, this is a 
judgement that should be left to Congress to debate and decide. 
Congress must ask itself and the FDIC if the United States is 
best served with deposits concentrated in relatively few banks. 
FDIC's own reports show that only 112 institutions have assets 
over $10 billion, which hold more than 75 percent of all assets 
at all banks, combined.
    So, while Congress is not qualified to resolve failed 
institutions, and it's not my intention to tell regulators 
which banks should be closed and which should remain open, 
Congress must aggressively investigate the FDIC to ensure 
transparency for the American people from this opaque 
institution, which is literally destroying communities across 
our State. In fact, one individual in our home State said, 
``We're not losing an industry. We're losing communities.''
    So, today's hearing is just the first step to answer these 
questions. This committee must commit to doing its due 
diligence to understand the FDIC's decision-making process in 
closing financial institutions, and I urge the chairman to hold 
more hearings on this, and I look forward to those, and this 
hearing as well. Thank you, Mr. Chairman.
    Chairman Gutierrez. Thank you. I yield myself 1 minute just 
to enter into the record, since I was here--I arrived here in 
the November 1992 election--and then in 1994, the Republicans 
were in the Majority, in 1996, 1998, 2000, 2002, 2004, and 
2006, when finally we were in the Majority.
    So, to hear my colleagues say that we shielded everybody, 
and that we were in charge, it's just not the historical 
record. As a matter of fact, let me see, President Bush was 
elected in 2001 and re-elected in 2004, and the calamity 
happened the last year of his Administration. We weren't in 
charge, again. So, I just wanted to put it in some perspective.
    And lastly, bonuses for GSEs? We proposed freezing bonuses 
for GSEs. That's our proposal. Every one of my colleagues on 
the other side of the aisle voted against freezing the bonuses 
of the GSE, but they want the GSE chairman to come before us. 
So that's kind of the record that we have.
    And now we will open to the opening statement of our 
colleagues--
    Mr. Bachus. Mr. Chairman?
    Chairman Gutierrez. Yes, sir?
    Mr. Bachus. Could I have a moment to respond?
    Chairman Gutierrez. It's just that you--we have only used 7 
minutes of our time--
    Mr. Bachus. Oh, okay, I see.
    Chairman Gutierrez. We gave you 12 minutes on your side.
    Mr. Bachus. All right.
    Chairman Gutierrez. So I am going to just--
    Mr. Bachus. I just wasn't aware of a bill that restricted 
GSE compensation. I would like a copy of it. Thank you.
    Chairman Gutierrez. There is a hearing tomorrow on 
executive compensation, and it will come up tomorrow at the 
hearing.
    Mr. Bachus. Now I do have legislation to limit the 
compensation of GSEs--
    Chairman Gutierrez. Really, really, you will have time.
    Mr. Bachus. Okay, thank you.
    Chairman Gutierrez. I assure you, when your time comes up, 
either tomorrow or today, when 5 minutes--but the Majority used 
7 minutes, we granted you 12 minutes. And you used your time, 
and we used our time.
    Mr. Bachus. Thank you very much.
    Chairman Gutierrez. We are going to proceed. Before we get 
to the first panel, I would like to enter into the record an 
article entitled, ``Failed Banker Called Local Hero,'' from 
yesterday's Chicago Tribune, which Mr. Hensarling quoted from 
as well, and a letter from the Oak Park mayor, David Pope.
    I ask unanimous consent that these two items be entered 
into the record. Hearing no objection, it is so ordered.
    And now, we will go to our witnesses today. Each of them 
will be recognized for 5 minutes. There is a little clock 
there, and it will get green, and then it will get yellow, and 
red means stop. So when you see the yellow, know that you have 
60 seconds to kind of wrap it up. We know that we're going to 
be very gentle up here, in terms of giving you the time 
necessary.
    We are going to start with Steve McCullough. He is the 
president and CEO of Bethel New Life in Chicago, and is here 
representing both his organization and the Coalition to Save 
Community Banking.
    Next, we will hear from Michael Kelly, who is the chairman 
and CEO of FBOP Corporation, and is here representing himself.
    After him, we will hear from Richard Hartnack, who is the 
vice chairman in charge of consumer and small business lending 
at U.S. Bank.
    And finally, Ranking Member Hensarling will introduce Mr. 
Austin, a fellow Texan, a little bit later on.
    Mr. McCullough?

 STATEMENT OF STEVEN McCULLOUGH, PRESIDENT AND CHIEF EXECUTIVE 
                 OFFICER, BETHEL NEW LIFE INC.

    Mr. McCullough. To the honorable members of the 
Subcommittee on Financial Institutions and Consumer Credit, 
thank you, Chairman Gutierrez, for inviting me to testify 
today. Thank you to the staff of your office for their support.
    One year ago, my wife and daughter, who was then 5-years-
old, drove to Washington to witness history. We would never 
have thought that 1 year later, we would be here again, but 
this time as an entire community, to reverse a bad decision by 
our government.
    I represent not only myself as a proud resident of the West 
Side of Chicago, but also as a leader of a community-based 
organization named Bethel New Life that employs over 250 
individuals and serves thousands of residents, and as a humble 
member of the coalition of citizens who have spontaneously, and 
in an unscripted manner, come together as a result of the 
seizure of Park National Bank, and First Bank of Oak Park 
Corporation, FBOP, in October of 2009.
    I am here to speak on behalf of that broad and diverse 
coalition of community organizations, nonprofits, local 
leaders, religious institutions, and concerned citizens named 
``A Coalition to Save Community Banking.'' My testimony's 
intent today is to make a case for the reversal of the seizure 
of Park National Bank and FBOP Corporation by the FDIC, to 
question the process by which Park National Bank was seized, 
and to advocate for real reform that supports community banks 
across rural and urban America.
    Park National Bank was a model community-based bank. It was 
both financially successful and mission-driven. It provided the 
quality of service, access to capital, and community 
reinvestment that all financial institutions should aspire to 
deliver. PNB demonstrated its commitment to the community by 
employing local residents and investing in new schools, small 
businesses, and affordable housing. PNB supported the work of 
local nonprofits and cultural organizations, and exemplified 
innovation, fairness, and flexibility. All of this is detailed 
in my written testimony.
    Our experiences may be local in nature, but they are 
national in significance. In 2009 alone, 140 of the Nation's 
8,000 local banks failed. And at this moment, more and more are 
struggling to stay afloat, as the FDIC issues demands for banks 
to raise capital reserves above standard thresholds. In 
Illinois, seven community-based banks are at serious risk, if 
not more.
    What is the wisdom of a program like TARP that allows model 
financial institutions to die, while saving banks that have 
ignored the call to increase lending and to bank the unbanked? 
Why was TARP funding allocated to only the largest banks, while 
smaller banks collectively received a much lesser amount?
    If we seek greater economic stability, then how does 
withholding crucial assistance from community-based banks 
advance the FDIC's goal of avoiding a future in which banks 
become too-big-to-fail?
    Invoking the cross-guarantee authority, a mechanism used by 
the FDIC only 6 times in 20 years, the FDIC seized Park 
National Bank, along with its sister banks under FBOP Corp. 
Despite the fact that PNB was profitable and well-capitalized, 
it was unable to compensate for the heavy losses suffered by 
its subsidiaries in the south and west, which were particularly 
hard hit by the mortgage crisis. As a result, PNB was sold to 
U.S. Bancorp, along with FBOP's 8 other banks at a cost to the 
taxpayers of $2.5 billion. A pillar of our community and an 
exemplary bank was lost.
    The seizure occurred only hours after United States 
Secretary of the Treasury Timothy Geithner personally awarded 
$50 million in tax credits to Park National Bank, an indication 
of confidence in the bank's stability and an acknowledgment of 
its vital role in community reinvestment and economic recovery.
    Furthermore, the FDIC inexplicably disregarded FBOP Corp.'s 
request for a 1-week grace period following the seizure to 
formalize the acquisition of $600 million in private equity, 
which FBOP had secured to help stabilize the struggling banks.
    We have come here today to ask why? To the residents of the 
community served by PNB, this seizure and sale are 
incomprehensible. Why was a financially successful, model 
community-based bank not only allowed to die, but prevented 
from saving itself? Why was the FDIC so inflexible that it 
would not grant the 7 days it needed to save itself? Why were 
TARP funds withheld from smaller financial institutions? And 
why is there still no relief for community-based banks?
    We presumed, we hoped, that the buck stops here with the 
United States Congress and the White House. Imagine our 
frustration when we learned that, in fact, the buck does not 
stop here, that there was nothing that our congressional 
representatives or the White House could do to alter the FDIC's 
decision. If the FDIC cannot be held accountable by our 
congressional representatives, then by whom? By what power? Who 
is regulating the regulators?
    We believe that it's not too late to save our bank. We ask 
this subcommittee to urge the FDIC to reassess and reverse 
their actions regarding FBOP. If this cannot be done, we expect 
U.S. Bancorp, being the sixth largest bank in the United 
States, to not only meet, but exceed the commitment to our 
communities that Park made.
    We ask that Congress exercise its full power to ensure that 
other community banks across our Nation do not meet a similar 
fate to that of PNB.
    We rode for 14 hours on a bus to get here.
    Chairman Gutierrez. Your time has expired.
    Mr. McCullough. And tonight we will make a 14-hour trip 
back home, because many of us cannot afford overnight 
accommodations. That is how important this issue is to our 
community.
    We realize that this issue is bigger than us alone, bigger 
than--
    Chairman Gutierrez. Mr. McCullough, your time has expired.
    Mr. McCullough. --Mike Kelly at Park National Bank and U.S. 
Bank. These are questions that you can answer for us.
    Chairman Gutierrez. Mr. McCullough--
    Mr. McCullough. Our country is waiting for your response 
and for your leadership. Thank you.
    [The prepared statement of Mr. McCullough can be found on 
page 131 of the appendix.]
    Chairman Gutierrez. Thank you. I would ask the witnesses--
that was almost a minute over--and there is 5 minutes for 
everyone.
    Mr. McCullough. I apologize.
    Chairman Gutierrez. So when you see the yellow light, start 
summarizing. We are going to ask you questions. If you want to 
answer a different question than the one we're asking you to 
make a point--I think you all understand how we can get that 
done.
    Mr. Kelly, you are recognized for 5 minutes.

  STATEMENT OF MICHAEL E. KELLY, CHAIRMAN AND CHIEF EXECUTIVE 
                   OFFICER, FBOP CORPORATION

    Mr. Kelly. Thank you. Good morning. My name is Mike Kelly, 
and I am chairman of FBOP Corporation. Thank you, Mr. Chairman, 
and members of the subcommittee for inviting me to testify 
today.
    I would like to give some brief remarks on the background 
of FBOP Corporation, and the events that led up to the closure 
of our nine community banks. I would also like to explore ways 
in which TARP funds might be made available to smaller 
community banks that are struggling in the current economic 
environment.
    First, a little background on FBOP Corporation. FBOP 
Corporation was a $19 billion privately held multi-banking 
holding company headquartered in Oak Park, Illinois. We 
operated nine separate charter community banks in the States of 
California, Texas, Arizona, and Illinois. We employed 2,400 
people. We were the largest privately held holding company in 
the United States, and the second-largest bank holding company 
in Illinois. We posted record profits for 25 straight years, of 
exceeding earnings and service to the community, and had never, 
ever paid a common stock dividend. All earnings were retained 
within the bank group.
    Regulators considered FBOP to be a problem solver, and 
approved us to acquire 29 institutions, primarily failed or 
sub-performing banks. We were recognized for best practices in 
credit administration by our regulators. We were rated as best 
in class by the largest real estate valuation company in the 
country as recently as only 6 months ago, and they referred to 
us as an A underwriter.
    One-third of FBOP's 150 branches were located in low- to 
moderate-income census tracks. Our banks were consistently 
rated outstanding for their community investment efforts, an 
honor given to only 8 percent of banks in the United States.
    In 2007 and 2008, FBOP Corporation banks made community 
donations and investments totaling $55 million, which 
represented 28 percent of our total earnings.
    Fannie Mae and Freddie Mac are Government-Sponsored 
Entities created by Congress, which carried the implied 
guarantee of the government. Banks like FBOP invested in Fannie 
Mae and Freddie Mac because it was considered to be a very safe 
investment. At the time we acquired these investments, they 
were all AA-rated investments.
    Furthermore, the market--in fact, the regulators assigned 
national banks like FBOP a 20 percent capital risk weighting 
for Fannie and Freddie preferred stocks, the same risk 
weighting as U.S. agencies or cash. The regulators considered 
it so safe that the FDIC permitted banks to invest up to 100 
percent of their tier 1 capital in Fannie and Freddie preferred 
securities.
    But on September 7, 2008, the Federal Government took over 
Fannie Mae and Freddie Mac, and rendered these investments 
worthless. This takeover created an $885 million impairment 
loss for FBOP in an investment that it considered to be a safe 
haven and a conservative investment. It left four of our banks 
less than well-capitalized.
    On the morning of the takeover, Secretary Paulson made a 
statement to the press, and I want to quote here, if I may: 
``The agencies encourage depository institutions to contact 
their primary Federal regulator if they believe that losses on 
their holdings of Fannie Mae and Freddie Mac common or 
preferred shares, whether realized or unrealized, are likely to 
reduce the regulatory capital below well-capitalized. The 
banking agencies are prepared to work with the affected 
institutions to develop capital restoration plans consistent 
with capital regulations.'' In our case, this did not happen.
    I am also here this morning in the hope that other well-
run, still-viable community banks are not closed unnecessarily. 
While more than 100 community banks have failed to date, 
estimates are that many more are still in danger of failing. 
Few of these community banks have ever engaged in predatory 
lending practices, or awarded exorbitant compensation packages 
to their executives.
    The first round of TARP provided a great deal of assistance 
to the largest banks during the worst financial meltdown since 
the Depression. Since then, Treasury has now imposed very 
strict guidelines for access to TARP. These guidelines were not 
in place for the larger community banks when they were fully 
funded in the initial stages of the TARP program.
    The small community banks are bearing the brunt of these 
stricter guidelines. For example, regulators now require that, 
for a bank to qualify for TARP, they have to be well-
capitalized and rated as either a one or a two institution--the 
top ratings. There are few banks in the United States today 
that meet that criteria.
    The issue of these smaller community banks stem not from 
poor management, but from their commitment to their communities 
as an active lender.
    Chairman Gutierrez. Take 30 seconds and wrap up, Mr. Kelly, 
please.
    Mr. Kelly. I have some other remarks. Hopefully, I will be 
able to make those in the question stage.
    Chairman Gutierrez. And your complete statement will be 
entered into the record without objection.
    Mr. Kelly. Thank you.
    [The prepared statement of Mr. Kelly can be found on page 
112 of the appendix.]
    Chairman Gutierrez. Thank you, Mr. Kelly.
    Mr. Hartnack?

   STATEMENT OF RICHARD C. HARTNACK, VICE CHAIRMAN, U.S. BANK

    Mr. Hartnack. Thank you very much, Mr. Chairman. And 
members, I appreciate the time to speak with you today. In the 
time allotted, I would like to just give a little bit of 
background on a couple of points that I think are relevant to 
the discussions here.
    First, though, I would like to talk just a little bit about 
our bank. U.S. Bank has been participating in resolving failed 
banks because we have maintained a record of superior 
performance: consistent profitability; strong capital position; 
and far fewer loan problems than many banks in the country.
    To understand U.S. Bank, you should think of us as the 
largest community bank in America, not the smallest big bank, 
and certainly not a Wall Street bank. We are headquartered in 
Minnesota--go Vikings--and our business practices reflect our 
Midwestern roots and values.
    Second, in our view, the FDIC process, subsequent to the 
decision by the prudential regulator to fail a bank, is a 
sound, transparent, fair, and value-maximizing process. Our 
experience has been entirely satisfactory, and we believe we 
have met all of the obligations for the transactions in which 
we have participated.
    Third, we want you to know that we are in this process of 
resolving failed banks as an opportunity to invest in 
communities and expand our community franchise. We are not in 
this for a quick trade. We are not in this for a fast buck. 
And, as a result, we pay a lot of attention, in every case, to 
employment, maintaining branch access in the communities, 
community relations, and community support. We do everything we 
can to retain clients, enhance our reputation, and maintain 
support for the community.
    Finally, we believe our track record of financial 
performance, growth in our customer franchise, well-documented 
community reinvestment, and community support, and community 
development lending and investing all suggest that the FBOP 
franchise has ended up in capable, caring hands. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Hartnack can be found on 
page 92 of the appendix.]
    Chairman Gutierrez. Thank you. And Mr. Hensarling will 
introduce Mr. Austin.
    Mr. Hensarling. Thank you, Mr. Chairman, for the courtesy 
of introducing our next panelist. Jeff Austin is a fourth-
generation banker, and vice chairman of the board of Austin 
Bank Texas. He also happens to be chairman-elect of the Texas 
Bankers Association.
    He has, in the past, served as: the past chairman of the 
Tyler Area Chamber of Commerce; a member of the Frankston/Lake 
Palestine Chamber of Commerce; a member of the development 
board and the audit committee of the UT Health Science Center 
in Tyler; a board member of Lon Morris College; a board member 
and past president of East Texas Area Council Boy Scouts; a 
member of the Better Business Bureau of East Texas; and a 
member of the Children's Advocacy Center of Smith County. If we 
had more time, I could go through the rest of his biography.
    But the point I would like to make is there is simply there 
is very little good that goes on in charity or economic 
development in east Texas that Mr. Austin is not involved in or 
knows of. He is a very important voice in banking in east 
Texas, and a very respected voice in banking in our State.
    And, although he is technically not a constituent, I would 
be proud if he was. I am happy that he has joined us here 
today. Mr. Chairman, I introduce Mr. Austin.
    Chairman Gutierrez. And Mr. Austin, you are recognized for 
5 minutes.

    STATEMENT OF JEFF AUSTIN III, VICE CHAIRMAN, AUSTIN BANK

    Mr. Austin. Thank you, Congressman Hensarling, Mr. 
Chairman, and committee members. I am proud to be here this 
morning. Like many other bankers across the country, we are 
involved in our communities, and we are on the front line when 
boards and people call us for involvement.
    My message is clear this morning, and I want to state it 
simply: I am proud to be a banker, and please do not shoot the 
survivors.
    The theme is an underlying and frustrating tone among many 
bankers across the country. This is also felt by the hundreds 
of thousands of employees and many other bankers across the 
country.
    The investment banking activities of some of the Wall 
Street giants that are sometimes loosely referred to as banks, 
or ``the shadow banking system,'' have been inappropriately 
blended with banks like ours. There seems to be a populace view 
that banks are not lending. I just looked in the Washington 
paper this morning, and it said, ``Slow Lending; Cautious 
Banks.''
    This is true for banks across the country, but I will say 
that when the economy slows down and when some of the large 
banks as stated here in the Washington paper this morning slow 
down, if they sneeze, smaller banks catch pneumonia.
    By saying banks do not want to lend, it's like telling 
McDonald's they do not want to sell hamburgers. We do want to 
loan money. That's our mission, that's our purpose. And we ask 
for your help to help us get back to this without throwing on 
unnecessary regulations, unnecessary taxes, unnecessary 
intrusion into compensation, and a lot of distractions that 
take us away from doing what we are supposed to do.
    I would also suggest when you go back into your districts 
over the next couple of weeks, create a conference call. Talk 
to your bankers. You're going to hear a lot of other stories 
like the ones that you have heard here, and the ones that I 
will share.
    Recent exams? They're not like they used to be. There is 
probably an overkill, looking at recent valuations on real 
estate that are being applied with distressed values. Banks are 
having to put up reserves against loans that have not taken 
losses. We're building them up.
    And, in addition, the SEC's rules and proposal from FASB-5 
do not work. The intent of that was banks that were building up 
reserves in good times, they did not want that to happen, where 
it could come back into earnings. We would like to be allowed 
to build up reserves in the good times to prepare for the 
turbulent times that we have right now.
    There are a lot of things that are happening in the banking 
industry. Traditional bankers, as we are--there is a 
difference--we know our customers. We want to loan to them, we 
want to be involved with them. We want to work with them 
through the different and varying economic cycles.
    I have submitted my written testimony. I would like to give 
some time back and make myself available to answer some 
questions.
    But again, we are proud to be bankers. I am proud to be a 
banker. And please, do not shoot the survivors.
    [The prepared statement of Mr. Austin can be found on page 
62 of the appendix.]
    Chairman Gutierrez. Thank you, Mr. Austin. And I will yield 
myself 5 minutes.
    Welcome to everyone, especially those who did come on a 
bus. I know you will be returning on a bus shortly after this 
hearing, back to Chicago.
    We have work to do. Because, as Mr. Kelly suggests, and I 
agree with him, Fannie Mae and Freddie Mac, while not 
guaranteed by the Federal Government, certainly were taken over 
by the Federal Government, and certainly were institutions that 
were created by Federal mandate. And I remember when the 
Secretary said, ``Tell us about your losses,'' and the fact 
that did not happen in your institution, with nearly $900 
million worth of equity that you had in Fannie Mae and Freddie 
Mac when it all disappeared overnight. So I think that's a very 
serious issue that we should take a look at.
    And I agree with Mr. Kelly when he says that the rules were 
changed. That is, the bigger, larger institutions were able to 
access, by signing, actually, just a document, a sheet of paper 
no larger than--and with probably fewer words than many of the 
sheets of paper that we have here before us, in terms of our 
testimony, a simple signature and billions of dollars were 
transferred to them.
    And the rules changed in that smaller institutions that 
were out in the community didn't have access to that capital at 
the second place. So I think that's an important issue that we 
should--so I understand the basic unfairness.
    And Park National Bank, within the holding company, 
obviously had a stellar reputation and condition, in terms of 
its relationship with the community, the geographical community 
that it represented. And I think it's fair--it might not be 
the--in the regulations, you know, it might not be in the law, 
it might not be what is stated--but it seems fair that if the 
FDIC sells an institution to--in this case to U.S. Bank--that 
U.S. Bank consider what that institution was doing within the 
community when they acquired it.
    So, it not only acquires the accounts that were there, and 
the assets that were there, but it also acquires the history of 
that institution, and the relationship that institution had 
with that community. I think that is important.
    Because what we're talking about, Mr. Austin, is not 
affecting your bank. What we're talking about is what you 
suggested earlier. Many of the larger banks are really 
investment banking firms, and that's where they're making their 
money. Because we see many of them, the larger--the ones that 
got the TARP money, they are lending less money.
    But what is curious to us, and what we want to get down to 
is, if you are lending less money, but you're giving out 
billions of dollars of bonuses at the same time you're lending 
less money, then obviously you're profitable somewhere. But 
you're not profitable to the people who need, that is, by 
lending money to people. So you must be making your money 
somewhere else, while you're FDIC-insured, and while the 
Federal Government is standing behind you, and why, in many 
cases, you receive TARP money.
    So, that's the--it's really not the community bankers. I 
think we need to explore how it is we do ease up. But it's the 
large banks that got the TARP money, that survived, that 
brought us into this crisis, that today are--you read about it, 
billions of dollars in bonuses, handing out billions of dollars 
less in loans.
    So, it seems to me you got the money, you're just not 
lending it. But you're keeping it in-house to give the billions 
of dollars of bonuses to your top employees, while not creating 
any economic activity, other than trading in equities, which I 
imagine is economic activity of a few people on Wall Street, as 
they trade.
    But it doesn't create bakeries, it doesn't create homes. It 
doesn't create a hardware store. It doesn't create economic 
activity. It doesn't give somebody a truck that they might need 
so that they can start a landscaping service, I mean the basic 
fundamental kinds of things that people need and need access to 
capital.
    So, having said that, Mr. Hartnack, I don't come to U.S. 
Bank--just so that we understand from the very beginning--in 
terms of what happened, in terms of making any judgements. But 
I would like to ask you, what has U.S. Bank done since it 
acquired the institution to keep that kind of faith and that 
kind of activity that was so well-known and cherished with Park 
National Bank? If you could, just speak to that a moment.
    Mr. Hartnack. Thank you, Mr. Chairman. I would like to make 
sure that the record would reveal that U.S. Bank took TARP--
probably, in 20/20 hindsight, didn't need it--paid it back, and 
doesn't pay billions of dollars in bonuses. So--
    Chairman Gutierrez. That's why I tried to not be defensive 
here.
    Mr. Hartnack. Yes, okay. So I just want to be sure we--
    Chairman Gutierrez. If you could just speak to that issue, 
because--
    Mr. Hartnack. Yes--
    Chairman Gutierrez. --time is up.
    Mr. Hartnack. Yes. With regard to the process of 
integrating a new institution into our company, we have a 
process that we follow both in open market transactions and in 
these FDIC transactions. Fundamentally, we come to the bank, 
sit down with the management that's there, and begin a process 
of understanding the bank, in terms of customers on the loan 
side, customers on the--
    Chairman Gutierrez. I'm trying to--because the time has 
expired, my time has expired, here is what I'm going to ask you 
to do. I'm going to ask you to put in writing to this committee 
what it is U.S. Bank, since acquiring these assets through the 
FDIC, since bidding on these assets, what it has done to keep 
its relationship. Is it keeping--what are your commitments, 
given the past history of Park National Bank, to the community? 
If you could, just roll those out. We will have a chance to 
talk a little bit later.
    Mr. Hensarling, you are recognized for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. Mr. Kelly, my 
first couple of questions will be for you, as I read through 
your testimony.
    My first question is, had the FDIC not had their rule in 
place, which you cite in your testimony, that allowed 100 
percent of Fannie and Freddie preferred stock to count against 
the tier one capital where other investments are generally 
restricted to 10 percent, would you have concentrated as large 
of an investment in Fannie and Freddie?
    Mr. Kelly. Absolutely not.
    Mr. Hensarling. Okay. So but for the FDIC rule, you would 
not have had that concentration. But for--
    Mr. Kelly. If I could elaborate on that just for a second?
    Mr. Hensarling. Please.
    Mr. Kelly. There were four special regulations put in place 
by the FDIC and the OCC to specifically encourage banks to buy 
these instruments. We were allowed to buy no other equity-type 
instruments, other than this preferred stock. Preferred stock, 
in this instance, was nothing more than a highly-refined debt 
instrument. We had unlimited amounts--we were actually given 
regulatory--lowest regulatory capital, the same as a government 
issue. And there were a number of incentives for banks to buy 
this.
    We thought this was a safe haven, AA-rated instruments. We 
were never criticized by our examiners for the investment, or 
the large concentration in it. This was a terrible mistake on 
my part, on our part. But there were so many incentives in 
there to do this.
    Mr. Hensarling. So, in some respect, your mistake was you 
trusted your government, which told you to go out and invest in 
Fannie and Freddie?
    Mr. Kelly. We did believe that the government backed these 
instruments. They created the organizations. There was no SEC 
reporting on these--we could not define and analyze this, as we 
could with any other investment.
    Mr. Hensarling. So, Mr. Kelly, you said but for the 
regulators, you would have not had the concentration of Fannie 
and Freddie. Once you had the concentration of Fannie and 
Freddie--but for that, would you still own the bank today, had 
you not concentrated in Fannie and Freddie preferred stock?
    Mr. Kelly. Unquestionably. We took a $900 million hit that 
wiped out over half of our capital on September 7th. We were 
never able to recover. TARP funding would have been adequate 
for us to recover and go forward. That was not available to us.
    I still don't understand why that wasn't available. We were 
approved for TARP in October. We were called and told we had 
received TARP. The next day we were told that, ``I'm sorry, 
there is nothing in place for a privately held bank, only 
publicly traded banks are eligible for TARP at this time. You 
will have to apply next month.'' We did after already being 
approved, and our request was deferred into January, there was 
a change in administration, and we never got a yes or a no on 
TARP.
    Mr. Hensarling. Do you have a personal or professional 
opinion about the Administration announcing $6 million bonuses 
for the execs of Fannie and Freddie?
    Mr. Kelly. That's a little beyond my scope of expertise. I 
am going to defer on that.
    Mr. Hensarling. Thank you. Mr. Austin, I would like to turn 
to you. I believe--hopefully you--I certainly listened to your 
statement, I hope you listened to mine, as I quoted one of your 
fellow east Texas bankers, Milton McGee of Henderson Citizens 
Bank Shares.
    I would like to quote another Texas banker from Royse City, 
president and CEO of Texas Leadership Bank, talking about what 
he sees as a relative dearth of lending activity. He said, ``I 
would say it's twofold with lenders and borrowers. Borrowers 
are reluctant to take on additional debt during an uncertain 
economic period. They are reluctant to invest their liquidity 
as equity. They are unsure how much additional tax and 
regulatory burden that the President and the leadership in 
Congress may place on their business. Lenders are reluctant to 
take on additional risk during an uncertain economic period. 
Lenders are focusing their efforts on improving existing asset 
quality, rather than on new business opportunities, and are 
reluctant to take on any moderate levels of risk that are under 
the current intense regulatory scrutiny that may subject the 
institution to potential criticism.''
    So, these are just two of the bankers in Texas. Are these 
fair characterizations, as far as what many of us in Washington 
perceive to be an inadequacy of lending activity to help get 
this economy going? Could you elaborate on your views?
    Mr. Austin. Sure. Congressman, those statements would be 
echoed by bankers across the country in every community. We are 
facing a glut in lending, because our focus has shifted from--
we want to continue working with our customers, but we have 
shifted our focus to focus on the unnecessary regulation, the 
proposed regulations that are coming down, and really trying to 
build up capital reserves. Capital is king.
    And taking on unnecessary risk is something that bankers 
are not going to do. We're cautious by nature. We do want to 
lend money, but we need to be able to get back in. And looking 
at some of the exams that are coming from our regulators, we 
know they have a job to do, and this has nothing to do with the 
personalities, but the examinations are extremely tedious, 
looking at the alphabet soup of regulations, and that's taking 
us away from being able to loan money, which is what we're here 
to do.
    Mr. Hensarling. Thank you.
    Chairman Gutierrez. Thank you, Mr. Austin. Congressman 
Moore, you are recognized for 5 minutes.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. Mr. Austin, 
on page four of your testimony, you say that ``no examiner or 
agency wants to be caught not enforcing consumer protections or 
stated regulations because of the real fear of criticism from 
the inspector general's office.''
    Are you saying examiners are only being tough on banks now 
because an IG might double-check their work to see if they're 
fully enforcing the law?
    Before you respond, I would point out that taxpayers have 
learned a lot from recent IG audit material loss review 
reports. For example, the Treasury IG found six examples where 
OTS was complicit--or even worse, directed banks to back-date 
capital infusion so they would appear healthier than they 
really were. One OTS official involved resigned a few weeks 
after I wrote a letter to the acting director, inquiring why he 
had not been fired.
    So, should Congress eliminate these inspectors general with 
the hope that the bank examiners will look the other way if 
there are fewer consumer protection violations?
    Mr. Austin. Congressman, thank you for your question. I 
will say I'm a fourth generation banker.
    Mr. Moore of Kansas. Yes, sir.
    Mr. Austin. I have read the minutes of a couple of our 
banks going back to the 1920's and 1930's. Trust me, examiners 
were tough then, too. That is something that has not changed. 
And they have a job to do.
    We have one of the most sound banking systems in the world, 
and I think all of us can be proud of that. It's like going to 
the doctor. They're going to ask you to do some things, and 
maybe it's going to improve your health, which we need to 
continue to do. But some of the unnecessary results of swinging 
the pendulum too far, that's what we are concerned about.
    With the proposed creation of a consumer protection agency, 
I think that's also adding another unnecessary agency that 
would impose duplication and cause someone else to take a look 
at the examinations or the regulations, when we already have 
qualified experts with our regulatory agencies doing that right 
now.
    Mr. Moore of Kansas. How do we protect and assure the 
public that we're going to make sure what happened in this 
incident doesn't happen again in the future, then, if we don't 
put some further regulations in place to make sure that this 
doesn't happen again?
    Mr. Austin. Regulations are good. Unfortunately, some 
people look at them as suggestions. We do not. And how we 
interpret these, our banks are profitable. We are staying 
focused to our core mission, and that's lending back in our 
communities, working with borrowers that we have known for a 
long time, and been able to work with them through various 
cycles. That's what traditional bankers do.
    Mr. Moore of Kansas. But what about other bankers you're 
calling, I suppose, non-traditional? I understand the community 
banks, and I have talked to my people back home.
    What should Congress do? What should this committee do to 
try to ensure that what happened before doesn't happen again?
    Mr. Austin. There are some of the activities that we did 
not engage in that I can come back with some other responses 
from other--I think some of the other entities are better 
qualified to answer that than I am, because we did not engage 
in those activities for a reason. Some banks do not have the 
expertise to do it; we did not have the expertise to do that.
    What can Congress do? One thing is to take a look at some 
of the other GSEs. Keep the respective agencies focused with 
their core mission, and do not allow mission creep. Keep the 
banking focused on banking. I have been involved in listening 
to different discussions of, let's put the firewalls back up 
between traditional banking activities and the other 
activities. That's something that I think we could take a look 
at.
    Mr. Moore of Kansas. Thank you. Mr. Kelly, I would like you 
to talk about how the culture of excessive lending and abusive 
leverage contributed to the financial crisis. Will we ever know 
what the appropriate level of leverage and use of debt is that 
would maintain financial stability?
    I have heard from many bankers back in Kansas that bank 
examiners seem to be overcompensating, and not allowing them to 
loan as much as they prudently could. But how do we, as 
lawmakers, help strike the right balance of responsible lending 
that's safe and sustainable, while also giving affordable 
credit to the small businesses which can help create jobs, get 
people back to work, and promote economic growth?
    Mr. Kelly. That's a lot to answer. My response is that one 
of the basic things that can be done is allowances for banks to 
maintain larger loan loss reserves, generally. That's basically 
prohibited under FASB right now.
    Everyone knows that banking is a cyclical industry. There 
are going to be downturns. There is no cushion allowed right 
now for loan loss reserves. That has to be changed, so when the 
bad times come, there are reserves there.
    As far as--I am sorry, the other part of your question?
    Mr. Moore of Kansas. Well, that was it. And I would just 
ask you if you have--
    Mr. Kelly. That would be my one recommendation.
    Mr. Moore of Kansas. If you have any further comments you 
would like to make, I would appreciate those in writing after 
this. My time is just about up.
    Mr. Kelly. Thank you.
    Mr. Moore of Kansas. Thank you. Would anybody like to 
address that in the few minutes we have left here?
    [no response]
    Chairman Gutierrez. The gentleman's time has expired.
    Mr. Moore of Kansas. Thank you.
    Chairman Gutierrez. Mr. Bachus, you are recognized for 5 
minutes.
    Mr. Bachus. Thank you, Mr. Chairman. Mr. Austin, we hear 
from local bankers that they're being told by examiners in 
certain cases to require what they consider excessive principal 
payments that the bankers believe will cause borrowers to 
default. In other words, they're told, ``You need to have a 
payment on principal,'' and the bank is actually just 
collecting interest.
    And the banks, you know, a lot of them feel like if they 
had exercised forbearance until the economy improved, that the 
borrower could have been able to meet those things. But we hear 
that examiners are sometimes requiring collateral write-downs, 
and that both of these things are causing unnecessary loan 
defaults. Would you like to comment on that?
    Mr. Austin. Yes, sir. Thank you for asking that. What 
you're hearing is reality. I can cite several examples of where 
we have had good paying customers, we have known them for a 
long time, they're paying as agreed and on time. But we may--
for example, we may have a loan that may be based on a 20-year 
amortization with a 5-year balloon payment. When it comes time 
to renew that payment, that amount, examiners are asking us now 
for a new appraisal.
    Let me use an example. Say you purchased a farm for 
$120,000; we financed $100,000. Maybe you have paid down to 
$95,000. But when that 5 years comes up, we obtain a new 
appraisal, as required, but it comes back at $70,000. We're 
going to have to write that down by creating a reserve of an 
additional $25,000.
    The real heartbreak in this situation comes when we come 
back to you, as a customer, and we say, ``Mr. Customer, would 
you bring us another $25,000 or $30,000 to pay down, so we can 
be within the loan limit, or will you bring us additional 
collateral?'' And this comes at a time when many customers are 
strapped for cash, they're trying to expand, they're trying to 
keep their own households afloat.
    May I add? A lot of these valuations in real estate are 
also caused by the forensic exams after banks are closed, 
where, in many parts of the country, even in east Texas, 
bankers are being asked by the regulators to include--and by 
the FDIC--to include a liquidation value on real estate. That 
is depressing the local real estate markets. It is dumping real 
estate that is really--it's not helping the communities, and 
it's not helping the banks, and we're creating reserves against 
unrealized losses.
    Mr. Bachus. Thank you. Yes. I think, in many cases, the 
regulators or examiners are making underwriting decisions that 
I think the bank ought to make. And--
    Mr. Austin. Yes, sir.
    Mr. Bachus. --as you say, I think it is causing all kinds 
of problems.
    Mr. Kelly, I noticed that a week after your bank was taken 
over, President Obama signed into law a bill easing the rules 
on how Fannie and Freddie losses can be realized.
    Mr. Kelly. Right.
    Mr. Bachus. Would that--and I know the Chicago Tribune 
article says that would have dramatically reduced the amount of 
money that you would have had to have raised.
    Mr. Kelly. That's correct. That was worth as much as $200 
million in capital to us. It would have raised our capital 
levels, and it also would have vastly improved our chances to 
raise outside capital.
    Mr. Bachus. Did--
    Mr. Kelly. We knew that was pending, the regulators knew it 
was pending. We asked for an additional week. It was not 
granted. We had always been a top-rated bank, one and two in 
all categories in banking. We had excellent rapport with our 
regulators prior to the GSE issue. And why we got no 
accommodation, I still have no answer.
    Mr. Bachus. Yes, that was going to be my next question, you 
know. You knew it was coming, they knew it was coming. It would 
have reduced our cost, and yet they didn't extend you a one-
week extension.
    Mr. Kelly. No, that's a good question. I do not have the 
answer to that question.
    Mr. Bachus. Yes, I don't, either. I can't imagine.
    Mr. Hartnack, when U.S. Bank took over--and I notice you 
all have taken over several failed institutions--the FDIC took 
a $2.5 billion write-down. Is that correct?
    Mr. Hartnack. I think those are the numbers that they 
estimated at the time, yes, sir.
    Mr. Bachus. Yes, and I don't know that you can answer this, 
but Mr. Kelly was offering a plan that would have cost $600 
million. And maybe less, had they waited another week. But it 
cost $2.5 billion, the deal they made. Is that--
    Chairman Gutierrez. The ranking member--
    Mr. Bachus. Is that kind of--
    Mr. Hartnack. Yes, I really wouldn't be in a position to 
address that. I think, you know, we came in after the fact, 
and--
    Chairman Gutierrez. The time of the gentleman has expired. 
The FDIC witness will be here, and I am sure we will ask him 
those questions.
    Mr. Bachus. Thank you.
    Chairman Gutierrez. Mrs. McCarthy from New York is 
recognized for 5 minutes.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman. I 
appreciate you holding this hearing. I apologize for not being 
here for the first part of your testimony, though we did go 
through all the testimony last night.
    One of the things, Mr. Austin, that I want to ask you is, 
in your testimony, you discuss the many hurdles facing the 
survivors of the recession, and one of them is dramatically 
higher capital requirements. What are the capital requirements 
imposed on community banks versus the larger financial 
institutions? What would you constitute as a fair capital 
requirement for community banks versus the large banks?
    Mr. Austin. Congresswoman, thank you for the question. The 
capital requirements for FDIC-insured institutions are really 
basically the same.
    Some of the differences are going to be based on the risk 
weighting of our assets. And I think that is what we need to 
turn around and look at--for example, some banks maybe are more 
highly concentrated in commercial real estate versus one-to-
four family real estate. One-to-four family real estate has a 
lower risk weighting than an investment property. And I think 
that's something--when we look at the--this is one thing that 
the regulators do come in and review with great intensity, our 
balance sheets.
    In regards to capital standards, one concern that we are 
seeing is listening to some investors and some others that may 
want to charter new banks. The FDIC is--we have heard--I have 
not tried directly, but from some of our members and 
colleagues--are not allowing new banks to be chartered until 
they can recapitalize and increase the FDIC Fund.
    One consequence from this is that with the new banks that 
have recently been chartered, they are requiring substantially 
higher capital ratios.
    Mrs. McCarthy of New York. Thank you. Mr. Austin, the 
ranking member had actually asked the kind of questions that I 
was going to be--I'm sorry, Mr. Kelly--what I was going to be 
asking.
    But one of the things--we will have the opportunity this 
afternoon--is going to be with the regulators, and I think that 
we can follow up. I think that was one of the reasons we 
reversed it. We wanted to hear from all of you before we 
started talking to the regulators because, obviously, the 
regulators are the ones who are putting you through the hoops, 
as we say, so that we can take your testimony and then ask the 
questions.
    But on one of the parts that we were looking at, were you 
given any guidance on how to modify your application, or any 
changes that were necessary, given the new Administration--
going with your testimony to Mr. Bachus earlier?
    Mr. Kelly. I would have to say that the Office of the 
Comptroller of the Currency, our primary regulator, was very 
supportive, they were very helpful, they were very sympathetic. 
Right from the beginning, they acknowledged that our issue was 
GSE only. They referred to us as a well-managed bank with 
strong asset quality and a good track record.
    And they strongly recommended us for TARP approval in 
October. We were approved for TARP approval by the regulatory 
committee. But because we were not a publicly traded bank, they 
had no rules in place to deal with private banks that did not 
have a stock price.
    Therefore, we were deferred, and that deferral took us into 
January and February. The rules totally changed. The rules 
became so restrictive that the only way you could get TARP is 
you had to be well-capitalized. We, by virtue of the GSE 
losses, were not well-capitalized. Therefore, we didn't 
qualify. The rules were vastly different for the larger, 
publicly traded banks than they were subsequently for the 
smaller banks and privately-traded. And also, the guidelines 
were done at a period well into the economic downturn, when 
everyone's numbers looked much more difficult, as far as loan 
loss provisions and delinquencies.
    Mrs. McCarthy of New York. And I'm sorry if I missed this 
part. Could you tell me what happened to your customers? What 
was the results to your customers?
    Mr. Kelly. I think that has yet to be seen. I think we're 
concerned. We hope that U.S. Bank will step forward and meet 
the commitments that we had in place, both the donations, the 
financial institutions--many of our institutions, many of our 
not-for-profit companies, are totally dependent on the 
commitments we made to support them. And I am hopeful, and I 
believe that U.S. Bank will step forward and do that.
    But the effect on our customer base, U.S. Bank has a vastly 
different model than our model. They're a very efficient bank; 
they run with fewer people. We had 2,400 people, and I am very 
concerned about how many people will be employed by U.S. Bank a 
year from now.
    Mrs. McCarthy of New York. Mr. Hartnack, could you follow 
up on that, on what was just said?
    Mr. Hartnack. I'm sorry. Say it again.
    Mrs. McCarthy of New York. Could you follow up? I was 
asking what happened to the customers of the banks. It was 
mentioned that U.S. Bank was now taking over. Could you tell me 
what's going to affect--
    Mr. Hartnack. Sure. I think we would look at the depositors 
first, and assure you that we continue to offer the same 
products. In fact, the products are unchanged at this point. 
They will be modified during computer conversion, but will be 
substantially the same.
    Interest rates have come down, so depositors are seeing 
lower rates, but they would have seen those lower rates, even 
if--
    Chairman Gutierrez. The time of the gentlelady has expired. 
Thank you very much.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman.
    Chairman Gutierrez. Mr. Neugebauer for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. I thank our 
witnesses.
    Mr. Austin, I want to go back to something you said, 
because it's something I have heard from my community bankers 
not just during this period, but for a number of years, which 
is that during good times, when earnings were good, and the 
economy was stable, growing, that attempts to increase, you 
know, kind of beef up the balance sheet were resisted by the 
examiners.
    But yet they were very quick to come in, when the economy 
turned down and the asset quality diminished some because the 
economy, to tell you you needed to build your capital back up. 
Am I repeating that correctly?
    Mr. Austin. Yes, sir. It's capital in reserves, as well. 
And if I may answer part of that based on our loan loss 
reserve, I think back many years ago when we, after an exam, we 
would ask our examiners for what is called a certification 
letter. That certification letter, on their letterhead--FDIC, 
State Department of Banking, or OCC--would really state that, 
``We're declaring your reserve adequate.''
    We would, in return, take that to our CPAs to defend, in 
case of an IRS audit. Because, under the current rules, we're 
only able to deduct from income taxes the amount that--to the 
extent of our losses, based on the reserve. That would not 
allow us to build up--and it was a disincentive to build back 
up our reserves.
    Today, when we are trying to build them back up, it's at 
the worst time, with depressed earnings. When anything takes a 
hit to earnings, that takes away from money that we can loan 
back into our communities, which is what we are geared to do.
    Mr. Neugebauer. And, in fact, banks are--like most small 
businesses--is that the best source and most ready source of 
capital is earnings, and retaining those earnings. Is that 
correct?
    Mr. Austin. Capital is king, yes, sir.
    Mr. Neugebauer. And so, what would be some of your 
suggestions that we take, moving forward here, to take care of 
both sides of the ledger there, one, the regulatory side, and 
the tax side, to allow financial institutions to, in fact, 
build up those loan loss reserves so that in the event the 
storm comes again, that they are able to weather those better?
    Mr. Austin. There is more than one solution, and this is 
the beauty of this, but it is going to take working with the 
SEC, the IRS, and FASB to allow us to do this. By us being able 
to increase these reserves within a prudent amount by using the 
banker's judgement, based on their characteristics, their level 
of risk tolerance, we would like to put that back in the hands 
of the banks and the bank management, regardless if you're 
publicly traded or not.
    I know of one recent exam from a colleague. One of the 
examiners asked them, ``Well, is your excess or unallocated 
reserve going to be greater than $15,000? And the reply was, 
``No, we will get it down to $12,000,'' because either they 
were going to find something else to charge off, or they have 
to back it back into earnings.
    Mr. Neugebauer. Thank you. Mr. Kelly, I want to go back to 
something you said, that except for the portfolio of the 
preferred stock that you had in Fannie, the rest of your asset 
quality was found to be acceptable to the examiners. Is that 
correct?
    Mr. Kelly. That's correct. In fact, in August of 2008, one 
month before the Fannie and Freddie Mac investments were 
rendered worthless, we were approved by all three regulatory 
agencies to acquire a $3 billion problem institution in 
California. They only give that approval to well-managed, well-
run banks with good numbers. We received that within 48 hours 
expedited time. They knew we were a bank that was capable of 
dealing with problems.
    But when we had the $900 million--almost $900 million--
impact of the Freddie and Fannie losses, it wiped out more than 
half of our capital, we had to cancel that acquisition, and we 
were in a tailspin.
    Mr. Neugebauer. If you would have gotten the same deal that 
some of the people who were holding some of that AIG 
instrument--you might have come out a little better, mightn't 
you?
    Mr. Kelly. We would have been quite happy just to get our 
allocation of TARP money, as most of the other banks our size 
or larger received. That's all we wanted. We were initially 
approved. Why we didn't qualify, I have no idea why that was 
deferred. That will be my question--
    Mr. Neugebauer. But if the government had made you whole on 
those Fannie Mae preferred stock, it would be a different day 
for you, right?
    Mr. Kelly. That would have been nice, yes. Our issues were 
related to the Fannie and Freddie investments.
    Mr. Neugebauer. Yes, and that's the reason that many of us 
on this side of the aisle are very concerned about the 
government picking winners and losers. And, unfortunately, this 
bank was chosen to be a loser, where other financial 
institutions were chosen to be winners, instead of letting the 
marketplace do that. And we cannot allow that to continue in 
the future. It does not promote good behavior, market behavior. 
And, quite honestly, it's not the right thing to do. And so I 
hope that--
    Chairman Gutierrez. The time of the gentleman is expired.
    Mr. Neugebauer. --we will do things to prevent that from 
happening in the future.
    Chairman Gutierrez. Mr. Clay, you are recognized for 5 
minutes.
    Mr. Clay. Thank you, Mr. Chairman, and thank you for 
conducting this hearing. And let me start with Mr. McCullough. 
Mr. McCullough, can you share with this committee your take on 
the accelerated home foreclosures in and around the Chicago 
area? Was it attributable to certain financial institutions 
steering certain customers to subprime loans instead of 
conventional mortgages? I would like to hear what you think 
about that.
    Mr. McCullough. It's no surprise in our community, like 
many other communities across the country, that many residents 
are in distress. Either they have been foreclosed on, or are in 
the process. In our community, on the west side of Chicago, 
there are thousands of families who are either in multi-family 
housing or single-family who have either been foreclosed on or 
are in process.
    In terms of banking--banks and other financial 
institutions, you know, doing subprime lending, there is a long 
list. I am just here to say that Park National Bank was not one 
of them. In fact, Park and Bethel, the organization that I run, 
have specifically designed banking products to meet the needs 
of very low-income residents in the community, as well as 
homeowners. And we were active partners to really address the 
issues that face the residents in our community.
    Mr. Clay. And in your testimony, you also point out that 
U.S. Bank--you compare the charitable giving of U.S. Bank 
versus Park National Bank and FBOP, where you take a number 
like 27 percent of your profits went back into charitable 
giving, and then you compared U.S. Bank with a 0.7 percent. And 
I think that speaks volumes about the service that Park 
National Bank gave, compared to a company like U.S. Bank.
    Mr. McCullough. Well, just like all politics is local, all 
banking--really good banking--is local. And I think to Park 
National Bank's credit, you know, Mr. Kelly and his staff knew 
our community, and knows our community, and knows what the 
challenges and the needs are, and was able to be very targeted, 
in terms of not only loans and business transactions, but also 
charitable giving.
    It is yet to be seen what U.S. Bank's commitment is to our 
community. They do have an existing branch and footprint on the 
west side of Chicago, but obviously not to the same caliber as 
Park has been.
    Mr. Clay. Does that charitable giving--does that also 
include loan modification?
    Mr. McCullough. It does.
    Mr. Clay. It does?
    Mr. McCullough. Yes.
    Mr. Clay. In other words, you work with the borrower to 
make the modification reasonable and something that they can 
accomplish?
    Mr. McCullough. Yes. I mean Bethel itself is a HUD-
certified counseling agency. We work with homeowners across the 
area. And Park was, you know, definitely a partner. And some of 
the members of the coalition who also do homeowner counseling, 
as well, share the same experience.
    Mr. Clay. Thank you for your response. Mr. Hartnack, tell 
me, did FBOP have a large number of subprime loans, and was 
that one of the reasons for its failure?
    Mr. Hartnack. Certainly not in the first mortgage arena, 
no, sir.
    Mr. Clay. No?
    Mr. Hartnack. Nor did U.S. Bank, for that matter.
    Mr. Clay. Okay, okay. You didn't have anything to comment 
about the charitable giving, did you?
    Mr. Hartnack. If you looked at it on an apples-to-apples 
basis, and included our extensive community development--
lending, tax credit lending and new market tax credit 
investing--then the percentages would be a great deal larger 
than the .7 that was discussed. But we certainly would never 
have given away 27 percent of our profits.
    Mr. Clay. Okay. Let me move on to Mr. Austin. Mr. Austin, 
can you share with us your opinion on the treatment by the FDIC 
with smaller community banks versus banks that are considered 
too-big-to-fail?
    Mr. Austin. We are all governed by a lot of the same rules 
and regulations. If we were to show you everything that we had, 
it would fill up this table and probably four or five more.
    In regards to too-big-to-fail, I really do not feel any 
institution is too-large-to-fail, especially in a capitalistic, 
free market enterprise system like the United States was 
founded. We need to look at the risk weighting of the different 
types of these activities that the banks are engaged in.
    You know, I appreciate the question to the previous witness 
regarding communities and contributions. I think if we start 
looking at those types of measurements, compared to looking at 
what banks are really doing to lending, that's where we are 
getting away from our focus.
    You know, we are governed by the Community Reinvestment 
Act, which I think goes too far--
    Chairman Gutierrez. The gentleman's time has expired. Mr. 
Paulsen, you are recognized for 5 minutes.
    Mr. Paulsen. Thank you, Mr. Chairman. Mr. Hartnack, I was 
just curious. It seems like banks are getting a mixed message. 
Mr. Austin has related this already in some of his comments, 
too. But, you know, obviously there is encouragement to lend, 
to provide capital in the marketplace for the business 
community that wants to expand and grow jobs right now.
    But there is also the message out there, at least from the 
regulators and the anecdotal stories I have had, in terms of 
communicating with some of my bankers locally--I know you're 
based in Minnesota, too--but the mixed message is that they're 
being encouraged to hang on to capital, actually. And that has 
been discussed a little bit.
    I talked to one individual, a small business owner 
actually, who was going out to get a loan with a bank he had a 
long-time relationship with. And the bank actually came back 
and said, ``We would like to provide the loan for you. But in 
order to do that, you're going to have to have 50 percent 
capital, or 50 percent of your money down.''
    Well, of course, we commented to each other, ``Then you 
might as well be a bank on your own,'' when you're in that type 
of a situation. And I think that expresses some of the 
frustration people have. But I'm just sort of curious.
    You know, one other anecdote too, real quick, is that the 
regulators then come in and they're putting the squeeze on the 
banks with some really tough requirements, in terms of new 
standards. And one community bank I talked to not long ago 
mentioned that he had some examiners in. I asked, ``Was that 
just three people? Were they in for a week?''
    And he said, ``No, it's like 14 people, and they were in 
there for a month-and-a-half.'' And it seems very 
overburdensome and a high threshold to cross. So, I'm just 
curious.
    Right now, in general, given the current economic climate, 
what can banks do to try and be effective partners in their 
local communities with these challenges that are truly out 
there?
    Mr. Hartnack. It clearly is a different circumstance in 
every bank. There are 8,000 community banks in America. And, 
frankly, many of them are still very strong, financially. But 
if a bank is in a circumstance where they don't have enough 
capital, clearly, lending is a very difficult deal for them. If 
they lend, every dollar they put out requires roughly 10 
percent of capital. If you don't have the capital, you're 
simply digging a deeper hole for yourself.
    What we do--and we're in a lucky position of having 
adequate capital, good earnings to keep replenishing our 
capital, we just announced quarterly profits yesterday, and 
we're able to embellish our capital--is we tell our story in 
every possible place, and try to let the communities that we 
serve know that we're open for business for good loans. And the 
terms are, in many cases, not very different from a while back.
    In some cases, it is not different at all. It depends on, 
obviously, the purpose of the loan. And the economy is not as 
strong, so sometimes additional protection is required. But, 
you know, what banks in America can do to help their 
communities is make loans. And as Mr. Austin said, telling a 
bank to make loans is like telling a McDonald's guy to cook 
hamburgers. This is what we do for a living. Our CO constantly 
talks to us about the fact that we make dreams come true in 
America, and we do that by lending people the money to build 
their business, grow their business, start their business, to 
educate a kid, to buy a house, all the things that Americans do 
and want to do. And I think our industry's role is to make that 
happen to the extent our capital allows us to do it.
    Mr. Paulsen. Mr. Austin, maybe you could provide some 
additional comments, as well?
    Mr. Austin. Absolutely, and thank you. We want to make 
loans. A joke among bankers is that when we make loans, they're 
all good. But some bad things happen to good borrowers.
    I know, just thinking back to the subprime debacle--and we 
should note--the overwhelming majority of the subprime loans 
were made outside the traditional banking industry. And I want 
to equate this back to after 9/11. One thing the automobile 
companies did was create special financing units to push and 
sell their excess inventory, also known as zero percent 
financing. They took on excessive risk, and they also took on 
borrowers who normally would not be able to repay.
    Today, if you're looking at some of the subprime loans, 
some in the housing industry also created special financing 
units, and they packaged those loans and sold them as 
securitized investments--again, outside the traditional banking 
system.
    We still have--I will quote my grandfather. He told me, 
``Son, there is a preamble to every promissory note, `And I do 
hereby promise to pay.''' We have to keep that in mind to make 
prudent decisions when we make loans, because our regulators 
are looking at them, and we also don't want to do something 
wrong for our customers in extending too much credit.
    Mr. Paulsen. Well, I will just comment, Mr. Chairman, but 
we need a strong traditional banking system, so I appreciate 
it.
    Chairman Gutierrez. Mr. Scott, you are recognized for 5 
minutes.
    Mr. Scott. Thank you, Mr. Chairman. And thank you for this 
hearing. It's a very timely hearing. I represent a State where 
we all--I think it's really the epicenter of this entire 
situation, regarding the bank closings. And I would like to 
focus on that for a moment, as we move forward to find 
solutions. And my State is Georgia.
    Over the past year, we have had 25 bank closings. 
Nationwide, we have had 140. That means that, in my State, 20 
percent of the banks that closed--clearly, one-fifth of all the 
banks--happened in my State. So it might be good for us to look 
at Georgia to try to figure out what went wrong, and how we 
correct this.
    I guess it focuses on my first question, which is this: We 
have 300 banks in Georgia. About 100--I think 103--of them were 
established in the last 10 years. Ninety percent of the banks 
are small, State-chartered banks, which are overseen by both 
the FDIC and the State regulators. Seventy percent of their 
portfolios are all devoted to real estate loans. And they went 
into this overexuberance, and I think that's what caught them.
    But I wonder if you would tell me if it's possible that 
there were just too many banks to begin with. And did the rise 
in subprime lending lead to a banking bubble in which banks 
were established that lacked the stability and the experience 
to sustain through the natural cycles of boom and bust, 
expansion and contradiction?
    Should we put some sort of regulation on how much of the 
portfolio could go into real estate, or could go into one area? 
Is that risky behavior? And where you have the mixture of State 
and Federal regulations, what falls where? Should Congress act 
first, or should States act first?
    These are a series of questions I would like to get some 
answers on. Should we not put some kind of standards on too 
much going into one area, 70 percent of your portfolio going 
into one area, putting some kind of criteria on too many banks, 
and looking at our Georgia case to see how we could use this as 
some examples of what went wrong to correct?
    Right now, in my State of Georgia, there is contemplation 
of whether or not our State legislature should do anything at 
all. And many are saying, ``Well, let's wait on the Feds to do 
this.''
    So, I think this brings us right dead center to answering 
some of these certain questions, and that's what I would like 
to put before you today. If you could, respond to my questions.
    Mr. Hartnack. Was that directed to any one of us?
    Mr. Scott. Yes, either one. I would like to get both of 
your comments on this. I mean--
    Mr. Hartnack. Real quickly, so I don't take everybody 
else's time, I would say that the principle of diversification 
of assets, so there is as little correlation between the 
behavior of assets on the balance sheet as is practical, is a 
rock-solid part of prudent banking, and certainly one of the 
reasons our bank is in good shape today. And I think the 
regulators understand that.
    Whether it was enforced among small new banks or not 
effectively, I will let you find that out from the regulators. 
But clearly, the principle of diversification is absolutely 
rock foundation of good banking.
    Mr. Austin. I would like to also share that competition is 
healthy, I think for everyone, not just in the banking 
industry, but every industry in our communities.
    In regards to your question about what should be done, and 
what are the regulators doing, one, we appreciate and support a 
dual banking system, where we have charter choice.
    A few years ago, we were up here with the Texas Bankers 
Association, visiting with the FDIC. And I want to defend them, 
because they made a very pointed comment to the banking 
industry: ``We see some trends that are beginning to emerge in 
some sectors of the country. Beware. Let's fix the roof while 
the sun is shining.'' They did send us the warnings. Some chose 
to listen, some chose not to.
    In their defense, there are ample regulations and guidance 
that have been sent out that we look at for commercial real 
estate limits and construction limits. So we are managing, and 
they are managing us when they examine us, based on the risk 
weighting.
    Mr. Ellison. [presiding] Mr. Marchant from Texas is 
recognized.
    Mr. Marchant. Thank you, Mr. Chairman. It's good to see you 
here, Mr. Austin. And it seems to me that when regulators leave 
your banks these days, the greatest concern is not whether you 
are equipped and motivated to loan money into the community, 
but that the FDIC Insurance Fund will have little or no 
exposure to loss.
    In the old days, they were there to help guide you on how 
to stay healthy and profitable. It's my contention that until 
that approach is moderated, adjusted, changed, and we get more 
back to the original purpose, that we will not have a recovery, 
we will not have new jobs, and we will--and our banks will 
remain on the sidelines, investing in treasuries and offering 
.65 percent on a 5-year CD, and making their spreads the safest 
way possible that presents the absolute least risk to the FDIC 
Insurance Fund.
    Now, it seems to me like that is the issue that we are 
dealing with.
    Mr. Austin. Wow, there is a lot there. I could speak for 
hours on that. Let me say, when the examiners come in, the 
primary focus is safety and soundness to protect the Fund. And 
we don't disagree with a lot of that.
    But I will say our bank is fortunate. We have extremely 
good relations with our examiners because, one, we have reached 
out and they have reached out to listen, help give us guidance. 
We meet with them. We have taken a proactive approach to visit 
with them on a quarterly basis. We would encourage many banks 
to do that. But not everybody can say that.
    If you talk about competition and .65, the treasuries--in 
some cases lower--one area that we're competing against is you, 
the government. Specifically, I call it a ward of the 
government, which is GMAC's new bank, also known as Allied 
Bank, which advertised at all the football games. They're 
paying exorbitantly high rates because of their backing from 
the government. That's hard for us to compete against.
    Mr. Marchant. Let me ask you for my second question--both 
you and U.S. Bank--about the policy that the FDIC is using now, 
as far as acquisition of banks that they are closing.
    I know that in this--I believe it was in this recent 
transaction--there were three small banks in Texas that didn't 
have anything--that really weren't in the geographical areas--I 
think they were your banks, weren't they, Mr. Kelly? Yet the 
FDIC, instead of saying, ``Let's keep U.S. Bank in this area, 
and let's let these three banks in Texas--let's find a 
legitimate buyer there,'' instead they just take the position, 
``You have to take everything.'' And then I think, in this 
case, U.S. Bank turned around and sold those three banks off.
    It seems to me that the FDIC needs to take a little bit 
more flexible position on that. And I believe that they try to 
match up the sales of the banks with entities that are healthy 
and have some proximity to the market. And I would encourage 
them--and I will, the next panel--to give some consideration to 
not having that be a two or three-step process, where local 
banks end up having the opportunity to take over local banks.
    Mr. Austin. I would like to comment. I know we--one of our 
affiliate banks was within 60 or 70 miles of one of those 
institutions that was well-capitalized. We did contact the FDIC 
and ask if that particular bank could be sold separately. The 
response was, ``No, we prefer to sell them as one group.''
    The advantage, by allowing someone to purchase that 
locally, or with closer proximity to that community, would be 
the great advantage, one, to the customers in that community, 
because they know who they are. In Texas, that means we have 
lost three charters. And I think we look at a lot of--we hear a 
lot of bankers who are discouraged by what's going on, and 
probably want to exit out of banking. And that's not good for 
the local communities--
    Mr. Marchant. It seems like a local bank might give a 
higher bid to the FDIC for that, and actually benefit the Fund.
    Mr. Ellison. The gentleman from Texas, Mr. Green, is 
recognized.
    Mr. Green. Thank you, Mr. Chairman. And I thank the 
witnesses for appearing today. I would like to take just a 
moment to see if I can provide a limited amount of ocularity to 
this obviously difficult problem.
    The community banks are of the opinion--and there seems to 
be some body of empirical evidence to support their 
contention--that they were not the cause of the crisis. That 
seems to be the prevailing opinion among community bankers. 
They also seem to be of the opinion that, because they didn't 
cause the crisis, they should not have to account for the sins 
of those who did cause the crisis. Community banks did not 
engage in 3/27s, 2/28s, teaser rates that coincided with pre-
payment penalties.
    Generally speaking, community banks make the argument that 
they knew who they were dealing with. They were dealing with 
people who were regular customers, to a great extent, people 
that they knew in the community, people that they have to meet 
in the shopping center, and so they had a better understanding 
of who they were working with. And, as a result, they made 
better loans. Many of their loans, they contend, were 
maintained on their portfolio. They didn't engage in a 
wholesale pushing of loans to someone else, such that they 
would qualify persons for teaser rates but would not qualify 
them for adjusted rates.
    And, generally speaking, they maintained a good capital 
ratio. The capital ratio is important, because you don't lend 
money from the capital. The money that you lend comes from the 
money that you take in by way of deposits. So you have to be 
well-capitalized to lend money.
    So, the community banks find themselves in the position of 
saying, ``Someone ought to look at our circumstance and 
understand that there should be a greater degree of flexibility 
as it relates to what we do.''
    The example that I encounter most regularly is that of a 
good loan that was made in good times, but now the borrower 
finds himself with an inability to make a payment or two. And 
the contention is that when the examiners come in, they don't 
accept the notion from the community banker that, ``I know this 
person. This person is going to catch up. This person is going 
to maintain this loan, such that this is not really a bad loan, 
it's just that these are bad times.''
    And somehow, this ought to be considered, so that we don't 
find the bank having to increase its capital, and if it does 
not, then it can't do as much lending. And apparently, this 
concern is something that a number of my colleagues have heard, 
because I hear colleagues on both sides talking about it.
    So, my question is this, with reference to the community 
banks. When you differ with the examiner, tell me about the 
process that allows you to appeal to an ombudsman or someone 
such that you may--your opinion that is different, for reasons 
that you contend are legitimate--how does that process serve 
you?
    And I will start with, if I may, Mr. Austin. Do you have an 
opinion on the appeal process, please?
    Mr. Austin. Yes, sir. And, Congressman Green, thank you. I 
know you have always been a leader in listening. And I want to 
say thank you for your efforts in financial literacy and 
working with banks.
    There is a difference--we have not really gone through the 
appeal process, because we try to work it out locally with the 
examiners. And I think that's usually the best practice. We do 
ask for them to rely on our judgement, because we know the 
customers, and are familiar with them, and we are sitting on 
the desk, looking at them eyeball-to-eyeball. We are also 
visiting their businesses, looking at their trends, and knowing 
what's going on.
    Where we have some issues are the conflicting types of 
accounting policies and practices, from regulatory accounting--
I call it RAP. You have GAAP, and there is probably another one 
that applies that rhymes with it pretty well.
    Mr. Green. Would someone else care to give a comment?
    [No response.]
    Mr. Green. I will conclude by thanking you, Mr. Chairman, 
for the time. Thank you.
    Mr. Ellison. The gentleman from Colorado.
    Mr. Perlmutter. Thanks, Mr. Chairman. And I thank the panel 
for being here today. Mr. Kelly, I am sorry for the plight. We 
are--I am working on some pieces of legislation to take a look 
at capital, to take a look at TARP being available to community 
banks, smaller banks, to take--you know, to look at the 
regulations that really now say you have too much concentration 
in real estate or too many restaurant loans, or you're working 
with too many auto dealers, because this financial crisis--
which was because of a lot of gambling on Wall Street, in my 
opinion--caught everybody short, you know, whether you're the 
restaurant owner or you're the auto dealer, or you're the 
banker--unless you were the guys on Wall Street, and I don't 
think any of you were.
    And I don't know what we can do to unring the bell in your 
situation, but I'm trying, and we are going to work on ways to 
provide some cushion to local banks and smaller banks, so that 
they can give a little cushion to their borrowers, as we work 
our way through this mess.
    Do you feel--and I would say that I don't think you were 
the only one caught short with Fannie Mae and Freddie Mac 
pieces of paper. A lot of credit unions, central credit unions, 
particularly in California, Nevada, and the southwest had a lot 
of that paper and they went down.
    What--let me ask you a question, then I want to talk to my 
friend from U.S. Bank, Mr. Hartnack--and I do want to say to 
some of my friends on this side of the aisle that U.S. Bank and 
its predecessor, Colorado National Banks, have a long history 
in Colorado of community service and community involvement. And 
so I just want to have that on the record and make it clear 
that they are considered to be a good neighbor in our area.
    So, what would you have us do, Mr. Kelly? Today, as 
legislators trying to get, you know--your situation is what it 
is. What would you have us do to correct things?
    Mr. Kelly. This could be corrected very easily. Treasury 
has the ability, under TARP, they have total latitude as to 
what type of program they want to create.
    If the Treasury Department would take a small percentage of 
the dollar amount that was advanced in the first few weeks to 
the largest banks--over $125 billion--if they would reserve 
only 20 percent of those funds for viable community banks that 
have a shortage of capital, and change the rules that exist 
right now--right now, there was a tremendous reaction, 
community reaction, public reaction, negative, to the large 
dollars being given to the larger banks. As a result of that, 
all of the rules were tightened up very tightly.
    The problem was, all the big banks--
    Mr. Perlmutter. Before it got to the community banks?
    Mr. Kelly. All the money had already gone out. Now the 
community banks are there. Now there is a whole different set 
of regulations.
    Mr. Perlmutter. Okay.
    Mr. Kelly. That has to be changed. And that can be done. 
The regulators--the test should be: if they receive TARP, will 
they be a viable institution?
    Nobody wants to give money to a bank that is ultimately 
going to fail. But right now, you have to prove that you're 
viable before you qualify for TARP, which basically means you 
have to show that you don't need the money at the outset. What 
bankers have always been accused of, ``You prove that you don't 
need the loan, and then I will make it,'' this is basically 
what is happening.
    Mr. Perlmutter. Okay. Mr. Hartnack?
    Mr. Hartnack. I think that the situation is so complex. But 
if I was a legislator, what I would be looking for is to make 
sure the prudential regulation keeps an eye on the ball all the 
way along.
    Where things went wrong was organizations were inventing 
products, selling the products to people who couldn't repay it, 
and packaging the resulting loan and selling it to people who 
shouldn't have been investing in it. And that just should never 
happen again. And, you know, for the record, U.S. Bank wasn't 
involved in that.
    Mr. Perlmutter. Mr. Austin?
    Mr. Austin. None of our banks actually applied, the banks 
that we're involved with, and we did not want to. I will be 
honest with you. We didn't want the government intervention, 
additional regulation and oversight. We wanted to try to raise 
capital privately, if we needed to.
    Mr. Perlmutter. Okay.
    Mr. Austin. And I agree--I concur with the previous 
comments.
    Mr. Perlmutter. What about just some of the regulatory--not 
just the TARP piece, but capital requirements. Do you see, in 
your area, capital going from 10 percent--in the old days, 
capital, statutory capital, was 5 percent. Now, regulatory 
capital is 10 percent, and then you have risk-based capital, 
which I still don't understand, at 13 percent.
    Are you seeing capital moving? And what would you have me 
do about it?
    Mr. Austin. This is a complex question with multiple 
answers. I think, one, you look at the different capital 
components that you just mentioned. That also dictates how we 
are assessed on our FDIC premiums. Let me give you an example--
    Mr. Ellison. The gentleman from Illinois, Mr. Davis, is 
recognized.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman. 
And let me, first of all, thank Chairman Gutierrez and Ranking 
Member Hensarling for giving me the opportunity to be here, 
although I am not a member of this subcommittee.
    I also would like to note that Congressman Bobby Rush, whom 
I left at something else, expects to join us in a few minutes, 
and I know that he is on his way.
    Let me also thank all of the witnesses for coming, and all 
of the people who have traveled all the way from Chicago, most 
of whom live in my congressional district, where Park National 
Bank is located, which sort of spearheaded the interest and the 
concern, and the whole business of trying to take a look at 
what has happened in this situation.
    As we interacted and interfaced with the problem, we were a 
bit concerned, basically because Mr. Kelly, who is a member of 
the panel, is recognized by our community as simply an 
outstanding banker, a tremendous civic leader, a man of great 
astuteness, from a business vantage point, and of tremendous 
community interest. And while we knew that there were problems 
existing and troubles brewing, we also were hopeful that we 
would be able to experience I guess what one calls a ``work-
out.''
    Mr. Kelly, could I ask you, from your vantage point, what 
do you think perhaps could have happened, or could have 
happened differently, that would have generated the ability of 
you and your associates to retain control and ownership of Park 
National?
    Mr. Kelly. Thank you. We were approved for TARP funds in 
October. TARP funds would have been adequate for us to put back 
capital, and also would have enabled us to have access to other 
outside capital.
    Although we were approved, we were not a publicly traded 
bank. The rules did not exist at that time for a non-publicly 
traded bank. We were deferred, we were deferred, and we were 
deferred, to the point where new rules were put in place, and 
we no longer qualified.
    All of the other, larger institutions were funded without 
the requirements in place that we were later held to. The fact 
that TARP--before TARP came out, we were in the public markets 
in New York. We were out soliciting private capital. We had a 
preliminary $600 million capital injection available to us. But 
when TARP was announced, that was all obsolete.
    Once you had--once the TARP fund was there, everybody would 
say, ``Well, why wouldn't you get the TARP money?'' And so that 
was our sole goal. For 5 months, our only capital plan was the 
receipt of TARP, and that was with the full approval of our 
primary regulator, the OCC. And then, in February, we were told 
we didn't qualify for TARP. At that point, we were dead. We had 
no other option. We had to go out and find private equity in 
the worst capital markets available, and with the stigma that 
we had not been eligible for TARP. That was the kiss of death.
    After that, we tried a number of things, but we came up 
short at the end.
    Mr. Davis of Illinois. Are you of the opinion that, should 
the regulations be changed that would encompass institutions 
like yours, that it would be very helpful to them, perhaps in 
the future, even if it's not helpful to Park National?
    Mr. Kelly. Absolutely. I think the Treasury has the ability 
to change the rules with no further legislation, or legislation 
can be passed to encourage that, that funds can be available to 
banks that, after the receipt of TARP, with their qualifying 
TARP amount, would be viable institutions. If they meet that 
test--and that should be a test that the regulators primarily 
make--that then they should be eligible for TARP.
    There is basically a bar right now. You have to be a top-
rated institution and well-capitalized to qualify for TARP. Any 
bank that meets that requirement doesn't want TARP.
    Mr. Davis of Illinois. Thank you very much. Mr. Hartnack, 
as you can see, the primary location of Park National sits in a 
hotbed of community activism. That is, I often say that the 
people in my congressional distract are more proactive than 
what you will find in many places throughout the country, which 
healthy, good, and creates tremendous movement.
    Based upon your interactions already--and I am sure that 
there have been many recommendations that they have provided, I 
am sure they have tried to understand--
    Chairman Gutierrez. The time of the gentleman--
    Mr. Davis of Illinois. My time has expired? Thank you very 
much, Mr. Chairman.
    Chairman Gutierrez. We recognize the gentlelady from 
Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. You know, it seems--
it's nice to see you, Mr. Kelly. I had three of your banks that 
were in my district, so I--regulators are adding to the problem 
by insisting on tighter credit standards, mark-to-market in 
what is not a normal market, by any acceptable standard, 
increased reserves for loan losses, and capital increases.
    And all the while, the banks' earnings are dramatically 
down, and the cost of obtaining additional capital is upwards 
of 10, 12 to 14 percent, with a prime rate of 3.25 percent, and 
Federal funds are at a rate of 0 to 0.25 percent. Qualified 
buyers are scared off, and not borrowing.
    What are we going to do with these issues, like mark-to-
market and just the increased regulations? And this is 
something that a community banker in my district wrote in a 
letter. Have the regulators overreacted? Whomever would like to 
talk about that?
    [No response.]
    Mrs. Biggert. It's not a problem?
    Mr. Austin. I will take it.
    Mrs. Biggert. Yes, Mr. Austin.
    Mr. Austin. Some of these issues are beyond our control. 
When FDIC/OCC comes into our bank, they are actually reviewing, 
based on FASB policies. And I think that's where we need to 
really work with them to try to come up with some reasonable 
policies.
    You know, just like with overregulation, we're marketing to 
market loans based on a perceived value that has not actually 
been realized, or liquidation values for loans. We are setting 
up additional reserves. That is a problem.
    Mrs. Biggert. But, as you do that, then it cuts out credit. 
And how are we going to jump-start this economy? We have been 
trying to do it. Is it us who should be saying--you know, 
changing the law? Is it--one reason maybe that cash flow isn't 
being counted, or does mark-to-market need an overhaul?
    Mr. Austin. I think we need to look at a multitude of 
issues, and that's something that we would be happy to work 
with your office and the committee, to come back and bring some 
viable recommendations.
    Mrs. Biggert. Okay, thank you. I yield back.
    Chairman Gutierrez. The gentlelady yields back. Mr. Bobby 
Rush.
    Mr. Rush. Thank you, Mr. Chairman. I want to say to you how 
delighted I am that you have convened this hearing. I used to 
be on this committee, and I haven't been here in this room for 
quite a while, but it's certainly good to be back.
    I want to associate my remarks with--most of my remarks--
with my colleague from the seventh congressional district, 
although I want to make sure that he understands that I am not 
in agreement with him when he talks about his district. I don't 
want him to leave my district out. We are vying for where the 
hotbed of activism really lies, in the first or the seventh 
district. But that is a good competition, and I think all the 
people benefit from that.
    I only have limited time, so I want to, first of all--Mr. 
Kelly, good to see you. And, as you know, in the final hours, 
we worked together quite vigorously to try to get the 
governmental institution--at the Federal level--to respond. I 
think the request was a simple request, and to me it was a 
doable request. All you needed was another week to present your 
case to the Federal regulators. And they would not even grant 
you that week. And they had the authority to grant you that 
week extension before they made a final decision.
    I have learned--and others have indicated--that your 
investment in Fannie Mae and Freddie Mac was mainly at the 
behest of the Federal Government, that they encouraged you, and 
highly encouraged you to make that type of investment.
    And I am also confused--not confused, but astounded at the 
fact that, at 10 a.m., the Federal Government and the Secretary 
of the Treasury was in town, giving you a check for $50 million 
at 10 a.m., and at 10 p.m., he was putting padlocks on your 
door. So that was sending some kind of a mixed message of the 
worst sort, in my estimation.
    As you reflected on that, is there anything that this 
Congress can do that could--that you would recommend, so that 
we would have more consistency at the level of Treasury, 
especially as it relates to community banks?
    And before you answer that question, I want to just take a 
moment just to say how much your bank has meant to the people 
of the south side of the City of Chicago. You know I--
Inglewood, which is a fine organization here, friends of mine, 
they do a great job. And you have been there, you know, the 
heart and soul of that effort.
    And I have been assured--I'm going to ask this question as 
a follow-up--that we don't want to leave a gaping hole in our 
communities, especially those communities that are struggling. 
We don't want to leave a gaping hole. And I am not in any way 
casting any kind of predictions on U.S. Bank or anything like 
that. But we know what you--what Park National has done, and 
you set a standard very, very high for banks. And we want to 
make sure that whoever, be it U.S. Bank or anybody else, that 
they meet that particular standard, because these are hurting 
communities.
    Again, my question is, as you reflected on this over a 
period of weeks now, what do you think could have been done by 
the Federal regulators that would have--that would guarantee 
that, going into the future, no other good community-based, 
community-related bank with the community at the heart of its 
interests, that they have to undergo the same kind of 
experiences?
    Mr. Kelly. I have thought about that quite a bit, 
obviously. We had asked for a one-week extension from the FDIC. 
It was not granted. We had asked for a meeting with the FDIC in 
Washington with the investors that we had lined up in the last 
weeks before the closure. That meeting was not granted.
    I believe--and this is strictly my perception--that the 
regulators already had U.S. Bank lined up. They had marshaled 
the forces, they were ready to close the bank. They have a big 
job to do, there are lots of banks out there, and they 
basically just did not want to extend more time.
    I don't understand, with one week later, knowing that there 
was a change that would make up to $200 million difference in 
our capital structure, why we couldn't have been granted one 
more week extension. I don't have the answer to that.
    Mr. Rush. I want to ask--okay. I yield back the balance of 
my time.
    Chairman Gutierrez. We have votes going on, on the House 
Floor. I wanted to say thank you to the first panel, to all of 
the members of the first panel. I want to thank Congressman 
Danny Davis and Congressman Bobby Rush and Congresswoman 
Biggert--she's a member of the Financial Services Committee--
for coming, and for speaking to me and bringing the issue of 
Park National Bank to my attention.
    We are going to recess until after the votes--that could 
take probably a good 45 minutes to 60 minutes before we vote--
and come back. When we do reconvene, we are going to have the 
regulators come before the committee. And I assure you, I have 
some interesting questions to ask them about Park National 
Bank, especially the FDIC.
    Thank you so much. We will be back. We are at recess until 
immediately after the votes.
    [recess]
    Chairman Gutierrez. We will reconvene at this point. And we 
will have the second panel.
    First, we have David Miller, who is the Director of 
Investments for the Department of the Treasury. Jennifer Kelly 
is the Senior Deputy Comptroller for Midsize and Community Bank 
Supervision at the Office of the Comptroller of the Currency. 
And last, but certainly not least, Mitchell Glassman is the 
Director of the Division of Resolutions and Receiverships at 
the Federal Deposit Insurance Corporation.
    Mr. Miller, you are recognized for 5 minutes. Please 
proceed.

STATEMENT OF DAVID N. MILLER, ACTING CHIEF INVESTMENT OFFICER, 
 OFFICE OF FINANCIAL STABILITY, U.S. DEPARTMENT OF THE TREASURY

    Mr. Miller. Chairman Gutierrez, Ranking Member Hensarling, 
and members of the subcommittee, thank you for the opportunity 
to testify today regarding participation of small banks in the 
trouble asset relief program.
    Small and medium-sized banks play a vital role in the 
economic fabric of our society, and will be essential to the 
long-term success of the economy as a whole. As such, the 
Administration has strived to recognize the importance of, and 
protect the health of smaller institutions throughout the 
implementation of TARP.
    Treasury designed the Capital Purchase Program, the first 
and largest program implemented under TARP, to provide capital 
to financial institutions of all sizes with equal treatment on 
economic terms. Smaller financial institutions make up the vast 
majority of participants in CPP, which is consistent with 
smaller financial institutions constituting the majority of 
financial institutions in the country.
    Of the 707 CPP applications that were approved and funded, 
473, or 67 percent, were institutions with less than $1 billion 
in total assets. In May 2009, the Administration reopened the 
application window for CPP only to institutions with less than 
$500 million in assets. And to ensure adequate funding levels, 
Treasury also increased the amount of capital these 
institutions could receive to 5 percent of risk-weighted 
assets, up from 3 percent.
    Let me now turn briefly to CPP eligibility and the 
application process. CPP was designed to promote financial 
stability, while also protecting the taxpayer, by injecting 
capital into viable financial institutions. An institution 
wishing to participate in the program applied to its primary 
banking regulator, which then made a viability assessment for 
the financial institution.
    If a financial institution is deemed viable by its primary 
regulator, the regulator forwarded the application it 
recommends for funding to Treasury's office of financial 
stability for further review. In certain cases, applications 
were first forwarded to a council of Federal banking regulators 
for review, prior to submission to Treasury.
    Once an application was received by Treasury, experienced 
examiners from the various Federal banking regulators onsite at 
Treasury assisted in reviewing the application. Applications 
were then presented to an internal Treasury investment 
committee, consisting of high-level officials who reviewed the 
application in its entirety, and recommended an action to the 
Assistant Secretary for Financial Stability.
    Treasury has not approved any application for funding 
without a determination of viability from the primary 
regulator. This approach ensures program consistency and 
fairness to institutions, regardless of size. Treasury has 
invested in 650 small and medium-size financial institutions 
through the CPP.
    The Administration believes that more can be done to build 
upon these important efforts. On October 21, 2009, the 
President outlined a new program designed to provide lower-cost 
funds to viable small banks, with the goal of increasing 
lending to small businesses. As President Obama explained, to 
spur lending to small businesses, it is essential that we make 
more credit available to the smaller banks and community 
financial institutions that these businesses depend on.
    Administration officials have been working diligently to 
design a program that will provide the maximum benefit to small 
businesses, while simultaneously providing taxpayer protection 
and encouraging credit markets. We plan to release the full 
details of the program soon.
    In addition to the small business lending initiative, 
Treasury is also developing a program that will make low-cost 
capital available to community development financial 
institutions, which provide more than 60 percent of their 
lending in economic development services to low-income and 
underserved communities.
    We look forward to finalizing these programs in the near 
future, and working with you to meet the challenge of helping 
our businesses and communities flourish. Thank you.
    [The prepared statement of Mr. Miller can be found on page 
147 of the appendix.]
    Chairman Gutierrez. Thank you.
    Ms. Kelly, you are recognized for 5 minutes.

  STATEMENT OF JENNIFER KELLY, SENIOR DEPUTY COMPTROLLER FOR 
     MIDSIZE AND COMMUNITY BANK SUPERVISION, OFFICE OF THE 
               COMPTROLLER OF THE CURRENCY (OCC)

    Ms. Kelly. Chairman Gutierrez, Ranking Member Hensarling, 
and members of the subcommittee, my name is Jennifer Kelly, and 
I am the Senior Deputy Comptroller for Midsize and Community 
Bank Supervision at the Office of the Comptroller of the 
Currency. I appreciate the opportunity to describe the OCC's 
role in the supervision of national banks, and in the 
resolution of severely troubled banks.
    The primary mission of the OCC is to ensure that national 
banks remain safe and sound, comply with applicable laws, and 
support the needs of their customers through fair access to 
credit and financial products. We recognize the important role 
that credit availability and prudent lending play in our 
Nation's economy, particularly in the current environment.
    However, banks cannot support their communities unless they 
operate in a safe and sound manner, and have sufficient capital 
to support lending to creditworthy borrowers. Even in today's 
strained economy, most national banks are in sound condition, 
and have the capacity to weather the current economic 
environment. Some, however, are experiencing significant 
difficulties. While most banks that develop problems are 
restored to a safe and sound condition, some are not.
    When a bank cannot be rehabilitated, the OCC has a 
statutory responsibility, as do the other Federal banking 
agencies, to work with the FDIC to minimize both the cost to 
the Deposit Insurance Fund, and disruption to the bank's 
customers.
    With regard to the FBOP banks, the circumstances and events 
surrounding their failure were unique and extremely complex. My 
written testimony provides a detailed account of OCC's actions 
and decisions that I will briefly summarize for you.
    FBOP was a financial holding company that owned 6 national 
banks and 3 State banks, with combined assets of approximately 
$19 billion and operations in California, Illinois, Arizona, 
and Texas. The FBOP banks were an interrelated enterprise with 
business strategies largely determined on a corporate-wide 
basis.
    Beginning in late 2007, FBOP made several strategic 
decisions that exposed its banks to elevated risk, and 
ultimately led to their failure. Specifically, the company 
invested heavily in the stock of Fannie Mae and Freddie Mac, as 
well as the securities of Washington Mutual Bank and other 
financial sector firms. At the same time, as the credit and 
real estate markets began to deteriorate, FBOP embarked on a 
strategy of aggressive loan growth. This was a business model 
that had proven very successful for the organization during 
previous market downturns.
    In the third quarter of 2008, the GSEs were placed into 
conservatorship. And shortly thereafter, WaMu failed. The loss 
to FBOP as a result of these 2 events represented 63 percent of 
the consolidated bank's tier one capital.
    Over the course of the following 14 months, the OCC worked 
closely with FBOP, as it pursued a variety of plans for 
obtaining the capital it desperately needed. These options 
included attracting new outside investors, applying for TARP 
capital, and selling one or more of the banks in the group. 
Despite intensive efforts, FBOP was not able to reach any 
definitive agreement to recapitalize the banks.
    FBOP's inability to raise new capital, coupled with the 
rapidly deteriorating condition of all six national banks, 
triggered regulatory requirements under prompt corrective 
action. Two of the FBOP banks became critically 
undercapitalized on July 30, 2009, requiring that they be 
placed into receivership within 90 days. We also determined 
that deterioration of two of the other national banks had 
reached the point where it was necessary to close them, as 
well.
    Park National Bank and Citizens National Bank were in a 
somewhat different status. Their condition was seriously 
deteriorating. But at that time, it was not clear that there 
were grounds to close them. On October 30, 2009, the OCC and 
the States of Illinois and Texas placed 7 of the 9 FBOP banks 
into receivership.
    Then, under its cross-guarantee authority, the FDIC 
presented the two remaining national banks with orders to 
immediately pay assessments equal to the anticipated losses to 
the Deposit Insurance Fund. Since this cross-guarantee 
liability greatly exceeded their capital, Park and Citizens 
became overwhelmingly insolvent. On that basis, the OCC 
appointed the FDIC as a receiver for both banks.
    The OCC's decisions to place FBOP's national banks into 
receivership were made only after thorough internal 
deliberation, extensive efforts to work toward a solution with 
FBOP management, and close consultation with the FDIC. Our 
actions were consistent with not only the requirements of 
prompt, corrective action, but also with the statutory 
framework Congress put in place to resolve the failure of banks 
at the least cost to the Deposit Insurance Fund.
    Again, I appreciate the opportunity to appear before the 
subcommittee today, and look forward to your questions.
    [The prepared statement of Ms. Kelly can be found on page 
98 of the appendix.]
    Chairman Gutierrez. Mr. Glassman?

   STATEMENT OF MITCHELL L. GLASSMAN, DIRECTOR, DIVISION OF 
   RESOLUTIONS AND RECEIVERSHIPS, FEDERAL DEPOSIT INSURANCE 
                       CORPORATION (FDIC)

    Mr. Glassman. Thank you. Good afternoon, Chairman 
Gutierrez, and Ranking Member Hensarling. I appreciate the 
opportunity to testify on behalf of the FDIC on our bank 
resolution process and related matters.
    My first experience with a closed depository institution 
was in 1975. I was working at Swope Parkway National Bank in 
Kansas City, Missouri, when that bank failed and the FDIC was 
named receiver. Because I worked for this bank, like many of 
the people in this hearing room today, I know firsthand the 
importance of a community bank.
    The FDIC normally uses two basic resolution techniques: a 
purchase and assumption transaction, known as a P&A and a 
deposit payoff. A P&A occurs when a healthy institution 
purchases some or all of the assets of a failed bank or thrift, 
and assumes some or all of the liabilities, including insured 
deposits. In a P&A transaction, the acquirer usually reopens 
the institution the next business day, and the customers of the 
failed institution automatically become customers of the 
acquiring institution, with full access to their insured 
deposits. Almost all of our resolutions are structured as P&A. 
A deposit payoff occurs when there are no potential acquirers 
for the failing institution.
    When an institution gets into trouble, and is at risk of 
becoming insolvent, the FDIC works closely with the primary 
Federal regulator or State regulator, and often participates 
with that regulator in an onsite examination.
    Once the FDIC receives notice that the chartering authority 
is closing the institution, the FDIC contacts the CEO of the 
failing institution, gathers necessary data and information to 
value the assets, determines the resolution options to be 
offered, and prepares an information package for potential 
bidders. Based on recommendations by the FDIC staff, the FDIC 
Board approves the least costly resolution options to be used 
for the failing institution.
    In 1989, Congress adopted amendments to allow the FDIC to 
recoup losses to the Insurance Fund by assessing a claim 
against the insured institutions under common control for 
losses caused by the failure of an affiliated insured 
depository institution. The cross-guarantee authority allows 
the FDIC to recover losses on a failed, commonly-controlled 
financial institution by assessing any of the commonly-
controlled depository institutions that remain open. The FDIC's 
cross-guarantee authority is designed to result in a least-cost 
to the DIF for resolving the problems of a commonly controlled 
group.
    On October 30, 2009, the FDIC entered into a P&A agreement 
with U.S. Bank of Minneapolis, Minnesota, to assume all the 
deposits, and purchase essentially all of the assets of the 
nine failed banks owned by FBOP. The FDIC received notification 
of intent to close seven of the nine subsidiary banks from the 
chartering authorities.
    The resolution transaction was a culmination of a marketing 
process where the banks were offered on a stand-alone basis, or 
linked with any combination of the seven. The FDIC later 
offered Park National Bank and Citizens National Bank on a 
stand-alone basis without loss share, or as a linked bid for 
all nine institutions with loss share.
    Neither Park nor Citizens National Bank would have 
qualified for a waiver or any delay in the assessment of a 
cross-guarantee liability, because this would have resulted in 
a higher cost to the DIF, since both banks had serious 
problems, and were in deteriorating condition, and were very 
likely to fail. As a result, the cross-guarantee assessment was 
made, and the OCC closed the institution and appointed the FDIC 
as receiver. The overall least costly bid was received from a 
single bank to acquire all nine institutions.
    We expect a continued high level of failures during 2010. 
Over the past several years, the Division of Resolutions and 
Receiverships of the FDIC has enhanced in staffing levels, in 
response to the increased workload. I know that our staff has 
the full backing of our Board of Directors to provide us with 
the resources to do the job.
    Fortunately, the FDIC is well-positioned to carry out its 
responsibilities to protect and insure depositors, and maintain 
stability and public confidence in our banking system.
    Thank you. I would be pleased to answer any questions.
    [The prepared statement of Mr. Glassman can be found on 
page 81 of the appendix.]
    Chairman Gutierrez. Thank you. We will now open up for a 
round of questions from the members.
    First of all, I would like to welcome you all here. Mr. 
Glassman, do you ever talk to Mr. Miller?
    Mr. Glassman. This is the first time I have met Mr. Miller.
    Chairman Gutierrez. Okay. Do you talk to anybody at 
Treasury before the FDIC closes down a bank?
    Mr. Glassman. No, I do not talk with anybody at Treasury.
    Chairman Gutierrez. You don't? Do you talk to Ms. Kelly?
    Mr. Glassman. I do have conversations with Ms. Kelly.
    Chairman Gutierrez. Did you talk to Ms. Kelly about Park 
National Bank and the other affiliated banks?
    Mr. Glassman. Not directly, but staff would have had a lot 
of conversations with the OCC.
    Chairman Gutierrez. So, in other words, we ask for a 
hearing to talk about this, and we have two other people who 
have come here that you haven't spoken to about this 
transaction.
    And, Mr. Miller, you didn't say a darn word about the whole 
thing in your testimony. That surprises me. Do you usually come 
to hearings, Mr. Miller, in which you're asked questions about 
a specific transaction, such as Park National, and then not 
speak to the issue?
    Mr. Miller. The--
    Chairman Gutierrez. Or did I miss something? Because I 
listened to you attentively, and at least--
    Mr. Miller. Yes, I think it's--
    Chairman Gutierrez. --Ms. Kelly and Mr. Glassman, at least 
they attempted to try to talk about what they did vis a vis 
Park National Bank. But you didn't say a single word.
    Mr. Miller. The issue of Park National--the Troubled Asset 
Relief Program is obviously not a banking regulator. And so 
their application to TARP, as I tried to describe in our 
process--
    Chairman Gutierrez. How long have you been at Treasury, Mr. 
Miller?
    Mr. Miller. Since December 2008.
    Chairman Gutierrez. Since December of 2008. So you were 
there when the former Treasury Secretary was there.
    Mr. Miller. Correct.
    Chairman Gutierrez. All right. And he said--I remember--
that, ``If you have Fannie Mae and Freddie Mac, and you have 
just lost, I, the Treasury Secretary, am going to make sure 
that you don't suffer any undue hardship, in terms of what that 
money does to the viability of your financial institution.'' Do 
you remember that?
    Mr. Miller. Yes, I believe it's in section 103.6.
    Chairman Gutierrez. Okay, so it wasn't something that Mr. 
Kelly and the rest of us just kind of remembered, but maybe 
didn't happen. It actually did happen?
    But it didn't seem to happen here in this case. And I think 
that's part of the problem, as I see it. I listened to the 
three of you, and there is this large institution that was sold 
to U.S. Bank, and different people aren't speaking to different 
people.
    So, once you decided, Mr. Glassman of the FDIC, you decided 
that--just so that we have this clear, how many of them? There 
were seven different banks all involved in this thing, seven?
    Mr. Glassman. In the FBOP family, there were nine 
institutions.
    Chairman Gutierrez. There were nine.
    Mr. Glassman. We were notified--
    Chairman Gutierrez. And there were two in Illinois, 
Citizens and Park National, that were still operating, that you 
couldn't find a reason to shut down. But then you said, ``Oh, 
we want those two that are still alive to pay,'' right, ``the 
assessments for the other seven that we have declared dead,'' 
is that correct?
    Mr. Glassman. Under the statute, we are required to conduct 
a least-cost resolution.
    Chairman Gutierrez. You applied that statute--
    Mr. Glassman. --to protect the Deposit Insurance Fund.
    Chairman Gutierrez. Okay. You applied that statute. You are 
not required to apply that statute. That's a statute that you 
decided to apply to this case.
    Mr. Glassman. The statute asks us to protect the Deposit 
Insurance Fund.
    Chairman Gutierrez. I understand that. But you see, you 
didn't have to apply that statute. Is that correct?
    Mr. Glassman. In order to protect the Fund--
    Chairman Gutierrez. I understand. You made a decision that, 
in order to protect the taxpayers--your way of looking at it--
that you would apply that statute. Is that correct? You made 
that determination.
    Mr. Glassman. We made a determination--
    Chairman Gutierrez. But that's a subjective determination 
that you made. There isn't a law that said, ``Voila, there are 
these nine institutions. We must apply this statute to them.'' 
There isn't. You made that subjective decision. I'm not saying 
you're right or wrong, but you made that decision.
    Mr. Glassman. We made a decision to apply the assessment--
    Chairman Gutierrez. Very good.
    Mr. Glassman. --against these two banks--
    Chairman Gutierrez. You made the decision to apply it in a 
subjective manner. The law did not require you in this instance 
to do that. What you said was, ``There are these seven 
institutions, they are not doing well, so we are going to make 
the two institutions that are already wobbling on the brink of 
disaster pay for the assessments of the other seven.''
    Okay. So you are asking two people--it's like asking two 
people who are almost drowned to come and help the other seven 
who have already drowned. That's what you, in essence, did, 
killing any opportunity.
    The reason I raise that is because when you did that, it's 
like this chain of events that just destroyed an institution 
that maybe didn't--because in your determination, it was the 
most effective. How much did we lose? How much money did we 
lose?
    Mr. Glassman. Well, when the 7 banks did fail, $1.8 billion 
was lost.
    Chairman Gutierrez. How much?
    Mr. Glassman. $1.8 billion.
    Chairman Gutierrez. $1.8 billion was lost--
    Mr. Glassman. --lost to the Insurance Fund for this 
transaction.
    Chairman Gutierrez. --in this transaction. So, $900 
million--
    Mr. Glassman. For the seven banks.
    Chairman Gutierrez. I'm sorry?
    Mr. Glassman. I'm sorry, for the seven banks that failed.
    Chairman Gutierrez. The seven banks that did fail. And Park 
National and the other, what was the total amount?
    Mr. Glassman. We went out for individual bids for Park, and 
the inherent loss in Park and Citizens was close--approximately 
$1 billion.
    Chairman Gutierrez. So, $2.8 billion, total? That's what it 
cost?
    Mr. Glassman. Approximately $2.5 billion, thereabouts.
    Chairman Gutierrez. Okay, $2.5 billion. And you see, here 
is my problem. And here is why, in the future, I am not going 
to delay in calling the FDIC. I am not going to delay in 
calling the OCC and Treasury. Because you guys don't like it 
when Members of the House, particularly Members who have 
jurisdiction over you, call you and ask you. But it is clear 
that somebody has to watch the people who are watching. 
Somebody has to watch the regulators.
    Somebody has to call you, because, oh, we're going to talk 
about the Chicago Tribune article--and, Mr. Kelly, what a nice 
article--I know what the Chicago Tribune does if Congressman 
Bobby Rush and I call you. All the sudden there is an article, 
``Oh, Gutierrez and Bobby, they're meddling in the affairs, the 
internal affairs.''
    Well, maybe we need to meddle a little more in the internal 
affairs of the executive part of government, because I really 
think what you did was really unfair, unfair to an institution 
that was handing out tens of millions of dollars every year, 
doing their job. And you know something? Almost $900 million 
they lost, because, between the 3 of you, you told them it was 
okay to have 25 percent of their money. And we voted to give 
big banks lots of money, and they couldn't get the TARP money.
    There were a lot of instances, but in the very instance 
when you could put that dagger right through their heart, you 
decided to do the cross-thing on them with the other seven 
institutions and say, ``Pay for the other seven institutions.'' 
So that's it, because I am over my time.
    Mr. Hensarling, you are recognized for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. I would like to 
ask the panelists all one question. Did you hear the witnesses 
from the earlier panel? Mr. Miller, were you here?
    Mr. Miller. Yes.
    Mr. Hensarling. So you heard it. Ms. Kelly?
    Ms. Kelly. Yes.
    Mr. Hensarling. Mr. Glassman? Okay. So, then, you are well 
acquainted with the subject matter of today's hearing.
    Mr. Miller, my first question is for you. Mr. Kelly had 
testified--well, actually, about the concentration of his bank 
holding company in Fannie and Freddie preferred stock. That, 
number one, he was incented to do so by the FDIC, so I have a 
question for the FDIC.
    But my question to you, Mr. Miller, is this is not the only 
bank in America that has either become insolvent, had troubles 
because of their concentration in Fannie and Freddie preferred 
stock. Already, as you are well aware, the taxpayer has been 
called upon to bail out Fannie and Freddie with $110 billion. 
They were, according to the testimony of the gentleman who 
headed up the bank holding company, they were the reason that 
this bank failed, and all the good things they had done 
throughout the community.
    Why, Mr. Miller, on Christmas Eve, did the Treasury 
Department of this Administration lift the limit on taxpayer 
exposure to Fannie and Freddie, and simultaneously announce 
bonus packages of $6 million apiece for the CEOs, $42 million 
of bonuses--oh, by the way, to be paid in cash, not stock, as 
everybody else is supposed to be incented, but in cash? Why did 
they announce that on Christmas Eve, to reward an institution 
that is costing the taxpayer billions and billions of dollars, 
and caused the failure of this bank?
    Mr. Miller. Thank you for the question.
    Mr. Hensarling. I'm not sure you really mean that, but 
please, I'm interested in the answer.
    Mr. Miller. I think you are raising some important issues. 
I do have to remind you that the Office of Financial Stability 
is not responsible for the GSEs, does not have an investment in 
them, and so we play no role in those decisions.
    Mr. Hensarling. Well, I guess, unfortunately, you just have 
Treasury on your business card. We will certainly ask this 
question, then, of other representatives of the Treasury. I 
would like to get to the bottom of this, and understand why 
this is happening.
    Mr. Miller, you spoke about protecting smaller banks under 
the TARP program. I have the testimony before me of Jeff 
Austin, who is the chairman-elect of the Texas Bankers 
Association. I represent a district in Texas. One of the 
aspects of his testimony--I know you don't have it in front of 
you, and I do--he talks about the concern, specifically, that 
GMAC ``took away some of the bread-and-butter consumer loans 
from traditional banks.'' I might point out that in recent 
months, TARP money has been channeled to automotive financing, 
to keep this unfair practice going.''
    So, I have at least one community banker who has been 
elected to represent all community banks in my home State 
saying that, at least with respect to your bailouts of GMAC, 
you're not helping the community banks, you're hurting the 
community banks. What is your response?
    Mr. Miller. We do not get involved in the day-to-day 
operations of the companies with which we have an investment--
that goes for TARP banks, or--as well as GMAC. I think the 
issue you're referring to is they were paying slightly higher 
levels of interest on their deposits to their customers. I 
believe the FDIC looked into this, discussed it with them. But 
again, we do not manage, as an active shareholder, we're not 
managing their day-to-day decisions on what they set interest 
rates at.
    Mr. Hensarling. Okay. Finally--I see my time is starting to 
wind down--I know that recently the President has announced a 
new bank tax.
    Now, let me read further from the testimony of Mr. Austin: 
``I want to point out that while the proposed bank tax is 
initially aimed at penalizing larger banks, it will also have 
an impact on smaller ones. When the big banks sneeze, we run 
the risk of catching pneumonia. We rely on them for 
correspondence services, check clearing, wire transfers, 
letters of credit, and many other services. And this will only 
increase the prices for these services, which will be passed on 
to consumers and small business.'' Again, a gentleman who has 
been in banking for four generations, now has been elected to 
represent all the community banks in Texas.
    Did the Treasury, in announcing this particular new 
proposed tax, consider its impact on smaller community banks 
and small businesses?
    Mr. Miller. The issue of the responsibility fee, I would 
like to point out, under section 134 of the Emergency Economic 
Stabilization Act, there is specifically a section that 
instructs the President to put a fee on the financial industry 
in place to recoup TARP funds. I think that's the purpose of 
this fee.
    The structure of it is specifically on institutions that 
are large institutions, greater than $50 billion in assets. I 
think the purpose here is to target those that have the highest 
leverage, that were taking the excessive risks, and therefore--
    Mr. Hensarling. Mr. Miller, I see I'm out of time. But if 
you quit bailing them out, you don't have to recoup the cost. I 
yield back.
    Chairman Gutierrez. The gentleman yields back. Mr. 
Perlmutter is recognized for 5 minutes.
    Mr. Perlmutter. Thanks, Mr. Chairman. And I would like to 
ask the panel--I just want to go back a year-and-a-half to July 
of 2008, when the Bush Administration and Secretary Paulson, 
sitting where you are sitting, asked for some additional powers 
with respect to Fannie Mae and Freddie Mac, even though they 
had sort of coddled Fannie Mae and Freddie Mac for years, 
according to the prior chairman of this committee, Mr. Oxley--
and we can get into that.
    But they came and said, ``We would like to be able to put 
Fannie Mae or Freddie Mac into either conservatorship or 
receivership, but we're not going to use those powers.'' One 
month later, Secretary Paulson places Fannie Mae and Freddie 
Mac into conservatorship. And Mr. Kelly, who testified earlier, 
he and his bank, as well as other financial institutions across 
the country, had worthless paper. At that point, that caused 
them to immediately become undercapitalized.
    So, Secretary Paulson and President Bush felt that was an 
appropriate step. Fine. We went forward, and we did TARP, to be 
made available to banks to help them stabilize themselves, and 
keep the banking system in place.
    Now, Mr. Kelly's testimony--and I think you all heard it--
was that originally his bank was approved for TARP in October 
of 2008. I want to ask just a very straightforward question. 
Why, in October of 2008, after he had been approved for TARP, 
was he then denied TARP? Mr. Miller?
    Mr. Miller. I think it is important to clarify the sequence 
of events. I think the term ``approved'' that he was using was 
being used incorrectly. He was originally recommended by his 
primary regulator. At the time, there was no program for 
private institutions. Several weeks later, there was a term 
sheet put out. At that time, the regulator who was recommending 
it brought it to what's called the council of regulators for 
more due diligence and review.
    At that point, they went and did other work, but we did not 
get their recommendation where we would then go forward and 
fund the institution. Their recommendation--
    Mr. Perlmutter. The council--OCC recommended that the bank 
receive TARP, but the council--
    Mr. Miller. Yes, there is a council--
    Mr. Perlmutter. --declined?
    Mr. Miller. There is a council of the other regulators--
    Mr. Perlmutter. Who makes up the council?
    Mr. Miller. There is a council of the OCC, the Fed, the 
OTS, and the FDIC.
    Mr. Perlmutter. Okay. And do you know what the reason was 
that the OCC, which--you know, when they have been in front of 
this committee, they have been pretty hard-nosed about the 
banks under their jurisdiction. So I'm surprised that if the 
OCC is making the recommendation that this bank get TARP money, 
that under the Bush Administration, they would be denied TARP 
money. What caused that?
    Mr. Miller. We followed a very consistent process over 
1,000 applications. And a recommendation from either the 
primary regulator or the council forwarding the application up 
was a requirement for us to move forward.
    Again, as I said, if you did not get a recommendation and a 
statement that said, ``This institution is viable without TARP 
funds,'' we did not review the application and fund. And that 
was consistently--
    Mr. Perlmutter. Do you know whether that statement was made 
as to Mr. Kelly's bank?
    Mr. Miller. My understanding is the council could never 
make that statement, and so we did not have any further 
involvement in the institution, going forward.
    Mr. Perlmutter. All right. Let's now move forward in time. 
So, over time, they're trying to get capital, because they have 
$900 million of worthless Fannie Mae and Freddie Mac paper. 
They're trying to do that. They were working with the FDIC, as 
I understood the testimony.
    When did the FDIC start this, you know, deciding that this 
is a deteriorating--I think your term, it was deteriorating 
condition, and then, bang, close them and sell it to U.S. Bank? 
When did that all occur, Mr. Glassman?
    Mr. Glassman. Conversations with the primary regulator, the 
OCC, were ongoing. But when the seven banks--seven out of the 
nine banks were told that they were going to become insolvent, 
and that they would be placed under receivership, we then had 
to take a look at the total family. But the conversations were 
ongoing.
    Mr. Perlmutter. Why?
    Mr. Glassman. --with the OCC--
    Mr. Perlmutter. Why? Why do you have to take a look at the 
total family? Why can't you save one or two banks out of nine 
banks?
    Mr. Glassman. Well, our intent was never to try to look for 
any type of institution to fail. But the statute is very clear 
about protecting the Deposit Insurance Fund.
    Mr. Perlmutter. Right.
    Mr. Glassman. With the two other banks that were part of 
the family--according to the statute--we have a right to assess 
liability for the losses.
    Chairman Gutierrez. Time has expired. Mr. Bachus, you are 
recognized for 5 minutes.
    Mr. Bachus. The Chicago Tribune article says that when the 
government took over Fannie and Freddie in September 2008, it 
wiped out the value of the company's equity overnight. FBOP 
suffered an $885 million loss, blowing a gaping hole in its 
reserves. That's pretty--that's true, is it not? Ms. Kelly?
    Ms. Kelly. Yes, that is.
    Mr. Bachus. Okay. That's true? Okay. Ms. Kelly, you all had 
a full-time examiner at FBOP?
    Ms. Kelly. Yes, we had one examiner who was overseeing all 
six of the national banks that were part of that group.
    Mr. Bachus. Right. At any time did that examiner, or did 
the OCC become concerned about Fannie and Freddie and their 
solvency?
    Ms. Kelly. We were well aware of the size of the 
concentration of the investment that they had in the Fannie and 
Freddie stock, and our examiner was having conversations with 
them. As the value of that stock was dropping before the 
conservatorship, we were obviously watching that closely. And 
the examiner had conversations with bank management about the 
need to develop capital contingency plans in the event the 
value fell even further.
    Mr. Bachus. At any point did the Federal regulators--you 
had a regulation which allowed these banks to--really, a 
regulatory bias towards holding Fannie and Freddie preferred 
stock. You acknowledge that?
    Ms. Kelly. I'm not sure what you mean by a ``regulatory 
bias.''
    Mr. Bachus. Well, you allowed them to count the preferred 
stock in Fannie and Freddie as if it were Treasury.
    Ms. Kelly. It had a 20 percent risk weight.
    Mr. Bachus. That's true?
    Ms. Kelly. Yes, that's true.
    Mr. Bachus. Yes, which--now you would agree, in hindsight, 
that was almost a foolish assessment of their risk, would you 
not?
    Ms. Kelly. Well, we certainly have a different view now, 
given events that have transpired, yes.
    Mr. Bachus. Right. At any time did you all change your 
regulations and tell the banks that was no longer going to be 
the case, or try to back out of that--what I call, you know, a 
terrible regulation?
    Ms. Kelly. The 20 percent risk weight?
    Mr. Bachus. Yes.
    Mr. Kelly. No.
    Mr. Bachus. Okay. Well, you saw the value of the stock, and 
you know, Treasury was seeing it, and the FDIC. I'm sure you 
all were at some point all aware, prior to becoming--September 
2008--into the perilous condition of Fannie and Freddie. In 
fact, you know, by that time Secretary Paulson had come before 
the Congress and asked for as much as $300 billion to inject 
into Fannie and Freddie.
    Well, you know, you didn't--there was no advance warning by 
the regulators. You all were here in Washington. You 
acknowledge that? No change in regulation? And I'm not just 
talking about Ms. Kelly. Mr. Glassman?
    Ms. Kelly. No, we didn't make any change in our risk 
weighting.
    Mr. Bachus. All right. And that caused a tremendous problem 
for them.
    They also--you know, the Tribune points out that just the 
week--you took them over, and in that same week legislation was 
going to the President's desk that would have allowed them to 
realize the Fannie and Freddie losses immediately, which would 
have greatly helped them, would it not, Mr. Glassman or Ms. 
Kelly?
    Ms. Kelly. I think you're speaking about the loss carry-
back--
    Mr. Bachus. That's right.
    Ms. Kelly. Yes, this could have generated some additional 
capital. However, the way that would have worked is the 
benefits would have had to have been spread across the nine 
charters and--
    Mr. Bachus. Right.
    Ms. Kelly. --the two banks that were critically 
undercapitalized, they needed $178 million--
    Mr. Bachus. Oh, I know. But it would have helped the group 
substantially. Right?
    Ms. Kelly. I know $200 million seems like a lot of money, 
but--
    Mr. Bachus. Yes, it does.
    Ms. Kelly. --given the situation that those charters were 
in, it was insignificant to helping them fix the problem.
    Mr. Bachus. Well, yes. Now, Mr. Kelly apparently offered 
you all a deal which would have cost about $600 million. Is 
that correct, Mr. Glassman?
    Mr. Glassman. Go ahead.
    Ms. Kelly. He didn't offer--he was trying to raise capital.
    Mr. Bachus. This article says that he actually made a 
proposal that a private equity group would inject $600 million, 
and the FDIC would either contribute a similar amount or share 
losses up to $600 million. Is that accurate or not accurate?
    Ms. Kelly. That was not something the OCC was involved in.
    Mr. Glassman. And I am not familiar with it.
    Mr. Bachus. So, would--did you read that article? Was that 
the first time you were aware of this proposal?
    Chairman Gutierrez. The time of the gentleman has expired.
    Mr. Bachus. Thank you.
    Chairman Gutierrez. Mr. Minnick, you are recognized for 5 
minutes.
    Mr. Minnick. My concern is procyclical regulation. I have a 
number of financial institutions that do business or are 
headquartered in my district that have been through a scenario 
where they will have an examination by the FDIC or the OCC. The 
asset values supporting commercial lending are in the 
examinations based upon the latest distress sale, which may be 
at $.20 or $.30 on the replacement cost because they are 
valued--assets are valued so low.
    The loan is then classified, and they have to take 
additional reserves, which eats into their tier one capital. 
They are then required to go out and raise substantial 
additional capital, and the request is usually not just the 
capital required to get them up to the regulatory minimum, but, 
in light of the bad experience they have just had with 
commercial lending, let's raise another 2 or 3 percent above 
that lending.
    My question to Mr. Glassman and Ms. Kelly is, do you think 
it is reasonable for your fair market value bank examinations, 
evaluations of collateral values in this market, to be based 
only at the last distressed sale price for comparable property 
when that bears no relationship, either to a normal functioning 
fair market valuation or to replacement value?
    Ms. Kelly. That's a very complicated issue that you are 
raising. We previously sent a letter to you explaining our 
position on this. We are trying to take a very balanced 
approach in our supervision. However, we have to be cognizant 
of the environment that we're in now, and the problems that the 
banks are having. And it's important for us to ensure that 
banks are--
    Mr. Minnick. But the problems are largely of your creation, 
because of this valuation. You are driving banks that would 
otherwise be perfectly sound and functioning and lending in our 
community into bankruptcy. You are the cause of the problem, to 
a substantial extent.
    Ms. Kelly. Well, we--
    Mr. Minnick. In my opinion.
    Ms. Kelly. Do you want me to respond to that?
    Mr. Minnick. Yes, please.
    Ms. Kelly. Okay. We need to look at the quality of the 
assets that the bank has. And if borrowers are having trouble 
repaying their loan, then bankers need to recognize that, and 
they need to work with the borrowers to try to have the loans 
repaid. But just ignoring the problems doesn't make them go 
away.
    Mr. Minnick. Many of these loans are fully performing. And 
the problem is your valuations being so far below any 
reasonable market value or replacement value or likely value, 
if they are allowed to be sold over a meaningful period of 
time, that you are forcing banks to set up reserves that bear 
no relationship to what they really need against fully 
performing loans.
    Ms. Kelly. I would say that's an oversimplification of the 
way that our OCC examiners look at loans.
    If there is a specific situation that we could discuss 
further, we would be happy to get into the details. Every 
situation is different, and we need to look at it.
    But if a borrower has full ability to repay the loan, just 
the fact that the value of the collateral declined is not going 
to force us to take action on that loan. We're looking at the 
ability of the bank to collect that loan. And if the borrower 
can repay it, regardless of what has happened to the value of 
the collateral, then that's what we are focusing--
    Mr. Minnick. So, whether or not the lender can repay the 
loan is relevant to the issue of fair market value?
    Ms. Kelly. A--
    Mr. Minnick. Because I don't think that, in fact, is what 
is happening. But I am delighted if that is the case, because 
that is a way of dealing with this issue and keeping some banks 
from being--going insolvent that are teetering on the very edge 
right now, because of your regulatory focus.
    Ms. Kelly. If the loan can be repaid on reasonable terms, 
that's what we are looking for. But again, there are a lot of 
nuances to these situations. We would really have to talk in 
more specifics to get at some of the cases that you may be 
hearing about. And we would be happy to provide more 
information, and have that conversation.
    Mr. Minnick. Mr. Glassman?
    Mr. Glassman. I am not on the examination side, but I would 
like to have a response provided to you by our examiners and 
the folks who deal with the safety and soundness issues 
regarding your question. So if you would allow us to give you a 
written answer back, I will make sure it gets done.
    Mr. Minnick. Well, it's a complaint. And it may be an 
oversimplification, but we have limited time. But it's a 
complaint that has been brought to me by the CEOs of a whole 
host of banks in my district. And what we hear from you, at 
your level, is quite different from the experience they are 
having on the ground with your field personnel.
    Your field personnel never get criticized for being overly 
conservative. They only get criticized if they are not--
    Chairman Gutierrez. The time of the gentleman has expired. 
The gentleman from Georgia, Mr. Price.
    Mr. Price. Thank you, Mr. Chairman. I want to follow up on 
the comments that were just being made.
    The American people are angry, and they are fearful, and 
they are concerned about what's going on, because they don't 
believe their government gives a hoot about them any more. I 
mentioned in my opening statement the FDIC is destroying 
communities, and that is what you are doing. You are destroying 
communities. And it's wrong. It's wrong.
    All the failures in our State, the State of Georgia now, 
with 25 bank failures last year, all those failures were 
community banks. Now, some of them were young, 
undercapitalized, and appropriately, in this environment, 
probably should have been closed. But now you all are moving 
into more and more of the older, established banks, some banks 
that are very well-capitalized with performing loans that would 
be an envy to some other banks that are allowed to stay open 
right now. Private capital is sitting on the sidelines, because 
you all are changing the rules day in and day out, and it's 
wrong.
    I have read statements, Mr. Glassman, from you, and you 
have testified before our committee that you believe there are 
too many banks, too many banks. I also read your 53-page 
statement last week to the Financial Crisis Inquiry Commission 
where you made not one single reference to community banks.
    So, what I would like you to do for us, please, is to 
clarify whether it is the FDIC's position, on why you feel that 
we have too many banks, and what obstacles, either 
legislatively or by rule, tie your hands to keep you from 
providing more flexibility to these struggling, established 
community banks. Does the FDIC believe we have too many banks?
    Mr. Glassman. Congressman, this is the first time I have 
been on the Hill in some time, so I'm not certain who has 
testified or whether that was our Chairman. But, again, I would 
like to get back with you on that, on the particulars of your 
question. The staff behind me will do that.
    Mr. Price. Does the FDIC believe there are too many banks?
    Mr. Glassman. I do not believe there are too many banks.
    Mr. Price. From banker after banker after banker, as Mr. 
Minnick has said, they are being required to come up with real 
capital to cover theoretical losses in communities all across 
this Nation. And when they are unable to come up with that real 
capital because private capital is sitting on the sidelines 
because of what you all are doing, then you sell them to one of 
the big boys.
    And that may be a good solution for the government, but 
it's not a good solution for that community, because the people 
in that community will no longer have access to local 
resources, local money. And those communities will die. These 
are real people out there that you are harming with the 
decisions that you are making.
    I understand that the reserve over losses timeline that is 
being used currently for community banks is now down to 6 
months, and that is something that apparently you all have 
control over. Is that correct?
    Ms. Kelly. Are you referring to the reserve for loan 
losses?
    Mr. Price. Yes.
    Ms. Kelly. Those are accounting standards. That was what 
was talked about on the previous panel quite a bit, and that's 
something that the Comptroller has been outspoken about, that 
we would like to see some changes in how that's done.
    Mr. Price. Is the OCC unable to change that right now of 
your own accord?
    Ms. Kelly. Banks have to operate in compliance with 
accounting standards, and we have to honor those accounting 
standards. We are working closely with the standard setters.
    Mr. Price. Do you have any flexibility with those standards 
right now?
    Ms. Kelly. We certainly work with the banks to ensure that 
they have a good calculation for their loan loss reserve. But 
they still have to be in compliance with the accounting 
standards.
    Mr. Price. And is there any accounting standard that says 
that the timeframe for which properties need to be evaluated in 
this instance for these, for the reserves, is a 6-month period 
of time for the valuation of the property?
    Ms. Kelly. No, it's not stated that way.
    Mr. Price. Is that what you're using?
    Ms. Kelly. No.
    Mr. Price. You're not using 6 months?
    Ms. Kelly. I'm not entirely sure what you are referring to. 
Six months' anticipated losses, or what?
    Mr. Price. The timeframe under which a property is valued, 
to determine whether or not there is appropriate capitalization 
within the bank itself.
    Ms. Kelly. A property that the bank has lent money on?
    Mr. Price. Yes.
    Ms. Kelly. So the collateral underlying--
    Mr. Price. Yes.
    Ms. Kelly. Oh, the value of the underlying collateral.
    Mr. Price. Yes.
    Ms. Kelly. That's what we're talking about.
    Mr. Price. Yes.
    Ms. Kelly. Okay. I'm sorry. I misunderstood your question.
    Mr. Price. I'm sorry I wasn't clear.
    Ms. Kelly. In Georgia, as you know, there are areas of the 
country where the real estate markets have--
    Chairman Gutierrez. The time of the gentleman has expired. 
Mr. Bobby Rush is recognized for 5 minutes.
    Mr. Rush. Thank you, Mr. Chairman. And, again, I want to 
thank you for your courtesy in allowing me to, as a non-
committee member, to be a part of this hearing.
    I think this question should be directed to Ms. Kelly. Ms. 
Kelly, there are severely and moderately unbanked communities 
throughout this Nation. And, has been indicated by various 
testimony earlier today and on--by my colleagues who are on the 
committee here, communities are hurting.
    Is there a policy that the OCC has that would take into 
consideration the lives and interests of those residents of 
communities where there is meager and non-existent banking 
services? What kind of proactive policies do you all have to 
address the concerns of citizens in minority--mostly minority, 
low income, and moderately or severely unbanked communities?
    Ms. Kelly. We examine banks' compliance with the Community 
Reinvestment Act in a variety of our offices around the 
country. We have community affairs officers who work with both 
the community groups and national banks to try and help banks--
    Mr. Rush. Did the Community Reinvestment Act play any role 
in the decision in Park National?
    Ms. Kelly. Our decision to place Park into receivership?
    Mr. Rush. Right.
    Ms. Kelly. No.
    Mr. Rush. It didn't?
    Ms. Kelly. No, it didn't.
    Mr. Rush. So--
    Ms. Kelly. The bank was insolvent.
    Mr. Rush. So the Community Reinvestment Act becomes silent 
when you close banks, community banks, is that correct?
    Ms. Kelly. Our objective is to ensure banks operate in safe 
and sound conditions so they can service their communities. The 
Community Reinvestment Act is how well they service their 
communities--
    Mr. Rush. So, sometimes you find yourself at cross purposes 
with the Community Reinvestment Act, is that correct?
    Ms. Kelly. But if a bank is not in a safe and sound 
condition, it impairs its ability to service.
    Mr. Rush. Okay. If there are any ancillary conditions or 
responsibilities, shared responsibilities other than the 
decisions of the local banker--if the--if you, as the Federal 
agency, or any other Federal agency, is culpable, in terms of 
the decisions of that bank, do you assume any responsibility 
for that bank not being safe and sound, or is it strictly up to 
the bank?
    Ms. Kelly. We work with the bank to ensure they are 
operating in a safe and sound manner. If the bank's condition 
deteriorates, then we have various tools we can use, 
enforcement acts and such--
    Mr. Rush. Okay. Let me ask you this question, speaking 
specifically to Park National. When did the FDIC make their 
decision about the closure of Park National? What date?
    Ms. Kelly. To--
    Mr. Rush. To close--
    Ms. Kelly. To assess them for the liability? Or when did 
they make the decision--
    Mr. Rush. To close it.
    Ms. Kelly. You would really have to ask the FDIC when that 
decision was made.
    Mr. Rush. Okay. Mr. Glassman, when did you all make that 
decision?
    Mr. Glassman. That decision was not made until late 
October, before its failure. And it was only made after we had 
put both Park--and there was another bank called Citizens--out 
for bid to see if there was value. But the bids came back, the 
market came back and said that there was not any value.
    We were already looking at a $1.8 billion loss to the 
Insurance Fund.
    Mr. Rush. So do you know specifically what date in October?
    Mr. Glassman. I don't have it on my notes, but it was 
shortly before the closure.
    Mr. Rush. Okay, when did you begin--
    Mr. Glassman. I'm--
    Mr. Rush. When did you begin discussions with U.S. Bank of 
the possibility of the close of PNB's seizure? When did you 
begin those discussions with U.S. Bank? What date?
    Mr. Glassman. Well, that would have been October 30th, when 
the banks were declared insolvent.
    Mr. Rush. Was that prior to your making the decision to 
seize Park National?
    Mr. Glassman. October 30th was the day that the banks' 
charters were going to be pulled. But the seven banks that were 
part of the family had failed.
    Mr. Minnick. [presiding] The Chair grants the gentleman one 
additional minute.
    Mr. Rush. Thank you.
    Mr. Glassman. The seven banks had failed first, and we then 
applied the guarantee to both Park and Citizens, asking for 
reimbursement for those losses. And on that basis, the OCC then 
had to pull the charter for those two national banks on October 
30, 2009.
    Mr. Rush. Thank you, Mr. Chairman. I yield back.
    Mr. Minnick. The Chair grants the gentleman from New 
Jersey, Mr. Lance, 5 minutes.
    Mr. Lance. Thank you, Mr. Chairman. I yield my time to Dr. 
Price.
    Mr. Price. I thank the gentleman. And I want to follow up 
on the line of questioning that we were on before in a little 
different light.
    It's my understanding that community banks now are required 
to determine the appraised value of a property within the last 
year, the worst year of performance. And that results in the 
need for higher capitalization, for them to not get in the 
cross-hairs of OCC and FDIC.
    It's also my understanding that you all have the ability to 
decouple the accounting of those assets from the capitalization 
requirements for the bank. Is that true?
    Ms. Kelly. I'm sorry, I'm not clear on what the question 
is.
    Mr. Price. Because the OCC and the FDIC are requiring 
greater capitalization, more--the raising of greater capital 
because the assets on a bank sheet are decreasing in their 
value--
    Ms. Kelly. Okay.
    Mr. Price. --banks that are--the loans that are performing 
normally--the only thing that's different is the value of the 
property that you all are requiring the banks to assign to it--
bring the bank into jeopardy of being foreclosed.
    It's my understanding that you all have the ability to 
divorce, to decouple, the determination of the value of an 
asset from the capitalization requirements. Is that true?
    Ms. Kelly. Well, we do have the ability to set individual 
capital requirements for banks, based on our assessment of 
their risk profile. And, obviously, the volume of problem 
assets they have, meaning loans that are in danger of not being 
collected, that maybe have to be charged off--
    Mr. Price. And on loans that are performing--
    Ms. Kelly. Yes.
    Mr. Price. --how do you determine, on loans that are 
performing, that they will not perform in the future, and 
therefore use them as your justification for saying that the 
bank is in danger?
    Ms. Kelly. Well, that determination about the likelihood of 
a loan performing in the future is based on an analysis of the 
available financial information on the borrower--
    Mr. Price. And--
    Ms. Kelly. --the value of the collateral, if that is a 
repayment source. It is a complex process. The banks do it 
themselves, and then the regulators come in and check the 
bank's assessment of the quality of its assets.
    Mr. Price. And that's where the rub is coming, because what 
you all are deciding in bank after bank after bank--this isn't 
an isolated incident.
    We have one billion plus banks--banks with one billion plus 
capitalization--that are in your cross-hairs right now, and 
with performing loans. And then you all close it down, you sell 
it to somebody else, and you expose the taxpayer to $200 
million to $300 million in liability, when if you just worked 
with the bank they would work it through. They have done it 
before.
    Ms. Kelly. And we do encourage banks to work with their 
borrowers who are troubled, and try to find a way to work it 
out. But--
    Mr. Price. That's not what is happening. Ms. Kelly, in your 
testimony you stated, ``Where rehabilitation is not achievable, 
it's the OCC's goal to affect early and least cost 
resolution,'' etc. How do you determine whether resolution is 
achievable or not?
    Ms. Kelly. We have to make a determination about the 
likelihood that the bank can be rehabilitated, that it's going 
to be able to get more capital, it's going to be able to 
overcome the problems it has.
    Some banks have been purchased by other banks and merged 
together. There are a variety of ways that problems can be 
worked out.
    Mr. Price. You understand that the consequences of closing 
a community bank that is functioning well, that is well-
capitalized, the consequences of that destroy communities.
    Ms. Kelly. We do not close banks that are well-capitalized.
    Mr. Price. Ms. Kelly, that is not true. That is simply not 
true. And when we raised that issue with the FDIC, and asked 
for a specific meeting of a bank with the FDIC, we were told by 
the FDIC--Mr. Glassman, I would be interested in your comment 
on this--told by the FDIC that it was inappropriate for a 
Member of Congress to ask for a meeting between the bank and 
the FDIC. Do you believe that?
    Mr. Glassman. I'm not familiar with that, but the FDIC is 
the insurer of the banks. I just can't imagine why we would not 
speak to any bank that has our deposit insurance.
    Mr. Price. Well, we will get back with you on that. But 
this is a very troubling situation, and you all are affecting 
real lives and real people in an adverse way. And it's wrong.
    Ms. Kelly. I would just like to say if you feel that we are 
closing banks that are well-capitalized--
    Chairman Gutierrez. The time has expired. Mr. Danny Davis, 
you are recognized for 5 minutes.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman, 
and I certainly want to thank you again for the opportunity to 
participate in this hearing.
    Mr. Glassman, let me ask you, do you feel that Park 
National was given ample time to correct its deficiency before 
engagement took place with the U.S. Bank?
    Mr. Glassman. My colleague from the OCC may be in a better 
position to respond, but the history of this institution showed 
that there was a lot of involvement by the primary regulator 
for over 14 months to try to raise capital, and to try to put 
the bank in a healthy posture. By the time it got to where the 
FDIC had to be involved, it was inevitable that it was a 
potential near failure where insured depositors were being 
placed at risk.
    Mr. Davis of Illinois. Ms. Kelly, let me ask you, based 
upon information that was going back and forth, and information 
that I had received, and I guess others had received, and--the 
feeling that we had gotten was that Park National was on the 
verge of being able to rectify its financial situation with a 
new private investment. And the investment was basically agreed 
to, except the T's had to be crossed and the I's dotted. All of 
the nuances of the agreement had to be worked out, but the 
basic agreement and the basic ability had occurred for a new 
investor to come in with the resources that they needed.
    Was that inaccurate information that was coming out, or was 
there any accuracy to that, or--
    Ms. Kelly. Our assessment of the situation was that it was 
not, at that point, close to just dotting I's and crossing T's. 
There certainly were discussions under way, but it had not 
reached the point of a definitive agreement that the new 
capital was coming in, which is what we had made clear we 
needed.
    Mr. Davis of Illinois. Oh, so there was--the question of 
flexibility also was a question under discussion by interested 
entities and interested parties at that time, relative to--what 
kind of flexibility did the OCC, did the FDIC--what kind of 
flexibility existed, if any, that this one week of time that 
was being asked for by Park National--or had it reached the 
point where the decision had really already been made, that 
U.S. Bank was going to be the receiver, and that they were just 
kind of blowing in the wind at that point?
    Ms. Kelly. I'll start with that, and then perhaps Mr. 
Glassman would like to follow up. But from the OCC perspective, 
it's important to understand we had been working with the bank 
for almost 14 months, since the time the GSEs were placed into 
conservatorship and they had that immediate need for capital.
    And I feel, in terms of flexibility, we had been working 
closely with the FBOP management. We had been looking at 
numerous proposals, providing feedback on those proposals. We 
did support their TARP application. We did everything we could 
to try and find a solution for this group of banks.
    When we got to the point where two of the banks went under 
the critical undercapitalized level, that triggers the 90-day 
clock that we have to put the banks in receivership. And so, we 
were operating under that 90-day clock at that point in time, 
and we made it clear that the only thing that would allow us to 
stop that was a signed, definitive agreement, and we did not 
have that.
    Do you have anything you want to add to that?
    Mr. Glassman. You know, the other point, as far as 
flexibility, is also the fact that we are the deposit insurer. 
This family of banks had close to a half-a-million accounts. A 
lot of them needed to have the deposit insurance applied so 
they would be able to continue their banking needs.
    So, for us, the fact is that--
    Chairman Gutierrez. The time of the gentleman has expired. 
I would encourage the witnesses to answer in writing any 
questions that they might not have had the time or opportunity 
to answer.
    I want to thank the witnesses and the members for their 
participation. The Chair notes that some members may have 
additional questions for the witnesses, which they may wish to 
submit in writing. Therefore, without objection, the hearing 
record will remain open for 30 days for members to submit 
written questions to the witnesses, and to place their 
responses in the record.
    This subcommittee hearing is now adjourned.
    [Whereupon, at 2:07 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            January 21, 2010


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