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

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2011

    _______________________________________________________________________

                                    HEARINGS

                                    BEFORE A

                               SUBCOMMITTEE OF THE

                           COMMITTEE ON APPROPRIATIONS

                             HOUSE OF REPRESENTATIVES

                          ONE HUNDRED ELEVENTH CONGRESS
                                 SECOND SESSION
                                    ________
           SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
                                 APPROPRIATIONS
                       JOSE E. SERRANO, New York, Chairman
     DEBBIE WASSERMAN SCHULTZ, Florida  JO ANN EMERSON, Missouri
     ROSA L. DeLAURO, Connecticut       JOHN ABNEY CULBERSON, Texas
     CHAKA FATTAH, Pennsylvania         MARK STEVEN KIRK, Illinois
     BARBARA LEE, California            ANDER CRENSHAW, Florida
     ADAM SCHIFF, California
     STEVE ISRAEL, New York
     TIM RYAN, Ohio

     NOTE: Under Committee Rules, Mr. Obey, as Chairman of the Full
    Committee, and Mr. Lewis, as Ranking Minority Member of the Full
    Committee, are authorized to sit as Members of all Subcommittees.
               Lee Price, Bob Bonner, Angela Ohm, and Ariana Sarar
                               Subcommittee Staff

                                    ________

                                     PART 5
                                                                       Page
     Internal Revenue Service.........................................    1
     Treasury Department..............................................   65
     Financial Crisis and TARP........................................  147

                                       S

                                    ________

             Printed for the use of the Committee on Appropriations
                                     Part 5

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2011
                                                                          ?

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2011

    _______________________________________________________________________

                                    HEARINGS

                                    BEFORE A

                               SUBCOMMITTEE OF THE

                           COMMITTEE ON APPROPRIATIONS

                             HOUSE OF REPRESENTATIVES

                          ONE HUNDRED ELEVENTH CONGRESS
                                 SECOND SESSION

                                    ________

           SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
                                 APPROPRIATIONS
                       JOSE E. SERRANO, New York, Chairman
     DEBBIE WASSERMAN SCHULTZ, Florida  JO ANN EMERSON, Missouri
     ROSA L. DeLAURO, Connecticut       JOHN ABNEY CULBERSON, Texas
     CHAKA FATTAH, Pennsylvania         MARK STEVEN KIRK, Illinois
     BARBARA LEE, California            ANDER CRENSHAW, Florida
     ADAM SCHIFF, California
     STEVE ISRAEL, New York
     TIM RYAN, Ohio

     NOTE: Under Committee Rules, Mr. Obey, as Chairman of the Full
    Committee, and Mr. Lewis, as Ranking Minority Member of the Full
    Committee, are authorized to sit as Members of all Subcommittees.
               Lee Price, Bob Bonner, Angela Ohm, and Ariana Sarar
                               Subcommittee Staff

                                    ________

                                     PART 5
                                                                       Page
     Internal Revenue Service.........................................    1
     Treasury Department..............................................   65
     Financial Crisis and TARP........................................  147

                                       S

                                    ________

                         U.S. GOVERNMENT PRINTING OFFICE
     62-166                     WASHINGTON : 2010

                                      COMMITTEE ON APPROPRIATIONS

                       DAVID R. OBEY, Wisconsin, Chairman

     NORMAN D. DICKS, Washington        JERRY LEWIS, California
     ALAN B. MOLLOHAN, West Virginia    C. W. BILL YOUNG, Florida
     MARCY KAPTUR, Ohio                 HAROLD ROGERS, Kentucky
     PETER J. VISCLOSKY, Indiana        FRANK R. WOLF, Virginia
     NITA M. LOWEY, New York            JACK KINGSTON, Georgia
     JOSE E. SERRANO, New York          RODNEY P. FRELINGHUYSEN, New
     ROSA L. DeLAURO, Connecticut       Jersey
     JAMES P. MORAN, Virginia           TODD TIAHRT, Kansas
     JOHN W. OLVER, Massachusetts       ZACH WAMP, Tennessee
     ED PASTOR, Arizona                 TOM LATHAM, Iowa
     DAVID E. PRICE, North Carolina     ROBERT B. ADERHOLT, Alabama
     CHET EDWARDS, Texas                JO ANN EMERSON, Missouri
     PATRICK J. KENNEDY, Rhode Island   KAY GRANGER, Texas
     MAURICE D. HINCHEY, New York       MICHAEL K. SIMPSON, Idaho
     LUCILLE ROYBAL-ALLARD, California  JOHN ABNEY CULBERSON, Texas
     SAM FARR, California               MARK STEVEN KIRK, Illinois
     JESSE L. JACKSON, Jr., Illinois    ANDER CRENSHAW, Florida
     CAROLYN C. KILPATRICK, Michigan    DENNIS R. REHBERG, Montana
     ALLEN BOYD, Florida                JOHN R. CARTER, Texas
     CHAKA FATTAH, Pennsylvania         RODNEY ALEXANDER, Louisiana
     STEVEN R. ROTHMAN, New Jersey      KEN CALVERT, California
     SANFORD D. BISHOP, Jr., Georgia    JO BONNER, Alabama
     MARION BERRY, Arkansas             STEVEN C. LaTOURETTE, Ohio
     BARBARA LEE, California            TOM COLE, Oklahoma
     ADAM SCHIFF, California
     MICHAEL HONDA, California
     BETTY McCOLLUM, Minnesota
     STEVE ISRAEL, New York
     TIM RYAN, Ohio
     C.A. ``DUTCH'' RUPPERSBERGER,
    Maryland
     BEN CHANDLER, Kentucky
     DEBBIE WASSERMAN SCHULTZ, Florida
     CIRO RODRIGUEZ, Texas
     LINCOLN DAVIS, Tennessee
     JOHN T. SALAZAR, Colorado
     PATRICK J. MURPHY, Pennsylvania

                     Beverly Pheto, Clerk and Staff Director

                                      (ii)

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2011

                                        Wednesday, February 24, 2010.

                   FY2011 BUDGET FOR INTERNAL REVENUE SERVICE

                                    WITNESS

    DOUGLAS H. SHULMAN, COMMISSIONER, INTERNAL REVENUE
        SERVICE
        Mr. Serrano. The Subcommittee will come to order. We
    welcome the Commissioner of Internal Revenue, Douglas Shulman.

                      Opening Statement, Chairman Serrano

        Before we begin, we want to express our most sincere
    condolences to you, the staff, and the families of the folks
    that were caught up in that horrible tragedy. There is very
    little that can be said at times like these, but please stand
    assured that if there is any assistance you need from us to
    deal with that particular issue, we stand ready to assist you.
        And please convey, on behalf of this Committee, to the
    employees of the IRS, that we support their work, that we feel
    their tragedy, and that we personally--I personally believe
    that no violent action against government employees can be
    justified, regardless of how anyone feels about any issue in
    this country.
        So before we begin today's hearing, and this is the first
    hearing of the year for us, we just want to convey that. And I
    turn to Mrs. Emerson.
        Mrs. Emerson. Let me also express my sincere sympathies,
    and please let all of the almost 100,000 IRS employees know
    that we are very impressed by their resilience in the face of
    such tragedy. And our thoughts and prayers are with the family
    of Vernon Hunter and all of the employees.
        Thank you.
        Mr. Serrano. Thank you. We welcome Commissioner of Internal
    Revenue, Douglas Shulman, back for his third appearance before
    the Subcommittee. The IRS employs more than 100,000 people,
    processes more than 140 million tax returns each year, and
    collects more than 95 percent of the revenues that fund the
    Federal Government.
        Recently, the IRS has also been involved in implementing an
    array of tax benefits containing last year's Recovery Act, in
    addition to preparing for the requirements of the annual tax
    filing season.
        What is still fresh in our minds is last week's tragedy at
    the IRS facility in Austin, Texas. Our hearts go out to those
    who were killed, those who were injured, and their families.
    This Subcommittee will do its part to ensure that the IRS will
    recover from the difficulties caused by the terrible event last
    week.
        In its fiscal year 2011 budget submission, the IRS is
    requesting $12.6 billion, an increase of $487 million, or four
    percent above fiscal 2010.
        I want to continue to emphasize the importance of the IRS's
    taxpayer service mission. Taxpayers who need information and
    assistance to deal with the complexities of the Tax Code should
    be able to come to the IRS for help. Good taxpayer service can
    lead to increased compliance and lower IRS costs in the area of
    enforcement. The IRS continues to provide assistance through
    its walk-in sites, partner organizations, and the IRS website
    and toll-free telephone hotline.
        I am pleased that in this budget request the IRS is
    attempting to address its problems in the area of telephone
    assistance, and to implement improvements to the IRS website.
    At the same time, I am disappointed that the budget proposes to
    reduce funding for grants to low-income taxpayer clinics and
    volunteer income tax assistance sites. Both of these programs
    have provided essential assistance to low and moderate income
    taxpayers throughout the country.
        The budget request also reduces funding for tax counseling
    for the elderly grants. However, I am pleased that the budget
    request continues the IRS enforcement initiative aimed at
    offshore tax evasion and corporate and high income taxpayers.
    The level of tax non-compliance in these areas continues to be
    a problem, and this initiative will help to address the
    problem.
        In addition, I greatly appreciate Commissioner Shulman's
    announcement last month of an IRS proposal to increase its
    oversight of paid tax preparers by requiring registration,
    testing, and continuing education requirements for preparers
    not already subject to oversight. Paid preparers are a
    prominent part of the tax system, and the vast majority of paid
    preparers are both helpful and ethical, but, as I have pointed
    out before, there have been many cases of scam artists who bilk
    taxpayers out of their money.
        We have also heard of incompetent preparers who do not make
    sure that people are able to get all of the benefits for which
    they are eligible. This has been a problem in neighborhoods,
    including my own in the Bronx, where the need for the tax
    benefits is greatest.
        The paid preparer initiative is very much needed and will
    go a long way toward helping taxpayers utilize these services.
    And I really thank you and congratulate you for that. I thought
    it was a bold step and one that was due.
        I look forward to a very interesting discussion today on
    these and other issues facing the IRS. Commissioner Shulman, we
    thank you for your testimony today. I would like to turn to my
    amiga--how is that? That will create--see, he is scampering all
    over.
        Mrs. Emerson. Instead of amigo, amiga.
        Mr. Serrano. Yes. There is a difference. Yes, it is amiga.
    Our ranking member, Mrs. Emerson.

                   Opening Statement, Ranking Member Emerson

        Mrs. Emerson. Thank you, Chairman. Since this is our first
    hearing, I just want to say for the record that I enjoyed
    working with you and other members of the Subcommittee last
    year.
        Mr. Serrano. Thank you.
        Mrs. Emerson. Because we have jurisdiction over such a
    diverse group of agencies, many of which have a profoundimpact
    on Americans' lives and financial stability of our economy, it is good
    when we try to work in a bipartisan way. And I look forward to
    continuing that practice this year.
        I also want to say that, with the federal debt at more than
    $12 trillion, I sure hope we can work to find ways to minimize
    and reducing spending this year as we construct a bill that
    also safeguards the integrity of our nation's financial system.
        Welcome back, Commissioner Shulman. I really do appreciate
    your being here with all of the--your employees and their
    families on your mind. And it is important for all of your
    employees, too. Hopefully they know how deeply moved and how
    deeply you have been touched by this tragedy as well.
        Let me just start by addressing an issue that I know you
    are hard at work on, and that has to do with tax cheats, for
    lack of a better way of saying it. Over the last decade,
    surveys by the IRS oversight board have noted a general
    downward trend in the acceptability of cheating on your taxes.
        However, the 2009 survey reported an increase from six to
    nine percent of those who feel it is acceptable to cheat on
    their taxes a little bit here, a little bit there, and similar
    increases over the next few years of those who believe it is
    acceptable to cheat on their taxes may highlight a major
    problem. So hopefully we will be able to work with you to find
    ways to prevent people from accepting the notion that it is
    okay to cheat.
        As I have stated in the past, I am committed to making sure
    that you have all of the necessary resources to educate
    taxpayers on how to comply and identify those who have not paid
    their fair share, those who willfully file frivolous returns,
    or conceal assets at home or overseas. But I have to say, with
    our FY2010 deficit projected to be at $1.6 trillion, and
    deficit spending expected to continue throughout the next
    decade, I think it is really critical to review every single
    area of government spending.
        So I need to ask, probably more rhetorically at this moment
    in time than not, if a $487 million increase to the total
    budget is really necessary. I am grateful and appreciate the
    fact that you have proposed a number of cuts and efficiencies
    in the budget request, but I am interested to know if there are
    any additional areas that might be trimmed back as well, and
    look forward to your testimony.
        Thanks so much.
        Mr. Serrano. Thank you.
        Commissioner, we are ready for you. And after all of these
    wonderful things we have said about you, we now have to tell
    you that you have five minutes, and that the rest of your
    statement can go in the record, so that we can take time to
    grill you today.

                   Statement of Commissioner Douglas Shulman

        Mr. Shulman. Thank you, Chairman Serrano, Ranking Member
    Emerson, members of the Committee. I am glad to be here to talk
    about our 2011 budget. Before I do, let me say a couple of
    things about the tragedy in Austin.
        As you know, a plane was intentionally flown into an IRS
    building targeting IRS employees. I just came back yesterday
    from Austin, and am going back down tomorrow. What I will tell
    you is what I told the employees. I am incredibly proud of this
    agency. Thousands of people have reached out to me from across
    the country, and (a) said they will do anything to support
    those employees who are traumatized--we lost a life--and (b)
    said that it is not going to deter them from their work.
        I tell folks that as a leader of a government agency, I
    stand on the shoulders of those who came before me, to try to
    improve the agency, to continue with excellence. We are all now
    going to be standing on the shoulders of a colleague who served
    two tours in Vietnam, and then died at his desk working for the
    IRS.
        We are going to stand on his shoulders and the shoulders of
    the people who are traumatized, and try to make this agency
    better. And I will definitely convey to the workforce your
    thoughts, and I very much appreciate them.
        Moving to the budget, I am very pleased that the President
    recognized the critical role we play in this country, both
    serving taxpayers and collecting the money needed to run the
    government. The unique thing about the IRS is that we have a
    positive return on investment, so investing in us actually
    brings more money in and it does have a net positive outflow.
        This budget recognizes that, but also recognizes the need
    to have a balance between service and enforcement, as well as
    technology and people investment, so we are investing in the
    long-term future, not just in next year.
        On the service side, we tried to balance all of the IRS'
    needs, from processing paper to dealing with people in person.
    We increased funding for telephone service, and we increased
    funding for the web, which meet the greatest variety of needs.
    And I would be happy to talk to you more about the issues that
    you brought up earlier around VITA and low income taxpayer
    clinics.
        On enforcement, we are continuing to focus on high income
    individuals, international evasion, and non-filers. This is a
    relatively balanced portfolio. We try to maximize impact,
    maximize deterrent effect across the entire economy, but do so
    in the least burdensome way to taxpayers while continually
    respecting their rights.
        On the modernization side, we have asked for an increase in
    our funding for our taxpayer database. I believe that by making
    this investment we will be able to have all individual
    taxpayers on a centralized relational database by the end of
    fiscal year 2011, meeting the promise of faster refunds, better
    service, and providing consistent information about what a
    taxpayer owes in our database. I think we are on a path to that
    promise that we set out to meet in the late '80s, and actually
    finish it with the funding in this budget. There is also
    judicious investments in people, so we make sure we have the
    workforce to do the job.
        Let me end by just saying there are a number of legislative
    proposals. A lot of the reason for our phone level of service
    going down and other things, is legislation being passed that
    results in us being given more and more responsibilities to
    both distribute money and collect taxes. We have asked for some
    legislative authorities that will actually allow us to better
    collect taxes, better serve customers, and better do our jobs.
        Let me just highlight three. One is repealing the
    requirement of a partial payment when you try to get an offer
    in compromise, especially in these difficult economic times
    with high unemployment. We do not think people who want to
    settle their tax debt should have to pay a 20 percent
    downpayment. They should be able to come in, and we should be
    able to settle their tax debt with them and get them to pay
    what they owe.
        Second is a proposal relating to Section 530 of the Tax
    Code, which would allow us to create more certainty for small
    businesses, large businesses, and individuals about whether
    they are an independent contractor or an employee. And, third,
    there are a variety of international proposals in the budget
    that will help us do our job better, including support for a
    bill that is before Congress right now, which is called FATCA,
    which gives us better tools to detect non-compliance by those
    hiding money overseas.
        So, Mr. Chairman, this concludes my oral testimony. I would
    be happy to answer questions.
        [The prepared statement of Commissioner Douglas Shulman
    follows:]

    [GRAPHIC] [TIFF OMITTED] T2166A.001

    [GRAPHIC] [TIFF OMITTED] T2166A.002

    [GRAPHIC] [TIFF OMITTED] T2166A.003

    [GRAPHIC] [TIFF OMITTED] T2166A.004

    [GRAPHIC] [TIFF OMITTED] T2166A.005

    [GRAPHIC] [TIFF OMITTED] T2166A.006

    [GRAPHIC] [TIFF OMITTED] T2166A.007

    [GRAPHIC] [TIFF OMITTED] T2166A.008

    [GRAPHIC] [TIFF OMITTED] T2166A.009

    [GRAPHIC] [TIFF OMITTED] T2166A.010

    [GRAPHIC] [TIFF OMITTED] T2166A.011

    [GRAPHIC] [TIFF OMITTED] T2166A.012

    [GRAPHIC] [TIFF OMITTED] T2166A.013

    [GRAPHIC] [TIFF OMITTED] T2166A.014

    [GRAPHIC] [TIFF OMITTED] T2166A.015

    [GRAPHIC] [TIFF OMITTED] T2166A.016

                             TAX RETURN STATISTICS

        Mr. Serrano. Thank you so much. Let me ask you a question.
    Does the agency have any information on how many tax returns we
    get in the country?
        Mr. Shulman. Give or take, 140 million individual returns
    annually.
        Mr. Serrano. Okay. And of those, do we know how many folks
    prepare it themselves, how many have an accountant, and how
    many just go somewhere other than an accountant?
        Mr. Shulman. The last year for which we have the data
    analyzed and collated is '08. About 60 percent of people used a
    preparer, some form of a paid preparer. About 20 percent used
    software packages, so they were doing it themselves with the
    assistance of technology. And then, about 20 percent just do it
    themselves on their own.
        What I will tell you is, interestingly, the numbers are on
    the rise around people who do it themselves and file directly
    on the Internet. We have a horrendously complex tax code, but I
    believe we should have as many people as possible able to file
    themselves and do it for free. And so that is why we have a
    variety of outreach. We prepare millions of returns between us
    and our partners.
        We also put online a web application that allows you just
    to fill out the form and the application does the math
    calculation for you. It does not go as far as the software,
    which guides you through your answers. And so I think more and
    more people are trying to do self-service. I would be happy to
    talk later about the return preparer initiative, which is
    incredibly important because of those 60 percent of people that
    are getting service from a return preparer, which is also
    affecting their compliance.

                            PAID PREPARER INITIATIVE

        Mr. Serrano. Right. And that was my question. It was a
    lead-in to the fact that I commended you for the position you
    took, and you noted in your written statement that the IRS is
    increasing its ``knock and talk'' visits with tax preparers
    this year. What are the specific steps that will be taken over
    the next year to begin implementing the paid preparers
    initiative?
        Mr. Shulman. The preparer initiative has multiple
    components, and the goal is, really, to make sure preparers are
    providing people good service and making sure preparers are
    helping us make sure people pay the right amount of taxes. So
    it is a compliance and service initiative.
        People are going to register, take a test, and make sure
    they are prepared through continuing education. We are going to
    have a database once everyone takes the test, so the public can
    look and say, ``Am I using a registered preparer?'' And then,
    we are increasing enforcement.
        This is going to be a multi-year effort. We estimate about
    a million people are preparers, and so to implement this kind
    of regulatory regime for the preparer community is not an
    overnight thing. This year we sent out 10,000 letters reminding
    people of obligations, and we stepped up calling people and
    saying we were going to come talk to them, make sure they were
    doing things right, audit preparers, etcetera.
        And so that effort is happening right now, and ``knock and
    talks'' include calling them and telling them, but also some
    undercover visits where we suspect fraud.
        We are going to get guidance out this year. Our goal this
    year is to get everybody to have a preparer number, so we can
    start tracking them. Our goal next year is to start the testing
    regime and let everyone have about two years to test in and be
    a preparer, and also next year to start pushing out continuing
    education.
        And so within three years, the initiative will be fully
    implemented. Anyone providing any peparation service will have
    been tested and be in a database available for the public. It
    is our goal, but this is all very fluid. One of the things I am
    committed to is a very open process for this initiative. We
    held public hearings. We have talked to people. We signaled
    what we were going to do. We took comment. And so we have
    listened to taxpayers, we have listened to consumer advocates,
    we have listened to the preparer community, and we are trying
    to make this a smooth transition to ultimately help the tax
    system.
        The last thing I would say is that this initiative is
    potentially the most transformational step that we will take
    while I am here to really increase compliance and service. What
    we are really doing is saying let us make sure those million
    people who are part of the overall tax system are qualified.
    And if we are going to have a complex tax code where people
    have to go to preparers, let us make sure they are part of the
    overall solution to serving Americans.
        Mr. Serrano. Right. You know, with that in mind, we all
    come to Congress bringing with us our likes and dislikes, those
    things we feel strongly about, and those things that make us
    nervous. I may be totally off base here, but I tell you, it
    makes me nervous to see in my district a person dressed in a
    Statue of Liberty outfit handing out cards, saying down the
    block, ``We will prepare your taxes for you.''
        Now, in a way, that is a contradiction to who I am, because
    the person who is dressed in the suit is probably otherwise
    unemployed, and that is the job they have. And the people who
    are taking the card to go see that preparer cannot afford to go
    to where I go or to where JoAnn goes to get her taxes done, or
    do not have access to a computer, or would not even dare try to
    fill out their own.
        So, in a way, I realize that as I am making this statement
    I am kind of contradicting myself, because I am commenting on
    the very people that I know somewhat about the condition they
    find themselves in. But paying your taxes, filing your taxes,
    to me is one of those issues that is very serious.

                        EARNED INCOME TAX CREDIT AUDITS

        And the whole idea of a circus attitude around it makes me
    nervous, so I support anything that happens in the direction of
    finding out whether the person who taxpayers meet after they
    walk through the door is qualified to give them the best
    assistance. That is something that you will get a lot of
    support on from this Committee and from this Chairman, because
    it just makes me nervous that we are heading towards a major
    problem, which leads me to the next point, and that is, as you
    recall when we first met, my biggest complaint was the fact
    that--what was it, 44 percent of all the audits were being
    conducted on 17 percent of the taxpayers? Which were the--if I
    have got my numbers right, the EITC folks?
        And I suspect that a lot of the EITC issues were not
    necessarily harassment by the IRS, but the people who were
    preparing these forms. What was there, intentionally or
    otherwise, that caused so many audits?
        Mr. Shulman. You and I have talked a number of times about
    EITC. It is a tricky issue, because in one respect, we are
    incredibly proud that the IRS is part of the process of putting
    out about $50 billion a year to help raise people out of
    poverty, about 24 million people. But when there is a large refundable
    credit, there is also opportunity for fraud.
        I think you hit the point right on, which is a lot of fraud
    is happening not because the taxpayer is intending to defraud,
    but they go to unscrupulous preparers who help coach them
    through. They say, ``You can get more EITC if you have a child
    living with you for six months,'' and so the taxpayer says,
    ``Well, they were with me five months.'' And the preparer says,
    ``Well, why not just put down six months and you can get a
    bigger refund?'' and then these people get a refund
    anticipation loan and it all churns.
        We have, over the years, had a steady number of EITC
    audits. The have gone down as a percentage of overall audits,
    because we have been increasing the number of audits, for
    instance, in the last five years, on millionaires. And we have
    increased the audits on people earning over $200,000. We have
    not increased EITC audits.
        With that said, EITC audits bring in or save, because we
    stop money before it goes out--about $3 billion a year. And so
    our main focus is to keep it steady, to not unfairly target
    people who get EITC, but in the same respect, have a decent
    coverage rate because big refundable credits are where there is
    often incentive for fraud. And then, the preparer strategy, we
    think, is a cornerstone to reducing that fraud and error,
    because error is a big issue with EITC. It is a 68-page form.
    It is incredibly convoluted.
        And so part of this initiative is educational outreach, and
    our whole EITC program is all about maximized participation,
    minimized fraud. As with a lot of things we do at the IRS, we
    have got to get that balance right, and that is what we try to
    do.
        Mr. Serrano. Thank you.
        Mrs. Emerson. You know, let me mention something
    interesting. I recently, probably two weeks ago now, did a--had
    all of my community organizations come in and we actually did a
    taxpayer clinic with a lot of these community-based
    organizations and some of the organizations that actually do
    free computer--you know, like Intuit and, well, the TurboTax
    people and all those folks, just to help train some of these
    folks to then assist their clients who would be able to claim
    the EITC.
        And one of the interesting things that we did talk about,
    too, though, are those refund anticipation loans which I hate.
    It is like going to the payday lender and getting all sorts of
    outrageously high interest rates and, in essence, you know,
    those companies are ripping off the people who, you know, need
    that short-term help. But hopefully through your business
    systems modernization, and other services that you are able to
    provide, will make the refund so much faster that they do not
    have to get those anticipation loans, because I do not like
    that whole concept, just because they have to pay so much
    interest.

                           TELEPHONE LEVEL OF SERVICE

        I wanted to ask you a little bit about the telephone
    service. And if I could, just because it is such an important
    part of your mission, just looking at the figures, between
    FY2007 and FY2008, the level of phone service plummeted from 82
    percent to 53 percent. And we have been told that was
    attributable to all of the demands placed on the agency by the
    passage of nearly 50 new tax provisions, of course that we
    imposed upon you all from Congress.
        But in looking at this year's budget request, your goal is
    to get from 71 to 75 percent, which I do not find particularly
    exciting. I mean, it does not seem to me for $20.9 million that
    four percent of an increase is enough of a stretch I guess. I
    would think that we would want to expand the phone service a
    little bit better.
        But does not it make sense that if we want to improve tax
    compliance then the phone service should be a guaranteed avenue
    available to all taxpayers to get their answers? Are you
    comfortable, or do you find 75 percent acceptable?
        Mr. Shulman. No. I am glad you asked me about phones
    because there has been a lot of focus on it. Let me just start
    by saying I am not happy where we went, but let me also put it
    in context. We were hitting the 80 percent level of service.
    Let me explain what level of service is because 80 percent
    level of service does not mean 20 percent are not getting
    through, which is important. But we were hitting our level of
    service internal numbers for a number of years when we were
    getting about 65 million calls a year.
        When we sent out the stimulus checks we went from 65
    million to 150 million calls that year. Last year, as we were
    cleaning up from the stimulus checks and implementing the
    Recovery Act, we had about 100 million calls. And so, while
    this one number everyone has been focusing on--level of
    service--has been dropping, we have been answering five million
    more calls every year.
        Telephone level of service is a composite number that
    includes people who get through, people who cannot get through,
    and people who voluntarily hang up. And one new feature we made
    available is estimated wait time. If you call at peak season,
    first week of April, first thing in the morning, you are going
    to have a longer wait than if you call later in the evening or
    you call at a different time.
        We put a wait time on the phone lines, which was a service,
    so you tell taxpayers it is going to be a six-minute wait to
    talk to an assistor. And if someone does not have six minutes,
    he or she hangs up and calls back at a different time.
        If you look at last year, our 70 percent number, and you
    take away people who hung up within three minutes, because this
    is the first time it ever said it would take this long, that
    number went up to 79 percent. And so included in there is what
    we call voluntary disconnects.
        I will also tell you the phone calls are taking longer,
    because the tax law is getting more complex. There are a bunch
    of new tax laws in place. We are doing a lot of Recovery Act
    calls, and so that is important.
        And the last thing I would say before I answer your
    question directly about the 75 percent is look at the main
    service number, which is the American Customer Satisfaction
    Index. Again, it is not how many people are happy, but it is
    what is the taxpayer experience with filing, phones, walking
    in, Internet.
        So it is really looking at all of our channels, not just
    one of our channels. That score actually jumped this year from
    68 percent to 71 percent, so we continue to make it easier for
    people to deal with their taxes. But the phones are an issue.
        The reality is demand is driving these numbers, and so we
    are going to answer more calls this year than we answered last
    year, and we are going to answer more calls next year than we
    answered the year before. We are anticipating more calls than
    before.
        My goal is to next year, in '11, get it back up to 75
    percent, but we have those wait times, so it is well over 80
    percent if you take away the people who are hanging up right
    away. We will keep driving that back up to historical levels.
    Hopefully we do that by getting back to historical levels of
    tax changes every year, as well as helping drive demand down.

                        TAXPAYER SERVICE FUNDING LEVELS

        Mrs. Emerson. Well, I hope so, too, because since we are
    giving, you know, a fair--I used to think that $20.9 million
    was a lot of money, but as we start using the ``trillion'' word
    somehow it does not seem quite as high as it used to. But,
    nonetheless, hopefully you will be able to achieve those goals.
        And let me just mention, too, because Joe did as well, the
    VITA services that you all provide have been tremendously
    helpful in my district, and I actually went on a couple. Have
    you ever been on one? They are great. To go with--to go to like
    a senior center and have the voluntary--the tax preparers
    there. And it is hugely popular, and I just would like--I am
    not happy with the amount of money for that service being cut,
    and hopefully, Mr. Chairman, you will be able to figure out how
    to add some more back, so that the Commissioner----
        Mr. Serrano. Is this without adding to the deficit, or
    what?
        Mrs. Emerson. I am sure we could take a little bit from
    here, but we do not----
        Mr. Serrano. I know.
        Mrs. Emerson [continuing]. Want to have to ask the
    Commissioner to say bad things about OMB.
        Mr. Serrano. Right.
        Mrs. Emerson. All right. I will stop there and----
        [Laughter.]
        Mr. Serrano. Thank you so much. And, by the way, I was
    unpopularly trying to be funny.
        Mrs. Emerson. I know.
        Mr. Serrano. But you are right, there are services that
    should not be considered part of a concern about how we spend
    money, because those services have to be there.
        I am supposed to make a statement right now, since it is
    the beginning of our second season of hearings, for members to
    stick to the five-minute rule. But I am not worrying too much
    about it, since I broke it at the beginning.
        Ms. Lee.

                      OPENING STATEMENT, CONGRESSWOMAN LEE

        Ms. Lee. Well, thank you very much. You are a very fair
    chairman. And thank you, it has been a pleasure being on your
    Committee. I think last year was my first year on the
    Committee, and it has been very enlightening and very helpful
    for me and my district, so thank you, Mr. Chairman.
        Mr. Serrano. You are quite welcome.
        Ms. Lee. Good morning, Commissioner Shulman, and let me
    just thank you, first of all, for your testimony, also for your
    service during this very challenging period.
        And I want to also associate myself with the remarks of my
    colleagues. My sympathy goes out to the family and members and
    staff of the IRS, and to yourself, and just know that we all
    stand to help you during this very tragic period in anything
    that we need to do to help your family, our family, move
    forward.
        Mr. Shulman. Thank you very much.
        Ms. Lee. I want to also just thank all of the dedicated
    staff for rapidly and efficiently putting into place some of
    the very vital tax breaks for working families that the
    Congress passed and the President signed during the height of
    the economic crisis.
        I know that many of the provisions have really directly
    impacted the work of the IRS, like the homeowners tax credit,
    the make work pay credit, and the extended child tax credits,
    as well as the COBRA extension. Your leadership and the work of
    your staff really has ensured that taxpayers were able to take
    advantage of these vital programs during the downturn that
    really did help stabilize the economy and helped to reduce the
    terrible impact of this financial crisis.
        The ongoing recession, rising unemployment, this means that
    millions of Americans continue to face the harsh reality of
    living in poverty. The work of the IRS to rapidly follow
    through on implementing the credits and other initiatives that
    the President, you know, put forth, that has kept untold
    families out of poverty, those hanging right on the edge, and
    also has provided vital assistance to families who find
    themselves facing the brunt of this economic crisis. So I have
    to thank the IRS for that.
        Oftentimes we do not focus--at least many in my district do
    not focus on the positives of the IRS. The IRS sometimes
    becomes a very difficult agency for many people to deal with,
    but I think they have seen a different side of the IRS during
    this very serious economic downturn.
        I want to ask you--well, first of all, I am glad that you
    are getting Americans to file taxes electronically and
    streamlining the filing process and the refund process. I also
    support the increased funding that the IRS requests for
    business systems modernization, and it is my hope that
    strategic investments in these systems will make tax time more
    efficient for the IRS and the American taxpayer.

                              READY RETURN PROGRAM

        Now, in California, which is my home state, we have a
    program called Ready Return where the state sends a pre-
    populated or pre-filed--pre-filled tax return to tax filers,
    and they are very simple, these returns. Taxpayers then just
    simply review the form for errors, and, if everything is
    correct, they just sign it and mail it in. And I believe the
    President has supported the possibility of a pro-populated
    return as--a pre-populated return as well.
        I think that the IRS could save a lot of money if you
    implement this national Ready Return Program. It will save
    time, it will increase compliance, it will make tax season
    really a lot less painful. And so I would like to know if you
    looked at that. Do you think that makes sense? And how can we
    help if it does?

                             TAX EXPENDITURE CHART

        And then, secondly, let me just say I think it would really
    be an important public service to provide the American taxpayer
    a breakdown of how much of their tax dollars go to programs
    like housing, education, science, technology, transportation,
    infrastructure, health care, defense.
        And I would like to ask you, and I would like to ask the
    chair, if we could consider including a detailed graph or chart
    of how the United States--how our government spends tax dollars
    with each tax form distributed by the IRS, you know, maybe a
    pie chart or some kind of a graph or something that really
    shows the taxpayer how their money is being spent.

                BUSINESS SYSTEMS MODERNIZATION AND READY RETURNS

        Mr. Shulman. On a couple of the points you raised, one is
    thank you for your support for BSM, our business systems
    modernization. I have run big technology projects outside of
    the government, and coming in I saw the IRS had some missteps
    in the '90s around its modernization, butfor an agency that
    interacts with 140 million individual Americans, not to mention all the
    non-profits and businesses, and processes, two billion information
    returns, crunches huge amounts of data, I think we have underinvested
    in our technology over the years. And so getting us back on a prudent
    path makes sense.
        I also think that modernization is linked to any concept of
    pre-populated returns. A lot of what this investment is is
    getting us to the point where we have all of the data on the
    taxpayer in one place. It is getting this relational database
    done.
        And so we certainly have looked at and are very familiar
    with the California Ready Return example. I think there is a
    question of how many people would be eligible, because I
    understand the California program is for single people who take
    the standard deduction who only have wage income. There is a
    set of criteria around it, and so it is not 140 million
    eligible people.
        But, you know, I think our goal is to get this
    modernization done, and then really open our eyes and say,
    ``How can we better service taxpayers once we get this
    investment over the goal line?''

                             TAX EXPENDITURE CHART

        On the chart idea, it is very interesting. I tell people
    that people say, ``Oh, you are the tax collector.'' And I say,
    ``Yes, well, that is our moniker, and that is what the IRS
    thinks of, but we are also the people who make it possible to
    have national defense, and to have environmental protection,
    and to have whatever else you want the government to do for
    you.''
        And so communicating that kind of a message is a big part
    of what I try to do as a leader of the IRS. I will not speak to
    the specific proposal. I view it as probably a broader policy
    call whether you want to tell people exactly where their tax
    dollars are going, but I know you directed that to the
    chairman. [Laughter.]
        Ms. Lee. Thank you very much. But also, Commissioner, I
    would like to just hear your feedback, and thank you for your
    feedback.
        But, Mr. Chairman, I would like to talk to you and our
    ranking member about that, because I think the more
    transparency taxpayers have about where their tax dollars go
    the better equipped taxpayers are, you know, to really
    communicate to us what they think about our priorities.
        Mr. Serrano. Thank you so much. As the saying goes, you
    collect it, we spend it. [Laughter.]
        Mrs. Emerson. And then spend and spend.
        Mr. Serrano. Please stop. [Laughter.]
        We are very frugal on this Committee.
        Every time that we have a hearing I ask my staff, are we on
    TV? And I want to tell you the reason is because I love that
    tie, and that tie should be on TV. [Laughter.]
        Mr. Crenshaw.
        Mr. Crenshaw. Thank you, Mr. Chairman. I like your tie,
    too.
        Mr. Serrano. Thank you.
        Mr. Crenshaw. Yes, it is a nice tie.

                 TAX GAP, INVESTMENTS AND RETURN ON INVESTMENT

        But thank you for your service in the difficult times, and
    thank you for your testimony today. I wanted to ask you about
    this so-called tax gap. You know, it has to do with compliance
    I guess. I mean, everything I understand about compliance is
    that either people--they underreport their income or they do
    not pay all their income, or they just do not even file a
    return.
        But most of the non-compliance, as I understand it, is just
    underpayment. And everything I read that--for every dollar you
    collect you miss maybe $15 or $20, that the so-called tax gap
    is about 15, 20 percent of the overall tax revenues. And if
    that is the case--and you can comment on that--but if we
    collect, let us say I guess, $2.7 trillion, you figure it up,
    then maybe--and I have read that the tax gap is about $350
    billion, which kind of fits, about 15 percent of that $2.7
    trillion, I just wonder--and I guess from time to time we have
    all heard some of our colleagues, you kind of use the tax gap
    as kind of a piggybank. And they say, ``Well, I have a new
    program. It costs $50 billion. So if we just spend a little
    more money on enforcement, then we will get $50 billion.''
        And in your budget, you have got almost $6 billion, almost
    half the money you spend you spend on enforcement. And so I
    have always been curious about that. Number one, how do you
    kind of determine what that tax gap is? How do you decide that
    this year's ballpark is going to be $350 billion, or whatever?
    And then, number two, how do you decide--I mean, obviously, it
    is not that simple, because if you say--if you appropriate $6
    billion, then the tax gap will only be $350 billion, which is a
    lot of money, and somebody would say, ``Well, why do you not
    ask for $12 billion, and then the tax gap maybe would go down
    by half, $175 billion, and that is money well spent.''
        So I guess it is not that easy, or you would just say,
    ``Give us more money for enforcement, and we will eliminate the
    tax gap altogether.'' So talk about that. How do you kind of
    figure out what it is? And then, how do you decide how much
    money you want to spend on enforcement? For every dollar you
    spend, you know, is that money well spent in decreasing that
    tax gap?

                                    TAX GAP

        Mr. Shulman. Let me try to address it in a number of ways.
    The tax gap is basically the voluntary compliance rate in the
    country because we have a voluntary tax system in general. We
    are not going in to everybody and taking the money before you
    ever have it. Generally, people get their money, and they fill
    out a tax return themselves, and they send it in. Then we have
    audit coverage, we have programs, et cetera.
        The tax gap number to which you are referring, I would say
    is imperfect. It is very hard to say what it is. You know what
    you get. It is hard to figure out what you do not get. The way
    we do it is through a National Research Program. Usually when
    we do an audit, we go and do it because there is some
    indication of error or fraud. We have a variety of formulas and
    algorithms that point us in the direction of places that it
    would be fruitful to do audits, as well as doing some
    geographic coverage and industry coverage, so people know that
    in general, they are just not going to get off scot-free.

                           NATIONAL RESEARCH PROGRAM

        To study the tax gap, we actually have a program called the
    National Research Program, which does random audits. So instead
    of going and doing an audit and finding out how much someone
    really owed because we had some indication to conduct an audit,
    we audit people where we have no indication of issues and see
    what that spread is. And, as you said, the gap runs about 16
    percent, but we then bring in about two percent, so it runs
    about 14 percent.
        There are only five other countries that try to measure
    their tax gap, and generally it is all about the same as ours.
    There is some level of noncompliance, and it depends on how
    your society runs: how much cash economy you have, how much
    information you have. I have told a variety of people, there
    are some Nordic countries where you are born and you are given
    a number, and you have that number in the hospital, and that is
    your number at your school, and that is your number for your
    health care, and that is your number for your employment, and
    there is a lot of tracking.
        That is not how our society works. We do not have as much
    government intervention. You could go in a different direction
    and probably narrow that gap.

                             LEGISLATIVE PROPOSALS

        Half of the money we bring in, we bring in from people who
    pay their wages by having taxes withheld at the source. So half
    the taxpayers are 99 percent compliant. So your schoolteachers,
    your firemen, your policemen, we get their W-2, they get their
    W-2, their employer withholds taxes, and there is no
    noncompliance.
        Almost all of the noncompliance in the tax gap comes where
    we do not have third party information or there is no
    withholding. And so a lot of the thrust of where you have seen
    my major initiatives and the administration's initiatives over
    the last several years, supported by President Obama and the
    Secretary and others, are around information reporting, better
    information reporting for us, so that we are less intrusive. So
    we are not doing audits, as much as we are matching information
    and sending a letter that says, ``We see a mismatch.'' And
    there are a bunch of proposals in the President's budget.
        For international compliance, where money crosses the
    border and you do not see it, it disappears, we are asking for
    some information on cross-border transactions, as well as
    heightening the responsibility for banks to give us information
    on their clients once they leave the country.
        Then, we have this preparer initiative that the Chairman
    was talking about, again, enlisting them to help us do our job.
    In this budget we have roughly $300 million of pure enforcement
    investment. That is going to return $2 billion. We do audits,
    we get money from that effort. The deterrent effect is much
    higher than that, and we do not try to, especially for
    Appropriations Committees and budgets, say exactly what that
    is.
        But if we are focusing on high income individuals who have
    non-reporting, the word is going to get out there. So we are
    going to get a certain amount in the audits, but we are also
    going to deter noncompliance. But a lot of the future to get
    the real money in the tax gap is some of these much broader
    programs, from information reporting, the preparer initiative,
    and some of our international strategy.
        But I think there is a real tradeoff. You are never--I do
    not think you want a society where there is no tax gap because
    it means the government is so intrusive. I am the IRS
    Commissioner and I think it is a balance between how intrusive
    the IRS is, how much burden is imposed, and bringing in the
    money. And we try to balance all of those along the way.

                      RETURN ON INVESTMENT AND THE BUDGET

        Mr. Crenshaw. Just one quick followup. There is really not
    any empirical data, like if you spend an extra dollar--when you
    decide you want--like you said, it is not only enforcement
    money, it is a lot of the other programs, so that you really
    cannot quantify, say, ``If I just had $1 million more to spend
    on enforcement, I could pick up an extra X dollars.'' It is not
    really that sophisticated.
        Mr. Shulman. Oh, no. We absolutely can do that.
        Mr. Crenshaw. Then, why do you say, ``We want $5.7 billion
    for enforcement,'' and not say, ``We want $6 billion,'' which
    is another $300 million which might get you, you know, more
    than you spent.
        Mr. Shulman. I mean, I think you have to balance the
    investment with capacity. And so we have rough orders of
    magnitudes. When we bring people on, it actually takes three
    years to get them fully up and trained and productive. We have
    to take our best people offline to recruit and analyze if we
    are getting a good person who can do financial forensics, who
    has an accounting degree.
        Then, we take good people offline to do training. So a lot
    of this decision is about capacity. I mean, this is basically
    what we think we can handle. What you really want to do is a
    multi-year investment that is somewhere in this range over
    multiple years and buildup. If you gave me $1 billion and said,
    ``Hire a bunch more agents next year,'' I would say, ``I do not
    want that,'' because I have got to run the operation, I have
    got to have my exam coverage this year.
        I think the way we came up with this $300 million is, how
    do we invest money to make sure we are part of bringing down
    the deficit, collecting the money that is due? What is a
    prudent investment, given what was invested last year? What are
    the other priorities of the agency?
        But this revenue-producing enforcement money, we have
    formulas, and they are heavily vetted between OMB and CBO. They
    have done a 10-year look-back. They have said, ``What have we
    brought in based on what has been invested?'' And so the pure
    enforcement numbers are very clean, and we know thaton average
    it is about a seven-to-one investment.
        What is harder to quantify is BSM, our business systems
    modernization. I can guarantee you that is going to help
    compliance. There is going to be better service; there is going
    to be better enforcement. It is very hard to get a number that
    the budgeteers around Washington and the analysts will all
    agree on. The preparer strategy is going to bring in money.
        Those investments do not have return on investment attached
    to them in the submission because we do not have the 10-year
    history around them. That is part of the trick of how do you
    run an agency? How do you make bets on the future? How do you
    keep getting better every year in a world in which throwing a
    dollar at an examiner is the thing that you know returns the
    investment but you have still got to move the agency forward?
        Mr. Crenshaw. Thank you. Thank you, Mr. Chairman.
        Mr. Serrano. Thank you. I want to take this opportunity to
    inform the Committee that David Reich, our Committee Clerk last
    year, is now the Committee Clerk for the Labor-HHS
    Subcommittee. And Mr. Lee Price, this very studious-looking
    gentleman watching over my shoulder here, is our new Committee
    Clerk. And he has promised, Mrs. Emerson, singlehandedly to
    make sure our bill gets through the Senate as a stand-alone
    bill. [Laughter.]
        Mrs. Emerson. And come to the House floor?
        Mr. Serrano. Oh, it will come to the House floor. It will
    pass. I mean, but then no omnibus bill. You know, there will be
    a signing ceremony for you and I to attend.
        Mrs. Emerson. And in return?
        Mr. Serrano. In return, I just told a lie. [Laughter.]
        Welcome. Welcome aboard.
        Mrs. Emerson. Welcome, Lee.

                   EFFECT OF COLLECTION ACTIONS ON TAXPAYERS

        Mr. Serrano. Commissioner, the IRS taxpayer advocate, in
    her most recent annual report, argues that the IRS too often
    does not consider the impact of its enforcement actions on low
    income taxpayers. In particular, the taxpayer advocate argues
    that IRS lien filings are too often counterproductive, damaging
    the taxpayer's credit score and thus harming their ability to
    find employment, making them less able to pay their tax debt
    and future taxes, obviously, if they are not working.
        How does the IRS respond to this concern? And, secondly,
    why does the budget propose a five percent cut in funding for
    low income taxpayer clinics, which help low-income taxpayers
    who experience difficulty as a result of an IRS enforcement
    action?
        Mr. Shulman. Collection is one of the most difficult things
    we do because, obviously, Congress expects us to collect the
    taxes owed. If people are in a collection situation where they
    have not paid their taxes on time, or they have said they are
    not going to pay and we need to go find them, it is also where
    we need to be incredibly sensitive and respect taxpayer rights.
    We need to make sure that we are not doing anything that overly
    burdens someone while we are doing collections.
        The history of the IRS is collection efforts is something
    that is expected of us. It is not easy to do. It is one of the
    toughest jobs at the IRS, but we try to do it with balance.
        For low-income taxpayers, I am very focused on going the
    extra mile, especially in this last year where people were
    trying to make decisions such as, ``Am I going to pay for my
    medical expense? Am I going to keep my kid in college? Or am I
    going to pay my taxes?'' I mean, Americans were making some
    unprecedented decisions, given the economic downturn.

                             COLLECTION FLEXIBILITY

        We gave our collectors extra flexibilities. We raised the
    threshold number where they could make judgments that someone
    could not pay. We let people skip payments if they previously
    were compliant taxpayers. We allowed people into offers in
    compromise programs. If their home equity was the only thing
    staying in the way, we let people subrogate liens if they were
    refinancing houses. And so we did a lot of extra special things
    to try to help people through this difficult time, while
    collecting the taxes owed.
        As to the report that came out from the Taxpayer Advocate,
    because we are the IRS, we touch every American and it is very
    healthy for our agency to have lots of people pushing and
    prodding from different angles.
        With respect to liens, one, I will tell you I am looking at
    that report and assessing what, exactly, we are doing and if we
    should take any of her recommendations. Two, liens are an
    authority that Congress gave us, and it protects the American
    taxpayers' interest. It protects the public, the FISC, the
    whole government's interest. We try to use those judiciously.
        I am looking at the report. I think lien authority is a
    tool we are given, we are expected to use it, we need to
    collect the money that is owed. But we want to do it in a way
    that gets us the money that the government is owed, but does
    not hurt taxpayers, if we can help it.
        Mr. Serrano. Do you have a schedule at which time you will
    say, ``We looked at the report, and now we will either take
    some actions, make some changes based on the report, or ignore
    it?'' And I am not being sarcastic, but, you know----
        Mr. Shulman. Yes.
        Mr. Serrano [continuing]. A point where this Committee
    would know what happened to that report in terms of your
    actions?

                           COLLECTION PROCESS REVIEW

        Mr. Shulman. Yes. I am a big fan of continuous improvement,
    and I challenged our leadership to not get complacent and to
    keep looking freshly at things and seeing how the program
    evolves. I have asked our new Deputy Commissioner for Services
    and Enforcement to do a thorough review of collection, taking
    input from Congress over the last several years, taking input
    from the GAO, taking input from the Taxpayer Advocate's report.
        And so they have started taking a broad look at collection,
    and this is part of the mix. That review is going to be done in
    this fiscal year, and then we will see how to evolve the
    program.

                              OFFSHORE INITIATIVE

        Mr. Serrano. Okay. One further question here. Last year the
    President requested, and the Congress provided, funding to
    enhance the work of IRS enforcement aimed at the offshore tax
    evasion schemes. What can you tell us about the progress the
    IRS is making in hiring the additional personnel to address
    this issue?
        Mr. Shulman. Last year the President gave us 800 new people
    for international enforcement. This year for FY11, he has
    requested funding again. We are well on track to hit those
    goals. This area is a priority of mine, it is a priority of the
    President, it is a priority of the Treasury Secretary, and so
    we are going to keep focusing on that.
        Some of that money is going towards agents who are pursuing
    individuals hiding assets offshore. Some of that money is going
    to make sure that we have specialists who can identify
    corporations when they do things like transfer pricing,
    transfer of intangibles, financial products. We have
    economists, financial specialists, lawyers, who we can match up
    with business, which is getting more and more global.
        On the international individual noncompliance we have made
    much more progress. I am very pleased with our progress there.
    We have gone much further than I think our team would have
    imagined a year and a half ago when we started down this path.
    We had a ground-breaking deal with UBS, in which the Swiss
    government made some agreements with us that they had not made
    in the past.
        We ran a voluntary compliance program or a voluntary
    disclosure program, in which we told people the U.S. Government
    is beefing up enforcement and getting very serious about
    offshore tax evasion. The risk of being caught has just gone
    up. We are going to give you a chance to come in, pay your back
    taxes, pay a severe penalty, but avoid going to jail.
        We thought maybe a couple thousand people would come in. We
    had 15,000 people come in under that program, which (a) is
    going to bring us a lot of money, but (b) means these 15,000
    people are going to be tax-paying Americans for the next 10,
    15, 20 years. The money is brought back. They are paying taxes
    now.
        Also I have become Chairman of the Federation of Tax
    Administrators, which is the global forum on tax
    administrators. And we are stepping up our international
    cooperative efforts, and we are making great strides.
        I think the next big thing that needs to happen, and that
    we hope happens, is Chairman Rangel and Chairman Baucus both
    put forward this Foreign Account Tax Compliance Act. It is in a
    number of things, including a jobs bill that is moving around
    now in the Senate. We are quite hopeful that passes, because it
    is going to give us a bunch more tools to continue on this
    effort.
        Mr. Serrano. Okay. Just one quick question. You know, we
    who serve in this House I find at times will use words or
    phrases, and we do not stop to say, ``Do I really know what I
    am saying?'' Not that we do not know what we are saying, but
    rather what does a term mean?
        So we talk about offshore all the time. Can you very
    briefly tell us, what does that really mean? Is it people
    putting money in savings accounts? Is it people hiding money
    somewhere? Where do most of these accounts or these hiding
    places exist? What countries? And how does the scheme or the
    plan work?
        For instance, if I take what little savings I have and put
    it somewhere else, I already paid taxes on it. It was taken out
    every month. Downstairs they take the taxes out. So how would I
    then be hiding that?

                              OFFSHORE INITIATIVE

        Mr. Shulman. I think, generally, when people talk about
    offshore tax evasion by individuals they are talking about
    wealthy individuals who put money in a bank secrecy
    jurisdiction and keep it over there. So as they get dividends,
    they get interest, they get capital gains when they sell it,
    they are not paying their taxes on it.
        Sometimes it is illegal source activity. So someone got
    money illegally, did not pay any taxes on it, and parks it
    offshore, so it is the double-compounded issue.
        And regarding where it is and how the schemes work there
    was a well-publicized scheme last year where people from
    another country were sending bankers over here with encrypted
    laptops and secret words and hiding their travel records and
    going to a variety of locations around the U.S. selling to
    people. They were saying, ``You are going to get a better
    return on your investment because you are not going to have to
    pay your taxes.'' And so that happens.
        There are also promoters in foreign jurisdictions who work
    with intermediaries, whether it be disreputable accounting
    firms or law firms or others who are trafficking in setting up
    sham trusts. So you really control the trust, but you go down
    to the Cayman Islands or someplace and set up the XYZ
    Corporation, and all the monies flow to that. It is going to
    appear like a corporation, but it is really for your benefit.
    So there are a variety of schemes that are out there.
        Regarding where this happens, our voluntary disclosure
    program had accounts flowing in from every continent, except
    for Antarctica, and over 60 countries. Anecdotally, one of the
    great things about this voluntary compliance program, as we are
    churning through submissions and analyzing and creating
    databases of these accounts, is we are seeing patterns of
    intermediaries, patterns of institutions, patterns of
    countries. There has been a lot of news media, and I am not
    going to confirm it here, but there has been news media about a
    lot of movement out of places like Switzerland, and into Asia,
    Latin America. We have been working with other law enforcement
    agencies and tracking the flow of money.
        And, again, the interesting thing is one ofthe reasons we
    are doing so well, I think, is because the U.S. Government is very
    focused on this effort. It is a priority. All of our people know it is
    a priority. We are putting our best people on it. We are investing in
    technology. We are investing in our diplomatic relations around this
    effort.
        But also, the world is changing. Most people in this room
    have a retirement account or a 401(k). Most of those have some
    investment in a foreign stock. You can trade a stock
    electronically while sitting on the beach in Perth, Australia,
    on the New York Stock Exchange. You used to actually have to,
    you know, call a broker or call someone on the floor who ran
    over with a ticket.
        Technology is making things move, and countries who want to
    participate in the global capital markets know that they need
    to reach certain global capital norms to do so. And so I think
    both global trends, as well as our efforts, are helping move
    this in the right direction.
        Mr. Serrano. Great explanation. Thank you. Now we know what
    we are talking about. [Laughter.]
        Mrs. Emerson.

                                  EQUITY SWAPS

        Mrs. Emerson. Speaking of concealment, I have some
    questions about equity swaps. And perhaps I should define what
    an equity swap is. According to my notes here, it says
    financial derivatives that accomplish a number of goals
    basically by straddling the U.S. border.
        Mr. Serrano. I knew that.
        Mrs. Emerson. Have you made one before?
        Mr. Serrano. No. No.
        Mrs. Emerson. Anyway, so at least this is what we are told.
    So, number one, they enable a bank to avoid withholding taxes
    on the payment of a dividend by disguising who owns the stock.
    They enable an offshore hedge fund to collect a stock's
    dividend without actually owning the stock. And they enable
    both parties to somehow avoid paying any taxes on the
    transaction, which is ordinarily subject to a 30 percent tax.
        So, anyway, I wanted to ask the Commissioner about it,
    because I know that the IRS has been scrutinizing these
    securities. And so, first, I want to know if you all have
    reached any conclusions. It just seems to me that it is pretty
    unfair that the big banks would be allowed to hold assets in
    offshore accounts with hedge funds for the sole purpose of
    avoiding taxes.
        And I have also read that IRS regulations that govern
    equity swaps may be at the heart of the matter. So if that is
    the case, have you all considered changing the regulatory
    treatment of those equity swaps?
        And my last question, or maybe two more, with regard to
    that is, how successful have you all been at capturing dividend
    tax revenues at offshore hedge funds that are collected by
    foreign investors? And what can we do, or are there things that
    we can do legislatively that would make it easier for you to do
    your job and close that gap?
        Mr. Shulman. Let me say a few things about it. A swap is
    basically a contract where two parties, usually big parties--an
    institutional investor or a brokerage firm or a bank--enter
    into a contract that says, you will get this economic benefit
    based on this, and so it can be any number of things.
        I think the issue you are referring to is about publicity
    around some ongoing investigations about institutions that own
    a U.S. stock--say IBM, although this is all hypothetical--two
    weeks before or a week before there is going to be a big
    dividend, and there would have to be 30 percent withholding in
    it, they actually change that ownership into a swap contract.
    It gives them the same kind of economic benefit as if they
    owned the stock.
        And so they go into a swap contract, and they are basically
    going to get that dividend, but they no longer officially are
    the owner of record of the stock. And then, there is an
    agreement around not paying taxes on that or how you allocate
    those taxes.
        We continue to be focused on this issue and we look at that
    action. And some taxpayers have publicized what we cannot, what
    we are doing with individual taxpayers.
        I think the whole issue around the complexity of financial
    markets and people using financial instruments, whether you in
    Congress find the current laws tasteful or not, they are legal.
    Some things they do are not legal. When they are not legal, we
    are willing to push it, and we have been pushing it. That is
    why some of the 800 people who we are hiring are financial
    specialists and others who can look at these issues.
        I will say one more thing about swap contracts. In the old
    world everybody said, ``Okay. You deal with a big counterparty,
    and you do a swap with them, and it is just like owning the
    stock.'' I think over the last year where some big
    counterparties failed, people say, ``Okay. There is some
    counterparty risk involved,'' and that is the argument on the
    other side.
        When you ask what to do, and you and I talked a little bit
    about it at other times, is you could potentially do something
    around swaps, but then you still have equity-linked notes, you
    still have securities lending, you still have other
    derivatives. I think there is disparate tax treatment for
    different financial instruments. And as long as you have an
    incredibly complex global capital market, and complex tax laws
    around financial products, you are going to have opportunities
    for arbitrage.
        And our job is to hone in on it, make sure we keep people
    on the right side of the law, make sure that we are as
    sophisticated as folks, so if they are doing things legally and
    structuring it legally, so be it, but, if they are pushing the
    envelope, we are able to call them on it.
        And so this is not an issue that is going away. When people
    ask me, ``what is the focus on large corporate audits?'' in a
    world with this kind of global capital flows, complex financial
    markets, complex tax laws, we are going to have to keep
    investing to be able to keep up with people who are looking to
    make money.
        Mrs. Emerson. And it is very complex, and it seems to get
    more complex, and the more complex it is the better.
        But, anyway, let me ask another couple of question, because
    I really do not have too many more, Mr. Chairman.

                       EFFECT OF ECONOMY ON TAX REVENUES

        You know, we are all concerned--so very much concerned with
    the declining economy, and the impact, though, that that has on
    the amount of incoming revenue collected by all of you. Do you
    all estimate, talk about--I mean, internally, do you estimate
    the impact on your revenues by the declining economy? I mean,
    is that even a measure that you all specifically take other
    than simply revenues? You know, wehave this many--this much
    less revenue this year? And so I want to know that.
        And then, I have to assume that the bad economic state also
    affects the amount of your enforcement collections.
        Mr. Shulman. Yes.
        Mrs. Emerson. We talked about that a little bit. Can you
    all provide estimates of how much revenue has declined in the
    2009 tax year? Do you all know that answer?
        Mr. Shulman. Yes, we do. I am happy to get them to you. Let
    me answer off the top of my head, and with a big disclaimer for
    the man typing to my right--and we will get you the exact
    numbers--tax revenues went down in the 20 percent range.
    Corporate revenues, though, dropped from $300 billion down to
    $140 billion because people were experiencing so many losses.
        Our actual enforcement dollars dropped, but not as
    dramatically. And they dropped because people did not have the
    money. There are lots of ways we measure enforcement, but we
    have an enforcement revenue number which is literally cash in
    the door that year, resulting from some sort of action we took,
    and those dropped. People just did not have the cash.
        We also had a lot more people file--a lot of times people
    file a balance due. So, I owe $3,000 taxes, I file my tax
    return on time, April 15. I say I owe $3,000, but here is
    $1,000. We send out a collection notice, and within six months,
    these are compliant taxpayers, and they send the other $2,000
    in and we are done. A lot of those people just did not catch
    up, and so that decreased the dollars in.
        And then we went and examined you and said, ``No, you owed
    money from two years back or three years back.'' Usually we get
    checks when we close the exam. This year we had people not able
    to write checks. And so our enforcement dollars went down less
    than the overall revenues.
        Those revenue projections, though, are in the President's
    budget, and so we will get you the specific numbers.
        Mrs. Emerson. But you did say corporate revenue decreased,
    you thought ballpark, $300 billion to $140-?
        Mr. Shulman. That is the number I have in my head, but let
    us have the staff follow up and----
        Mrs. Emerson. Okay. Thank you so much.
        Mr. Shulman. No, no, that is not corporate revenue. That is
    tax----
        Mrs. Emerson. Tax.
        Mr. Shulman [continuing]. Revenue coming in. So a
    difference. That is how much the corporations are paying the
    government in taxes, not their revenues.
        [The information follows:]

        [GRAPHIC] [TIFF OMITTED] T2166A.017

        [GRAPHIC] [TIFF OMITTED] T2166A.018

        Mrs. Emerson. So, well, it would be interesting to carry on
    that discussion further to determine whether or not there are
    different tax schemes they are using or whether it was just
    simply a reduction across the board in----
        Mr. Shulman. There are a lot of people in the loss position
    last year.
        Mrs. Emerson. Yes.
        Mr. Serrano. Thank you.
        Ms. Lee.

              AUDITS OF ORGANIZATIONS IN RECEIPT OF BAILOUT FUNDS

        Ms. Lee. Thank you very much. Let me just ask you, in terms
    of a list of all of the banks, financial service companies, and
    other corporations who have received TARP or TALF funding, and
    have sold any of the assets of the Treasury programs like
    commercial paper funding facility or mortgage-backed securities
    to Fannie Mae or Freddie Mac, let me ask you if you are
    actually auditing any of those companies.
        Do they have any outstanding tax liabilities? They are
    benefiting from billions of dollars of taxpayer funds, and so
    how are you all kind of looking at what is taking place within
    those companies?
        Mr. Shulman. Without talking about any company
    specifically, a lot of the very biggest companies in the
    country are under continuous audit by us, and always have a
    variety of things in the pipeline that we are auditing, pending
    appeals of our decisions, things in the Tax Court. And so they
    have a variety of different books.
        I think when I was up here last year there was a number out
    there about money that TARP recipients had not paid. I actually
    think that number was a little skewed, because any big company
    in the country always has a variety of disputes going on, five
    or six tax years open with us, some things that are in appeals.
    So that is their right.
        We, obviously, are continuing to be part of the whole
    recovery effort. I would tell you I think we run a pretty fair,
    even-handed, long-term audit program. And so we are not doing
    anything special, but we are also not giving anyone any
    breaks----
        Ms. Lee. Okay.
        Mr. Shulman [continuing]. In that regard.
        Ms. Lee. I know you may not be doing anything special, but
    maybe you should. I mean, these are low interest loans that
    these companies have received. This is a special effort, and I
    would think that if these companies--or at least you would want
    to know if they have any outstanding tax liabilities or would
    consider doing some special audits, because it is a special,
    you know, type of initiative. But you are not.
        Mr. Shulman. We will definitely take that under
    consideration.
        Ms. Lee. Yes. I think it would be, Mr. Chairman, very
    prudent to do that. I think taxpayers----
        Mr. Serrano. Well taken.
        Ms. Lee [continuing]. Are angry enough about what has taken
    place, and I think any way to ensure transparency, to ensure
    that their tax dollars are being spent appropriately as it
    relates to TARP and TALF, I think that would be very helpful.
        Thank you.
        Mr. Serrano. Thank you.
        I have a set of questions that I will submit for the
    record. Any other member also that has----
        Mrs. Emerson. I have some for the record, yes.

                           TAXES ON FOREIGN NATIONALS

        Mr. Serrano. I just have one more question to ask,
    Commissioner, but I have a fun question ahead of that, because,
    you know, it is about 39 days before the baseball season
    starts.
        Mrs. Emerson. Oh, I was waiting for this.
        Mr. Serrano. Right?
        Mr. Shulman. We are all looking forward to this, Mr.
    Chairman.
        Mr. Serrano. So if you are here on a work visa from another
    country playing baseball, as so many are now, I know you pay
    your federal taxes for working here, for any money earned here.
    My understanding also is that you file state taxes for every
    state that your team visits during the season. So you have your
    home state, and then, you know, California, Georgia, whatever,
    those states.
        Now, the folks who still have their legal address, if you
    will, back home--Dominican Republic, Venezuela, China, Japan,
    wherever the countries are--Mariano Rivera, Panama--some of
    those folks who maintain those addresses, legal residents,
    still pay taxes there.
        Now, I know there are deals--there are arrangements made
    between state taxes and federal taxes where sometimes you get
    credit for that, that does not go on, does it? I mean, we do
    not give these millionaires a break on their federal taxes here
    because they are paying taxes somewhere else?
        Mr. Shulman. Before I answer, can I clarify, is this the
    Red Sox or the Yankees you are referring to? [Laughter.]
        Mr. Serrano. When it comes to the money they make, it is
    any----
        [Laughter.]
        The fact that the Yankees have had a cost-effective and----
        [Laughter.]
        Mrs. Emerson. Excuse me? They have----
        Mr. Serrano. And actually do something with the money they
    pay----
        Mrs. Emerson. Like build $2 billion stadiums?
        Mr. Shulman. You know, I believe the----
        Mr. Serrano. By the way, you know that I passed a
    resolution in the House congratulating the Yankees for the
    World Series. Let me tell you what we have. Resolutions like
    that pass 400 to zero. No. There are people who abstained,
    people who voted no. Mostly it is from Massachusetts and
    Pennsylvania, but----
        Mrs. Emerson. The Cardinals fans, we would get in trouble
    if we voted for the Yankees.
        Mr. Serrano. See what I mean? Go ahead.
        Mr. Shulman. I think the law, generally, is in the U.S. you
    pay taxes where you make the money, and it follows folks. I
    think if you fly over New York air space and you live in
    another state, but you are going there for work, you, in theory
    owe taxes. And so I think that is how it works, and we try to
    just apply the law----
        Mr. Serrano. Right.
        Mr. Shulman [continuing]. As it stands.
        Mr. Serrano. But to your knowledge there are no
    arrangements with other countries. In other words, just because
    they pay taxes there, but they work here, there is no----
        Mr. Shulman. Not to my knowledge.
        Mr. Serrano [continuing]. Not given a break.

                            TAX ON FOREIGN NATIONALS

        Mr. Shulman. I mean, we have treaties. We have treaties
    with a variety of countries a lot of times in the corporate or
    individual setting where if someone pays taxes--the basic
    theory of treaties is around double taxation, which is you
    should only pay tax once. And so they may actually, when they
    pay here, not have to pay it on their income there, so they are
    paying on their taxes once. But, you know, our general rule is
    if you make it here, you pay taxes here.
        Mr. Serrano. Yes. I would be concerned if it is the other
    way, that we would not tax them because they are paying taxes
    somewhere else.
        Mrs. Emerson. But if, in fact, you have let us just say a
    German guy who worked for a woman who works for a German
    company, and their residence is there but they spent more than
    50 percent of their time here, and they work here and get paid
    here, I mean, there is the credit. I mean, that is what
    happened when I used to work abroad and live here at the same
    time. I paid taxes where I lived and then got a credit and then
    paid the difference if it was less I think----
        Mr. Serrano. Yes, but you were not making $25 million a
    year.
        Mrs. Emerson. I was not even making $25,000 a year.
    [Laughter.]
        Mr. Serrano. There you go.
        Mrs. Emerson. But I still was complying with--I mean, the
    law was the law I guess is what I am trying to say.
        Mr. Serrano. I better end this, because I suspect that
    after a very good hearing this may be the story in tomorrow's
    papers about baseball players. And I do not want to do that to
    this hearing, you know?

                       ELIMINATION OF AUTOMATIC MAILINGS

        But I have one last question. It seems--well, the budget
    request assumes a savings of several million dollars by
    eliminating the automatic mailing of Form 1040 booklets. That
    is that thick, soft booklet that we all expect in the mail, and
    we cheer when we get it, or we cry, but there it is.
        So here is the question. Will you really save money? Will
    people now for the first time, in as long as I can remember not
    seeing that booklet, decide something is not happening? You may
    even get calls asking you, ``Does that mean I do not have to
    pay taxes this year?'' So the cost of those calls, the cost of
    the time you will be dealing with that, does that really offset
    the savings for not mailing the book out? And how much
    confusion?
        I mean, I know it sounds silly, but there are people who
    actually wait for that booklet to come, and then they open it
    up the middle, they rip out the----
        Mrs. Emerson. They are so excited.
        Mr. Serrano [continuing]. They rip out the form, right?
        Mr. Shulman. Yes.
        Mr. Serrano. That is the form they fill out. Now some folks
    must be going to go to your offices to look for forms. So was
    that truly a cost-saving move?
        Mr. Shulman. That is a great question. The President
    challenged all of us to say, ``Look, we will make prudent
    investments where needed,'' and I am very pleased that he
    decided to make an investment in the IRS. But he said, ``I want
    you to challenge yourselves and see where you can have
    efficiency savings.''
        This is one we debated. There is the issue of compliance,
    and it is unknown whether getting that book actually increases
    compliance. With that said, 60 percent of the people are using
    preparers; they do not need to get a book. Twenty percent are
    using software; they do not need to get a book. We only send
    the books now to people who filed on paper, and the paper
    filing decreased. The e-filing went up over 10 percent last
    year. It went up to 66 percent, and so we made this prudent
    choice.
        I will tell you there is a general target to decrease
    mailings, and the 1040 is an example. I have challenged our
    staff around inserts, can we decrease inserts, can we decrease
    all mailings? And so if this budget gets approved, we will make
    decisions about exactly what we do mail and do not. But we are
    committed to $20 million in mailing savings. That is really
    what the budget means.
        Mr. Serrano. Do you realize you are helping to kill another
    one of your accounts that we oversee, the Postal Service?
        Mr. Shulman. So be it. [Laughter.]
        Mrs. Emerson. Well, they could send out ``save the date to
    file your tax'' cards. That is expensive to print.
        Mr. Shulman. I know, I know.
        Mr. Serrano. So you think in the long run the push is to do
    as little mailing as possible.
        Mr. Shulman. It is kind of like I talked about with Mr.
    Crenshaw. You have got to move an agency forward. You have got
    to make the best decisions you can with the information you
    have. We think this is a prudent move. If we find out it is a
    big problem, we will deal with that and correct ourselves. But
    we are going to try cutting down some mailings.

                       ELIMINATION OF AUTOMATIC MAILINGS

        Mr. Serrano. In closing, you are not going to believe this.
    This falls under the category of ``You Are Not Going to Believe
    This.'' Someone on the street came up to me--as you know I have
    a walking district in the Bronx, and I walk around all the
    time--and this person said, ``And I understand, because there
    are no secrets, that the IRS is not going to send that book out
    anymore.'' I said, ``That is what we hear.'' He says, ``You
    have got to get me one, because I collect them.''
        Mr. Shulman. I will get him an autographed copy.
    [Laughter.]
        Mr. Serrano. Absolutely. It will be sold on eBay.
        I have no further questions. Do you?
        Mrs. Emerson. I only have questions to submit for the
    record, Mr. Chairman.
        Mr. Serrano. All right. So will I.
        I want to thank you. We want to thank you for your
    testimony today. We repeat our desire to stand ready not only
    on our budget issues, but also to stand ready to assist you in
    any way during this very difficult time. And please, once
    again, convey to the staff and to the folks at IRS this
    Committee's concern and heartfelt condolences for your tragedy.
    And we thank you for your testimony today.
        Mr. Shulman. Thank you.

        [GRAPHIC] [TIFF OMITTED] T2166A.019

        [GRAPHIC] [TIFF OMITTED] T2166A.020

        [GRAPHIC] [TIFF OMITTED] T2166A.021

        [GRAPHIC] [TIFF OMITTED] T2166A.022

        [GRAPHIC] [TIFF OMITTED] T2166A.023

        [GRAPHIC] [TIFF OMITTED] T2166A.024

        [GRAPHIC] [TIFF OMITTED] T2166A.025

        [GRAPHIC] [TIFF OMITTED] T2166A.026

        [GRAPHIC] [TIFF OMITTED] T2166A.027

        [GRAPHIC] [TIFF OMITTED] T2166A.028

        [GRAPHIC] [TIFF OMITTED] T2166A.029

        [GRAPHIC] [TIFF OMITTED] T2166A.030

        [GRAPHIC] [TIFF OMITTED] T2166A.031

        [GRAPHIC] [TIFF OMITTED] T2166A.032

        [GRAPHIC] [TIFF OMITTED] T2166A.033

        [GRAPHIC] [TIFF OMITTED] T2166A.034

        [GRAPHIC] [TIFF OMITTED] T2166A.035

        [GRAPHIC] [TIFF OMITTED] T2166A.036

                                             Wednesday, March 10, 2010.

                  FY2011 BUDGET FOR DEPARTMENT OF THE TREASURY

                                    WITNESS

    HON. TIMOTHY F. GEITHNER, SECRETARY
        Mr. Serrano. The subcommittee will come to order.
        Mr. Secretary, before we go on, I join Mrs. Emerson in
    having you convey to the folks at the IRS our deepest
    sympathies and our condolences. That was a tragic situation and
    one that can never be tolerated regardless of how anybody feels
    about anyone in government.
        And so, please let them know, as we told Commissioner
    Shulman, that our thoughts are with them, our prayers are with
    them and, personally--and I know Jo Ann feels the same way--
    that we respect and admire the work that they do on a daily
    basis.
        Secretary Geithner. Mr. Chairman, could I say before we
    start, thank you for that. And I wanted to begin my remarks
    today, actually, by thanking you for what you said at
    Commissioner Shulman's hearing.
        And I agree with everything you said, that we owe them our
    support, our gratitude, our respect. They are a remarkably
    dedicated group of public servants. They take great pride in
    their work. And nobody in that position should have to face
    what they faced. And they showed great bravery in evacuating
    that building quickly. They saved tens and tens of lives by how
    they acquitted themselves in that moment of panic and attack.
    And when I went out there with Commissioner Shulman, they were
    very strong and very brave and remarkably dedicated and
    committed to the work of the Service.
        Mrs. Emerson. Let me also say, Mr. Secretary, that all of
    the families and employees are in our deepest prayers and our
    thoughts every day. And they showed a remarkable resilience, in
    my opinion, as well. And oftentimes bureaucrats are not
    treated, perhaps, with the respect that they are due. But, in
    this particular case, I think it just points out to how many
    hardworking people there are really working for all of us on a
    daily basis.
        Mr. Serrano. Thank you.
        Today the subcommittee meets to consider the budget request
    and conduct oversight over the Department of the Treasury. We
    welcome the Secretary of the Treasury, Timothy Geithner, back
    for his second appearance before the subcommittee.
        For fiscal year 2011, the Treasury Department is requesting
    authority to spend $14.1 billion, an increase of $551 million,
    or 4 percent, above 2010.
        I welcome the second straight requested increase for IRS
    enforcement efforts to prevent offshore tax evasion. While most
    Americans rely on salaries from employment that are taxed
    before they receive their paycheck, many wealthy individuals
    and businesses continue to use offshore accounts to hide
    billions of dollars in income generated by investments and
    income from abroad.
        I note that Treasury's budget request also proposes to
    reform our taxes on international activity and to counter the
    use of offshore tax havens. These proposals would increase
    revenue by more than $120 billion over the next 10 years. These
    are good initiatives.
        I also welcome your proposed increase in funding for
    financial and technical assistance by the CDFI Fund and look
    forward to learning more about the proposed new CDFI
    initiatives on healthy food and banking the unbanked. I believe
    that the CDFI has done some of the most important work in
    lifting up disadvantaged communities and look forward to
    discussing this work with you today.
        The Treasury budget request has other notable increases,
    including a 13 percent increase for Treasury's departmental
    offices after a 9 percent boost for this year.
        I am concerned, however, that the Treasury budget proposes
    to reduce grants for low-income taxpayer clinics, tax
    counseling for the elderly, and the Volunteer Income Tax
    Assistance Grant Program. All three programs assist low- and
    moderate-income taxpayers. I believe that supporting these
    taxpayers is of paramount importance and have made them a
    priority in my years as chairman of this subcommittee.
        In addition, I am dismayed that the administration has once
    again included a $106 million proposal to tax all stores
    selling alcohol and tobacco the same amount regardless of their
    size. I am opposed to charging my neighborhood bodega the same
    flat fee as big suburban mall liquor stores, and Congress under
    both parties has repeatedly rejected it. As a practical matter
    under the current budget circumstances, I would probably have
    no choice but to consider budget cuts elsewhere to make up for
    this unrealistic proposal.
        Mr. Secretary, you may have come here to defend your
    budget, but, as you know, we never allow you to leave without a
    discussion of economic policy. You are the highest
    administration official with a major role in economic policy
    who is required to testify before Congress. From the outset,
    you have been at the center of the debate over how to respond
    to the financial crisis, first as president of the New York Fed
    and then as Treasury Secretary. Much of that debate here in
    Congress has been concerning the Troubled Asset Relief Program,
    TARP, which continues to be a point of great interest among
    Members on both sides of the aisle.
        Thankfully, it seems that perhaps the worst of the economic
    crisis is behind us, and yet we still have plenty more to do to
    get the economy back on its feet again. To that end, over the
    course of the last year, you have announced initiatives to
    respond to the concerns of everyday Americans: small business
    credit, mortgage relief, and limits on executive compensation
    at firms rescued by the taxpayers.
        Many of the next steps for these issues remain in the hands
    of Congress, but, as a matter of practice, we must trust that
    you are looking out for the American people on a day-to-day
    basis. I feel confident that you are doing so and look forward
    to discussing the administration's efforts on behalf of the
    American people with you today.
        And, with that, I turn to my colleague and sister, Mrs.
    Emerson.
        [The information follows:]

        [GRAPHIC] [TIFF OMITTED] T2166A.037

        [GRAPHIC] [TIFF OMITTED] T2166A.038

        Mrs. Emerson. Thank you, Mr. Chairman.
        Secretary Geithner, thank you so much for being here with
    us this afternoon. And I know, as Treasury Secretary, you are
    facing many daunting challenges, including the attempts to
    reinvigorate bank lending to consumers and small business;
    trying to stabilize housing and commercial real estate markets;
    and, most important, protecting the American taxpayer, their
    investments, and preserving the long-term financial health of
    the Federal Government. And I know that you and your staff have
    been working extraordinarily hard on these issues, and we
    appreciate your dedication.
        Regarding the financial condition of the Federal
    Government, I am very concerned that there does not appear to
    be a short- or a long-term plan to address deficit spending.
    The administration's budget estimates that the fiscal year 2010
    deficit will be $1.6 trillion, with deficit spending continuing
    to exceed $700 billion per year through fiscal year 2020 when
    it increases back up to $1 trillion.
        This level of spending will increase our debt-to-GDP ratio
    to almost 80 percent, the highest level since 1950. How is this
    level of debt sustainable, especially as more and more of the
    baby boomers, like Joe and I, reach retirement age? And are we
    on the same fiscal path as Greece? Are we irrevocably damaging
    the economic opportunities for future generations?
        Regarding the economy and unemployment, I am concerned with
    the administration's sometimes confusing message with regard to
    job creation. On the one hand, the Federal Government is
    running up enormous debts in an effort to stimulate the economy
    and create jobs; however, on the other, the administration is
    pushing for massive new regulations on health care, greenhouse
    gasses, and the financial industry. These new regulatory
    policies don't stimulate growth or small-business lending. In
    fact, they are creating a lot of uncertainty among lenders,
    among the many, many small businesses with whom I speak on a
    daily basis, and consumers.
        While I agree that there are some commonsense reforms
    needed in all of these areas, massive new government
    intervention in these areas will hinder short-term economic
    growth. So I am concerned that, while the administration is
    trying to spend our way out of the recession and high
    unemployment at the cost of future generations, that you all
    are also advocating policies that will hurt short-term job
    growth, not stimulate it.
        So, as I said to begin, you face a lot of challenges in
    managing the Federal Government's finances and in attempting to
    reinvigorate the economy. I hope to be able to work closely and
    collaboratively with you, the chairman, and the rest of our
    committee to address these matters. So, thank you.
        Thanks, Mr. Chairman.
        Mr. Serrano. Thank you.
        Well, Mr. Secretary, you know the routine. We hope you stay
    within 5 minutes. Your full text presentation will go in the
    record, and that will give us time to grill you as the time
    goes on.
        Secretary Geithner. Thank you, Chairman Serrano and Ranking
    Member Emerson, members of the committee. It is a pleasure to
    be back up here today. I want to thank you for all the support
    you have given Treasury and the IRS in the past. And I am very
    committed to, of course, working with you closely as we go
    forward meeting the many challenges the country faces.
        I want to begin, Mr. Chairman, just with a few remarks on
    financial reform. Many of you may have read today in the paper
    that we saw another of the Nation's large banks today decide to
    sharply limit the practice of charging customers outsized fees
    for overdrafts. And I just want to say we welcome these efforts
    by banks to try to begin the process of restoring trust and
    confidence of their customers. And we welcome the fact we are
    seeing banks now try to get ahead of the President's financial
    reform effort that is now working its way through the Congress.
        After years in which we saw many financial companies
    competing to exploit vulnerable borrowers, it is good to see
    banks once again competing to benefit their customers. And I
    want to urge other large banks that have not acted to follow
    the lead of some of their competitors.
        But voluntary action is not enough. Progress today can too
    easily erode, as memories of the crisis fade. And that is why
    the President has proposed a very strong set of reforms for
    Wall Street, including an independent consumer agency charged
    with making sure that customers get better access to
    information, better choices, with clear rules enforced across
    banks and nonbanks. The House has acted, and we hope that the
    Senate will support Chairman Dodd's efforts to move ahead now.
    We can't afford to go through another period where we see a
    race to the bottom across our financial system.
        Now, a little over a year ago, when President Obama took
    office, the urgent challenge facing the country was preventing
    a second Great Depression. At that time, as you know, the
    American economy was shrinking at an annual rate of 6 percent.
    Now, in the fourth quarter of last year, we saw the economy
    grow again at about that rate, about 6 percent. And this was a
    result, of course, of forceful action by the President and
    Congress under the Recovery Act and the result, also, of the
    steps we took to prevent the collapse of our financial system.
        But we still face enormous challenges as a country.
    Therecession caused enormous damage. Millions of Americans are still
    out of work. Many are still facing foreclosure. Many are still
    struggling to keep businesses open. They are still living with the
    consequences of the worst recession in many decades.
        Now, that is why job creation remains our principal focus.
    Working with Congress, we propose to expand and extend tax cuts
    for job creation and investment, a $30 billion small-business
    lending fund, and expansion of the SBA's programs. The
    President's budget also proposes investments in American
    innovation and education, in exports and infrastructure that
    will help lay a foundation for stronger future economic growth.
        And we are proposing to make these investments and reforms
    in a fiscally responsible way. As part of this commitment, the
    President proposed to freeze nonsecurity discretionary
    government funding for 3 years starting next fiscal year. And
    this, along with other steps to restore fairness to the tax
    system and what we hope will be the recommendations of the
    bipartisan fiscal commission, will help limit the growth of
    government spending in the future and reduce our deficits over
    time.
        Now, as you know, the Treasury Department plays a central
    role in this agenda of spurring job creation, encouraging
    innovation and investment, promoting strong economic growth,
    and restoring responsibility to our Nation's finances. And I
    just want to highlight briefly some of the key features of the
    Treasury Department's budget request for fiscal year 2011.
        At the start of this budget process, I asked Treasury
    senior staff to identify efficiency gains, program cuts and
    reforms. And, as a result of this process, you have before you
    today program cuts and new reforms that would generate nearly a
    half a billion dollars in savings and revenues for the
    Department. Just to cite two examples, we propose to cut $100
    million by not funding the CDFI Capital Magnet Fund and Bank
    Enterprise Award funds. And we identified savings that would
    generate for the IRS nearly $43 million through more electronic
    filing and by eliminating the automatic mailing of tax booklets
    to taxpayers.
        Now, we are proposing to use these savings to fund a series
    of targeted, modest investments in the Internal Revenue
    Service; the Community Development Financial Institutions Fund,
    the CDFI Fund; our global economic and national security
    priorities; and rebuilding the Treasury Department's
    professional staff. The resulting budget amounts to a modest
    but significant 3.5 percent increase over last year.
        Just very briefly, Mr. Chairman, for the IRS, we proposed
    to strengthen IRS enforcement with a $250 million investment to
    increase voluntary compliance, an effort that would produce as
    much as $2 billion in additional tax revenues; other targeted
    investments to improve IRS customer services; and technology to
    enable the IRS to process tax returns more quickly.
        We have proposed to expand the CDFI Fund, which has a long
    record of leveraging private money to help attract private
    investment to some of the country's most hardest-hit,
    distressed communities.
        On the international side, as you know, Treasury plays a
    very key role in advancing U.S. economic interests abroad and
    protecting our national security interests. And our budget
    request would provide funding for the Department's efforts to
    improve international cooperation on economic recovery and
    financial reform and to make sure that we have adequate
    resources put into our national financial sanctions program,
    which is designed to deprive terrorists, nuclear proliferators,
    and other illicit actors of access to financing.
        Now, Treasury entered this economic crisis with its
    professional ranks seriously depleted. We entered the worst
    economic downturn in generations with, just as an example, only
    25 economist in the Office of Economic Policy, which is a third
    fewer than in 2000, about a decade ago. Just to give you a
    comparison, similar offices at the Departments of Housing and
    Urban Development, Agriculture have 140 and 330 economists,
    respectively. The Federal Reserve system has over 500 Ph.D.
    Economists. Another example, our two key offices, Domestic
    Finance and Tax Policy, had very modest levels of staffing
    coming into this crisis, significantly below the levels that
    prevailed in the past.
        We have a long tradition in Treasury of operating with a
    very lean staff, and we are proud of that tradition. We have no
    intention of changing it, especially given the severe financial
    constraints the country faces as a whole. But we are going to
    have to make some targeted investments in rebuilding that
    institutional capacity at Treasury if we are going to have an
    adequate capacity to respond to future economic challenges. So
    we have proposed a modest additional investment to try to
    rebuild and strengthen in a very targeted way those three
    offices in the Treasury: Domestic Finance presides over the
    financial system, Tax Policy, and our Economic Policy division.
        Now, I have the honor of leading a team of very smart,
    dedicated individuals who are working every day to make our
    government more effective, make our economy stronger and more
    fair. Treasury officials work every day in critical, important
    priorities, from helping restart small-business lending to
    working to contain the nuclear ambitions of Iran, from
    promoting job creation and investments to supporting debt
    relief for Haiti, from extending the benefits of growth to the
    hardest-hit communities in our country to promoting American
    exports around the world, from cracking down on mortgage scams
    to providing technical assistance to the Governments of
    Afghanistan and Pakistan, for example.
        We have accomplished a lot over this year, but we have a
    lot of challenges ahead. And the investments we proposed in
    this budget will give us the tools to meet those challenges
    more effectively in the future.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Geithner follows:]

        [GRAPHIC] [TIFF OMITTED] T2166A.039

        [GRAPHIC] [TIFF OMITTED] T2166A.040

        [GRAPHIC] [TIFF OMITTED] T2166A.041

        [GRAPHIC] [TIFF OMITTED] T2166A.042

        [GRAPHIC] [TIFF OMITTED] T2166A.043

        [GRAPHIC] [TIFF OMITTED] T2166A.044

        [GRAPHIC] [TIFF OMITTED] T2166A.045

        [GRAPHIC] [TIFF OMITTED] T2166A.046

        Mr. Serrano. Thank you, Mr. Secretary.
        Let me begin by stating, when they devised TARP, our
    friends on the authorizing committees provided an open-ended
    funding stream for operational expenses. Congress has an
    obligation to do oversight of TARP operational spending.
        In the report language adopted by our committee for the
    fiscal year 2010 financial services bill, the committee
    required the Department to provide a full accounting of TARP
    spending and staffing to date in your projections for next
    year. That report was due with your budget request last month,
    but, unfortunately, the committee has yet to see this
    information.
        Do you have a time frame in place for providing this
    information to the committee? How much have operational
    expenses for TARP cost to date? And how much do you anticipate
    operating expenses for the TARP program will cost for the rest
    of this fiscal year and next?
        Secretary Geithner. Mr. Chairman, we will provide that
    information as quickly as we can. I assume we can do it quite
    quickly.
        But I just want to underscore, we are now in the process of
    winding down TARP. We have been able to achieve this recovery
    in the financial system at dramatically lower costs than we
    expected. The costs of this program have fallen--overall costs
    to the government of this program have fallen by over $400
    billion from the initial estimates just a year ago. We have had
    over, I think, $170 billion come back to the American taxpayer
    by forcing banks to replace the government's investments with
    private capital. We are seeing a very substantial return to the
    American taxpayer on the investments the government made in
    banks.
        Now, even though we have seen a lot of healing in the
    financial system, as you both said in your opening remarks,
    small businesses across the country still face a very difficult
    time getting credit. Our housing markets are still in the
    process of recovery; housing and finance still overwhelmingly
    dependent on the government. And we are going to need to
    continue to make some carefully designed, targeted programs to
    support additional credit expansion in those areas most damaged
    by the crisis. But I think the administrative costs of that are
    going to be a fraction, going forward, of what they were at the
    peak of the crisis.
        But I just want to underscore that the overall program has
    achieved a dramatic improvement in stability in the system at
    much, much lower costs than anybody anticipated. And if the
    Congress joins with the President in adopting this fee we have
    proposed to recoup any losses from the Nation's largest banks,
    then you can tell your constituents, you can tell the American
    people that they won't be exposed to a penny of loss in this
    program.
        Mr. Serrano. Let me ask you a question on that. Experts in
    the field tell us that consumer confidence and investor
    confidence are what drive our economy. If people are afraid, it
    doesn't work; they don't invest, they don't buy, they don't
    purchase. But, at the same time, there is another part to that,
    and it is the part that falls on Members of Congress and the
    administration, and that is to create consumer confidence that
    what we are doing is correct.
        So, on one hand, it might be--and it is, in many cases--
    that so much of what is going on is beginning to take hold. But
    the public thinks that we just threw money away, in many cases,
    and that we bailed out people we shouldn't have.
        How can you and how can we work together, how can you help
    us, to get a better message out, if nothing else? You know, why
    is there such a disconnect with what many believe to be what is
    really going on to what the public thinks is going on?
        Secretary Geithner. Well, I think it is very important to
    recognize that, even though the economy is now growing again
    and even though you are seeing the pace of job losses fall
    from, you know, three-quarters of a million Americans losing
    their job last January every month to--we are just now at the
    verge of the economy as a whole starting to create jobs again.
    But the crisis caused a huge amount of damage to confidence of
    the average American family, of the average business. And we
    are going to be living with the lasting effects of that damage
    to confidence for a long period. It is going to take some time
    for that to heal.
        But it is very important that we are able to demonstrate to
    the American people that the programs Congress authorized in
    the Recovery Act and to help rescue the financial system are
    delivering what they were supposed to do. And, again, the best
    measure of that is you had an economy that was shrinking at an
    annual rate of 6 percent a year to an economy now growing at an
    annual rate of 6 percent per year. You are seeing the costs of
    credit to municipal governments, to someone who wants to borrow
    to get a mortgage, to buy a car, put their kids through
    college, come down dramatically. Credit is much more available
    to an average business today than it was when we took office,
    when this Congress came into power about a year ago.
        Those are very, very substantial returns. In highlighting
    those returns--and they are the direct result of the actions
    Congress authorized in the Recovery Act. You know, remember,
    the Recovery Act was a third in tax cuts that went to 95
    percent of working Americans and to businesses across the
    country. It was about, roughly, a third in infrastructure
    investments, targeted investment in infrastructure and support
    to State and local governments. And a substantial chunk went to
    help the unemployed, help those people hardest hit by the
    recession. But those things are generating a very substantial
    return, and you would not have an economy that had moved this
    quickly from deep contraction on the edge of a Great Depression
    to an economy growing, as I said, at an annual rate of 6
    percent a year in the fourth quarter of last year.
        So we have a lot of challenges ahead, but I think the best
    thing we can do is, you know, just make sure we can draw
    people's attention to the concrete aspects of those programs.
        When you ask people whether they support tax cuts for
    working families, whether they support targeted infrastructure
    investments to help rebuild schools, rebuild bridges, when you
    ask them if they support assistance to State and local
    governments so they don't have to fire teachers and firemen,
    the American people support and welcome those investments. And
    it is important to draw their attention to the specifics,
    because it is sort of hard to understand when you limit the
    debate to these broad programs out there.
        And, again, just one more thing, Mr. Chairman. The efforts
    we took to stabilize the financial system were never going to
    be popular. But it is very important for people to understand
    that, when we came into office and when this Congress took
    office in January of last year, the governmenthad very
    substantial investments already in the banking system, and we have
    brought back more than two-thirds of those investments already. We did
    not write a check to a major U.S. bank since we came into office. We
    wrote some modest additional checks to small community banks, regional
    banks, but we did not give another dollar of the taxpayers' money to
    the Nation's major banks.
        Now, we had a bunch of problems we had to solve, bombs we
    had to defuse, problems we had to dig out of, but we have been
    very, very careful in managing this very, very unpopular
    program in ways that allowed us to get the American people's
    money back from the financial system, to save them, as I said,
    over $400 billion in potential losses. And we are in a much
    stronger position as a country today to come out of this
    stronger. We have saved dramatic amounts of money that we can
    use to meet the many, many challenges we face as a country
    today.
        Mr. Serrano. Well, I want to keep going on this subject,
    but I will defer now to Mrs. Emerson, because I suspect we will
    have many Members today and the chairman should set an example
    for the 5-minute rule, which I just broke.
        Mrs. Emerson. Darn it, I was hoping that you would go over,
    Mr. Chairman, so I could as well.
        Let me switch gears to the Federal debt for a moment, and I
    am sure we will come back to TARP. I have no doubt about it.
        As I mentioned in my opening remarks, I have great concern
    about where we are going to end up in 2020, where our Federal
    debt held by the public will be about 77.2 percent of GDP,
    which would be the highest percentage of Federal debt to GDP
    since World War II, 1950, when I was born. So I have about
    three questions I would like to ask with regard to this. Well,
    actually, it is probably four, but I know you will indulge.
        Given the size of the Federal debt, number one, is Treasury
    crowding out investment in the private sector? You know,
    obviously, to what extent are investors buying Treasury bonds
    instead of investing in businesses?
        Number two, given the trouble in the world economy, how
    difficult is it to attract buyers of Treasury debt? And are you
    increasing interest rates in order to attract those investors?
        And, three, who is investing in Treasury debt? And are you
    concerned about our dependence on foreign investors, foreign
    governments, sovereign wealth funds, and the like to finance
    our deficit spending?
        Secretary Geithner. Excellent questions.
        Let me just start by saying, as we discussed when I was
    here last year, that you are right to point out that our
    deficits are too high. They are unsustainably high. If you just
    look at over the next 10 years, they are unsustainably high,
    and they get dramatically worse, if Congress does not act to
    reform our Medicare and Social Security, they get dramatically
    worse in the succeeding decades.
        So they are too high. They are unsustainable. And if we do
    not act to address them, then we will face much greater
    challenges as a country. Growth will be weaker. America will be
    poorer as a country. And you are right to highlight these
    challenges. And, of course, we are deeply committed to make
    sure we start the process now of building consensus on the
    policies to bring those deficits down.
        Now, on your specific questions: You asked, is government
    borrowing today crowding out public investment? No, it is not.
    In a financial crisis, in a recession like this, the only
    fiscally responsible way to act as a country is to make sure
    you are providing temporary, targeted support to get the
    economy back on track, growing again.
        And the best measure of what I just said, which answers
    your second question, is that U.S. long-term interest rates
    today, the rate at which Treasury borrows today, is really
    remarkably low. And it reflects the fact that, for the moment,
    again, given the echoes of this crisis, the most responsible
    thing we can do as a country is try to make sure we are
    providing the support and the investments necessary to lay a
    foundation for strong, sustainable private-sector growth.
        Now, these things need to be temporary and targeted. And
    that is why we have proposed in the President's budget to begin
    the process in fiscal year 2011 of bringing down these deficits
    over time.
        One more thing that goes to your third question. Today, the
    American people are providing most of the financing for our
    deficits, for these temporary exceptionally high deficits. Over
    the last year or so, in particular, you have seen the savings
    rate of Americans start to rise again. Private savings rates
    have risen from a modest negative to a rate which is in the
    positive 4 percent territory. At the same time, our current
    account deficit, which is the amount of money we are borrowing
    from the rest of the world, has fallen very, very sharply.
        So, if you just step back, generally what you are seeing so
    far is a very high level of confidence among foreign investors
    in our economy and our financial system and a willingness of
    Americans to provide the financing the government needs
    temporarily to help get through this basic crisis.
        But you are absolutely right to underscore the fact that
    these deficits are too high. They are unsustainable. And as
    soon as we are confident that we have a self-sustaining
    recovery in place led by the private sector, then it is very
    important we shift at that point to bring those deficits back
    down to Earth.
        Mrs. Emerson. I appreciate your answers, but if we are
    still at a trillion-dollar deficit at 2020, when will the
    savings actually materialize?
        Secretary Geithner. Thank you for raising that.
        For an economy like ours--and this is the critical
    imperative--we need to make sure we are bringing the deficit
    down to a level that stabilizes our overall debt burden as a
    share of our economy to a level that is not going to be
    acceptable and not threaten future growth rates. And for an
    economy like ours, that requires we bring our deficits to below
    3 percent of GDP. It sounds like a magic number, but it is
    just, given the structure of our economy, that is what it takes
    to stabilize the overall debt burden as a share of our economy
    at an acceptable level.
        What we have proposed in the President's budget is a series
    of detailed measures on the expenditure side and the resource
    side that would bring our deficit down over the next 4 years to
    below 4 percent of GDP. That is not far enough. We are very
    explicit in the budget saying that is not far enough, we need
    to go further.
        And that is one reason why the President has proposed to
    form a bipartisan fiscal commission and to ask a set ofnational
    statesmen to step back from politics and try to take a fresh look at
    measures that help get us down further over the next 5 to 10 years but
    also begin to propose measures to deal with the long-term deficits in
    the further decades, which are clearly unsustainable and will be very
    damaging.
        Mrs. Emerson. You have great faith that that will work.
        Secretary Geithner. No, it is a--as you know, Congress has
    to enact policies that restore gravity to the Nation's fiscal
    position. We have proposed a series of detailed measures that
    begin that process. But we are, you know, following the model
    of President Reagan, who proposed and ran, helped establish I
    think the best example of a successful bipartisan commission on
    Social Security reform, and we are using that, proposing that
    model to try to build a consensus on things that will bring
    sustainability back to the Nation's finances.
        Mrs. Emerson. Okay. One more quick question, and then I
    will be finished. And it is a more philosophical question. How
    do you balance a desire for short-term benefits to the economy
    versus the long-term risk to the future generations of
    increasing debt? I mean, I feel like we are being greedy or
    something.
        Secretary Geithner. No, I think, again, with an economy
    facing the risk of a Great Depression, an economy living with
    the echos of the worst financial crisis in generations, the
    only possible, the only credible response of any government and
    the only thing that is fiscally responsible is to temporarily
    provide the kind of support on the tax side and on the
    investment side that can help reestablish a foundation for
    growth. That is what we did in the Recovery Act and our
    financial recovery efforts. And we are still in the period now
    where, as an economy, the best thing for us to do right now is
    to provide some modest additional targeted support for job
    creation and investment.
        But that will not work, will not be effective, unless we
    can make people confident, in the United States and around the
    world, that we are going to find the will as a country to start
    to bring those deficits down as we shift to growth that is
    going to be sustainable.
        So the imperative right now is still job creation and
    reinforcing growth. But, once we are confident we have an
    economy that is growing again, led by the private sector, then
    the right thing for the country to do is to bring those
    deficits down. That is how you balance them.
        And if you make sure these investments we make today, like
    in the Recovery Act, are temporary and targeted and they are
    focused on things that will help restart growth and job
    creation, then you are doing the responsible thing and the
    effective thing to help restore our Nation's finances over the
    longer term.
        These deficits are high today, as you know, they are high
    today overwhelmingly because of the policy choices made by the
    country over the past preceding 8 years and because of the
    consequences of the recession. When we came in office, you
    know, we had a--before we did one thing, asked Congress to
    propose one change to policy, we had a deficit of about $1.6
    trillion, more than 10 percent of GDP, and that was a legacy of
    the recession and the policy choices the country made over the
    preceding 8 years. Those choices left us with very high
    projected future deficits, unsustainably high debt burdens. And
    we are going to have to work together across the aisle,
    Republicans and Democrats, to dig our way out of that.
        Mrs. Emerson. Thank you.
        Mr. Serrano. Just a quick comment, not a question, but it
    seems to me that we never had major wars where we didn't raise
    taxes. So we are all guilty of the $2 trillion that it will
    cost us over the next generation just to pay for the last two
    involvements. But there is one resolution on the House floor
    today that we can all be fiscal conservatives about and vote to
    get out of Afghanistan.
        Now, Mr. Fattah, the way I see this is your beloved
    Phillies will play Ms. Emerson's beloved Cardinals for a chance
    to get beaten by the Yankees in the fall.
        Mr. Fattah.
        Mr. Fattah. Thank you, Mr. Secretary. I think you have done
    an extraordinary job in a difficult situation.
        If we looked a year ago, the first 2 months of the year, we
    lost more than a million and a half jobs. And these 2 months we
    have seen job losses of 50,000 in totality. But we have seen a
    major increase in temporary hiring; we have seen an increase in
    hours worked. All of this is a prelude to what all of us, I
    think, expect to see: net plus in job growth next month and
    going forward. The stock market was at 6,000 yesterday a year
    ago; it is now at 10,500. Purchasing is up, manufacturing is
    up. I mean, if you look at all of the indicators, they are
    pointing in the right direction.
        Now, there are still some naysayers, and there are people
    who principally are responsible for the conditions that we find
    ourselves in who are critics of the work of this
    administration. But I want to go through some of the details.
        When the President was sworn into office a year ago January
    20th, the Nation's national debt was over $10 trillion. And we
    had a $1.2 trillion deficit for that fiscal year. Now, 8 years
    before that, we had Alan Greenspan in here, and we were having
    a discussion about the fact that a $5 trillion surplus could
    take the country to be debt-free at the conclusion of the Bush
    administration.
        A bunch of decisions were made, so rather than surpluses to
    erase a $5 trillion national debt and an intellectual
    discussion about the economics profile of a nation that was
    debt-free, we had doubled the debt, and as it was the case at
    the end of World War II, in part for national defense. I don't
    think anyone would suggest that we should have forfeited World
    War II rather than run up some debt or that we should concede
    to bin Laden and company, you know, and sacrifice the lives of
    Americans because we are afraid to spend money. So, in part, we
    spent it on national security. And we also did tax cuts and so
    on.
        But the point I want to get to now is that there has been a
    lot of discussions, and with the ranking member, about the
    deficit. I want to talk about the debt. The deficit is just
    what the gap is year to year. I want to talk about the national
    debt.
        Now, we have seen the President set up the debt commission
    with Erskine Bowles and with Senator Simpson. We have seen the
    Vice President say that this national debt is a national
    security issue. The Secretary of State last week said it is a
    national security issue. You have made comments about the
    challenges that it presents in the international framework of
    our dealings.
        What do you--and I know that you are short a few economists
    in the Tax Policy Office. Previous Treasury Departments looked
    at broad-based tax reform. Everyone whois knowledgeable on this
    says we have to raise some revenue, we have to cut our long-term costs
    on entitlements, and we have to engage in broad-based tax reform.
        Now, the Reagan Treasury Department and the Bush Treasury
    Department, 20 years apart, looked at the national sales tax,
    said it was fatally deficient, it wouldn't work. They looked at
    the flat tax, said it wouldn't work.
        So my question to you is, as we go forward, we need to have
    a deficit commission, which we have in place--and I am happy to
    see that Leader Boehner has said he is going to make
    appointments, and the Republicans in the Senate are going to
    make appointments. So they can look at long-term entitlements,
    and that is great.
        What I am interested to know is what you think about an
    idea of a dedicated revenue focused entirely on paying down the
    national debt, going forward, as part of a constellation of
    things. You know, we passed statutory PAYGO and so on. But a
    revenue source dedicated to debt, what do you think about that
    as a generality?
        And then specifically, I have proposed a transaction fee on
    non-stock, non-financial markets activity of a penny on a
    dollar, dedicated entirely to the debt. I would like to know
    what you think about that specifically.
        Secretary Geithner. Congressman, you are right to point out
    that we have an unsustainable fiscal position, and we are going
    to have to bring our resources and our commitments more into
    balance over time.
        Now, what we have asked this commission to do, what the
    President has charged the commission with doing is to, as I
    said, step back from politics, take a fresh look, everything is
    on the table, no preconditions, and to see if they can come up
    with recommendations on a bipartisan basis that will help
    address both problems: not just the long-term problem of the
    next 4 decades, but the more immediate problem of how we get
    the budget down to a more sustainable level over the next 5 to
    10 years. Both are necessary. Both are part of the commission's
    mandate. It is not just the very long-term problems of
    entitlement reform.
        Now, they are going to take a look at a range of ideas. I
    am sure they will take a look at a range of ideas from both
    sides of the aisle. And, again, what we wanted to do is get a
    group of people together who can step back from politics, take
    a fresh look, no preconditions.
        And, you know, I think that it is important for us to
    recognize that we are a very strong, resilient country. In the
    past when we have faced challenges like this, we have acted.
    The world has confidence in our ability to do that. We need to
    make sure we are going to earn that confidence again.
        And I have no doubt that this is within our capacity to fix
    over time. We need to get some people together working on it
    now, because, you know, again, as the economy recovers, as
    growth gets established, it is going to be time then to start
    to move. We can't put this off.
        Mr. Fattah. Has Treasury looked at any new ideas, revenue-
    raisers?
        Secretary Geithner. As you know, Treasury has a great
    tradition, a great, pragmatic, creative tradition in tax policy
    and elsewhere, of looking at all ideas. And, you know, we will,
    along with OMB, we will provide some support to the commission
    as it goes through this. But we are going to leave the
    commission the task of trying to evaluate the options and help
    educate the American people about the challenges ahead.
        Mr. Fattah. Well, I understand. I appreciate that. The
    commission, obviously, has to have ideas that have been
    rigorously analyzed, and your department is most capable, so
    that they can make an informed choice. So----
        Secretary Geithner. And we will provide that, as we always
    have attempted to traditionally.
        Mr. Fattah. So my last question then is, can we get the
    proposal that I have made in H.R. 4646 analyzed by your
    department, torn apart, and looked at to see whether it can be
    a part of perhaps addressing some of these issues?
        Secretary Geithner. Again, we generally try not to ``tear
    apart'' proposals made by the Appropriations Committee----
        Mr. Fattah. Well, I mean----
        Secretary Geithner [continuing]. But we will take a careful
    look at anything that you all have proposed and asked us to
    take a look at.
        Mr. Fattah. Well, I will ask the chairman to submit it to
    you officially and ask for its review. Thank you.
        Mr. Serrano. Good idea. We will do that.
        Mr. Kirk.
        Mr. Kirk. Thank you, Mr. Chairman.
        You met yesterday with the Prime Minister of Greece. And I
    am particularly concerned by, as The Washington Post reported,
    Greece's problems, critics argue, have only partially to do
    with speculators, more to do with false economic data, broken
    tax system, runaway spending. The Greeks report that only 5,000
    people make over $136,000 in their whole country.
        I am particularly concerned about the role of U.S.
    financial institutions, particularly Goldman Sachs, that as
    Greece got on the heroin of borrowed money, Goldman was the
    crack dealer and did not disclose these increasing liabilities
    to the EU financial system, to the IMF, or to the Fed.
        Now, Papandreou asked you for money and backing. But it
    would seem that not only should we very carefully review any
    request he has, but have you had any frank discussions with
    Goldman about their very questionable role in this?
        Secretary Geithner. Congressman, just to clarify one thing,
    the Prime Minister did not ask me or the President for
    financial assistance yesterday. What he did do was to outline
    the reforms they have enacted so far and the plans they have in
    prospect to help dig themselves out of a unsustainable fiscal
    position and restore growth and competitiveness to that
    economy. He has a lot of challenges to face, but he is
    beginning that process. And he also walked us through their
    discussions with the Europeans to try to make sure they are
    managing through this carefully.
        Now, it is very important that the United States work with
    Europe to put in place a comprehensive set of reforms to
    provide oversight over the derivatives markets. It is important
    to us. It is important to them. It is something you have to do
    globally if you are going to do it effectively.
        And, as you know, we proposed in the House a sweeping set
    of reforms that would bring oversight to all participants in
    those markets, move the standardized parts of those markets on
    to clearinghouses, bring transparency to those markets, make
    sure that our enforcement authorities, the SEC and the CFTC in
    particular, have the ability to police, to goafter, to deter
    fraud and manipulation.
        And that is very important to us. We are going to work very
    closely with the Europeans to help support those reforms. Part
    of the imperative here is to bring as much transparency as we
    can to those markets now.
        Mr. Kirk. Let's go to the question.
        Secretary Geithner. I am coming to your question, which is
    that, you know, I can't comment on any ongoing investigations,
    but, of course, as you have heard the Federal Reserve chairman
    say, the responsible people in the U.S. are taking a careful
    look at these things, as you would expect them to do.
        Mr. Kirk. And so you have called Goldman and said, ``What
    is up?''
        Secretary Geithner. I am not going to comment on anything
    we have done specifically, but I just will draw your attention
    to the statements made by the chairman of the Federal Reserve
    Board and by the SEC, who are the competent authorities in this
    case, that they are going to take a careful look at this stuff,
    again, as you would expect them to do.
        Mr. Kirk. Okay. Yeah.
        As Treasury Secretary, you oversee much of the enforcement
    of the sanctions regime of the United States. We passed
    legislation in 1996, in the Clinton administration, to sanction
    any entity which invests more than $20 million in the energy
    sector of Iran. The Congressional Research Service has
    identified 25 companies that appear to have violated this.
        We now learn that the U.S. Government has provided $107
    billion to companies who are in direct violation, it appears,
    of the Iran Sanctions Act. We also understand that the Ex-Im
    Bank has extended $4.5 billion to entities which have directly
    violated the Iran Sanctions Act. Of the companies that have
    violated the act, 49 of them have no plans to suspend any
    activities in Iran.
        Also, just a few blocks from your office, the World Bank is
    about to send $258 million to the finance ministry of the
    Islamic Republic of Iran. Since we own about 20 percent of the
    IBRD, that is 50 million U.S. Taxpayer dollars under the Obama
    administration that would be paid to the Ahmadinejad treasury.
        We understand that Dalian Industrial made a $700 million
    investment in Iran oil refineries in direct violation of the
    act; that in 2009 the U.S. Army contracted $111 million with
    Dalian. Petrobras invested over $100 million in Iran oil. That
    is five times the trigger level of the act. Ex-Im Bank provided
    recently a $2 billion credit to Petrobras.
        Mazda is in business with the Iranian Revolutionary Guard
    Corps and yet still is winning U.S. Government contracts using
    U.S. taxpayer dollars. Any updates on that?
        Secretary Geithner. Congressman, let me just start by
    commending you for the support you provided for a more
    aggressive approach to implement existing sanctions, to
    strengthen those sanctions. I think you are right on that
    issue. And we are committed to working with countries around
    the world to put in place a stronger, more effective
    enforcement regime globally.
        As you know, the activities of the Iranian Government on
    the nuclear front to support terrorists in the region and
    around the world are a substantial threat to our national
    security interests, to the interests of the countries around
    the region. And we are working very hard, the President is
    working very hard with the Secretary of State to build support
    for a stronger U.N. Resolution. We are working with countries
    to encourage them to more aggressively enforce the existing
    sanctions regimes. The United States is running a very
    effective program now to tighten those existing sanctions using
    the authority we have. And we are going to work to build on
    that record.
        And, as you know, the Treasury plays a very important role
    on the financial side. And we have had remarkable success in
    making it much harder for those entities to get access to
    finance around the world because of the successful work with
    other countries to tighten up those sanctions----
        Mr. Kirk. But no success in stopping U.S. taxpayer money
    going from companies who are directly violating, no success
    whatsoever. And I have raised this with you before: no success,
    no effort whatsoever to stop World Bank payments----
        Secretary Geithner. No, no. Let me--I want to address--you
    know a lot about this, Congressman. And I know you have written
    to the Secretary of State about the concerns you began with,
    which are enforcement of the----
        Mr. Kirk. Iran Sanctions Act.
        Secretary Geithner [continuing]. Iran Sanctions Act. But
    let me just address the World Bank concerns directly.
        As you know, the World Bank has approved no new loans to
    Iran since, I believe, 1985. There are only----
        Mr. Kirk. No, that is not the issue. The issue is----
        Secretary Geithner. You are right, you are right. I am
    coming to it.
        There are only two loans outstanding where the World Bank
    is still disbursing. Those are two loans that go to water
    projects that are consistent with the humanitarian exemption
    that is under the U.N. resolution, permitted under the U.N.
    Resolution. These are modest----
        Mr. Kirk. I am running out of time, but are you naive
    enough to think that the money paid----
        Secretary Geithner. I don't have a naive bone in my body,
    Congressman, not a naive bone.
        Mr. Kirk. Okay. Okay.
        Mr. Serrano. Can we let the man respond?
        Secretary Geithner. I am saying that, as you know----
        Mr. Kirk. Are you naive enough to think that $258 million
    paid from the World Bank to the Ahmadinejad treasury actually
    goes to those projects? Do you actually think that?
        Secretary Geithner. No, what I am saying is that the U.S.
    has worked very effectively across administrations to make sure
    the World Bank was not authorizing any new loans. That has been
    successful policy of the government for a long period of time.
    The only two loans outstanding are these two loans permitted
    under the U.N. Resolution that go to support humanitarian and
    development projects.
        Now, I just want you to know that we agree with you and
    share your objective of making sure we are working around the
    world, as we have been doing, to tighten the effectiveness of
    this existing enforcement regime. And you are right to point
    out that it is an ongoing challenge. You can't stay still. If
    you don't keep intensifying the sanctions regime, people will
    get around these existing regimes. They will be able to find
    new opportunities to exploit it.
        But for us to be effective, we have to work with countries
    around the world to tighten up this net. And we are committed
    to that, and we are going to do it.
        Mr. Kirk. I just would hope that this is--right now, given
    the New York Times article, it is less to do about what is
    happening with other governments and more that the U.S.
    Government stops contracting with companies that do business
    with Iran.
        Secretary Geithner. That I wouldn't agree with. But I
    think, again, we have more in common on this than we may have
    on many other issues----
        Mr. Kirk. Okay.
        Secretary Geithner [continuing]. Which is, you are right to
    underscore the importance to our national security.
        Mr. Kirk. Yep.
        Secretary Geithner. But the critical thing for us to do is
    to make sure we are not just using our authority that Congress
    has provided to tighten up these sanctions, to make sure we get
    other countries to move with us, as they are doing on a--I
    would say we are having some impact now, and it is get getting
    some traction.
        Mr. Kirk. Thank you, Mr. Chairman.
        Mr. Serrano. Thank you.
        There is no way--no reflection on you, Mr. Secretary--there
    is no way that Mrs. Emerson and I can pass up this moment just
    to note that, if any of those folks had invested $2 in Cuba, it
    would be a major scandal throughout the country.
        Mr. Schiff.
        Mr. Schiff. Thank you, Mr. Chairman.
        Thank you for being here, Mr. Secretary.
        I have questions, really, on two different areas. The first
    is the proposal of the President to use some of the TARP
    funding to encourage small banks, community banks to lend to
    small businesses. I would like to know what the status of that
    is and what conditions or measures can be put in place to make
    sure that the small banks don't simply hold on to the money.
        I have heard--well, we have all gotten unstoppable feedback
    from small businesses in our districts that institutions they
    have had long relationships with, where they have perfect
    credit history, won't lend to them. They are arguing that the
    regulators--the banks will tell them the regulators won't let
    them lend. I don't know whether that is an excuse the banks are
    using or whether regulators really are putting on that kind of
    pressure.
        I am also hearing feedback, though, that the small banks
    are saying, ``Hey, you know, if we get the money, we will keep
    it, and we are not going to necessarily use it to lend.'' So in
    order to avoid some of the pitfalls that characterize the
    support for the big banks that didn't always turn around and
    lend it, what precautions have been put in place?
        And the second question is on the jobs issue. This recovery
    so far looks different than prior recoveries. It has not been
    as robust, even though the GDP growth last quarter was
    encouraging. Still, the job numbers are sluggish. And I am
    interested to know your both sense of why the jobs aren't
    bouncing back as quickly as in prior recessions and what are
    the most significant things that we can do to stimulate that
    job growth.
        Secretary Geithner. Excellent questions.
        First, on small-business lending, we are proposing, really,
    four separate things to help address this problem. One is we
    have a series of well-designed, targeted tax measures that go
    directly to small businesses: expensing, depreciation, zero
    capital gains on new investments in small businesses, new jobs
    tax credit. The second is to expand substantially SBA's
    existing guarantee programs. A variety of specific proposals in
    the President's plan, and we think those would be very
    effective.
        Those are important, but they are not sufficient. We are
    encouraging the supervisors--they are independent of the
    Treasury, but we are encouraging them to try to make sure they
    are providing a more balanced amount of guidance to examiners
    across the country so the examiners don't overcorrect and
    contribute unnecessarily to tightening of credit conditions
    that would hurt viable businesses.
        In addition to that, we propose, as you said, a $30 billion
    small-business lending fund that would give capital to small
    community banks that commit to use that capital to expand
    lending. We designed this in a way that gives pretty powerful
    incentives to lend the money out. So if you increase lending to
    small businesses above a certain baseline, then we have reduced
    the dividend you pay the Treasury over time.
        Now, our view is that is a pretty powerful package, set of
    proposals. And you can't be certain that small banks will take
    a dollar of capital and increase lending. But if small banks
    who could otherwise raise capital in a normal market can't
    raise capital, don't have access to capital, then they will cut
    lending. And that has a pretty negative effect on business
    access to credit. So capital is a very effective way of helping
    mitigate this problem.
        Mr. Schiff. On that last point, though, what baseline are
    you using to measure whether they increase lending? And, also,
    do you buy what the banks are saying about the kind of
    regulatory straitjacket they are in, or do you think they are
    using that as a fall guy?
        Secretary Geithner. I think you said it right. You know,
    think of it this way: A bank has been doing business with a
    customer for 30 years. The bank made a bunch of other decisions
    with a bunch of other clients in the real estate area that cost
    it a lot of money, left it very exposed, not enough capital. It
    is going to have to cut back on assets and lending to survive.
    What do you say to your customer that has been a good customer
    for 30 years? It is easier to say that the supervisor is making
    me do it than to explain that I made a bunch of judgments that
    got me too exposed to commercial real estate. So I think there
    is a lot going on.
        But, on the other hand, in every recession what happens is
    that there is a risk that examiners, after a period where in
    hindsight they look like they were too easy, tend to
    overcorrect. And so I think it is good that the leaders of our
    supervisors, bank supervisors across the country--and this is
    the FDIC, the Fed, the OCC, and the OTS--they need to make sure
    they are leaning against that tendency to overcorrect in a
    recession, because that can cause a lot of damage too.
        Just briefly on the job front----
        Mr. Schiff. Before you go, what is the baseline?
        Secretary Geithner. Oh, I am sorry, the baseline. I
    believe--but I have to check and make sure I say this
    correctly--I think we leave it at the level in 2009. We have
    designed that in a way--we think that is a realistic baseline.
        You know, the pipes, the parts of this financial system are
    still clogged. You can't force money through those pipes. We
    can't force banks to lend without taking a riskthat the
    government ends up with too much loss and risk. But we think we have
    designed this in a way that would substantially increase the odds that
    we are really helping mitigate the small business credit problem, where
    it remains.
        On the jobs front, you know, you won't have jobs without
    growth. Growth has to come first. There is always a lag. But I
    think most economists across the country would say we are on
    the verge now of seeing a sustained level of positive job
    growth for the country as a whole.
        And I think the best story, looking back, of why
    unemployment increased so much and why job losses were so steep
    was just that you saw just shattering damage to business
    confidence across the country. People were just too scared to
    do anything, and they cut back just dramatically because of the
    fear that they faced a very long period of no demand for their
    products. And that is going to take some time to heal, but it
    is beginning to heal. As your colleague said, you are seeing
    the early signs now: hours increasing, temp employment
    increasing. And that should----
        Mr. Schiff. One last short question, Mr. Chairman.
        Does this recovery look different to you? GDP growth was
    greater than expected but still smaller than in prior
    recoveries, and the commensurate job situation has improved.
    Why do you think this looks different?
        Secretary Geithner. I think, in many ways, growth came more
    quickly, stronger, and more broad-based than many people
    expected. In that sense, it is encouraging.
        But because this is a recession caused by a long period of
    excessive borrowing, a huge overinvestment in real estate, a
    huge increase in leverage in the financial sector, there was no
    way that recovery was not going to be dampened by those basic
    forces. So, as households across the country save more, start
    to deduce their debt burdens, as the financial sector digs out
    of this terrible mess it was in, any recovery was going to face
    significant headwinds in that context.
        So we are seeing, I think, the necessary, inevitable
    consequence of a recession that is borne in part of a very
    damaging financial real estate boom that was fed by excessive
    borrowing and lending.
        Mr. Schiff. Thank you, Mr. Secretary.
        Thank you, Mr. Chairman.
        Mr. Serrano. Thank you.
        Mr. Culberson.
        Mr. Culberson. Thank you, Mr. Chairman.
        Thank you, Mr. Secretary. I heard you talk a lot this
    afternoon about the importance of bringing down the deficit,
    controlling spending, and I appreciate your saying those
    things. I wondered if you would tell for the record, could you
    explain how the creation of the Obama health care entitlement
    will help bring down deficits?
        Secretary Geithner. I will be happy to do that. That is not
    the way I would describe the health reform plan, but I will be
    happy to describe and answer the question.
        The CBO estimates, and they are the independent scorekeeper
    of the Congress, they estimate that the reforms that are in
    prospect now would reduce the long-term deficits, the 10-year
    deficit, and would substantially reduce the rate of growth in
    health care expenditures over the succeeding decades.
        Mr. Culberson. Are you talking about the Senate bill?
        Secretary Geithner. Well, I would say that you can take the
    Senate bill as with suggested changes that the administration
    put out a few weeks ago, but they are all in the same basic
    ballpark. You say a meaningful reduction in the 10 years
    numbers and a very substantial reduction in succeeding decades.
    And that is because, as you know, that the biggest driver of
    the long-term deficit is the rate of growth in health care
    expenditures. It is more important than, for example, the fact
    that our population is aging. So there is no path of fiscal
    responsibility that does not go through health care reform that
    reduces the rate of growth in costs.
        Mr. Culberson. But the reductions they see in the future
    are all based on assumed reductions in health care expenditures
    in later years.
        Secretary Geithner. Well, again, they are doing what they
    always do is they take proposals Congress is considering, and
    they quantify those estimates on future spending by the
    Congress. They are just doing what they always do.
        Mr. Culberson. Right. And you recognize that those
    proposals entail 6 years of spending with 10 years of revenue.
        Secretary Geithner. Again, I am not trying to characterize
    their proposal. What I said is accurate in their estimates of
    the----
        Mr. Culberson. You are talking about the CBO?
        Secretary Geithner. Yes, CBO. But again, the most important
    thing to point out, which I know you understand, is that if you
    care about the fiscal position of the United States, you are
    worried about those long-term deficits, there is no way to deal
    with that without reforming the health care system in a way
    that reduces the rate of grown in costs.
        Mr. Culberson. Well, those of us on the fiscal conservative
    side are approaching it from the perspective of focusing on
    making health care affordable and portable so you can buy it
    across State lines and shop. I want to be able to buy coverage
    from my carrier in Arizona or Texas. That law needs to be
    changed. We need to focus on that, on medical malpractice
    reform to protect doctors from frivolous lawsuits has worked so
    successfully in Texas, on allowing small businesses to pool
    their ability to negotiate better rates together. We could do
    those things without--and bring down the cost of health
    insurance to make it affordable and portable. That is where,
    from our perspective as fiscal conservatives, the focus needs
    to be.
        But I just have to tell you the credibility of the
    administration is not very high when you or the administration
    attempts to persuade taxpayers who are--you know, they pay
    attention, and they--it just defies common sense to believe
    that we can, as your proposals do, expand coverage to 20 to 30
    million new people that will be brought into this new
    entitlement, which is clearly the mother--this is the mother of
    all entitlement programs.
        Secretary Geithner. Congressman.
        Mr. Culberson. You are going to bring in 20- to 30-million
    new people, and you are going to reduce deficits, and this is
    just not credible.
        Secretary Geithner. All I am citing----
        Mr. Culberson. It is just not credible.
        Secretary Geithner. All I am citing is the estimates of
    CBO.
        Mr. Culberson. Of CBO. Do you believe those estimates are
    accurate?
        Secretary Geithner. Well, I think they are the best
    estimates we have. And again, they have the virtue of being a
    fair and independent arbiter, nonpartisan arbiter, of the
    proposals now working their way through Congress. So you can
    challenge those things, but those are the ones Congress will
    rely on to score your proposals as well as the
    administration's.
        Mr. Culberson. We are, as you have said, in an
    unsustainable fiscal position, and I am as concerned as I know
    every one on this committee is, no doubt, that we would become
    Greece.
        Secretary Geithner. There is no risk of that. That will not
    happen in the United States.
        Mr. Culberson. We are spending money--as of June 1st we are
    running on the Nation's credit card. My office has calculated,
    and if you look at the available revenue as of June 1st this
    year, everything we spend beyond that point is borrowed money.
        And it is a fact, and I have to say also in your opening
    remarks earlier, Mr. Chairman, if I could very quickly, we are
    kicking the Bush administration. You can't just blame others
    for the scale of the deficit. The deficits that you inherited
    were way too high. I voted against virtually all of those major
    Bush spending issues. But this, Nancy Pelosi and Barack Obama
    have managed to spend over $2.5 trillion in about 1 year. That
    is just the big-ticket items. You spent more money in less time
    than any administration in the history of the United States.
    You have created more debt than any other administration in
    your budgets than any other administration in the history of
    the country, so it just isn't credible. You damage your own----
        Secretary Geithner. I would be happy to measure our record
    on fiscal responsibility with the record of the previous 8
    years. I will just give you one example. I was a career civil
    servant in the Treasury Department. I left the Treasury
    Department in 2001. At that point the CBO projected future
    surpluses of $5 trillion. Eight years later those surpluses
    turned into $8 trillion in projected future deficits.
        I would be happy to compare the basic records of what we
    achieved in that period of time on fiscal responsibility with
    the record of the succeeding 8 years, and I will say, not to
    make a political point, it is just a fair thing. And I think
    the important thing to recognize is over that period of time,
    when we demonstrated as a country that we were able to produce
    surpluses, we saw a record of trong private investment growth,
    strong productivity growth----
        Mr. Culberson. Because of tax cuts.
        Secretary Geithner [continuing]. Strong growth in incomes.
        No. In the----
        Mr. Culberson. In the Bush administration.
        Secretary Geithner. No, no. I was comparing the growth
    record of the previous 8 years. The growth record of the 8
    years under the Bush administration did not compare favorably
    to the preceding 8 years. It was worse on growth, worse on any
    basic measure of basic returns, and, again, worse on the thing
    you care about a lot, which is on basic tests of fiscal
    responsibility.
        Mr. Culberson. I am exceeding my time. The Chairman is
    being very gracious.
        Secretary Geithner. We can't change the past. I know you
    voted against a lot of those proposals, but we can't change the
    past. And right now we need to stand together and admit that
    deficits matter, tax cuts aren't free. We have to pay for stuff
    we propose to enact, and we need to bring our fiscal deficits
    back down to a point where they are sustainable over time, and
    I look forward to working with you in how to do that.
        Mr. Culberson. Thank you. We want to you live up to those
    words, that is all.
        Mr. Serrano. Mr. Crenshaw.
        Mr. Crenshaw. Thank you, Mr. Chairman.
        Welcome back. I have two questions. One kind of has to do
    with philosophy of managing these assets, and the other is kind
    of a quick question about the tax collections.
        You mention the TARP funds are being repaid quicker and in
    a greater amount than first thought. I think that is good news.
    I think we ought to do everything we can to maximize those
    dollars. But when you look at AIG, it seems to be, again, we
    are a majority shareholder, and so I guess we are involved in
    their decisions. And it seems to me I read they sold two life
    companies last week, $51 billion, which will go back to
    American taxpayers. That is good news.
        But if the philosophy there is to sell off these assets, it
    seems to me sooner or later you will kind of run out of assets
    to sell. You will have a company that has kind of been
    downsized, and you wonder what kind of capability itwill have
    to make any further payments. I think they have over $100 billion, and
    I think they paid back $15 billion maybe. So we are still on the hook.
        On the other hand, when I look at General Motors, as I
    understand it, if you take General Motors, Chrysler and GMAC,
    we maybe gave them $80 billion, and I think maybe General
    Motors was about $50 billion of that. And then I read where you
    said we are probably going to lose $30 billion on General
    Motors' deal. But I guess it seems like if the philosophy there
    is to--GM has kind of reinstated some of the dealerships, they
    are increasing their sales, maybe their market share is going
    to increase. So you would think that is one way to deal with
    the situation. You would think if they become an ongoing
    entity, and grow, and increase sales, and increase market
    share, they will be even in a better position to pay back--you
    know, of the $50 billion, maybe they end up paying it all back.
        So just help me understand the two different philosophies,
    because we must be involved in those decisions. Is it short-
    sighted on AIG? I am not asking whether we should have just
    broken it up early on, but we own it, and we want to get paid
    back as much as we can. And those are two different kind of
    case studies. Explain to me how it is working, how you think
    that works in the long run.
        Secretary Geithner. Excellent question. It is a difficult
    judgment. The two basic objectives we try to balance are to
    maximize the returns to the taxpayer, minimize the risk of the
    loss to the taxpayer. And we want to, frankly, get out as quick
    as we can. Those two objectives will sometimes be in conflict,
    as you said. So we are going to try to balance them.
        These companies where we are reluctant shareholders in
    these companies are dramatically in different positions, and
    the precise strategy is going to differ because of differing
    conditions. We are going to try to make sure we manage these in
    a way to minimize any risk of loss, maximize the achievable
    return, but we want to get out as quickly as we can, because we
    don't want to have the American Government involved in these
    companies a day longer than is necessary. So we will do it as
    quickly as we can, subject to that constraint that we don't
    want to leave the American taxpayer exposed to the risk of
    unnecessary loss in that case.
        You are right to point out that we are making really
    remarkable progress. I would say the board of AIG is making
    remarkable progress in reducing the risk and restructuring the
    company in a way that is going to reduce the expected loss to
    the taxpayer very, very dramatically. They have come down
    dramatically in that period of time. We are still exposed to
    substantial risk of loss, as we are in the other companies. But
    we are going to be very careful in managing those in a way to
    balance those two basic objectives.
        Again, I think we are being consistent in applying them,
    but where they differ is just because of inherent differences
    in the position of those companies and the opportunities we
    have to get out earlier.
        Mr. Crenshaw. Thank you. And the same question, just a
    brief question, I read in your testimony where there are going
    to be some new initiatives in terms of tax collection. You
    spend $250 million, which will--according to your testimony,
    that is going to bring in another $2 billion. Every time I read
    that, I can't help but kind of ask the question, how do know;
    how do you determine that spending $250 million on compliance
    is going to end up bringing you $2 billion? And then based on
    that, how do you decide, well, instead of spending $500
    million, we get $400 billion, or up and down the scales.
        I am just curious, because my colleagues know that from
    time to time Members of Congress use the so-called tax gap as
    like a piggy bank and say all you have to do, if you spend a
    billion, you get this. And I have always wondered are there any
    facts and figures to kind of verify that? And how do you decide
    to limit to $250 billion--$250 million to say that will get us
    $2 billion? And somebody says, well, gee, four times that would
    get you four times the money.
        Secretary Geithner. I asked the same questions when we had
    an initial discussion with Commissioner Shulman about what
    makes sense in this area. I think what he will tell you, I
    think he told you when he was up here before, and I will be
    happy to provide in more detail in writing and answer that
    question, but what he said is that those are pretty
    conservative estimates based on experience over in the past of
    putting more enforcement resources in targeted areas to
    generate better compliance. I think they are pretty
    conservative. I have seen much higher estimates than that.
        On the question which I asked, the same question, why not
    more? If the return is that high, then why not more? Part of it
    is just their judgment about this pace at which they can really
    bring on capable people to do this. There are some constraints
    on how quickly you can scale up those operations. We are trying
    to be relatively careful, given that we don't live in a world
    of unlimited resources, to do it in ways where we are confident
    you are going to see a high return. That is the best answer I
    can give, but I would be happy to follow up.
        Mr. Crenshaw. I appreciate that. You have stolen the ideas
    of all the Members of Congress, so we can't go talking about
    spending an extra $250 million to get another $4 billion. You
    kind of maxed out on that.
        Secretary Geithner. The virtue of what your colleague just
    pointed out, which is CBO is the arbiter of the extent to which
    you can actually justify investments on some return like that.
    We don't get to decide; you guys get to decide based on those
    estimates.
        Mr. Crenshaw. Thank you.
        Thank you, Mr. Chairman.
        Mr. Serrano. Ms. Wasserman Schultz.
        Ms. Wasserman Schultz. Thank you, Mr. Chairman.
        Mr. Secretary, the work that you have been doing with the
    TARP funds and the Recovery Act funds is obviously starting to
    take hold. And we have that little pinhole of a light at the
    end of tunnel that we are going to hopefully, as the recovery
    funds continue to get out there in the next couple of quarters,
    we will blow a wider hole into the tunnel.
        That having been said, I come from the State of Florida
    where the foreclosure crisis definitely puts a brake on the
    progress that we have been able to make, even with those TARP
    and stimulus funds out there. The data that I have seen
    nationwide is about 25 percent of all homeowners are upside
    down. In my State it is 46 percent, and in south Florida in
    particular it is 46 percent of all homeowners being under
    water. So the HAMP program, the Home Affordable Modification
    Program, is struggling because you have so many upside-down
    homeowners.
        So can you talk about the hardest hit fund and how thatis
    going to start to address the problem in a more effective manner? But
    specifically I mean, just to give you an example of the foreclosure
    crisis in south Florida, we have more than 97,000 foreclosures filed
    just in my 3-county area in the last year. I mean, we have got to get
    that turned around. And one of the most frustrating experiences that
    people will have is both with the HAMP program--and I hope that the
    hardest hit fund is going to fix this--is the banks just refuse to work
    with homeowners. They won't modify loans. They give them the runaround.
    I have dealt with constituents who spent months and months, willing
    constituents who can afford to make mortgage payments, but who the bank
    will absolutely not work with. So why not walk away? What is the point
    of continuing upside down?
        Secretary Geithner. You are exactly right, and I agree
    with, I think, everything you said.
        It is important to step back for a second and look back at
    what has happened over the past year. It is important to
    emphasize this before I respond directly to your question. When
    I think a year ago today, if you looked at expectations of what
    is happening in house prices in the future, people thought
    house prices might decline another 30 percent across the
    country. Instead we have seen more than 6 months of relative
    stability in house prices across the country on average for the
    first time. And that is very, very important to confidence,
    because houses are such an important source of economic
    security to many Americans.
        The HAMP program, as you know, has provided very, very
    substantial cash flow relief to now 1 million Americans; 1
    million Americans are now getting an average of $500 more a
    month in their pockets because of this program. It is not just
    that they are able to stay in their homes, but have very
    substantial reduction in their size of the mortgage
    obligations. This is a very large, very substantial tax cut. We
    are seeing very substantial increases in convergence to
    permanence, not as much as we would like still.
        But you are right to emphasize that there is just a huge
    amount of pain and damage still across the country, not just in
    Florida. In Florida and the other States targeted by this
    initiative, it is still just devastating damage. Again, it is
    just fundamentally people who did not borrow too much, who are
    very responsible, just the victims of the broader collapse,
    irresponsibility of everyone else. And we have an obligation as
    a government and a country to do everything we can to help
    those people who we can legitimately help stay in their homes.
        Now, this program targets five States where the problems
    are most acute, the combination of house price declines and
    high unemployment are most acute. We are providing substantial
    resources to help reinforce State efforts to experiment in
    assistance for the unemployed, for people who are under water,
    modifying mortgage programs, who want to support innovations at
    a State level, and maybe there are some lessons for that for
    other States nationally.
        We are also looking at, and we are looking carefully at, a
    series of other enhancements to the existing program to try to
    reach more people who are unemployed, and to help deal with the
    substantial number of Americans still who are--because they are
    under water, as you put it, they have negative equity, can't
    refinance, can't sell their homes.
        So we are looking at ways to try to reach more people, but
    it is very terrible out there still in the housing market, and
    it is very important that we keep working at trying to make
    sure we are reaching more people.
        And I want to end which is to say that it is very important
    for the servicers across the country to do a better job at
    helping these people get help.
        Ms. Wasserman Schultz. But they are not.
        Secretary Geithner. And again, the one thing we do that is
    very important is you can see now in the public domain every
    month very, very detailed numbers on how servicers are doing
    reaching these people. You can see how one bank is doing with
    another bank. And so they can look and see if their bank and
    their servicer is doing well or poorly. But I will just say my
    view is none of them are doing enough. They need to put
    substantially more resources in this program, and they need to
    do a better job of making sure they are reaching the people
    that we can legitimately reach with these programs.
        Ms. Wasserman Schultz. But mechanically how can we ensure
    that that happens, because I tell you, I stand in front of town
    hall meeting after town hall meeting where I have constituents
    legitimately stand up and say--we all do--legitimately stand up
    and say, we bailed them out; my bank wouldn't be in business
    anymore if it were not for the United States Government.
        Secretary Geithner. Absolutely. That is why people are so
    angry about it. So we have a variety of things. We have a
    detailed second look to make sure people who are eligible are
    not being denied. We make sure that we have got teams of people
    to go into these servicers and take a look at how they are
    doing. We are trying to put enormous pressure on them to do it.
    And we are going to keep at that, because we have a long way to
    go, and they can do it dramatically better.
        Ms. Wasserman Schultz. Just one more question, Mr.
    Chairman.
        I know you are going to be shocked I am asking a question
    about Cuba, but I feel a sense of obligation. In the last week
    or so, we had the tragic death of Orlando Zapata Tamayo, who
    was on an 85-day hunger strike, and who, along with the other
    dissidents, continued to protest the abuses of the Castro
    regime. I am particularly concerned about the prodemocracy
    efforts on the island and getting the funds that we have
    appropriated for the last 2 fiscal years to them.
        What is being done to expedite the licensing process to
    ensure that direct assistance and aid is being sent quickly to
    those prodemocracy organizations? The money is sort of being
    sat on right now for the last 2 fiscal years, and I realize
    that we need to be careful, and that we need to make sure that
    they are going to legitimate dissident organizations and
    ensuring that there is a vibrant prodemocracy movement, but
    sitting in the Treasury in Washington isn't going to accomplish
    that.
        Secretary Geithner. Congresswoman, I share your concern and
    would be happy to try to respond in more detail as to what we
    can do to be responsive to that concern. I would be happy to
    come talk to you and walk through that with you.
        Ms. Wasserman Schultz. That would be great.
        Secretary Geithner. I know there are strong feelings on
    both sides of the debate.
        Ms. Wasserman Schultz. Especially in this room.
        Secretary Geithner. Especially in this room. And we are
    doing our best to make sure we are enforcing the laws as
    written and we are meeting the objectives of the Congress.
        Ms. Wasserman Schultz. So you can follow up with me in more
    detail?
        Secretary Geithner. Of course. As on the issue raised by
    any of your colleagues I will be happy to listen more carefully
    and make sure that we understand your concerns and see if we
    can meet them.
        Ms. Wasserman Schultz. I want to press you a little bit
    more, though, because there are funds that we have appropriated
    for the last 2 fiscal years that aren't being spent and----
        Secretary Geithner. I am not trying to be unresponsive. I
    have to talk to my colleagues a little more to understand
    exactly what it is.
        Ms. Wasserman Schultz. The article that I just read the
    other day talked about how your Department is making sure that
    there are safeguards put in place and that we have the
    accountability measures, but it is an extraordinarily long time
    to be examining that.
        Secretary Geithner. We have careful people, and their
    obligation is to make sure they are implementing the law and
    following the intent of Congress. I am sure that is what they
    are doing, but I will take a careful look at it.
        Ms. Wasserman Schultz. Thank you very much.
        I yield back, Mr. Chairman.
        Mr. Serrano. Thank you.
        Mr. Secretary, as I noted in my hearing with IRS
    Commissioner Shulman a couple of weeks ago, I am concerned by
    several proposed cuts to programs that provide important
    services for low-income and working families, including the
    Volunteer Income Tax Assistant Grant program and Tax Counseling
    for the Elderly program. Do you believe that these cuts reflect
    the appropriate priorities as we struggle to recover from the
    economic downturn?
        Let me just say, the IRS, similar to the immigration
    department, it seems that some of those agencies, not that they
    have bad reputations, but they have a lot of people complaining
    about this all the time. And so when I saw the IRS begin to
    move in this direction, I said, what a wonderful way not only
    of helping people, but also helping the image of the agency,
    because now you are going to assist those who need help with
    those forms and everything else. So in terms of is it a real
    savings, in that budget, because of the message that it sends
    out that the people who need help the most are going to be cut
    out.
        Secretary Geithner. Mr. Chairman, I understand your
    concerns, and I would be happy to listen to those concerns in
    more detail. The Commissioner and I both believe that these are
    sensible proposals because they help us to increase resources
    we are providing to improve taxpayer servicers more generally.
    And we think that will help the same people that these programs
    help.
        But I would be happy to talk to you about it in more about
    detail. We are making difficult choices trying to make sure how
    we are using scarce resources as effectively against these
    things, and we are proposing very substantial increases in
    programs to improve taxpayer services generally, and we think
    that will help reach some of the same people that these
    programs you refer to are designed to reach.
        Mr. Serrano. Right. But these programs were created with
    the intent of both helping and showing that there was a desire
    to help. One is not necessarily the same as the other, but they
    both can work towards the same goal. So aren't you concerned
    about the message you are sending at the very time that the IRS
    was beginning to gain, I think, more respect from the public?
        Secretary Geithner. The IRS is going to continue to work
    very hard to do the right thing and earn the respect and
    confidence of the American people. One way they can do that is
    to make sure they are working very hard, and we are giving them
    the resources they need to improve service, to make it easier
    for Americans to meet their obligations. That is an objective
    that the Commissioner and I both share. And the Commissioner
    has done a very, very good job in helping improve the record of
    service IRS employees do.
        But again, Mr. Chairman, I respect your concerns and
    understand your concerns. I appreciate your support for those
    programs, highlighting their benefits, and we will work with
    you to make sure we come up with the right balance.
        Mr. Serrano. Okay. Because, you know, if this was a course
    in legislative politics 101, the professor would say, you
    shouldn't come before Serrano cutting these programs; it is not
    going to do well. And I suspect there are other folks on this
    panel who feel the same way, because this is one statement we
    can make on behalf of a community that needs help.
        Let us talk about the tax gap. How big do you think the
    overall tax gap currently is, and how much do international
    activities account for that? Where are the best opportunities
    for closing the tax gap?
        Secretary Geithner. We put out a very detailed report last
    year that went through the latest estimates of the size of the
    gap and the sources of that gap. As you highlight in your
    opening statement, the President in his budget has proposed a
    variety of ways to help make some progress reducing that gap.
    One of those proposals is to reform the tax treatment of
    overseas earnings of American companies. And the basic premise
    that underlies that proposal, just to make one specific
    example, is if you have two companies in your district, one
    invests overseas, one invests in your district, you don't want
    them facing different tax treatment.You don't want the Tax Code
    to create incentives to shift investment of jobs overseas. So we
    propose some changes to the program that would help address that issue.
        There is a range of proposals to the President's budget
    that we think are making headway. We are making a lot of
    progress, not just with Switzerland, but a range of countries
    around the world, to reduce opportunities for evasion, and we
    are committed, and we are going to keep at it. But the report
    that we laid out last year we have to provide the committee
    again is a very good, detailed analysis of the sources,
    principal drivers of the gap and the policies that we think
    would have the highest return in starting to close that gap.
        Mr. Serrano. Well, before I turn it over to Mrs. Emerson,
    let me ask my question--she will ask one, too--and make my one
    comment that you don't have to respond to.
        So much of what we discussed around Cuba is helping people
    inside Cuba oppose the government. For all intents and
    purposes, that is what it is. I often wonder how would we react
    to a foreign government funding groups here to oppose our
    government. Even during a government I didn't like, I would be
    a little upset, but anyway that is another issue.
        Last year the Department followed the lead of this
    subcommittee and allowed travel to Cuba by Cuban Americans
    visiting their families. The Department is also implementing an
    appropriations provision that partially relaxes the terms under
    which payment may be received on exports of agricultural and
    medical goods to Cuba. Mr. Secretary, please update us as to
    how implementation is proceeding with respect to these two
    areas of U.S. transactions with Cuba.
        Secretary Geithner. I can't do that justice in the hearing
    today, but I am happy to do it in writing. My sense is that it
    is going reasonably well, but, of course, open to other
    perspectives, and happy to try to respond to any specific
    concerns you have about how we are implementing. I would be
    happy to respond in detail in writing.
        Mr. Serrano. Then we will hold you to that, and we will ask
    you to write to us and tell us what is going on.
        And with that I turn to Mrs. Emerson.
        Mrs. Emerson. Thank you, Mr. Chairman.
        Mr. Secretary, looking back at the financial crisis, I,
    like all my colleagues and many Americans, are very upset with
    the lack of regulatory oversight that led to the climate in
    which our entire financial system was undermined. Our small
    banks in Missouri survived pretty well, we are tough and have
    got some good people, but life still isn't getting a lot easier
    for them.
        The burden of bank foreclosures falls entirely on the banks
    that survive this crisis, and as surviving banks continue to do
    their best to serve their customers, I do hope the Treasury and
    FDIC will give every consideration to fair descriptions of the
    risks they face and the Deposit Insurance Fund assessments that
    are based on those measurements of risk.
        And I also hope that, looking at the ultimate analysis of
    the financial crisis, something would be done in the future to
    perhaps allow FDIC to get more involved with or perhaps offer
    guidance to American banks who they identify as actually facing
    increasing risks. Perhaps by putting the bank back on the right
    track, we could limit the number of banks that must close their
    doors. Obviously the number of customers who have to turn to
    the Deposit Insurance Fund to be made whole, and a very obvious
    lack of consumer confidence in financial products.
        My real question focuses on one enforcement aspect of this
    matter. Do you all look at the financial statements of failed
    banks to see if they misrepresented their financial conditions,
    if executives took unreasonable compensation or bonuses out
    right before the bank failed? Can you all at Treasury claw back
    excessive compensation from such a bank? Because obviously the
    alternative is the Deposit Insurance Fund ends up making up the
    difference when they try to make depositors whole. And I think
    there is a Senate effort on this, but I am just curious if, in
    fact, you can claw back under those certain circumstances.
        Secretary Geithner. Congresswoman, I think I am correct in
    saying that--I will correct this if I get it slightly wrong--
    which is in the Recovery Act I believe that Congress passed a
    series of provisions to provide greater constraints, encourage
    reforms in executive compensation in institutions that took
    financial resources from the government. As part of that, if I
    am not mistaken, the government was given the authority to claw
    back compensation if there was clear misrepresentation of
    financial data.
        But I will take a more careful look at the way the law is
    written and will be happy to respond in more detail in writing.
    It is a sensible provision, and I will fully support that basic
    objective.
        We are trying to make sure we are bringing about
    fundamental reform and compensation practices across the
    finance industry because we want to make sure in the future
    that we don't see a repeat of the set of compensation practices
    that provided huge returns for taking lots of risks and no
    exposure to the downside.
        Mrs. Emerson. I appreciate that, and I will be grateful to
    get a written response from you.
        Let me ask you about too big to fail. Five banks control 80
    percent of U.S. deposits, and I guess that wins them the
    moniker of too big to fail.
        Secretary Geithner. Well, not--okay, keep going. I am
    sorry.
        Mrs. Emerson. No. Am I incorrect that five banks control
    about 80 percent of U.S. Deposits?
        Secretary Geithner. No, keep going. I will be happy to give
    the details. I think that is a little high, but it may not be.
    I am going to support your concern so----
        Mrs. Emerson. So the financial crisis pretty well proved
    that ``too big to fail'' is a misnomer without the guarantee of
    huge amounts of capital from the U.S. Government. If we keep
    borrowing money at the present rate, we may even test the
    hypothesis of whether the U.S. Treasury is too big to fail.
        Let me ask you, is it good to have institutions like these
    dominating the American market for savings? It makes me think
    about the old Ma Bell, if you will, which was disassembled in
    1984. Could you unwind those big banks that are too big to fail
    without government taxpayer assistance?
        Secretary Geithner. Critical issue, critical test of the
    financial reform plan and whether we fix what is broken,
    whether we address this problem of too big to fail, you can't
    have a financial system where the management of the firm, the
    boards of directors and the equity holders expect the
    government to come in and save them from their mistakes in the
    event that that they manage themselves to the edge of the
    cliff, as we saw happen for so many institutions in this
    crisis. So that is something that we have to fix and end.
        The only way to do it is to make sure first that you have
    the ability and the authority to constrain risk taking by those
    institutions ahead of the fall. That means much more
    conservative capital requirements; constraints on risk taking
    applied more effectively, more evenly across those
    institutions. That is necessary; it is not sufficient. You also
    want to make sure that if they get themselves to the point
    where, again, they can't survive without government assistance,
    you want to make sure the government has the ability, and the
    tools, and the authority to take them over temporarily, break
    them up, wind them down, sell the businesses off, and make sure
    the taxpayer is not exposed to risk of loss.
        This is the third thing that is important as we proposed
    this just to make sure that if the government is exposed to any
    risk of loss in doing that, they will recoup that loss in the
    form of a fee applied to the financial system over time, as we
    have proposed in the President's proposed fee on banks.
        So you need the ability to limit risk taking ahead of the
    crash, you need to prevent the future crisis, but in the event
    that companies are able to still mismanage themselves, in
    addition the ability to step in and put them through a kind of
    quasi bankruptcy regime and do that in a way that doesn't leave
    the taxpayer exposed to any risk of loss. Those are the kind of
    things. We cannot do that today with the existing authority the
    executive branch has. We need financial reform do that.
        Mrs. Emerson. No, I understand that, and I appreciate that.
    I guess what I am saying is--and perhaps you don't want to
    directly answer my question, and I won't be offended if you
    don't, which is if we had to take apart those banks today,
    would we have to use taxpayer funds to do so?
        Secretary Geithner. Well, I don't--I am not trying to----
        Mrs. Emerson. If we had to unwind those big banks.
        Secretary Geithner. I may say it differently, but I am
    being responsive to your question, which is right now--and this
    is a tragic failure of the Government of the United States. We
    still do not have the authority to deal with the potential
    failure of a major firm, a future AIG. We don't have that
    today. And we can't fix that without legislation to give us the
    authority to do that. So if we get that legislation, then we
    can meet your test, and we have the ability to manage its
    failure safely without leaving the taxpayer exposed to risk of
    loss or a bunch of innocent victims across the country exposed
    to the collateral damage caused by their failure.
        Mrs. Emerson. The analogy with Ma Bell just to me rings
    pretty true, because back in 1984 the Congress said, hey, this
    is anticompetitive, and let us just go ahead and break it
    apart. So, to me, five banks having--you know, even if it is
    close to 80 percent to me is a monopoly, and I obviously don't
    think it is healthy for this country.
        And I say that, too, because I don't even know if one of
    these banks failed, I don't know even if the FDIC would be able
    to handle the enormous liabilities of deposit insurance. I
    don't think they could.
        Secretary Geithner. Again, I am agreeing with you, which is
    that a critical imperative of financial reform is to make sure
    we have the tools and authority to do it, just what you said,
    manage failure safely without the taxpayer being exposed or a
    bunch of innocent businesses, families across the country being
    exposed to the collateral damage of their failure.
        Mrs. Emerson. Well, instead of even allowing banks to
    become too big to fail, perhaps we should give someone the
    authority to----
        Secretary Geithner. To limit their risk taking, that is
    right. You read this in January. Right now we have a cap on the
    share of the Nation's deposits any individual bank can hold.
    That is a necessary constraint, it is a good idea, it is a good
    thing for just the reasons you said. But it has this following
    effect which is unfortunate, which is you can become bigger
    over time as long as you fund yourselves with other sources,
    nondeposits, more risky sources of funding. It is a well-
    designed constraint, but it has the effect of still allowing
    size and concentration, but in more risky forms. So we propose
    to complement that cap with an additional cap on total size so
    you don't have a level of excessive concentration,
    consolidation in the industry over time.
        Again, just for some perspective, we have a system of 9,000
    banks in this country, and a great strength of our system is
    that not only do we have a set of large institutions operate
    globally, much stronger position today than they were 2 years,
    3 years, 4 years ago, but we have 9,000 banks across the
    country meeting needs in their communities, and that provides a
    great source of competition, resilience. We very much want to
    preserve that.
        Mrs. Emerson. I appreciate that.
        Mr. Chairman, I have to leave for about 20, 30 minutes, so
    I will be back. Thanks.
        Mr. Serrano. Mr. Fattah.
        Mr. Fattah. Thank you, Mr. Chairman.
        Mr. Secretary, I just want to deal with some issues that
    have been raised. First of all, I heard the Greece
    FinanceMinister yesterday on CNBC. He was asked about this question
    about Goldman Sachs, and what he said was that the activities that
    Goldman Sachs was involved in were perfectly legal at the time, and
    were part of the interactions that were taking place on behalf of a
    number of countries. And I don't want to have on the record allegations
    without any opportunity for a response, because I am actually
    appreciative of Goldman's efforts in another regard which I am moving
    to now, which is on the small business lending side. They have taken
    some $500 million and created a fund to try to aid in providing credit
    to small businesses. And I appreciate along with the point that you
    made earlier about Bank of America's decision on the debit card
    overdraft charges.
        You know, I think we ought to be careful as we go forward
    that we delineate where appropriate criticism should be levied
    and where it shouldn't be.
        But I wanted to get to a couple of points. One is we have
    had a number of dialogues over mortgage foreclosure. The
    program that I created in Pennsylvania, the HEMAP program, the
    Housing Emergency Mortgage Foreclosure Program, which is run
    through our housing and finance agency, which provides actual
    relief in terms of payment of mortgage payments for people who
    are unemployed by no fault of their own, it has helped over a
    couple of decades tens of thousands of families in our State,
    and you know as well, just putting it on the record, at no loss
    to the taxpayers because it then tags onto the back end of the
    mortgage, you know, those payments or as a small percentage of
    ongoing mortgages. So there has been no loss, it has worked
    very well, and we have had a moment in time in which many of
    these mortgage foreclosures were because of lending practices.
        The vast majority of foreclosures that we face now are
    related to unemployment, and there is no ability for someone
    who is unemployed to pay mortgages. And if we want to keep them
    in their home, there has to be some effort. That is why I am so
    happy that the House agreed with me and we passed some $3
    billion in the reform bill that you complimented us on earlier
    in your statement, and you urged the Senate to act.
        I hope you are also urging the Senate to keep the 3 billion
    in place. I was very pleased to see the billion and a half
    provided to what were determined to be the hardest-hit States.
    Now, States are a geographical place, but they are hardest-hit
    ZIP codes, and there a lot of ways we could delineate where
    people need the most help.
        But I am for helping taxpayers who have been law abiding,
    and who have been hard working, and who saved enough money to
    buy a home and were making their mortgage payment. They lost a
    job because of a recession that they have had no fault in. For
    us to take, on the other hand, tens of thousands--I think it is
    close to $90,000 it costs the taxpayers--to foreclose on their
    home when we could intercede to help, and we have a record of
    doing that in Pennsylvania to the tune of an average of about
    $6,000 a family, we would have been able to maintain people in
    their homes, not ruin their credit rating, not destabilize
    neighborhoods.
        So I just wanted to mention again and put it in the record
    and ask you both to comment on that, and to comment on in this
    new lending effort for small businesses, whether or not credit
    unions and CDFIs are quasi public entities in cities like
    Philadelphia may also be involved, because there you will get
    actual lending. You won't have to worry about the question of
    how much they keep for capital and how much they lend out. They
    are in the business of lending. So I would like to have your
    comment on that.
        Secretary Geithner. I have heard great things about the
    program you described, and everybody who has talked about it--
    --
        Mr. Fattah. It is all true.
        Secretary Geithner [continuing]. Says what you say, which
    is that it has a very good record, very good experience. And I
    compliment you for the design of it, and it is a good example
    of how initiative at the State and local level is a good thing
    for us to encourage and incent and reinforce. We have
    supported, will support the efforts you described in the House
    bill to provide a little bit more oxygen resources for those
    programs.
        You were actually right that one of the most effective ways
    you can get small business lending to increase in communities
    where credit was still starved for credit is through the CDFI
    program. And we have, as you know, not just put substantial
    additional budget resources into that program, into the New
    Market Tax Credit program, but we announced recently that we
    would give capital to--we would provide a program for CDFIs to
    get capital from the Treasury at very attractive dividend
    rates, and I think it is going to be a very effective program.
    And we are putting that in place right away. That is under the
    TARP for them to come. And we think that would have a very good
    return in communities where typically what happens is
    investment dries up quickest, credit flees most quickly, it
    comes back latest.
        It is a very good economic case, I think, for trying to
    make sure that we are getting resources targeted to those
    community institutions that can do a good job. You and I were
    in Philadelphia together, I think, just a couple of weeks ago
    highlighting one example of that kind of program. We are very
    committed to that.
        Mr. Fattah. Yes. Last question on commercial real estate,
    which is not new, but the challenge of the greatest, I think,
    concern in the horizon now. And I know of instances in
    Philadelphia, I assume they are not isolated, where you have
    commercial real estate mortgages that have been paid, that are
    vanilla deals that have, you know, no issues versus hardship
    cases. I am not talking about hardship cases--but where you
    have vanilla deals, and these deals are still being yanked. Is
    there any thought yet about how we might go about not having a
    run of foreclosures where we don't have to have them on the
    commercial side?
        Secretary Geithner. It will still be a big challenge, I
    think, the commercial real estate challenge. It is going to
    take a while to work through this problem. We have put in place
    a series of programs that I hear you are familiar with to help
    ease that adjustment process, but it will still be very
    difficult.
        Again, one of the reasons why we proposed this Small
    Business Lending Fund is to make sure we are getting capital to
    small community banks that are still the most hardest hit by
    what is happening in commercial real estate. But we think that
    mix of programs to get capital to banks who need it and to
    support efforts to get the securities markets more liquid again
    is the best thing we can do to ease that transition. I would be
    happy to talk to you in detail.
        Mr. Fattah. I have an idea, and I would be interested in
    dialogue in what we might be able to do in that area.
        Secretary Geithner. Mr. Chairman, I want to end wherethe
    Congressman began, which is that I think it is very important to
    recognize that, of course, banks are different, not all institutions
    were the same, but I would say across the American financial system you
    saw banks and finance companies doing things that caused a dramatic
    loss of trust, of confidence in the American financial system. And I
    think that they all need to work much harder to earn back the trust and
    confidence of their customers, of the American investors, and of people
    around the world in the American financial system. I think they have
    got a long way to go, and I would like to see them all doing more to
    help restore basic trust and confidence in their customers, in the
    American people.
        You highlighted some examples of things people have done,
    but we can see a lot more of it. They have a lot more to do.
    One thing they can do is try to help make sure that we get
    financial reform passed that puts in place a level playing
    field of strong protections, deals with the too big to fail
    problem. That is a good thing for the country and, I think, a
    good thing for the future of the American economy. And I think
    it is a fair thing to ask them to support, and we are hopeful
    they will work with us to get a strong package of reforms in
    place as the House has already passed.
        Mr. Fattah. With my $3 billion emergency mortgage
    foreclosure intact.
        Mr. Serrano. So far you have proposed seven bills. I like
    it.
        Mr. Fattah. This is already passed by the House, the Wall
    Street reform bill.
        Mr. Serrano. The other one is already on the way.
        Mr. Fattah. And the Secretary promised a rigorous
    examination of this idea, pros and cons.
        Secretary Geithner. You said to tear apart, but we will do
    a careful balance.
        Mr. Fattah. I think any idea should be able to withstand
    analysis.
        Mr. Serrano. Thank you.
        Mr. Culberson.
        Mr. Culberson. Thank you, Mr. Chairman.
        Mr. Secretary, the bailout bill which passed in the last
    months of the Bush administration, which I voted against and
    strenuously opposed, did contain language that had a
    requirement that TARP money repaid to the Treasury be used for
    deficit reduction, which I wanted to ask, do you agree that is
    important?
        Secretary Geithner. Oh, absolutely. Again, the important
    thing to recognize is that we have now taken back, replaced
    with private money, more than two-thirds of the investments
    that my predecessor had to make, and he did the right thing.
    They were the necessary things to do, but we have now gotten
    back more than two-thirds of that, I think more than $170
    billion of the American people's money, and that, under the law
    as written, that goes to reduce our deficits and our debt.
        Mr. Culberson. And should not be reallocated?
        Secretary Geithner. Again, Congress, under the laws of the
    land, can decide what it does with the resource here, but we
    saved substantial resources for the American people and would
    like to work with you and make sure we are devoting those to
    the right priorities for the country. And, of course, we face
    these two priorities now, which is getting this economy back on
    track and digging out of that fiscal hole we inherited.
        Mr. Culberson. Oh, wait, wait, wait, no. You inherited
    somewhat--you inherited a fiscal hole.
        Secretary Geithner. That is right.
        Mr. Culberson. But I want to go back to that, but you dug
    the whole three times deeper.
        Secretary Geithner. No, no, no. That is absolutely not
    true, Congressman. You know the facts in this is that when we
    came into office----
        Mr. Culberson. You dug the hole much deeper.
        Secretary Geithner. No, no, no. All we did was try to
    rescue an economy that was in collapse, a financial system at
    the edge of failure. We did that in the most careful, effective
    way we could, and those actions, as you have seen, have had a
    very substantial effect in restoring growth.
        Mr. Culberson. Set aside whatever your intent was in
    spending the money, it is a fact that the annual budget of the
    United States in 2007 with about 1 trillion, in 2008 was 1.1
    trillion, in 2009 was 1.2 trillion. And yet in a little over 12
    months, 13 months that the Obama administration has been in
    office, your administration and the Pelosi-Reid-led Congress
    has managed to spend--in the course of a single year, you
    signed $3.3 trillion worth of new spending into law. You spent
    more money.
        Secretary Geithner. I would be happy to go through it.
        Mr. Culberson. More than any Congress in the history of the
    United States, and it just defies common sense for this
    administration to pretend that you are paying any attention at
    all to deficit reduction.
        Secretary Geithner. No, no. Again----
        Mr. Culberson. In any way it just doesn't square with
    reality.
        Secretary Geithner. Congressman, faced with the worst
    economy in generations, the President and Congress acted. If we
    had not acted, the economy would have fallen off the cliff.
    Growth would still be declining. Our deficits would be larger.
    If you care about fiscal responsibility, there is no way you
    could have argued that the response for the government should
    have been to stand back, let this economy collapse, let it
    collapse. That would have been far more costly not just to the
    fiscal position of the United States, but to the fortunes of
    average Americans and businesses across the country. There is
    no fiscally responsible strategy in a crisis that would have
    justified standing back and not acting in that context.
        Mr. Culberson. Let us set aside the bailout, because that
    happened under the Bush watch, and that is the principal
    mechanism I am sure you are referring to.
        Secretary Geithner. No, no. I'm referring----
        Mr. Culberson. The stimulus bill, $787 billion; the
    omnibus, $439 billion; the supplemental, $105 billion;
    consolidated appropriations bill, $446 billion. The level of
    spending is unprecedented. The level of debt that you have
    asked our kids to pay off is unprecedented.
        Secretary Geithner. No.
        Mr. Culberson. The level of deficits is unprecedented.
        Secretary Geithner. Again, Congressman----
        Mr. Culberson. And it is really important that we want you
    to live up to what your words are----
        Secretary Geithner. The great thing about this country,
    Congressman----
        Mr. Culberson [continuing]. And we have not seen it.
        Secretary Geithner. The great thing about this countryis we
    get to debate what makes sense for the American people. And you can
    look at the actions that we proposed, Congress enacted, and said you
    would have preferred we do nothing, or preferred that more of it come
    in the form of tax cuts or other things. But we put in place a set of
    well-designed, targeted measures that were absolutely essential to
    break the back of the worst economic crisis in generations, and we are
    at the beginning of the process of healing the damage it has done.
        But I completely agree with you that we have to recognize,
    make sure the American people understand is we are going to
    have to dig our way out of this hole.
        Mr. Culberson. By spending more money.
        Secretary Geithner. No.
        Mr. Culberson. But that is what your approach has been.
        Secretary Geithner. Again, in this budget, the President's
    budget proposes specific measures on the tax side and the
    expenditure side to bring our deficits down dramatically as a
    share of our economy over the next 4 years.
        Mr. Culberson. You agree all the Bush tax cuts should be
    allowed to expire and therefore----
        Secretary Geithner. No, that is not true. We propose to
    allow----
        Mr. Culberson. Your budget proposes.
        Secretary Geithner. As Congress legislated, we propose to
    allow that tax cuts on the most fortunate 2 to 3 percent of
    Americans to expire as scheduled in 2011. Now, we have also
    proposed a freeze on nondefense discretionary expenditures for
    3 years. We have also proposed some other measures to cut
    spending over that period of time. And again, some of those
    proposals will cut our deficits to below 4 percent GDP in 4
    years.
        Now, you may propose different ways to do it, you may
    propose more aggressive ways to do it at a period of time, but
    the basic imperative we all share is to recognize, as I think
    you do, that deficits matter.
        Mr. Culberson. Yeah. I appreciate your vigorous defense of
    the administration's proposals, but this is why the country is
    so upset, because what you say doesn't square with your
    actions.
        Secretary Geithner. No. You can measure it by exactly what
    we are proposing.
        Mr. Culberson. You have spent more money and less time than
    any Congress in any administration in history, you have driven
    the deficits to unprecedented levels, and you are trying to
    sell a bill of goods to the country claiming that you are going
    to create the mother of all entitlements, insure 30 million
    more Americans, and we are going to save you money. No one
    believes that.
        Secretary Geithner. Again, I don't expect you to agree.
    Again, the great thing about our country is we get to have a
    national debate on what makes sense for the country.
        Mr. Culberson. That is true, and that is why the November
    election is going to be a tidal wave.
        Mr. Serrano. Thank you. And everything that went wrong
    started on January 20th of last year.
        Mr. Culberson. Oh, no. I voted against----
        Mr. Serrano. You are going to get a chance on the House
    floor to pull us out of Afghanistan, which is going to cost a
    couple of trillion dollars. Let us see how fiscal conservatives
    vote on that.
        But I must take issue with something, you threw into the
    package the omnibus bill.
        Mr. Culberson. Yes.
        Mr. Serrano. Well, if I recall, that was the regular
    appropriations bills that we have to constitutionally pass
    every year.
        Mr. Culberson. That is right.
        Mr. Serrano. I guess you were saying that we should have
    shut down government.
        Mr. Culberson. I had a problem, Mr. Chairman, with the 85
    percent increase in nondefense discretionary spending over the
    course of the last 2 years. That is what worried me.
        Secretary Geithner. Mr. Chairman, could I just say one
    thing? This is fun for both of us.
        Mr. Culberson. It is. And we are enjoying this. And my
    Chairman and I, we get along very well. That is what makes it a
    great country, friendly debate.
        Mr. Culberson. I agree.
        Mr. Serrano. But actually in all honesty, with all due
    respect to both of you, this is quite an accomplishment. He did
    not blame anything on immigrants today.
        Secretary Geithner. Congressman, I want to point out one
    thing about this, because I think it is important for you to
    recognize. In the President's budget we proposed to leave
    nondefense discretionary expenditures--this is sort of the
    measure of the discretionary government--4 years out at the
    same level in real terms that we inherited at the last year of
    the Bush administration. So we are proposing enough restraint
    to make sure these temporary things we did to save the economy
    from collapse go away, and that we bring ourselves down to a
    size of government, taking out defense and security, that is
    where it was in real terms when we came into office.
        Mr. Culberson. Four years from now.
        Secretary Geithner. Yeah. But we are going to get there. If
    you would like to get there overnight, I would be happy to work
    with you on that. But we are going to try to get there in a--by
    restraining expenditures in a way that is careful and balanced
    and allows us to come out and heal the damage caused by this
    crisis.
        But anyway, I respect you, I am glad you are here. You are
    making the rigorous case for fiscal responsibility. We need to
    have more people do it. It is a good thing for the country.
        Mr. Culberson. Mr. Chairman, you will enjoy this. May I ask
    one quick follow-up, with your permission?
        Mr. Serrano. Yes, in your 11th minute.
        Mr. Culberson. Do you still have the Zimbabwe bank note in
    your wallet you showed me?
        Secretary Geithner. No, I don't carry my wallet anymore,
    but I am glad you raised that again, because I remember that
    exchange from last year. But I remember, as you recall, you
    showed me the pink version, but I had a better one.
        Mr. Culberson. I had a $50 billion bank note, Mr. Chairman,
    from Zimbabwe, and I was very impressed the Secretary a
    trillion, I think, dollar.
        Secretary Geithner. Ten trillion.
        Mr. Culberson. Ten trillion dollar bank note from Zimbabwe.
    And we are ready to help you get those deficits under control
    and balanced.
        Secretary Geithner. We welcome that. And again, it is good
    for people like you to try to make the case for the country
    that deficits matter, and I am glad to hear you say it.
        Mr. Culberson. Thank you.
        Thank you, Mr. Chairman.
        Mr. Serrano. What I know about capitalism, what I learned
    about capitalism is that every so often you have to invest to
    make things happen. And banks and other folks were not
    investing, and so government invested some. I think at the end
    of the day we will get a good return.
        Mr. Secretary, on March 4th of last year, you stated that
    the administration had laid out a clear path forward to helping
    up to 9 million families restructure or refinance their
    mortgages to a payment that is affordable now and into the
    future. Unfortunately the latest Treasury report on this
    program showed that only 116,000 homeowners have received
    permanent mortgage relief. The result has been that millions of
    homeowners have been forced out of their homes through
    foreclosures on short sales.
        Can you take a moment to please explain what happened
    between your optimistic forecast and the reality of what has
    instead occurred?
        Secretary Geithner. The program we announced initially to
    help modify mortgages for a set of Americans facing the risk of
    losing their house, we thought over time it would reach perhaps
    up to 3\1/2\ million Americans. Now, that program in its
    initial 8-month life has now provided very substantial cash
    flow relief to a million families across the country, as I
    said, on average $500 less, almost $600 in lower monthly
    payments to reduce their mortgage obligations.
        Now, we are seeing a substantial number of those, less than
    we would like, converted to permanent modifications. But the
    number that matters now is a million. The million is growing.
    We are going to reach as many as we can.
        Mr. Serrano. So what was the 116,000?
        Secretary Geithner. That is the number of permanent today.
    But remember, when you get a temporary modification, your
    mortgage obligations get reduced substantially right from that
    point. Now, of course, we want to see people eligible for
    permanent modifications get permanent modifications. And it is
    now a million families across the country, they are seeing an
    immediate, substantial, sustained reduction in their mortgage
    obligations so that they have a chance of staying in their
    homes. And, of course, we are going to make sure we are
    reaching as many people as we can. That number is still
    growing, and we are going to make sure that as many of those
    temporary modifications are converted into permanent as
    possible. We are committed to doing that. We are seeing those
    numbers start to increase dramatically. They are not getting
    there fast enough, but we are going to keep working on that.
        Mr. Serrano. Okay. Then can I make a suggestion and ask you
    to issue yet another report that tells us what you just told us
    so people don't rely on the other one that they know.
        Secretary Geithner. Absolutely.
        Mr. Serrano. Because I am asking my question based on that
    information.
        Secretary Geithner. Absolutely. Well, we did not claim, Mr.
    Chairman, that we would reach 9 million Americans through that
    program. We thought as it was originally designed, it would
    reach up to 3\1/2\. We may not reach that target, but that was
    going to be over a 3-year period of time. And so the architects
    of this program say we are on track to hit those original
    objectives, but we are going to do as much as we can to make
    sure we again reach as many people as we can.
        Mr. Serrano. Okay. In the 2011 budget proposal for the CDFI
    fund, you propose zeroing out two existing programs, the Bank
    Enterprise Award Program, which provides assistance to banks
    that have demonstrated increased lending activity in low-income
    neighborhoods, and the Capital Magnet Fund, which provides
    competitive grants for constructing, preserving and
    rehabilitating or acquiring affordable housing in low-income
    neighborhoods, as well as other economic development projects
    in communities where the housing in question is located. Would
    you please explain why the administration made the decision not
    to request funding for these two programs?
        Secretary Geithner. As you know, as appropriators know,
    governing requires making choices among competing priorities
    with scarce resources. So what we did, which I think you need
    to expect us to do, is to take a careful look at all these
    programs and make sure we are allocating resources where they
    have the highest return. And we, after careful reflection, with
    the knowledge that many people like these two programs we
    proposed to cut funding on, we decided we thought those
    resources would be better used in supporting the signature CDFI
    program which has so much support across the country. It has
    such a good record of success. So the simplest way to say it is
    we took a careful look, and we thought those resources would be
    better used in support of the signature CDFI program.
        I think that I am confident that is the right judgment. But
    again, we are making choices and trying to demonstrate to you
    that we are going to use the resources you allocate to us
    carefully, and we are prepared to take a careful look at
    programs that, even if they help, may not provide high enough
    return for the resources we are providing.
        Mr. Serrano. Okay. But just for the record, it doesn't sit
    well with me and, I am sure, with other Members of the Congress
    that on the first page of my questions to you, I ask why are
    there cuts in the program serving low-income taxpayers, and on
    this one I am asking you similar questions. So it would seem
    either that I am asking all the questions that are leaning on
    one side, or we are taking hits again, directing hits, at the
    low-income homeowners of this country.
        Secretary Geithner. But on balance, we have proposed a
    significant expansion in these two signature programs, which
    are the CFI program and New Market Tax Credit program. For
    reasons that we both agree, these programs have a great record
    of reaching some of the hardest-hit communities in our country,
    with a very good record of success leveraging private money to
    help make sure that our taxpayer dollars are used effectively.
    They go to institutions who have a good record of lending in
    their communities.
        So my own view is that we are increasing our investments,
    and we are reforming how we use them in ways that make them
    more effective.
        Mr. Serrano. I have one last question, and then I will
    submit the others. I know Mrs. Emerson wanted to come back, Mr.
    Culberson, but it is getting to that crunch time here.
        In the last year banks have reduced their credit
    outstanding to commercial and industrial businesses by almost
    20 percent, or $300 billion. When businesses lose access to
    credit, they cut back jobs and prolong our efforts at economic
    recovery.
        Recently the Financial Press has reported that the
    financial services sector has paid out more than $100 billion
    in bonuses in the last couple of months.
        What do you think will be required to resume business
    lending in this country? Do you agree that the obscene amount
    of money handed out for bonuses could have been retained and
    used to increase credit in our struggling economy by hundreds
    of billions of dollars?
        Secretary Geithner. Mr. Chairman, what you have seen happen
    in terms of credit is a mix of two different things. One is you
    saw demand for credit fall very, very sharply as the economy
    growth slowed, the economy contracted; and then you have seen a
    substantial reduction in credit bank supply banks who are short
    capital. Both those two things were happening, but it is
    starting to ease.
        The best measure of whether credit is getting easier or
    tighter is the price of a loan, and the cost of credit has come
    down very, very dramatically across the country for a business,
    for a family, for a municipal government, and that is a measure
    of progress we have achieved in trying to heal the damage
    caused by the financial system.
        Now, I completely agree that what you have seen happen in
    compensation practices across the financial industry is
    unacceptable. It is outrageous. And we are working very hard
    using the authority Congress provided us trying to make sure we
    are bringing about durable reforms in how financial executives
    are compensated so they don't have the incentives again to take
    a bunch of risks and leave the American people holding the bag.
    And it is very important. We have seen some progress, but not
    enough, and we are going to keep working, making sure that we
    encourage reforms that will make sure we don't get in this kind
    of mess again.
        Mr. Serrano. I know you do realize that part of the lack of
    public confidence in what we are doing is when they continue to
    see this happen.
        Secretary Geithner. Of course. Absolutely.
        Mr. Serrano. And then one last point here, and I won't
    ask--I won't make all the comments that go before the question,
    but with the whole issue of TARP and the public feeling that
    the money is not going to the right place, with 20/20
    hindsight, what more do you think could have been done from the
    onset of TARP to ensure greater transparency and accountability
    in the way that TARP dollars were being used?
        Secretary Geithner. Mr. Chairman, it is a little hard for
    me to say that even with the benefit of hindsight now, but let
    me tell you what we did and what we are committed to.
        We made sure that we put the precise financial terms of all
    the investments we made in the public domain on our Web site
    for everybody to see right from the beginning. We have adopted
    a whole range of proposals by the various overseers Congress
    put in place over this program to try to improve transparency
    of this basic program.
        We have put in place a dramatic improvement in the basic
    access to information the American public have about these
    programs, where their resources went, what they were for, the
    terms in which they were provided, and we will continue to work
    on ways to do that.
        But the important thing to take, just to reflect on as you
    look at how this program was run, is that we have now again got
    back more than $170 billion from the financial system. We have
    reduced expected losses by more than $400 billion from where
    they were just a year ago. We have saved substantial resources
    for the American people to devote to our long-term fiscal
    challenges, not just our near-term priorities. We have done
    this at much lower cost than people expected, and we have seen
    a very dramatic improvement in credit conditions across the
    country.
        So I think the American people can look at that record, and
    they can see the detailed numbers on the return, on the risk of
    losses still where that is concentrated, and they can see the
    benefits where they are.
        Now, but we all recognize that there are a lot of
    challenges ahead of us still, in small business credit, in
    housing markets, in commercial real estate. And this is not
    over yet, and we are not going to make the mistake many
    countries have made across history over time, which is to pull
    back too quickly, to stop before we have actually healed the
    damage caused by--and this crisis caused a huge amount of
    damage. We have made a lot of progress. We have a lot of
    challenges left, though.
        Mr. Culberson. I would like to ask about Freddie and
    Fannie.
        Mr. Serrano. One more, and then we will wrap it up. He has
    to leave. I have to speak against the war, save some money.
        Mr. Culberson. That is always good to save money.
        Thank you, Mr. Secretary. I wanted to ask about Fannie and
    Freddie in particular. I know that the Congress had put limits
    on the liability of the taxpayers, and that Treasury had the
    authority to do so and lifted, I think, those caps on the
    amount of the exposure. But we have not yet seen a reform
    proposal out of the administration, and the scale of the
    losses, of course, at Freddie and Fannie are both immense. This
    is a very scary situation, and as a fiscal conservative, I
    certainly don't like to see the taxpayers put on the hook for
    this, particularly in an unlimited way.
        Would you, if you could, tell us what the administration's
    time frame is? Why are we still waiting to see reform of
    Freddie and Fannie, and what will it entail to help provide
    protection for your kids and my kids?
        Secretary Geithner. What we have suggested, Congressman, is
    that we are going to put out on the public domain--I am going
    to testify in a few weeks on this--some broad objectives and
    principles to guide reform. We are going to put out a set of
    broad questions on the strategy for public comment.
        This is a very complicated issue, as you know. It doesn't
    just involve Fannie and Freddie. We want to take a careful look
    at the entire set of government agencies that act in the
    housing market now and the set of policies that helped
    contribute to this terrible crisis. And our expectation now is
    that as we go through that process of public hearing and
    comment, we will put together some proposals for reform that we
    present to the Congress next year.
        Now, you have asked a legitimate question, which is why not
    now? And I will just be honest with you. We are doing a lot of
    things. We just have got a lot going on, and we thought to do
    it well, do it carefully, do it right, we wanted to go through
    a process of more careful reflection. If we rushed it, the risk
    is we would not achieve enough and not get consensus, something
    sweeping enough.
        But my personal commitment is we are going to need
    fundamental reform of the government's role in the housing
    market, not just in Fannie and Freddie in their future, but
    looking across a whole range of other policies and instruments.
    And what we allowed happen was, again, a national tragedy, it
    was avoidable, and we should never have let those institutions
    get themselves in a position where they took on that much risk
    without capital to back them, without credible oversight. With
    that degree of moral hazard, it is a terrible thing, and it is
    going to require comprehensive reform to change it.
        Mr. Culberson. The sooner the better. The unlimited
    liabilities are a real concern.
        And also, Mr. Chairman, it is important to ask about--we
    haven't touched on this yet--the commercial market. We are
    about to see a tremendous number of resets of commercial
    mortgages, and a lot of those properties have been dramatically
    devalued. The valuations have plummeted for a lot of those
    properties, you get a lot of vacancies, businesses that have
    left, and the banks are being--are so spooky, of course, about
    real estate loans. And we have got potentially another tidal
    wave coming.
        What is the administration doing? And forgive me for
    throwing this in at the end, Mr. Chairman, it is an important
    question. What is the administration doing to attempt to
    mitigate the size of the commercial reset tsunami which we see
    coming, which is conceivably as big, if not bigger than the
    residential mortgage problem?
        Secretary Geithner. You are right to say it is still a
    challenge. A big part is still ahead of us. It is going be to a
    challenge for the country to work through.
        Again, as I said to your colleague earlier, the two things
    we think are most effective are to make sure we are getting
    capital to the banks, to the small community banks, which still
    face substantial exposure to commercial real estate losses.
    That will help at the margin, but we want to make sure that we
    are helping to provide more liquidity to the securitization
    markets that are helpful in this context. The programs we have
    put in place in that area have been quite helpful so far, they
    have made some impact so far, but there is a lot of challenge
    still ahead. I would be happy to hear suggestions from you on
    what would be helpful.
        Mr. Culberson. One I would like, a suggestion that I will
    pass, the Chairman has been very gracious in indulging me and
    giving me extra time, is that the regulators--I am hearing this
    consistently from the smaller banks--the regulators are being
    unnecessarily aggressive in attempting to force banks to get
    real estate off their portfolios, and it is not a good idea.
    The regulators, I think, are a part of the problem. Obviously,
    you want to make sure that the loans are prudent, that they are
    going to be repaid. In Houston, for example, I know of a
    tremendous number of these are blue-chip borrowers with very
    long, stable credit histories that have never missed a payment,
    and banks are turning down loans just because the banks are
    being hammeredby the regulators to get real estate off of
    their--do you know what I am talking about?
        Secretary Geithner. I have heard this concern, too.
        Mr. Culberson. What can you do about that, that right
    there, just giving a little breathing room to the banks on the
    regulation side? If it is a safe investment in real estate, the
    guy has always paid his bills, you have seen some reduction in
    the valuation, but come on, you know, keep loaning money. What
    can you do there?
        Secretary Geithner. It is a serious concern. I hear it
    across the country, as do you. But this is a matter for the
    FDIC, for the OCC, the OTS, and the Fed, and what we are doing
    is encouraging them to continue to provide a little bit more
    care and balance in the guidance they give examiners across the
    country so they are not overdoing it, overdoing the tightening,
    not contributing to it. They put out some guidance in November
    that would help clarify how examiners should treat loans backed
    by commercial real estate to avoid some of the risk you said,
    but I will certainly carry that message to them.
        Mr. Culberson. Thank you, Mr. Chairman.
        Mr. Serrano. Mrs. Emerson and I and other Members will be
    submitting questions for the record.
        We thank you, Mr. Secretary, for your time. We thank you
    for your direct answers. We want to work closely with you to
    make sure that the recovery is strong, and that the things you
    inherited January of last year are dealt with properly. But we
    thank you for your time. Thank you.
        Secretary Geithner. Thank you very much.
        Mr. Serrano. Meeting is adjourned.

        [GRAPHIC] [TIFF OMITTED] T2166A.047

        [GRAPHIC] [TIFF OMITTED] T2166A.048

        [GRAPHIC] [TIFF OMITTED] T2166A.049

        [GRAPHIC] [TIFF OMITTED] T2166A.050

        [GRAPHIC] [TIFF OMITTED] T2166A.051

        [GRAPHIC] [TIFF OMITTED] T2166A.052

        [GRAPHIC] [TIFF OMITTED] T2166A.053

        [GRAPHIC] [TIFF OMITTED] T2166A.054

        [GRAPHIC] [TIFF OMITTED] T2166A.055

        [GRAPHIC] [TIFF OMITTED] T2166A.056

        [GRAPHIC] [TIFF OMITTED] T2166A.057

        [GRAPHIC] [TIFF OMITTED] T2166A.058

        [GRAPHIC] [TIFF OMITTED] T2166A.059

        [GRAPHIC] [TIFF OMITTED] T2166A.060

        [GRAPHIC] [TIFF OMITTED] T2166A.061

        [GRAPHIC] [TIFF OMITTED] T2166A.062

        [GRAPHIC] [TIFF OMITTED] T2166A.063

        [GRAPHIC] [TIFF OMITTED] T2166A.064

        [GRAPHIC] [TIFF OMITTED] T2166A.065

        [GRAPHIC] [TIFF OMITTED] T2166A.066

        [GRAPHIC] [TIFF OMITTED] T2166A.067

        [GRAPHIC] [TIFF OMITTED] T2166A.068

        [GRAPHIC] [TIFF OMITTED] T2166A.069

        [GRAPHIC] [TIFF OMITTED] T2166A.070

        [GRAPHIC] [TIFF OMITTED] T2166A.071

        [GRAPHIC] [TIFF OMITTED] T2166A.072

        [GRAPHIC] [TIFF OMITTED] T2166A.073

                                            Thursday, April 22, 2010.

                           FINANCIAL CRISIS AND TARP

                                   WITNESSES

    HERBERT M. ALLISON, JR., ASSISTANT SECRETARY OF THE TREASURY FOR
        FINANCIAL STABILITY
    NEIL BAROFSKY, SPECIAL INSPECTOR GENERAL FOR THE TROUBLED ASSET RELIEF
        PROGRAM
        Mr. Serrano. The subcommittee will come to order. Good
    morning.
        Today this subcommittee will examine the Treasury's
    responses to the financial crisis and the implementation of
    TARP. We are pleased to have two key witnesses on this topic.
    Leading off will be Herbert Allison, Assistant Secretary of
    Treasury for financial stability, who oversees the TARP
    program. He will be followed by Neil Barofsky, the special
    inspector general for TARP.
        The financial crisis caused the deepest economic decline
    since the Great Depression in the early 1930s. Although the
    economy has stabilized since the freefall of late 2008 and
    early 2009, credit continues to shrink and unemployment remains
    near 10 percent. We have a long way to go before most Americans
    will feel that the economy is back on its feet again. We need
    to understand the role TARP has played or could play in
    responding to our economic problems.
        TARP funds have been used for a variety of purposes.
    Roughly 700 banks have received capital infusions, totaling
    more than $200 billion. With several major modifications along
    the way, TARP funds have been used to provide mortgage
    modifications to homeowners. Support for the auto industry has
    totaled more than $80 billion. Funds were set aside to back up
    efforts to revive flows for credit, for small businesses,
    students, and consumer credit cards. TARP funds have also
    provided a backstop for Federal Reserve actions with AIG.
        There is also a budget angle to today's hearing. The TARP
    legislation allows Treasury to spend on administration whatever
    it decides without further congressional check. To decide how
    much to appropriate for Treasury, however, this subcommittee
    needs to understand how much Treasury is spending because of
    TARP and where it draws the line between appropriator funds and
    TARP-related money.
        In addition, the TARP legislation created the SIGTARP and
    provided it with $50 million that authorizers tell us they
    expected to last the life of the TARP. They were granted
    another $50 million last spring. Last October, SIGTARP came to
    our subcommittee with an urgent request for $23 million to
    avoid having to shut down this spring. In other words, SIGTARP
    had made hiring and other commitments that far exceeded the
    funds that the authorizers thought sufficient to last through
    the life of TARP. We provided those funds for fiscal year 2010,
    and SIGTARP has requested another $49 million for fiscal year
    2011, far more than the $30 million annual budget for the
    Treasury Department's IG.
        We look forward to hearing from our witnesses how effective
    each of the various TARP initiatives have been in restoring a
    healthy flow of credit, a growing economy, and relief for
    worthy borrowers. And we welcome you to our hearing today.
        With those opening remarks, I would like to recognize Ms.
    Emerson for any comments she may want to make.
        Mrs. Emerson. Thank you, Mr. Chairman.
        Secretary Allison, thank you so much for being here today.
    We are grateful to you.
        The Emergency Economic Stabilization Act was passed by
    Congress to buy troubled assets. I am very disappointed that
    both the current and the former administrations have instead
    used this authority to bail out banks and to become majority or
    nearly majority owners of AIG, Citigroup, and auto
    manufacturers.
        Acquiring stock shares and lending hundreds of billions of
    borrowed dollars across the financial sector with little
    accountability or transparency in return is not what we in
    Congress intended. It is impossible to justify to taxpayers why
    banks received billions of dollars without being required to
    increase lending, account for the funds they received, or take
    meaningful steps to limit executive compensation.
        Most of the experts I talk to in Missouri see little sign
    of how TARP improved the financial environment they work in
    every day. And I am concerned that many of the troubled assets
    TARP was meant to purchase still exist. They may still be out
    there, hindering our economic recovery. No way do the
    expenditures of TARP to rescue troubled assets even begin to
    approach the estimates still being made today of how many
    troubled assets continue to exist in our country's financial
    sector.
        Despite the taxpayers' investment in banks in 2008 and
    2009, the FDIC reported that bank lending declined in 2009. The
    Missouri small-business folks I talk to all tell me that credit
    is still very, very hard to get, even for businesses with
    perfect--and I mean perfect--credit histories. In addition,
    meaningful steps to reform executive compensation have not been
    taken, home foreclosures and unemployment are still
    unacceptably high, and some experts project a crisis in the
    commercial real estate market.
        I understand that $186 billion of TARP funds have been
    returned, and I am very pleased that Secretary Geithner
    previously testified before our full committee saying that the
    funds repaid to TARP should be used for deficit reduction and
    not new government spending.
        Regarding the costs of the Office of Financial Stability--
    regarding the costs that you all's office incurs to administer
    the TARP programs, I am concerned that you estimate spending at
    $298 million in mandatory funding for fiscal year 2011. And I
    hope that you will explain this to us because I need to
    understand why this level the administrative spending is
    necessary, given that most of the TARP funds banks received
    have been returned and all of theTARP programs should be
    winding down during fiscal 2011.
        Despite my concerns, I know that you and all of the staff
    at the Office of Financial Stability are working hard to
    improve our Nation's economy, and I am grateful and
    appreciative of your efforts.
        Thanks, Mr. Chairman.
        Mr. Serrano. Thank you.
        Mr. Allison, you know the drill. Five-minute presentation,
    your full statement will go in the record, and then we can ask
    you some questions. Please proceed.
        Mr. Allison. Thank you very much, Chairman Serrano and
    members of the subcommittee. Thank you for the opportunity to
    testify today regarding the Troubled Asset Relief Program, or
    TARP.
        Many Americans believe that the Federal Government bailed
    out Wall Street and forgot about Main Street. But what many
    Americans at first viewed as a distant financial crisis on Wall
    Street posed the risk of devastating consequences for Main
    Street.
        In the fall of 2008, we faced the possibility of a second
    Great Depression. Credit markets froze, and people lost
    confidence in the banking system. Without credit and
    confidence, our financial system was facing collapse. Had that
    happened, people would have not been able to use their credit
    cards to buy gas or groceries, families would not have been
    able to get a loan to buy a car or send their kids to college,
    businesses large and small would not have had the credit to buy
    inventory or pay their workers. People were seeing the values
    of their homes plummet and their retirement savings shrink.
    Without bold action, job losses that were already growing could
    have skyrocketed and our economy could have collapsed. So our
    government took unpopular but necessary steps, like creating
    the TARP program, to avert complete failure of the financial
    system.
        Before we could start economic recovery, we first had to
    achieve financial stability. The American Recovery and
    Reinvestment Act and the Financial Stability Plan launched by
    the Obama administration provided economic stimulus and
    restored liquidity that have enabled businesses to resume
    hiring, provided much-needed financing to States, and improved
    consumer confidence.
        With the new administration, the focus of TARP changed from
    primarily investing in larger financial institutions to helping
    homeowners avoid foreclosures and improving small-business
    lending.
        For the past year, TARP has been assisting distressed
    homeowners through the Home Affordable Modification Program, or
    HAMP, and other innovative methods. HAMP is now providing
    substantial relief to more than 1 million homeowners. Their
    mortgage payments have been reduced by about a third, or about
    $500 per month on average, for an estimated total savings of
    more than $3 billion to date.
        We have recently enhanced HAMP to help more homeowners
    whose mortgages are under water and those who are temporarily
    unemployed to assure homeowners that they won't face
    foreclosure while being considered for a mortgage modification.
        We have also launched an innovative program to provide
    additional relief to the 10 States hardest hit by the mortgage
    crisis and high unemployment.
        The administration is also focusing its financial recovery
    efforts on small business. We are now seeking legislation to
    create a new $30 billion small-business lending fund outside of
    TARP that would provide small and mid-sized banks with capital
    on terms with strong incentives to increase small-business
    lending.
        Additionally, Treasury will provide TARP funds to community
    development financial institutions, or CDFIs, to lend to small
    business. CDFIs play a vital role in providing financial
    services to some of the hardest-hit and poorest communities.
        Together, TARP and the Recovery Act are already producing
    positive results. Jobs are being created. Borrowing costs for
    State and local governments have been reduced. Securities
    markets essentially frozen 15 months ago have reopened. And
    housing markets are showing signs of stabilizing.
        With improving economic conditions and careful stewardship
    of taxpayers' money, TARP investments are delivering better
    returns than originally expected. We estimate that TARP will
    ultimately cost about $120 billion--far less than the maximum
    $700 billion appropriated by Congress.
        200 billion dollars in repayments and income from TARP
    investments have already been reused to reduce the national
    debt. If Congress joins the President in enacting a financial
    recovery fee, TARP will not cost the American taxpayers a dime.
        Because of the bold actions taken by Congress and the
    administration, our financial markets are more stable and signs
    of recovery are increasingly visible on Main Street.
        Thank you very much, and I am happy to answer your
    questions.
        [The prepared statement of Mr. Allison follows:]

        [GRAPHIC] [TIFF OMITTED] T2166A.074

        [GRAPHIC] [TIFF OMITTED] T2166A.075

        [GRAPHIC] [TIFF OMITTED] T2166A.076

        [GRAPHIC] [TIFF OMITTED] T2166A.077

        [GRAPHIC] [TIFF OMITTED] T2166A.078

        Mr. Serrano. Thank you so much for your testimony.
        Let me, just on your last comment, what you are saying, I
    think, is that we may allocate as much as the $700 billion, but
    at the end of the day it may cost $120 billion because the rest
    would have been paid back?
        Mr. Allison. Yes, that is correct. In fact, we have not
    invested the entire $700 billion.
        Mr. Serrano. Okay.
        Mr. Allison. We plan to invest about $535 billion. And
    already we have seen that the investments in the banks, which
    have amounted to about $245 billion, have produced returns of
    about $20 billion. And we have been paid back about 70 percent
    of that money.
        Mr. Serrano. So did we, the Congress or the administration,
    overestimate the need?
        Mr. Allison. I think----
        Mr. Serrano. Because there was, what, 787, right? Oh, I am
    sorry.
        Mr. Allison. Well, that was the stimulus act.
        Mr. Serrano. Numbers here, numbers there. Okay.
        Mr. Allison. Actually, many people----
        Mr. Serrano. Well, that is an area code in Puerto Rico.
    Either way.
        Mr. Allison. Right.
        A lot of people conflate the Recovery Act with TARP. And
    TARP's purpose was to achieve financial stability, and, of
    course, ARRA was to recover the economy.
        Mr. Serrano. Right. But you are saying that, at the end of
    the day, it may cost $120 million?
        Mr. Allison. It could. Now----
        Mr. Serrano. But then you also said it may not cost a dime.
        Mr. Allison. Exactly. Let me explain that.
        A year ago, the estimated cost was $341 billion. By last
    fall, the estimate was down to $117 billion. That is the number
    I am using here today.
        We will be updating this number again. We expect that the
    cost could come down further. We have been encouraged by
    developments at AIG and General Motors, the car companies. We
    are starting the sale of Citigroup shares very soon. And we are
    doing our best to move out of these investments as rapidly as
    we can, consistent with protecting the interests of taxpayers.
        Mr. Serrano. Okay. I would just give you a little bit of
    advice, which usually we give at the end of the hearing, not at
    the beginning. But whatever office it is you have that puts out
    that information--I think Ms. Emerson would agree with us--
    should be putting it out a little better. Because the public's
    perception is that it may be going down a hole. And you are
    telling us that, at the end of the day, it may not cost a
    penny. So I think people need to know that.
        Mr. Allison. Thank you.
        Mr. Serrano. Mr. Allison, as we consider the Treasury and
    SIGTARP budgets for next year, it is helpful to understand your
    plans for TARP activity and the relationship between your
    budget and the rest of the Treasury budget.
        You run the Office of Financial Stability, where most of
    the TARP administrative expenses seem to be incurred. Our
    regular appropriations has always funded Treasury efforts on
    financial stability. How does the Department decide what TARP
    pays for and what the regular Treasury appropriation pays for?
        Mr. Allison. We keep very careful track of our
    expenditures. We have our own finance department within TARP,
    which is unusual for a government program.
        We have also established an internal review department
    within TARP that monitors all of our expenditures. They are
    currently auditing these expenditures to make sure that all of
    the money allocated to TARP is spent only on TARP activities
    and not on Treasury activities.
        Mr. Serrano. And that is pretty much established?
        Mr. Allison. Yes, sir.
        Mr. Serrano. I mean, if people were to look at it or the
    press were to ask, you could see that clearly?
        Mr. Allison. Yes, sir. And we also work closely--our own
    financial people work closely with the GAO and the special
    inspector general and other oversight bodies who are also
    concerned with making sure that we only spend TARP funds on
    TARP matters.
        Mr. Serrano. Also, last June, the report language for our
    bill asked the Treasury for detailed information on the
    staffing and budget for specific TARP-related activities. On
    March 10th, when I expressed my disappointment in the
    information that had been provided, Secretary Geithner replied,
    and I quote, ``We will provide that information as quickly as
    we can. I assume we can do it quite quickly, but I just want to
    underscore we are now in the process of winding down TARP.''
    That is the end of his quote. Six weeks later, we have yet to
    receive any additional information as for winding down TARP.
        The budget documents show the FTEs in your Office of
    Financial Stability are expected to increase from 260 this year
    to 271 next year. So the question is, when will the Department
    finally provide us with how the TARP-funded staff is being
    assigned by subject area, as specified in our report language,
    and the same for your contract employees?
        And the February budget documents for your office show an
    estimate for contractor services this year at $314 million, up
    from an initial estimated $213 million. What are the services
    that you are buying, and why did the estimate go up almost 50
    percent?
        Mr. Allison. Yes, sir. First of all, we are still
    increasing our staff. We expect that our staff could be in the
    high 260s or in the 270s by the end of this fiscal year. After
    that, it will begin coming down somewhat. We project 271, as
    you mentioned, for the end of the next fiscal year.
        The reason why the staff is still increasing is that we are
    still improving our control systems, and we are building
    systems that can last us the years that TARP continues to
    operate. Even though we will stop making new investments on
    October 3rd, we will still have to monitor these investments.
    We are very concerned about protecting the taxpayers' interest.
    That means having very strong controls and oversight and
    reporting capabilities. So our increases are devoted to those
    functions. And we will be winding down other parts of our
    program over time as we are repaid.
        Now, while we have received about 70 percent of the funds
    back from the banks, relatively few banks accounted for those
    funds. And so we still have well over 600 banks whose moneys we
    have to oversee. So the burden on the staff has not been
    reduced materially by being paid back all those funds.
        Mr. Serrano. You say there are 600 banks that have----
        Mr. Allison. Over 600 banks, yes. And this is primarily
    today. It is no longer a large-bank program. Thelarge banks
    have repaid. Today, we have over 600 banks that are mid-sized and small
    banks. So our program today is a small-, mid-sized-bank program, not a
    large-bank program. But it requires that we monitor the funds of 600
    different institutions.
        Mr. Serrano. And what is it that these small and mid-sized
    banks are not doing? They are not reporting back on time?
        Mr. Allison. Actually, sir, the banks are reporting.
        Mr. Serrano. Right.
        Mr. Allison. We require reports from them monthly and
    quarterly.
        Mr. Serrano. Right.
        Mr. Allison. By the way, those are all disclosed on our Web
    site. We also disclose all of our transactions, and have,
    within 48 hours after the transactions are consummated. We
    provide fulsome reporting, and we continue to improve our
    reporting for the public. And that is available on
    financialstability.gov.
        Mr. Serrano. All right. Thank you.
        Mrs. Emerson.
        Mrs. Emerson. Thanks, Mr. Chairman.
        Secretary Allison, one of the things that really is still
    troubling me, and maybe you can make me feel better about this,
    really is the question of the viability of our financial
    institutions.
        I watch and hear from different economists, from one
    spectrum to the other philosophically, talking about the
    current tactics of financial institutions is to kind of extend
    and pretend with the mountain of debt caused by assets still on
    their books from the collapse of the mortgage-backed
    derivatives market in 2008. And so, I am really worried, still,
    that we haven't gotten to the crux of the problem yet.
        And back in November of 2009, Dominique Strauss-Kahn of the
    IMF said that only 50 percent of all the bad assets held by
    banks had been declared to that date. And on October the 26th,
    IMF is actually scheduled to release the next Global Financial
    Stability Report, and we have been told that the percentage of
    unreported bad assets may go up as high as 66 percent in that
    document.
        So I guess I have four short questions to ask you: one, if
    you agree with Mr. Strauss-Kahn's numbers. How would you define
    a bad asset? As banks leave the TARP, what provisions are being
    made for ensuring a more complete disclosure on remaining bad
    assets? And, four, have you all looked at why the audits for
    the banks have not been used to disclose these bad assets?
        Mr. Allison. Well, first of all, we have been watching the
    situation of the mid-sized and smaller banks. You referred to
    the commercial real estate and bank portfolios. Those are
    concentrated primarily in mid-sized and smaller banks. These
    are banks to which we still have advanced funds, as I mentioned
    earlier.
        By the way, we do not get repaid until the regulators of
    the banks approve repayments. And the regulators are the ones
    who are most responsible for overseeing the financial condition
    of the banks. That is not a function of the Treasury
    Department. So, again, we rely on the regulators.
        However, as we have looked at the commercial real estate
    issue, while we do think it is a serious challenge for these
    institutions, we do see that actions are being taken to
    moderate that problem. There have been, first of all, write-
    downs of those assets, and, therefore, their values today have
    been written down, in many cases substantially, closer to the
    present value of those investments.
        And so we are pleased to see that the accounting is coming
    to terms with the actual condition of those assets.
        Mrs. Emerson. Do you believe that all the bad assets--I
    mean, they have been written down, but, I mean, what do you all
    estimate still exists in the financial community? And I need
    you to define what you believe a bad asset is.
        Mr. Allison. Well, I think what we have found--``bad
    asset'' is a vague term, of course, and I don't think we have a
    precise definition for what a bad asset is. However, there were
    assets that were seriously troubled because they could not be
    traded. They couldn't easily be valued because there were no
    markets that were highly liquid at that time during the height
    of the crisis. So banks didn't know, in some cases, what the
    assets were worth or what the other bank's assets were worth.
    And so trading between banks, which is necessary for a fully
    functioning money market, for example, was breaking down. That
    is why TARP was so necessary: to provide additional confidence.
        I think now some markets have reopened. Spreads on assets
    are down substantially, meaning that those assets are viewed as
    less troubled today than they were a year and a half ago. And
    there has been a tremendous improvement in credit spreads,
    which are indicative of the risk seen in those assets by the
    markets.
        So I think what you see is the situation of the banks is
    much healthier than it was before. Many banks of all sizes have
    improved their capital ratios. They hold more equity in other
    capital as a percentage of their total assets today, so they
    are better able to support those assets. At the same time, the
    assets have been written down in value. So the overall
    condition of these banks, by and large, is far stronger than it
    was before.
        Mrs. Emerson. But, yet, they are doing nothing about
    lending to small businesses. You know, they are not taking--I
    mean, when they have customers who seriously--and I have had
    several meetings over the past few weeks with small-business
    people who have tremendously perfect credit scores, who
    actually have been growing their businesses in spite of the bad
    economy, and yet either they can get loans at 8 percent, which
    is ridiculous given the fact that the banks are borrowing at 0
    or maybe 0.2 percent or something like that, and yet they are
    not lended out any money.
        And then, you know, the examiners are saying, well--they
    are being very difficult on the one hand, but then you are
    saying that the regulators are really the people who are in
    charge. But, yet, the regulators are also the people who let us
    down in the first place.
        So I am not as optimistic as perhaps you are, and I need
    you to just convince me that I should be.
        Mr. Allison. All right. Well, Congresswoman Emerson, you
    point out an issue of real concern. And we agree that lending
    did decline. Small businesses especially have been hard-hit by
    this because they don't have the same access to the capital
    markets that larger corporations do. And small businesses are
    the creator of many jobs in this country, so it is vitally
    important that they have access to borrowings and capital.
        So we have been meeting with small businesses and with
    banks of all sizes, including just last week, to ascertain from
    them what is the state of lending. Now, it is normalthat in a
    deep recession, like we have just had, lending contracts for a number
    of reasons. First of all, the banks are suffering losses, they pull
    back, they are trying to conserve capital, they are very cautious, they
    raise their landing standards, typically. Small businesses and large
    businesses pull back initially, as well, because they were concerned
    about dropping revenues, and they weren't sure they wanted to take on
    the risk of additional borrowings.
        Now the economy has improved significantly, and the
    financial markets have, as well. We have been told by banks as
    recently as last week that they anticipate increasing loans to
    small business, for example, this year. They were uniform in
    saying this to us. Now, we are going to be meeting with them
    every quarter because we want to make sure that they are
    following through with this.
        We also have proposed to Congress the establishment of a
    $30 billion small-business loan fund. And it has terms in it,
    if it is passed, that would provide very strong encouragement
    to banks to lend. Because the more they lend, the lower the
    dividend rate that they will be paying on this capital. But
    they are going to have to perform before the rate comes down.
        Mrs. Emerson. I appreciate that. And we will follow up when
    it is my next turn to ask questions on the small-business
    lending. Thanks.
        Mr. Allison. Sure. Thanks.
        Mr. Serrano. Commenting on when your next turn comes up, we
    will have better attendance than usual today, so we will--and
    we have some votes lurking in the near future, so we will
    adhere to the 5-minute rule.
        With that in mind, Mr. Edwards.
        Mr. Edwards. Thank you, Mr. Chairman.
        Mr. Allison, as I recall, according to former President
    Bush, his Chairman of the Federal Reserve, Mr. Bernanke, and
    his Secretary of the Treasury, Mr. Paulson, all said in the
    fall of 2008 that we were potentially on the edge of facing a
    second Great Depression.
        I realize there are some today in Washington that, for
    whatever reasons, would elevate the Herbert Hoover approach to
    preventing depressions to some exalted level. I am one who,
    along with President Bush, agreed we needed to take aggressive
    action.
        There are some who would suggest that TARP was a terrible
    mistake. I would suggest to them that they should go back and
    see what happened to the stock market in the last 3 minutes of
    the first vote of TARP when literally hundreds of billions of
    dollars of families' life savings and businesses' savings were
    lost when the stock market went down 3 percent in the last 3
    minutes of that vote when the market realized it was actually
    going down. I would have to believe if the market believed
    there wasn't a chance to come back and have a second vote, it
    might have even dropped more precipitously than that.
        I think some who suggest the Herbert Hoover approach to
    getting us out of the terrible economic disaster we were facing
    forget that, in the year prior to the Great Depression,
    household wealth dropped by 3 percent, on average. I believe,
    in the year prior to this recession, or in the first year of
    the recession, household wealth dropped by 17 percent. You
    know, I think it was Sam Rayburn of Texas, maybe among others,
    who said, ``It is awfully easy to kick down a barn. It is a lot
    harder to build one.''
        I want to talk about TARP. My first question would be to
    ask you, if you could send to this subcommittee a list of
    leading economic indicators going back to the fall of 2008 and
    then send us what those economic indicators are today. And I
    would like to just touch on those very briefly with a couple of
    very specific questions that might allow a short answer.
        One, do you recall whether we had positive or negative
    economic growth in the last quarter of 2008?
        Mr. Allison. I am not sure what the growth rate was. I will
    be happy to check for you.
        Mr. Edwards. On an annualized basis, I think it went down
    about 6 percent. And then, after TARP and after the economic
    recovery efforts in the last quarter of 2009, if you had
    checked, I believe that economic growth, on an annualized
    basis, went up 5.7 percent. A lot better going up 5.7 percent
    than down 6 percent.
        As I recall, and if I could check these numbers for our
    committee, the last quarter of 2008, the monthly job loss in
    America was about 700,000 jobs per month being lost. And I
    believe the last economic report said that America gained
    162,000 jobs, last month I believe. So, instead of losing
    700,000 jobs a month, we are gaining 162,000.
        If you would check, I believe these numbers are close to
    correct, but in the year of 2008, the last year of the Bush
    administration, the S&P 500 that a lot of businesses and
    families have their investments in and children's college funds
    and their families' retirement funds, the S&P went down 38
    percent. And I believe, since March of 2009, it has gone up
    over 70 percent. If you could verify those numbers, along with
    other economic indicators, and send that to the committee, I
    would appreciate it.
        But I would like to, finally, ask you specifically--and you
    touched on this. But, had we not passed TARP, an effort to
    stabilize the financial system of the United States and even
    the world, do you think there could have been a high
    probability that we could have seen either a much deeper
    recession than we already have suffered through or even the
    odds were that we could have faced an actual depression?
        And I remember what my father told me it was like to go
    through the first Great Depression. I certainly didn't want to
    go through a second one.
        How serious of a problem were we facing in the fall of 2008
    when President Bush asked Democrats and Republicans to support
    the financial stabilization bill?
        Mr. Allison. Congressman Edwards, first of all, your
    comparisons are absolutely right. I think no one expected----
        Mr. Edwards. Is your microphone on, Mr. Allison. I guess it
    was on. I am sorry. Please go ahead.
        Mr. Allison. No one expected that we would see the recovery
    this quickly, a year ago. And I don't think it is possible to
    exaggerate how serious the financial and economic problem was
    in the fall of 2008. We were facing a potential catastrophe if
    action hadn't been taken quickly.
        And I think that the people who were in the government at
    the time and especially the people in Congress who had to take
    a very difficult vote for TARP were courageous and bold to do
    so. And I think that those actions saved the financial system
    and saved the economy.
        Mr. Edwards. Thank you.
        Thank you, Mr. Chairman.
        Mr. Serrano. Thank you.
        Mr. Crenshaw.
        Mr. Crenshaw. Thank you, Mr. Chairman.
        Another way to answer that question that Congressman
    Edwards was talking about--and I think it is kind of clear and
    straightforward. Can you tell us, in your opinion, if we had
    done nothing, would that have been more expensive or less
    expensive than passing a TARP program?
        Mr. Allison. Well, first of all, the TARP program is going
    to turn out to be far less expensive than anyone expected. It
    already has been.
        And, secondly, the cost to the country of a financial
    collapse would have been immeasurable. We would have seen the
    financial system essentially destroyed in this country. It
    literally wouldn't have been possible for people to cash
    checks. There was almost a run--there started to be a run on
    money market funds, which many people depend upon for their
    cash. And so the government had to step in and guarantee $3
    trillion of money market funds, overnight almost, to prevent a
    classic run of the bank, if you will, like we saw back in the
    1930s.
        This country depends on a strong financial system. Every
    day, people are using their credit cards. They are borrowing
    money for a car or for their house or for college education.
    Without this system, this economy can't function. It is part of
    the lifeblood of people's everyday lives. And so, it was
    essential at the time to take unprecedented action.
        And because those actions were taken, we are recovering at
    a very rapid pace, far quicker than most people imagined a year
    ago. Now, we are not totally out of the woods. We----
        Mr. Crenshaw. No, but, just, I mean, I think whatever you
    are saying is that, you know, regardless of how much money TARP
    ends up costing--and it is going to cost less than we thought
    to start with--that is going to be less expensive than it would
    have been to do nothing. And that is your opinion. And I
    appreciate that, sir, because I happen to believe that.
        Mr. Allison. Yeah.
        Mr. Crenshaw. Now, let me ask you--you know, everybody that
    comes before our subcommittee talks about, ``We can't sustain
    the kind of debt that we have, both on an annual basis or our
    total national debt. It is just unsustainable.'' And so, people
    talk about how to get out of that mess. They talk about raising
    taxes. You hear about the value-added tax. You hear about the
    bank tax.
        And let me ask you--it is interesting, because I would like
    to, kind of, go through those numbers again to see how much
    TARP is going to cost. But one of the things--when you say,
    maybe TARP doesn't cost us anything, and that would be
    wonderful, but one of the proposals the President has made is a
    bank tax, I think he calls it a fee, that will raise $90
    billion by taxing banks that have over $50 million, in terms of
    their deposits.
        And one of the justifications for that tax or that fee is
    that that money would be used to pay back the TARP money. But
    you can see, if TARP didn't cost us anything, then I guess you
    would agree that we wouldn't need that $90 billion of new taxes
    to pay for the TARP that didn't cost anything. Would that be
    correct?
        Mr. Allison. What I said in my testimony, Congressman, was
    that we estimate--the latest estimate is that TARP would cost
    about $120 billion. And----
        Mr. Crenshaw. But if it didn't cost anything--I mean, let's
    assume--I hope you are right that it doesn't cost anything.
    Then would you say, well, we don't need to talk about this fee
    on banks to raise $90 billion. Because if you raised it, you
    might use it for something other than paying back TARP money,
    because it would have been paid back.
        Mr. Allison. What I said, Congressman, was that if a
    financial recovery fee is enacted by Congress, TARP won't cost
    the taxpayers a dime, because those moneys could offset----
        Mr. Crenshaw. So, best case maybe you would be $90 billion
    short, so you would assess a fee and have that $90 billion paid
    off. And I can appreciate that.
        Let me go through those numbers because, as I understand
    it, there is $700 billion, but some of the money hasn't really
    been spent. Isn't there about $300 million just sitting in the
    bank?
        Mr. Allison. Well, we were authorized to spend $700
    billion. We estimate that we are going to utilize about $545
    billion or $550 billion of that money.
        Mr. Crenshaw. So that is about $250 billion that you are
    not going to utilize?
        Mr. Allison. It is about $150 billion, yes----
        Mr. Crenshaw. Okay.
        Mr. Allison [continuing]. That we don't expect to utilize.
        Mr. Crenshaw. Now, what are you going to do that? If you
    don't utilize it, would you ever consider paying down the
    national debt or giving it back? Or would you, kind of, hang on
    to it just in case you need it somewhere along the way?
        Mr. Allison. Well, our ability to invest these funds
    expires on October 3rd of this year. And any money----
        Mr. Crenshaw. Well, what are you going to do if you have
    $150 billion on October 3rd of this year?
        Mr. Allison. All of that goes back----
        Mr. Crenshaw. Where does it go?
        Mr. Allison [continuing]. To the Congress. Well, we have
    not spent it. That would be used to reduce, along with the
    moneys we receive back, the national debt--or the perceived
    planning of the national debt.
        Mr. Crenshaw. You wouldn't spend it on something else?
        Mr. Allison. No, sir.
        Mr. Crenshaw. Okay.
        Thank you, Mr. Chairman.
        Mr. Allison. All the money we receive back goes into the
    Treasury to reduce the national debt.
        Mr. Crenshaw. Thank you.
        Mr. Serrano. You said exactly what he wanted to hear.
        Mr. Boyd?
        Mr. Boyd. Thank you, Mr. Chairman.
        And thank you, Mr. Allison, for your years of service to
    the country.
        I want to focus on CDCI.
        Mr. Allison. Yes, sir.
        Mr. Boyd. You alluded to it briefly in your opening
    remarks. And I think most of us understand what it is designed
    to be.
        And one of the things that we find out in our communities
    is that our CDCI applications have--they are dragging out, and
    they have very long waiting periods before approval or denial.
        Can you bring the committee up to speed on how CDCI is
    working in our communities to provide TARP funds in a timely
    manner? You know, obviously, the objective there is to infuse
    capital into our small businesses and those troubled, mostly
    rural areas.
        Mr. Allison. Yes, sir. And, Congressman Boyd, thank you for
    asking about the CDFIs. We believe and we know that they
    provide an essential service, especially in disadvantaged areas
    of this country that are not banked. Many banks don't even have
    branches in some of these areas where the CDFIs operate. So
    they are providing a vital and a unique role in the communities
    where they operate.
        So we believe it is very important to assure their
    continued operation during this very difficult time. And so we
    have already instituted a program for CDFIs. These are
    regulated CDFIs that provide the bulk of the lending and assets
    to those communities.
        And we are seeing very strong interest in this program. The
    application period to participate in our capital program, where
    we can make capital available to the CDFIs, up to 5 percent of
    their risk-weighted assets, on very good terms, that program,
    the application period expires on April 30th. So we have been
    urging them and the Secretary has written a letter to the CDFIs
    urging them to participate in this program.
        And we are very encouraged by the high percentage that are
    showing interest. And we expect a substantial number of the
    regulated CDFIs to participate, which means that more capital
    would be available to them so they can continue and grow their
    activities, where possible.
        Mr. Boyd. So you have a cutoff date for applications of
    April 30?
        Mr. Allison. Yes, sir.
        Mr. Boyd. The approval or denial of those applications, has
    that already started?
        Mr. Allison. Yes, sir. Yes.
        Mr. Boyd. Is there anything that we can, as individual
    Members, be doing about the expedition of the decision of
    approval or denial?
        Mr. Allison. Well, first of all, thank you for your
    interest in this program.
        We are encouraged, as I mentioned, by the application rate,
    which is quite high. And the applications have to be processed
    through the regulators of these CDFIs. And I know the
    regulators are working hard to process those as rapidly as
    possible. So we do expect a large participation. And, of
    course, we will be reporting on all of this to the public.
        Mr. Boyd. Okay. Have some of those applications already
    been approved or denied, or they will all be coming at once?
        Mr. Allison. Some applications--a large number have already
    been forwarded to us by the regulators. So they have been
    approved by the regulators.
        Mr. Boyd. Okay. Thank you very much.
        Mr. Allison. Thank you.
        Mr. Boyd. Thank you, Mr. Chairman.
        Mr. Serrano. Thank you, Mr. Boyd.
        Ms. Lee?
        Ms. Lee. Thank you very much.
        Good to see you.
        Mr. Allison. Thank you.
        Ms. Lee. And I am one who was very skeptical about voting
    for TARP. You know, I am glad to see that the financial markets
    were stabilized and we saved the economy from going into a
    depression. And I am delighted that many of the goals of TARP
    have been or are being achieved.
        But many of my constituents don't know that. And I will
    tell you why: Many don't have credit cards. Many don't have
    access to capital. Because they are minority-, women-owned
    small businesses, they can't get credit. Many have lost their
    homes due to the scams of the loan sharks. And I hope that
    there will be some criminal prosecutions of these individuals.
    And so it is very difficult to explain in terms of Main Street
    benefiting from this.
        So I am curious in terms of how this administration, how
    you see us moving forward for those millions of people who
    really don't quite understand why we did this for the financial
    system and why in the world we can't require these banks and
    lending institutions to step up to the plate and lend to
    minority-owned businesses and small businesses. Because they
    are just not doing it. We had an opportune time to do that when
    we bailed them out. We didn't require them to do it. And now we
    are looking at many of our communities that are devastated as a
    result of the last 8 years, quite frankly.
        And so, how do we begin to turn this around and make sure
    that these financial institutions that did receive TARP money
    know that they have a responsibility to be fair and to provide
    equal opportunities to small businesses and to minority-owned
    businesses? Because they just haven't done that.
        Mr. Allison. Congresswoman Lee, we fully understand and
    appreciate your concerns. And you have been eloquent and very
    strong in speaking out about these things for a long time.
        We have undertaken a number of programs addressed
    specifically at that point. The first is the CDFI program,
    because, as you know, in many of these communities the CDFIs
    are the only financial institutions that people can turn to.
        Secondly, the Obama administration has set up a facility of
    about $23 billion for housing finance agencies to innovate
    approaches to deal with housing issues in these communities.
        Thirdly, we have launched what we call the Help for the
    Hardest-Hit Housing Markets, which is a program designed
    toencourage HFAs in the 10 States whose people have been hardest hit by
    unemployment and house price declines to innovate solutions for those
    people; for instance, by helping to make more people eligible for HAMP
    modifications, for example, providing additional assistance to
    unemployed people.
        We also, in Treasury, have been encouraging in our programs
    participation by minority groups. In fact, now we are
    launching, soon, our sale of Citigroup's stock, and Morgan
    Stanley has pledged to us that it will devote 25 percent of the
    economics they receive to minority- and women-owned firms. So
    we are committed to encouraging diversity in our own programs.
        Much more still has to be done. And I think by shining a
    light on this issue and making it a high priority of the Obama
    administration, which, in addition to TARP and the other
    programs I mentioned, has comprehensive stimulus efforts,
    recovery efforts aimed at disadvantaged communities. We have to
    do more; I think this administration realizes that. And they
    have made all-out efforts to try to help in these areas.
        Ms. Lee. Great. And I appreciate what you are doing
    futuristically and what we are beginning to do.
        What I want to see, Mr. Secretary, is how--and I don't know
    if you have the numbers, the statistics, the reports on what
    lending these financial institutions--how they lend it, who
    they lended their money to. Did they lend to minority- and
    women-owned businesses? If so, what is the percentage? If not,
    we need to shine some light on it.
        Mr. Allison. Yes.
        Ms. Lee. I think we have anecdotal information, but I am
    not sure if we have the facts. And so I am wondering if we
    could ask you to report back to this committee the types of
    loans and to whom those loans went to these institutions that
    we bailed out.
        Mr. Allison. Yes.
        Ms. Lee. Because I think it is important that that never
    happen again. Because, you know, we raised a lot of
    expectations in many of these communities, and businesses have
    gone out of business because they could not get access to
    credit, regardless of whether TARP was there or not. They just
    froze it.
        Mr. Allison. Yeah. We will be happy to follow up on that.
    Thank you for the question. We will come back to you.
        Let me also mention, though, that in our housing program we
    have extensive reporting on the performance of the servicers in
    making modifications available. And we have been collecting
    data by race, for example, and gender since the beginning of
    this year. And as soon as we have statistically valid
    information on that, we are going to start reporting that, as
    well.
        Ms. Lee. Thank you. It is very important, because these
    scam loan sharks--that is what I call them--they targeted
    minority communities. I mean, they didn't just do this de
    facto. They went in there and decided they were going after
    African Americans and Latinos. So it is very important that
    this report come out to show what has taken place.
        And, also, I hope you will get back to us on the lending to
    minority- and women-owned businesses.
        Mr. Allison. Thank you very much. We will do that.
        Ms. Lee. Thank you very much.
        Mr. Serrano. Thank you.
        Ms. Wasserman Schultz?
        Ms. Wasserman Schultz. Thank you, Mr. Chairman.
        Thank you so much for your public service and for being
    with us this morning.
        And I know that all of us feel that the whole notion of
    stabilizing our economy and creating jobs and getting the
    housing markets back on track--being a Floridian, that is
    particularly important, to make sure that we can continue to
    move forward.
        And I read Mr. Barofsky's testimony, in which he discusses
    some of the missed TARP payments. And we have heard a lot of
    good news lately about Goldman Sachs and GM's payment of their
    debts in full. But I want to hear a little bit more about what
    you don't think is working very well and where there has been
    room for improvement. Which payments have you not yet received?
    And which have been late? And are there any that you anticipate
    not getting back at all?
        Mr. Allison. We have had some banks not paying the
    quarterly dividends to us. If they don't pay us for six
    quarters, we have a right to appoint two directors to their
    boards.
        Ms. Wasserman Schultz. Okay.
        Mr. Allison. We have had, though, I would say, given the
    magnitude of the crisis, a relatively low rate of outright
    losses. Today, the losses are a little over 1 percent of the
    total amount that was invested in the banks. But even with
    those losses, the total net return has been about 9 percent on
    the investments. And we have received over $20 billion of
    dividends and warrant proceeds and interest on those
    investments.
        So, overall, this plan, this program, has benefited
    taxpayers. They have profited from this program, so far,
    substantially.
        Ms. Wasserman Schultz. In other words, we have actually
    made more back than we initially invested.
        Mr. Allison. Yes. We have made about $20 billion on those
    investments.
        Ms. Wasserman Schultz. Wow. That is certainly something
    that I would love to see get out there more. Because the hatred
    of the TARP and the whole notion of TARP has been
    understandable because we certainly wish we were never in this
    situation in the first place. But the fact that we have made
    the investment back with interest, to the tune of $20 billion,
    that is an important point that Americans should know.
        I want to ask you a little bit about the AIG subsidiaries,
    selling off AIG subsidiaries. There is a concern that AIG is
    selling off some of the better parts of its business just to
    repay the government. Is it AIG that is directing those sales,
    or is it the government looking to recover some of the money
    more quickly? And do you believe that AIG is cannibalizing its
    future earnings so that they can get short-term results?
        Mr. Allison. First of all, let me emphasize that we are a
    reluctant shareholder in any of these companies.
        Ms. Wasserman Schultz. Yes.
        Mr. Allison. And we would like to dispose of our
    investments in the stocks of AIG, General Motors, Citigroup as
    rapidly as possible, consistent with protecting the interests
    of taxpayers. We do not get involved in day-to-day decisions of
    these institutions, or strategic decisions.
        We do expect that the asset sales that AIG is making today
    will enable the company to repay, first of all, the Federal
    Reserve for a large part or all of its investment. We do have
    continual communications with AIG about its condition and about
    its plans.
        We are encouraged by the progress that the company has
    made, and especially the last 6 or 8 months. And we have seen
    the risk in the company come down dramatically. Financial
    Products, their financial products subsidiary, which was the
    cause of a lot of the problems in AIG, has dramatically reduced
    its exposures to the market. And so, we see a very positive
    trend so far in the improvement in AIG's condition.
        Ms. Wasserman Schultz. And, Mr. Chairman, forgive me, I was
    not here when you made your opening remarks. But, in my home
    State of Florida, restoring the housing market and helping
    ensure that we can keep people in their homes and prevent them
    from being foreclosed on is incredibly important. Our recovery
    is lagging behind the rest of the country.
        Can you talk a little bit about the Hardest-Hit Fund, how
    that and other innovative ideas using TARP funds that are
    designed to help make sure that we can bring that part of the
    economy up?
        Mr. Allison. Yes. Well, we think that the Hardest-Hit Fund
    is extremely important, especially in these 10 States. And
    Florida, of course, is one of those. And I believe Florida is
    receiving more than $400 million.
        Ms. Wasserman Schultz. Yes.
        Mr. Allison. And this will enable the State, the housing
    finance agency and others, to look at the particular conditions
    within Florida and certain areas of Florida to see what methods
    might be used to assist in stabilizing the housing markets and
    relieving the pressure on homeowners in those areas.
        And, as you well know, this housing crisis is highly
    concentrated in certain parts of the country. Southern Florida
    is one that has been particularly hard-hit, as you well know.
        Ms. Wasserman Schultz. Yes.
        Mr. Allison. And, fortunately, what we do see are signs of
    stabilizing of prices. And that is going to be essential, so
    that we attract more demand for houses and we begin to
    stabilize and balance supply and demand in those areas.
        So we are encouraged by some of these developments. Even
    though it has been extremely painful, maybe we are nearing the
    point where that market----
        Ms. Wasserman Schultz. Do you have that sense, that we are?
        Mr. Allison. Our sense is that, increasingly we are
    seeing--some of the hardest-hit places are the ones where the
    prices rose the quickest.
        Ms. Wasserman Schultz. Right.
        Mr. Allison. They came down the furthest. But they are
    actually maybe reaching a point quicker than some other parts
    of the country where they have an equilibrium of supply and
    demand. And so----
        Ms. Wasserman Schultz. From your mouth to God's ears.
        Mr. Allison. Yes, well, we hope so.
        Now, we are not complacent about this. That is why we just
    implemented this new program. We still think we have to do
    more. And, frankly, in the eyes----
        Ms. Wasserman Schultz. Pushing the banks to work mortgages
    out is incredibly important, as well.
        Mr. Allison. Exactly. And we are also publicizing their
    performance. And, frankly, they still have more to do.
        Ms. Wasserman Schultz. A lot more.
        Mr. Allison. All of them. And we meet with them
    continually. And we are seeing progress, but it is not fast
    enough. And I think, frankly, they need to invest more in their
    mortgage activities in order to reach the type of scale that we
    need.
        However, let me mention that last month is the first month
    when we actually saw the servicers convert more mortgages to
    final modifications than they had new trial modifications. So
    it does show capacity is increasing, and we are starting to get
    on top of this problem. And we expect that we will have seen
    decisions made on trial modifications awaiting decisions. Most
    of those should be completed by the end of June.
        But we are still working with the banks to increase their
    capacity. This is still a very serious problem. We still see
    the possibility of a million foreclosures in this country this
    year; maybe 3 million foreclosure starts, but usually about a
    quarter to a third of those turn into actual foreclosures. We
    are trying to prevent as many of those as we can.
        And that is why we have the HAMP program. And we are
    encouraged that we have over a million people who have already
    benefited from that. But we want to make sure that people know
    the program is available. We want to make sure that the
    servicers--and we have already reached an understanding with
    the servicers. From now on, starting in June, they must look at
    every 60-day-plus delinquent mortgage to see whether the
    homeowner could be eligible for HAMP.
        Ms. Wasserman Schultz. That is good.
        Mr. Allison. And so, that should also bring more people
    into this program. But we have to publicize it more.
        Ms. Wasserman Schultz. Yes.
        Mr. Allison. We are holding events throughout the country,
    including in Florida, to----
        Ms. Wasserman Schultz. Let Members of Congress know how we
    can help you publicize it.
        Mr. Allison. We will. Thank you very much.
        Ms. Wasserman Schultz. Thank you very much.
        Mr. Allison. Thanks for your questions.
        Ms. Wasserman Schultz. Thank you for your indulgence, Mr.
    Chairman.
        Mr. Serrano. Thank you.
        Mr. Culberson.
        Mr. Culberson. Thank you, Mr. Chairman.
        Secretary Allison, as a general rule, when a company
    accepts Federal dollars, they are subject to all the Federal
    rules and regulations. And, in this case, a company that has
    paid back the TARP money is still subject to all the Federal
    guidelines that they accepted the money under? Or are they
    completely free of Federal strings once they repay the money?
        Mr. Allison. Once they have repaid the money entirely, they
    are free from the TARP restrictions. Of course, they are
    subject to all other laws----
        Mr. Culberson. Certainly. But, I mean, in terms of the TARP
    restriction.
        Mr. Allison. Yes, sir.
        Mr. Culberson. And it is my recollection, didn't the
    original language of the October 2008 TARP legislation leave
    it--I don't know that it was mandatory, but is it the
    Secretary's discretion to use the money that is repaid to pay
    down the deficit?
        Mr. Allison. The money that comes back to the Treasury that
    is repaid under the TARP program is put back into the general
    account of the U.S. Treasury for debt reduction.
        Mr. Culberson. For debt reduction.
        Mr. Allison. Yes, sir.
        Mr. Culberson. But the Congress and this new Congress and
    the President have just routinely rechurned that money, so it
    is not--well, let me ask you this: Has any of that money been
    applied to debt or deficit reduction? Because if it has, I am
    not aware of it. I am not aware of any of that money being used
    to pay down the debt or the deficit.
        Mr. Allison. Well, actually, I would be glad to send you
    information on this. But, so far, we received about $170
    billion, roughly, in repayments--no, I am sorry, $186 billion.
    And we have received another $20 billion in proceeds from
    dividends and interest and sales of warrants.
        Mr. Culberson. About $180 billion, and has that $180
    billion all been used to pay off, pay down the debt or deficit?
        Mr. Allison. Absolutely. It has been used to pay down the
    debt and the deficit.
        Mr. Culberson. Then that is terrific. Is it going to
    continue to be any money that is paid back used to pay down
    either the debt or the deficit?
        Mr. Allison. Absolutely and that is under EESA law.
        Mr. Culberson. So that is required. It is mandatory. And it
    is not just, of course, the Treasury Department, but the
    Federal Reserve, FDIC have all been in the business of
    guaranteeing loans and ensuring, helping to provide some
    underpinning to a whole variety of industries. How much money
    and to whom has the Federal Reserve been loaning money?
        Mr. Allison. I don't have the answer off the top of my
    head. We will be glad to contact the Federal Reserve and
    provide that information to you.
        Mr. Culberson. You could provide that to the committee?
        Mr. Allison. I will. We will request the Federal Reserve to
    provide it to you.
        Mr. Culberson. Have they provided it to you? Has the
    Department of Treasury seen in detail how much money the
    Federal Reserve has loaned and to whom and under what terms?
        Mr. Allison. I will find the answer to that for you, but my
    own department doesn't look at that, but I will see whether
    others in Treasury have done so.
        Mr. Culberson. To your knowledge, has Treasury received
    that information from Federal Reserve?
        Mr. Allison. I don't know.
        Mr. Culberson. How much money, do you know a ballpark
    figure, as to how much money the Federal Reserve has either
    loaned out or guaranteed?
        Mr. Allison. I don't have that information right in front
    of me, but if you would like, I will certainly try to get the
    information for you.
        Mr. Culberson. Thank you. What about the FDIC, I understand
    they are also a part of this as well?
        Mr. Allison. Well, the FDIC oversees----
        Mr. Culberson. Sure.
        Mr. Allison. It has had its own facilities where it has
    guaranteed borrowing for a period of time. That program has
    been terminated however.
        Mr. Culberson. Has the United States Government, or excuse
    me, U.S. taxpayers, more accurately, ever guaranteed this much
    money in the private sector, this many loans, this much money
    on this broad of a scale ever in U.S. history?
        Mr. Allison. I don't know. I would doubt it, but there
    hasn't been a crisis--this is, I think, a unique financial
    crisis that this country faced. And as I mentioned before in my
    testimony, it would have been catastrophic if actions hadn't
    been taken.
        The cost to this economy would have been incalculable if
    these actions hadn't been taken. And what we have seen is,
    thanks to these actions, the economy has recovered far faster
    than most people would have dared to predict.
        Mr. Culberson. What is the amount of money that the
    Secretary of Treasury has available to him to use under the
    TARP fund to continue to make loans or guarantees? You have got
    money coming back in that is repaid, but isn't there a
    continuing amount of money that the Secretary of Treasury has
    available to continue to use at his discretion?
        Mr. Allison. The amount of TARP funding available that
    allocated at TARP was $700 billion.
        Mr. Culberson. Right. You say $180 billion of that has been
    repaid, applied to deficit reduction. And that is gone; that
    has gone to pay off debt, right?
        Mr. Allison. Yes. But the entire $700 billion has not been
    used. And as the Secretary announced when he extended TARP to
    October 3 of this year, we don't expect to use more than about
    $550 billion. We actually have made investments of about $390
    billion, as I recall, but we plan to make, we have made
    commitments of about $491 billion, and we plan toutilize about
    $545 billion to $550 billion.
        Mr. Culberson. And as that money comes back in and is
    repaid, you will apply that specifically to debt?
        Mr. Allison. That is correct.
        Mr. Culberson. Buying back U.S. Treasury debt?
        Mr. Allison. It is done. It reduces the national deficit,
    yes, sir.
        Mr. Culberson. And then the money is not reused? We will
    make sure----
        Mr. Allison. The money is not reused.
        Mr. Culberson. Thank you, Mr. Chairman.
        Mr. Allison. However, let me be totally clear with you, as
    the money is repaid, that increases the head room, because the
    actual authorization remains constant at $700 billion. However,
    we are totally transparent that the money that has been repaid
    goes back to reduce the National Debt. We disclose all of the
    utilization of the money on our Web site, and the amounts that
    I have given you will indicate that we have not used the entire
    $700 billion.
        Mr. Culberson. Maybe someone could follow up on that, Mr.
    Chairman, because it is still a little bit of source of
    confusion. The authorization level stays the same. You say you
    are paying down debt with it.
        Mr. Allison. That is right.
        Mr. Culberson. But you continue to churn within that $700
    billion.
        Mr. Allison. No, sir, because any new investment-- under
    the law, we strict reply follow the EESA law. Any money
    returned to us is used to pay down the National Debt. Within
    the $700 billion, we may make additional investments, but we
    have not come close to utilizing the entire $700 billion, so it
    is really a moot point. So any money we return back goes to
    reduce the National Debt. We will be glad to give you a table
    showing you exactly what has been utilized so far and how much
    has been paid back.
        Mr. Culberson. You are always gracious with the time. I
    have some follow up. Thank you, sir.
        Mr. Serrano. That is all right. The gentleman answered
    about nine times it was going back to pay the National Debt.
    Just for the record.
        But I understand your concern. It is the concern of many
    folks.
        Last year the TARP was used to create new public-private
    investments to increase credit for small businesses, students,
    car buyers and other consumers. How would you evaluate the
    effectiveness of these programs in making more credit available
    for creditworthy small business, students and consumers?
        Mr. Allison. The impact has been both direct and indirect.
    When the Public-Private Investment Program was announced about
    a year ago, it had an almost immediate effect on the credit
    spreads for Commercial Mortgage-Backed Securities and
    Residential Mortgage-Backed Securities. Those rates, you can
    trace it to the day of the announcement. The rates came in
    dramatically, which helped to improve the cost of credit
    throughout that sector of the financial markets.
        And, since then, we have been working with nine investment
    managers to invest in this these types of instruments, which
    help to provide additional liquidity to the market and also
    price discovery, which stabilizes and creates more confidence
    in those markets.
        And, again, that program will be also fully invested soon,
    and we plan no others because the markets have improved so much
    in terms of spreads returning to near normal, in many cases,
    that there is not a need for adding to that program.
        Mr. Serrano. My only concern would be that that is the
    program that speaks, those programs speak to areas where the
    people with the least power, if you will, in the society were
    benefited. So when you say we don't intend to add more to it or
    whatever, that is fine if everything is okay. But I would hope
    we know everything is okay before we decide to cut back on
    that.
        Mr. Allison. Well, what we are seeing is that, even as that
    program nears being fully invested, we are seeing that the
    spreads in those markets remain quite low, especially compared
    to where they were at the height of the crisis. And they have
    returned to near normal in many cases. We would like to see
    more activity in those markets. That is going to take some
    time, but they have been improving and healing, thanks to these
    programs.
        Mr. Serrano. Right.
        In the last year, banks have reduced their credit
    outstanding to commercial and industrial businesses by almost
    20 percent or $300 billion. When businesses lose credit like
    that, they cut back jobs. Recently the financial press has
    reported that the financial services sector has paid out more
    than $100 billion in bonuses this year. Do you agree that the
    money, if retained instead of paid out in bonuses, could have
    been conservatively leveraged to increase credit in our
    struggling economy by hundreds of billions of dollars?
        And what do you think will be required to get a
    satisfactory resumption of credit growth in the country?
    Treasury is required to review the executive compensation at
    hundreds of banks. How is that process going, and do you see
    any significant change in that compensation?
        Mr. Allison. Well, first of all, I think many Americans
    have been outraged by the level of bonuses in the financial
    industry, especially among the largest financial institutions
    that received the largest amount of TARP funds. These
    institutions have repaid TARP. I think what is important, our
    administration believes what is important is to enact financial
    reform legislation that would, for example, provide for
    shareholders to have a say in pay for the top executives of
    these financial companies. I think we are going to see over
    time, if this is enacted, much more discussion and much more
    information about how pay is determined in these companies, and
    that in, in turn, should help to lead to better control over
    that type of activity.
        We are, like you, we have been troubled by the shrinkage in
    lending. We do see signs, as I mentioned before, that lending
    is increasing. A number of the largest banks have pledged that
    they will increase lending here in 2010. We hope that happens
    as soon as possible.
        Mr. Serrano. You know, as you speak, I think of something,
    and my last statement here, for anyone who will care to listen,
    if they could help us with this, but the statement I just made,
    the question I just asked you raises some eyebrows at City Hall
    back in my hometown in New York, because, as you know, Mayor
    Bloomberg and others have said, sure, go after Wall Street, and
    in the process, you will destroy New York's economy.
        You know, New York gets caught up in a little situation
    there where we know that these bonuses are totally improper and
    outrageous, but then taxes are collected on people who work in
    New York and collect those bonuses. I wish there wasa way that
    we could come up with some sort of a presentation that would say these
    restrictions do put this kind of slight pain on New York, but look at
    what the rest, in dealing with this issue in general, will do for the
    State and for the city, and no one has been able to do that.
        And I wish someone could direct me in the direction as to
    where we could get those numbers to indicate that, while we may
    put restrictions on folks who work on Wall Street in New York,
    in the long run, it is better for New York City and New York
    State to have this in place rather than what we had before,
    because it is not enough to say we are trying to put
    restrictions on the folks who caused the problem to begin with.
        People tend to forget, you know, they tend to forget that
    we shouldn't have invaded Iraq or we should have been out of
    Afghanistan. They forget, so they somehow forget who caused the
    problem. Now it is, who is going to cause the current problem
    or the next problem, or why hasn't this been taken care of?
        So if you know anyone that you could direct us to, to begin
    to put together a presentation that would say, yes, we will
    restrict, but here is the final outcome for places like New
    York or Chicago or financial centers throughout the Nation.
        Mr. Allison. I think you ask a very interesting question
    and make a terrific observation. Let me also mention that for
    the seven companies that receive special assistance, what we
    call exceptional assistance, from TARP, the special master that
    was appointed by the Secretary of the Treasury directly oversaw
    the compensation of the top 25 executives in each of these
    companies. We saw that their compensation declined dramatically
    under the special master's oversight. Those companies are all
    doing better than they were before, and they are still very
    competitive.
        And so certainly the administration is well aware of the
    need for responsibility and farsightedness in compensation
    awards by these companies. And the President, of course, is
    speaking today up in New York about the financial industry and
    the need for financial reform, which includes greater
    disclosure and a say on pay.
        And it is vital that shareholders have the ability to voice
    their views about the compensation in financial companies.
        Mr. Serrano. Because, as you know, the argument we get, if
    you keep doing this, they will leave. Where are they going to
    go? I mean, are they going to quit their job on Wall Street and
    go elsewhere? When you have people in my congressional district
    in the South Bronx who might have gotten, and I am not being
    funny here, might have gotten a $100 Christmas bonus at their
    job and somebody is fighting over whether they are getting $5
    million or $10 million in a bonus, I don't think it is much of
    an argument.
        Thank you.
        Mrs. Emerson.
        Mrs. Emerson. Thank you, Mr. Chairman.
        All right. Let's go back to small business lending, if we
    could. You know, I am a little bit confused here. I have got a
    letter from the Special Inspector General, dated February 19th,
    that says, in essence, that Treasury perhaps was going to
    include the SIGTARP in overseeing the new Small Business
    Lending Program and then--or at least that is what your
    legislation would reflect--and then you all decided not to.
        But yet the way that I understand that the program has
    actually been designed really sounds pretty much like an
    extension of the Capital Purchase Program, so I am just a
    little bit confused. And perhaps you can explain to me or
    perhaps assure me that there is no reason at all why you all
    would want to involve SIGTARP's oversight in this newly
    proposed program. And just because it was kind of back and
    forth, back and forth, so I am not quite sure where we are in
    the process right now.
        So please explain.
        Mr. Allison. Yes. Well, first of all, it is important to
    point out that the new program would be subject to special
    legislation. The program would be outside of the TARP Program.
    It is not identical to the Capital Purchase Program. It is
    qualitatively different because it will be providing direct
    incentives for lending. It will be geared to stimulating
    lending. It is not primarily, as the Capital Purchase Program
    was, to bolster the capital of banks. This was to give them
    capital that they may need in order to expand lending, and they
    will only get a reduced dividend if their lending grows.
        We didn't think it was appropriate in legislation for us to
    tell Congress how we ought to be overseen.
        Mrs. Emerson. But you are using TARP money to do it, right?
        Mr. Allison. No, we would not be using TARP money. This
    would be done entirely outside of TARP, under separate
    legislation, without using TARP funds.
        Mrs. Emerson. Okay, but, if, in fact, Congress determined
    that it was, you know, because of the whole SIGTARP office has
    really ramped up and actually has the ability to oversee this,
    it would not be something that you all would push back on,
    would it? In other words, if, in fact, we decided in our
    legislation to have SIGTARP oversee, that is not a problem, is
    it?
        Mr. Allison. We welcome strong oversight over all of our
    programs. We have oversight not only by the Special Inspector
    General but by the Congressional Oversight Panel, the Financial
    Stability Oversight Board and the GAO.
        We think that they all add value to what we do. And the
    only advice we would give is that there should be continued
    strong oversight of all of these programs.
        Mrs. Emerson. Well, certainly we need to protect the
    taxpayer, but it seems to me if we have got an entity that is
    really doing its job well, we might as well just keep using
    them.
        The small, as I said earlier, my small businesses are just
    troubled by the lack of their ability to access credit. And so
    I am hopeful that whatever program comes about actually is
    going to work.
        Can you tell me what specific actions your office took to
    encourage lending, particularly from the banks receiving TARP
    funds, and then anything in excess of that?
        Mr. Allison. We think one of the best ways, Congresswoman
    Emerson, to encourage lending by the banks is to shine a light
    on their lending practices, and so we disclose their lending
    and have since the beginning on our Web site.
        We have also asked them to report to us periodically on how
    they are using TARP capital. And, by the way, some of those are
    recommendations of SIGTARP, which we thought were very
    constructive.
        We are working with banks. We have been talking to many
    banks about their lending practices to encourage them to try to
    lend responsibly. In fairness, we have seen collateral values,
    especially this affects small business, the value of their
    collateral, such as their commercial real estate that they may
    pledge or their personal real estate that they may pledge in
    order to get a loan, has dropped substantially. And that is one
    reason why some banks have cut back on their credit.
        Nonetheless, with the stimulus activities by the
    government, by the funding of many programs, by the improvement
    in the economy, we think and we are hearing from banks that
    they are reaching an inflection point where you are likely to
    see a pick up in lending in 2010, and that is very encouraging
    for small business and for the economy.
        Mrs. Emerson. Well, it certainly, in almost every single
    newspaper article that I can read, including another article in
    USA Today, ``Banks Who Took Aid Decreased Lending,'' every
    single headline. And that is very troubling, given the fact
    that part of the whole reason that we--those of us who
    supported TARP--it was to get Main Street back in business.
        Mr. Allison. Let me just also mention on that point, one
    can't just look at the loan balances on the bank's books to see
    what their current activity is, because banks have had to write
    down a lot of bad loans. And so even their lending activity may
    be stronger today, but the overall balance comes down because
    other loans have either matured or been written down.
        So one has to look at the actual lending activity of the
    bank, not at the balances on the bank's balance sheet, to get
    the real picture as to what is going on.
        Mrs. Emerson. All I have to do is talk to small businesses
    in my district, and I can get the real answer to this question.
    And we are not talking about Bank of America banks; we are
    talking Missouri, big Missouri banks, just for example.
        But, I know that for much of the last year, the secondary
    market for many types of loans was frozen, and so whether it is
    mortgages, SBA loans, other asset-backed securities currently
    functioning, I mean, tell me what steps you all are taking to
    ensure those markets do continue to function effectively so we
    can move this along faster.
        Mr. Allison. You have just given the rationale,
    Congresswoman Emerson, for this Small Business Lending Fund
    that we would like Congress to enact. This program is designed
    specifically to encourage lending. We totally agree with your
    points. We hear the same anecdotes from many businesses across
    the country. I get letters from many of these businesses.
        You are pointing to a real problem, and we understand that.
    That is why we have designed this program. That is why we are
    hopeful that the Congress will enact it as soon as possible so
    we could be providing capital to these banks and enabling,
    giving them the confidence and the capital so they can increase
    their lending.
        Mrs. Emerson. So what is going to happen if we don't pass
    legislation?
        Mr. Allison. I think it will simply take longer for the
    lending to recover. Eventually it will increase again, but we
    would like to see it happening sooner rather than later. We
    want to help create jobs, and jobs depend upon small business
    being able to get funding to purchase inventories, to make new
    investments in plant and equipment to hire more people. And so
    to get the economy moving more rapidly, we think providing
    capital to the smaller banks who do an outsized portion of
    small business lending across the country is extremely
    important.
        I and my colleagues have been talking with many of these
    banks across the country in all districts. And what they tell
    us is that they see good quality companies that they want to be
    lending to. I think that we are seeing some parts of the
    country where lending is going to pick up a little more rapidly
    than other parts. But by providing the capital, we enable banks
    to take another look at their lending practices to review loans
    that they may have turned down but they might want to review
    again with the prospect of perhaps increasing lending to those
    companies.
        Mrs. Emerson. Well, it is a problem, and hopefully we will
    get to this issue. I would certainly encourage you all just to
    make it a lot easier on yourselves by saying SIGTARP can handle
    the oversight here.
        But I also want to just, before I close, I also want to
    mention, there is another issue--and this isn't specific to our
    subcommittee at all--but the fact is that the credit unions are
    actually trying to increase the cap on their member business
    lending so they, in fact, could make some of these small
    business loans the banks are so reluctant to do because they
    have the capital to do it.
        And it seems to me ridiculous that the Treasury Department
    would be pushing back on this and saying--and this isn't in
    your field--but it is just a frustrating thing. You have got
    these very stable financial institutions wanting to do
    something to help keep the economy going, and, you know,
    Treasury is pushing back on them. And it seems to me that it
    would be a win/win if we were able to do something in that
    regard simply to increase the inventory of financial
    institutions that have money to offer. Thanks.
        Mr. Allison. Thank you.
        Mr. Serrano. Thank you. Thank you, Mrs. Emerson.
        We are going to recognize remaining members, and then we
    are going to try to wind down this first panel so that we can
    get going with the second panel. We hope to unwind this before
    we face the impending votes on the House floor.
        Mr. Edwards.
        Mr. Edwards. Mr. Chairman, in the remaining time, I have no
    additional questions other than I did want to ditto the line of
    questioning of Mrs. Emerson; while I believe we needed
    financial stabilization measures in 2008 and 2009 to keep us
    from going into the second Great Depression, clearly small
    businesses all across the country, and it certainly reflects
    that and I see that in Texas, they are having challenges.
    Anything we can do together to free up that liquidity in a
    responsible way would be very, very important.
        Mr. Serrano. Thank you.
        Mr. Culberson.
        Mr. Culberson. Thank you. A follow-up on that same line of
    questioning, I can back up what Mr. Edwards and Mrs. Emerson
    are saying, but pointing directly to information that I have
    gotten and I know they probably have heard, too, from the
    Associated General Contractors in Texas, the Greater Houston
    Builders Association, the Associated Builders and Contractors
    in Houston, the Houston Association of Realtors, the Texas
    Association of Realtors, I am sure this is true across the
    country, that the banks are flush with money. And the
    regulators have instructed the banks to unload realestate
    loans, stop loaning money for real estate loans or commercial real
    estate, even if it is a blue chip borrower who has always paid back
    their loans. So it is a regulatory problem as well, but these banks who
    have received this money are absolutely flush with money.
        This is within Treasury's jurisdiction. I know FDIC is a
    key part of this, but I know all of us, and I suspect Mr.
    Edwards would join me in this, he is nodding back there, we
    would all encourage it. We want the banks to loan money to
    people who can pay it back, but they are not loaning money to
    people who can pay it back.
        To what extent can you help, can Treasury help put pressure
    on regulators to quit forcing banks to unload or stop making
    real estate loans to good borrowers? I mean, these are good
    credit risks. In fact, most of the home building, Chet, in
    Houston, I just had home builders come see me yesterday, and
    several of them have gone out of business because the banks
    will not lend them money. And these are solid credit risks.
    They have always--you could have a nuclear attack from the
    Russians, and these guys would pay their loan back.
        What can you do to help get the regulators to quit
    pressuring the banks to stop making these loans to good credit
    risks?
        Mr. Allison. Well, first of all, we fully understand the
    importance of increasing lending to small business.
        Mr. Culberson. But good credit risk.
        Mr. Allison. Yes, sir, I understand. We do not control the
    regulators. The regulators are totally independent from the
    Treasury Department. We know that they have provided additional
    guidance to their examiners throughout the country about
    lending to small business.
        Mr. Culberson. They have, indeed. They are putting this----
        Mr. Allison. Well, I would think that perhaps the
    regulators should speak for themselves on that issue.
        Mr. Culberson. You have got a role in that, though; it is
    atmospherics. And to the extent you can, I hope you will, as
    the Department of Treasury, do whatever you can. What can you
    do? They are not complete. I mean, obviously, they are
    independent. You want them to be.
        Mr. Allison. Well, the regulators are well aware of that
    issue, and that is one reason why they have communicated
    additional guidance to their supervisors and their examiners.
    But I would invite you to speak with the regulators directly
    because they are independent of the U.S. Treasury Department.
    We obviously have dialogue with them, but they make their own
    decisions.
        Mr. Culberson. Mr. Chairman, I know it would be very
    helpful for this committee to do whatever we can, obviously,
    making sure that we want loans to be made to people who can pay
    them back. I am sure it has happened in New York, too, and in
    Pennsylvania. They are absolutely not making loans to
    creditworthy borrowers who will pay them back. And we need to
    do whatever we can, Mr. Chairman, to help get the regulators to
    quit putting the screws to the banks.
        Mr. Serrano. The point is well taken. It is a problem in
    every community in this country.
        Mr. Fattah.
        Mr. Fattah. Thank you, Mr. Chairman.
        Well, we don't live in a socialist country. We can't
    dictate to the banks what they do in a free market economy, but
    I do empathize with much of what has been said that there is a
    concern about getting credit flowing.
        Let me start here, first, to really congratulate the
    Department in its work on the TARP Program. I mean, it is an
    amazing feat, an extraordinary one, and unexpected by many of
    the critics of the TARP Program that the Department would have
    made money and expect to make money in totality when the funds
    were made available to banks to stem the financial crisis. The
    economy has bounced back significantly, and the stability in
    the financial markets, I think, is obvious to everyone.
        So you have done a very good job, and you have maintained
    stewardship over the taxpayers' money in a way that I think
    deserves to be noted for you and the work of Secretary
    Geithner.
        I do think that where we see a need that is not being
    filled in the market, it isn't inappropriate at all for the
    government to step in. That is what SBA exists for, and I think
    the administration's program of moving some $30 billion through
    CDFIs, through community banks, so that it can be available to
    small businesses who are good credit risks, I think, is an
    appropriate role.
        And this is what we have done where the market has not
    worked in the past, and the government has stepped in. And I
    think that that is something we should move expeditiously on. I
    know that the Department is working on it. The administration
    is working on it. And I just want to voice my support for it,
    because I know many small businesses in the Philadelphia
    community who have still had some challenges, notwithstanding
    being very good credit risks and having, you know, in essence,
    the narrow deals have had difficulty getting loans.
        But I think that we don't on the one hand want to criticize
    banks for the risks that they took that took the country to the
    edge of a financial disaster, as regulators are saying that
    they need to be more conscious of the risk they are assuming,
    and at the same time say, well, we want Treasury to put
    pressure on regulators to back off. I mean, you know, we can't
    have our cake and eat it, too, in that sense. But I do think
    that we can step in through the Treasury, through SBA, and
    provide assistance.
        I am more interested in what we are doing about mortgage
    foreclosures, and I know a billion and a half was made
    available to the housing and finance agencies to develop
    programs related to the unemployed, in terms of foreclosure
    prevention, different from the foreclosures we saw in the front
    end of this problem, which were largely driven by the subprime
    and other issues.
        The foreclosures that are moving through the market now are
    driven in large part because people have lost their job and
    then followed their home. And it makes no sense for us to
    create deadbeats out of persons who are taxpaying, law-abiding
    citizens, paying their bills. It created a situation where we
    now have a vacant home in the neighborhood and driving prices
    down, but also have them out on the street and their credit
    rating ruined for a decade or so.
        And the cost for the taxpayer for a foreclosure, which
    doesn't get discussed a lot, is, you know, quite substantial,
    somewhere above $80,000 per foreclosure.
        We have a program in Pennsylvania through our housing and
    finance agency that I helped create a few decades ago that has
    worked very well to step in and help unemployed homeowners who
    have lost their job through no fault of theirown and through no
    risk to the taxpayers. We have gotten every dollar paid back, and the
    average amount of help was 4 or 5 months of assistance to that
    homeowner with those dollars being paid to the long-term payment of the
    mortgage.
        So I was very happy to see the Treasury's initiative
    focused on the hardest-hit States. We have, in the Wall Street
    reform bill, the House version, a $3 billion allotment to
    mirror those efforts throughout the country to step in to help
    homeowners.
        So I would just like to get from you what has happened with
    the initial $1.5 billion and what these hardest-hit States are
    doing, if you can comment.
        Mr. Allison. Congressman Fattah, thank you very much for
    your comments and your question for help for the hardest-hit
    States. As you know, the first billion and a half, as you said,
    was devoted to five States. We then allocated another $600
    million to five other States. And we have received the
    proposals from the first five States as of last Friday. We are
    looking at those right now.
        I think you would be pleased that the HEMAP Program in
    Pennsylvania has been looked at very closely by a number of
    those States as maybe they could model something after HEMAP to
    tide people over, as you said, who are unemployed. This
    programs is aimed at areas most affected by high unemployment
    and by falling housing prices. And this is a localized problem
    in that it is acute in some particular parts of the country,
    and that is why we allocated the money to those particular 10
    States.
        So we are looking forward to seeing what their proposals
    are, to working with them on implementing those proposals.
        We will have final decisions next month on those proposals,
    and then they can get moving.
        But we totally agree with your analysis of this problem.
    That is why we innovated this program. And we have high hopes
    that it will be truly creative and develop solutions that best
    suit these particular areas of the country, because they are
    developed by people who know those communities.
        And we found that, because this is a highly concentrated
    problem, we need local expertise to work alongside the Treasury
    Department and the Department of Housing and Urban Development
    to provide and develop the most effective solutions possible.
        Mr. Fattah. Let me thank you for your testimony. Thank you
    for your testimony.
        I am going to thank the chairman.
        Mr. Serrano. Thank you.
        Mr. Allison, we thank you. I have one more question to
    submit to the record.
        Mrs. Emerson. Mr. Chairman, I have several to submit to the
    record. If you would like to wind this down, I can wait.
        Mr. Serrano. We will wind it down. The one I do have for
    the record is one that probably should have been the first one,
    and that is, tell us how you are going to wind down TARP and,
    as that winds down, all of the information.
        So we thank you for your testimony. We thank you for your
    service, and we thank you for what I know is your desire to
    keep us informed on all the different issues that we presented.
        As you well understand, both programs that were put forth,
    in our opinion, were very necessary, but they have created a
    lot of controversy and created a lot of questions, and that is
    why we ask so many questions and ask you to keep us informed.
        Mr. Culberson. Mr. Chairman, could I ask, if I could, for
    the witness to provide the chairman as well the information
    about how much money the Federal Reserve has loaned out and to
    whom and under what conditions? I know the chairman would be
    very interested in that as well.
        Mr. Serrano. The chairman would be very interested in that.
        Mr. Culberson. Thank you.
        Mr. Serrano. Thank you.
        Thank you, Mr. Allison.
        Mr. Allison. Thank you, sir.
        Mr. Serrano. In my opening statement an hour and a half
    ago, I told you that our next witness would be Mr. Barofsky,
    and we ask you now to come forward and give us your testimony.
    We will try to do this as painless as possible because we are
    running against a time constraint.
        I am always amazed at how Members of Congress get in so
    many hearings, considering what we are always up against. And
    you know the drill; 5-minute presentation, and we will put
    anything else in the record.
        Mr. Barofsky. Thank you, Mr. Chairman.
        Thank you, Mr. Chairman, Ranking Member Emerson, members of
    the committee.
        It is a privilege to appear before you today to testify
    about SIGTARP's proposed budget for 2011. As you know, in the
    President's budget request for 2011, he includes a request for
    approximately $49.6 million for the operations of SIGTARP. That
    proposed budget will allow us to continue to operate as the
    agency that stands between hundreds of billions of taxpayer
    dollars and those who would seek to steal, waste or abuse them.
    We carry out this role in three different areas: Transparency,
    oversight and enforcement.
        Let me start with enforcement. As the only oversight body
    in the TARP legislation with law enforcement authority, we
    literally have the role as the TARP cop on the beat. And to
    meet those challenges, we built a sophisticated law enforcement
    agency. We have 84 ongoing investigations. We have recently
    opened up offices in New York and are about to do the same in
    L.A. and San Francisco, and we are trying to establish a
    nationwide presence to deter and detect TARP fraud.
        Our cases are as diverse as the 13 sub-TARP programs that
    have developed. For example, we recently arrested and got
    criminal charges against the president and CEO of Park Avenue
    Bank for his attempt to try to steal $11 million fromthe TARP
    Program. We have brought criminal charges against two individuals out
    in California who are running a mortgage modification fraud scheme that
    brought in a million dollars from struggling homeowners.
        In Tennessee, Gordon Grigg, a hedge fund executive, is
    serving 10 years in prison for a fraud that he was doing by
    trying to sell fictional investments that he called TARP-backed
    securities. In Atlanta, we have a number of convictions and
    charges related to our investigation of Omni Bank, another TARP
    applicant. We have executed search warrants in California
    against a law group that is alleged to have participated in
    other mortgage modification scams. And in Florida, two banks,
    one of which had received conditional approval, was about to
    receive $553 million in TARP funds that never went out the
    door.
        On the civil side, we work with the SEC and the New York
    State Attorney General in their investigations into Bank of
    America. And all told, our investigations division has helped
    in the recoupment or the prevention of loss through fraud of
    more than $700 million.
        We also leverage our resources with other law enforcement
    agencies. We formed the TALF PPIP Task Force in New York
    consisting of eight different law enforcement agencies. We have
    the TARP Inspector General counsel that we founded here in
    Washington, and we have a leading role in the President's Fraud
    Enforcement Task Force.
        With respect to transparency and oversight, we do that
    through our auditing and reporting function. This week we
    issued our sixth comprehensive quarterly report reviewing
    operations of TARP and of SIGTARP for the preceding quarter,
    and these reports are intended to be desk books, reference
    guides that try to translate all the Wall Street terminology
    into Main Street language.
        The American people have a thirst for information about
    this program in which they are investors. In SIGTARP, we have
    tried to meet that thirst with more than 42 million hits to our
    Web site since our inception.
        As far as audits, we have issued eight audits to date. Just
    as a way of example, they have covered issues such as TARP
    recipient use of funds, the impact of outside influences on the
    TARP application process, the decision by government officials
    to pay the equivalent of 100 cents on the dollar to AIG's
    counterparties for securities that were worth less than half of
    that amount, and most recently, on the HAMP, the mortgage
    modification program, the administration's response to the
    foreclosure crisis.
        We have made about 50 recommendations to date. And while
    many have been adopted, some have not. But those that have, I
    believe, have significantly contributed to the TARP being
    better run, better executed and, most importantly, better
    protected against the risk of loss through fraud as a result.
        Finally, one of our roles is, of course, to keep the
    Congress informed of what is going on in TARP and what is going
    on at SIGTARP. And we have conducted dozens and dozens of
    individual Member briefings, staff briefings. And today marks
    my 14th time testifying before Congress as the Special
    Inspector General to discuss what is going on in the TARP and
    the TARP programs.
        Mr. Chairman, Ranking Member Emerson, again, thank you for
    this opportunity today. I look forward to answering any
    questions you may have.
        [The prepared statement of Mr. Barofsky follows:]

        [GRAPHIC] [TIFF OMITTED] T2166A.079

        [GRAPHIC] [TIFF OMITTED] T2166A.080

        [GRAPHIC] [TIFF OMITTED] T2166A.081

        [GRAPHIC] [TIFF OMITTED] T2166A.082

        [GRAPHIC] [TIFF OMITTED] T2166A.083

        [GRAPHIC] [TIFF OMITTED] T2166A.084

        [GRAPHIC] [TIFF OMITTED] T2166A.085

        [GRAPHIC] [TIFF OMITTED] T2166A.086

        [GRAPHIC] [TIFF OMITTED] T2166A.087

        [GRAPHIC] [TIFF OMITTED] T2166A.088

        [GRAPHIC] [TIFF OMITTED] T2166A.089

        [GRAPHIC] [TIFF OMITTED] T2166A.090

        [GRAPHIC] [TIFF OMITTED] T2166A.091

        [GRAPHIC] [TIFF OMITTED] T2166A.092

        [GRAPHIC] [TIFF OMITTED] T2166A.093

        [GRAPHIC] [TIFF OMITTED] T2166A.094

        [GRAPHIC] [TIFF OMITTED] T2166A.095

        Mr. Serrano. Did you say 14, 14 times?
        Mr. Barofsky. This is number 14. We counted up for the
    testimony today. I was surprised at the number.
        Mr. Serrano. I think you were here for most of the prior,
    previous testimony, so I am going to give you an opportunity to
    comment on the answers Mr. Allison gave, particularly on
    mortgage relief and the general effects of TARP on credit
    conditions, if you have anything you would like to add to that.
        Mr. Barofsky. I think that, with respect to the mortgage
    program, the TARP mortgage program, HAMP, as I said, we
    recently released an audit, and we had new recommendations in
    our most recent quarterly report. It is a program that has a
    lot of promise. But it has had a lot of problems in execution.
    With only 230,000 permanent modifications more than a year into
    the program, it is making a very small dent into a much larger
    problem.
        We addressed that in our audit through our recommendations.
    There has been problems with execution; a lot of the decisions
    and the practices in some ways have been rushed, which has
    resulted in some inefficiencies; a lot of borrower confusion,
    which has led to avenues for fraud. And there has been problems
    in some of the program design, which leaves it vulnerable to
    redefault. That is when someone gets a mortgage modification
    but is still unable or unwilling to continue to make the
    payments, either because the payments are still too
    unaffordable or because they are too hopelessly underwater.
        To Mr. Allison and to Treasury's credit, after receiving
    that audit report, they announced some significant revisions to
    the program that do address things like underwater mortgages,
    carving out $14 billion of the program just for one program
    alone with FHA.
        Those announcements also raised some significant concerns,
    which are addressed in our quarterly report. But we are hopeful
    and confident, and we will continue to work with Treasury to
    assist them in making this a program that will have the impact
    that the dollar amount that is committed to it should deserve.
        Mr. Serrano. When you speak about you hope to continue to
    work, has the past or recent past been rocky in that
    relationship? Are things getting better if they have been
    rocky? How do you see it? Because we in this panel want you all
    to get along.
        Mr. Barofsky. I think we do get along. I think the nature--
    --
        Mr. Serrano. Just in case, just for the record.
        Mr. Barofsky. I think we get along. I think the nature of
    our oversight, we are very vigorous in our oversight.
        Mr. Serrano. Well, that is the key. We want you to work
    together. We don't want you to get along too much.
        Mr. Barofsky. No. I think that, while there have been areas
    where certainly we have had some disagreement, certainly
    sometimes very passionate disagreement, I credit Treasury; I
    credit Mr. Allison. We are all working towards the same goal,
    which is helping to make sure this program protects the
    American people, it maximizes its efficiency, and it best
    protects against risk of loss from fraud. I think we have a
    great working relationship.
        Mr. Allison and I spend, at least once a week where we sit
    down and discuss the TARP issues. And as I said before, I think
    that sometimes we have to work a bit longer and a little bit
    harder to get them to see our way. But overall, this program is
    in much, much better shape because of the willingness of
    Treasury to work with us and to try to meet us at least
    halfway, sometimes all the way on our side, with some of our
    most important recommendations.
        Mr. Serrano. SIGTARP's budget request of $49.6 million is
    higher than the budget request in the Treasury's Office of
    Inspector General, which is $30.3 million. So why is your
    organization so much more costly to operate? How much do you
    pay for contracted services, and what types of the services do
    you contract out?
        Mr. Barofsky. Sure. The scope of our operations has changed
    dramatically since EESA was first passed, and originally it was
    contemplated to be one program basically to buy $700 billion of
    assets, direct purchases, a relatively straightforward program.
    It has changed a lot since then. As I said before, 13
    subprograms that put a lot of demands on our agency, which I
    think are a lot different not just from the Treasury Inspector
    General but for most non-Special Inspector Generals.
        We don't just address what is going on in Treasury. In
    other words, our oversight just isn't over Mr. Allison's
    office, the Office of Financial Stability. Because of the way
    that these programs have evolved, for example, the Capital
    Purchase Program, we also are providing oversight to more of
    the Treasury entities but also the FDIC and also the Federal
    Reserve. We also take a very aggressive role because we really
    are the sole law enforcement authority over all TARP-related
    programs. That really makes an expansive jurisdiction.
        The Treasury Inspector General doesn't necessarily get out
    to those who come into the government for a program, so let me
    just give you an example. AIG, Bank of America, and Citi have
    devoted a lot of our audit and investigative resources, more
    than 700 banks, probably closer to 800 banks just through one
    program, the Capital Purchase Program, and we are responsible
    for safeguarding those investments.
        The HAMP program is 110 different servicers, a lot of the
    large banks, and potentially millions of applicants coming in
    through the door.
        The TALF program is a very complex program run by the
    Federal Reserve and Treasury. It involves 15 or 16 primary
    dealers and their customers.
        The PPIP program is nine, now eight, sophisticated hedge
    fund asset management, which has a tremendous amount of
    challenges.
        So I think one of the reasons why--our budget is larger is
    that our scope is very broad and our responsibility is very
    broad. And I would compare us to other Special Inspector
    Generals. For example, we based a lot of our growth on the
    Special Inspector General for Iraq reconstruction, which
    oversees about $50 billion, compared to our much larger scope
    of--and our budget, when they were reaching their peak, is
    right around the same area.
        The other Inspectors General--just by way of example, when
    ours was passed, one Inspector General commented for us that it
    would only leave him resources with one auditor per billion
    dollars, which that Inspector General thought was an unmeetable
    goal. If we had one auditor for every billion dollars, our
    audit division alone would be 700, not even counting our
    investigations.
        We have taken costs very seriously from day one. We try to
    be frugal, we try to be prudent, and, above all, we try to get
    the most bang for our buck to get the most coverage possible
    for this breathtakingly complex program.
        Mr. Serrano. Thank you.
        Mrs. Emerson.
        Mrs. Emerson. Thank you.
        Thank you so much for being here and thanks for the great
    job that your office is doing under your leadership. It really
    makes those of us who have to live and breathe this every day
    feel a lot better because you all are watching over our very
    precious tax dollars.
        Let me ask you, you mentioned some of the audits and that
    sort of thing that you had done, and I read it in the part of
    the quarterly report I got through last night--I must say I
    didn't finish the whole thing--but, last year, you stated in
    written testimony--and I am going to quote: We stand on the
    precipice of the largest infusion of government funds over the
    shortest period of time in our Nation's history. History
    teaches us that an outlay of so much money in such a short
    period of time will inevitably attract those seeking to profit
    criminally. If by percentage terms some of the estimates of
    fraud in recent government programs apply to the TARP programs,
    we are looking at the potential exposure of hundreds of
    billions of dollars in taxpayer money lost to fraud, end quote.
        So, number one, have your fears materialized and have you
    been able to find any large-scale fraud in the TARP programs?
    If so, what types of fraud have you uncovered? And then, third,
    how closely are other agencies such as HUD, the FBI, SEC, FTC,
    and U.S. Attorneys working with you all to investigate and
    prosecute cases of fraud?
        Mr. Barofsky. I believe that ultimately the success of my
    organization of SIGTARP historically will be judged by how we
    do against those typical numbers of the 10 percent burn rate
    for the FBI. Sometimes it is 7 percent, sometimes it is 12
    percent. I think we are really well on our way because, even
    more important from our investigative functions, I believe, in
    detecting and bringing people to justice, is how much we do as
    a job of deterrence through building and making our
    recommendations to make these programs as safe as possible and
    then for getting the word out and making sure that those who
    are contemplating committing fraud know we are out there.
        We certainly are seeing fraud, probably inevitable of a
    program of this size. We are not so far seeing anything close
    to what the typical government burn rate is for fraud. Now we
    still have a ways to go to be sure, but I am very--we really
    try to get out in front.
        I mentioned in my opening testimony the TALF PPIP Task
    Force. That is not just a law enforcement group where we sit
    around and figure out ways to arrest people. A lot of our
    recommendations came from those discussions. We try to get
    experts from the SEC, from the FBI together so we can make
    these programs well designed.
        I think the TALF program, when we originally started, it
    was originally pitched to us by the Federal Reserve. It had
    virtually no fraud protection whatsoever. It was going to rely
    on rating agencies and investor due diligence, the two things
    that led to this financial crisis in many ways. I think now
    this program is remarkably well designed.
        They took our recommendations to heart. I remember they
    came down the day after our first initial report, came down to
    Washington and sat with us and worked with us and put in some
    really, really good protections. Sometimes they went beyond
    what we said, which we thought was terrific.
        They kept residential-mortgage-backed securities out of
    that program, which was a pretty courageous move. I mean, this
    is something that was announced by the Secretary and the
    Chairman of the Board of the Federal Reserve that they were
    going to put those securities through that program. We had real
    problems with it, because we didn't think the program was well
    designed, and they listened to it.
        So, real quick--I hear the buzzing--we have had wonderful
    cooperation with the Department of Justice, the U.S. Attorney's
    office, our law enforcement partners. We work with HUD OIG, we
    work with FDIC CIG, really, every law enforcement agency that
    has a hand in white-collar law enforcement works with us on our
    cases, Postal, ICE, and we also work with State and local
    authorities as well, like the New York State Attorney General.
    The New York State Banking Superintendent is very supportive in
    our recent case in New York.
        Mrs. Emerson. I appreciate that. Thanks.
        I think, just to let the other colleagues get a question
    in, I will wait and do another round if we do.
        Mr. Serrano. I agree. I thank you.
        Mr. Fattah.
        Mr. Fattah. Let me go back to the chairman's question about
    contracted services, services you contract out for. You didn't
    describe any or make any response to that question.
        Mr. Barofsky. Oh, I will be happy to.
        Basically, for contracting, obviously, EESA gives us the
    authority to do so. And when we do our contracting, we always
    try to do it when it is most cost-effective. As a temporary
    agency, we have to be sort of selective in what we bring in-
    house and what we contract out, because we are not a permanent
    organization, to build and hire up.
        Mr. Fattah. Tell us what you do. What kinds of services
    have you the contracted out for?
        Mr. Barofsky. Perhaps our most significant contract is a
    program manager to help us with the production and design of
    our quarterly reports. The quarterly report has a tremendous
    amount of data that we collect in it, that we crunch and turn
    into charts and numbers. We do extensive vetting; and we have a
    contractor, Deloitte, actually, financial advising services,
    which assists us in that.
        We then have a bunch of smaller contracting services,
    everything from cars for our investigators, our special agents,
    to buy supplies for them, rent, obviously, as well as parking
    spots. We have other advisory services that help us with, you
    know, some of our human resource functions. We don't do all of
    our human resource functions in-house because, as I said, as a
    temporary agency it would just be too expensive.
        Mr. Fattah. Your total personnel complement is?
        Mr. Barofsky. Right now, we are at 116 FTE.
        Mr. Fattah. Can you guesstimate for the committee the
    number, the percentage, of women, African Americans, Hispanics,
    what level of diversity? Since you are the cop for TARP, I was
    interested in the question of how diverse the picture might be.
    So can you give us a general notion?
        Mr. Barofsky. I don't want to hazard numbers, because I
    don't have them, but I am happy to get those numbers to you,
    assuming our H.R. Department keeps track of them.
        I know that I have emphasized from day one from to all of
    my senior managers who do the hiring on down the importance of
    diversity, and we certainly do strive for it.
        Mr. Fattah. Your senior managers, is it a diverse group of
    people?
        Mr. Barofsky. I believe our senior staff is remarkably
    diverse.
        Mr. Fattah. In your contracting out, have you utilized
    women and minority-owned, veteran-owned firms?
        Mr. Barofsky. Yes. We actually required for our largest
    subcontract with Deloitte that they subcontract to minority,
    small business, minority-owned, women-owned small business.
        Also, with our other, smaller contracts, advisory
    contracts, I know that has been an emphasis.
        As I said, I don't have the numbers and statistics at my
    fingertips, but I will get them for you.
        Mr. Fattah. Mr. Chairman, if we could have that request
    made for the record. Thank you very much.
        Mr. Barofsky. My deputy reminded me that when we went out
    and contracted for our use of funds survey we did hire a
    minority, woman-owned small business as well. So it is
    something that is always on the forefront of what we are
    thinking, but I just don't have the data.
        Mr. Fattah. Thank you very much.
        Mr. Serrano. We will make that request on the record, Mr.
    Fattah.
        Mr. Culberson.
        Mr. Culberson. Thank you, Mr. Chairman. I will be as brief
    as I can.
        Do you know how much money the Federal Reserve has loaned
    out and to who and under what terms and conditions and can you
    provide that to the committee, please?
        Mr. Barofsky. We did a comprehensive review last July, not
    just the Federal Reserve but all the different Federal
    government support of the financial industry during the crisis.
    So we will get you a copy of our July 2009, report. I fully
    plan to update that in our next quarterly report this July;
    and, obviously, we will get that back to you as well.
        Mr. Culberson. Thank you. I am sorry I didn't see it.
        Does it give detail as to who, what entities the Federal
    Reserve loaned money to? Because that has always been a concern
    to Members of Congress. Who are they loaning my daughter and
    our kids' money to and under what terms and conditions?
        Mr. Barofsky. Hopefully, that decision will be made by the
    Supreme Court.
        Mr. Culberson. They are not releasing the information.
        Mr. Barofsky. The Federal Reserve doesn't disclose it.
    There was recently a decision in the Second Circuit Court of
    Appeals that is going to order them to make available that type
    of information. My understanding is they are appealing that
    decision.
        Mr. Culberson. I bet. Could you send that to me? I would
    love to see the court case, too.
        We are running short of time.
        The HOPE for Homeowners Program that the chairman asked you
    about, that is in section 110 of the TARP bill, I recall. It is
    now title 12 of the United States Code, section 5220. Was that
    the same program you were talking with the chairman about?
        Mr. Barofsky. No, actually, HOPE for Homeowners is
    something a little bit different. That is a HUD program.
        Mr. Culberson. It is a separate program, but, I mean, the
    statute, TARP, references that. The purpose of the subsection
    of TARP is to implement the provisions of HOPE for Homeowners
    is my point, right?
        Mr. Barofsky. In certain aspects.
        Mr. Culberson. Do I remember it correctly? That is the
    section we are talking about of TARP?
        Mr. Barofsky. I don't remember the exact section either.
        Mr. Culberson. That language of that section says that the
    Federal property managers can, as I recall--in order to
    encourage people to stay in their homes, to encourage
    homeownership consistent with HOPE for Homeowners Program, the
    Federal property manager can, to the extent that the Federal
    property manager or the Treasury owns a mortgage-backed
    security or mortgages, reduce the amount of principal, reduce
    the amount of the interest, will make any other modification
    they wish. Is that accurate? Essentially that is what it is,
    isn't it?
        Mr. Barofsky. I mean, essentially, I think that was sort of
    a carryover of what TARP was originally intended to be, which
    was that the Federal Government was going to go out and buy
    toxic assets, including home mortgage loans, mortgage-backed
    securities. Because that really has never come to pass, I don't
    think those provisions have really----
        Mr. Culberson. But is that the section you are talking
    about? You said to the chairman, there is 230,000 permanent
    modifications that have been made to mortgages. I think that is
    the same program, isn't it, Mr. Chairman?
        Mr. Barofsky. No, Congressman, it is a separate program
    that has been initiated under TARP called the Home Affordable
    Modification Program.
        Mr. Culberson. Okay, completely separate.
        Mr. Barofsky. Completely separate. There the government
    doesn't actually own the mortgages. They are actually owned by
    private investors through private label mortgage-backed
    securities, or Fannie and Freddie, which technically is not the
    government owning those mortgages. But that program addresses
    privately-held mortgages.
        We don't really have through TARP an inventory of
    mortgages. Although that was what perhaps was originally
    intended with legislation, it is not what came to pass.
        Mr. Culberson. Well, I wish you would run this down for me,
    because it is in statute. And I spotted it, and I voted against
    the TARP, but this is one of the many reasons I voted against
    it. But it was a real source of concern to me.
        This other program you were mentioning to me, does the
    Federal Government then have the ability to insist that the
    bank modify the principal, reduce the interest, or make any
    modifications they can to keep the person in the home or keep
    somebody in the home?
        Mr. Barofsky. Once a mortgage servicer signs into the
    agreement--and so far more than 110 have, which covers about 90
    percent of the market--they are required to run a net present
    value test, a computer model that determines whether or not the
    mortgage modification, which there will be certain incentives
    provided by the government, if that will make more money for
    the investor than rather just doing nothing. And when that NVP
    test is positive under the program, the servicer is required
    to--it is mandatory--to do certain modifications of the
    mortgage. Under the current program, it starts with the
    reduction of the interest rate, and then it is followed by
    other factors like extending the term of the loan or
    forebearing.
        Mr. Culberson. Can we get the name of the program?
        Mr. Barofsky. That is the HAMP Program, the Home Affordable
    Modification Program.
        Mr. Culberson. Thank you, Mr. Chairman. I know we need to
    go vote, but it was a concern just because of obvious potential
    for fraud and abuse.
        Mr. Barofsky. We are literally all over this program. We
    have more than two dozen criminal investigations pending
    relating to the HAMP Program.
        Mr. Culberson. Two other quick questions.
        If you could ballpark the total amount of the exposure of
    taxpayers, in your opinion, the potential liability of
    taxpayers. How much have taxpayers been exposed to both through
    the Federal Reserve and through the Treasury through this TARP
    Program and other guaranteed programs like it?
        Mr. Barofsky. In July of 2009, when we did this analysis,
    it was about $3 trillion. What we are going to see, as I said,
    we are going to update it this July, and we will give you an
    updated number at this point.
        Mr. Serrano. There is no way we can leave to vote and come
    back. That will take quite a while. I don't want to have you
    wait here, but you have answered most of the questions.
        I was going to ask one more. So I am going to ask one more,
    and Mrs. Emerson, and then we will let you go. And this is one
    of those great, loaded questions.
        So if your staffing number is lower than expected in 2010,
    we assume that you will have money left over to carry into
    2011, which means you won't need the over $49.6 million that
    you are asking for in 2011. Is that a fair assumption or are
    you going to tell me now how you need every bit of the $49.6
    million?
        Mr. Barofsky. I am told by my budget folks that we do. And
    the reason is that we have a lot of expenses that I think we
    anticipated that are going to be incurred in this year in 2010
    that are not going to be--specifically with respect to our
    information technology, you know, we still--right now, we are
    sort of doing it with band-aids and duct tape.
        We have to build our own IT structure, not completely from
    scratch, but decide on what off-the-shelf products we are going
    to use. We have been relying on Treasury to sort of get us
    through. And what I have been told is that those funds are not
    going to be spent in 2010 and are not reflected in the 2011
    budget.
        So to the extent that this carryover of that money is going
    to be still spent in 2011 and that carryover will apply to
    that, we do anticipate spending all of our--I get the
    terminology wrong, and I apologize--our annual money, the money
    that we are being provided for 2010, that will be spent. There
    will probably be something left over of our no-year money,
    which is part of the initial allocation, and I apologize if I
    am getting the terminology wrong.
        But, again, as my staff tells me, because we haven't
    realized some of the expenses that we thought we would in2010,
    that they are going to be realized in 2011.
        Mr. Serrano. Okay. We would like you to keep us informed of
    that. In other words, speak to staff as we go along to make
    sure that we feel comfortable that even if you don't meet the
    goals you expected that we are still not giving you more money
    than you should be getting only because, across the board,
    everybody is very tight, and we don't want to run into any
    problems.
        Mrs. Emerson.
        Mrs. Emerson. Okay, 222 people haven't voted; and we have
    zero minutes remaining.
        Very, very quickly, because I am still bothered by this,
    with regard to the Treasury Department, back in December,
    approving a tax rule that allowed Citigroup to avoid paying
    billions of dollars in taxes. And I understand that this ruling
    will help make Citigroup shares more valuable, allowing the
    Treasury to make more money when you sell the shares that the
    government owns. But I guess it is just difficult for me to
    understand why a company that receives tens of billions of
    dollars in government bailouts should receive special treatment
    in the Tax Code. So I want to know if you have looked into this
    matter and whether or not you believe that the government will
    receive more revenue once Citigroup shares are auctioned than
    it would have if the tax rule hadn't been changed.
        Mr. Barofsky. This is the initiative that we have spent a
    lot of time thinking about. And, actually, Representative
    Kucinich has sent a letter to myself as well as to Senator
    Baucus, the chairman of the tax committee in the Senate, asking
    us to do two parts of a project that will review that: our side
    to review the decision-making process that led up to that
    decision, and on the Senate side to do a review of what the
    actual costs were, what is the dollars and cents.
        It is a very complicated and complex formula. Originally, I
    was hopeful that we would be able--you know, we were thinking
    about doing it ourselves. We can't. We don't have the
    expertise. We would have to contract it out. It would cost a
    fortune.
        So we are intending, we are going to work with the Senate
    and work with the tax committee and get to the point where we
    can, you know, make sure that that part of the project is being
    addressed. And, if so, we are certainly committed to addressing
    our part of getting and auditing what the decision-making
    process is.
        Mrs. Emerson. Thank you. I appreciate it.
        Mr. Barofsky. Because we agree that it is a very
    significant concern. It is a concern where, basically, the
    stock prices of Citi is being potentially buoyed, which
    benefits the government, as a 28 percent shareholder of the
    common stock of Citi, but it also benefits those other 82
    percent, or 72 percent. So it is something that is on our radar
    screen.
        Mrs. Emerson. I appreciate it. There is something that just
    smells funny about it to me. So I appreciate the fact that you
    all are going to look into it and will appreciate hearing back
    from you about what you may have found.
        Mr. Barofsky. Absolutely.
        Mr. Serrano. We will all be interested in that.
        Mr. Barofsky, we thank you, first of all, for your service.
    We thank you for the work you do. We thank you for testifying
    before us.
        We are sorry that we are kind of rushing here, but we are
    at zero. And there are at least four votes, which means this
    will go on for a while down there, and we don't want to keep
    you waiting here for us.
        So we thank you. We will continue to be in touch, and our
    staffs will continue to be in touch. And what you do is very
    important, very important to our mission here, to keep us
    informed and to do the right thing. And we thank you so much.
        Mrs. Emerson. Thank you.
        Mr. Barofsky. Thank you very much.

        [GRAPHIC] [TIFF OMITTED] T2166A.096

        [GRAPHIC] [TIFF OMITTED] T2166A.097

        [GRAPHIC] [TIFF OMITTED] T2166A.098

        [GRAPHIC] [TIFF OMITTED] T2166A.099

        [GRAPHIC] [TIFF OMITTED] T2166A.100

        [GRAPHIC] [TIFF OMITTED] T2166A.101

        [GRAPHIC] [TIFF OMITTED] T2166A.102

        [GRAPHIC] [TIFF OMITTED] T2166A.103

        [GRAPHIC] [TIFF OMITTED] T2166A.104

        [GRAPHIC] [TIFF OMITTED] T2166A.105

        [GRAPHIC] [TIFF OMITTED] T2166A.106

                               W I T N E S S E S

                                  ----------
                                                                       Page
    Allison, H. M., Jr...............................................   147
    Barofsky, Neil...................................................   147
    Geithner, Hon. T. F..............................................    65
    Shulman, D. H....................................................     1