[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
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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:]
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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.
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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.
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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.
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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:]
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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.
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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:]
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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:]
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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.
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W I T N E S S E S
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Page
Allison, H. M., Jr............................................... 147
Barofsky, Neil................................................... 147
Geithner, Hon. T. F.............................................. 65
Shulman, D. H.................................................... 1