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



 
                     THE STATE OF THE INTERNATIONAL

                      FINANCIAL SYSTEM, INCLUDING

                    INTERNATIONAL REGULATORY ISSUES

                     RELEVANT TO THE IMPLEMENTATION

                         OF THE DODD-FRANK ACT

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


                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 22, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-155



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 22, 2010...........................................     1
Appendix:
    September 22, 2010...........................................    47

                               WITNESSES
                     Wednesday, September 22, 2010

Geithner, Hon. Timothy F., Secretary, U.S. Department of the 
  Treasury.......................................................     7

                                APPENDIX

Prepared statements:
    Waters, Hon. Maxine..........................................    48
    Geithner, Hon. Timothy F.....................................    50

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Written responses to questions submitted to Secretary 
      Geithner...................................................    54
Lance, Hon. Leonard:
    Article from The New York Times entitled, ``One Nation, Two 
      Deficits,'' dated September 6, 2010........................    57


                     THE STATE OF THE INTERNATIONAL



                      FINANCIAL SYSTEM, INCLUDING



                    INTERNATIONAL REGULATORY ISSUES



                     RELEVANT TO THE IMPLEMENTATION



                         OF THE DODD-FRANK ACT

                              ----------                              


                     Wednesday, September 22, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2 p.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Watt, Moore 
of Kansas, Miller of North Carolina, Green, Cleaver, Foster, 
Adler; Bachus, Castle, Royce, Biggert, Hensarling, Garrett, 
Neugebauer, Campbell, Posey, Lee, Paulsen, and Lance.
    The Chairman. The hearing will convene. I, again, explain, 
not apologize, it wasn't my decision--we had scheduled this 
hearing, and the Minority had pointed out that we have a 
statutory requirement to have it and we have not lived up to 
that, and I appreciate their making it clear and they were 
correct.
    The hearing had been scheduled on the assumption that we 
would have been voting last night and that a full complement of 
members would be here. So just as I acknowledged to the head of 
the FHA this morning, our witness, the Secretary of the 
Treasury, is testifying to fewer members than is the norm.
    I say that as an explanation, not an apology, first of all, 
and we apologize for it because we haven't done it.
    Secondly, I have yet to meet the Administration witness who 
minded that people weren't here. We are more often asked to 
apologize for the people who are here. So we can still proceed 
and that will mean we won't have to be held--I will say to the 
members we don't--it may not seem like a lot to others, people 
will understand this, we can sort of shoot for 6\1/2\ minutes, 
maybe 7 minutes. We don't have to hold strictly to 5 minutes, 
which can be a constraint.
    Now, let me begin my opening statement. I welcome Secretary 
Geithner. I think he comes to us in general with a very 
successful record. We had a situation in which the economy when 
he and the Administration took office was in terrible shape, a 
very deep recession. We have begun the process of emerging, 
more slowly than anyone would like for a variety of reasons, 
and we will be debating those reasons, but it is clear that in 
every economic area, we have been making some progress.
    We are here particularly today to talk about the 
international area. This committee has jurisdiction over that, 
in a number of ways, including what is often overlooked, our 
jurisdiction over American relations with the international 
financial institutions. I am going to begin with that.
    We had a crisis earlier this year. We didn't have one. 
Europe had a crisis. In fact, if you look at the trajectory of 
economic recovery, the first slowdown in the pace of recovery 
is coincident with, and I think caused by, the problems in 
Europe. We know how interconnected the world is, and it was the 
Greek debt crisis that really caused the first glitch, and we 
have not fully recovered from that.
    Europe was threatened with a significant set of problems. 
What happened was there was a European coordinated response, in 
which we participated and in which we can take a little bit of 
pride because I think much of what was done to respond to the 
Greek debt crisis and its implications built on what we did 
beginning in 2008 and 2009, the joint effort of the Bush 
Administration and this Congress and carried out by the Obama 
Administration. People have gotten angrier and there has been 
more bitterness, but the events from September 2008 to early 
2009 were one of the most important bipartisan efforts in 
American history: Republican and Democratic leaderships in both 
Houses, and first the Bush Administration and then the Obama 
Administration collaborating on a set of policies that were: 
(A) unpopular; and (B) successful.
    In fact, much of what was done in Europe built on that and 
I know there were criticisms of the role of the International 
Monetary Fund. I think events have now shown that our ability 
to work with the International Monetary Fund cost us not a 
single penny of our tax dollars and was, in fact, helpful in 
containing what could have been a serious problem, although it 
was serious enough to have been, I think, one of the things 
that has slowed down the growth.
    The second issue is coordination. I have been pleased to 
read articles in the Financial Times and the New York Times 
saying that, yes, Basel is a good thing, but it deals with only 
the banking industry in the technical sense and there is the 
whole non-bank financial industry where the problems were.
    And recently in both Ford Norsen's comment in the New York 
Times and Patrick Jensen's in the Financial Times, they said 
the only country that has stepped up to deal in a serious way 
with the non-bank issues is the United States with our 
financial reform bill. But we also know that having simply us 
do it doesn't work.
    As I said before, Lenin did manage to cook up a 
justification called socialism in one country to explain why 
Marxist predictions that the whole world would fall to him 
didn't come up. That didn't work very well, socialism in one 
country, but regulation in one country would work even less 
well because we have a total fungibility of activity and money. 
And so what is very important is for us to work together.
    I am very proud that we worked very closely with the 
Europeans, the Australians, the Japanese, the English, who are 
somewhat separate from the Europeans here, the Canadians, and I 
think we made very real progress in pulling things together.
    We have also been willing to assert our role to defend 
Americans' economic interests. We have an ongoing situation 
where we intervened with the European Parliament and the 
European Union where they were talking about rules that would 
have discriminated against American hedge funds, and we have 
had some progress there.
    What we will expect the Secretary to do is talk to about 
our progress there, and I do want to reiterate the importance 
to us of a provision that was fully supported by the 
Administration. In the bill that was signed into law in July, 
there is a mandate to the Federal Reserve and the Treasury to 
take defensive action against any nation anywhere that lets its 
financial system be used and its legal system be used as a way 
to bypass our regulations. We are very serious about that.
    Fortunately, or unfortunately, we have experience in that 
because we have under Stuart Levy, who was a holdover from the 
previous Administration to this one, good experience in the 
Administration and the sanctions regime and how you deal with 
rogue nations. And the experience we have had in being tough 
there we expect to be applied to any nation that holds itself 
out as the haven.
    The gentleman from Alabama.
    Mr. Bachus. Mr. Chairman, thank you for holding this 
hearing.
    America is the largest economy in the world, and it is 
actually larger than our three next competitors, and we got 
there through choice, competition, and freedom, not by a 
government running everything. And when you go to other 
countries, you come back to the United States and you know that 
America ultimately will be okay. We will have a sound economy. 
We may have challenges, but we will confront them and we will 
beat them.
    A famous investor once said, ``I can make money no matter 
what the rules are, I just need to know the rules.'' In the 
wake of this recession, which was brought on by Wall Street 
excesses and government incompetency, the American people have 
not asked for a bailout or special favors or for more 
government programs, and they certainly have not been clamoring 
for higher taxes. They have asked for two things: for the 
government to stop making things worse; and for some semblance 
of economic certainty. They need to know what the rules are. 
Instead, what we have been given is a bloated bureaucracy, more 
government control, and still more uncertainty.
    In response to the greatest financial crisis this country 
has witnessed since the Great Depression, many of my colleagues 
on the other side of the aisle have decided that the answer was 
not to identify the causes and fix them or to identify where 
government and the regulators failed. No, they decided that the 
solution was to draft 2,300 pages of legislation directing the 
same regulatory agencies that missed the crisis to come up with 
literally hundreds of new Federal regulations on top of those 
already in existence and empower a new generation of 
bureaucrats to exercise command and control over the economy 
for years to come. In fact, I talked to bankers back in 
Alabama, and they say, ``If the regulators would get out of my 
bank I could do a better job of stabilizing the mess.''
    With the recent release of proposed international capital 
standards by the Basel Committee in Switzerland, yet another 
element of uncertainty has been added. We can all agree that 
banks in the United States and overseas held insufficient 
capital to withstand the financial panic that struck the global 
economy in late 2008. Indeed, I pointed out when Secretary 
Paulson first unveiled the original TARP proposal that the 
major challenge the banks were facing at the time was a 
shortage of capital, not a toxic asset problem.
    But higher capital standards alone will not provide the 
stability our financial system requires to support a full 
economic recovery, and the prosperity our citizens need and 
demand, and for job creation overreliance on increased capital 
in Basel, tradeoffs that every member of this committee needs 
to consider.
    Higher capital standards means less credit. Less credit 
means fewer jobs and less economic growth. We need to make sure 
the standards we adopt really do make the financial system more 
resilient without needlessly sacrificing more jobs.
    But on to something as important as this, the 
Administration has failed once again to give the Americans the 
certainty they need. We don't know how much new capital our 
banks will need to raise. We don't know how many loans they 
will call in to meet those standards. We don't know how many 
businesses and consumers will be denied credit so that the 
banks can comply with Basel III. And the reason we don't know 
is that we are still trying to figure out how the 
Administration is going to implement the new standards and how 
those new standards will interact with Dodd-Frank. Until those 
questions are answered, it is impossible to say whether the 
Basel process will yield a more sustainable global banking 
system or, instead, serve as yet another obstacle to economic 
recovery.
    Because this is likely to be the last opportunity this 
committee has to hear from the Secretary, I hope he can provide 
some certainty for our markets, our businesses, our citizens, 
and for those citizens who need jobs, and our country 
desperately needs answers to all those questions.
    I thank the Secretary for being here, and I yield back the 
balance of my time.
    The Chairman. The gentleman from Illinois is recognized for 
2 minutes.
    Mr. Foster. Thank you, Mr. Secretary and Mr. Chairman, for 
having these hearings.
    As the author of two amendments to the House-passed version 
of the bill that actually survived the Senate negotiations 
involving both contingent capital and countercyclical capital 
elements, I was interested to see the third to last paragraph 
of your written testimony which references the fact they are 
still in play in the negotiations. I will be asking questions 
about the details of that state of play and the envelope of the 
negotiations because I think they are fundamental to making the 
system more stable and shock resistant, and I look forward to 
your testimony.
    I yield back.
    The Chairman. The gentleman from Texas is recognized for 
1\1/2\ minutes.
    Mr. Neugebauer. I appreciate Chairman Frank for calling 
this hearing with Secretary Geithner.
    The authority to set capital standards is the strongest 
tool financial regulators have, but it is essential that the 
regulators reach the right balance, and they haven't always 
done this in the past. Even without the new regulatory 
requirements, the marketplace has already pushed banks to 
increase their capital. Although these standards are complex, 
our committee has a responsibility to understand the position 
taken by the United States regulators and the impact this 
agreement would have on the U.S. financial system and 
competitiveness.
    The new international capital standards can have just as 
much impact on our financial system as our regulatory bill that 
we just passed recently.
    I would like for Secretary Geithner to provide us with 
assurances that we are using good data and analysis to set 
these standards. It is unclear to me whether anyone really ran 
the numbers on what these standards would be before we agreed 
upon it. I am also interested to know how the United States 
plans to implement the agreement if it becomes final, and while 
there are dates set out in the agreement, the timing of when 
the U.S. regulators choose to issue regulations determines when 
these rules actually become in effect.
    And so with that, I yield back the balance of my time.
    The Chairman. The gentleman from California, Mr. Royce, is 
now recognized for \1/2\ minutes.
    Mr. Royce. Thank you, Mr. Chairman. I think all of us have 
to remember that overleveraging throughout the financial 
sector, certainly leading up to the crisis, is what brought a 
lot of the conundrum to us. We had investment banks leveraged 
at 30:1. We had Fannie Mae and Freddie Mac over 100:1. So over 
the long run, we need to ensure financial institutions are 
sufficiently prepared for a downturn.
    But as the head of the Dallas Fed told us, requiring 
additional capital against risk sounds like a good idea but is 
incredibly difficult to implement. And since 1864, regulators 
have been struggling to stay ahead of the game when it comes to 
capital regulation. One of the problems we have here is that 
Europe is going to drag their feet. We are going to go forward, 
and that puts some of our firms at a competitive disadvantage.
    In my opinion, the most troubling aspect of Basel III is 
its reliance on the old model of risk weighting assets because 
it assumes that the securities which have been risky in the 
past are the same that will be risky in the future. And under 
this regime, banks will need to hold more common equity than 
ever against their risk weighted assets, which in turn incents 
these institutions to find low risk weight assets with some 
return since these assets can be leveraged much more highly.
    So, Mr. Geithner, you can correct me if I am wrong later, 
but this is going to lead to double A rated sovereigns are 
going to carry a risk weight of zero if I read this right under 
this proposal. So looking at the CDS spreads on Italy, on 
Ireland, they are far from risk free, and with this in mind, 
Mr. Geithner, I hope you can shed some light on exactly what 
will make Basel III different from Basel II and every other 
attempt at regulating capital, especially with the Europeans 
already telling us they are going to drag their feet on this. I 
don't think history is on our side.
    I yield back, Mr. Chairman.
    The Chairman. I made a miscalculation. We now have 2 
minutes left on that side. I am just going to take one more 
minute, we have more time here, and I didn't have others who 
wanted to speak.
    I just want to talk about an institutional problem that has 
occurred to me that we are all going to have to focus on. The 
European Community is still in the process of a constitutional 
evolution. The roles are not as clear. The role of the European 
Parliament has been increasing. It was initially fairly weak 
vis-a-vis the Commission. What we have encountered a couple of 
times now, particularly in the hedge fund, is I think a lack of 
clarity in Europe, in the community, between the role of the 
European Commission, the executive part, and the Parliament. 
And for example, with regard to hedge funds, I believe it was 
the case that it was the Parliament that was being more 
restrictive. I am merely following up on what the gentleman 
from California said. One of the things we are going to have to 
give some attention to is that.
    Now, we have begun meetings. We have met several times with 
the European Parliament's committee of jurisdiction. They have 
their own problems obviously with many different nations, but 
that is one of the issues that we are going to have to look at 
because as we get to coordination--and it is not surprising, we 
are elected officials. We understand that. The kind of 
nationalism and resistance to international cooperation is 
greater in the Parliament than it is in the executive.
    And I just note that as we go forward, no matter who is 
doing what, that is one of the things we are going to have to 
be working with our European friends to address.
    Now the gentleman from Texas, I believe, has 2 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    I am certainly glad that the Secretary is here to address 
Basel III, and I want to take advantage of an infrequent 
occasion to agree with the Secretary, having read a portion of 
his testimony, that indeed the liquidity and capital standards 
were a major contributor to the economic crisis that we had, 
and clearly, internationally, capital standards were not 
applied consistently, which in some respects begs the question, 
why did we pass legislation, the Dodd-Frank bill, that goes so 
far beyond capital liquidity standards, getting into bailout 
mechanisms, product banning authorities, price controls, and 
the list goes on.
    Nonetheless, as important as Basel III is, we know that it 
doesn't take effect until 2013. The American people are more 
concerned with where are the jobs today, why does unemployment 
continue to hover around 10 percent for almost every month that 
the Obama Administration has been in existence? The American 
people are asking after two consecutive trillion dollar plus 
deficits, when will the madness end, when will this President 
and this Congress take their foot off the spending accelerator 
and put it on the brake as they drive down the road to national 
bankruptcy?
    Fundamentally, this economy is not suffering from a lack of 
capital. It is suffering from a lack of confidence. Between the 
health care bill, the tax increases, the financial regulation, 
the cap-and-trade and mind-boggling debt, job creators are 
mired in uncertainty and feel nothing but hostility from this 
President and this Congress, and I hope in the question-and-
answer portion that the Secretary will have an opportunity to 
address these topics.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. Mr. Secretary, you are now recognized.

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

    Secretary Geithner. Thank you, Chairman Frank, Ranking 
Member Baucus, and members of the committee. I am going to 
confine my opening remarks to what I regard as the most 
important elements of international financial reform.
    You gave us a very strong hand in the Wall Street Reform 
Act, in the Dodd-Frank bill, and we are trying to use that hand 
to play a leadership role internationally in trying to make 
sure we put in place global standards that help protect 
American interests. And last week, the Federal Reserve, the 
Office of the Comptroller of the Currency, and the FDIC reached 
agreement with their major foreign counterparts to 
substantially increase the levels of capital that major banks 
will be required to hold. By forcing these institutions to hold 
more capital, we will significantly reduce the risk of future 
financial crises and reduce the damage caused by future 
financial failures.
    Failures in our system of capital requirements were a major 
contributor to the crisis. Where we had capital requirements, 
they were too low and they were not supplemented with 
complementary liquidity requirements. Furthermore, there were 
no meaningful capital requirements in place for the shadow 
banking system of investment banks, AIG, and a diverse mix of 
large non-bank banks and finance companies.
    Finally, capital standards were not applied consistently 
around the world. Banks in many parts of the world were allowed 
to run with low levels of capital relative to the risks they 
took on.
    I want to highlight what I regard as the most important 
elements of these new global standards. First, the amount of 
capital that banks will be required to hold relative to risk 
will, as I said, increase very substantially. Under this new 
agreement, major banks will be subject to two tiers of 
requirements. All firms will need to hold a substantial minimum 
level of capital, and in addition, they will be required to 
hold an additional buffer of capital above the minimum. And 
these two separate requirements have been set to ensure that 
the major banks hold enough capital, that they will be able to 
withstand losses similar to what they faced in the depths of 
this recession and still have the ability to operate without 
turning to the government for extraordinary help.
    Second, banks will be required to hold more capital against 
the more risky assets, against more risky products and more 
risky activities, including derivatives that caused a 
substantial role in the crisis. These assets and exposures are 
held predominantly by the very largest firms, meaning that this 
aspect of the new reforms will fall most heavily on the large 
banks and have only a very modest impact on small banks.
    Third, the Basel agreements will improve the quality of 
capital that banks hold. The new requirements are set in terms 
of high quality common equity, tightly defined to mean capital 
that will truly be able to absorb losses when firms get into 
trouble.
    Taken together, these new agreements will impose a very 
substantial increase in capital requirements on the major banks 
that operate around the world. The changes in the ratios 
themselves represent a more than threefold increase.
    But in addition to this--this is important--the new, more 
restricted definitions of capital and the more stringent 
assessment of capital against risk will raise the capital 
requirements even further, and again, these additional effects 
will fall most heavily on the largest, most interconnected, 
most systemic institutions in our markets.
    Now, in addition to these new capital requirements, the 
Basel Committee has agreed to impose new global standards for 
liquidity management. These new liquidity standards are 
designed to ensure firms can withstand a severe shock to 
liquidity without facing a deepening crisis.
    And finally, the agreement offers the promise of a more 
level global playing field with less risk to us, less risk than 
we faced before this crisis, that other countries will be able 
to allow their banks to operate with lower standards than those 
that will apply to the major U.S. banks. These are very tough 
standards, and they will require banks to run with less 
leverage, with more capital and more stable funding than was 
true before the crisis. But if we were to apply these standards 
too quickly, we could hurt economic growth and recovery. And to 
limit that risk, that possible risk, the agreement gives banks 
a substantial transition period to meet the new standards.
    Now, it is important to note that because we moved so 
quickly with the bank stress tests in early 2009 to force our 
banks to raise more common equity, the U.S. financial system is 
in a very strong position internationally to meet these new 
global rules. For the most part, our major banks should be able 
to meet these new requirements through future earnings over 
time, which will also help protect the economic recovery now 
under way.
    This is a major milestone in the process of global 
financial reform, but we still have some more work to do. The 
liquidity requirements will need more work before they are 
fully implemented.
    And I want to emphasize that it is very important to us 
that these new standards are implemented by national 
authorities around the world in a way that generates a level 
playing field. It is not enough just to have a clear measurable 
minimum floor on required capital. There needs to be tight, 
consistently enforced limits on the ability of banks and 
national supervisors to apply these standards in a more 
permissive way for their institutions.
    These new standards have to be implemented at the national 
level. The agreement that was just reached and the Basel III 
proposals must be fully implemented through national 
regulations by the end of 2012. The United States is committed 
to meeting those deadlines.
    I want to emphasize, Mr. Chairman and Ranking Member 
Baucus, that we will continue to work closely with this 
committee as we implement the financial reform bill and as we 
work together to strengthen global financial standards so that 
we have a level playing field.
    But I want to conclude my remarks by just noting for the 
record that we are about to close another chapter in the work 
of this committee to end this financial crisis. This morning, 
Assistant Secretary of the Treasury Herb Allison announced he 
was stepping down as the head of the Office of Financial 
Stability. He and his team, working with Lee Sachs, who was 
then counsel to the Secretary of the Treasury, were the 
architects of what is increasingly regarded by outside experts 
as one of the most successful emergency programs in financial 
history.
    And I want to mark that event in the upcoming formal end of 
TARP authority by praising the political courage of President 
Bush and Secretary Paulson and those in Congress, Republicans 
and Democrats, who voted at that grave moment of financial 
peril to give the government of the United States the authority 
to solve this financial crisis.
    If you are a conservative Republican, you can celebrate the 
fact that we solved the most dangerous part of this financial 
crisis largely with private capital, not public capital, and 
you can welcome the fact that we have reduced those investments 
in the American financial system to a tiny fraction of those I 
inherited, and every day we are working to extract the 
government from those remaining investments.
    If you are a fiscal conservative, you can celebrate the 
fact that CBO now estimates that losses on the TARP investments 
will be in the range of $66 billion, less than 10 percent of 
the $700 billion in authority provided by the Congress.
    If you are a liberal or a progressive, you can welcome the 
fact that after a lost decade for the middle class and a crisis 
which left millions of Americans out of work and living below 
the poverty line, we did not have to spend hundreds of billions 
of dollars of scarce taxpayer resources on banks, which gives 
us more room to protect investments in our critical priorities 
of the country.
    If you care about manufacturing, you can celebrate the fact 
that the American automobile industry is stronger and leaner 
today than it was before the crisis, and that businesses across 
the country find it easier now to raise capital to access 
credit than they did before the crisis and in the peak of the 
crisis when we took office.
    And of course, all Americans should be relieved that their 
savings today are safer and more valuable than they were in the 
fall of 2008 and that we were careful custodians of their 
scarce resources.
    Now, I know a lot of people who voted for TARP decided 
later that they had to distance themselves from that vote by 
disparaging the programs, but I think they should be proud of 
the votes they cast. They were on the right side of history.
    Thank you, Mr. Chairman.
    [The prepared statement of Secretary Geithner can be found 
on page 50 of the appendix.]
    The Chairman. Thank you, Mr. Secretary, and I will probably 
see the Republican leader, Mr. Boehner, later today and I will 
pass along to him your thanks. He was of course one of the 
staunch supporters of the TARP. I don't know if I will run into 
Senator McConnell, but I will be glad to do the same with him.
    I was just reading Secretary Paulson's book and noted his 
quote of the comment from Mr. Boehner, ``We would be crazy not 
to rescue AIG.'' So I appreciate that.
    I want to talk about one piece of this, and that is the 
automobile piece. There is a lot of discussion today in this 
country about our need to protect and, in fact, expand the 
amount of manufacturing we have. There is a repudiation of the 
notion that we can exist as a successful economic nation, 
offering a full range of opportunities to all of our citizens 
at various levels of skill and education, if we don't have a 
significant manufacturing component. So manufacturing support 
gets a lot of rhetorical service.
    It seems to me that the single most successful effort of 
public policy to advance manufacturing and to make sure it 
stays here doesn't get that respect, and that was the decision 
initiated by President Bush, because again, I think you are 
correct about the bipartisanship, and then carried out further 
by this Administration with the authority a bipartisan Congress 
had given, to intervene on behalf of both General Motors and 
Chrysler.
    And we ought to be clear that while Ford was not itself the 
beneficiary directly of those funds, Ford strongly supported 
the funds being made available to General Motors and Chrysler 
from the standpoint of keeping manufacturing in America because 
Ford feels that if General Motors and Chrysler went bankrupt 
and were to substantially diminish their activity and perhaps 
Chrysler disappeared, one result would be that the amount of 
manufacturing that went on for the auto industry, the supply 
chain in the Umited States would have been damaged, and Ford 
would have been at a severe disadvantage in trying to keep its 
manufacturing going.
    So I would ask you to reflect not just on the financial 
aspect, because I gather with General Motors when you are 
talking about them beginning to repay or they have already 
begun to repay some, what would the effect have been on this 
very important sector of American manufacturing, automobiles 
and the supply chain for automobiles, if the Bush 
Administration had not initiated and your Administration had 
not followed up on an intervention in the automobile industry.
    Secretary Geithner. I think you are absolutely right, Mr. 
Chairman. The effects would have been devastating. You would 
have seen thousands and thousands of jobs lost, hundreds and 
hundreds of small suppliers affected by the collapse, and it 
would have dramatically amplified the damage caused by this 
recession.
    And if you care about our capacity to make things in 
America again and to make sure that we are strengthening our 
ability to make things in this country again, you have to look 
at that intervention, that strategy, again initiated by 
President Bush, and view it as an incredible success.
    I don't want you to understate, though, the importance of 
the financial changes because the great strength of the 
American economy over the decades was the fact that our 
financial system was the best in the world at providing capital 
to people with an idea that could build a growing business. We 
lost our way along the way and created a system that had too 
much risk and that was a devastating mistake, but we are 
substantially along the way to restoring that fundamental 
strength of the American system.
    The Chairman. Let me build on that because one of the 
arguments against the intervention is from people who say, 
look, the intervention might in and of itself be a good thing 
but it becomes addictive and that there is no such thing as an 
intervention and then a withdrawal, that what you then have is 
what should be the private sector becoming dependent.
    My view is that what we had with both the financial system 
and with the automobile manufacturers, certainly with GM, was a 
specific intervention, but the intervention worked in that the 
entities are now doing well on their own, and we are in the 
process of withdrawing that. So the argument that once you 
intervene you own this and you can't get back to the private 
thing has been repudiated by the experience. Would you comment?
    Secretary Geithner. I agree, and no one should ever have to 
be in a position to take these steps, but in that case, because 
they were forced to go through a deeply wrenching restructuring 
process, they are emerging sooner, more profitable than anybody 
expected, and they can stand now on their own, and that is also 
now true for the American financial system as a whole.
    So it is not just that the system is stronger today than it 
was before the crisis, certainly when we came in office, but 
that we have let the weakest parts of the system go away and 
those that survived were able to meet a market test, being able 
to raise private capital on the strength of their franchise, 
their basic solvency.
    So I think we have been very careful to design these 
programs in a way that makes it very likely people would look 
at the prospect of government intervention in the future as 
being an easy, attractive option for them; it was devastating 
for the firms involved but our system, our country is stronger 
for it.
    The Chairman. The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    One thing I might say about the making money, House 
Republicans, particularly this committee, Republicans on our 
committee stood strong against the original proposal to the 
toxic assets, which proved to be a real boondoggle, and it was 
not done, and we actually insisted on dividends and warrants, 
and that is the part of the program that has made money.
    Secretary Geithner. I compliment you on that, by the way. 
You said at that beginning, and you are absolutely right, that 
at that time--and this was the principal cause of the crisis 
and the most damaging part of the dynamic was a perception that 
U.S. firms did not have enough capital.
    Mr. Bachus. That is right.
    Secretary Geithner. But if you look at the program, where 
the returns to the taxpayers have been the highest is because 
those capital investments have earned a very substantial 
positive return, more than $20 billion in positive returns to 
the American taxpayer. It was the most effective use of 
taxpayers' money that you could conceive of doing to help 
resolve a crisis like this.
    Mr. Bachus. And actually, Chairman Frank stood with the 
House Republicans, who actually on the first meeting proposed 
those dividends, proposed capital injections.
    We did oppose AIG. In fact, when Secretary Paulson--and I 
corrected him when he put in his book that he informed all of 
us. He failed to call me and inform me of the AIG intervention, 
and when I called him, he acknowledged that fact.
    The Chairman. If the gentleman, because there was a lot of 
camaraderie there and we should be clear, the AIG intervention 
was unilateral by the Federal Reserve, and at the time didn't 
need any congressional approval. Subsequently both sides, 
though we had some differences in the financial reform bill, in 
both versions of it, we repealed the provision, section 13(3), 
by which the Federal Reserve did that.
    Mr. Bachus. I am just saying that Congress has gotten some 
credit for some of the programs which lost money when 
actually--the programs that made money, we insisted on that 
protection for the taxpayers, and I am proud of Roy Blunt and I 
am proud of the subcommittee ranking members on this side and 
Jack Reed on the Senate side and Chairman Frank and others who 
supported that.
    Secretary Geithner. Mr. Bachus, could I just reinforce one 
point you are making? I am very confident when we look at this 
crisis, that if you look at the full complement of what the 
FDIC did, they will have been even to making money. The Federal 
Reserve programs, in totality, all of them, looked at together, 
will also offer a substantial return to the American taxpayer.
    Mr. Bachus. And let me say this, I am not debating that, 
but a lot of the actions that were taken, Congress did not 
approve or participate in. They were unilateral and made by the 
Federal Reserve.
    Let me just ask you one question. The President recently 
appointed Elizabeth Warren to head up really I think the most 
powerful agency that has been formed by the government in the 
last 30 years, which I think is a credit--and also has the 
power to allocate credit and to set fees. Many of us oppose 
giving them that carte blanche effect. Now, he has gone around 
Senate confirmation, despite the fact that Article II, Section 
2, says ``advise and consent of the Senate,'' and he did that 
on Constitutional Day, which was sort of an ``in your face.'' 
My first question is, is he going to go to the Senate or is he 
going to just avoid that?
    Second, because he appointed her as a Presidential 
appointee on the White House, he could claim executive 
privilege in her testifying before us. Is he going to assert 
executive privilege?
    And third, the bill is written to where actually this 
agency has a right, the Federal Reserve, to pay as much as $680 
million to fund that agency. Is Congress going to have any 
control over that, which I think the Constitution also provides 
that we at least control the spending?
    The Chairman. If the gentleman would yield, and I will give 
him extra time, before you answer, Mr. Secretary, I want to 
join in one part of that. I was supportive of that process, but 
I would be very unhappy if there was any obstacle to Ms. Warren 
testifying before the Congress, and I hope we will get an 
affirmation that will in no way be an obstacle to her 
testifying.
    Mr. Bachus. Thank you. Mr. Chairman.
    Secretary Geithner. Congressman, let me start with the 
following.
    There is no risk that this agency--although it is true it 
has been given substantial authority--has the authority to 
allocate credit and set the price of credit across the American 
financial system, and I would not be part of it, would not 
support it if it did; that is not in the law.
    What this bill does do, though, is take a bunch of 
authorities that were spread across multiple Federal agencies 
and put them in one place so there is one place with a 
dedicated mission to provide Americans better protection for 
their financial security; that is, it was a necessary, just 
act.
    The President is going to nominate a person for the Senate 
to confirm to lead this agency over time. What he has asked 
Elizabeth Warren to do, with my full support, is ask her to 
come play an advisory role to us as we help stand up this 
agency and figure out how to make the best use possible of that 
basic law. And I want to say that we are absolutely committed 
to making sure we do this in a way that strikes a careful 
balance.
    I will give you an example. The first thing we have done 
was yesterday, we convened a group of experts around the 
country to talk about how to make mortgage disclosure more 
simple, more accessible. Why is that important? Disclosure is 
one of the most powerful tools we have for making sure people 
can make sensible financial decisions, can shop for the best 
possible deal, can protect themselves from being taken 
advantage of.
    Mr. Bachus. Mr. Secretary, we all support the Treasury. Let 
me just ask this: Can you guarantee us that she will not 
exercise any rulemaking authority until Senate confirmation?
    Secretary Geithner. She can't--I didn't speak to the 
question about--I just said that the President will nominate a 
director for confirmation by the Senate.
    Mr. Bachus. And do you know when that will happen?
    Secretary Geithner. On the specific question of testimony, 
I am a little reluctant to say this, I want to make sure I get 
it right. It is my expectation, of course, that she would be 
obviously happy to testify with respect to her duties at the 
Treasury in this role as adviser to me and the President on the 
initial design of this agency.
    Now, on the question of rule-writing authority, the statute 
makes it absolutely clear what authority the agency has before 
there is a confirmed director and before the date of transfer, 
I think. And it is fair to say that until that authority is 
transferred, which will not happen before July of 2011, and 
before there is a confirmed director in place, this agency, by 
statute, has very limited authority to actually write new 
rules. But we are going to try to use that interim period to 
try to build a stronger consensus among the major players on 
how to improve disclosure and things like that.
    Mr. Bachus. Of course, if she picks the rulemakers, that is 
kind of a stacked deck, too.
    Secretary Geithner. No, but again, that authority is with 
the President and me, and it is not something that falls 
anywhere else, and of course none of can have any powers that 
the statute didn't give us.
    Mr. Bachus. We disagree with a lot of that statute.
    Thank you.
    The Chairman. I would notice, disagreement with the statute 
that has been signed into law doesn't have a lot of legal 
force.
    Mr. Bachus. I believe in the rule of law.
    The Chairman. That is the statute that you disagree with.
    Mr. Bachus. No, I am not advocating disregard for the law.
    The Chairman. If the gentleman would yield, when we wrote 
that law, it did occur to us that Senate confirmation might be 
problematic. So it is not accidental that there were abilities 
to function until the Senate confirmed someone.
    Mr. Bachus. But we also wrote in that law that he or she 
would be appointed by the Senate.
    The Chairman. Not appointment by the Senate.
    Mr. Bachus. Advise and consent of the Senate.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    Mr. Secretary, we have all focused on what went wrong in 
the financial crisis, and appropriately so, but I think it is 
equally important learn to from the responsible actors and 
build on their successes. So, last month, the Oversight 
Subcommittee I chair held a field hearing in Kansas to listen 
to, and learn from, responsible Midwest banks and credit unions 
who were not the cause of the financial crisis. While these 
smaller firms were clearly not ``too-big-to-fail,'' many raised 
the question to what extent the Dodd-Frank Act and the Basel 
III agreements finally end ``too-big-to-fail.'' I believe they 
will over a short period of time, but I would like to hear from 
you, how will Basel III specifically help end ``too-big-to-
fail?''
    Secretary Geithner. Excellent question, and to answer, you 
have to look both at the capital requirements and their effect 
and what the Dodd-Frank Act did to our ability to dismember a 
major institution without causing huge damage to the American 
economy.
    Capital is important because it reduces the risk that any 
individual firm will fail, but it has a more powerful separate 
effect, which is that it raises capital requirements for 
everybody else, too. They are much more likely to be able to 
absorb the trauma, the loss, the shock that could happen when a 
major firm collapses. So it has that huge effect of reducing 
the risk of failure, reducing the probability of a major crisis 
and the losses associated with the crisis.
    But what the bill does is essential, which is it also says 
if in the future, a major firm manages itself to the point 
where it can't survive without exceptional assistance, we have 
no option but to put them through an orderly dismemberment that 
allows us to reduce any risk to the taxpayer and protect the 
innocent from the collateral damage that we saw that was so 
traumatic in this crisis.
    So the combination of the bill, that framework, the 
authority for capital and to dismember are the most effective 
ways we know for ending the problems associated with ``too-big-
to-fail,'' and very important is this bill and these capital 
standards put much tougher restraints on the big institutions 
than they do on the small, because we want to preserve a 
financial system that allows for the great diversity of 
strength we get from having a system of 9,000 banks, community 
banks, small banks, credit unions across the country that 
provide critical financial services to Main Street America.
    Mr. Moore of Kansas. Thank you, Mr. Secretary.
    The recent Basel agreement with respect to capital 
standards appears to be very good. I am a little concerned that 
the implementation period is too long or may be too long, but 
tripling the capital ratios appears to be a very good step in 
strengthening financial stability.
    I am also pleased the new agreement is countercyclical, 
building on key provisions that the New Democratic Coalition, 
led by Representatives Bean and Foster, pushed to have included 
in the Dodd-Frank Wall Street Reform Act.
    Mr. Secretary, will you please profess how the 
countercyclical nature of these new Basel capital standards 
will strengthen financial stability? For example, if these 
rules had been in place 10 years ago, would they have helped 
mitigate the recent financial crisis?
    Secretary Geithner. Just to start where you ended, 
absolutely. Our system would have been much more stable, much 
more resilient, much better positioned to handle a recession 
like this if we had tough requirements in place.
    And just to echo something the chairman said at the 
beginning, one of the most important things the Dodd-Frank bill 
does is make sure we can apply capital requirements to those 
who are in the business of taking risk in lending. In the 
previous system, we could only apply them to banks. They didn't 
exist for a whole range of institutions that competed with 
banks and were allowed to take on much more leverage and risk, 
and that was very catastrophic for the system. So Dodd-Frank 
allows us to apply them evenly across institutions that are in 
the business of banking, regardless of what they call 
themselves.
    Now what this agreement does is--I will give you two 
examples of how it makes the system more resilient, less 
procyclical, more stabilizing in boom. What you want to do of 
course is reduce the tendency to euphoria in a boom and to 
panic in a crisis, and the best way to do that is to make sure 
that people operate in a boom with higher requirements so that 
they can dip into those as they face the losses that happen in 
downturns.
    And what this agreement does is allow you to--you have to 
run with 7 percent against risk, which is more than triple the 
previous standard, but as you face losses in a recession, you 
can dip into that cushion of capital. Now, if you go past a 
certain point, you have to start to conserve capital, stop 
dividend payments, stop share buybacks or raise capital, reduce 
compensation, and that feature should make the system less 
procyclical than it was in the past.
    But as I will say in response to Congressman Foster's 
questions later, we are still examining whether we can 
complement this framework with other forms of contingent 
capital, countercyclical capital so that again we make the 
overall system less vulnerable to booms and less vulnerable to 
panics in the future. I don't think we have found the adequate 
answer to that question, but this puts us in a much better 
position than we were before the crisis.
    Mr. Moore of Kansas. Thank you, Mr. Secretary.
    The Chairman. The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Secretary. I appreciate you 
being here.
    One of the things I am a strong proponent of is making sure 
that these entities are adequately capitalized, and I believe 
that part of the problems that we faced where we did have some 
entities that didn't have the capital to sufficiently cover the 
risk that they were taking. And as I read about the agreement 
that was reached, I see a couple of things there. One is that 
we are going to increase the capital requirements across-the-
board and then we are going to increase also or more clearly 
define what capital counts towards meeting those goals.
    But there is a point out there with capital, and what you 
are going to do with those entities is going to raise the cost 
of capital for them in many ways. So, across-the-board, you are 
going to have all these entities out looking for additional 
capital. It is going to raise the cost of capital.
    And so in order to be able to continue to generate the 
returns to the investors in these entities, obviously there is 
going to be huge pressure on them to increase their income or 
their revenue streams. And so one of the questions that kind of 
pops into my mind is, is there a point there where we put so 
much restraint and capital requirements there that we actually 
encourage riskier behavior in order to meet the returns and to 
pay for this capital, and so how do you balance that?
    Secretary Geithner. Excellent question. It is a thing worth 
worrying about. I think the architects of this were very 
careful to take that into consideration.
    Maybe this is one way to explain how it does that, which is 
to say if you take more risk, you have to hold more capital 
against that risk. Now, if you again look at the mistakes made 
prior to this crisis, you could say that people were able to 
hold on to all sorts of assets that they thought were risk free 
that actually had a lot of risk in it, and that was a costly 
failure. So by raising the risk you have to hold against the 
complex, inherently much more risky activities, you reduce 
exactly the incentive problem that you described.
    Now, capital doesn't solve all problems. You have to make 
sure that you have a risk management system, you have a set of 
internal controls, you have tough supervisors looking over the 
stuff to make sure that people can't get around these 
constraints and evade them, and you have to be careful about 
going too far because if you get these capital requirements too 
high, then you will raise the cost of credit unnecessarily, and 
you will encourage people to move their risk outside of the 
banking system again, and that would not create a more stable 
system. So you have to get a balance right, and I think this is 
a very strong agreement and has a much better balance than we 
had before the crisis.
    Mr. Neugebauer. One of the questions, though, and you make 
a point, is that one of the key parts of that then is the 
regulatory structure, making sure that the risks are being 
identified and recognized, but the question I have is, let's 
take bank A in the United States and they have a 7 percent 
capital requirement that they are meeting and we have a bank in 
another country that says we are meeting the 7 percent but 
their regulatory structure may not be as rigorous as the U.S. 
regulatory structure. So, in fact, that bank is able to engage 
and leverage their risk in a different way than the U.S. bank 
is. How do we protect the markets in that way?
    Secretary Geithner. We are very worried about that for the 
obvious reasons you are, and again, if you look at what the 
system was like before the crisis, there was very, very 
substantial scope for countries to let their banks run with 
much lower capital than our banks were forced to run with. The 
required minimums were lower. They could count all other sorts 
of stuff as capital that we didn't allow people to count, and 
in addition, we don't think they were as tough on how they 
accounted for risk as our supervisors are. And I know that if 
you look at the mistakes we made in the United States, it is 
hard to understand this, but in fact the requirements we had in 
place for our banks were substantially tougher than was true 
for banks in many of the major economies around the world.
    So what this agreement does is substantially narrow the 
capacity for countries to have their system run with lower 
standards, because it is much tighter definitions of what 
counts as capital, much tougher risk weights on risky assets, 
and a higher overall minimum standard. And I think the 
combination of things give us much more confidence that it will 
be applied evenly. It is not enough, though. We have a lot of 
work to do to, as I said in my remarks, to make sure that as 
the regime is operating we don't let too much discretion seep 
back into the system that would put us at a competitive 
disadvantage.
    The provisions in the bill give us a strong hand and we are 
going to make the whole system much more transparent, so there 
will be a good market test all the time about how much capital 
these guys are actually allowed to run with. And we are going 
to be and have to be very careful, monitor very carefully and 
pursue much more aggressively any signs of differential 
standards.
    Mr. Neugebauer. So will it be specific risk premiums, a 
prescriptive way on certain types of assets that everybody 
across the spectrum will be required to use in analyzing the 
amount of capital and the risk in that portfolio of assets?
    Secretary Geithner. It is not quite that, and there is risk 
in that approach, too, because then if you do that, if you have 
the government just sit there and prescribe the risk weight, 
then there is a real risk people can just get around that, 
arbitrage around that, and leave the system more risky.
    What it does is make sure that there is a common framework 
you have to use for how you measure risk, and that basic 
framework has to be common across countries. It is not perfect. 
There is still a lot of risk. People will operate it with 
different degrees of rigor, which is why we are going to have 
to be on this for a sustained period of time.
    But we have a much better chance now that we will be able 
to watch this stuff on a quarterly basis and see where firms 
who compete against each other are operating with different 
actual standards of leverage.
    The Chairman. The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you.
    Mr. Secretary, I am committed to try to get as much of our 
money back, taxpayer money back as possible that has been 
expended or loaned as a part of all of this, TARP, as well as 
the conservatorship of Fannie and Freddie. A couple of months 
ago, in July, FHFA, the Fair Housing Finance Agency, sent 64 
subpoenas to try to determine if there were legal claims 
arising from their private label mortgage-backed securities. In 
the Bush Administration, they were pushed to take on the 
highest--fill the housing goals that they have ever had, and 
they were allowed to meet those goals by buying the mortgage-
backed securities, frequently subprime, generally subprime 
mortgage-backed securities issued by their bitter rivals, their 
heavy competitors. And those mortgage-backed securities appear 
to be one of the many areas of losses. We now have $145 billion 
or more into that conservatorship. The subpoenas seem to be 
aimed at a couple of different claims. One is outright fraud, 
but another is simple breach of contract, which is a lot easier 
to prove than fraud, that there were representations, there 
were warranties about the mortgages that were in the pools that 
had been purchased from the securitizers, for the most part, 
the big banks.
    And Mr. Kanjorski, Ms. Speier, and I sent a letter to 
President Obama last month urging that all of those claims be 
pursued vigorously, any available legal claims that will limit 
the losses to taxpayers. Mr. Frank since then has supported 
that position. Do you support pursuing with enthusiasm legal 
claims that we may have to minimize our losses?
    Secretary Geithner. Absolutely.
    Mr. Miller of North Carolina. Okay. So you support the 
subpoena, the request for information?
    Secretary Geithner. I don't think I can speak with 
sufficient care or clarity about the precise legal tools we 
have available to us, but it is very important to us that we 
are very aggressive in pursuing the taxpayers' interest in 
limiting the scale of losses that were inherited at the time of 
conservatorship.
    Mr. Miller of North Carolina. Do you have any or was 
potential liability on these theories taken into account at all 
in the stress test? The securitizers who presumably would be 
the defendants in any litigation are the 19 biggest banks that 
got the stress test. Was there potential liability taken into 
account at all in the stress test a year ago?
    Secretary Geithner. I don't think so. I would have to refer 
that question to my colleagues in the Fed, but the broad 
parameters of losses that were estimated in the stress test on 
mortgage exposures were very, very tough. Very, very tough. In 
fact, the loss rates that underpinned the stress test assumed 
losses higher than the U.S. banking faced in the Great 
Depression.
    Mr. Miller of North Carolina. But of course, those 
mortgages were off their books at that point.
    Secretary Geithner. Some were on the books, some were off, 
but they were very careful to also try to capture the 
contingent off balance sheet exposure that these firms run 
with. But I will refer to the Fed your question about precisely 
whether--
    Mr. Miller of North Carolina. There was also pending 
litigation that so far has not gotten past certain procedural 
defenses but may well end up getting past those procedural 
defenses by the private purchasers of those mortgage-backed 
securities, for the most part pension funds, insurance 
companies, some hedge funds, that would have substantially 
identical claims to the claims that Fannie and Freddie would 
have that FHFA would be pursuing in the conservatorship. It 
seems that if they get past--and the litigation brought by the 
Massachusetts Attorney General seems to show that almost all of 
those mortgages failed to meet--the subprime mortgages in the 
mortgage-backed securities failed to meet representations and 
warranties. Could you also consider that or let me know if that 
potential liability was taken into account in the stress test?
    Secretary Geithner. Again, I will be happy to refer those 
questions, and of course, we have your letter and we are 
looking through exactly the issues you raised in your letter 
and how best to respond to those. But we will be happy to 
pursue those with you.
    Mr. Miller of North Carolina. Mr. Chairman, my time is 
close enough to having expired. I yield back.
    The Chairman. The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Secretary Geithner, you said in response to Ranking Member 
Baucus that until July, the CFCB, this new agency, will have 
very limited authority to write new rules and sort of 
acknowledged that before next July that it will plan to do 
that.
    But I noticed yesterday that you and I guess it is Advisor 
Warren--is that what she will be called--hosted a closed 
meeting about mortgage disclosures. And in the Treasury press 
release you were quoted as saying, ``Moving quickly to improve 
mortgage disclosures is in a series of concrete steps we are 
taking.'' And you continued that, ``Whenever possible, we are 
committed to expediting completion of the law's requirements 
ahead of statutory deadlines.''
    Changing the mortgage disclosures required under RESPA and 
TILA to me is costly to small businesses. We have been working 
on whether the--trying to get the Federal Reserve and HUD to 
work together on ironing those out, and that seems to be a long 
process that didn't really get there, I don't think. But with 
this endeavor or any other rule or regulatory change 
spearheaded by you and Ms. Warren, do you plan to consider the 
consequences for small businesses and how do you plan to do 
that?
    Secretary Geithner. Let me just say that I think it is very 
hard to look at the existing body of regulations in these areas 
that were designed to improve disclosure and protect consumers 
and be proud of what they have achieved, both in terms of the 
burden that they impose on people providing financial services 
as well as the benefit they provided to consumers. And I think, 
my own personal view, is where we have authority, like in this 
area, to try to combine these forms, bring convergence or put 
new protections in place, it is an obligation on us to try to 
make sure we can find ways to streamline the existing body of 
rules that have outlived their usefulness or did not meet their 
stated objectives. I think we have a very substantial scope to 
do that; and I think it is very important to us, to the whole 
credibility of this effort, to try to demonstrate that we are 
not just putting new rules on top of old bad ones, that we are 
cleaning out the underbrush and trying to lighten the burden on 
people who have to--are in the business of trying to help 
people borrow responsibly.
    Mrs. Biggert. If I might, you have, under the law that says 
that for a covered agency, a description of the steps the 
agency has taken to minimize any additional cost of credit for 
small entities. And this going to be such a problem with what 
businesses are facing with looking at what is the law right now 
and how it is going to change. They have spent so much money in 
trying to work out with the new RESPA and TILA that has been 
put into place and then to changing this.
    And, also, Advisor Warren has criticized the Treasury's 
data as sparse. And she said that reasonable people may 
disagree about how to help small businesses gain access to 
loans, but no one doubts that the solution must begin with a 
clear understanding of the problem, and yet Treasury has 
gathered only space data on the small business credit crunch.
    Do you agree with that or is this something that is going 
to have to be done?
    Secretary Geithner. No, I don't agree with that, but I can 
take this opportunity to say that the Congress is on the verge 
of passing a set of very powerful, not just tax benefits for 
small businesses, which we think are very well designed to make 
a big impact on improving investment in this country more 
quickly than otherwise would take place, but a very well 
designed set of programs, credit programs, limited to community 
banks that will help give them the resources to lend more to 
growing small businesses.
    And my own view, again probably based on our experience 
with the initial investments we made under the TARP, is that 
those programs have a--can have a very substantial positive 
effect on increasing the availability of the credit that small 
businesses are still living with the scars caused by this 
crisis. I think that the Senate passed this bill last week, and 
I am told that the prospects are quite good that it will be the 
law of the land quickly.
    Mrs. Biggert. What are Treasury's plans to assess the 
impact of the new rule or regulation on--
    Secretary Geithner. I am sorry, Congresswoman. You are 
right to say that the Dodd-Frank bill does also have a set of 
requirements that you refer to in making clear that we have to 
carefully examine the effect on small businesses.
    But just to cite the example you said, I find it--I am very 
confident that improving disclosure and simplifying forms will 
not just make it easier for consumers to shop for best 
financial products but do so with a lower burden on the people 
who provide those financial services. I cannot believe--this is 
not rocket science--we can do a much better job than we have 
done to date in reducing the burden on people in part by 
simplifying these kind of forms in disclosure.
    Mrs. Biggert. I would hope so, but will there be a comment 
period, public comment period?
    Secretary Geithner. Absolutely. Again, one of the great 
things about the United States is we have a set of important 
basic disciplines, obligations on transparency requirements for 
comment and we will meet those obligations.
    Mrs. Biggert. Thank you.
    The Chairman. The time has expired.
    I will just make an announcement, since it came up, that I 
will be at the Rules Committee at 5:00 today to ask for a rule 
on that small business lending bill. And it is our intention to 
ask the House to accept, after swallowing hard, the Senate 
version of that bill tomorrow.
    The gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the Secretary for appearing. Good afternoon. Sorry 
that I arrived a little bit after your testimony. We have quite 
a busy day on the Hill today, a number of hearings.
    Let's talk for just a moment about the alternative. We have 
a proposal. Can you explain to us what the alternative is? It 
seems as though there is a notion that there is something much, 
much better that we could be doing if we would but only do that 
something that is much, much better. What are the alternatives? 
If we don't increase capital requirements, what is the 
alternative?
    Secretary Geithner. Congressman, I believe there is no 
credible alternative. You can debate how much is enough, how 
much is too much, how quickly people should have to build 
capital to achieve the new minimums. And we can debate and we 
will continue to work on ways to make this system more 
resilient, make these shock absorbers work in a way that, as 
Congressman Foster and others have suggested, that makes the 
system less procyclical. And we have more work to do on that.
    But there is no credible alternative to less leverage, 
higher capital requirements, more stable funding requirements 
on institutions. Financial crises all have in common that 
single basic failure that firms were able to operate with less 
leverage. That is what makes them vulnerable to panics and 
runs, and that is what brought our economy to the edge of its 
knees.
    Mr. Green. Now, what you are attempting to do and we are 
attempting to do is make this as global as possible. Would you 
please address the transparency necessary to implement this in 
a global market?
    Secretary Geithner. A clear, measurable, simple standard 
that countries not just have to commit to abide by but they 
have to pass national regulations to make those rules apply to 
their institutions. Disclosure requirements so that the world 
can look at those institutions every quarter and see whether 
they are holding enough capital to meet those requirements. A 
long, ongoing effort to monitor enforcement by supervisors on 
as consistent a framework as we can. Those are the principal 
elements of what gives us the hope that we have a much tighter 
set of constraints and a more level playing field globally.
    Mr. Green. And, finally, the definition of a bank that will 
be universal such that we won't have some country that 
concludes that these institutions, while they look like banks 
and they lend like banks, they are really not banks.
    Secretary Geithner. Unfortunately, that was uniquely an 
American problem. In really almost every other major economy 
around the world, they had the authority to apply capital 
requirements to institutions that operated as banks even if 
they called themselves merchant banks or housing finance 
companies or banks or investment banks or commercial banks.
    Our system was unique in basically saying we had two 
worlds, a set of banks that had rules and a set of all sorts of 
other institutions with different types of names that didn't 
have rules. And that is why consumer protection was such a 
failure and that is why this crisis was so much more severe, 
because people were able to take a huge amount of risk without 
being subject to those constraints.
    So I do not believe that we face material risk, that 
countries have been scarred by this experience and this 
crisis--and it was in many ways harder for other countries and 
even was for us in the United States--will decide they are 
going to let people evade those basic rules. And if that 
happened, we would work very hard to convince them that in 
their own interest, they would want to extend those protections 
to those nonbank institutions.
    Mr. Green. I thank you very much, and I look forward to 
hearing alternatives from those who contend that this doesn't 
work. And I thank you for the time.
    Mr. Chairman, I yield back.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. Secretary, I think it was the day before yesterday that 
the Nation awoke to the news that, by a narrow definition of 
economists, the recession ended 15 months ago. Clearly, there 
had been no celebrations in the street, for obvious reasons.
    I really don't have a specific question, but I have a 
statement and a request. Having spent months now speaking to 
people not only in my own congressional district, but Fortune 
50 CEOs, billionaire investors, and, most importantly to me, 
small business people in Mineola, Palestine, and Athens, Texas, 
one word continues to come to the forefront of the discussion: 
uncertainty. Uncertainty. You have probably seen the NFIB poll 
of small business confidence had a generational low. Hopefully, 
you are hearing their voices.
    The chief economist, Bill Dunkelberg, for the NFIB talked 
about how the tax rates, health care, discussion of the 
deficits ``scare us to death.''
    The Business Roundtable: The voice of big business, 
government isinjecting uncertainty into the marketplace making 
it harder to reduce capital, create new business.
    The U.S. Chamber: It is fundamental uncertainty that is 
holding business back. Look at the tax costs. Look at the 
health care bill.
    Now, again, I know that the Administration is not going to 
relitigate and Congress is not going to unpass the health care 
bill, much less the FinReg bill. But the sheer volume of 
rulemakings that will take place under this legislation by any 
historic standard, although perhaps the recession may have 
ended by some narrow definition, clearly the recovery hasn't 
started. The recovery will not start until this Administration, 
working with Congress, fundamentally begins to remove the 
uncertainty and listens to the voices of job creators. And I do 
not believe that voice has been heard heretofore.
    So that is a combination of a statement and a request. Now, 
in that vein, I do have a question. You mentioned earlier about 
this, and I believe you said we have legislation pending for 
tax incentives for small business. But, unfortunately, you also 
have proposed legislation that would impose taxes on small 
business, specifically the Administration's plan to increase 
marginal rates for the top two brackets. And according to JCT, 
the Joint Committee on Taxation, that includes 50 percent of 
all small business income. The Tax Foundation has reported that 
the top two brackets, that two-thirds of that revenue produced 
will come from business income. And so, on top of the 
uncertainty, now we are adding yet another tax on business in 
general, small business in specific. Why?
    Secretary Geithner. Congressman, let me just start with 
something you said in your opening comments before you asked 
that basic question. This reform bill will correct mistakes in 
how we have managed our financial system that caused 
devastating damage. And as we bring clarity to the rules that 
will prevail, as my colleague Chairman Bernanke and others did 
last week on capital, that has been helpful to provide clarity.
    If you look at how the markets responded to that, they 
were, frankly, reassured that the rules struck a good balance 
between stability and basic growth. And it is very important to 
us as we move forward to move this bill that we bring that same 
standard of balance and we are going to do it as quickly as we 
can.
    Now, I talk to businesses across the country all the time 
as well, and I would say--
    Mr. Hensarling. Unfortunately, my yellow light has already 
gone off. Could you address the question?
    Secretary Geithner. Yes, I absolutely want to get to your 
question.
    I talk to businesses across the country as well and I would 
say that it is unmistakably true that businesses across this 
country, as are average Americans, are still living with the 
deep scars caused to their basic confidence caused by the basic 
crisis. And their principal question, frankly, is how fast is 
the economy going to grow in the future?
    We are having, frankly, a very welcome debate about what is 
the best mix of policies that is going to encourage investment 
in the United States and future growth. And let me tell you 
what separates us now, Congressman, because I think it is 
important to say this.
    Mr. Hensarling. The seconds are really ticking down, Mr. 
Secretary. So do you push back on the data? Are you not 
proposing a tax increase on 50 percent of small businesses?
    Secretary Geithner. I welcome the question, and I want to 
explain it to you.
    The Chairman. I would ask unanimous consent that we have 3 
additional minutes for the gentleman of Texas. We have a fairly 
significant debate going on here, and if there is no objection, 
we will do another 3 minutes.
    Secretary Geithner. So let's discuss what we agree on and 
what separates us, okay?
    We hope you will join us in passing this set of very 
powerful tax incentives for small businesses in the small 
businesses bill. I will give you an example: 100 percent 
expensing up to a certain limit for small businesses for any 
capital investment. Zero capital gains on investments in small 
businesses. These are very well-designed tax incentives that 
Republicans have supported with fervor in the past.
    We have proposed that Congress join the President in 
proposing, for a temporary period, full expensing for 1 year 
for capital investments by all businesses in the country, 
again, to give them the incentive to make those investments 
today to help get Americans back to work.
    We have proposed that the government start a multi-year 
program of improvements in public infrastructure that will help 
not just put more people back to work but improve future growth 
rates.
    Now, where we--and we have proposed, and I think Congress 
would support this, to decide soon to extend the middle-class 
tax cuts that go to not just 97 percent of working Americans 
but to 97 percent of small businesses across the country.
    Now, where we disagree--
    Mr. Hensarling. But it is still 50 percent of the income, 
Mr. Secretary.
    Secretary Geithner. Congressman, I am getting to that. That 
is a deeply misleading, as you know, characterization.
    Mr. Hensarling. No, I don't know, Mr. Secretary, or I 
wouldn't have cited it in the first place.
    Secretary Geithner. But I am going to come to it.
    Mr. Hensarling. It is my time, is it not, Mr. Chairman?
    I would say, listen, Republicans want to work with you on 
the immediate expensing, certainly on the capital gains tax 
relief. I would say, though, that what you give with one hand, 
this Administration more than takes away with another hand.
    Secretary Geithner. Not so, Congressman.
    Mr. Hensarling. So, at the end of the day, Mr. Secretary, I 
don't think this Administration with its proposals is 
fundamentally addressing the uncertainty that is keeping job 
growth to almost nil in this economy. Otherwise, again, we 
wouldn't continue to be mired in almost 10 percent unemployment 
almost every month of the existence of the Administration. So I 
suppose we will just have to agree to disagree.
    The chairman was generous in giving an additional 3 
minutes. In the time I have remaining, I do want to move on to 
one--
    Secretary Geithner. Mr. Chairman, can I just respond to 
that?
    The Chairman. I will ask for an additional minute for a 30-
second response from the Secretary, and then it is the 
gentleman from Texas' time.
    Secretary Geithner. If you look at the full impact of our 
suggestions, we extend today the middle-class tax cuts, our 
proposals for enhanced business expensing for 1 year for all 
businesses, and our proposal to jump start a multi-year public 
investment program, the net impact on growth for this country 
at this time of grave challenge would be much, much more 
powerful, a substantial multiple, than simply deciding to 
extend those tax cuts that go to 2 percent of small businesses 
and 2 percent of the most fortunate Americans in the country.
    The Chairman. I think you got your point across.
    The gentleman has the remaining time.
    Mr. Hensarling. Thank you, Mr. Chairman; and, 
unfortunately, Mr. Secretary, in this particular forum I am 
allowed to have the last word.
    I do think, though, it is curious that one of the most 
single-most-quoted economists by Democrats is Mark Zandi, who 
said, ``It would not take much more of a pullback by the 
affluent than anticipated to derail the recovery,'' when he 
advocated not raising taxes on the top two brackets.
    In the roughly 45 seconds I assume I have remaining, one of 
the questions I have you may only be able to respond to in 
writing.
    I understand the Keynesian argument behind the stimulus. I 
don't agree with it. I think it has been ineffective. You 
believe that it is effective. We will postpone that debate. 
Here is what I don't understand. At a time where we are 
absolutely drowning in debt, where we know that gross debt is 
now over 90 percent of GDP, that history tells us we could lose 
economic growth because of this, why in your 10-year budget 
plan do all you do is extend the deficits, extend the debt in 
the outyears? Surely you do not believe under your policies we 
are still going to be mired in this recession 3, 4, 5, 6 years 
from now? What explains the spending and the doubling of the 
debt in 5, tripling the debt in 10, debt held by the public?
    Secretary Geithner. In the spirit of your question, 
Congressman, you are asking me to go out and borrow $700 
billion from investors around the world to extend tax cuts from 
President Bush that would expire for 2 percent of the 
wealthiest Americans in the country. There is no plausible 
argument that that is a fiscally responsible action for the 
Government of the United States at this time.
    Mr. Hensarling. Mr. Secretary, you could have reduced 
spending, and it is going to cost $2 trillion.
    The Chairman. The gentleman's time--this is the last 
answer. I don't think I have been tough on time.
    Mr. Secretary, conclude your answer, and we will go on to 
the next one.
    Secretary Geithner. I was just going to observe that the 
proposals the President made in his budget would reduce our 
deficit by more than half as a share of GDP if you join us in 
approving those proposals over the next 5 years.
    The Chairman. The gentleman from Missouri, the long-
suffering gentleman from Missouri. As a minister, he certainly 
knows how to do that.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Thank you for being with us, Mr. Secretary, and thank you 
for the very difficult job you perform, but it is appreciated.
    Let me just start out, in the 1870's, Thomas Edison created 
a phenomenal little deal called a light bulb, and afterwards we 
ended up having the creation of a major corporation called 
General Electric. And we had this unique little creation born 
here in this country.
    At the end of this month, GE will discontinue making 
incandescent lights and the plants will be closed. This light 
will not be made anywhere in the United States. There is a 
reason. The CFLs actually use about 75 percent less 
electricity. But the negative part of it is that, because it is 
circular, there is a lot of hand labor involved, and now the 
United States will import almost all of the CFLs from China, 
which gives me great pain.
    The stimulus also provided some opportunities for the 
Department of Energy to help companies get involved in green 
technology.
    I mention all that because in your September 16th testimony 
in the Senate you said, ``We are committed to promoting 
policies in both the United States and China to create new 
opportunities for Americans and grow jobs in the United States 
and we are not leaving these outcomes to chance.'' And so I am 
wondering what--tell me and, hopefully, others--what the 
Administration is doing that would make certain that we are not 
leaving this to chance, considering China is probably making 
some big mistakes. Because as they are underwriting many of the 
factories that are doing this work and doing big land deals 
which could conceivably cause them to have a real estate crisis 
later on. But I am interested in your response.
    Secretary Geithner. Congressman, a very important question, 
and I would suggest the following:
    It is very important that we do things in the United States 
that increase incentives for Americans to invest and build 
things here rather than overseas. And the proposals you 
referred to, they were in the Recovery Act to provide very 
substantial incentives for investment in new technologies. 
Basic science, research, and development in new energy 
technologies are part of that process. But we are going to have 
to do a lot more in that context, and it is very important to 
us for us to recognize that the most important thing we can do 
for manufacturing in the United States is going to do a better 
job of improving the incentives for companies to invest here 
rather than outside the United States.
    That is not enough, though. It is very important that our 
companies face a level playing field around the world, and that 
is why it is so important that we continue to try to encourage 
China to let their exchange rate reflect market forces and to 
end practices that discriminated against U.S. companies. And we 
are looking for ways to--we are making a little bit of 
progress, but we have a long way to go on that front. But you 
have to do both. You have to do both those things. You have to 
invest more here and make sure we are being as effective we can 
in making sure other countries are not pursuing policies that 
put our firms at a disadvantage.
    Mr. Cleaver. Mr. Secretary, thank you for your time and 
your thoughtful response.
    Mr. Chairman, I yield back the balance of my time.
    The Chairman. The gentleman from Delaware, Mr. Castle, is 
now recognized for 5 minutes.
    Mr. Castle. Thank you, Mr. Chairman.
    And, Mr. Secretary, sort of following along the lines of 
Mr. Hensarling's questions, one of the things that I hear about 
out there--and you do, we all do, I guess--is the lack of 
certainty with certain of our policies that we do here in 
Congress, that perhaps the White House does. Tax policy is 
obviously one. Regulatory policy is another.
    We, as you know, had passed legislation involving credit 
cards, and we had passed other legislation involving banks, 
etc. To the best of your knowledge--the broad question may be 
on your testimony here today, but to the best of your 
knowledge, is the Administration focused on this and perhaps 
the need to introduce stability to get whatever it is we have 
to get done and leave it alone and make it permanent so 
businesses can make decisions based on whatever the laws are 
and not what they might be 1 or 2 years from now?
    Secretary Geithner. Absolutely. And that is one reason why 
we don't think Congress should wait on providing clarity to the 
tax treatment that is going to be so overwhelmingly important 
to, again, 97 percent of working Americans and small 
businesses. And if we can work together to give them additional 
incentives to invest here, I think it is very important we do 
that.
    It is not rocket science. It doesn't take a lot of time to 
do. Certainty would be better.
    I am very concerned by the extent to which, you talk to 
businesses and individuals across the country, they think there 
is some risk Congress won't act to extend those middle-class 
tax cuts. And that is a remarkable thing. Because it would be a 
deeply irresponsible act to leave them with uncertainty longer 
than we need to about what that tax stream is going to be.
    On the regulatory front, I can only speak to the issues 
that are part of the financial reform legislation; and there we 
have a challenge. These are very complex rules. It is very 
important that we get them right.
    The legislation gives a set of deadlines we have to meet. 
Those are very tight deadlines, but they still mean for the 
next--we are going to be in a 6-, 12-, 18-month, 24-month 
process before we bring those all down to earth. And I think 
the best way we can provide a little bit more confidence that 
we are going to get the balance right, like we did in the 
capital rules, is to make sure we are listening carefully to 
people on how to design them, everyone affected by them, and 
try to, again, demonstrate by our actions, like we tried to do 
on capital, that we are going to get the balance right.
    And, again, capital is a good example, and we should hold 
ourselves to that high standard. When the rules were clarified, 
that certainty was very helpful. I don't comment on markets 
ever, but I am just saying if you look at what happened to how 
the world looked at the financial system when the rules were 
clarified, they were more confident that they knew what they 
were going to mean, and our banks are in a very good position 
to meet them.
    But that is a high standard. We are going to try to meet 
that. And I absolutely agree with you that bringing more 
certainty to what these new rules are going to be would be very 
helpful. We will do it as quickly as we can.
    Mr. Castle. I met with Senator Carper and our bankers in my 
State, Delaware. And one of their complaints was that the 
various--they have varying regulators, obviously. But one of 
the regulators is being so restrictive in the kinds of loans 
that they can make that they can't really help the economy as 
much as they would like. They claim that they are making loans 
and the regulators--and they have made their cuts because they 
knew they had to do this. And then the regulators are coming in 
and saying you have to really go further than you have already 
gone, and it is really restricting them in terms of what they 
can do.
    I can't--I have no idea of the accuracy of that statement, 
but it is concerning. If we are somehow by our own regulatory 
policies, etc., cutting off the possibility of investments that 
might help our economy recover, that would be a problem. I am 
sure you have probably heard this complaint. Any comments you 
have about that I would appreciate.
    Secretary Geithner. I have heard that concern from banks 
across the country as have you and your colleagues. And I know 
that Chairman Bernanke and Chairman Bair and the OCC are very 
aware of those concerns, and they are trying to make sure that 
their supervisors or examiners don't overdo it.
    But the biggest challenges facing small banks across the 
country still are that many of those banks got themselves too 
exposed to commercial real estate, just don't have quite enough 
capital, and are finding it hard to raise capital in these 
markets. That is still a much more powerful concern for most of 
those banks than the concern you referred to, and that is one 
reason why we hope this bill gets through.
    Because what this bill will do is give those banks the 
ability to come to the Treasury and get an investment from the 
Treasury at a very economically attractive price. And if they 
expand lending, we reduce their dividends even lower, so it 
creates more incentive for them to put that capital to work to 
expand lending, and that is why we think it is such a promising 
bill.
    Mr. Castle. A final question--and I missed the beginning 
because I was at other meetings--but did you comment or would 
you comment, if you didn't, on where we are with the GSEs? I 
know that you are working on it, and I know we are going to 
hear something pretty soon. I still believe that was the 
genesis of a lot of our problems.
    Secretary Geithner. You are absolutely right that the GSEs 
were a substantial contributor to the financial crisis. And as 
you all are aware, the losses they accumulated and the 
decisions they made before conservatorship are very 
substantial. We have begun a process, as has this committee, to 
look at a range of options for how to replace the institutions 
with a better, more stable system. And we are running a very 
careful process of bringing experts together and looking at 
ideas on all sides. A bunch of staff members from the 
Republican side and the Democratic side came to a conference we 
held at the Treasury last month on this.
    And, again, we are trying to make sure we look at all ideas 
with no presumption on it. And our obligation under the law is 
to bring forward legislation, I think, Mr. Chairman, early next 
year. In any case, that is the timeline we expect to meet.
    Mr. Castle. Thank you, Mr. Secretary.
    I yield back, Mr. Chairman.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Thank you for being here, Secretary Geithner.
    You and I have disagreed a bit about whether or not 
government should basically deny or discontinue certain risky 
products. You have said to me many times you believe that you 
manage those, you regulate, but you don't use the power of the 
government to discontinue products. Do you still feel that way?
    Secretary Geithner. I believe that there are certain 
practices, activities--I will give you an example. Paying a 
mortgage broker to steer a customer into a loan they can't 
afford that generates more fees in the short term is not a 
practice we should support or condone. But I think the best way 
to manage the risks in financial innovation in a market 
financial system is to make sure that we require institutions 
to hold more capital against the more complex financial 
products. And I still believe that is a more effective 
approach.
    Ms. Waters. I am sorry. If I may, I see that where you 
basically talk about banks will be required to hold more 
capital against more risky products and activities. But what I 
am concerned about is whether or not you think Alt-A or no 
documentation loans are something that you should hold more 
capital against that kind of risk when you are not documenting 
income, etc., etc. Why should that product be on the market in 
the first place?
    Secretary Geithner. I believe it is very important--and the 
law gives us new authority and a mandate to do this--to make 
sure that banks, when they make loans to people, have to be 
able to demonstrate that the individual can afford those loans 
when--their capacity to pay, and I think that is very 
important. And if we do a better job at that as a country, it 
is inconceivable to me that we will get back into the business 
of letting people get a loan with no documentation, no proof of 
income.
    Ms. Waters. Mr. Secretary, have you ever heard of a 30-year 
fixed adjustable rate mortgage?
    Secretary Geithner. I have, and I find them appealing in 
their simplicity in terms of their terms and benefits.
    Ms. Waters. A 30-year fixed adjustable rate mortgage is a 
contradiction within itself. That is number one.
    Number two, if there is something called a 30-year fixed 
adjustable rate mortgage that is marketed to a 60-year old 
couple where it will reset every year up to 10 percent interest 
and by the time they are 75 or 80 years old, it will be 
substantially more than what they got into it for, do you think 
that is a decent product?
    Secretary Geithner. I misspoke. I thought you meant just a 
classic 30-year fixed rate.
    Ms. Waters. No. I said 30-year fixed adjustable rate 
mortgage that is being marketed. And I use that as an example 
of products that are on the market that should not be on the 
market. There should not be anything called a 30-year fixed 
adjustable. It is a contradiction.
    Secretary Geithner. Having listened to you more carefully, 
I apologize. I understand your concern completely, and 
personally, I would not want to be associated with anything 
like that. I think that is the kind of practice that should not 
be possible in our post-reform financial system.
    Again, it should not be possible for banks or brokers to 
steer people into mortgages that they cannot understand and 
cannot afford. It was a mistake for us to allow it, and I think 
this new law gives us the power to prevent it.
    Ms. Waters. Thank you very much.
    Mr. Secretary, let me just say this: You keep talking about 
steering. They should not be steered into that kind of product. 
That kind of product should not exist. It is not that the 
product is all right as long as people are not steered into it 
who can't afford it, that product, Alt-A product, certain 
adjustable rate products; and I am hopeful that our Consumer 
Protection Financial Bureau will be able to get the kind of 
support from you and others that will take those kind of 
products off the market.
    So I keep asking you this every time I see you, because I 
am hoping you are going to change your mind, and you are going 
to find that there is just some product out there that you 
would ban tomorrow if you had the power to do it.
    The Chairman. Will the gentlewoman yield?
    Ms. Waters. Yes.
    The Chairman. I do believe with regard--while there is not 
a general power in the consumer bureau to do this, the mortgage 
section is a more specific section. And I believe that the 
mortgage--in the mortgage area, for instance, with prepayments, 
etc., there is the power to ban certain products if mortgages--
that they have a greater power in the mortgage area than in 
other areas.
    Ms. Waters. I certainly hope that Ms. Warren will get that 
kind of support.
    And, finally, if I could indulge for 30 seconds, Mr. 
Chairman.
    The Chairman. Certainly.
    Ms. Waters. There is something in the Wall Street reform 
bill called the creation of the offices of minority and women 
inclusion. Are you aware of it?
    Secretary Geithner. Absolutely.
    Ms. Waters. And have you started your agency on the 
implementation?
    Secretary Geithner. We have started, but we are not there 
yet.
    Ms. Waters. And you know you have to have it done in 6 
months?
    Secretary Geithner. I do.
    Ms. Waters. And you know that some of us have worked very 
hard to put it in there?
    Secretary Geithner. I do, and I very much respect the 
reasons why you did it.
    Ms. Waters. Okay. Thank you very much. I yield back.
    The Chairman. The gentleman from New York, Mr. Lee.
    Mr. Lee. Thank you; and, Mr. Secretary, thank you for 
coming before us today.
    I wanted to start off by addressing two issues which are 
near and dear to me based on my background in manufacturing and 
in seeing what has transpired with manufacturing in this 
country over the last decade and its demise. I know last week 
you were in front of the House Ways and Means Committee 
regarding the undervaluing of Chinese currency. And you 
expressed concern similar to that of the U.S. Trade Rep that 
the currency reform for fair trade is not a viable option 
because of a belief that it may not be WTO compliant.
    At the same time you said, ``The Administration is using 
all the tools available to ensure that American firms and 
workers can trade and compete fairly with China.''
    It has been apparent for years that China's currency is 
pegged to the U.S. dollar and it is severely undervalued, yet 
the Administration refuses to officially list China as a 
currency manipulator and, based on yours and Ambassador Kirk's 
statement, also refuse to discuss a legislative option. Mr. 
Secretary, if these issues are off the table, I would like to 
know specifically what the Administration is doing to address 
our disparity with China and create a level playing field for 
American manufacturers who are hurting.
    Secretary Geithner. Can I just clarify one thing you said? 
I actually was very careful last week not to comment on the 
basic question about whether that particular draft legislation 
was consistent with our international obligations. You implied 
that I said it wasn't, but I did not say that.
    We obviously want to make sure that any legislation that is 
passed is consistent with our obligations. Because, if it 
weren't, it wouldn't give us much leverage to go after those 
things.
    I believe, as I said last week, the two most important 
things for us to do as a country are to work with countries 
around the world to encourage countries--China to let their 
exchange rate appreciate in response to market forces, which we 
are working very hard at doing. They are starting that process, 
but they haven't done much very yet.
    Mr. Lee. At a very anemic level.
    Secretary Geithner. I agree, and I said that very clearly 
last week. And we believe, as I think you do, that the exchange 
rate is significantly undervalued.
    Mr. Lee. As we say, we can't dictate what they pay their 
workers, what their regulation is. But when you are talking 
about something as basic as market forces with currency, a 30 
to 40 percent disadvantage is killing American manufacturing.
    Secretary Geithner. I think it has a very substantial 
adverse material effect on our economy and our interest, but 
that is not enough, and I want to make it clear on this.
    In addition--and this is a real problem for us--we face a 
number of practices by the Chinese government that do 
discriminate against American producers in the United States 
and those who operate in China, and we are trying to encourage 
them to end those basic practices, and we want to do both.
    Mr. Lee. And I think we should. Because if we keep kicking 
the can down the road for a few more years, we will not have 
manufacturing in this country as we know it today.
    I just want to switch to something else, because I know I 
have limited time. But it is another issue that, again, is very 
important to me based on having a lot of retirees in my 
district.
    Last year, I spoke to you during one of your visits to our 
panel and asked your thoughts on the inequitable treatment of 
pensioners for more than 20,000 Delphi salaried retirees, the 
majority of which suffered significant cuts in their pension 
during the restructuring of GM and the Treasury's Auto Task 
Force. You replied that your team would sit down with me and 
provide answers as to why these salaried workers were treated 
differently than the hourly retirees when pensions were topped 
up, presumably with TARP funds provided by taxpayers.
    To date, despite multiple requests directly to you, the 
Auto Task Force, and the President, I have not received any 
substantive reply to my request.
    I have now tried a different avenue and have secured 
official investigations through SIGTARP and the GAO, but, 
frankly, I would like to try one more time to hear from you, 
Mr. Secretary, exactly why the Administration, your Department, 
is refusing to make public all the documents concerning how 
unfair and unjustified this decision has been?
    Secretary Geithner. Absolutely. We will work with you and 
the range of bodies that oversee these programs to make sure 
they have all the information to reach those judgments. And I 
will reaffirm my commitment to you to have those people come up 
and meet with you and your staff to talk through this very 
complicated, very difficult problem.
    Mr. Lee. And I will take you at your word on that. Because 
this is something we have now been working on for 18 months, 
and we have a lot of retirees who have been drastically 
impacted. I meet with them on a regular basis, and it boils 
down to fairness, period. All they are looking for is to be 
treated as--if they had to take a haircut, let's do this thing 
equally. But it appears that they have really been singled out, 
and I will hold you to that.
    And with that, I will yield back.
    The Chairman. Will the gentleman yield?
    I would just add, Mr. Secretary, I just received a letter 
from three of our colleagues--Senator Sherrod Brown and 
Representatives Charlie Wilson and Tim Ryan--on that identical 
issue. So I would agree, of course. They asked for something 
similar, and I am going to have them join with Mr. Lee, and we 
will work on that.
    The other thing, I just wanted to clarify that we have 
gotten an answer, which is, under the consumer bill that was 
passed, there is a particular section on mortgages, and there 
is greater power on mortgages than in general; and the product 
that the gentleman from California mentioned could, in fact, be 
banned under that special mortgage power.
    The gentleman from Illinois.
    Mr. Foster. Thank you, Mr. Chairman.
    I guess, I would like to start out by asking for 
recognition that the sufferings of a scientist are no less than 
those of a minister when you listen to this politicized debate 
here. Anyway, also, but actually--
    The Chairman. If the gentleman would yield? I will give you 
back your time.
    He got me backwards. I said the minister could bear it more 
easily. No question, you are more impatient. I will give you 
that.
    Mr. Foster. But, also, as someone who started a 
manufacturing firm myself, I would like to associate myself 
with the comments of my Republican colleague there. The Chinese 
currency manipulation is a fundamental problem that has to be 
fixed and fast. You are going to find lots of friends on both 
sides of the aisle for pushing you, and if there is a role for 
Congress in playing bad cop in this, we are happy to play that 
role.
    Let's see, a couple--actually, one quick historical comment 
on the ultimate cost of TARP which you mentioned. And it is 
interesting to compare that to the ultimate taxpayer cost of 
the savings and loan bailout that happened under the Bush--the 
Bush I and Reagan years, which was $160 billion of 1990 dollars 
or about 3.2 percent of GDP. The numbers you just quoted--which 
I had not heard yet--were $66 billion, or less than half a 
percent of GDP. So expressed as a fraction of GDP the ultimate 
taxpayer cost of this emergency intervention will be about one-
fifth that of the savings and loan bailout, which is a very 
interesting comparison.
    Now, the question I had, there had been recent stories in 
the press about the toxic assets and whether or not they have 
actually cleared. And so my question to you is, at the time 
that the Basel requirements actually take hold--first off, are 
these continuing to do damage on the balance sheets of 
financial firms and will that damage largely have cleared by 
the time the Basel stuff kicks in?
    Secretary Geithner. I do not believe--let me say it in the 
affirmative way. Because of what we did in the early stage of 
2009, the major U.S. banks that account for a substantial 
fraction of banking assets in the country now hold very, very 
substantial levels of capital against the risks that they 
retain on their balance sheet. So I do not believe that those 
potential losses now are a material source of risk to the 
recovery or the stability of those institutions, and that is a 
remarkably important accomplishment.
    Now, it is still true that community banks across the 
country that got themselves exposed to commercial real estate 
are still facing really tough, tough problems, and they have a 
long way to go to work through that. And for some of them it is 
harder to raise capital, again, which is one of the reasons why 
this small business lending program is so important.
    Mr. Foster. In regards to Basel, are there requirements in 
the pipeline having to do with institutionalized stress tests, 
standards for risk management treatment of sovereign debt risk 
in the standards?
    Secretary Geithner. It is our view--and I am not sure I can 
speak with the right degree of precision about what the law 
requires and what the consensus in Basel is at this stage, but 
I think it is very important for supervisors around the world 
on a regular basis to conduct stress tests that try to capture 
the potential risk of loss that banks might face in the future 
recession, and that is a very good test over time about whether 
the capital requirements that are in place are actually 
delivering enough capital over time. So I am very much in favor 
of that and will work to make sure we do that on a regular 
basis going forward.
    Mr. Foster. They must be standardized. If they end up being 
what drives the capital structure of these large financial 
firms, they are as important as the basic Basel formulas.
    Secretary Geithner. They should be standardized in the 
sense that they need to capture a crisis with the same level of 
severity and loss. In that sense, I totally agree with you.
    Mr. Foster. And can you say a little bit about the state of 
play of contingent capital a little more?
    Secretary Geithner. I would say it this way, which is there 
is still tremendous appeal to us in designing a form of 
continuing capital that would, again, make the overall banking 
system less prone to periods of mania, euphoria, and less prone 
to panics and the trend-amplifying margin spiral dynamics and 
deleveraging you see in a crisis. We are looking at and there 
is a group of experts in the United States and around the world 
that are looking at a whole range of ideas of how to design 
those instruments in ways that would work.
    And you have thought a lot about this, and I respect very 
much your views on this and happy to talk about in more detail 
elsewhere, but the problem we find is how you design it in a 
way that would be real, really available in a crisis, not be 
punitively expensive, and not come with the risk that you have 
to require the uncertain judgment of officials, bureaucrats, 
around the world to trigger their--
    Now there are ways around those problems, but we haven't 
found the perfect thing yet.
    Mr. Foster. Thank you. I yield back.
    Ms. Waters. [presiding] Mr. Lance.
    Mr. Lance. Thank you, Madam Chairwoman.
    Good afternoon, Mr. Secretary.
    You have certainly given us your position, Mr. Secretary, 
on the tax cuts. My position is that they should be extended 
for all tax brackets. I believe we agree, however, that 
certainty is required.
    Mr. Hensarling has raised this, Mr. Castle, and I raise it 
again. In the Administration's judgment, when should we engage 
in certainty on the tax cut issue? In other words, should we do 
that now while we are still in session or should we wait until 
after the election to the lame duck session of Congress?
    Secretary Geithner. That is really a question for the 
leadership on both the Democratic and Republican side.
    Mr. Lance. And I think it is a question of the 
Administration. Does the President, and do you as Secretary of 
the Treasury, have a position on that?
    Secretary Geithner. My view, as I said many times, and the 
President said this, that since there is very broad agreement 
on the merits of extending the middle-class tax cuts that, 
again, go to 98 percent of working Americans and small 
businesses, that why not act to extend those as soon as we can. 
And we can still have a debate about what to do about the rest 
of them, but why hold those hostage to the debate we have to 
have, again, on whether it makes sense for us to go out and 
borrow $700 billion to add to our deficit to extend those high-
income tax cuts?
    Mr. Lance. So could you be a little more definite in what 
you believe the time period should be?
    Secretary Geithner. Not on the legislative question. Again, 
that is a question where the leadership of both Houses on both 
sides would have to come to a judgment.
    Mr. Lance. Regarding your indication of your belief of 
borrowing $700 billion for the top two brackets, what 
percentage of income is that? You indicate 2 or 3 percent of 
taxpayers. What percentage of total income is that?
    Secretary Geithner. Obviously, it is a larger share of 
total income. But the right way to think about it economically 
I think is to look at the overall effects on the economy 
relative to GDP of extending them. And I think there are--
    Mr. Lance. What percentage of income is it, do you know?
    Secretary Geithner. It would be a very small fraction of 
GDP, which is overall national income. But I think the right 
way to think about it, if I could say, is that I think it is 
very hard to find an economist that would argue that if the 
economy needs more support and we are a country with not 
infinite resources that that is the best use--
    Mr. Lance. Mr. Orszag, your former colleague, has indicated 
he favors extending all of the tax cuts for 2 years.
    Secretary Geithner. First of all, I can't--I won't speak to 
his opinion. But our view is that the best thing to do for the 
country is to extend those tax cuts for middle-class Americans 
and small businesses as quickly as we can. And if we believe 
the economy needs additional reinforcement, as we do, then 
let's find a way to give additional incentives to businesses to 
invest here in the United States. Let's do that as soon as we 
can.
    Mr. Lance. Thank you.
    Madam Chairwoman, is it permissible for me to place in the 
record the op-ed piece of Mr. Orszag that was in the New York 
Times on this issue?
    Ms. Waters. Without objection, it is so ordered.
    Mr. Lance. Thank you.
    In another area, Mr. Secretary, Professor Warren has been 
named an Assistant to the President. I understand that. Is she 
technically a person who is on the staff of the White House or 
on your staff, Mr. Secretary, or on the staff of both the White 
House and the Department of the Treasury?
    Secretary Geithner. She is an advisor to the Secretary of 
the Treasury. Her office is in the Treasury. But she is also--
has the additional title as Assistant to the President.
    Mr. Lance. So, sir, does she report to you or to the 
President or to both of you?
    Secretary Geithner. As the dual title implies, and as the 
President made clear, she reports to the Secretary of the 
Treasury and the President of the United States.
    Mr. Lance. And do you favor an early appointment of a 
Director so that appointment might go appropriately before the 
Senate?
    Secretary Geithner. I do and it will.
    Mr. Lance. And could you define with a little greater 
precision what your definition of ``early'' might be?
    Secretary Geithner. Early in the sense that I think it is 
the best interest of getting this agency up and running to have 
a confirmed Director in place as soon as we can.
    Mr. Lance. During this session of Congress or would it be 
in the next session of Congress?
    Secretary Geithner. Again, that is sort of a question for 
the leadership. But, as I said, I think early would be good.
    Mr. Lance. I think it is a question for the President and 
the Administration, since it is the President who has the 
constitutional responsibility to appoint the Director.
    Secretary Geithner. He does, and he will meet that 
responsibility.
    Mr. Lance. At an early date?
    Secretary Geithner. At an early date.
    Mr. Lance. Thank you.
    Madam Chairwoman, I yield back the balance of my time.
    Ms. Waters. Thank you very much.
    Mr. Watt.
    Mr. Watt. Thank you, Madam Chairwoman.
    Thank you for being here. I am sorry I didn't have the 
benefit of your testimony or the prior questions.
    Is there still a shadow banking system out there that we 
need to be concerned about that is still not appropriately 
regulated?
    Secretary Geithner. It is a shadow of its former self, but 
yes, there are still institutions that are not legally banks 
that operate in the credit markets, financial markets, and play 
a significant role. And part of one of the most important 
initial tasks we have under the Dodd-Frank bill is to designate 
what universe of institutions should be subject to the capital 
requirements we are discussing in this hearing today.
    Mr. Watt. So that shadow banking system will continue in 
place until we get those rules in place, is that what you are 
saying?
    Secretary Geithner. Yes. One of the most important 
provisions of this bill is it gives us the authority for the 
first time to make sure that for institutions that play a 
critical role in our financial system, whatever you call them, 
banks or nonbanks or investment banks, that they come into a 
common framework of rules on leverage so we protect the system 
from their risks.
    Mr. Watt. I think I am driving at a slightly different 
issue that some of the minority members of this committee, 
racial minority members of the committee tried to raise this. 
There are some shadow institutions in our communities that have 
a profound impact on what is going on in our communities that 
don't have a systemic impact on the system. Those are the ones 
that I am asking the question about. Have we done enough in 
this bill to rein in or regulate those institutions that don't 
necessarily have systemic risk to bring down the whole system 
but still prey on communities, prey on consumers, who really 
have very few options for credit or transfer of money in, at 
least they perceive, in the regular banking system?
    Secretary Geithner. Apologies for misunderstanding your 
question.
    Absolutely. What the bill does is give us the authority for 
the first time to make sure that basic protections consumers 
need to borrow responsibly are extended not just to banks but 
to consumer finance companies or mortgage brokers to pay the 
lenders.
    Mr. Watt. Now, who will have the primary responsibility for 
that? Will that be the Consumer Financial Protection Bureau or 
some other agency?
    Secretary Geithner. The Consumer Financial Protection 
Bureau will be the single Federal entity charged with that 
responsibility. But their work will have to be reinforced at 
the State level by the State authorities whom we expect have to 
play a key role in enforcing these rules on a range of, let's 
call them, consumer credit finance companies.
    Mr. Watt. So with respect to those kinds of entities, you 
envision that the Consumer Financial Protection Bureau will be 
playing the same kind of regulatory role that the other 
regulators are playing with respect to the traditionally 
regulated institutions. Is that what you are saying?
    Secretary Geithner. Yes. And, actually, the way the 
division of labor in the bill is designed is for the large 
banks in the country and for the nonbank institutions you are 
referring to--the Consumer Protection Agency will have the 
primary enforcement authority. For small banks--
    Mr. Watt. Let me ask one more question. Is there the risk 
of a shadow banking system internationally, and how will that 
be regulated?
    Secretary Geithner. There is always a risk that countries 
will seek to build a financial business by attracting business 
with the promise of lower standards. And we will have to work 
very hard to reduce their opportunities to do that like we do 
in the tax area, like we have done, as the chairman referred to 
initially, in the broad area of terrorism finance, and we are 
going to have to do it in the financial area as well.
    Mr. Watt. Is Basel focused on that at all?
    Secretary Geithner. Absolutely. And the Basel Committee has 
around the table countries that represent, I think, more than 
85 percent of GDP around the world. That still leaves some 
people outside that process, but we want to extend the rules to 
them as well.
    Mr. Watt. Thank you.
    Ms. Waters. Thank you.
    Mr. Paulsen.
    Mr. Paulsen. Thank you. Mr. Secretary, I want to touch on 
two subjects. First, we have had a lot of discussion about 
taxes and jobs and getting the economy back. But can I just 
touch quickly on the free trade agreements? The President has 
made it his goal to double exports in the next 5 years, and in 
light of that goal, can you explain a little more forcefully 
why the Administration hasn't encouraged at least more 
forcefully the majority party here to act on some of the 
pending free trade agreements that we have right now that will 
increase exports and produce jobs? I know there has been some 
progress on South Korea, but Europe has moved in the direction 
now and has already come to an agreement with South Korea. I am 
just wondering, sir, when will this hurdle actually move 
forward?
    Secretary Geithner. I agree with you, and the President 
agrees with you, that one of the most important things we can 
do to expand exports and increase jobs in this country is to 
make sure we are playing a major role in those growing markets. 
And, as you know, the President, in June, committed to bring to 
conclusion the free trade agreement with Korea so that he can 
present it to the Congress, we hope, by the end of this year. 
And to make that possible, of course, we have to demonstrate 
this is an agreement that is a good deal for Americans; and we 
need to find a way to get enough support in this body and in 
the Congress that we can actually pass it. But it is very 
important to us as a country that we don't leave those markets 
to our competitors.
    Mr. Paulsen. So it would be your opinion, Mr. Secretary, 
that the ratification of those pending agreements would create 
jobs and would help?
    Secretary Geithner. Can I say it slightly differently? We 
have to make sure that we have agreements in place that provide 
a good deal for American businesses and American workers. So 
where we have strong agreements that meet that test it will be 
very important to us to make them law.
    Mr. Paulsen. I want to follow back up, because--the Basel 
discussion earlier on the capital standards, I want to ask a 
question just about capital formation. The financial reform 
bill that is now law changed the net worth test for meeting the 
accredited investor standard. I am just wondering, did you 
support those changes? Do you believe that altering the 
accredited investor standard will impact the ability now of 
entrepreneurs to raise capital and take their companies public, 
some of those standard changes?
    Secretary Geithner. You are testing my memory of the origin 
of that provision, and I will be happy to look at it in more 
detail and get back to you.
    But my general view--and I think it is supported by how the 
broader financial markets and the investment community had 
reacted to this bill--is that this will provide a better system 
for companies to go raise capital and a better system--a better 
way for us to make sure that the entrepreneurs in the future, 
businesses in the future, can go out and raise capital at 
attractive terms.
    Mr. Paulsen. I just spent some time talking with some of 
these folks who do this private investing; and they include the 
assets of their home, etc., as a part of meeting the accredited 
investor standard. And with the changes that have occurred 
there is a concern that they are not going to have the 
liquidity to actually provide--and they have invested in 
companies. They have helped create companies that have actually 
provided job growth. And that is, again, part of that 
uncertainty equation out there, which is why I raise that.
    Secretary Geithner. I would be happy again to ask my 
colleagues to take a closer look at the potential impacts of 
that provision. Because I think we share the same objective, 
which is we want to make sure that--we want to make our system 
more stable, because we saw how devastating it is when it is 
not. But we also want to make sure that it goes back to the 
business of providing ability for people to raise capital on 
appropriate terms.
    Mr. Paulsen. And without that access to capital, of course, 
business slows. Without a regulatory certainty, capital 
disappears.
    I guess in November of this year, I think it is November 
18th, the SEC is going to convene some sort of a gathering of a 
2010 government finance forum on small business capital 
formation. And in advance of that meeting can you tell us or 
describe whether you believe that a small company should be 
subject to the same regulatory demands that a Fortune 500 
company, for instance, might be required to shoulder as a part 
of the discussion that could take place?
    Secretary Geithner. Can I answer slightly differently? But 
I would be happy to come back to the broader question.
    I believe that small banks should not be subjected to the 
same basic standards that are necessary for the large systemic 
institutions; and what we propose is a much tougher set of 
rules on the large institutions, tough enough that they will be 
more stable but still competitive but a lower standard of 
protections for small banks.
    Mr. Paulsen. Thank you, Mr. Secretary. Thank you, Madam 
Chairwoman.
    Ms. Waters. Thank you.
    Mr. Royce, let me just say, the Secretary has to leave--we 
promised that he can leave about 4:00, so let's see what we can 
do to help him.
    Mr. Royce. Thank you, Madam Chairwoman.
    I want to go back just for a minute to my colleague's 
opening argument there about the light bulb. The government 
didn't invent the light bulb. The private sector did. It was 
the government's job to protect the patent for the light bulb, 
and back when it was invented, our government did that pretty 
effectively. But today, I don't think our government would 
protect that patent from being duplicated in China; and that is 
a huge problem.
    But, on top of it, back when the private sector was as 
robust as it was and we hadn't had the growth of government as 
we have, we had a very different situation than we have today 
with the massive, massive increase in the size and scope of 
government with the corresponding shrinking of the private 
sector. And I don't think it is a particularly enlightened 
position. I think it is going to leave us in the dark.
    I wanted to ask you because from the standpoint of us being 
the tax collector for the welfare state, do you think it is 
logical--the comments you made, I think not increasing taxes 
would be treated the same as government expenditures, all 
right, under your assumption. Not increasing taxes is the same 
as government expenditures. Human reaction is not going to be 
the same. If you increase tax assessments on people to 100 
percent, would you get 100 percent of that revenue, do you 
think.
    Secretary Geithner. Congressman, it is a very complicated 
set of issues and I know we are not going to agree on them 
completely, but I would just start with the following: We do 
not believe that governments create jobs. Businesses create 
jobs, and our job as policymakers, people involved in 
governing, our job is to make sure that we are providing better 
incentives for businesses to invest here at home and create 
jobs here in the United States.
    Mr. Royce. That is right, and one of those issues is tax 
rates. If we have tax rates, remember, there are taxes on 
income at the State level and Federal level. If you hike that 
up over 50 percent, the idea that you are going to get 50 
percent, the economic studies I have seen show that maybe the 
maximum--because when you set the tax rates at 28 percent, 
maybe about there is when people give it their all in terms of 
their overtime, in terms what they are willing to risk, in 
terms of how much they put on the table, in terms of not seeing 
the tax avoidance issues and you collect more.
    But you get up--you hike that rate up over 50 percent as we 
are going to do next year between the combined State and 
Federal tax rates, and all of the sudden you diminish the 
amount of the take. So I just don't buy into your basic thesis 
that automatically you are going to be able to hike those rates 
up and see that kind of income. I think it is going to be a lug 
on the economic engine.
    But another concern I had that I wanted to ask about 
quickly was, Basel III treats many high risk sovereigns as 
essentially risk free, and I would just ask you, do you think 
that Italian debt really is risk free? We had the same problem 
under Basel II with Fannie Mae and Freddie Mac, right? It was 
treated basically as risk free. It did not turn out that way, 
and it certainly helped collapse those financial institutions. 
So I would ask you your opinion on that.
    Secretary Geithner. I am going to start with the tax 
question.
    Mr. Royce. Yes.
    Secretary Geithner. I just offer two things in response. 
Obviously, since we can't do everything, we have to balance two 
basic objectives. We want to have the best incentives for 
growth and investment in the United States by businesses, by 
individuals, and we have to find a way to do it in a way that 
is fiscally responsible.
    And if we agree--and I think we do--that our challenge now 
is to find ways to give more reinforcement to economic growth 
and investment in the United States, then we should have a 
debate about how to do that. Again, our judgment is the most 
responsible way to do that and the biggest, most powerful 
return for those dollars is to give businesses more incentives 
to expand investment, not extend the tax cuts that are set to 
expire for just that top 2 percent of Americans.
    But one observation is, of course, marginal tax rates 
matter for incentives--you are absolutely right--but we have a 
good experience to look to about the effects of those. And for 
the period I was last in Treasury, in the late 1990's, when 
those tax rates were in place at roughly that same level, we 
had the best record of private investment, the best record of 
productivity growth, the broadest big gains in income, and we 
had a remarkable improvement in our fiscal position.
    So I believe--
    Mr. Royce. Even in a recession, you believe in hiking the 
taxes? Oh, I get it. I get it. But let's go to that last 
question.
    Do you think that Italian debt is risk free, because under 
Basel III, that is the assumption. That has to be a problem.
    Secretary Geithner. That is a very important question, and 
I respect your concern about this, but again, what this--
    Ms. Waters. We are going to have to move on to Mr. 
Campbell, please, so that we can get the Secretary out.
    Mr. Royce. For the record, I am going to ask on another 
issue, on EU regulations regarding alternative investment 
firms, I am going to ask for some response but you have already 
been involved in this.
    Secretary Geithner. Let me say quickly that this new Basel 
agreement does a much better job of making sure banks hold more 
risk against products that have risk regardless of what their 
rating is, and that is very important to us.
    Mr. Royce. Thank you.
    Ms. Waters. Mr. Campbell.
    Mr. Campbell. Thank you, Madam Chairwoman.
    Mr. Secretary, I just have one question for you. There are 
several of us--a bunch of us actually on this committee who are 
perplexed as to why, given the current interest rate 
environment, Fannie and Freddie were not selling off some of 
that portfolio, 106 and 107 cents on the dollar, reducing the 
taxpayers' exposure, investment, etc.
    So we wrote a letter to the Director of FHFA, and in the 
letter, in part, he says, and I will read just one sentence: 
``Other than a few limited exceptions, any Enterprise sale of 
assets not considered ordinary course of business require 
Treasury consent.'' Essentially kicking the football to the 
Treasury, I think, on this.
    So I would like to ask you, are you in favor of Fannie and 
Freddie doing that or against it, and what is the reason for 
either position?
    Secretary Geithner. To do justice to this, I probably 
should respond to you in writing, but I will say the following 
to you.
    Mr. Campbell. I will be happy to address it to you in 
writing.
    Secretary Geithner. I hate to invite letters. It is very 
important to us that we do everything we can to reduce the 
ultimate losses we are going to face because of the decisions 
that were made before conservatorship. The basic businesses, 
beginning today, we believe by any reasonable calculation are 
going to be very profitable ongoing businesses for the 
institution, but we will keep looking at ways to make sure we 
are managing those investments in a way that maximizes the 
ultimate return to the taxpayer. Beyond that, I don't want to 
say more in public on it, but I will be happy to try to do it 
carefully in writing.
    Mr. Campbell. Thank you, Mr. Secretary. I yield back.
    The Chairman. The gentleman from New Jersey, I guess, is 
up.
    Mr. Garrett. You guessed right. So very quickly, on AIFMD, 
the Alternative Investment Fund Management Directive, my 
understanding is that they have set up some or at least 
proposed some proposals that would be protectionist--
    Secretary Geithner. This is the European directorate?
    Mr. Garrett. Yes. And I also understand some of them are 
ill-informed from our perspective. I also understand that you 
wrote to the Commissioner on this a few months back, and I 
think you also wrote back in March of this year, to express our 
concern. So a few quick questions on this: what has the 
response been then; are you still concerned; and are you 
committed to make sure that U.S. firms have as complete and 
open access as we are providing to foreign firms?
    Secretary Geithner. Yes, we are concerned, and yes, we are 
committed to achieving that outcome. And I guess my basic 
sense, Congressman, is that they have listened to our concerns. 
They have acknowledged them. They have moved in some ways, but 
I do not believe we have solved this to our satisfaction yet.
    Mr. Garrett. But you are still--
    Secretary Geithner. We are on it.
    Mr. Garrett. Also out of the Commission last week is 
proposed legislation on regulation of the derivatives market. 
My understanding there is they are doing it differently than we 
are doing it. They will not subject the end users to clearing 
and margin requirements as we see in the Frank-Dodd bill. So 
couple of questions there, and also I understand some of our 
regulators here are considering subjecting some end users to, 
as I call them, bank-like regulation with respect to 
derivatives that are put in place, as we call it, to manage 
their risk.
    So very quickly, since there is a limited time here, do you 
believe that our regulators over here have that authority that 
we hear that they are considering to put in place? And would 
that be in contravention, if they are, to what that letter from 
Dodd and Lincoln after the final bill went through, you may 
recall, expressing the concerns in that area? I will have a 
quick question on that to follow up.
    Secretary Geithner. I will tell you what my sense is. It it 
is not clear what the Europeans are going to do yet. I think 
they have moved very, very close to the broad outlines of what 
is in the Dodd-Frank bill on derivatives, and we are going to 
work very hard to make sure that those regimes are as close in 
design as possible for the obvious reasons that we don't want 
to just see this stuff migrate over there.
    Mr. Garrett. Right.
    Secretary Geithner. So we have a team of people at the 
Federal Reserve, the SEC, and the CFTC that are not just 
working on designing our regs but are working with their 
counterparts to try to make sure that these different oversight 
frameworks are as closely aligned as possible.
    Mr. Garrett. And if that doesn't happen to the extent you 
are satisfied with, does that put us then at a competitive 
disadvantage? And the other question also I previously asked 
was with regard to, do you believe that our regulators here 
have the authority in essence to put margin requirements on all 
end users?
    Secretary Geithner. I want to respond to that specific 
question in writing because I want to make sure I do it 
carefully, and it is a very complicated question.
    On this first question, if we end up with a system where it 
puts our firms at a disadvantage, how can we reduce that risk, 
I am actually very confident we can reduce that risk. But we 
are not at the point yet where we know with confidence how it 
is going to come out, but we are very focused on it, and it is 
very important to us again that these things are as closely 
aligned as possible because again we just don't want to create 
a new arbitrage opportunity for people to evade the tougher 
rules here.
    Mr. Garrett. Seeing I have time left, going back to the 
issue with CFCB and Elizabeth Warren, I think what we heard 
here in this committee, oddly enough during the creation of the 
bill and the CFCB, that constitutional evasion was part and 
parcel of the drafting of the bill. By that, I mean the 
chairman said we understood this thing would not be set up--
confirmation would not be done for some time, and so therefore, 
his comment was made we want to make sure that it would 
function before the Senate made those appointments, which I 
think might be just trying to skirt the issue.
    The Chairman. Would the gentleman yield?
    Mr. Garrett. Sure.
    The Chairman. That was the ranking member who said the 
Senate made these appointments. The Senate does not make 
appointments. But I never said before the Senate made the 
appointments.
    Mr. Garrett. Reclaiming my time, what the chairman did say 
was you want to have this function before the appointments are 
approved by the Senate, which basically as I said is, in 
essence, trying to evade the constitutional requirements which 
seem to be part and parcel of the discussion in crafting of the 
bill.
    But specifically, as to where we are right now, you talked 
about executive privilege and you talked about Ms. Warren being 
compelled to testify. Thank you for that. Does she have to 
comply with the Administrative Procedures Act?
    Secretary Geithner. I will talk to our lawyers about that, 
but I guess my basic sense is, of course, but I am not a 
lawyer.
    Mr. Garrett. Get back to me? Is her appointment right now 
to both positions a violation of the Vacancies Act, to have 
someone running the CFCB without nominating them and subjecting 
them to Senate confirmation?
    Secretary Geithner. I do not believe so, but again, I would 
be happy to respond to that in writing. But maybe I could 
respond, Mr. Chairman, just more generally on this.
    The law, carefully crafted, I know there is a lot of 
concern about it, but carefully crafted, gives us a set of 
authorities for trying to improve consumer protection. We don't 
have authorities Congress didn't give us. We will use those 
authorities carefully, but it is important to recognize that 
most of that consolidation of authority only happens when there 
is a transfer date established, which we have now set for next 
July, and the additional authorities that don't come then only 
come when there is a confirmed Director in place. So it is 
substantially in our interest and I think in the interest of 
the Congress for us to have a confirmed Director in place as 
soon as we can, but of course we can only nominate and we need 
the consent of the Senate for that to happen.
    The Chairman. The gentleman's time has expired. The 
gentleman from Florida.
    Mr. Posey. Thank you, Mr. Chairman. Thank you for coming, 
Mr. Secretary.
    When we had the regulators in here, we asked them about 
common sense without forbearance, and they were all about that, 
but what they told us and what is going on in Florida right now 
are not the same. Regulators will mark down a performing loan 
because they don't think you should be able to make it. The 
evidence of a performing loan used to be whether or not it is 
performing. Now it is whether or not in the examiner's wildest 
imagination it shouldn't be performing. I hope you can have 
some input on that in your position.
    Secretary Geithner. I would like nothing better. Let me 
just to say to you that I agree it is still a problem. It is a 
hard problem to fix because people's tendency is to overreact 
in a crisis like this because they want to be careful, but if 
they overdo it, it is a problem.
    Mr. Posey. One question I have is whether or not you agree 
with academics who claim the recession is over.
    Secretary Geithner. I am not an economist, and I am not an 
academic, and I would just say the following: This is still a 
very tough economy. Absolutely.
    Mr. Posey. I know, but you are supposed to be the smartest 
guy in the Nation on that subject.
    Secretary Geithner. Not a chance.
    Mr. Posey. And if you don't know, nobody knows. Do you 
think we have bottomed out? Do you think the recession is over?
    Secretary Geithner. I would say the following, which is the 
best measures we have of how the economy is performing today 
tell the following story. We have now been growing, the economy 
has been growing, incomes have been growing now for more than 
12 months. The private sector, not the government, the private 
sector has been creating jobs.
    Mr. Posey. Please just tell me yes or no, to the best of 
your knowledge, swag it, don't be afraid. Just say, I think it 
is over or I don't think it is over. That is all I want to 
know.
    Secretary Geithner. I am very confident, absolutely very 
confident, that this economy is on a path to a gradual steady 
improvement in economic growth that will--
    Mr. Posey. I think we all are. If we don't bust, we will 
recover in a year, 2 years, 3 years, 4 years, 5 years--
    Secretary Geithner. You are asking me--
    The Chairman. It is the gentleman's time. If he wants to 
talk, he can talk. The Chair will listen. The gentleman may 
talk.
    Mr. Posey. Thank you, Mr. Chairman. I was just hoping that 
you would shock a bunch of people and man up and say yes or no.
    Secretary Geithner. I just don't--I just think the question 
about what economists think about recessions is--
    Mr. Posey. Forget what economists think. I want to know 
what you think. I know what the retired people in my district 
think. I know what the working people in my district think. I 
know what the husbands and wives, what they think, but I want 
to know what you think. You are the Secretary of the Treasury. 
Do you think we are out of the recession? Do you agree with the 
academics or not?
    Secretary Geithner. I think we are in agreement, 
Congressman, that this is still a very tough economy, and we 
are still living with the deep scars caused by this crisis, 
absolutely, and we have a lot of work to do to repair that 
damage. I think we are agreeing, not disagreeing.
    Mr. Posey. It is just such incredible effort just to get a 
yes or no out of anybody in Washington. I think that is what 
frustrates the public, that is what makes the public distrust 
us more. Again, you are the highest authority in the land on 
this right now, and I just asked you what time it is, and you 
want to describe a clock. Just say, yes, I think we are out of 
it, I agree with the academics; or no, I don't think we are out 
of it.
    Secretary Geithner. We are absolutely out of the worst 
stage, worst, most gravest, most severe, most at risk point of 
this crisis, absolutely, absolutely.
    Mr. Posey. We are getting warmer. Go ahead, Mr. Chairman.
    The Chairman. Would the gentleman yield? I just want to say 
I obviously took the gentleman's time and I will give him extra 
time. But I am disappointed that you would pursue it in that 
fashion. The gentleman from Texas asked some questions and we 
had some thoughtful debate. I would hope that we could have a 
serious economic discussion, not play ``gotcha.''
    The gentleman can have extra time if he wants to respond.
    Mr. Posey. This isn't a ``gotcha,'' Mr. Chairman. I get 
asked by my people back home every day, when are we going to 
get out of the recession; what do you think about the 
recession? I am asking the person that I think would be the 
foremost authority--
    The Chairman. He is trying to give you a thoughtful answer. 
If you didn't like the answer, that is one thing, but he wasn't 
evading the question.
    Mr. Posey. Listen, if I ask you a question that is a yes or 
no question, and you want to dance and just say--the honest 
approach is to say, ``I am going to refuse to answer the 
question.''
    The Chairman. If the gentleman would yield, what if they 
say that is not a very thoughtful question; that is a question 
which takes categories that I don't think are realistic and 
that excludes the ability to give a good answer. The National 
Bureau of Economic Research is a private group; it is not the 
government. If the gentleman has a quarrel with them, he ought 
to write them a letter.
    Mr. Posey. They have an opinion, I have an opinion, I am 
sure you have an opinion. I was just wondering what the 
Secretary's opinion is. There is nothing diabolical, sinful, 
mean, evil, wicked, nasty, partisan about that. I just wonder 
if he personally believes, like the academics do, that the 
recession is over or if he doesn't agree with the academics, 
that it is not over. This is supposed to be the smartest guy in 
the world and he is not answering a simple question.
    The Chairman. If the gentleman would yield, that is kind of 
an interesting concept. It is an insult by excessive 
compliment. The Secretary has never claimed that. The gentleman 
can have as much time as he wants, but I am disappointed that 
he takes that tone. He has never claimed that. He is a very 
thoughtful guy, but that kind of denigration by hyper 
compliment I don't think advances the discussion.
    Mr. Posey. Mr. Chairman, it is not a hyper compliment. It 
is sincere. My question is sincere. There is no ulterior 
motive.
    The Chairman. Does the gentleman sincerely believes he is 
the smartest man in the world?
    Mr. Posey. I beg your pardon?
    The Chairman. Does the gentleman sincerely believe that the 
Secretary of the Treasury is the smartest man in the world?
    Mr. Posey. On this subject.
    The Chairman. Oh, you didn't say that.
    Mr. Posey. On this subject, I sure hope he is.
    The Chairman. But see, that is the problem with yes and no. 
On this subject, I didn't get a yes and no when I asked you--
    Mr. Posey. How about that, yes.
    The Chairman. I asked you if you believed he was the 
smartest man in the world and you didn't give me a yes or no. 
You said on this subject.
    Mr. Posey. I will tell you yes, right now. He is the second 
smartest man in the world. You have to be the smartest.
    The Chairman. No, I would say I might have been, but not 
after engaging in this conversation. No one would think I was 
very bright. Time has expired. The hearing is over.
    [Whereupon, at 4:20 p.m., the hearing was adjourned.]



                            A P P E N D I X



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